Interstate Bakeries 10Q 2007 Q3 Quarterly report

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 March 10, 2007


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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yeso Noþ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

There were 45,250,816 shares of common stock, $0.01 par value per share, outstanding on April 6, 2007. Giving effect to our senior subordinated convertible notes and common stock equivalents, there were 55,149,257 shares of common stock outstanding as of April 6, 2007.

INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 10, 2007


Description	Page
PART I — FINANCIAL INFORMATION (UNAUDITED)		3

ITEM 1. Financial Statements		3

Condensed Consolidated Balance Sheets		3

Condensed Consolidated Statements of Operations		4

Condensed Consolidated Statements of Cash Flows		5

Condensed Consolidated Statement of Stockholders’ Deficit		6

Notes to Condensed Consolidated Financial Statements		7

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

Forward-Looking Statements		40

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		43

ITEM 4. Controls and Procedures		44

PART II — OTHER INFORMATION		45

ITEM 1. Legal Proceedings		45

ITEM 1A. Risk Factors		46

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		47

ITEM 6. Exhibits		48

Signatures		49
302 Certification of Chief Executive Officer
302 Certification of Executive VP and Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Executive VP and Chief Financial Officer

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)


	March 10,			June 3,
	2007			2006
ASSETS

Current assets
Cash	$	70,907		$	78,178
Restricted cash		8,829			86,353
Accounts receivable, less allowance for doubtful accounts of $3,215 and $3,400, respectively		146,553			150,507
Inventories		67,092			65,431
Assets held for sale		10,175			11,931
Other current assets		56,634			67,637


Total current assets		360,190			460,037

Property and equipment, net		559,670			601,101
Intangible assets		160,441			161,128
Other assets		30,399			30,789


Total assets	$	1,110,700		$	1,253,055


LIABILITIES AND STOCKHOLDERS’ DEFICIT

Liabilities not subject to compromise
Current liabilities
Long-term debt	$	451,508		$	494,882
Accounts payable		128,440			117,044
Accrued expenses		232,306			244,166


Total current liabilities		812,254			856,092

Other liabilities		269,018			272,647
Deferred income taxes		75,719			77,819


Total liabilities not subject to compromise		1,156,991			1,206,558

Liabilities subject to compromise		288,809			287,080


Stockholders’ deficit
Preferred 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, 45,251,000 and 45,295,000 shares outstanding, respectively		816			816
Additional paid-in capital		584,238			585,631
Accumulated deficit		(237,562	)		(142,711	)
Treasury stock, 36,328,000 and 36,284,000 shares at cost, respectively		(678,714	)		(678,572	)
Unearned restricted stock compensation		—			(1,869	)
Accumulated other comprehensive loss		(3,878	)		(3,878	)


Total stockholders’ deficit		(335,100	)		(240,583	)


Total liabilities and stockholders’ deficit	$	1,110,700		$	1,253,055

See accompanying notes to condensed consolidated financial statements.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(dollars in thousands, except per share data)


	Sixteen Weeks Ended						Forty Weeks Ended
	March 10,			March 4,			March 10,			March 4,
	2007			2006			2007			2006
Net sales	$	861,641		$	874,809		$	2,217,799		$	2,321,839


Cost of products sold (exclusive of items shown below)		440,215			455,740			1,139,908			1,183,175
Selling, delivery and administrative expenses		417,300			447,546			1,058,672			1,151,793
Restructuring credits		(246	)		(33,332	)		(3,910	)		(21,677	)
Depreciation and amortization		22,015			23,531			54,548			59,082
Loss on sale or abandonment of assets		2,023			1,183			2,757			1,749

		881,307			894,668			2,251,975			2,374,122


Operating loss		(19,666	)		(19,859	)		(34,176	)		(52,283	)


Other (income) expense
Interest expense (excluding unrecorded contractual interest expense of $1,867, $1,867, $4,617, and $4,550, respectively)		14,673			16,529			38,831			39,020
Reorganization charges, net		9,980			10,255			26,687			28,402
Other income		(44	)		(82	)		(1,120	)		(2,917	)

		24,609			26,702			64,398			64,505

Loss before income taxes		(44,275	)		(46,561	)		(98,574	)		(116,788	)
Provision (benefit) for income taxes		(2,040	)		(3,927	)		(3,723	)		(13,842	)


Net loss	$	(42,235	)	$	(42,634	)	$	(94,851	)	$	(102,946	)


Loss per share

Basic	$	(0.94	)	$	(0.94	)	$	(2.10	)	$	(2.28	)

Diluted	$	(0.94	)	$	(0.94	)	$	(2.10	)	$	(2.28	)

See accompanying notes to condensed consolidated financial statements.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)


	Forty Weeks Ended
	March 10,			March 4,
	2007			2006
Operating activities
Net loss	$	(94,851	)	$	(102,946	)
Depreciation and amortization		54,548			59,082
Provision (benefit) for deferred income taxes		900			(1,260	)
Reorganization charges, net		26,687			28,402
Cash reorganization items		(27,399	)		(28,094	)
Non-cash bankruptcy-related credits		848			(294	)
Non-cash interest expense — deferred debt fees		2,524			5,247
Non-cash restricted stock and deferred share compensation expense		83			641
(Gain) loss on sale, write-down or abandonment of assets		(3,349	)		(31,217	)
Change in operating assets and liabilities:
Accounts receivable		3,954			22,402
Inventories		(1,661	)		11,079
Other current assets		8,003			(1,198	)
Accounts payable and accrued expenses		623			(15,096	)
Long-term portion of self insurance reserves		(219	)		15,049
Other		(1,485	)		(7,095	)


Net cash from (used in) operating activities		(30,794	)		(45,298	)


Investing activities
Purchases of property and equipment		(21,135	)		(25,225	)
Proceeds from sale of assets		14,445			79,839
Restricted cash deposit		(12,503	)		(74,276	)
Restricted cash release		89,222			—
Acquisition and development of software assets		(1,678	)		—
Other		221			51


Net cash from (used in) investing activities		68,572			(19,611	)


Financing activities
Reduction of long-term debt		(46,066	)		(800	)
Increase in revolving credit facility		3,051			13,415
Stock option exercise proceeds		—			101
Acquisition of treasury stock		—			(1	)
Debt fees		(2,034	)		(750	)


Net cash from (used in) financing activities		(45,049	)		11,965


Net increase (decrease) in cash		(7,271	)		(52,944	)

Cash at the beginning of period		78,178			151,558


Cash at the end of period	$	70,907		$	98,614


Cash payments (received)
Interest	$	35,668		$	35,234
Income taxes		(13,499	)		(15,486	)

Non-cash investing and financing activities
Long-term debt reduction from lease rejections		359			890
Asset disposals from lease rejections		271			705
Convertible note conversion to equity		1			—
Interest income earned on restricted cash deposit		688			405

See accompanying notes to condensed consolidated financial statements.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(UNAUDITED)

(dollars and shares in thousands)


	Common																Unearned			Accumulated
	Stock Issued				Additional						Treasury Stock						Restricted			Other			Total
	*Number*		Par		Paid-in			Accumulated			*Number of*						Stock			Comprehensive			Stockholders’
	*of Shares*		Value		Capital			Deficit			*Shares*			Cost			Compensation			Loss			Deficit
Balance June 3, 2006		81,579	$	816	$	585,631		$	(142,711	)		(36,284	)	$	(678,572	)	$	(1,869	)	$	(3,878	)	$	(240,583	)
Comprehensive loss		—		—		—			(94,851	)		—			—			—			—			(94,851	)
Adoption of SFAS No. 123R,Share-Based Payment		—		—		(1,869	)		—			—			—			1,869			—			—
Convertible note conversion		—		—		(1	)		—			—			2			—			—			1
Restricted share compensation expense		—		—		883			—			—			—			—			—			883
Restricted share surrenders		—		—		(406	)		—			(44	)		(144	)		—			—			(550	)


Balance March 10, 2007		81,579	$	816	$	584,238		$	(237,562	)		(36,328	)	$	(678,714	)	$	—		$	(3,878	)	$	(335,100	)

See accompanying notes to condensed consolidated financial statements.

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Voluntary Chapter 11 Filing

On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821 and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity security holders was appointed in our Chapter 11 cases. Mrs. Cubbison’s Foods, Inc., or Mrs. Cubbison’s, a subsidiary of which we are an eighty percent owner, was not originally included in the Chapter 11 filing. However, on January 14, 2006, Mrs. Cubbison’s filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). The minority interest in Mrs. Cubbison’s is reflected in other liabilities and the minority interest impact on the statement of operations is insignificant for all periods presented. We are continuing to operate our business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In general, as a debtor-in-possession, we are authorized under the Bankruptcy Code to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

On September 23, 2004, we entered into a Revolving Credit Agreement (the DIP Facility) with JPMorgan Chase Bank, or JPMCB, and each of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party thereto, together with JPMCB, the Lenders, J.P. Morgan Securities Inc., as lead arranger and book runner, and JPMCB, as administrative and collateral agent for the Lenders. The DIP Facility received interim approval by the Bankruptcy Court on September 23, 2004 and final approval on October 22, 2004. The DIP Facility provides for a $200.0 million commitment, or the Commitment, of debtor-in-possession financing to fund our post-petition operating expenses, supplier and employee obligations. We entered into the first amendment to the DIP Facility on November 1, 2004, the second amendment to the DIP Facility on January 20, 2005, the third amendment to the DIP Facility on May 26, 2005, the fourth amendment to the DIP Facility on November 30, 2005, the fifth amendment to the DIP Facility on December 27, 2005, the sixth amendment to the DIP Facility on March 29, 2006, the seventh amendment to the DIP Facility on June 28, 2006, the eighth amendment to the DIP Facility on August 25, 2006 and the ninth amendment to the DIP Facility on February 16, 2007 to reflect certain modifications. See Note 8. Debt for further discussion regarding the DIP Facility.

In conjunction with the commencement of the Chapter 11 process, we sought and obtained several orders from the Bankruptcy Court which were intended to enable us to operate in the normal course of business during the Chapter 11 process. The most significant of these orders:

	•		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.

Pursuant to the Bankruptcy Code, our pre-petition obligations, including obligations under debt instruments, generally may not be enforced against us. In addition, any actions to collect pre-petition indebtedness are automatically stayed unless the stay is lifted by the Bankruptcy Court.

As a debtor-in-possession, we have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, “assume” means that we agree to perform our obligations and cure all existing defaults under the contract or lease, and “reject” means that we are relieved from our obligations to perform further under the contract or lease but are subject to a claim for damages for the

breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 process unless such claims had been secured on a pre-petition basis. As of April 6, 2007, we have rejected approximately 440 unexpired leases and have included charges for our estimated liability related thereto in the applicable periods. We are in the process of reviewing our executory contracts and remaining unexpired leases to determine which, if any, we will reject. For these executory contracts and remaining unexpired leases, we cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting these contracts or leases, and no provisions have yet been made for these items.

Since the Petition Date, we have been actively engaged in restructuring our operations. With the assistance of an independent consulting firm specializing in restructuring operations, we restructured our 10 profit centers (PCs), including the closure of bakeries and distribution centers, rationalized our delivery route network, and reduced our workforce. In addition, we disposed of certain non-core assets during our Chapter 11 case and commenced negotiations of long-term extensions with respect to most of our approximately 420 collective bargaining agreements (CBAs) with union-represented employees. Finally, we have initiated a marketing program designed to offset revenue declines by developing protocols to better anticipate and meet changing consumer demand through a consistent flow of new products. As part of our restructuring efforts we are evaluating various alternatives including, but not limited to, the sale of some or all of our assets, infusion of capital, debt restructuring and the filing of a plan of reorganization with the Bankruptcy Court, or any combination of these options.

When we began the PC review process, we recognized that such complex consolidation activities would entail certain implementation risks. For example, it could not be determined with precision that forecasted sales would be achieved in terms of either sales volume or gross margin. We anticipated that there would be a period of transition before the true impact of the projected efficiencies could be realized. Indeed, we expected that the path would not always be smooth as both employees and customers had to become accustomed to the restructured operations. Accordingly, we have been and will continue to evaluate the impact of these restructurings. For instance, we continue to focus on improving manufacturing processes in the bakeries and enhancing service to customers through our field sales force. Understanding the true impact of the projected efficiencies is a critical component in evaluating the credibility of a long-term business plan. A credible long-term business plan is essential to the assessment of a reasonable range of values for our reorganized business and the determination of how much debt and equity our businesses will be able to support. Both of these assessments are prerequisites to discussions regarding the filing of a plan of reorganization.

See Note 14. Restructuring (Credits) Charges to these condensed consolidated financial statements for related disclosures.

Our financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, because of the Chapter 11 filing process and the circumstances leading to the bankruptcy there is substantial doubt about our ability to continue as a going concern. Our continuation as a “going concern” is dependent upon, among other things, our ability to evaluate and execute various alternatives including the sale of some or all of our assets, infusion of capital, debt restructuring and the development, confirmation and implementation of a plan of reorganization, our ability to comply with the terms of the DIP Facility, our ability to obtain financing upon exit from bankruptcy and our ability to generate sufficient cash from operations to meet our obligations and any combination of these factors. In the event our restructuring activities are not successful and we are required to liquidate, additional significant adjustments will be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used.

The condensed consolidated financial statements reflect adjustments in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7,Financial Reporting by Entities in Reorganization Under the Bankruptcy Code(SOP 90-7), which was adopted for financial reporting in periods ending after September 22, 2004, assuming that we will continue as a going concern. In the Chapter 11 proceedings, substantially all unsecured liabilities except payroll and benefit related charges as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 proceedings are segregated and classified as Liabilities Subject to Compromise in the consolidated balance sheet under SOP 90-7. The ultimate amount of and

settlement terms for our pre-bankruptcy liabilities are dependent on the outcome of the Chapter 11 proceedings and, accordingly, are not presently determinable. Pursuant to SOP 90-7, professional fees associated with the Chapter 11 proceedings, and certain gains and losses resulting from a reorganization of our business are reported separately as reorganization items. In addition, interest expense is reported only to the extent that it will be paid during the Chapter 11 proceedings or that it is probable that it will be an allowed claim under the bankruptcy proceedings.

2. Description of Business and Significant Accounting Policies

Description of Business

Interstate Bakeries Corporation is one of the largest wholesale bakers and distributors of fresh bakery products in the United States. The accompanying unaudited condensed consolidated financial statements, included herein, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the sixteen and forty weeks ended March 10, 2007 may not necessarily be indicative of the results for the full year ending June 2, 2007.

The consolidated balance sheet presented at June 3, 2006 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 3, 2006.

Unless the context indicates otherwise, “IBC,” “us,” “we,” and “our” refers to Interstate Bakeries Corporation and its subsidiaries, taken as a whole.

Significant Accounting Policies

For further information, refer toSignificant Accounting Policiesin our Annual Report on Form 10-K for the year ended June 3, 2006.

Fiscal year end— Our fiscal year is a 52 or 53-week period ending on the Saturday closest to the last day of May.

Principles of consolidation— The condensed consolidated financial statements include the accounts of IBC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of estimates— The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents— We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Additionally, included in accounts payable are checks written in excess of recorded balances totaling approximately $37.6 million and $26.7 million at March 10, 2007 and June 3, 2006, respectively. Restricted cash represents cash held as collateral pursuant to our debtor-in-possession financing agreement and is not considered a cash equivalent in the consolidated statement of cash flows. See Note 8. Debt to these condensed consolidated financial statements for related disclosures.

Contingencies— Various lawsuits, claims and proceedings are pending against us. In accordance with SFAS No. 5,Accounting for Contingencies, we record accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. See Note 17. Commitments and Contingencies to these condensed consolidated financial statements for related disclosures.

Newly Adopted Accounting Pronouncements— In May 2005, the Financial Accounting Standards Board (FASB)

issued Statement of Financial Accounting Standards (SFAS) No. 154,Accounting Changes and Error Corrections(SFAS 154), which replaces Accounting Principles Board Opinion (APB Opinion) No. 20,Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting and reporting of a change in accounting principle. SFAS 154 requires that, when a company changes its accounting policies, it must apply the change retrospectively to all periods presented instead of a cumulative effect adjustment in the period of the change. SFAS 154 may also apply when the FASB issues new rules requiring changes in accounting. However, if the new rule allows cumulative effect treatment, it would take precedence over SFAS 154. This statement is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. SFAS 154 was effective for us in the first quarter of fiscal 2007. The implementation of SFAS 154 did not have a significant impact on our consolidated results of operations, cash flows, and financial position.

In December 2004, the FASB issued SFAS No. 123R (Revised 2004),Share-Based Payment(SFAS 123R), which amended SFAS No. 123,Accounting for Stock-Based Compensation,(SFAS 123) and superseded Accounting Principles Board Opinion (APB Opinion) No. 25,Accounting for Stock Issued to Employees (APB Opinion 25). In April 2005, the Securities and Exchange Commission delayed the implementation of SFAS 123R, which became effective for public companies as of the first interim or annual reporting period of the registrant’s first fiscal year that began after June 15, 2005. Under the new rule, SFAS 123R became effective for us in the first quarter of fiscal 2007. See Note 13. Stock-Based Compensation to these condensed consolidated financial statements for related disclosures.

In November 2004, the FASB issued SFAS No. 151,Inventory Costs – An Amendment of ARB No. 43, Chapter 4(SFAS 151).SFAS 151 is effective for fiscal years beginning after June 15, 2005, and was effective for us in the first quarter of fiscal 2007. SFAS 151 amends the existing guidance on the recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense, freight, handling costs, and wasted material (spoilage). Existing rules indicate that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be “so abnormal” as to require treatment as current period charges. SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The implementation of SFAS 151 did not have a significant impact on our consolidated results of operations, cash flows, and financial position.

Recently Issued Accounting Pronouncements— In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Liabilities(SFAS 159). SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007, and is effective for us at the beginning of fiscal 2009. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value that are not currently required to be measured at fair value. Accordingly, companies would then be required to report unrealized gains and losses on these items in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We are currently in the process of evaluating the effects of the adoption of SFAS 159 on our consolidated results of operations, cash flows, and financial position.

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans(SFAS 158). SFAS 158 requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. SFAS 158 requires prospective application, and the recognition and disclosure requirements are effective for the end of fiscal years ending after December 15, 2006, which will be effective for us in the fourth quarter of fiscal 2007. Additionally, SFAS 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008 and will be effective for us in the fourth quarter of fiscal 2009. We are currently in the process of evaluating the effects of the adoption of SFAS 158 on our consolidated results of operations, cash flows, and financial position.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157). SFAS 157 defines fair

value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. This statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and will be effective for us in the first quarter of fiscal 2009. We are currently in the process of evaluating the effects of the adoption of SFAS 157 on our consolidated results of operations, cash flows, and financial position.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108,Quantifying Financial Misstatements(SAB 108), which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB 108 is effective for financial statements covering the first fiscal year ending after November 15, 2006 and will be effective for us in the fourth quarter of fiscal 2007. We are currently in the process of evaluating the effects of the adoption of SAB 108 on our consolidated results of operations, cash flows, and financial position.

In July 2006, the FASB issued FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(FIN 48). FIN 48 is effective for fiscal years beginning after December 15, 2006, and is effective for us in the first quarter of fiscal 2008. FIN 48 clarifies the way that companies account for uncertainty in income taxes by prescribing a consistent recognition threshold and measurement attribute, as well as establishing criteria for subsequently recognizing, derecognizing, and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to uncertain income tax positions. We are currently in the process of evaluating the effects of FIN 48 on our consolidated results of operations, cash flows, and financial position.

In March 2006, the Emerging Issues Task Force (EITF) issued EITF Issue No. 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)(EITF 06-3). A consensus was reached that entities may adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the tax amounts. The guidance is effective for interim and annual reporting periods beginning after December 15, 2006, which will be effective for us in the fourth quarter of fiscal 2007. We present retail sales net of sales taxes collected. This issue will not impact the method for recording these sales taxes in our consolidated financial statements.

3. Inventories

The components of inventories are as follows:


	March 10,		June 3,
	2007		2006
	*(dollars in thousands)*
Ingredients and packaging	$	44,155	$	44,540
Finished goods		22,937		20,891

	$	67,092	$	65,431

4. Property and Equipment

Property and equipment consists of the following:


	March 10,			June 3,
	2007			2006
	*(dollars in thousands*)
Land and buildings (lives ranging from 10 to 35 years)	$	389,895		$	390,573
Machinery and equipment (lives ranging from 4 to 15 years)		911,261			931,408

		1,301,156			1,321,981
Less accumulated depreciation		(741,486	)		(720,880	)

	$	559,670		$	601,101

Included in depreciation and amortization expense is approximately $16.8 million and $18.3 million for the sixteen week and $ 41.4 million and $45.9 million for the forty week periods ended March 10, 2007 and March 4, 2006, respectively, that relates to property and equipment used in our production process.

5. Assets Held for Sale

As part of our efforts to address our revenue declines and high cost structure, we are continuing a restructuring process for the consolidation and standardization of our distribution system, delivery routes and bakery outlets throughout the nation. This process also includes a review of productive capacity in our bakeries and where logical, we are closing bakeries and consolidating production. During the third quarter of fiscal 2007, excess assets amounting to approximately $2.9 million were identified and reclassified to assets held for sale with net assets of approximately $10.2 million remaining at March 10, 2007 when combined with assets previously identified as held for sale. Net gains realized on the sale of our assets in the third quarter of fiscal 2007 and 2006 aggregated approximately $0.1 million and $39.8 million while year-to-date net gains for fiscal 2007 and 2006 were approximately $6.6 million and $52.2 million, respectively. Substantially all of the net gains realized relate to restructuring activities and are classified as long-lived asset credits to our restructuring charges. See Note 14. Restructuring (Credits) Charges.

6. Lease Obligations

In the normal course of business, we enter into leases for office, transportation and delivery equipment as well as real estate leases used for both our retail outlets and as depots and warehouses in our distribution system. The majority of the operating leases contain renewal options for varying periods. Certain leases provide us with an option to acquire the related equipment at a fair market value during or at the end of the lease term.

At March 10, 2007, we had in place various operating leases for equipment on which at the end of the lease term we had guaranteed a buyout price, or residual value. On the effective date of FIN No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, we were required to disclose the undiscounted maximum potential liability of all guaranteed lease residual values and to record a liability for the fair value of such guarantees. At March 10, 2007, the maximum potential liability for all guaranteed lease residual values was $5.8 million, including amounts guaranteed prior and subsequent to the effective date of $2.4 million and $3.4 million, respectively. At March 10, 2007, we had an unamortized liability for the fair value of all guaranteed lease residual values that were entered into or modified subsequent to the effective date of $0.1 million.

7. Intangible Assets

In the third quarter of fiscal 2007, our annual impairment testing of our intangible assets indicated that no reduction in our carrying value was required.

Intangible assets consist of the following:


	March 10,			June 3,
	2007			2006
	*(dollars in thousands)*
Intangible assets with indefinite lives(generally trademarks and trade names)	$	157,471		$	157,471


Intangible assets with finite lives
Gross carrying amount	$	13,854		$	13,854
Less: Accumulated amortization		(10,884	)		(10,197	)


Net carrying amount	$	2,970		$	3,657

Intangible amortization expense for the third quarter of both fiscal 2007 and 2006 was approximately $0.3 million while year-to-date for both fiscal 2007 and 2006 intangible amortization expense was approximately $0.7 million. These amounts were primarily recorded as a reduction of net sales.

8. Debt

Long-term debt consists of the following:


	March 10,			June 3,
	2007			2006
	*(dollars in thousands)*
Secured
Post-petition credit agreement	$	—		$	—
Senior secured credit facility — pre-petition		447,510			489,817
Unsecured
6% senior subordinated convertible notes — pre-petition		99,999			100,000
Capital lease converted to pre-petition debt		6,125			6,125
Capital leases
Real Estate		3,998			5,065

		557,632			601,007
Less:
Long-term debt recorded to current liabilities		(451,508	)		(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

On September 23, 2004, we entered into a debtor-in-possession Revolving Credit Agreement (the DIP Facility) which provides for a $200.0 million commitment (the Commitment) of financing to fund our post-petition operating expenses, supplier and employee obligations. The DIP Facility originally provided for a secured revolving line of credit through September 22, 2006, which date has been extended to February 9, 2008 pursuant to the ninth

amendment. The Commitment additionally provides, with certain restrictions, for the issuance of letters of credit in the aggregate amount of $150.0 million (increased from the original limitation of $75 million as a result of prior amendments) of which $109.1 million was utilized at March 10, 2007. These letters of credit were partially collateralized by $8.8 million of restricted cash at March 10, 2007 as required by the DIP Facility. We pay fees approximating 3.0% on the balance of all letters of credit issued and outstanding under the DIP Facility. The Commitment is subject to the maintenance of a satisfactory Borrowing Base as defined by the DIP Facility. Obligations under the DIP Facility are secured by a superpriority lien in favor of the Lenders over virtually all of our assets. Interest on borrowings under the DIP Facility is at either the alternate base rate (as defined in the DIP Facility) plus 1.75%, or, at our option, the London Interbank Offered Rate (LIBOR) plus 2.75%. We also pay a commitment fee of 0.50% on the unused portion of the DIP Facility. Interest is payable monthly in arrears. As of March 10, 2007, there were no borrowings outstanding under the DIP Facility and we had $90.9 million available under the DIP Facility (of which up to $40.9 million could be used for additional letters of credit).

The DIP Facility subjects us to certain obligations, including the delivery of financial statements, cash flow forecasts, operating budgets and a strategic business plan at specified intervals and cumulative minimum EBITDA covenants. Furthermore, we are subject to certain limitations on the payment of indebtedness, entering into investments, the payment of capital expenditures, the incurrence of cash restructuring charges and the payment of dividends. In addition, payment under the DIP Facility may be accelerated following certain events of default including, but not limited to, (1) the conversion of any of the bankruptcy cases to cases under Chapter 7 of the Bankruptcy Code or the appointment of a trustee pursuant to Chapter 11 of the Bankruptcy Code; (2) our making certain payments of principal or interest on account of pre-petition indebtedness or payables; (3) a change of control (as defined in the DIP Facility); (4) an order of the Bankruptcy Court permitting holders of security interests to foreclose on debt secured by any of our assets which have an aggregate value in excess of $1.0 million; and (5) the entry of any judgment in excess of $1.0 million against us, the enforcement of which remains unstayed. At March 10, 2007, we were in compliance with all financial covenants, terms and conditions of the DIP Facility.

To date in fiscal 2007, we have completed three amendments. The seventh amendment, dated June 28, 2006, extended the suspension period established by the fifth amendment from June 3, 2006 through July 29, 2006. On August 25, 2006 the eighth amendment extended the maturity date of the DIP Facility to June 2, 2007 and made certain other financial accommodations, including (1) increased the sub-limit for the issuance of letters of credit to $150.0 million from $125.0 million; (2) extended the period for delivery of financial statements; (3) reset the maximum capital expenditures covenant levels; and (4) amended the cumulative consolidated EBITDA amounts. In addition, the eighth amendment contained a provision that allowed us to use for general corporate purposes fifty percent of the restricted cash previously unavailable to us, with the remaining fifty percent going to partially repay our senior pre-petition loans. The total amount of such restricted cash subject to the eighth amendment was approximately $90.7 million at August 25, 2006. These covenant adjustments and accommodations were made in lieu of extending the suspension period set forth in prior amendments. On February 16, 2007, we completed the ninth amendment, which amended and restated the DIP Facility and extended the maturity date to February 9, 2008, adjusted the eligible real property and finished goods components of the borrowing base, amended the minimum cumulative consolidated EBITDA amounts, limited the amount of cash restructuring charges incurred to $10.0 million and added covenant levels for the extension of the DIP Facility.

Senior Secured Credit Facility

During fiscal year 2002, we entered into a $900.0 million Senior Secured Credit Facility agreement with a syndicate of banks and institutional lenders which includes (1) a five-year $375.0 million tranche A term loan, repayable in quarterly installments; (2) a six-year $125.0 million tranche B term loan, repayable in quarterly installments; (3) a six-year $100.0 million tranche C term loan, repayable in quarterly installments; and (4) a five-year $300.0 million revolving loan, or the revolver, which allowed for up to $215.0 million for letters of credit. At March 10, 2007, we owed $173.4 million, $111.0 million, $89.7 million and $73.4 million under tranche A, tranche B, tranche C and the revolver, respectively. At March 10, 2007 outstanding letters of credit aggregated $101.7 million. At March 10, 2007, there was no availability for additional borrowing or issuance of letters of credit under the revolver. The Senior Secured Credit Facility is secured by all accounts receivable and a majority of owned real property, intellectual property and equipment. Interest on borrowings is at either the ABR (as defined in the Senior Secured Credit Facility) plus 3.0%, 3.25%, 3.0%, and 2.5% for tranche A, tranche B, tranche C, and the revolver, respectively, or, at our option LIBOR plus 4.0%, 4.25%, 4.0%, and 3.5% for tranche A, tranche B, tranche C and

revolver, respectively. At March 10, 2007, the average rate incurred for these borrowings in the aggregate was 9.35%. We also pay a facility fee of 0.50% on the revolver commitment (currently in the amount of $175.1 million) and fees ranging from 3.625% to 4.0% on the balance of all letters of credit outstanding under the revolver.

The Senior Secured Credit Facility agreement contains covenants which, among other matters (1) limit our ability to incur indebtedness, merge, consolidate and acquire, dispose of or incur liens on assets; and (2) limit aggregate payments of cash dividends on common stock and common stock repurchases.

Due to the secured nature of the Senior Secured Credit Facility, amounts outstanding are not considered as liabilities subject to compromise and interest, fees and expenses continue to be accrued and paid monthly.

6% Senior Subordinated Convertible Notes

On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior subordinated convertible notes due August 15, 2014 in a private placement. The notes are convertible at the option of the holder under certain circumstances into shares of our common stock at an initial conversion rate of 98.9854 shares per $1,000 principal amount of notes (an initial conversion price of $10.1025 per share), subject to adjustment. In July 2006, a principal amount of $1,000 was converted to 98 shares of our common stock.

Other Matters

At March 10, 2007, we have classified all of our pre-petition debt as payable within one year due to various defaults under the related credit agreements including our Chapter 11 filing on September 22, 2004. Under the Bankruptcy Code, actions to collect pre-petition indebtedness are stayed and our other contractual obligations may not be enforced against us. Therefore, such commitments may not reflect actual cash outlays in the future period.

We have classified the 6% senior subordinated convertible notes and certain capital leases which were converted to pre-petition debt, all of which are unsecured, as liabilities subject to compromise and, in accordance with the guidance provided by SOP 90-7, we have suspended the accrual of interest on this debt.

9. Derivative Instruments

We are exposed to market risks relative to commodity price fluctuations. To manage the volatility associated with this exposure, we utilize commodity derivative instruments to manage certain commodity prices. All financial instruments are used solely for hedging purposes and are not issued or held for speculative reasons.

Commodities we use in the production of our products are subject to wide price fluctuations, depending upon factors such as weather, crop production, worldwide market supply and demand and government regulation. Our objective is to utilize commodity hedging derivatives, including exchange traded futures and options on wheat, corn, soybean oil and certain fuels, to reduce our exposure to commodity price movements for future ingredient and energy needs. The strategy is to purchase futures and options to hedge the variability of cash flows related to the underlying commodity. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed one year.

We formally document the nature of and relationships between the hedging instruments and the hedged items at the inception of the trade, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and methods of assessing hedge effectiveness.

In addition, from time to time we enter into commodity derivatives, in which we do not elect to apply hedge accounting. Realized and unrealized gains or losses on these positions are recorded in the consolidated statements of operations in cost of products sold or selling, delivery and administrative expenses as appropriate.

Derivative commodity instruments accounted for under SFAS No. 133 are subject to mark-to-market accounting, under which changes in the market value of outstanding commodities are recognized as unrealized gains or losses in the consolidated statements of operations or OCI in the period of change. We record the fair market value of our

derivatives based on widely available market quotes, as well as information supplied by independent third parties.

During the forty week periods ending March 10, 2007 and March 4, 2006, we did not elect to apply hedge accounting for any of our derivative commodity purchases and all such derivatives were marked-to-market through cost of products sold or selling, delivery and administrative expenses, as appropriate. At March 10, 2007, the fair value and notional amounts of our commodity derivatives were de minimis based upon widely available market quotes. At March 4, 2006, we held no commodity derivatives in our portfolio. The only derivative activity in OCI for fiscal 2006 was the reclassification to cost of products sold of amounts in OCI at fiscal 2005 year end.

We are exposed to credit losses in the event of nonperformance by counterparties on commodity derivatives.

10. Liabilities Subject to Compromise

Under bankruptcy law, actions by creditors to collect amounts we owe prior to the petition date are stayed and certain other pre-petition contractual obligations may not be enforced against us. All pre-petition amounts have been classified as liabilities subject to compromise in the fiscal 2007 and 2006 consolidated balance sheets except for secured debt and those other liabilities that we expect will not be impaired pursuant to a confirmed plan of reorganization.

On December 14, 2004, the Court entered an Order establishing March 21, 2005 as the last date for all persons and entities holding or wishing to assert bankruptcy claims against the Company or one of its subsidiaries to file a proof of claim form. As of April 6, 2007, we have received approximately 9,100 claims, some of which have been filed after the deadline established by the court. We continue to evaluate all claims asserted in the bankruptcy proceedings and file periodic motions with the court to reject, modify, liquidate or allow such claims. In addition, we may receive additional claims resulting from the future rejection of executory contracts where the deadline to file a claim resulting from lease rejection is a function of when such contracts are formally rejected. Amounts that we have recorded may, in certain instances, be different than amounts asserted by our creditors and remain subject to reconciliation and adjustment.

We received approval from the Court to pay or otherwise honor certain of our pre-petition obligations, including employee salaries and wages, benefits and certain tax and other claims. We also have suspended the accrual of interest on the unsecured 6% senior subordinated convertible notes in the aggregate principle amount of $100.0 million that we issued August 12, 2004. The cumulative contractual unrecorded interest at March 10, 2007 on these obligations was approximately $14.8 million. The unrecorded interest expense for the third quarter of fiscal 2007 and 2006 on these obligations was approximately $1.8 million and $1.9 million, respectively, and year-to-date for both fiscal 2007 and 2006 unrecorded interest on these obligations was approximately $4.6 million. See Note 8. Debt to these financial statements for a discussion of the credit arrangements we entered into subsequent to the Chapter 11 filing.

The following table summarizes the components of the liabilities subject to compromise in our consolidated balance sheets:


	March 10,		June 3,
	2007		2006
	*(dollars in thousands*)
Accounts payable	$	129,960	$	129,951
Taxes payable		6,923		7,966
Retirement obligations (SERP and deferred compensation)		14,339		14,598
Legal reserve		13,263		12,910
Interest bearing debt and capital leases		106,124		106,125
Other		18,200		15,530

	$	288,809	$	287,080

The increase in other liabilities subject to compromise primarily reflects the settlement of various insurance claims.

11. Employee Benefit Plans

American Bakers Association Retirement Plan

In December, 2004, we began a review with respect to the proper accounting treatment for the American Bakers Association Retirement Plan, or ABA Plan, in light of newly identified information. Prior to our recent restructuring efforts, approximately 900 active IBC employees participated under the pension plan, although the number of active employees has significantly decreased as a result of the restructuring to approximately 350 active employees in the ABA Plan as of September 30, 2006. We had previously accounted for the ABA Plan as a multi-employer plan, which resulted in recognition of expense in the amount of our actual contributions to the ABA Plan but did not require recognition of any service cost or interest cost or for the Company to record any minimum pension benefit obligation on our balance sheet.

Upon review, the Company has determined that the ABA Plan is a type of pension plan that requires recognition of service cost and interest cost. Additionally, we have concluded our balance sheet should also reflect the appropriate pension benefit obligation. We believe that the ABA Plan has been historically administered as a multiple employer plan under ERISA and tax rules and should be treated as such. However, the amounts reflected in our financial statements were calculated on the basis of treating the ABA Plan as an aggregate of single employer plans under ERISA and tax rules, which is how the ABA Plan contends it should be treated. We have reflected our interest in the ABA Plan as an aggregate of single employer plans despite our position on the proper characterization of the ABA Plan due to representations we received from the ABA Plan and a 1979 determination issued by the Pension Benefit Guaranty Corporation (PBGC) (as discussed below). As of March 10, 2007, we have recorded a net pension benefit obligation liability of approximately $61.7 million with respect to our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans.

As a result of a request made by us and the Kettering Baking Company, another participating employer in the ABA Plan, the PBGC, which is the federal governmental agency that insures and supervises defined benefit pension plans, revisited its 1979 determination that the Plan was an aggregate of single employer plans and after reviewing the status of the ABA Plan, on August 8, 2006, made a final determination that the ABA Plan is a multiple employer plan under ERISA and tax rules. On August 9, 2006, we filed a lawsuit in Bankruptcy Court seeking enforcement of the PBGC’s determination, but there can be no assurance as to whether we will obtain such enforcement or the amount of any reduction to our net benefit obligation liability. Accordingly, due to the lack of a definitive resolution of this uncertainty prior to the end of the fiscal periods presented herein, as noted above we have continued to reflect our interests in the ABA Plan as an aggregate of single employer plans.

We believe that treatment of the ABA Plan as a multiple employer plan will result in a significant reduction in our net pension benefit obligation with respect to our employee participants from that which is reflected in the table below. The ultimate outcome of this uncertainty cannot presently be determined.

Since January 2006, we have not made required quarterly minimum funding contributions for a total of approximately $20.8 million to the ABA Plan and have filed, or are in the process of filing, the necessary reports with the PBGC. In addition, in June 2006, we received notice of a corrective contribution under the single employer plan assumption totaling approximately $13.9 million, which we do not believe is correct. We have not made such contributions pending the resolution of the uncertainties surrounding the ABA Plan. However, we expect that the amount of such contributions would be significantly less than amounts assessed by the ABA Plan on the assumption that the plan was an aggregate of single employer plans.

The ABA Plan’s net benefit obligation liability is recorded in other liabilities except for the current portion of $37.3 million and $37.5 million for March 10, 2007 and June 3, 2006, respectively, which is recorded in accrued expenses.

The components of the pension (credit) expense for the ABA Plan are as follows:


	Sixteen Weeks Ended					Forty Weeks Ended
	March 10,		March 4,			March 10,		March 4,
	2007		2006			2007		2006
			(dollars in thousands)
Service cost	$	348	$	486		$	870	$	1,214
Interest cost		1,035		987			2,587		2,467
Expected return on negative plan assets		112		76			280		190
Recognition of actuarial gain		—		(1,709	)		—		(4,271	)


Total periodic pension (credit) cost		1,495		(160	)		3,737		(400	)
Curtailment gain		—		—			—		(1,176	)


Net pension (credit) expense	$	1,495	$	(160	)	$	3,737	$	(1,576	)

Defined Benefit Pension Plan

We also maintain a defined benefit pension plan to benefit certain union and nonunion employee groups, with participation generally resulting from business acquisitions. The components of the pension expense for the defined benefit pension plan are as follows:


	Sixteen Weeks Ended						Forty Weeks Ended
	March 10,			March 4,			March 10,			March 4,
	2007			2006			2007			2006
				(dollars in thousands)
Service cost	$	284		$	278		$	710		$	696
Interest cost		1,221			1,242			3,053			3,106
Expected return on plan assets		(1,662	)		(1,503	)		(4,154	)		(3,757	)
Recognition of
Prior service cost		85			88			211			220
Actuarial loss		10			167			24			415


Net pension (credit) expense	$	(62	)	$	272		$	(156	)	$	680

Postretirement Health and Life Plans

In addition to providing retirement pension benefits, we provide health care and life insurance benefits for certain eligible retired employees.

In fiscal 2004 and prior, under our plans, all nonunion employees, with 10 years of service after age 50, were eligible for retiree health care coverage between ages 60 and 65. In April 2005, the bankruptcy court approved a motion to discontinue nonunion postretirement health care coverage for all future retirees, although participation is open to grandfathered retirees and dependents through age 65.

Certain union employees who have bargained into our company-sponsored health care plans are generally eligible after age 55 to 60, with 10 to 20 years of service, and have no benefits after Medicare eligibility is reached. Certain of the plans require contributions by retirees and spouses and a limited number of participants have supplemental benefits after Medicare eligibility.

The components of the net postretirement benefit (credit) expense are as follows:


	Sixteen Weeks Ended						Forty Weeks Ended
	March 10,			March 4,			March 10,			March 4,
	2007			2006			2007			2006
	(dollars in thousands)
Service cost	$	226		$	445		$	822		$	1,111
Interest cost		929			1,043			2,595			2,609
Amortization
Unrecognized prior service benefit		(2,274	)		(2,274	)		(5,686	)		(5,686	)
Unrecognized net loss		278			402			762			1,006


Net postretirement benefit (credit) expense	$	(841	)	$	(384	)	$	(1,507	)	$	(960	)

In the third quarter of fiscal 2007, we adjusted the net postretirement benefit expense based on an updated interim fiscal 2007 actuarial valuation.

12. Supplemental Executive Retirement Plan

We established a Supplemental Executive Retirement Plan (SERP) effective June 2, 2002. The SERP provided retirement benefits to certain officers and other select employees. The SERP is a non-tax qualified mechanism, which was intended to enhance our ability to retain the services of certain employees. The benefits were limited to a maximum of 1.8% of a participant’s final average salary multiplied by the years of credited service up to twenty years.

As of November 11, 2004, we suspended the SERP. Approximately $10.6 million representing the portion of the SERP liability, at both March 10, 2007 and June 3, 2006, attributable to retired participants has been reclassified to liabilities subject to compromise.

SERP expense was $0.4 million for both sixteen week periods ended and $1.0 million for both forty week periods ended March 10, 2007 and March 4, 2006, respectively, which represented interest cost.

13. Stock-Based Compensation

Effective June 4, 2006, we adopted the provisions of SFAS 123R, which generally requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value and to recognize the cost over the requisite service period. Prior to the adoption of SFAS 123R, we used the intrinsic value method prescribed in APB Opinion 25, and related interpretations in accounting for our 1996 Stock Incentive Plan, and therefore, no compensation expense was recognized for stock options issued under the Plan.

We adopted SFAS 123R using the modified prospective method. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS 123R. The cumulative impact of adopting SFAS 123R on the unvested equity-based awards, which were granted prior to 2007, was inconsequential to the consolidated financial statements.

1996 Stock Incentive Plan

The 1996 Stock Incentive Plan (the Plan) allows us to grant to employees and directors various stock awards including stock options, which are granted at prices not less than the fair market value at the date of grant, and restricted and deferred shares. A maximum of approximately 18.7 million shares was approved by our stockholders to be issued under the Plan. On March 10, 2007, shares totaling approximately 8.7 million were authorized but not awarded under the Plan. The stock options may be granted for a period not to exceed ten years and generally vest from one to three years from the date of grant. Our current practice is to settle awards out of treasury stock.

The year-to-date analysis of our stock option activity is as follows:


						Weighted
				Weighted		Average
				Average		Remaining
				Exercise Price		Contractual		Aggregate
	Shares			Per Share		Term		Intrinsic Value
								*(dollars in*
	*(in thousands)*							*thousands)*
Outstanding, beginning of period		4,099		$	16.41
Expired		(580	)		18.17

Outstanding, end of period		3,519			16.12		4.31	$	25,347

Options exercisable, end of period		3,519			16.12		4.31	$	25,347

On January 23, 2004, we exchanged outstanding options to purchase shares of our common stock with exercise prices of $25.00 or greater held by certain eligible employees for shares of restricted stock. The offer resulted in the exchange of options representing the right to purchase an aggregate of approximately 3.5 million shares of our common stock for approximately 0.5 million shares of restricted stock. The restricted stock, which vests ratably over a four-year term, was granted and the eligible options were granted under our 1996 Stock Incentive Plan. We used approximately 0.5 million shares of treasury stock for the award. Net unearned compensation of approximately $7.4 million is being charged to expense over the vesting period, net of surrenders, with expense charges of a de minimis amount for the third quarters of fiscal 2007 and 2006 due to surrenders at vesting of restricted share awards. Expense for the third quarter year-to-date periods in fiscal 2007 and 2006 was $0.4 million and $0.6 million, respectively, of which approximately $0.2 million was recognized in selling, delivery, and administrative expenses and $0.2 million in cost of products sold in the third quarter year-to-date of fiscal 2007 and approximately $0.4 million in selling, delivery, and administrative expenses and $0.2 million in cost of products sold in the third quarter year-to-date of fiscal 2006.

As required by SFAS 123R, unearned compensation of $1.9 million, which was previously reflected as a reduction to stockholders’ equity as of June 3, 2006, was reclassified as a reduction to additional paid-in capital.

The table below summarizes the nonvested restricted stock transactions:


				Weighted
				Average
				Grant Date
	Shares			Fair Value
	*(in thousands)*
Nonvested, beginning of period		162		$	14.49
Vested		(42	)		14.80
Surrendered		(44	)		14.23

Nonvested, end of period		76			14.47

The total compensation cost related to nonvested restricted stock awards not yet recognized as of March 10, 2007 was $0.9 million and is expected to be fully amortized by the fourth quarter of fiscal 2008.

In addition, $(0.3) million was recognized in the third quarter of fiscal 2007 as a result of deferred share awards disclaimed by former members of our Board of Directors, of which $(0.2) million was recognized in selling, delivery, and administrative expenses and $(0.1) million in cost of products sold.

On March 10, 2007, approximately 12.7 million total shares of common stock were reserved for issuance under various employee benefit plans.

Pro Forma Employee Stock-Based Compensation Expense

Prior to June 3, 2006, we accounted for stock-based employee compensation in accordance with the provisions and related interpretations of APB Opinion 25. Had compensation cost for share-based awards been determined consistent with SFAS 123R, as amended by SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure, which required pro forma disclosures determined through the use of an option-pricing model as if the provisions of SFAS 123R had been adopted.

Had we adopted the provisions of SFAS 123R in the first quarter of 2006, estimated pro forma net income and earnings per share would have been as follows:


	Sixteen
	Weeks			Forty
	Ended			Weeks Ended
	March 4, 2006
	(dollars in thousands, except per share data)
Net loss, as reported	$	(42,634	)	$	(102,946	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		11			641
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(138	)		(989	)


Pro forma net loss	$	(42,761	)	$	(103,294	)


Basic and diluted loss per share
As reported	$	(0.94	)	$	(2.28	)
Pro forma		(0.95	)		(2.29	)

14. Restructuring (Credits) Charges

The components of restructuring (credits) charges are as follows:


	Sixteen Weeks Ended						Forty Weeks Ended
	March 10,			March 4,			March 10,			March 4,
	2007			2006			2007			2006
				(dollars in thousands)
Severance (credits) charges	$	(680	)	$	1,252		$	(384	)	$	5,756
Long-lived asset (credits) charges		4			(36,381	)		(5,191	)		(32,094	)
Curtailment gain on a benefit plan		—			—			—			(706	)
Other exit costs		430			1,797			1,665			5,367


Total	$	(246	)	$	(33,332	)	$	(3,910	)	$	(21,677	)

Fiscal 2007 Activity

In the third quarter of fiscal 2007, no new restructuring activities were initiated.

Year-to-date fiscal 2007 restructuring costs related to the fiscal 2005 consolidation and company-wide reduction in force (RIF) were $0.3 million, comprised of $0.2 million in other exit costs and $0.1 million in net loss on the sale of real estate and equipment.

For the third quarter of fiscal 2007, we realized a restructuring credit of approximately $0.3 million due to the expiration of certain obligations for severance payments associated with the Profit Center Review plan that was initiated in the fourth quarter of fiscal 2005 to consolidate production, delivery routes, depots and bakery outlets. Year-to-date for fiscal 2007, we realized $0.2 million of net restructuring charges, including $0.8 million of other exit charges, offset by $0.3 million from net gains on sale of property and $0.3 million in severance credits.

As part of our ongoing efforts initiated in fiscal 2006 to consolidate operations to achieve production efficiencies, we realized a net restructuring credit of $0.1 million in the third quarter of fiscal 2007, comprised of $0.2 million of other exit costs for taxes, security, and utilities, offset by $0.3 million due to the expiration of certain obligations for severance payments. Year-to-date for fiscal 2007, we realized a net restructuring credit of $4.7 million related to the fiscal 2006 consolidation efforts, comprised primarily of net gains on the sale of real estate and equipment of $5.0 million, and restructuring credits due to the expiration of certain obligations for severance payments of $0.3 million, partially offset by additional miscellaneous exit costs of $0.6 million.

Year-to-date severance charges for two accounting office closings in fiscal 2007 were approximately $0.2 million.

The fiscal 2007 year-to-date analysis of our restructuring costs activity is as follows:


				Long-Lived
	Severance			Asset
	and Related			Charges
	Benefits			(Credits)			Other			Total
				*(dollars in thousands)*
Fiscal 2004 Plan

Balance June 3, 2006	$	—		$	—		$	—		$	—

Expensed in Fiscal 2007		—			(8	)		4			(4	)
Cash Paid in Fiscal 2007		—			—			(4	)		(4	)
Noncash Utilization in Fiscal 2007		—			8			—			8

Balance March 10, 2007		—			—			—			—


Fiscal 2005 Consolidation & RIF Plan

Balance June 3, 2006		199			—			—			199

Expensed in Fiscal 2007		6			84			201			291
Cash Paid in Fiscal 2007		(197	)		—			(201	)		(398	)
Noncash Utilization in Fiscal 2007		—			(84	)		—			(84	)

Balance March 10, 2007		8			—			—			8


Fiscal 2005 PC Review Plan

Balance June 3, 2006		893			—			98			991

Expensed in Fiscal 2007		(317	)		(309	)		836			210
Cash Paid in Fiscal 2007		(541	)		—			(934	)		(1,475	)
Noncash Utilization in Fiscal 2007		—			309			—			309

Balance March 10, 2007		35			—			—			35


Fiscal 2006 PC Review Plan

Balance June 3, 2006		1,000			—			45			1,045

Expensed in Fiscal 2007		(264	)		(4,958	)		569			(4,653	)
Cash Paid in Fiscal 2007		(643	)		—			(614	)		(1,257	)
Noncash Utilization in Fiscal 2007		—			4,958			—			4,958

Balance March 10, 2007		93			—			—			93


Accounting Office Closings

Balance June 3, 2006		345			—			—			345

Expensed in Fiscal 2007		191			—			55			246
Cash Paid in Fiscal 2007		(417	)		—			(37	)		(454	)
Noncash Utilization in Fiscal 2007		—			—			—			—

Balance March 10, 2007		119			—			18			137


Consolidated

Balance June 3, 2006		2,437			—			143			2,580

Expensed in Fiscal 2007		(384	)		(5,191	)		1,665			(3,910	)
Cash Paid in Fiscal 2007		(1,798	)		—			(1,790	)		(3,588	)
Noncash Utilization in Fiscal 2007		—			5,191			—			5,191

Balance March 10, 2007	$	255		$	—		$	18		$	273

Fiscal 2006 Activity

We recorded a net restructuring credit in year-to-date fiscal 2006 of $10.6 million related to our fiscal 2004 plan that resulted from a net gain realized upon the sale of one of our bakeries of $10.8 million, net of additional restructuring charges of $0.2 million recorded in third quarter, primarily comprised of changes in estimates of real estate and equipment fair values.

Continuing with the process of consolidating operations carried on in fiscal 2005 to achieve production efficiencies, we incurred an additional $0.3 million in restructuring charges for year-to-date fiscal 2006, all recorded in the first and second quarters, related primarily to real estate taxes, security, utilities, and clean up charges.

In the fourth quarter of fiscal 2005, we undertook restructuring efforts at three of our Profit Centers in order to consolidate production, delivery routes, depots, and bakery outlets. The continuation of this review process in fiscal 2006 resulted in a year-to-date net restructuring credit of $10.3 million, with a $10.5 million net restructuring credit being recorded in the third quarter. The year-to-date net restructuring credit included a $0.4 million credit for the adjustment of severance costs, impairment charges on bakery equipment of $1.9 million ($1.7 million in third quarter), net gains on the sale of certain real property and equipment of $13.2 million ($12.7 million in third quarter), a $0.7 million credit resulting from curtailment gains on a pension plan related to this restructuring effort, and other exit costs of $2.1 million ($0.5 million in third quarter) for relocation and further utility costs, security, taxes, and clean up activities.

In fiscal 2006, we continued the review of our Profit Centers and initiated further restructuring activities. During the first three quarters, we closed four bakeries, two in the first quarter and two in the second quarter, and consolidated operations by standardizing distribution and consolidating production routes, depots and bakery outlets. In addition, we sold certain properties associated with our 2006 restructuring activities for a gain. These restructuring activities resulted in a net restructuring credit of approximately $23.1 million in the third quarter and a year-to-date fiscal 2006 restructuring credit of approximately $1.2 million. We recorded severance charges of $1.3 million for the elimination of approximately 230 employee positions during the third quarter of fiscal 2006, bringing the year-to-date total of employee positions eliminated to approximately 2,074 and year-to-date severance charges to $6.2 million. In the third quarter, we recorded a net gain on the sale of certain real property and equipment of $26.0 million, partially offset by year-to-date asset impairment charges of $15.9 million ($0.5 million in the third quarter) to adjust real estate and equipment to fair value. We incurred other miscellaneous exit costs in year-to-date fiscal 2006 of $2.8 million ($1.2 million in the third quarter).

The cumulative restructuring charges recognized through the third quarter of fiscal 2007, as well as expected remaining charges through plan completion, are summarized in the two tables below. Most of the remaining costs are expected to be incurred during the next year.

Cumulative restructuring (credits) charges by plan (in thousands):


			Long-Lived
	Severance		Asset
	and Related		Charges
	Benefits		(Credits)			Other			Total
Fiscal 2004 Plan	$	2,537	$	(8,091	)	$	7,006		$	1,452

Fiscal 2005 Consolidation & RIF Plan		5,581		6,473			2,784			14,838

Fiscal 2005 PC Review Plan		6,889		18,348			(4,192	)		21,045

Fiscal 2006 PC Review Plan		5,899		(19,358	)		3,594			(9,865	)

Accounting Office Closings		536		—			55			591

Expected remaining restructuring charges by plan (in thousands):


	Severance
	and Related
	Benefits		Other		Total
Fiscal 2005 PC Review Plan	$	—	$	644	$	644

Fiscal 2006 PC Review Plan		—		224		224

Accounting Office Closings		103		—		103

15. Reorganization Charges

The components of reorganization charges are as follows:


	March 10, 2007
	Sixteen Weeks			Forty Weeks
	Ended			Ended
	Reorganization			Reorganization			Cash
	Charges			Charges			Payments
	(dollars in thousands)
Professional fees	$	10,548		$	29,003		$	29,623
Employee retention expenses		316			1,016			1,968
Lease rejection charges (credits)		(44	)		54			—
Interest income		(839	)		(2,560	)		(3,366	)
Gain on sale of assets		(1	)		(826	)		(826	)


Reorganization charges, net	$	9,980		$	26,687		$	27,399


	March 4, 2006
	Sixteen Weeks			Forty Weeks
	Ended			Ended
	Reorganization			Reorganization			Cash
	Charges			Charges			Payments
	(dollars in thousands)
Professional fees	$	10,136		$	25,901		$	27,165
Employee retention expenses		1,347			5,753			4,323
Lease rejection charges (credits)		618			547			—
Interest income		(1,846	)		(3,202	)		(2,797	)
Gain on sale of assets		—			(597	)		(597	)


Reorganization charges, net	$	10,255		$	28,402		$	28,094

16. Income Taxes

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


	Forty Weeks Ended
	March 10,			March 4,
	2007			2006
Statutory federal tax rate		35.0	%		35.0	%
State income tax, net		1.1			1.1
Valuation allowance increase		(30.9	)		(26.6	)
Adjustments to prior year tax accruals		0.3			3.5
Other		(1.7	)		(1.1	)

		3.8	%		11.9	%

The income tax benefit we have recognized in 2007 relates principally to expected refunds of tax we previously paid, available to us pursuant to a federal statutory provision that permits certain net operating losses to be carried back ten years. Only a portion of the net operating loss we incur is eligible for this treatment. Our effective tax rate for fiscal 2007 is based, in large part, upon our estimate of the amount of our fiscal 2007 loss which we expect to be eligible for the ten year carryback. Our fiscal 2006 tax provision also reflects the impact of the ten year carryback.

The amount of income taxes we pay is subject to periodic audits by federal, state and local tax authorities, which result in proposed assessments from time to time. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonable foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. During the first quarter of fiscal 2006, we adjusted our prior year tax accruals based upon a review of recently closed audits and the status of prior tax years relative to the statutes of limitation, as well as for the approval of tax credits for prior years, which had a significant favorable impact on our effective tax rate for fiscal 2006.

We provide a valuation allowance against deferred tax assets if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Valuation allowances were recorded in fiscal 2007 and fiscal 2006 against deferred tax assets originating in those years.

17. Commitments and Contingencies

On September 22, 2004, or the Petition Date, we and each of our wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the Western District of Missouri, or the Bankruptcy Court (Case Nos. 04-45814, 04-45816, 04-45817, 04-45818, 04-45819, 04-45820, 04-45821 and 04-45822). On September 24, 2004, the official committee of unsecured creditors was appointed in our Chapter 11 cases. Subsequently, on November 29, 2004, the official committee of equity security holders was appointed in our Chapter 11 cases. On January 14, 2006, Mrs. Cubbison’s, a subsidiary of which we are an eighty percent owner, filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court (Case No. 06-40111). We are continuing to operate our business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. As a result of the filing, our pre-petition obligations, including obligations under debt instruments, may not be generally enforceable against us and any actions to collect pre-petition indebtedness and most legal proceedings are automatically stayed, unless the stay is lifted by the Bankruptcy Court.

On August 12, 2004, we issued $100.0 million aggregate principal amount of our 6.0% senior subordinated convertible notes due August 15, 2014 in a private placement to six institutional accredited investors under an exemption from registration pursuant to Rule 506 of Regulation D promulgated by the SEC. The convertible notes

were purchased by Highbridge International LLC, Isotope Limited, AG Domestic Convertibles LP, AG Offshore Convertibles LTD, Shepherd Investments International, Ltd., and Stark Trading. Between the dates of September 2 and September 21, 2004, we received written correspondence from all of the purchasers of the convertible notes stating that it was their position that we had made certain misrepresentations in connection with the sale of the notes. No legal action has been filed by any of the purchasers with regard to their claims and we will aggressively defend any such action in the event it is filed. On December 6, 2004, U.S. Bank National Association, as indenture trustee, filed proofs of claim in our bankruptcy case on behalf of the noteholders in the amount of $100.7 million, plus any other amounts owing pursuant to the terms of the indenture and reimbursement of the trustee’s fees and expenses. In addition, on March 18, 2005, R2 Investments, LDC filed a proof of claim in the amount of $70.4 million plus interest, fees and expenses based on its holdings of 70% of the notes.

On July 9, 2004, we received notice of an informal inquiry from the SEC. This request followed the voluntary disclosures that we made to the SEC regarding the increase in our reserve for workers’ compensation during fiscal 2004 with a charge to pre-tax income of approximately $48.0 million. We cooperated with the SEC in its inquiry by providing documents and other information. On January 18, 2005, we announced that the SEC had issued an Order commencing a formal investigation of the Company for the time period June 2002 through the present. The Formal Order indicated that the SEC staff had reported information tending to show possible violations of Section 10(b), 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1 and 13b2-2. The specific allegations pertaining to these subsections included that IBC may have, in connection with the purchase or sale of securities, made untrue statements of material fact or omitted material facts, or engaged in acts which operated as a fraud or deceit upon purchasers of our securities; failed to file accurate annual and quarterly reports; failed to add material information to make any filed reports not misleading; failed to make and keep accurate books and records and maintain adequate internal controls; and falsified books or records.

Pursuant to the Formal Order, the SEC subpoenaed documents and testimony from several current or former officers and directors and individuals from third party professional firms providing services to us. We cooperated fully with the SEC’s investigation. On November 2, 2006, we announced that, without admitting or denying the allegations by the SEC, we had submitted an offer of settlement to the staff of the Division of Enforcement of the SEC in connection with the investigation, which was subject to approval by the Commission. On December 21, 2006, the Commission approved our settlement offer and entered a cease and desist order against future violations of the record-keeping, internal controls and reporting provisions of the federal securities laws and related SEC rules. No fine was imposed.

After the commencement of our Chapter 11 cases, the NYSE notified us that its Market Trading Analysis Department was reviewing transactions in the common stock of IBC occurring prior to our August 30, 2004 announcement that we were delaying the filing of our Form 10-K and prior to our September 22, 2004 filing of a petition for relief under Chapter 11. In connection with its investigation, the NYSE requested information from us on various dates, including September 22 and October 5, 2004, and February 2, 2005. We believe that we have fully responded to each of the NYSE’s requests for information, with our last response to the NYSE dated June 10, 2005, and we expect to continue to cooperate with the NYSE if it requires any further information or assistance from us in connection with its inquiry.

In June 2003, a purported shareholder derivative lawsuit was filed in Missouri state court against certain current and former officers and directors of IBC, seeking damages and other relief. In the case, which is captioned Miller v. Coffey, et al., No. 03-CV-216141 (Cir. Ct., Jackson Cty.), plaintiffs allege that the defendants in this action breached their fiduciary duties to IBC by using material non-public information about IBC to sell IBC stock at prices higher than they could have obtained had the market been aware of the material non-public information. Our Board of Directors previously had received a shareholder derivative demand from the plaintiffs in the June 2003 derivative lawsuit, requesting legal action by us against certain officers and directors of IBC. In response, our Board of Directors appointed a Special Review Committee to evaluate the demand and to report to the board. Prior to our Chapter 11 filing, the parties had agreed to stay the lawsuit until October 11, 2004 and also had initiated preliminary discussions looking towards the possibility of resolving the matter. On October 8, 2004, the court entered an order extending the stay for an additional 60 days. It is our position that, as a result of our Chapter 11 filing, the case has been automatically stayed under the Bankruptcy Code.

We are named in two wage and hour cases in New Jersey that have been brought under state law, one of which has

been brought on behalf of a putative class of RSRs. The case involving the putative class is captioned Ruzicka, et al. v. Interstate Brands Corp., et al., No. 03-CV 2846 (FLW) (Sup. Ct., Ocean City, N.J.), and the other case is captioned McCourt, et al. v. Interstate Brands Corp., No. 1-03-CV-00220 (FLW) (D.N.J.). These cases are in their preliminary stages. As a result of our Chapter 11 filing, these cases have been automatically stayed. The named plaintiffs in both cases have filed a proof of claim in our bankruptcy case for unpaid wages. We intend to vigorously contest these lawsuits.

We are named in an additional wage and hour case brought on behalf of a putative class of bakery production supervisors under federal law, captioned Anugweje v. Interstate Brands Corp., 2:03 CV 00385 (WGB) (D.N.J.). This action is in the preliminary stages. As a result of our Chapter 11 filing, this case has been automatically stayed. We intend to vigorously contest this litigation.

The EPA has made inquiries into the refrigerant handling practices of companies in our industry. In September 2000, we received a request for information from the EPA relating to our handling of regulated refrigerants, which we historically have used in equipment in our bakeries for a number of purposes, including to cool the dough during the production process. The EPA has entered into negotiated settlements with two companies in our industry, and has offered a partnership program to other members of the bakery industry that offered amnesty from fines if participating companies converted their equipment to eliminate the use of ozone-depleting substances. Because we had previously received an information request from the EPA, the EPA/Department of Justice (DOJ) policies indicated that we were not eligible to participate in the partnership program. Nevertheless, we undertook our own voluntary program to convert our industrial equipment to reduce the use of ozone-depleting refrigerants. Prior to our Chapter 11 filing, we had undertaken negotiations with the EPA to resolve issues that may exist regarding our historic management of regulated refrigerants. The DOJ, on behalf of the United States of America, filed a proof of claim in our bankruptcy case on March 21, 2005 based upon our refrigerant handling practices. Although the proof of claim does not set forth a specific amount, the claimants allege more than 3,400 violations during the period from 1998 through 2002 and assert that each violation is subject to penalties of up to $27,500 per day. We are engaged in settlement discussions with the EPA/DOJ. If these discussions are unsuccessful, we intend to vigorously challenge any penalties calculated on this basis and defend against such claims by the EPA/DOJ.

On June 11, 2003 the South Coast Air Quality Management District in California, or SCAQMD, issued a Notice of Violation alleging that we had failed to operate catalytic oxidizers on bakery emissions at our Pomona, California facility in accordance with the conditions of that facility’s Clean Air Act Title V Permit. Among other things, that permit requires that the operating temperatures of the catalytic oxidizers be at least 550 degrees Fahrenheit. Under the South Coast Air Quality Management District rules, violations of permit conditions are subject to penalties of up to $1,000 per day, for each day of violation. The Notice of Violation alleges we were in violation of the permit through temperature deviations on more than 700 days from September 1999 through June 2003. Since that time, four additional instances of alleged violations, some including more than one day, have been cited by the SCAQMD. We are cooperating with the SCAQMD, have taken steps to remove the possible cause of the deviations alleged in the Notice of Violation, applied for and received a new permit, and have replaced the oxidizers with a single, more effective oxidizer. The SCAQMD filed a proof of claim dated December 8, 2004 in our bankruptcy case for $0.2 million in civil penalties. Management is committed to cooperating with the SCAQMD and is taking actions necessary to minimize or eliminate any future violations and negotiate a reasonable settlement of those that have been alleged.

plan under ERISA and tax rules and should be treated as such. However, the amounts reflected in our financial statements after the fiscal 2004 financial statement restatement were calculated on the basis of treating the ABA Plan as an aggregate of single employer plans under ERISA and tax rules, which is how the ABA Plan contends it should be treated. We have reflected our interest in the ABA Plan as an aggregate of single employer plans despite our position on the proper characterization of the ABA Plan due to representations we received from the ABA Plan and a 1979 determination issued by the Pension Benefit Guaranty Corporation (PBGC) (as discussed below). As of March 10, 2007, we have recorded a net pension benefit obligation liability of approximately $61.7 million with respect to our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans.

In our December 2005 submission requested by the PBGC in connection with its review of the 1979 determination referred to above, we asserted our belief based on available information that treatment of the ABA Plan as a multiple employer plan will result in an allocation of pension plan assets to our pension plan participants in an amount equal to approximately $40 million. We believe that treatment of the ABA Plan as a multiple employer plan will result in a significant reduction in our net pension benefit obligation with respect to our employee participants from that which is reflected in Note 11. Employee Benefit Plans. The ultimate outcome of this uncertainty cannot presently be determined.

In addition, we have received requests for additional corrective contributions assessed after May 28, 2005, under the single employer plan assumption, which we do not believe is correct. We have not made such contributions pending the resolution of the uncertainties surrounding the ABA Plan. However, we expect that the amount of such contributions would be significantly less than amounts assessed by the ABA Plan on the assumption that the plan was an aggregate of single employer plans. On May 3, 2006, Sara Lee Corporation instituted proceedings against the ABA Plan and the Board of Trustees of the Plan (the “Board of Trustees”) in the United States District Court for the District of Columbia. Sara Lee Corporation v. American Bakers Ass’n Retirement Plan, et al., Case No. 1:06-cv-00819-HHK (D.D.C.) (the “Sara Lee Litigation”). The relief Sara Lee seeks includes, among other things, a mandatory injunction that would compel the ABA Plan and the Board of Trustees to (i) require all participating employers in the ABA Plan with negative asset balances – which would include the Company – to make payments to the Plan in order to maintain a positive asset balance and (ii) cut off the payment from the ABA Plan of benefits to employee-participants of the Company and other participating employers with negative asset balances, to the extent such employers did not maintain a positive balance. However, the Sara Lee Litigation is premised on the notion that the ABA Plan is an aggregate of single employer plans, which is inconsistent with the PBGC’s determination dated August 8, 2006 that the ABA Plan is a multiple employer plan. On September 29, 2006, Sara Lee filed an amended complaint adding the PBGC as a defendant and challenging the PBGC’s August 8, 2006 determination. In order to obtain a resolution of these matters without litigation over the proper forum, we have voluntarily stayed our lawsuit in Bankruptcy Court seeking enforcement of the August 8, 2006 determination upon the agreement by the ABA Plan and its Board of Trustees to join IBC as a party to the Sara Lee Litigation.

On December 4, 2006, the ABA Plan and the Board of Trustees served a summons upon us as a third party defendant to a Third Party Complaint filed in the Sara Lee Litigation against Sara Lee and the other participating employers in the ABA Plan. The Third Party Complaint seeks a declaratory judgment as to the nature of the ABA Plan and further asserts that the August 8, 2006 determination was arbitrary and capricious and should be rescinded. At this time, we believe all relevant parties have been joined to the Sara Lee Litigation and the District Court for the District of Columbia will review the PBGC’s administrative determination.

On November 22, 2006, the ABA Plan and the Board of Trustees filed a motion in the bankruptcy court seeking an

order requiring IBC to file an application with the Internal Revenue Service requesting a waiver of the minimum funding requirements applicable to the ABA Plan or, in the alternative, make $3.9 million of contributions to the ABA Plan no later than June 15, 2007. On December 8, 2006, the Bankruptcy Court denied the ABA motion. On April 4, 2007, the PBGC filed a motion for summary judgment in the Sara Lee case asking the court to enforce the PBGC’s August 8, 2006 determination that the ABA Plan is a multiple employer plan. At a status conference held on April 5, 2007, the court scheduled oral argument on the PBGC’s motion for July 2, 2007.

On October 30, 2006, Brencourt Advisors, LLC, a stockholder of the Company, filed a complaint in the Court of Chancery of the State of Delaware for New Castle County, captioned Brencourt Advisors LLC v. Interstate Bakeries Corporation, C.A. No. 2506-N (the “Complaint”) seeking to compel an annual meeting of stockholders for the purpose of electing directors. On November 29, 2006, we filed a motion with the Bankruptcy Court in response to the Complaint seeking (i) to have the Bankruptcy Court confirm our Board of Directors to be the nine individuals currently serving as members of our Board of Directors and (ii) an injunction from the Bankruptcy Court ordering Brencourt to cease the prosecution of the Complaint. On January 5, 2007, the Bankruptcy Court approved a settlement among the Company and its various constituency groups to reconstitute our Board of Directors from nine to seven members. Pursuant to the terms of the settlement, five directors left the Board, two new directors were appointed by the Bankruptcy Court and the remaining Board seat was filled by our new Chief Executive Officer on February 16, 2007. On January 11, 2007, the Complaint was dismissed without prejudice.

On February 16, 2007, the Bankruptcy Court approved the Employment Agreement of Craig D. Jung as our Chief Executive Officer and member of our Board of Directors. Under the terms of the Employment Agreement, Mr. Jung will receive pre-emergence cash awards upon the achievement of certain levels of Total Enterprise Value (as defined in the Employment Agreement) and a post-emergence equity award, all as provided in the Employment Agreement.

Except as noted above, the Company has not determined a loss is probable and cannot estimate a range of loss or gain for the items disclosed herein; however, the ultimate resolutions could have a material impact on our condensed consolidated financial statements.

We are subject to various other routine legal proceedings, environmental actions and matters in the ordinary course of business, some of which may be covered in whole or in part by insurance. Except for the matters disclosed herein, we are not aware of any other items as of this filing which could have a material adverse effect on our condensed consolidated financial statements.

18. Earnings (Loss) per Share

Basic and diluted earnings per share are calculated in accordance with SFAS No. 128,Earnings per Share. Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period including the effect of all potential dilutive common shares, primarily stock options outstanding under our stock compensation plan and the impact of our 6% senior subordinated convertible notes.

The following is the reconciliation between basic and diluted weighted average shares outstanding used in our earnings per share computations:

Sixteen Weeks Ended

Forty Weeks Ended

March 10,

March 4,

March 10,

March 4,

2007

2006

2007

2006

(in thousands)

Weighted average common shares outstanding:

Basic and diluted

45,169

45,129

45,167

45,111

Diluted weighted average common shares outstanding exclude options on common stock, unvested restricted stock and deferred shares awarded, and our 6% senior subordinated convertible notes, which aggregated to approximately 13.6 million and 14.4 million for the third quarter of fiscal 2007 and 2006, respectively, and approximately 13.8 million and 14.5 million for year-to-date fiscal 2007 and 2006, respectively, because their effect would have been antidilutive. Due to our reported net losses for all periods, diluted loss per share amounts are not adjusted for the effect of dilutive stock awards.

Under an August 12, 2004 amendment to our Senior Secured Credit Facility, we are prohibited from paying dividends until our senior secured bank debt is rated at least BB- by Standard & Poor’s Ratings Services and Ba3 by Moody’s Investors Service, in each case with a stable outlook or better. In addition, during the term of the DIP Facility, the payment of dividends is prohibited.

19. Comprehensive Loss

Reconciliations of net loss to comprehensive loss are as follows:


	Sixteen Weeks Ended						Forty Weeks Ended
	March 10,			March 4,			March 10,			March 4,
	2007			2006			2007			2006
	*(dollars in thousands)*
Net loss	$	(42,235	)	$	(42,634	)	$	(94,851	)	$	(102,946	)

Other comprehensive income (loss):
Commodity derivative (gains) losses reclassified to cost of products sold, net of income taxes of $0		—			—			—			(477	)

Comprehensive loss	$	(42,235	)	$	(42,634	)	$	(94,851	)	$	(103,423	)

20. Segment Information

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, requires us to report information about our operating segments according to management’s approach for determining reportable segments. This approach is based on the way management organizes segments within a company for making operating decisions and assessing performance.

We have aggregated our identified operating segments into two distinct reportable segments by production process, type of customer, and distribution method as follows:

Wholesale operations— Our wholesale operations accounted for approximately 89.2% and 88.5% of our net sales for the sixteen weeks ended and 88.8% and 88.3% for the forty weeks ended March 10, 2007 and March 4, 2006, respectively, and consists of an aggregation of our ten profit centers that manufacture, distribute, and sell fresh baked goods.

Retail operations— Our retail operations generated approximately 10.8% and 11.5% of our net sales for the sixteen weeks ended and 11.2% and 11.7% for the forty weeks ended March 10, 2007 and March 4, 2006, respectively, and consists of five regions that sell our baked goods and other food items.

Our reportable segments are strategic business units that are managed separately using different marketing strategies.

Our management evaluates reportable segment performance based on profit or loss from operations before other income, interest expense, and income taxes. Because of our integrated business structure, operating costs often benefit both reportable segments and must be allocated between segments. Additionally, we do not identify or allocate fixed assets and capital expenditures for long-lived assets by reportable segment and we transfer fresh goods between segments at cost without recognizing intersegment sales on these transfers. Intersegment transfers of products at cost aggregated approximately $30.4 million and $33.4 million for the sixteen weeks ended and $83.9 million and $91.4 million for the forty weeks ended March 10, 2007 and March 4, 2006, respectively.

The measurement of reportable segment results is generally consistent with the presentation of the consolidated statement of operations.


	Sixteen Weeks Ended						Forty Weeks Ended
	March 10,			March 4,			March 10,			March 4,
	2007			2006			2007			2006
	(dollars in thousands)
Net Sales
Wholesale operations	$	768,577		$	774,564		$	1,969,859		$	2,049,747
Retail operations		93,064			100,245			247,940			272,092


Total net sales	$	861,641		$	874,809		$	2,217,799		$	2,321,839


Operating Income (Loss)

Wholesale operations	$	4,393		$	(28,589	)	$	19,183		$	(19,048	)
Retail operations		1,556			(199	)		6,555			6,883

		5,949			(28,788	)		25,738			(12,165	)
Corporate		(25,615	)		8,929			(59,914	)		(40,118	)


Total operating loss		(19,666	)		(19,859	)		(34,176	)		(52,283	)

Interest expense		14,673			16,529			38,831			39,020
Reorganization charges		9,980			10,255			26,687			28,402
Other (income) expense		(44	)		(82	)		(1,120	)		(2,917	)


		24,609			26,702			64,398			64,505

Loss before income taxes		(44,275	)		(46,561	)		(98,574	)		(116,788	)
Provision (benefit) for income taxes		(2,040	)		(3,927	)		(3,723	)		(13,842	)


Net loss	$	(42,235	)	$	(42,634	)	$	(94,851	)	$	(102,946	)

21. Subsequent Events

On March 14, 2007, the Bankruptcy Court approved the fiscal 2007 IBC Management Incentive Plan, or the Plan, for key employees. Payments under the Plan are to be based upon our financial performance during fiscal 2007. Any compensation expense due under the Plan will be accrued in the fourth quarter of fiscal 2007.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with our consolidated financial statements, notes, and tables included elsewhere in this report, as well as, the more detailedManagement’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contained in our 2006 Annual Report on Form 10-K. This MD&A may contain forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, future performance involves risks and uncertainties, which may cause actual results to differ materially from those expressed in the forward-looking statements. SeeForward-Looking Statements for further information.

COMPANY OVERVIEW

Interstate Bakeries Corporation is one of the largest wholesale bakers and distributors of fresh baked bread and sweet goods in the United States, producing, marketing, distributing and selling a wide range of breads, rolls, croutons, snack cakes, donuts, sweet rolls and related products. Our various brands are positioned across a wide spectrum of consumer categories and price points. We operate 45 bakeries and approximately 800 bakery outlets located in strategic markets throughout the United States. Our sales force delivers baked goods from approximately 700 distribution centers on approximately 6,500 delivery routes.

RECENT DEVELOPMENTS

On January 5, 2007, the Bankruptcy Court approved a settlement among the Company and its various constituency groups to reconstitute our Board of Directors from nine to seven members. Pursuant to the terms of the settlement, David I. Pauker and Terry R. Peets joined the Board of Directors and five other members of the Board of Directors departed. The settlement contemplated that the Company’s new Chief Executive Officer, when appointed, would fill the seventh seat on our Board of Directors.

On January 30, 2007, David N. Weinstein resigned as a director of the Company. On February 28, 2007, our Board of Directors, following the recommendation of the Equity Committee organized in our Chapter 11 proceedings and the Nominating and Corporate Governance Committee of our Board of Directors, appointed Philip A. Vachon as a director to fill the vacancy left by the resignation of Mr. Weinstein.

On February 16, 2007, the Bankruptcy Court approved the employment agreement of Craig D. Jung as our Chief Executive Officer and, consistent with the terms of the settlement discussed above, appointed Mr. Jung as a member of our Board of Directors. Mr. Jung succeeds Antonio C. Alvarez II, who had served as our interim Chief Executive Officer since September 2004.

Together with Mr. Pauker, Mr. Peets, Mr. Vachon and Mr. Jung, our Board of Directors also currently consists of Robert Calhoun, a Board member since 1991; Michael Anderson, a Board member since 1998; and William Mistretta, a Board member since 2006. Additionally, our Nominating and Corporate Governance Committee is comprised of Mr. Peets (Chair), Mr. Pauker, and Mr. Vachon; our Audit Committee is comprised of Mr. Calhoun (Chair), Mr. Anderson and Mr. Mistretta; and our Compensation Committee is comprised of Mr. Pauker (Chair), Mr. Calhoun and Mr. Peets.

We are reviewing our restructuring alternatives consistent with the following four priorities established by Mr. Jung, which he is leading management’s efforts to address: (1) fix our cost structure to grow margins; (2) accelerate innovation to realize attractive revenue growth; (3) drive productivity to improve margins; and (4) create a performance culture.

Also on February 16, 2007, the Bankruptcy Court approved an extension of the maturity date of IBC’s post-petition debtor-in-possession (DIP) financing facility to February 9, 2008 from June 2, 2007.

In the third quarter of fiscal 2007, we introduced 100 Calorie Packs on a national basis in the following three flavors: chocolate cake with chocolate icing, yellow cake with chocolate icing and carrot cake with cream cheese icing.

CRITICAL ACCOUNTING POLICIES

Refer toCritical Accounting Policiesin our 2006 Annual Report on Form 10-K for information on accounting policies that we consider critical in preparing our consolidated financial statements. These policies include significant estimates made by management using information available at the time the estimates were made. However, these estimates could change materially if different information or assumptions were used.

RESULTS OF OPERATIONS

The following table sets forth the relative percentages that certain income and expense items bear to net sales:


	Sixteen Weeks Ended						Forty Weeks Ended
	March 10,			March 4,			March 10,			March 4,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold (exclusive of items shown below)		51.1			52.1			51.4			51.0
Selling, delivery and administrative expenses		48.4			51.2			47.7			49.6
Restructuring credits		—			(3.8	)		(0.2	)		(0.9	)
Depreciation and amortization		2.6			2.7			2.5			2.5
Loss on sale or abandonment of assets		0.2			0.1			0.1			0.1


Operating loss		(2.3	)		(2.3	)		(1.5	)		(2.3	)
Interest expense		1.7			1.9			1.8			1.7
Reorganization charges, net		1.1			1.1			1.2			1.1
Other income		—			—			(0.1	)		(0.1	)


Loss before income taxes		(5.1	)		(5.3	)		(4.4	)		(5.0	)
Provision (benefit) for income taxes		(0.2	)		(0.4	)		(0.1	)		(0.6	)


Net loss		(4.9	)%		(4.9	)%		(4.3	)%		(4.4	)%

Net Sales

(dollars in thousands)


	Sixteen Weeks Ended													Forty Weeks Ended
	March 10,					March 4,					%			March 10,					March 4,					%
	2007		%			2006		%			Change			2007		%			2006		%			Change
Wholesale operations	$	768,577		89.2	%	$	774,564		88.5	%		(0.8	)%	$	1,969,859		88.8	%	$	2,049,747		88.3	%		(3.9	)%
Retail operations		93,064		10.8			100,245		11.5			(7.2	)		247,940		11.2			272,092		11.7			(8.9	)


Total net sales	$	861,641		100.0	%	$	874,809		100.0	%		(1.5	)%	$	2,217,799		100.0	%	$	2,321,839		100.0	%		(4.5	)%

Consolidated net sales.Net sales for the third quarter of fiscal 2007, the sixteen weeks ended March 10, 2007, were approximately $861.6 million, a decrease of approximately $13.2 million, or 1.5%, from net sales of approximately $874.8 million in the same period in fiscal 2006. Year-to-date net sales for fiscal 2007 decreased approximately $104.0 million, or 4.5%, to approximately $2,217.8 million, from net sales of approximately $2,321.8 million, in fiscal 2006.

Wholesale operations net sales.Wholesale operations net sales for the third quarter of fiscal 2007 were approximately $768.6 million, a decrease of approximately $6.0 million, or 0.8%, from net sales of approximately $774.6 million in fiscal 2006. Year-to-date wholesale operations net sales for fiscal 2007 decreased approximately $79.8 million, or 3.9%, to approximately $1,969.9 million from net sales of approximately $2,049.7 million in fiscal 2006. The net sales for the third quarter and year-to-date periods for fiscal 2007 reflected unit volume declines of approximately 6.2% and 8.7%, respectively, as compared to comparable periods in fiscal 2006. These unit volume declines for the quarter and year-to-date for fiscal 2007 as compared to fiscal 2006 were the result of sales

discontinued as part of our restructuring efforts, reduced demand for our products, and from the effects of a highly competitive market with increased promotional spending. These declines are partially offset by an overall unit value increase, related to selling price increases and product mix changes, of approximately 6.4% for the third quarter and 5.5% for the year-to-date periods of fiscal 2007 as compared to the prior year.

Retail operations net sales.Retail operations net sales for the third quarter of fiscal 2007 were approximately $93.1 million, a decrease of approximately $7.1 million, or 7.2%, from net sales of approximately $100.2 million for the same period in fiscal 2006. Year-to-date retail operations net sales for fiscal 2007 decreased approximately $24.2 million, or 8.9%, to approximately $247.9 million from net sales of approximately $272.1 million for the same period in fiscal 2006. The decline in revenue is mainly attributable to the closing of retail outlets in conjunction with our restructuring efforts.

Gross profit (exclusive of depreciation and amortization).Gross profit was approximately $421.4 million, or 48.9% of net sales, for the third quarter of fiscal 2007, in comparison with approximately $419.1 million, or 47.9% of net sales, for the same period in fiscal 2006. Year-to-date gross profit was approximately $1,077.9 million, or 48.6% of net sales, in comparison with approximately $1,138.7 million, or 49.0% of net sales, when compared to the same period in fiscal 2006.

Total cost of products sold for the quarter decreased by approximately $15.5 million when compared to the same period in fiscal 2006. This cost decrease relates to the effects of reduced sales on our costs, as a well as the production efficiencies gained in our restructuring efforts. On a cost per pound basis, direct component costs per pound increased approximately 5.8% when compared to fiscal 2006. These direct component costs, when compared on a cost per pound of production with fiscal 2006, increased 4.7% for ingredients, 0.6% for packaging, and 0.5% for labor. Overhead and administrative costs as a percent of net sales decreased approximately 0.4% when compared to fiscal 2006 principally as a result of reductions in labor, labor-related, and facility costs resulting from our restructuring activities. Higher selling prices initiated in response to higher commodity costs in fiscal 2007 along with the net effect of the decline in overhead and administrative costs, partially offset by the unfavorable increase in the direct component cost per pound of production when compared to our sales, resulted in our gross profit margin improvement of approximately 1.0% for the third quarter of fiscal 2007 when compared with fiscal 2006.

Total cost of products sold year-to-date decreased by approximately $43.3 million when compared to the same period in fiscal 2006. A substantial amount of this cost decrease relates to the effects of reduced sales on our costs, as a well as the production efficiencies gained in our restructuring efforts. On a cost per pound basis, direct component costs per pound increased approximately 6.0% when compared to fiscal 2006. These direct component costs when compared on a cost per pound of production with fiscal 2006 increased 5.3% for ingredients, 0.4% for labor and 0.3% for packaging. Overhead and administrative costs as a percent of net sales decreased approximately 0.3% when compared to fiscal 2006 principally as a result of reductions in labor, labor-related, and facility costs resulting from our restructuring activities. This along with higher selling prices initiated in response to higher commodity costs in fiscal 2007 only partially offset by the net effect of the unfavorable increase in the direct component cost per pound of production resulting in our gross profit margin decrease of approximately 0.4% for year-to-date fiscal 2007 when compared to the same period in fiscal 2006.

Selling, delivery and administrative expenses.Selling, delivery and administrative expenses were approximately $417.3 million, representing 48.4% of net sales, for the third quarter of fiscal 2007 down from approximately $447.5 million, or 51.2% of net sales when compared with the same period in fiscal 2006. Year-to-date selling, delivery and administrative expenses for fiscal 2007 amounted to approximately $1,058.7 million, or 47.7% of net sales, decreasing from approximately $1,151.8 million, or 49.6% of net sales for the same period in the prior year.

For the third quarter of fiscal 2007, the reduction in selling, delivery and administrative expenses as a percent of net sales was approximately 2.7% when compared to the third quarter of the previous year. A substantial portion of our cost decreases relates directly to our restructuring activities, which resulted in route, depot, and retail outlet consolidations and closings. Our labor and labor-related costs, including workers’ compensation, decreased approximately 1.8% as a percent of net sales. Additionally, advertising, energy costs and all other costs decreased as a percent of net sales by 0.5%, 0.2% and 0.2%, respectively.

On a year-to-date basis, the reduction in selling, delivery and administrative expenses as a percent of net sales when compared to the same period of the previous year was approximately 1.9%. As with this quarter, a substantial portion of the cost decrease relates directly to our restructuring activities, which resulted in route, depot, and retail outlet consolidations and closings. Our labor and labor-related costs, including workers’ compensation, decreased approximately 1.5% as a percent of net sales. Additionally, advertising and all other costs decreased as a percent of net sales, each by approximately 0.2%.

Restructuring credits.During the third quarter of fiscal 2007, we incurred net restructuring credits of approximately $0.2 million related to the continuation of certain restructuring plans to close and restructure certain bakeries and retail stores as compared to net restructuring credits of approximately $33.3 million for the same period in fiscal 2006. On a year-to-date basis, we incurred net restructuring credits of approximately $3.9 million as compared to net restructuring credits of approximately $21.7 million for the same period in the prior year.

The net restructuring credits in the third quarter of fiscal 2007 were composed of a credit of approximately $0.7 million for the adjustment of severance accruals and approximately $0.5 million net exit costs such as utility costs, security, taxes and clean up activities. Year-to-date restructuring credits were composed of a credit of approximately $0.4 for severance accruals, and approximately $5.2 million in gains on disposals of long-lived assets, offset by other exit costs of approximately $1.7 million.

See Note 14. Restructuring (Credits) Charges to the condensed consolidated financial statements regarding detail components of restructuring charges.

Operating Loss

(dollars in thousands)


	Sixteen Weeks Ended												Forty Weeks Ended
	March 10,						March 4,						March 10,						March 4,
	2007			%			2006			%			2007			%			2006			%

Wholesale operations	$	4,393			(22.3	)%	$	(28,589	)		144.0	%	$	19,183			(56.1	)%	$	(19,048	)		36.4	%
Retail operations		1,556			(7.9	)		(199	)		1.0			6,555			(19.2	)		6,883			(13.1	)


		5,949			(30.2	)		(28,788	)		145.0			25,738			(75.3	)		(12,165	)		23.3
Corporate		(25,615	)		130.2			8,929			(45.0	)		(59,914	)		175.3			(40,118	)		76.7


Total operating loss	$	(19,666	)		100.0	%	$	(19,859	)		100.0	%	$	(34,176	)		100.0	%	$	(52,283	)		100.0	%

Consolidated operating loss. Based upon the above factors, the operating loss for the third quarter of fiscal 2007 was approximately $19.7 million, a decrease of approximately $0.2 million from the prior year’s operating loss of approximately $19.9 million. Our fiscal 2007 year-to-date operating loss was approximately $34.2 million, down approximately $18.1 million from the prior year’s operating loss of approximately $52.3 million. Our fiscal 2007 operating loss for the quarter included a restructuring credit of approximately $0.2 million as compared to a restructuring credit of approximately $33.3 million for the same period in the prior year. Our fiscal 2007 year-to-date operating loss included a restructuring credit of approximately $3.9 million as compared to a restructuring credit of approximately $21.7 million for the same period in the prior year.

Wholesale operating income (loss).Wholesale operating income for the third quarter of fiscal 2007 was approximately $4.4 million representing an increase of approximately $33.0 million from an operating loss of approximately $28.6 million in the third quarter of fiscal 2006. On a year-to-date basis, the net wholesale operating income was approximately $19.2 million, an increase of approximately $38.2 million from an operating loss of approximately $19.0 million when compared to the same period in the prior year. The third quarter increase in

wholesale operating income was attributable to a decrease of approximately $39.0 million in wholesale operating costs partially offset by a decrease in income of approximately $6.0 million. On a year-to-date basis the increase in wholesale operating revenue of approximately $38.2 million was attributable to a decrease in wholesale operating costs of approximately $118.1 million partially offset by a decrease in revenue of approximately $79.9 million.

Retail operating income (loss).Retail operating income for the third quarter of fiscal 2007 was approximately $1.6 million representing an improvement of approximately $1.8 million from operating loss of approximately $0.2 million in the third quarter of fiscal 2006. The increase in retail operating income for the quarter was attributable to a decrease of approximately $9.0 million in retail operating expenses partially offset by a reduction in sales of approximately $7.2 million.

On a year-to-date basis the net retail operating income for fiscal 2007 was approximately $6.6 million, a decrease of approximately $0.3 million from approximately $6.9 million in operating income for the same period in the prior year. The year-to-date decrease in retail operating income was attributable to a drop in revenues of approximately $24.1 million partially offset by a reduction in retail operating expenses of approximately $23.8 million.

Reorganization charges.For the sixteen weeks ended March 10, 2007, reorganization charges relating to expense or income items that we incurred under our bankruptcy proceedings were approximately $10.0 million. The cost of these activities includes (1) professional fees and similar types of expenses related to the Chapter 11 proceedings of approximately $10.5 million; and (2) approximately $0.3 million in payroll related charges to retain key employees during our reorganization; partially offset by (3) interest income of approximately $0.8 million.

Reorganization charges for the forty weeks ended March 10, 2007 were approximately $26.7 million consisting of (1) professional fees and similar types of expenses related to the Chapter 11 proceedings of approximately $29.0 million; and (2) approximately $1.0 million in payroll related charges to retain key employees during our reorganization; offset by (3) interest income of approximately $2.5 million; and (5) approximately $0.8 million in gains on the sale of assets.

Reorganization charges for the sixteen weeks ended March 4, 2006 were approximately $10.3 million consisting of (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings of approximately $10.1 million; (2) approximately $1.4 million in payroll related charges to retain key employees during our reorganization; and (3) charges related to the rejection of certain lease agreements covering equipment and real estate of approximately $0.6 million; offset by (4) interest income of approximately $1.8 million.

Reorganization charges for the forty weeks ended March 4, 2006 were approximately $28.4 million consisting of (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings of approximately $25.9 million; (2) approximately $5.8 million in payroll related charges to retain key employees during our reorganization; and (3) charges related to the rejection of certain lease agreements covering equipment and real estate of approximately $0.5 million; partially offset by (4) interest income of approximately $3.2 million; and (5) approximately $0.6 million gain on the sale of assets.

Interest expense.Net interest expense for the third quarter was approximately $14.7 million representing a decrease of approximately $1.8 million when compared to approximately $16.5 million in the third quarter of fiscal 2006. This decrease resulted primarily from a $1.6 million decline in the amortized debt fees associated with the pre-petition and post-petition debt facilities and a decrease in funded debt levels, offset by slightly higher interest rates.

Year-to-date interest expense was approximately $38.8 million representing an increase of only $0.2 million when compared to approximately $39.0 million for the same period of fiscal 2006. This decrease results from decreases in amortized debt fees associated with the pre-petition and post-petition debt facilities offset by somewhat higher interest costs resulting from higher interest rates on a decrease in funded debt levels.

Provision for income taxes.The effective income tax benefit rates were 3.8% and 11.9% for the first three quarters of fiscal 2007 and 2006, respectively. Our effective income tax benefit rate was impacted favorably in the first quarter of fiscal 2006 by adjustments to our prior year tax accruals and by the approval of tax credits for prior years. Our effective income tax rates for fiscal 2007 and 2006 were negatively impacted by valuation allowances recorded

because we do not believe that it is more likely than not our net operating losses and certain other deferred tax assets will be able to be utilized in future years. We provide a valuation allowance against deferred tax assets if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. During fiscal 2007 and 2006 we recorded additional valuation allowance relating to deferred tax assets originating in those years.

The income tax benefit we have recognized in fiscal 2007 relates principally to expected refunds of tax we previously paid, available to us pursuant to a federal statutory provision that permits certain net operating losses to be carried back ten years. Only a portion of the net operating loss we incur is eligible for this treatment. Our effective tax rate for fiscal 2007 is based, in large part, upon our estimate of the amount of our fiscal 2007 loss which we expect to be eligible for the ten year carryback. Our fiscal 2006 tax provision also reflects the impact of the ten year carryback.

CASH RESOURCES AND LIQUIDITY

CASH FLOWS

During the forty weeks ended March 10, 2007, the Company used $7.3 million of cash, which was the net impact of $30.8 million in cash used in operating activities, $68.5 million in cash generated from investing activities, and $45.0 million in cash used in financing activities.

Cash from (used in) operating activities.Cash used in operating activities for fiscal 2007 was $30.8 million, which represents a decrease of $14.5 million from cash used in fiscal 2006 of $45.3 million. While we posted a net loss of $94.9 million during the forty week period, some items contributing to the loss were non-cash items, including $54.5 million related to depreciation and amortization and $3.3 million in gains on sale, write-down or abandonment of assets. In addition, changes in working capital components generated $9.2 million in cash during the forty week fiscal period primarily due to (1) a decrease in other current assets of $8.0 million; (2) a reduction in accounts receivable of $4.0 million; (3) an increase in accounts payable and accrued expenses of $0.6 million; offset by (4) an increase in our inventories of $1.7 million; and (5) other items totaling $1.7 million. For fiscal 2006, changes in working capital components provided cash equal to $25.1 million.

Cash from (used in) investing activities.Cash provided by investing activities during fiscal 2007 was $68.5 million, $88.1 million more than the cash used during fiscal 2006 of $19.6 million. This significant increase is primarily attributable to the release, pursuant to the eighth amendment to the DIP Facility, of restricted cash previously held as collateral and unavailable to the Company in the amount of $89.2 million (excluding interest earned) at August 25, 2006, the effective date of the eighth amendment to the DIP Facility. During the forty week period, we received $14.4 million in asset sale proceeds and made deposits to the restricted cash account in accordance with the DIP Facility in the amount of $12.5 million (excluding interest earned). We used $22.8 million to acquire property, equipment and software assets. During fiscal 2006, we received asset sale proceeds in the amount of $79.8 million and made deposits to the restricted cash account in accordance with the DIP Facility in the amount of $74.3 million. During fiscal 2006, purchases of property and equipment totaled $25.2 million.

Cash from (used in) financing activities.Cash used in financing activities for fiscal 2007 was $45.0 million, primarily due to a reduction in our pre-petition secured debt of $45.4 million. The previously discussed eighth amendment to the DIP Facility released restricted cash plus accumulated interest in the amount of $90.7 million effective August 25, 2006 and required that $45.4 million of that amount be used to reduce the outstanding balance of the pre-petition secured debt. This compares to cash generated from financing activities in fiscal 2006 which totaled $12.0 million due mostly to an increase in our pre-petition secured revolving credit facility of $13.4 million.

SOURCES OF LIQUIDITY AND CAPITAL

We have historically maintained two primary sources for debt capital: (1) bank lines of credit; and (2) capital and operating lease financing to support the acquisition and lease of our bakery outlets, depots, route trucks, tractors, trailers and computer equipment. In addition, on August 12, 2004 we issued $100.0 million aggregate principal amount of 6% senior subordinated convertible notes due in August 2014. Failure to maintain adequate sources of debt capital would have a material adverse impact on our operations.

At March 10, 2007, under our Senior Secured Credit Facility, we owed $374.1 million in term loans and $73.4 million in a revolver loan. In addition, at March 10, 2007, we had issued $101.7 million in letters of credit under our revolver loan.

On August 12, 2004, we issued in a private placement $100.0 million aggregate principal amount of our 6.0% senior subordinated convertible notes due August 15, 2014. Purchasers had an option to purchase in the aggregate up to $20.0 million in additional notes for a period of 60 days following the closing, which purchase option was not exercised. Under certain circumstances, the notes are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 98.9854 shares per $1,000 principal amount of notes (an initial conversion price of $10.1025 per share), subject to adjustment.

The foregoing commitments regarding our senior secured term and revolving credit facilities and our 6% senior subordinated convertible notes due August 15, 2014 include significant obligations that occurred prior to our bankruptcy filing (see Voluntary Chapter 11 Bankruptcy Filing below). Under the Bankruptcy Code, actions to collect pre-petition indebtedness are stayed and our other contractual obligations may not be enforced against us. Therefore, the commitments shown above may not reflect actual cash outlays in future periods.

Voluntary Chapter 11 Bankruptcy Filing.On September 22, 2004 (the “Petition Date”), due to significantly limited liquidity, we and each of our wholly-owned subsidiaries filed voluntary petitions for reorganization relief under Chapter 11 of the Bankruptcy Code. On January 14, 2006, a subsidiary of which we are an eighty percent owner, Mrs. Cubbison’s Foods, Inc., also filed a voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy Code. These filings were made in order to facilitate the restructuring of our business operations, trade liabilities, debt, and other obligations. We are currently operating our business as a debtor-in-possession under the supervision of the Court.

Subsequent to the Petition Date, the Company and a syndicate of lenders, including JPMorgan Chase Bank, entered into the DIP Facility, which was subsequently revised and approved by the Court, to provide up to $200.0 million in post-petition financing. The DIP Facility expires on the occurrence of an event that constitutes a termination date as defined in the DIP Facility agreement or, if no such event has occurred, pursuant to an extension, on February 9, 2008. All outstanding borrowings under the DIP Facility, if any, are due and payable on the termination date. The obligations under the DIP Facility are secured by a super priority lien against our assets in favor of the DIP lenders. The DIP Facility may be utilized for the issuance of letters of credit up to an aggregate amount equal to $150.0 million, which amount was increased from the original limitation of $75.0 million as a result of prior amendments. In connection with entering into the DIP Facility we also make periodic adequate protection payments to our pre-petition secured lenders in the form of interest, fees and expenses based on amounts owed under the pre-petition Senior Secured Credit Facility.

The DIP Facility subjects us to certain obligations, including the delivery of financial statements and certifications, cash flow forecasts, and operating budgets at specified intervals and cumulative minimum EBITDA requirements. Furthermore, we are subject to certain limitations on the payment of indebtedness, entering into investments, the payment of capital expenditures, the incurrence of cash restructuring charges and the payment of dividends. Failure to comply with these obligations could lead to an event of default under the DIP Facility and acceleration of payments thereunder.

In addition, payment under the DIP Facility may be accelerated following certain events of default including, but not limited to, (1) the conversion of any of the bankruptcy cases to a case under Chapter 7 of the Bankruptcy Code or the appointment of a trustee pursuant to Chapter 11 of the Bankruptcy Code; (2) our making certain payments of principal or interest on account of pre-petition indebtedness or payables; (3) a change of control (as defined in the DIP Facility); (4) an order of the Bankruptcy Court permitting holders of security interests to foreclose on debt secured by any of our assets which have an aggregate value in excess of $1.0 million; (5) the entry of any judgment in excess of $1.0 million against us, the enforcement of which remains unstayed; (6) certain Termination Events (as defined in the DIP Facility) related to ERISA plans; and (7) failure to make payments required by Section 302(f)(1) of ERISA where the amount determined under Section 302(f)(3) of ERISA is equal to or greater than $1.0 million, subject to certain exceptions. Notwithstanding acceleration pursuant to an event of default, the maturity date of the DIP Facility is February 9, 2008.

At March 10, 2007, we were in compliance with all financial covenants, terms and conditions of the DIP Facility.

As of March 10, 2007, we had not borrowed under the DIP Facility. However, the DIP Facility was utilized to support the issuance of letters of credit in the amount of $109.1 million primarily to support our workers’ compensation and auto liability insurance programs. These letters of credit were partially collateralized by $8.8 million of restricted cash as required by the DIP Facility.

As a result of the Chapter 11 filing, our principal sources of liquidity used in funding short-term operating expenses, supplies and employee obligations include cash balances, operating cash flows and the $200.0 million DIP Facility. As of March 10, 2007, we had approximately $70.9 million in available cash and $90.9 million available for borrowing under the DIP Facility. This compares to the $78.2 million in available cash and $90.1 million available for borrowing under the DIP Facility as of June 3, 2006. These amounts of available cash exclude $37.6 million and $26.7 million at March 10, 2007 and June 3, 2006, respectively, related to checks written in excess of recorded balances included in accounts payable on our consolidated balance sheets. We cannot assure you that the amount of cash from operations and from our DIP Facility will be sufficient to fund operations until such time as we are able to propose a plan of reorganization that will receive the requisite acceptance by creditors, equity holders and parties in interest and be confirmed by the Bankruptcy Court. In the event that cash flows and available borrowings under the DIP Facility are not sufficient to meet our liquidity requirements, we may be required to seek additional financing.

Since the Petition Date, we have been actively engaged in restructuring our operations and selling assets no longer necessary to our operations. We continue to analyze our business based on a number of factors including, but not limited to, historical sales results, expected future sales results, cash availability, production costs, utilization of resources, and manufacturing and distribution efficiencies. As part of our restructuring efforts we are evaluating various alternatives including, but not limited to, the sale of some or all of our assets, infusion of capital, debt restructuring and the filing of a plan of reorganization with the Bankruptcy Court, or any combination of these options.

The maturity date of the DIP Facility has been extended to February 9, 2008. We may need to negotiate an additional extension of the maturity date or refinance the DIP Facility to provide adequate time to complete a plan of reorganization. There can be no assurance that we will be successful in extending or refinancing the DIP Facility or that we can extend or refinance the DIP Facility on terms favorable to us. Failure to obtain such extension or additional or replacement financing would have a material adverse impact on our ability to operate as a going concern.

Our future capital requirements will depend on many factors, including our evaluation of various alternatives in connection with our restructuring, the form of our plan of reorganization, the aggregate amount to be distributed to creditors to satisfy claims, the amount of any unknown claims or contingent claims from creditors or equity holders, the outcome of litigation and the costs of administering the Chapter 11 process, including legal and other fees. At this time it is not possible to predict the exact amount or nature of such new capital. In addition, there can be no guarantee that additional capital will be available to us, or that such capital will be available on favorable terms. Raising additional capital could result in the significant dilution of current equity interests, but it is not possible to predict the extent of such potential dilution at this time.

Our financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, no assurance can be given that we will be able to continue to operate on a going concern basis. Because of the Chapter 11 filing process and the circumstances leading to the bankruptcy there is substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent upon, among other things, our ability to evaluate various alternatives including the sale of some or all of our assets, infusion of capital, debt restructuring and the development, confirmation and implementation of a plan of reorganization, our ability to comply with the terms of the DIP Facility, our ability to obtain financing upon exit from bankruptcy and our ability to generate sufficient cash from operations to meet our obligations and any combination of these factors. In the event our restructuring activities are not successful and we are required to liquidate, additional significant adjustments would be necessary in the carrying value of assets and liabilities, the revenues and expenses reported and the balance sheet classifications used. Further,

the value of debt and equity interests may be significantly or completely impaired in the event of a liquidation or conversion to a Chapter 7 proceeding.

OFF-BALANCE SHEET FINANCING

We do not participate in, nor secure financings for, any unconsolidated, special purpose entities.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

We have two reportable segments: Wholesale Operations, which consists of aggregation of our ten profit centers that manufacture, distribute, and sell fresh baked goods; and Retail Operations, which consists of five regions that sell our baked goods and other food items. See Note 20. Segment Information to these condensed consolidated financial statements for further information.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2. Description of Business and Significant Accounting Policies to our condensed consolidated financial statements for further information regarding recently issued accounting standards

FORWARD-LOOKING STATEMENTS

Some information contained in or incorporated by reference herein may be forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are not historical in nature and include statements that reflect, when made, our views with respect to current events and financial performance. These forward-looking statements can be identified by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should” and “continue” or similar words. These forward-looking statements may also use different phrases. These forward-looking statements are not historical in nature and include statements relating to, among other things:

	•		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 expires on February 9, 2008;

	•		our ability to develop, propose, confirm and consummate one or more plans of reorganization with respect to the Chapter 11 proceeding;

	•		our ability to achieve the following four priorities established by Mr. Jung: (1) fix our cost structure to grow margins; (2) accelerate innovation to realize attractive revenue growth; (3) drive productivity to improve margins; and (4) create a performance culture;

	•		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;

	•		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;

	•		increased costs and uncertainties with respect to the ABA Plan;

	•		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.

These forward-looking statements are and will be subject to numerous risks and uncertainties, many of which are beyond our control that could cause actual results to differ materially from such statements. Factors that could cause actual results to differ materially include, without limitation:

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;

	•		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.

These statements speak only as of the date of this report, and we disclaim any intention or obligation to update or revise any forward-looking statements to reflect new information, future events or developments or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere herein.

Similarly, these and other factors, including the terms of any reorganization plan ultimately confirmed, can affect the value of our various pre-petition liabilities, common stock and/or other equity securities. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 proceeding to each of these liabilities and/or securities. Accordingly, we urge that the appropriate caution be exercised with respect to existing and future investments in any of these liabilities and/or securities.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

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

Commodity prices.Commodities we use in the production of our products are subject to wide price fluctuations, depending upon factors such as weather, crop production, worldwide market supply and demand and government regulation. To reduce the risk associated with commodity price fluctuations, primarily for wheat, corn, sugar, soybean oil and certain fuels, we sometimes enter into forward purchase contracts and commodity futures and options in order to fix prices for future periods. A sensitivity analysis was prepared and, based upon our commodity-related derivative positions as of March 10, 2007, an assumed 10% adverse change in commodity prices would not have a material effect on our fair values, future earnings or cash flows.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 10, 2007. Based on that evaluation and due to the existence of material weaknesses in our internal control over financial reporting, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 10, 2007.

(b) Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarterly period ended March 10, 2007, except as described below. Management believes that all of the material weaknesses described under the caption “Item 9A — Controls and Procedures” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 3, 2006 existed as of March 10, 2007, and we are continuing to address deficiencies in the Company’s internal controls. Certain of these remediation actions are described under the caption “Item 9A — Controls and Procedures” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 3, 2006. Efforts to remediate and test our internal control over financial reporting are continuing and are expected to continue throughout fiscal 2007 and beyond.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As previously disclosed in our 2007 second quarter Form 10-Q, we are involved in a dispute regarding the proper characterization of the American Bakers Association Retirement Plan, or ABA Plan. We believe that the ABA Plan has been historically administered as a multiple employer plan under ERISA and tax rules and should be treated as such. The ABA Plan contends it should be treated as an aggregate of single employer plans under ERISA, which is also how it is reflected in our financial statements. We have reflected our interest in the ABA Plan as an aggregate of single employer plans despite our position on the proper characterization of the ABA Plan due to representations we received from the ABA Plan and a 1979 determination issued by the Pension Benefit Guaranty Corporation (PBGC) (as discussed below). However, the PBGC, which is the federal governmental agency that insures and supervises defined benefit pension plans, revisited its 1979 determination that the ABA Plan was an aggregate of single employer plans and after reviewing the status of the ABA Plan, on August 8, 2006, made a final determination that the ABA Plan is a multiple employer plan under ERISA and tax rules. On August 9, 2006, we filed a lawsuit in Bankruptcy Court seeking enforcement of the PBGC’s determination, but there can be no assurance as to whether we will obtain such enforcement or the amount of any reduction to our net benefit obligation liability. Accordingly, due to the lack of a definitive resolution of this uncertainty prior to the end of the fiscal periods presented herein, as noted above we have continued to reflect our interests in the ABA Plan as an aggregate of single employer plans.

On May 3, 2006, Sara Lee Corporation instituted proceedings against the ABA Plan and the Board of Trustees of the Plan (the “Board of Trustees”) in the United States District Court for the District of Columbia. Sara Lee Corporation v. American Bakers Ass’n Retirement Plan, et al., Case No. 1:06-cv-00819-HHK (D.D.C.) (the “Sara Lee Litigation”). The relief Sara Lee seeks includes, among other things, a mandatory injunction that would compel the ABA Plan and the Board of Trustees to (i) require all participating employers in the ABA Plan with negative asset balances – which would include the Company – to make payments to the Plan in order to maintain a positive asset balance and (ii) cut off the payment from the ABA Plan of benefits to employee-participants of the Company and other participating employers with negative asset balances, to the extent such employers did not maintain a positive balance. However, the Sara Lee Litigation is premised on the notion that the ABA Plan is an aggregate of single employer plans, which is inconsistent with the PBGC’s determination dated August 8, 2006 that the ABA Plan is a multiple employer plan. On September 29, 2006, Sara Lee filed an amended complaint adding the PBGC as a defendant and challenging the PBGC’s August 8, 2006 determination. In order to obtain a resolution of these matters without litigation over the proper forum, we have voluntarily stayed our lawsuit in Bankruptcy Court seeking enforcement of the August 8, 2006 determination upon the agreement by the ABA Plan and its Board of Trustees to join IBC as a party to the Sara Lee Litigation.

On November 22, 2006, the ABA Plan and the Board of Trustees filed a motion in the bankruptcy court seeking an order requiring IBC to file an application with the Internal Revenue Service requesting a waiver of the minimum funding requirements applicable to the ABA Plan or, in the alternative, make $3.9 million of contributions to the ABA Plan no later than June 15, 2007. On December 8, 2006, the Bankruptcy Court denied the ABA motion. On April 4, 2007, the PBGC filed a motion for summary judgment in the Sara Lee case asking the court to enforce the PBGC’s August 8, 2006 determination that the ABA Plan is a multiple employer plan. At a status conference held on April 5, 2007, the court scheduled oral argument on the PBGC’s motion for July 2, 2007.

As previously disclosed in our 2007 second quarter Form 10-Q, on October 30, 2006, Brencourt Advisors, LLC, a stockholder of the Company, filed a complaint in the Court of Chancery of the State of Delaware for New Castle

County, captioned Brencourt Advisors LLC v. Interstate Bakeries Corporation, C.A. No. 2506-N (the “Complaint”) seeking to compel an annual meeting of stockholders for the purpose of electing directors. On November 29, 2006, we filed a motion with the Bankruptcy Court in response to the Complaint seeking (i) to have the Bankruptcy Court confirm our Board of Directors to be the nine individuals currently serving as members of our Board of Directors and (ii) an injunction from the Bankruptcy Court ordering Brencourt to cease the prosecution of the Complaint. On January 5, 2007, the Bankruptcy Court approved a settlement among the Company and its various constituency groups to reconstitute our Board of Directors from nine to seven members. Pursuant to the terms of the settlement, five directors left the Board, two new directors were appointed by the Bankruptcy Court and the remaining Board seat was filled by our new Chief Executive Officer on February 16, 2007. On January 11, 2007, the Complaint was dismissed without prejudice. For a further discussion regarding our reconstituted Board of Directors, see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments.

Item 1A. Risk Factors

The risk factors set forth below update, and should be read together with, the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 3, 2006.

We face uncertainty regarding the adequacy of our capital resources, including liquidity, and have limited access to additional financing.

We currently have available a $200.0 million DIP Facility to potentially fund our post-petition operating expenses, supplier and employee obligations. The DIP Facility received interim approval by the Bankruptcy Court on September 23, 2004 and final approval on October 21, 2004. The DIP Facility has been amended nine times through the date of this filing.

The DIP Facility subjects us to certain obligations, including the delivery of a Borrowing Base Certificate (as defined in the DIP Facility), cash flow forecasts and operating budgets at specified intervals, as well as certain limitations on the payment of indebtedness, entering into investments, the payment of capital expenditures and the payment of dividends. The DIP Facility also contains financial covenants, requiring minimum Consolidated EBITDA (as defined in the DIP Facility), restricting Capital Expenditures (as defined in the DIP Facility), and limiting the amount of periodic cash restructuring charges (as defined in the DIP Facility). There can be no assurance that we will be able to consistently comply with these obligations, financial covenants and other restrictive obligations in our DIP Facility.

We are highly reliant on suppliers and vendors to continue to provide capital and materials for our ongoing operations. Any interruptions in our capital and materials could have a material adverse effect on our operations.

In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other restructuring costs in connection with the Chapter 11 process and the restructuring of our business operations and expect that we will continue to incur significant professional fees and restructuring costs. As of March 10, 2007, we had approximately $70.9 million in available cash and $90.9 million available for borrowing under the DIP Facility. This compares to the $78.2 million in available cash and $90.1 million available for borrowing under the DIP Facility as of June 3, 2006. These amounts of available cash exclude $37.6 million and $26.7 million at March 10, 2007 and June 3, 2006, respectively, related to checks written in excess of recorded balances included in accounts payable on our consolidated balance sheets. We cannot assure you that the amounts of cash from operations together with our DIP Facility will be sufficient to fund operations until such time as we are able to propose a plan of reorganization that will receive the requisite acceptance by creditors, equity holders and parties in interest and be confirmed by the Bankruptcy Court. In the event that cash flows and available borrowings under the DIP Facility are not sufficient to meet our liquidity requirements, we may be required to seek additional financing. We can provide no assurance that additional financing would be available or, if available, offered on acceptable terms. Failure to secure additional financing would have a material adverse impact on our operations.

As a result of the Chapter 11 process and the circumstances leading to the bankruptcy filing, our access to additional financing is, and for the foreseeable future will likely continue to be, very limited. Our long-term liquidity

requirements and the adequacy of our capital resources are difficult to predict at this time and ultimately cannot be determined until a plan of reorganization has been developed and is confirmed by the Bankruptcy Court in the Chapter 11 process.

The maturity date of the DIP Facility has been extended from September 22, 2006 to February 9, 2008. We may need to negotiate an additional extension of the maturity date or refinance the DIP Facility to provide adequate time to complete a plan of reorganization. There can be no assurance that we will be successful in extending or refinancing the DIP Facility or that we can extend or refinance the DIP Facility on terms favorable to us.

Future cash contribution obligations to the American Bakers Association Retirement Plan, or the ABA Plan, are expected to significantly exceed previous contributions to the ABA Plan.

As a result of the review of the ABA Plan begun in December 2004, we have recorded a significant net pension liability. Since January 2006, we have been notified of $34.7 million of required contributions which we have not paid and due to our severely underfunded position within the plan, future cash contribution obligations could continue to significantly exceed levels experienced in calendar years prior to 2006. Our responsibility to make all of these payments, as well as the timing of such payments, may be impacted by application of the Bankruptcy Code and/or other applicable law, including the August 8, 2006 determination from the Pension Benefit Guaranty Corporation that the ABA Plan is a multiple employer plan, as had been asserted by the Company and disputed by the ABA Plan, as well as pension reform legislation recently enacted by Congress.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities (A)


					*Total Number of*		*Maximum Number (or*
					*Shares (or Units)*		*Approximate Dollar*
					*Purchased as Part*		*Value) of Shares (or*
	*Total Number of*		*Average Price*		*of Publicly*		*Units) that May Yet Be*
	*Shares (or Units)*		*Paid per Share*		*Announced Plans*		*Purchased Under the*
*Period*	**Purchased(B)**		*(or Unit)*		*or Programs*		*Plans or Programs*
Period 7 November 19-December 16, 2006		5	$	2.79		5		7,396,649
Period 8 December 17, 2006-January 13, 2007		1	$	2.86		1		7,396,648
Period 9 January 14-February 10, 2007		2	$	5.78		2		7,396,646
Period 10 February 11-March 10, 2007		8	$	3.31		8		7,396,638


Total		16	$	3.48		16		7,396,638


(A)		Since May 11, 1999, our Board of Directors has authorized the purchase of approximately 11.0 million shares of our common stock. Prior to the Chapter 11 filing, management had the discretion to determine the number of the shares to be purchased, as well as the timing of any such purchases, with the pricing of any shares repurchased to be at prevailing market prices. As of March 10, 2007, 7,396,638 shares of our common stock were available to be purchased under this stock repurchase program. As a result of our Chapter 11 filing and restrictions imposed by the DIP Facility, however, the program has effectively been suspended since the filing.
(B)		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.

Item 6. Exhibits


Exhibit
No.		Exhibit

3.1		Restated Certificate of Incorporation of Interstate Bakeries Corporation, as amended (incorporated herein by reference to Exhibit 3.1 to Interstate Bakeries Corporation’s Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended March 9, 2002, filed on April 19, 2002).

3.1.1		Certificate of Amendment to the Restated Certificate of Incorporation of Interstate Bakeries Corporation (incorporated by reference to Exhibit 3.1 to Interstate Bakeries Corporation’s Form 8-K filed on March 21, 2007).

3.2		Restated Bylaws of Interstate Bakeries Corporation (incorporated herein by reference to Exhibit 3.1 to Interstate Bakeries Corporation’s Quarterly Report on Form 10-Q for the quarter ended November 15, 2003 filed on December 22, 2003).

3.2.1		Amendment Number One to the Restated Bylaws of Interstate Bakeries Corporation (incorporated by reference to Exhibit 3.2 to Interstate Bakeries Corporation’s Form 8-K filed on March 21, 2007).

10.1		Employment Agreement by and among Interstate Bakeries Corporation, Interstate Brands Corporation and Craig D. Jung, dated January 30, 2007 (incorporated by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Form 8-K filed on January 31, 2007).

10.2		Ninth Amendment, dated as of February 16, 2007, to the Revolving Credit Agreement, dated as of September 23, 2004, as amended, among Interstate Bakeries Corporation, a Delaware corporation (“Parent Borrower”), a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, each of the direct and indirect subsidiaries of the Parent Borrower, each of which is a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank) (“JPMCB”), and certain of the other commercial banks, finance companies, insurance companies or other financial institutions or funds from time to time party to the Revolving Credit Agreement (together with JPMCB, the “Lenders”), JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as administrative agent for the Lenders, and JPMorgan Chase Bank, N.A., a national banking association (formerly known as JPMorgan Chase Bank), as collateral agent for the Lenders (incorporated by reference to Exhibit 10.1 to Interstate Bakeries Corporation’s Form 8-K filed on February 16, 2007).

31.1		Certification of Craig D. Jung 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 Craig D. Jung 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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	INTERSTATE BAKERIES CORPORATION
Dated: April 18, 2007	By:	/s/ Craig D. Jung
		Craig D. Jung
		Chief Executive Officer (Principal Executive Officer)


Dated: April 18, 2007	By:	/s/ Ronald B. Hutchison
		Ronald B. Hutchison
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Interstate Bakeries (IBCIQ) Inactive 10-Q2007 Q3 Quarterly report

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