UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 3, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-11165
INTERSTATE BAKERIES
CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction
of incorporation or organization)
  43-1470322
(I.R.S. Employer
Identification No.)
     
12 East Armour Boulevard,
Kansas City, Missouri
(Address of principal executive offices)
  64111
(Zip Code)
(816) 502-4000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Preferred Stock Purchase Rights
     Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
     Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
     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. Yes o No þ
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
     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 filer o     Accelerated filer þ      Non-accelerated filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
     The aggregate market value of the 21,523,009 shares of voting stock of the registrant held by non-affiliates, computed by reference to the $2.85 closing price of such stock on November 17, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was $61,340,576. The aggregate market value of such stock, computed by reference to the $8.28 closing price of such stock on June 2, 2006, the last business day of the registrant’s fourth quarter of fiscal 2006, was $178,210,515.
     There were 45,285,314 shares of common stock, $0.01 par value per share, outstanding as of December 6, 2006. Giving effect to our senior subordinated convertible notes and common stock equivalents, there were 55,183,755 shares of common stock outstanding as of December 6, 2006.
DOCUMENTS INCORPORATED BY REFERENCE: None
 
 

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EXPLANATORY NOTE
In addition to this annual report on Form 10-K, on the same date, we also filed our Quarterly Reports on Form 10-Q for the quarters ended August 20, 2005, November 12, 2005, March 4, 2006, and August 26, 2006. The primary reasons for our delay in filing certain of these reports are related to our Chapter 11 filing and issues related to the restatement of our fiscal 2004 Form 10-K. All of the reports filed concurrently herewith should be read together and in connection with this Annual Report on Form 10-K for a comprehensive description of our current financial condition and operating results.

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INDEX
         
    Page Number  
FORWARD-LOOKING STATEMENTS
    4  
 
       
PART I
    8  
 
       
ITEM 1. BUSINESS
    8  
ITEM 1A. RISK FACTORS
    16  
ITEM 1B. UNRESOLVED STAFF COMMENTS
    26  
ITEM 2. PROPERTIES
    27  
ITEM 3. LEGAL PROCEEDINGS
    27  
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    31  
 
       
PART II
    31  
 
       
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    31  
ITEM 6. SELECTED FINANCIAL DATA
    34  
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    35  
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    54  
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    106  
ITEM 9A. CONTROLS AND PROCEDURES
    106  
ITEM 9B. OTHER INFORMATION
    113  
 
       
PART III
    114  
 
       
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    114  
ITEM 11. EXECUTIVE COMPENSATION
    117  
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    123  
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    125  
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    126  
 
       
PART IV
    128  
 
       
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
    128  
Subsidiaries of Interstate Bakeries Corporation
       
Certification of Antonio C. Alvarez II pursuant to Rule 13a-14(a)/15d-14(a)
       
Certification of Ronald B. Hutchison pursuant to Rule 13a-14(a)/15d-14(a)
       
Certification of Antonio C. Alvarez II pursuant to 18 U.S.C. Section 1350
       
Certification of Ronald B. Hutchison pursuant to 18 U.S.C. Section 1350
       

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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 (as described below);
 
    our ability to operate pursuant to the covenants, terms and certifications of the Revolving Credit Agreement, or DIP Facility (as described in Item 1 below);
 
    our ability to obtain any necessary relief from the minimum EBITDA covenant under our DIP Facility, as described herein;
 
    our ability to negotiate an extension (if necessary) or refinance our DIP Facility, which, pursuant to an extension, expires on June 2, 2007;
 
    our ability to develop, propose, confirm and consummate one or more plans of reorganization with respect to the Chapter 11 proceeding;
 
    risks associated with failing to obtain court approval for one or more extensions to the exclusivity period for us to propose and confirm one or more plans of reorganization or with third parties seeking and obtaining court approval to terminate or shorten any such exclusivity period, for the appointment of a Chapter 11 trustee or to convert the Chapter 11 proceeding to a Chapter 7 proceeding;
 
    risks associated with inflationary cost increases in materials, ingredients, energy, and employee wages and benefits;
 
    risks associated with our restructuring process, including the risks associated with achieving the desired savings in connection with our profit center restructuring and bakery and route consolidations (as described below);
 
    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 attract, motivate and/or retain key executives and employees;
 
    changes in our relationship with employees and the unions that represent them;
 
    increased costs and uncertainties related to periodic renegotiation of union contracts;
 
    risks associated with a stockholder action to compel an annual meeting for the purpose of effecting a change in

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      control of the Company;
 
    increased costs and uncertainties with respect to the American Bakers Association Retirement Plan, or ABA Plan;
 
    the Securities and Exchange Commission’s, or SEC’s, acceptance of the recommendation from the staff of the SEC’s Division of Enforcement to accept the proposed settlement of the previously announced investigation relating to the establishment of our workers’ compensation and other reserves;
 
    the delayed filing with the SEC of our fiscal 2006 Form 10-K and of our fiscal 2006 and 2007 Forms 10-Q;
 
    successful resolution of material weaknesses in our internal controls;
 
    resolution of any deficiencies and implementation of software updates with respect to our financial reporting systems;
 
    changes to dietary guidelines;
 
    the continuing effects of changes in consumers’ eating habits;
 
    the performance of our recent new product introductions, including the success of such new products in achieving and retaining market share; and
 
    the outcome of legal proceedings to which we are or may become a party.
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 (as described below), 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;

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    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;

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    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.

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PART I
ITEM 1. BUSINESS
General
Interstate Bakeries Corporation, a Delaware corporation incorporated in 1987, is one of the largest wholesale bakers and distributors of fresh baked bread and sweet goods in the United States. Unless otherwise noted, any reference to “IBC,” “us,” “we” or “our” refers to Interstate Bakeries Corporation and its subsidiaries, taken as a whole. We produce, market and distribute a wide range of breads, rolls, croutons, snack cakes, donuts, sweet rolls and related products under national brand names such as “Wonder®”, “Hostess®”, “Baker’s Inn®” and “Home Pride®,” as well as regional brand names such as “Butternut®,” “Dolly Madison®,” “Drake’s®” and “Merita®.” Based on independent publicly available market data, “Wonder®” bread is the number one selling white bread brand sold in the United States and “Home Pride®” wheat bread is a leading wheat bread brand in the United States. “Hostess®” products, including “Twinkies®,” “Ding Dongs®” and “HoHos®,” are among the leading snack cake products sold in the United States.
Our principal executive offices are located at 12 East Armour Boulevard, Kansas City, Missouri 64111, and our telephone number is (816) 502-4000.
We operate 45 bakeries and approximately 800 distribution centers, from which our sales force delivers fresh baked goods on approximately 6,400 delivery routes. We also operate approximately 830 bakery outlets located in markets throughout the United States.
Proceedings Under Chapter 11 of the Bankruptcy Code
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). 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 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 and the eighth amendment to the DIP Facility on August 25, 2006 to reflect certain modifications. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” below for a further discussion regarding the DIP Facility.

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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 December 6, 2006, we have rejected over 420 unexpired leases and have included charges for our estimated liability related thereto in the period of rejection. 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.
We continue to communicate with principal vendors and customers, and we believe that most of our current relationships will continue. The loss of major vendors or customers, as well as significant adverse changes to vendor payment terms, could have a material adverse effect on our results of operations and financial condition, including our ability to operate as a going concern.
The Bankruptcy Code provides that we have the exclusive right for 120 days (which exclusive period may be extended by the Bankruptcy Court) during which only we may file and solicit acceptances of a plan of reorganization. The periods during which we have the exclusive right to file a plan and solicit acceptances of a plan have been extended on five occasions and are presently set to expire on January 31, 2007, and April 21, 2007, respectively. If we fail to file a plan of reorganization during the exclusive period or, after such plan has been filed, if we fail to obtain acceptance of such plan from the requisite impaired classes of creditors and equity holders during the exclusive solicitation period, any party in interest, including a creditor, an equity holder, a committee of creditors or equity holders or an indenture trustee, may file their own plan of reorganization.
Since the Petition Date, we have been actively engaged in restructuring our operations. With the assistance of Alvarez & Marsal LLC, or A&M, a firm specializing in corporate advisory and crisis management services to troubled and under-performing companies and their stakeholders, we restructured our 10 profit centers (PCs), including the closure of nine bakeries and approximately 200 distribution centers; rationalized our delivery route network, reducing the number of routes by approximately 30 percent, from approximately 9,100 delivery routes to approximately 6,400; and reduced our workforce by approximately 7,000 positions. In addition, we disposed of certain non-core assets during our Chapter 11 case, the aggregate net proceeds of which have been approximately $102.8 million, and commenced negotiations of long-term extensions with respect to most of our 420 collective bargaining agreements (CBAs) with union-represented employees resulting in ratification by employees or agreements reached in principle, subject to ratification by employees, of approximately 310 CBAs. 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.

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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. 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 to be gained by these actions is a critical component of a credible 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, and the filing of, a plan of reorganization.
In the event that we file a plan of reorganization with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors, equity holders and parties in interest. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that:
    with respect to each impaired class of creditors and equity holders, each holder in such class has accepted the plan or will, pursuant to the plan, receive at least as much as such holder would receive in a liquidation;
 
    each impaired class of creditors and equity holders has accepted the plan by the requisite vote (except as described in the following sentence); and
 
    confirmation of the plan is not likely to be followed by a liquidation or the need for further financial reorganization unless the plan proposes such liquidation or reorganization.
If any impaired class of creditors or equity holders does not accept the plan and, assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the “cram down” provisions of the Bankruptcy Code.
Under the “cram down” provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. These requirements may, among other things, necessitate payment in full for senior classes of creditors before payment to a junior class can be made. As a result of the amount of pre-petition indebtedness and the availability of the “cram down” provisions, the holders of our common stock may receive no value for their interests under the plan of reorganization. Because of this possibility, the value of our outstanding common stock is highly speculative.
The administrative and reorganization expenses resulting from the Chapter 11 process will and have unfavorably affected our results of operations. Future results of operations may also be adversely affected by other factors related to the Chapter 11 process.
Company History
Our predecessor company, Schulze Baking Company, was founded in Kansas City in 1927. We were subsequently created through the merger of Schulze Baking Co. and Western Bakeries Ltd. in 1937. Since 1937, we have completed a number of acquisitions of other baking businesses. We have grown to our present size primarily through strategic acquisitions.
In July 1995, we acquired Continental Baking Company from Ralston Purina Company, adding the “Wonder®” and “Hostess®” brands to our portfolio of products. This acquisition made us the nation’s largest baker of fresh baked bread and sweet goods in terms of net sales. In January 1998, we acquired the assets of John J. Nissen Baking Company, a Maine-based baker and distributor of fresh bread primarily in New England and various related entities. In August 1998, we acquired the assets of Drake Bakeries, Inc. and the Drake’s baking division, which sells snack cakes throughout the northeastern U.S. under its well-known brand names, “Devil Dogs®,” “Ring Dings®,”

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“Yodels®” and “Yankee Doodles®.” Our acquisitions throughout the years have allowed us to increase scale, expand our product and brand portfolio and broaden our geographic presence.
Financial Information about Segments
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 88.3% of our fiscal 2006 net sales 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 11.7% of our fiscal 2006 net sales 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.
See Note 23. “Segment Information” to our consolidated financial statements, which is incorporated in this section by reference, for financial information about our reportable business segments.

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Products and Brands
We produce, market, distribute and sell white breads, variety breads, reduced calorie breads, English muffins, croutons, rolls, buns and baked sweet goods under a number of well-known national and regional brand names. Our brands are positioned across a wide spectrum of categories and price points. The following chart illustrates our principal categories and brands:
         
Category   Our National Brands   Our Regional Brands
Breads, Rolls and Buns
       
(White, variety, crusty, reduced-calorie and bagels)
  Wonder   Bunny*
 
  Home Pride   Butternut
 
  Baker’s Inn   Merita
 
  Bread du Jour   Millbrook
 
  Beefsteak   Eddy’s
 
      Cotton’s Holsum*
 
      Holsum*
 
      J.J. Nissen
 
      Sunbeam*
 
      Sweetheart
 
      Di Carlo
 
      Colombo
 
      Roman Meal*
 
      Sun-Maid*
 
      Pillsbury*
 
       
Fresh Baked Sweet Goods
  Hostess   Dolly Madison
(Donuts, sweet rolls, snack pies and snack cakes)
  Twinkies   Drake’s
 
  Ding Dongs   Devil Dogs
 
  HoHos   Ring Dings
 
  Suzy-Qs   Yodels
 
      Yankee Doodles
 
      Zingers
 
       
Other
  Mrs. Cubbison’s    
(Croutons and stuffing mix)
  Marie Callender’s*    
 
 
*   Licensed brands
We believe that our brand trademarks such as “Wonder®,” “Hostess®,” “Home Pride®,” “Baker’s Inn®,” “Butternut®” and “Dolly Madison®” and product trademarks such as “Twinkies®,” “HoHos®” and “Zingers®” are of material importance to our strategy of brand building. We take appropriate action from time to time against third parties to prevent infringement of our trademarks and other intellectual property. We also enter into confidentiality agreements from time to time with employees and third parties, as necessary, to protect formulas and processes used in producing our products. Some of our products are sold under brands that we have licensed from others on terms that are generally renewable at our discretion. These licensed brands include “Bunny®,” “Cotton’s® Holsum,” “Holsum®,” “Marie Callender’s®,” “Pillsbury®,” “Roman Meal®,” “Sunbeam®” and “Sun-Maid®.”
In the third quarter of fiscal 2006, we introduced nationally three new white bread varieties, Wonder® Made with Whole Grain White, Wonder® White Bread FansTM, and Wonder Kids®. Wonder® Made with Whole Grain White and Wonder® White Bread FansTM are targeted to people who prefer the taste and texture of white bread but who want to add more nutrition to their diets. In the fourth quarter of 2006, we introduced a national program on Wonder® buns and rolls to add new varieties, including wheat hamburger and hot dog buns and buns made with whole grains. In the first quarter of fiscal 2007, we introduced Wonder® Wheat and Wonder® Honey Wheat bread.

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Marketing and Distribution
The majority of our bread is sold through national mass merchandisers and supermarkets, while our sweet goods are sold principally through national mass merchandisers, supermarkets and convenience stores. One customer, Wal-Mart Stores, Inc., accounted for approximately 13.4% of our net sales in fiscal 2006. No other single customer accounted for more than 10.0% of our net sales. Sweet goods sales tend to be somewhat seasonal, with a historically weak winter period, which we believe is attributable to altered consumption patterns during the holiday season. Sales of buns, rolls and shortcake products are historically higher in the spring and summer months.
Our marketing and advertising campaigns are conducted through targeted television, radio and print advertising as well as coupon inserts in newspapers and other printed media. Our national accounts department manages our relationships with our largest customers. This group focuses on customer service and satisfaction and communicates on a regular basis to our customers regarding new products and upcoming product events.
We distribute our products in markets representing over 80.0% of U.S. supermarket volume. Our plants and distribution centers across the U.S. are located close to the major marketplaces enabling effective delivery and superior customer service. We do not keep a significant backlog of inventory, as our fresh bakery products are promptly distributed to our customers after being produced.
We deliver our fresh baked bread and sweet goods from our network of bakeries to our distribution centers. Our sales force then delivers primarily to mass merchandisers, supermarkets and convenience stores on approximately 6,400 delivery routes. We are one of only a few fresh baked bread and sweet goods producers with a national direct store delivery, or DSD, system that enables us to provide frequent and individualized service to our national and regional customers. Our DSD system allows us to effectively manage shelf space and efficiently execute in-store promotions and new product introductions. In accordance with industry practice, we repurchase dated and damaged bread products from most of our customers. A portion of our dated bread and other products are delivered to our approximately 830 bakery outlets for retail sale. Bakery outlet sales represented approximately 11.7% of our net sales during the 53-week period ended June 3, 2006.
Sources and Availability of Raw Materials
Most ingredients in our products, principally flour, sugar and edible oils, are readily available from numerous sources. We currently are dependent on a small number of suppliers for an ingredient we use to produce fresh bread products under our extended shelf life, or ESL, program. Maintenance of our relationships with our suppliers is a material focus of our reorganization proceeding. Failure to maintain satisfactory on-going trading terms with our suppliers would have a material adverse impact on our business. We do not have a long-term supply contract with any of these suppliers; however, we believe this is in our best interest because of rapidly changing technology in this area. We 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 terms of such instruments, and the hedging transactions to which they relate, generally do not exceed one year. Our ability to hedge may be negatively impacted by counterparty concern regarding our financial situation. We also purchase other major commodity requirements through advance purchase contracts, generally not longer than one year in duration, to lock in prices for raw materials. The balance of our commodity needs are purchased on the spot markets. Through our program of central purchasing of baking ingredients and packaging materials, we believe we are able to utilize our national presence to obtain competitive prices.
Prices for our raw materials are dependent on a number of factors including the weather, crop production, transportation and processing costs, government regulation and policies, and worldwide market supply of, and demand for, such commodities. Although we believe that we are able to utilize our central purchasing function to obtain competitive prices, the inherent volatility of commodity prices occasionally exposes us to fluctuating costs. We attempt to recover the majority of our commodity cost increases by increasing prices, moving towards a higher margin product mix or obtaining additional operating efficiencies. We are limited, however, in our ability to take greater price increases than the bakery industry as a whole because demand for our products has shown to be negatively affected by such price increases.

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Employees
As of December 6, 2006, we employ approximately 25,000 people, approximately 82% of whom are covered by one of approximately 420 union contracts. Most of our employees are members of either the International Brotherhood of Teamsters or the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union. We are in the process of renegotiating union contracts affecting the majority of our unionized workforce. We are in the process of renegotiating the remaining union contracts. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Labor Union Negotiations” for a discussion of the negotiations. We believe that we have good relations with our employees. However, because our union groups are concentrated in the two organizations listed, contract negotiations with any local unit can involve the threat of strike by other union members at other IBC facilities. Although the Chapter 11 process could strain relations with employee groups and labor unions, we are committed to working with those groups to attempt to resolve any conflicts that may arise in order to ensure the continued viability of our business.
Competition
We face intense competition in all of our markets from large national bakeries, smaller regional operators, small retail bakeries, supermarket chains with their own bakeries, grocery stores with their own in-store bakery departments or private label products and diversified food companies. Competition is based on product quality, price, customer service, brand recognition and loyalty, promotional activities, access to retail outlets and sufficient shelf space and the ability to identify and satisfy consumer preferences. Customer service, including responsiveness to delivery needs and maintenance of fully stocked shelves, is also an important competitive factor and is central to the competition for retail shelf space. Our ability to provide customer service through our DSD delivery system is highly reliant on the execution and performance of our route drivers. This system is operated under collective bargaining agreements that can restrict the implementation, timing and effectiveness of our sales operation. Campbell Soup Company, George Weston Limited, Flowers Foods, Inc., Grupo Bimbo, S.A. and Sara Lee Corporation are our largest fresh baked bread competitors, each marketing bread products under various brand names. Flowers Foods, Inc., George Weston Limited, Grupo Bimbo, S.A., Krispy Kreme Doughnuts, Inc., McKee Foods Corporation and Tasty Baking Company are our largest competitors with respect to fresh baked sweet goods. In addition, fresh baked sweet goods also compete with other sweet snack foods like cookies and candies. From time to time, we experience price pressure in certain of our markets as a result of competitors’ promotional pricing practices.
Governmental Regulation; Environmental Matters
Our operations are subject to regulation by various federal, state and local government entities and agencies. As a baker of fresh baked bread and sweet goods, our operations are subject to stringent quality, labeling and traceability standards, including the Federal Food and Drug Act and Bioterrorism Act of 2002. Our bakery operations and our delivery fleet are subject to various federal, state and local environmental laws and workplace regulations, including the federal Occupational Safety and Health Act of 1970, the federal Fair Labor Standards Act of 1938, the federal Clean Air Act of 1990 and the federal Clean Water Act of 1972. Future compliance with or violation of such regulations, and future regulation by various federal, state and local government entities and agencies, which could become more stringent, may have a material adverse effect on our financial condition and results of operations. We could also be subject to litigation arising out of such governmental regulations that could have a material adverse effect on our financial condition and results of operations. We believe that our current legal and environmental compliance programs adequately address such concerns and that we are in substantial compliance with such applicable laws and regulations.
We have underground storage tanks at various locations throughout the U.S. that are subject to federal and state regulations that establish minimum standards for these tanks and where necessary, require remediation of associated contamination. On some parcels of owned real property, we discovered that underground storage tanks containing gasoline or diesel fuel had leaked and contaminated the adjacent soil. Typically, the discovery of these leaks and the resulting soil contamination is made in connection with the sale of a property or the removal of an underground storage tank. When we discover that a leaking tank has contaminated a site, we take appropriate steps to clean up or remediate the site. We are presently in the process of or have completed remediating any known contaminated sites.

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In addition, the Environmental Protection Agency, or EPA, has made inquiries into the refrigerant handling practices of companies in our industry. Two of these companies entered into a negotiated settlement with the EPA and made substantial settlement payments. In September 2000, we received a request for information from the EPA relating to our handling of regulated refrigerants, which we use in equipment in our bakeries for a number of purposes, including to cool our dough during the production process. In January 2002, the EPA offered a partnership program to members of the baking industry pursuant to which individual companies can elect to participate. Because we had previously received a request for information from the EPA, the EPA/Department of Justice (DOJ) policies indicated that we were not eligible to participate in the program. Nevertheless, we undertook our own voluntary program to convert our industrial equipment to eliminate the use of ozone-depleting refrigerants. Prior to our Chapter 11 filing, we had undertaken negotiations with the EPA. 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 intend to vigorously challenge any penalties calculated on this basis and defend against such claims by the EPA/DOJ. We have also received notices from the EPA, state agencies, and/or private parties seeking contribution, that we have been identified as a potentially responsible party, or PRP, under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, arising out of the alleged disposal of hazardous substances at certain disposal sites on properties owned or controlled by others. Because liability under CERCLA may be imposed retroactively without regard to fault, we may be required to share in the cleanup cost with respect to six “Superfund” sites. Our ultimate liability in connection with these sites may depend on many factors including the volume and types of materials contributed to the site, the number of other PRPs and their financial viability and the remediation methods and technology to be used.
The Clean Air Act of 1970, as amended, provides for federal, state and local regulation of the emission of air pollutants. Under the Clean Air Act, many of our facilities are required to report and control air emissions, including volatile organic compounds, nitrogen oxides and ozone-depleting substances. In April 2004 the EPA promulgated rules relating to EPA’s more stringent National Ambient Air Quality Standards (NAAQS) for ozone. State and local authorities may apply additional emissions limits to certain of our bakeries to comply with the new ozone NAAQS likely beginning in 2006.
While it is difficult to quantify the potential financial impact of actions involving environmental matters, particularly remediation costs at waste disposal sites and future capital expenditures for environmental control equipment, in the opinion of our management, the ultimate liability arising from such environmental matters, taking into account established accruals for estimated liabilities, should not be material to our overall financial position, but could be material to results of operations or cash flows for a particular quarter or annual period.
Availability of Reports; Website Access
Our Internet address is http://www.interstatebakeriescorp.com. We provide a hyperlink to the 10kWizard.com website on our website by selecting the heading “Investors” and then “SEC Filings”. Through that hyperlink, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, we provide a hyperlink entitled “Restructuring Information” on the “Investors” webpage that provides access to all filings related to our Chapter 11 proceedings.

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ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, together with all of the other information included or incorporated in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem insignificant may also impair our business operations. The occurrence of any of these risks could adversely affect our financial condition, results of operations and cash flows.
     We face significant challenges and uncertainties in connection with our bankruptcy reorganization.
On September 22, 2004, we and each of our wholly-owned subsidiaries filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. 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. We currently operate our business as a debtor-in-possession pursuant to the Bankruptcy Code.
We are continuing the process of stabilizing our businesses and evaluating our operations before beginning the development of a plan of reorganization. We have evaluated operations at each of our ten profit centers and have consolidated bakeries, depots, thrift stores and routes in these profit centers. This process is discussed in greater detail below. In addition, 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. In the event that we file a plan of reorganization with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to creditors, equity holders and parties in interest in order to solicit acceptance of the plan. Following the solicitation, the Bankruptcy Court will consider whether to confirm the plan. If proposed, our plan of reorganization may not receive the requisite acceptance by creditors, equity holders and parties in interest, or the Bankruptcy Court may not confirm the proposed plan. Moreover, even if a plan of reorganization receives the requisite acceptance by creditors, equity holders and parties in interest and is approved by the Bankruptcy Court, the plan may not be viable.
In addition, due to the nature of the reorganization process, actions may be taken by creditors and parties in interest that may have the effect of preventing or unduly delaying the filing and confirmation of a plan of reorganization in connection with the Chapter 11 process. Accordingly, we can provide no assurance as to whether or when a plan of reorganization may be filed or confirmed in the Chapter 11 process.
     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 eight 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. Currently, we expect that we will not be able to remain in compliance with the minimum Consolidated EBITDA covenant as early as prior to the end of our 2007 third fiscal quarter. We intend to negotiate with the lenders under the DIP Facility to obtain the necessary relief from this covenant. However, we can give no assurance that any relief will be obtained. Failure to comply with the terms, covenants and requirements of the DIP Facility could have a material adverse impact on our operations.
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.

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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 November 18, 2006, we had approximately $84.0 million in available cash and $77.8 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. We cannot assure you that the amounts of cash available 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 cash 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 June 2, 2007. 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.
     We face uncertainty due to an action commenced by a stockholder seeking to compel us to hold an annual meeting of stockholders.
On October 30, 2006, a stockholder of the Company, commenced an action in the Court of Chancery of the State of Delaware seeking to compel us to convene an annual meeting of stockholders. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Company Overview – Recent Developments – Stockholder Action” below for a further discussion of this action. Although we have filed a motion in the Bankruptcy Court seeking to enjoin the stockholder from proceeding with action, there can be no assurance that the Bankruptcy Court will grant us this relief.
If the action is allowed to proceed and we are compelled to hold an annual meeting of stockholders, the election of directors at such meeting could result in a change of control of the majority of our Board of Directors. This change of control could adversely affect the success of our restructuring process as well as our financial condition, results of operations and cash flows. Such a change would constitute an event of default under the DIP Facility and trigger significant claims under management continuity agreements with certain of our key senior executives in the event any of these executives is terminated within two years of the change in control. We are dependent upon the financing provided by the DIP Facility and, in the event that such event of default were to occur and we were unable to obtain a waiver, there can be no assurance that we would be able to obtain financing from alternative sources on acceptable terms, if at all.
In addition, the uncertainty created by the threat of a change of control of our Board of Directors is undermining (i) our permanent CEO search process, (ii) the development of a credible long-term business plan for the Company based on current results, (iii) the exploration of potential availability of financing for the Company to facilitate a plan of reorganization to emerge from Chapter 11, (iv) our ability to regain lost customers and take advantage of new business opportunities, and (v) the availability of adequate credit terms from our vendors and creditors. These activities are vital components of our restructuring process, and if such uncertainty persists, it could have an adverse affect on the success of our restructuring process, as well as our financial condition, results of operations and cash flows.

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Our potential inability to implement our restructuring plan, or to realize its anticipated benefits, could adversely affect our results of operations and financial condition.
Since filing to restructure under Chapter 11, we have undertaken a comprehensive review of our operations to determine the appropriate actions necessary to restructure our business. The outcome of our restructuring is dependent on a number of factors, including the success of our new product introductions as well as the positive resolution of on-going labor negotiations. Our restructuring process also could expose us to increased risks, including the diversion of resources and management time, disruptions to our business, the impairment of relationships with employees, unions or customers and the impairment of supplier relationships.
As the first step in our restructuring process, we closed one bakery, implemented a reduction in workforce, reduced corporate costs, reduced or suspended certain employee benefit programs and renegotiated our contracts with a third party service provider. The second stage of our restructuring process involved an exhaustive review of each of our ten profit centers on an individual basis in order to address continued revenue declines and our high-cost structure. We have recently closed a number of bakeries and consolidated a number of routes, depots and outlet stores in our ten profit centers. The profit center restructuring process was intended to improve profitability by rationalizing marginal products and strengthening our focus on branded sales and deliveries. The success of the profit center restructuring process also will be influenced by our ability to achieve increased route averages as a result of newly consolidated routes. While we believe it is critical that we eliminate unprofitable products and routes, streamline distribution, rationalize the number of brands and stock-keeping units (SKUs) and eliminate excess capacity in order to return the company to profitability, the profit center restructuring process has and will result in lower revenues for at least a period of time, which could adversely affect our financial condition, results of operations and cash flows.
Beginning in the fourth quarter of 2006, we began focusing on improving manufacturing processes and service to customers through our restructured sales force.
In addition, we have been and will continue to evaluate the impact of these restructurings. Understanding the true impact of the projected efficiencies to be gained by these actions 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, and the filing of, a plan of reorganization. There can be no assurance that we will be able to successfully develop and implement a credible business plan or a plan of reorganization, which could adversely affect the success of our restructuring process as well as our financial condition, results of operations and cash flows.
If we are unable to effectively implement our restructuring process, we may not reap the anticipated benefits and may face higher than anticipated costs and delays. In addition, we may not be able to achieve the cost savings and efficiencies we anticipate will result from the closures and consolidations, or realize these savings or efficiencies as quickly as we expect. Even if we are able to achieve the expected cost savings and efficiencies, there can be no assurance that such savings and efficiencies will offset the significant upward cost pressure we are experiencing.
     Terms of collective bargaining agreements and labor disruptions could adversely impact our results of operations.
We employ approximately 25,000 people, approximately 82% of whom are covered by one of approximately 420 union contracts. Most of our employees are members of either the International Brotherhood of Teamsters or the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union. Because a substantial portion of our workers are unionized, our costs are generally higher and our ability to implement productivity improvements and effect savings with respect to health care, pension and other retirement costs is more restricted than in many nonunion operations as a result of various restrictions specified in our collective bargaining agreements. Terms of collective bargaining agreements that prevent us from competing effectively could adversely affect our financial condition, results of operations and cash flows. In addition, our Chapter 11 filing and restructuring activities, including changes to our benefit programs and on-going labor negotiations in connection with our profit center review process, have strained relations with employee groups and labor unions. We are committed to working with those groups to resolve conflicts as they arise in order to ensure the continued viability of our business. However, there can be no assurance that these efforts will be successful.

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     The Chapter 11 process and the DIP Facility impose restrictions on the conduct of our business.
We are operating our business as a debtor-in-possession pursuant to the Bankruptcy Code. Under applicable bankruptcy law, during the pendency of the Chapter 11 process, we will be required to obtain the approval of the Bankruptcy Court prior to engaging in any transaction outside the ordinary course of business. In connection with an approval, creditors and parties in interest may raise objections to the request for approval and may appear and be heard at any hearing with respect to the approval. Accordingly, although we may sell assets and settle liabilities (including for amounts other than those reflected on our financial statements) with the approval of the Bankruptcy Court, there can be no assurance that the Bankruptcy Court will approve any sales or proposed settlements. The Bankruptcy Court also has the authority to oversee and exert control over our ordinary course operations.
The DIP Facility contains both affirmative and negative covenants pursuant to which we agree to take, or refrain from taking, certain actions. The primary on-going affirmative obligation that we are required to perform is the scheduled periodic delivery of a Borrowing Base Certificate (as defined in the DIP Facility), which reflects the components of and reserves against the Borrowing Base (as defined in the DIP Facility), establishes borrowing availability pursuant to an agreed formula, certifies as to the accuracy and completeness of the information presented and includes any documentation necessary or appropriate to support the information presented. Additionally, we are required to deliver periodic operating budgets and cash flow forecasts, as required by the DIP Facility.
The DIP Facility also contains several restrictive covenants that are typical for a debtor-in-possession credit facility of this type. The DIP Facility contains certain 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). In addition, the DIP Facility also imposes restrictions relating to, among other things, incurrence of liens, our ability to consolidate or merge with or into another entity, incurrence or guarantee of debt, payment of dividends, making of investments, and the disposition of assets.
Failure to satisfy any of these covenants could result in an event of default that could cause, absent the receipt of appropriate waivers, an interruption in cash and letter of credit availability, which could cause an interruption of our normal operations. As a result of the restrictions described above, our ability to respond in a timely fashion to changing business and economic conditions may be significantly restricted and, absent approval by the requisite number of lenders, we may be prevented from engaging in transactions that might otherwise be considered beneficial to us.
     Our financial statements assume we can continue as a “going concern”.
Our consolidated financial statements included elsewhere in this Annual Report on Form 10-K have been prepared assuming we can continue as a going concern. Because of the Chapter 11 process and the circumstances leading to the bankruptcy there is substantial doubt that we can 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 negotiate an extension of or refinance our DIP Facility at its maturity, our ability to implement our restructuring process, 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.
In addition, the amounts reported in the consolidated financial statements included in this Annual Report on Form 10-K do not reflect adjustments to the carrying value of assets or the amount and classification of liabilities that ultimately may be necessary as the result of a plan of reorganization.

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     We are no longer listed on the New York Stock Exchange and the market in our common stock is highly speculative and may not continue.
Our common stock was delisted from the New York Stock Exchange, or the NYSE, on September 23, 2004. Our common stock now trades on the over-the-counter bulletin board under the symbol “IBCIQ.PK.” Our delisting has reduced the market and liquidity of our common stock and consequently may adversely affect the ability of our stockholders and brokers/dealers to purchase and sell our shares in an orderly manner or at all. Trading in our common stock through market makers and quotation on the over-the-counter bulletin board entails other risks. Due in part to the decreased trading price of our common stock and the elimination of analyst coverage, the trading price of our common stock may change quickly, and market makers may not be able to execute trades as quickly as they could when the common stock was listed on the NYSE. The NYSE also has notified us that its Market Trading Analysis Department is reviewing transactions in our common stock occurring prior to our announcement on August 30, 2004 that we were delaying the filing of our Form 10-K and prior to our filing of a petition for relief under Chapter 11 of the Bankruptcy Code on September 22, 2004. 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 addition, as a result of pre-petition indebtedness and the availability of the “cram-down” provisions of the Bankruptcy Code described in “Item 1. Business – Proceedings Under Chapter 11 of the Bankruptcy Code” in this Annual Report on Form 10-K, the holders of our common stock may not receive value for their interests under a plan of reorganization. Because of this possibility, the value of our common stock is highly speculative and any investment in our common stock would pose an extremely high degree of risk. In connection with our motion filed in the Bankruptcy Court in response to the recently filed stockholder action to compel an annual meeting, we described our view that, based on current financial performance, it is difficult (if not impossible) to derive a current enterprise value for the Company that would result in value for the equity interests after first taking into consideration the amount of creditor claims against the Company. Potential investors in our common stock should consider the highly speculative nature of our common stock prior to making any investment decision with respect to our common stock.
     We may face deregistration proceedings under Section 12(j) of the Exchange Act.
Due to our failure to timely file our periodic reports with the SEC, we believe that the SEC will commence deregistration proceedings under Section 12(j) of the Exchange Act to deregister our common stock under the Exchange Act if we do not become current in our filings with the SEC by December 31, 2006. If our common stock is deregistered, publicly available information regarding the Company may be limited and the price of our common stock would likely suffer an immediate and significant decline. Our common stock would no longer be quoted on the OTC Bulletin Board and there can be no assurance that there will be any active trading market for our common stock. Accordingly, investors would likely find it more difficult to acquire or dispose of our common stock or obtain accurate quotations for our common stock following any such deregistration.
     Our internal control over financial reporting was not effective as of June 3, 2006 and weaknesses in our internal controls and procedures could adversely affect our financial condition.
As discussed in Item 9A, management assessed our internal control over financial reporting as of June 3, 2006, the end of our most recent fiscal year, and concluded that material weaknesses existed and our internal control over financial reporting was not effective.
We have engaged in, and are continuing to engage in, substantial efforts to improve our internal control over financial reporting and disclosure controls and procedures related to substantially all areas of our financial statements and disclosures. The remediation efforts are continuing and are expected to continue throughout fiscal 2007 and beyond. There remains a risk that we will fail to prevent or detect a material misstatement of our annual or interim financial statements. In addition, if we are unsuccessful in our remediation efforts, our financial condition, our ability to report our financial condition and results of operations accurately and in a timely manner and our ability to earn and retain the trust of our shareholders, employees, and customers, could be adversely affected.

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     Our reorganization will require substantial effort by management and may impact our ability to attract, retain and compensate key employees.
Our senior management has been, and will be, required to expend a substantial amount of time and effort structuring a plan of reorganization, as well as evaluating various restructuring 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, which could have a disruptive impact on management’s ability to focus on the operation of our business. Our restructuring process has, and will continue to, require a substantial amount of time and effort on the part of our senior management. In addition, we have had and continue to have difficulty retaining, compensating and attracting key executives and associates and retaining employees generally as a result of a number of problems related to the Chapter 11 process.
     Declining demand for our products could have adverse effects on our financial results.
We have experienced a significant decline in the demand for our products. According to data from Information Resources Incorporated (IRI), an independent market research concern that reports sales trends in most supermarkets (excluding mass merchandisers, club stores and discount stores), our total unit volume of branded bread products declined by 14.3% during fiscal 2006 from the comparable fiscal 2005 period, while unit volumes of branded sweet goods also declined by 9.1%. During fiscal 2006, revenues related to these products declined 10.0% from the comparable fiscal 2005 period. Data from IRI also indicates that the declining bread trend was broadly evident in the industry during fiscal 2006. We believe that we will continue to experience reduced demand for our products.
New dietary guidelines also could result in further reduced demand for our products. The Department of Health and Human Services and Department of Agriculture released the 2005 Dietary Guidelines for Americans in January 2005. The Guidelines provide dietary advice aimed at promoting health and reducing the risk for major chronic diseases, and serve as the basis for federal food and nutrition education programs. The guidelines recommend limiting the intake of saturated and trans fats, cholesterol, added sugar, salt and alcohol. The guidelines recognize that whole grains are an important source of fiber and nutrients and recommend an increased consumption of whole grain products by substituting whole grain products for some enriched bread products. We have a number of whole grain products among our product offerings. However, the substantial majority of our bread revenues are from the sale of white bread and other refined grain bread products. There can be no assurance that, if consumers increase their consumption of whole grain products as a result of the new guidelines, they will increase consumption of our whole grain product offerings.
We have not been able to adequately respond to decreased demand for our products because we have limitations on flexibility with our costs. Our labor costs are relatively fixed. We employ approximately 25,000 people, approximately 82% of whom are covered by one of approximately 420 union contracts. Because a substantial portion of our workers are unionized, our costs are generally higher and our ability to implement productivity improvements and effect savings with respect to health care, pension and other retirement costs is more restricted than in many nonunion operations as a result of various restrictions specified in our collective bargaining agreements.
     We may have difficulty in maintaining relationships and material contracts with our suppliers.
Although we have not had significant difficulty, in the future we may have difficulty in maintaining existing relationships with our suppliers or creating new relationships with suppliers as a result of the Chapter 11 process. Our suppliers may stop providing materials to us or provide materials on a “cash on delivery” or “cash on order” basis, or on other terms that could have an adverse impact on our short-term cash flow. Our ability to maintain arrangements with our suppliers that are critical to our operations may be adversely impacted due to supplier uncertainty regarding our cash-flow resources and the outcome of the Chapter 11 process. Failure to maintain these arrangements could have a material and immediate adverse impact on our ability to operate as a going concern.

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An investigation by the SEC regarding the restatement of our fiscal 2004 financial statements and related potential litigation could adversely impact our business.
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 have continued to cooperate fully with the SEC’s investigation. On November 2, 2006, we announced that we had submitted an offer of settlement to the staff of the Division of Enforcement of the SEC in connection with the investigation. The proposed settlement is subject to approval by the Commission. IBC has been informed that the staff of the Division of Enforcement has determined to recommend the settlement to the Commission. However, IBC cannot give assurance that the Commission will approve the proposed settlement. As part of the proposed settlement, IBC will consent, without admitting or denying the allegations by the SEC, to the entry of a cease and desist order from the SEC against future violations of the record-keeping, internal controls and reporting provisions of the federal securities laws and related SEC rules. No fines would be imposed under the proposed settlement.
     Increases in employee and employee-related costs could have adverse effects on our financial results.
Our health care and workers’ compensation costs have been increasing and may continue to increase. Our ability to pass along these increases in health care to our employees is limited by our collective bargaining agreements, which cover approximately 82% of our employees. Any substantial increase in health care or workers’ compensation costs may adversely affect our financial condition, results of operations and cash flows. In addition, a shortage of qualified employees or a substantial increase in the cost of qualified employees could adversely affect our financial condition, results of operations and cash flows.
     Increases in prices and shortages of raw materials, fuels and utilities could cause our costs to increase.
The principal raw materials used to bake our fresh bread and sweet goods, including flour, sugar and edible oils, and the paper, films and plastics used to package our products, are subject to substantial price fluctuations. The prices for raw materials are influenced by a number of factors, including the weather, crop production, transportation and processing costs, government regulation and policies, and worldwide market supply and demand. Commodity prices have been volatile and may continue to be volatile. Any substantial increase in the prices of raw materials may adversely affect our financial condition, results of operations and cash flows. We enter into contracts to be performed in the future, generally with a term of one year or less, to purchase raw materials at fixed prices to protect us against price increases. These contracts could cause us to pay higher prices for raw materials than are available in the spot markets.
We rely on utilities to operate our business. For example, our bakeries and other facilities use natural gas, propane and electricity to operate. In addition, our distribution operations use gasoline and diesel fuel to deliver our products. For these reasons, substantial future increases in prices for, or shortages of, these fuels or electricity could adversely affect our financial condition, results of operations and cash flows.

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     Price increases could reduce demand for our products.
In late fiscal 2006 and early fiscal 2007, we implemented significant price increases for many of our products. The increased prices could have a negative effect on consumer demand for our products and our sales and profits.
     Competition could adversely impact our results of operations.
The baking industry is highly competitive. Competition is based on product quality, price, customer service, brand recognition and loyalty, effective promotional activities, access to retail outlets and sufficient shelf space and the ability to identify and satisfy consumer preferences. We compete with large national bakeries, smaller regional operators, small retail bakeries, supermarket chains with their own bakeries, grocery stores with their own in-store bakery departments or private label products and diversified food companies. Some of these competitors are more diversified and have greater financial resources than we do. Customer service, including responsiveness to delivery needs and maintenance of fully stocked shelves, is an important competitive factor and is central to the competition for retail shelf space. From time to time, we experience price pressure in certain of our markets as a result of our competitors’ promotional pricing practices. Excess industry capacity could also result in price pressure in certain markets. As a result, we may need to reduce the prices for some of our products to respond to competitive and customer pressures and to maintain market share. Such pressures also may restrict our ability to increase prices in response to raw material and other cost increases. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when raw material costs increase, would harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations will suffer.
In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we continue to promote our products, advertise and introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, our actions may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks as a result of competing for customers in a highly competitive retail environment.
     We may be obligated to make additional contributions, or incur withdrawal liability, to multi-employer pension plans.
We have collective bargaining agreements with our unions that stipulate the amount of contributions that we and other companies must make to union-sponsored, multi-employer pension plans in which our employees participate. Under our collective bargaining agreements, we are obligated to make contributions to a number of multi-employer plans which cover the majority of our employees. Benefits under these plans generally are based on a specified amount for each year of service. We contributed $125.8 million, $133.5 million, and $132.0 million to all of our multi-employer plans in fiscal 2006, 2005, and 2004, respectively. Based on the most recent information available to us, we believe that certain of the multi-employer pension plans to which we contribute are substantially underfunded.
Multi-employer pension plans generally are managed by trustees, who are appointed by management of the employers participating in the plans (including our company, in some cases) and the affiliated unions, and who have fiduciary obligations to act prudently and in the best interests of the plan’s participants. For example, we have recently received notice from the trustees of one multi-employer plan to which we contribute requesting an increase in the amount of our contributions to the plan. We may also receive similar requests from other plans to which we contribute. Thus, while we expect contributions to these plans to continue to increase as they have in recent years, the amount of increase will depend upon the outcome of collective bargaining, actions taken by trustees, the actual return on assets held in these plans and the rate of employer withdrawals from the plans, as discussed below. Recent pension reform legislation will establish certain funding measures for multi-employer pension plans which could result in heightened contribution obligations in certain circumstances.
Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. If employers that withdraw or partially withdraw from a multi-employer pension plan are not able or fail to pay their withdrawal liability to the plan, by

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reason of bankruptcy or otherwise, the remaining participating employers in the plan must meet the plan’s funding obligations and are responsible for an increased portion of the plan’s underfunding. The decline in the value of assets held by certain of the multi-employer pension plans to which we contribute, coupled with the high level of benefits generally provided by the plans and the inability or failure of withdrawing employers to pay their withdrawal liability, has dramatically increased the underfunding of these plans in recent years. As a result, and in light of recent pension reform legislation at the federal level, we expect that our contributions to these plans will continue to increase and the plans’ benefit levels, underfunding and related issues will continue to create challenges for us and other employers in the bakery and trucking industries.
When we close bakeries, distribution centers and retail outlets, we may incur withdrawal liabilities with respect to underfunded multi-employer pension plans. In fiscal 2004, fiscal 2005 and fiscal 2006, we closed four, three and seven bakeries, respectively and, in connection with our restructuring activities, we may close additional bakeries, routes, bakery outlets and distribution centers. Any assessments for any withdrawal liability that we might incur by future closures will be recorded when the affected plans determine that it is probable that a liability exists and that the amount of the withdrawal liability can be reasonably estimated.
Additionally, the Internal Revenue Code and related regulations establish minimum funding requirements for multi-employer pension plans (which may be impacted by recent pension reform legislation). If any of these plans fail to meet these requirements and the trustees of these plans are unable to obtain waivers of the requirements from the Internal Revenue Service or reduce benefits to a level where the requirements are met, the Internal Revenue Service could impose excise taxes on us and the other employers participating in these plans, or we and the other employers may need to make additional funding contributions beyond the contractually agreed rates to correct the funding deficiency and avoid the imposition of such excise taxes. If excise taxes were imposed on us, or we make additional contributions, it could adversely affect our financial condition, results of operations and cash flows.
For the forgoing reasons, we are unable to determine the amount of future contributions, excise taxes or withdrawal liabilities, if any, for which we may be responsible or whether an adverse affect on our financial condition, results of operations and cash flows could result from our participation in these plans.
     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 $27.8 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.
     We rely on the value of our brands, and the costs of maintaining and enhancing the awareness of our brands are increasing.
We believe that maintaining our brands via marketing and other brand-building efforts is an important aspect of our efforts to attract and expand our consumer base. However, the costs associated with maintaining and enhancing consumer awareness of our brands are increasing. We may not be able to successfully maintain or enhance consumer awareness of our brands and, even if we are successful in our branding efforts, such efforts may not be cost-effective. In addition, our Chapter 11 filing may have an adverse impact on the reputation of our brands with consumers. If we are unable to maintain or enhance consumer awareness of our brands in a cost effective manner, it would adversely affect our financial condition, results of operations and cash flows.

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     Economic downturns could cause consumers to shift their food purchases from our branded products to lower priced items.
The willingness of consumers to purchase premium branded food products depends in part on national and local economic conditions. In periods of economic downturns or uncertainty, consumers tend to purchase more private label or other lower priced products. If this were to happen, our sales volume of higher margin branded products could suffer, which would adversely affect our financial condition, results of operations and cash flows.
     Inability to anticipate changes in consumer preferences may result in decreased demand for products.
Our success depends in part on our ability to anticipate the tastes and dietary habits of consumers and to offer products that appeal to their preferences. Consumer preferences change, and our failure to anticipate, identify or react to these changes could result in reduced demand for our products, which could in turn adversely affect our financial condition, results of operations and cash flows. We have recently introduced several new products and improved products in order to achieve and retain market share and have incurred significant development and marketing costs in connection therewith. If our products fail to meet consumer preferences, then our strategy to maintain and grow sales and profits with new products will be less successful.
     Our intellectual property rights are valuable and any inability to protect them could dilute our brand image and adversely affect our business.
We regard our trademarks, including “Wonder®,” “Hostess®,” “Home Pride®,” “Baker’s Inn®,” “Butternut®,” “Dolly Madison®,” “Drake’s®,” and “Merita®,” as well as our trade secrets and similar intellectual property, as important to our success. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. In the event that any of our proprietary information is misappropriated, our business could be seriously harmed. For example, if we are unable to protect our trademarks from unauthorized use, our brand image may be harmed. Other parties may take actions that could impair the value of our proprietary rights or the reputation of our products. Any impairment of our brand image could cause our enterprise value to decline. Also, we may not be able to timely detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. In the event we are unable to enforce our intellectual property rights, it could adversely affect our financial condition, results of operations and cash flows. In addition, protecting our intellectual property and other proprietary rights can be expensive. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and could adversely affect our financial condition, results of operations and cash flows. A number of our brands are also manufactured and produced pursuant to licensing agreements. Our ability to renew these licensing agreements as they come due may be made more difficult by the Chapter 11 process, which could also adversely affect our financial condition, results of operations and cash flows.
     Further consolidation in the retail food industry may adversely impact profitability.
As supermarket chains continue to consolidate and as mass merchants gain scale, our larger customers may seek more favorable terms for their purchases of our products, including increased spending on promotional programs. Sales to our larger customers on terms less favorable than our current terms could adversely affect our financial condition, results of operations and cash flows.
     Future product recalls or safety concerns could adversely impact our business and financial condition and results of operations.
We may be required to recall certain of our products should they become contaminated or be damaged. We may also become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury, illness or death. A product recall or an adverse result in any such litigation could adversely affect our financial condition, results of operations and cash flows.
We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of our products. Adverse publicity about the safety and quality of certain food products, such as the publicity about foods containing genetically modified ingredients, whether or not valid, may discourage consumers from buying our products or cause production and delivery disruptions.

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A number of our brand names are owned, and products are produced and sold under these brand names, by third parties outside the U.S. Product recalls or adverse publicity about the safety and quality of these products could discourage consumers from buying our products, which could adversely affect our financial condition, results of operations and cash flows.
     Costs associated with environmental compliance and remediation could adversely impact our operations.
We are subject to numerous environmental laws and regulations that impose environmental controls on us or otherwise relate to environmental protection and health and safety matters, including, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and clean-up of solid and hazardous wastes, and the investigation and remediation of soil and groundwater affected by regulated substances. We have underground storage tanks at various locations throughout the U.S. that are subject to federal and state regulations establishing minimum standards for these tanks and where necessary, remediation of associated contamination. We are presently in the process of or have completed remediating any known contaminated sites. In addition, we have received a request for information from the Environmental Protection Agency, or EPA, relating to our handling of regulated refrigerants. The EPA has not assessed any fines relating to this matter to date; however, the EPA may do so in the future. We have also received notices from the EPA, state agencies, and/or private parties seeking contribution, that we have been identified as a potentially responsible party, or PRP, under CERCLA, arising out of the alleged disposal of hazardous substances at certain disposal sites on properties owned or controlled by others. Because liability under CERCLA may be imposed retroactively without regard to fault, we may be required to share in the cleanup cost of six “Superfund” sites. Our ultimate liability may depend on many factors, including (i) the volume and types of materials contributed to the site, (ii) the number of other PRPs and their financial viability and (iii) the remediation methods and technology to be used.
It is difficult to quantify the potential financial impact of actions involving environmental matters, particularly fines, remediation costs at waste disposal sites and future capital expenditures for environmental control equipment at these or other presently unknown locations. We believe the ultimate liability arising from such environmental matters, taking into account established accruals for estimated liabilities, should not be material to our overall financial position, but could be material to our results of operations or cash flows for a particular quarter or fiscal year.
     Government regulation could adversely impact our operations.
Our operations and properties are subject to regulation by federal, state and local government entities and agencies. As a baker of fresh baked bread and sweet goods, our operations are subject to stringent quality and labeling standards, including under the Federal Food and Drugs Act of 1906. Our operations are also subject to federal, state and local workplace laws and regulations, including the federal Fair Labor Standards Act of 1938 and the federal Occupational Safety and Health Act of 1970. Future compliance with or violation of such regulations, and future regulation by various federal, state and local government entities and agencies, which could become more stringent, may adversely affect our financial condition, results of operations and cash flows. We could also be subject to litigation or other regulatory actions arising out of government regulations, which could adversely affect our financial condition, results of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.

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ITEM 2. PROPERTIES
Bakeries
We currently own and operate 45 bakeries in the following locations, which were also owned and operated as of June 3, 2006:
         
Birmingham, Alabama
  Schiller Park, Illinois   Rocky Mount, North Carolina
Anchorage, Alaska
  Columbus, Indiana   Akron, Ohio
Glendale, California
  Indianapolis, Indiana   Cincinnati, Ohio
Los Angeles, California (3)
  Waterloo, Iowa   Columbus, Ohio
Oakland, California
  Emporia, Kansas   Defiance, Ohio
Pomona, California
  Lenexa, Kansas   Northwood, Ohio
Sacramento, California
  Alexandria, Louisiana   Tulsa, Oklahoma
San Diego, California
  Biddeford, Maine   Philadelphia, Pennsylvania
Denver, Colorado
  Boonville, Missouri   Knoxville, Tennessee
Jacksonville, Florida
  Springfield, Missouri   Memphis, Tennessee
Orlando, Florida
  St. Louis, Missouri   Ogden, Utah
Columbus, Georgia
  Billings, Montana   Salt Lake City, Utah
Decatur, Illinois
  Henderson, Nevada   Seattle, Washington
Hodgkins, Illinois
  Wayne, New Jersey    
Peoria, Illinois
  Jamaica, New York    
Other Properties
As of December 6, 2006, we operate approximately 800 distribution centers and approximately 830 bakery outlets in approximately 1,100 locations throughout the United States. The majority of our bakery outlets and distribution centers are leased. Over the past few years, we have been able to realize operating synergies through consolidation of redundant bakeries and distribution centers. For further discussion of our properties and profit center review, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Profit Center Review.”
ITEM 3. LEGAL PROCEEDINGS
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. For more information about the filing, see “Item 1. Business — Proceedings Under Chapter 11 of the Bankruptcy Code.”
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

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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 have continued to cooperate fully with the SEC’s investigation. On November 2, 2006, we announced that we had submitted an offer of settlement to the staff of the Division of Enforcement of the SEC in connection with the investigation. The proposed settlement is subject to approval by the Commission. IBC has been informed that the staff of the Division of Enforcement has determined to recommend the settlement to the Commission. However, IBC cannot give assurance that the Commission will approve the proposed settlement. As part of the proposed settlement, IBC will consent, without admitting or denying the allegations by the SEC, to the entry of a cease and desist order from the SEC against future violations of the record-keeping, internal controls and reporting provisions of the federal securities laws and related SEC rules. No fines would be imposed under the proposed settlement.
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 February and March 2003, seven putative class actions were brought against us and certain of our current or former officers and directors in the United States District Court for the Western District of Missouri. The lead case is known as Smith, et al. v. Interstate Bakeries Corp., et al., No. 4:03-CV-00142 FJG (W.D. Mo.). The seven cases have been consolidated before a single judge and a lead plaintiff has been appointed by the Court. On October 6, 2003, plaintiffs filed their consolidated amended class action complaint. The putative class covered by the complaint is made up of purchasers or sellers of our stock between April 2, 2002 and April 8, 2003. On March 30, 2004, we and our insurance carriers participated in a mediation with the plaintiffs. At the end of that session, the parties reached a preliminary agreement on the economic terms of a potential settlement of the cases in which our insurers would contribute $15.0 million and we would contribute $3.0 million. We also agreed with plaintiffs and our carriers to work towards the resolution of any non-economic issues related to the potential settlement, including documenting and implementing the parties’ agreement. On September 21, 2004, the parties executed a definitive settlement agreement consistent with the terms of the agreement reached at the mediation. The settlement agreement was subject to court approval after notice to the class and a hearing. In connection with the potential settlement, we recorded a charge of $3.0 million during fiscal 2004, which is classified in liabilities subject to compromise at June 3, 2006.

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As a result of our Chapter 11 filing, further proceedings in the case were automatically stayed. The settlement agreement provided, however, that the parties would cooperate in seeking to have the Bankruptcy Court lift the automatic stay so that consideration and potential approval of the settlement could proceed. A motion to lift the stay was filed with the Bankruptcy Court on November 24, 2004, and the Bankruptcy Court entered an order granting this motion on April 8, 2005, so that the parties could seek final approval of the settlement agreement from the District Court where the litigation was pending. On September 8, 2005, the District Court entered a final order approving the settlement agreement. We understand that even though the settlement was approved, plaintiffs received an allowed, pre-petition unsecured claim in our Chapter 11 case that may be subject to subordination to the claims of other unsecured creditors.
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 route sales representatives . 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 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.
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

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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.
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 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 June 3, 2006, we have recorded a net pension benefit obligation liability of approximately $58.0 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.
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. 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. See Note 11. Employee Benefit Plans – American Bakers Association Retirement Plan to our consolidated financial statements for a discussion of these assessments from the ABA Plan.

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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.
We record accruals for contingencies, such as legal proceedings, in accordance with SFAS No. 5, Accounting for Contingencies. See Note 2. Description of Business and Significant Accounting Policies to our consolidated financial statements for more information. In addition, 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 consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. As a result of our Chapter 11 filing, the Company has not held an Annual or Special Stockholders Meeting since September 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to our bankruptcy filing, our common stock was listed on the New York Stock Exchange, or NYSE, and was traded under the symbol “IBC.” On September 23, 2004, we received written notice from the NYSE that our common stock would be delisted from the NYSE immediately in accordance with Section 802.00 of the NYSE Listed Company Manual. The NYSE indicated in a press release issued September 23, 2004 that application to the Securities and Exchange Commission to delist our common stock was pending the completion of applicable procedures. The NYSE stated that the delisting determination followed its review of our September 22, 2004 press release announcing that we had filed cases under Chapter 11 of the Bankruptcy Code. The NYSE further noted the overall uncertainty surrounding the bankruptcy process and the current delay in the filing of our audited financial statements for the fiscal year 2004 due to the previously announced restatement, financial reporting and other issues. As a result, our common stock now trades on the over-the-counter market under the symbol “IBCIQ.PK.”

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As of December 6, 2006, we had issued and outstanding 45,285,314 shares of our common stock, which were held of record by 2,854 persons (excluding account holders in our 1991 Employee Stock Purchase Plan). Giving effect to our senior subordinated convertible notes, common stock equivalents, we had issued and outstanding 55,183,755 shares of our common stock as of December 6, 2006.
The table below presents the range of high and low closing sales prices of our common stock by quarter for each fiscal quarter in fiscal 2006 and 2005, as well as the dividends paid on our stock in each such quarter:
Stock Price
                                 
Fiscal Year   Quarter   High   Low   Cash Dividends
2006
    1     $ 11.85     $ 5.95        
 
    2       11.95       8.55        
 
    3       8.40       6.45        
 
    4       9.80       7.14        
 
                               
2005
    1     $ 11.05     $ 7.50        
 
    2       8.19       2.05        
 
    3       6.75       4.05        
 
    4       6.63       4.75        
In March 2004, our Board of Directors suspended dividend payments on our common stock effective for the fourth quarter of fiscal 2004. The decision was made as a result of our cash flow shortfall due to recent operating performance in bread sales. Under the DIP Facility, we are prohibited from paying dividends.
On August 12, 2004, we also 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. Purchasers received 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 was not exercised. The convertible notes were purchased by Highbridge International LLC, Isotope Limited, AG Domestic Convertibles LP, Shepherd Investments International, Ltd., AG Offshore Convertibles LTD, and Stark Trading. 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. We used the net proceeds of the offering to prepay our principal payments due under our senior secured credit facility over the course of the next four quarters and for general corporate purposes, improving our near-term liquidity and financial flexibility.
See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” below for a further discussion regarding equity compensation plan information.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
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 June 3, 2006, 7,396,688 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.

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Issuer Purchases of Equity Securities
                                 
                    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 (A)     (or Unit)   or Programs     Plans or Programs  
Period 1
May 29-June 25, 2005
    7     $ 6.30       7       7,396,835  
Period 2
June 26-July 23, 2005
    17     $ 7.83       17       7,396,818  
Period 3
July 24-Aug 20, 2005
    11     $ 11.12       11       7,396,807  
Period 4
Aug 21-Sept 17, 2005
    24     $ 10.64       24       7,396,783  
Period 5
Sept 18-Oct 15, 2005
    22     $ 9.72       22       7,396,761  
Period 6
Oct 16-Nov 12, 2005
    5     $ 9.00       5       7,396,756  
Period 7
Nov 13-Dec 10, 2005
    9     $ 8.15       9       7,396,747  
Period 8
Dec 11, 2005-Jan 7, 2006
    13     $ 7.44       13       7,396,734  
Period 9
Jan 8-Feb 4, 2006
    5     $ 7.00       5       7,396,729  
Period 10
Feb 5-March 4, 2006
    12     $ 7.12       12       7,396,717  
Period 11
March 5-April 1, 2006
    9     $ 7.70       9       7,396,708  
Period 12
April 2-April 29, 2006
    4     $ 8.15       4       7,396,704  
Period 13
April 30-June 3, 2006
    16     $ 8.72       16       7,396,688  
 
                               
 
                       
Total
    154     $ 8.72       154       7,396,688  
 
                       
 
A)   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.

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ITEM 6. SELECTED FINANCIAL DATA
INTERSTATE BAKERIES CORPORATION
FIVE-YEAR SUMMARY OF FINANCIAL DATA
                                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
    June 3,     May 28,     May 29,     May 31,     June 1,  
    2006     2005     2004     2003     2002  
    (1)     (4) (5)     (6)     (7)     (8)  
    (dollars and shares in thousands, except per share data)
Statements of Operations
                                       
 
                                       
Net sales
  $ 3,060,473     $ 3,403,505     $ 3,467,562     $ 3,525,780     $ 3,531,623  
 
                                       
Cost of products sold (exclusive of depreciation and amortization) (3)
    1,552,731       1,724,054       1,733,303       1,739,746       1,676,963  
 
                                       
Operating income (loss)
    (56,368 )     (335,536 )     (18,326 )     70,276       143,838  
% of net sales
    (1.8 )%     (9.8 )%     (0.5 )%     2.0 %     4.0 %
 
                                       
Income (loss) before cumulative effect of accounting change
  $ (127,300 )   $ (379,280 )   $ (33,370 )   $ 18,727     $ 67,100  
Cumulative effect of accounting change (2)
    (1,017 )                        
 
                                       
 
Net income (loss)
  $ (128,317 )   $ (379,280 )   $ (33,370 )   $ 18,727     $ 67,100  
% of net sales
    (4.2 )%     (11.1 )%     (1.0 )%     0.5 %     1.9 %
 
                                       
Earnings (loss) per share before cumulative effect of accounting change:
                                       
Basic
  $ (2.82 )   $ (8.43 )   $ (0.74 )   $ 0.42     $ 1.34  
Diluted
    (2.82 )     (8.43 )     (0.74 )     0.41       1.31  
 
                                       
Common stock dividends per share
                0.21       0.28       0.28  
 
                                       
Weighted average common shares outstanding:
                                       
Basic
    45,124       45,010       44,868       44,599       50,091  
Diluted
    45,124       45,010       44,868       45,185       51,299  
 
                                       
Balance Sheets
                                       
 
                                       
Total assets
  $ 1,253,055     $ 1,398,650     $ 1,673,797     $ 1,697,349     $ 1,654,716  
Long-term debt, excluding current maturities (9)
                10,362       536,788       588,610  
Stockholders’ equity (deficit)
    (240,583 )     (116,924 )     261,708       290,430       274,343  
 
(1)   Fiscal 2006 operating loss includes net restructuring credits of approximately $27.2 million, or $0.60 per diluted share, relating to gains realized on the sale of the restructuring related assets partially offset by costs related to certain closings and restructurings of bakeries, depots and bakery outlets; and a machinery and equipment impairment of approximately $4.8 million, or $0.11 per diluted share.
 
(2)   In Fiscal 2006, as a result of adopting FIN 47, we recorded a cumulative effect of an accounting change of approximately $1.0 million, $0.02 per share, and a liability of the same amount as the related asset values were fully depreciated as of June 3, 2006.
 
(3)   Depreciation and amortization excluded from cost of products sold amounted to approximately $59.7 million, $70.2 million, $71.6 million, $72.7 million, and $72.8 million in fiscal 2006, 2005, 2004, 2003, and 2002, respectively.
 
(4)   Fiscal 2005 operating loss includes goodwill and other intangible asset impairments of approximately $229.5 million, or $5.10 per diluted share; restructuring charges of approximately $54.3 million, or $1.21 per diluted share, relating to the closures of five bakeries, a general workforce reduction and other cost reductions; settlement of class action litigation of approximately $8.7 million, or $0.19 per diluted share; and a curtailment loss from the suspension of our Supplemental Employee Retirement Plan of $12.4 million or $0.28 per diluted share.
 
(5)   Fiscal 2005 net loss includes a tax valuation allowance adjustment of $5.6 million, or $0.13 per diluted share, related to deferred tax assets originating in prior years.
 
(6)   Fiscal 2004 operating loss includes restructuring charges of approximately $12.1 million, or $0.17 per diluted share, relating to the closures of three bakeries, severance costs in connection with the centralization of certain finance and data maintenance administrative functions and the

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    relocation of certain key management employees in conjunction with our new more centralized organizational structure and settlement of class action litigation of approximately $3.0 million, or $0.04 per diluted share.
 
(7)   Fiscal 2003 operating income includes restructuring charges of approximately $9.9 million, or $0.14 per diluted share, relating to certain closings and restructurings of bakeries and bakery outlets and other charges of approximately $3.6 million, or $0.05 per diluted share, relating to the common stock award made on October 1, 2002 to IBC’s retiring Chief Executive Officer.
 
(8)   Fiscal 2002 operating income includes other charges of $25.7 million, amounting to $0.31 per diluted share, related to the closure of a bakery and the settlement of employment discrimination litigation.
 
(9)   In fiscal 2006, 2005, and 2004, we have reflected the total amount due under our senior secured credit facility agreement as amounts payable within one year due to our default under this facility. See Note 1. Voluntary Chapter 11 Filing to our consolidated financial statements regarding going concern considerations.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 830 bakery outlets located in strategic markets throughout the United States. Our sales force delivers baked goods from approximately 800 distribution centers on approximately 6,400 delivery routes.
In fiscal 2003, we commenced a major, company-wide project internally referred to as Program SOAR, an acronym for Systems Optimization And Re-engineering. This program was focused on re-engineering our business processes to increase efficiency, centralizing our management and administrative functions from the current decentralized model and on rationalizing our investment in production, distribution and administrative functionality to reduce the ongoing cost of supporting these infrastructures. Subsequent to our Chapter 11 filing, in an effort to conserve resources and focus on restructuring our business model, we made the determination to postpone our Program SOAR efforts indefinitely. In January 2006, the Company decided to resume implementation of the project to upgrade our current payroll and human resource system, which was originally part of Program SOAR.
Our net sales are affected by various factors, including our marketing programs, competitors’ activities and consumer preferences. We recognize sales, net of estimated credits for dated and damaged products, when our products are delivered to our customers.
Our cost of products sold consists of labor costs, ingredients, packaging, energy and other production costs. The primary ingredients used in producing our products are flour, sweeteners, edible oils, yeast, cocoa and the ingredients used to produce our extended shelf life products.
Our selling, delivery and administrative expenses include the employee costs and transportation costs of delivering our product to our customers; the employee costs, occupancy and other selling costs of our bakery outlets; the costs of marketing our products and other general sales and administrative costs not directly related to production.
We end our fiscal year on the Saturday closest to the last day of May. Consequently, most years contain 52 weeks of operating results while every fifth or sixth year includes 53 weeks. In addition, each quarter of our fiscal year represents a period of 12 weeks, except the third quarter, which covers 16 weeks, and the fourth quarter of any 53-week year, which covers 13 weeks.
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, but our Chapter 11 filing raises 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

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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, a plan of reorganization could materially change the amounts and classifications reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value or the classification of assets or liabilities that might be necessary as a consequence of a plan of reorganization.
RECENT DEVELOPMENTS
As more fully described in “Item 1. Business – Proceedings Under Chapter 11 of the Bankruptcy Code,” on September 22, 2004, we filed voluntary petitions for reorganization under the Bankruptcy Code in the Bankruptcy Court. 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 currently operating our businesses as a debtor-in-possession pursuant to the Bankruptcy Code. We are in the process of stabilizing our businesses and evaluating our operations in connection with the development of a plan of reorganization. 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. In the event that we develop a plan of reorganization, we would seek the requisite acceptance of the plan by creditors, equity holders and third parties and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code.
As a result of the filing, our creditors were automatically stayed from taking certain enforcement actions under their respective agreements with us unless the stay is lifted by the Bankruptcy Court. In addition, we have entered into the DIP Facility, which is more fully described below. All of our pre-petition debt is now in default due to the filing. During the Chapter 11 process, we may, with Bankruptcy Court approval, sell assets and settle liabilities, including for amounts other than those reflected in our financial statements. As of December 6, 2006, we have rejected over 420 unexpired leases. We are in the process of reviewing our executory contracts and remaining unexpired leases to determine which, if any, we will reject as permitted by the Bankruptcy Code. We cannot presently estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. The administrative and reorganization expenses resulting from the Chapter 11 process will and have unfavorably affected our results of operations. Future results of operations may also be affected by other factors related to the Chapter 11 process.
Profit Center Review
As part of our previously announced operational and financial restructuring, in fiscal 2006, we took the following actions:
On June 9, 2005, we announced plans to consolidate operations in our Northern California PC by closing two bakeries in San Francisco and consolidating production, routes, depots and bakery outlets. At the date of the announcement, we estimated this restructuring would affect approximately 650 employees with projected severance costs of approximately $6.0 million, projected asset impairment charges of approximately $2.5 million, and other projected exit costs of approximately $5.0 million for a total estimated cost of approximately $13.5 million.
On June 23, 2005, we announced plans to consolidate operations in our Southern California PC by standardizing distribution and consolidating routes. At the date of the announcement, we estimated this restructuring would affect approximately 350 employees with projected severance costs of approximately $1.5 million, no asset impairment charges, and other projected exit costs of approximately $1.0 million for a total estimated cost of approximately $2.5 million.

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On August 31, 2005, we announced plans to close the bakery located in Davenport, Iowa in the North Central PC. At the date of the announcement, we estimated this closing would affect approximately 150 employees with projected severance costs of approximately $1.5 million, projected asset impairment charges of approximately $2.0 million, and other projected exit costs of approximately $1.5 million for a total estimated cost of approximately $5.0 million.
On October 18, 2005, we announced plans to consolidate operations in our Northwest PC by closing the Lakewood, Washington bakery and consolidating routes, depots and bakery outlets. At the date of the announcement, we estimated this restructuring would affect approximately 500 employees with projected severance costs of approximately $2.5 million, projected asset impairment charges of approximately $12.0 million, and other projected exit costs of approximately $2.5 million for a total estimated cost of approximately $17.0 million.
On November 22, 2005, we announced our intention to consolidate sales and retail operations in the North and South Central PCs as well as the Southeast PC by standardizing distribution and consolidating delivery routes and bakery outlets. At the date of the announcement, we estimated this restructuring would affect approximately 450 employees with projected severance costs of approximately $1.0 million, no asset impairment charges, and other projected exit costs of approximately $2.0 million for a total estimated cost of approximately $3.0 million.
On February 27, 2006, we announced our intention to consolidate sales and retail operations in the Upper Midwest PC by consolidating delivery routes, depots, and bakery outlets. At the date of the announcement, we estimated this restructuring would affect approximately 230 employees with projected severance costs of approximately $0.4 million, projected asset impairment charges of approximately $0.1 million, and other projected exit costs of approximately $0.2 million for a total estimated cost of approximately $0.7 million.
See Note 15. Restructuring (Credits) Charges to our consolidated financial statements for actual fiscal year 2006 costs incurred, as well as expected remaining costs, related to the fiscal 2006 PC review.
Labor Union Negotiations
On October 18, 2005, we reached agreement with the International Brotherhood of Teamsters (IBT) local bargaining units within our Northeast PC to modify and extend through July 31, 2010, the existing collective bargaining agreements (CBAs) that govern the covered IBT members’ employment relationship with us. Since this initial agreement, we have commenced negotiations of long-term extensions with respect to most of our approximately 420 CBAs with our union-represented employees resulting in ratification by employees or agreements reached in principle, subject to ratification by employees, of approximately 315 CBAs. In total, these CBAs cover approximately 86% of our unionized workforce. We hope to negotiate similar agreements with our remaining collective bargaining units, although there are no assurances that the CBA negotiation process will proceed in the same time frame or fashion as it has to date. In addition, because the framework for the agreements was initially fashioned based upon operating assumptions made during the early stages of the PC restructuring process, it is possible that, if actual results do not meet expectations, these agreements (which remain subject to assumption or rejection in the Chapter 11 case) may need to be revisited and additional concessions may be necessary.
Stockholder Action
On October 30, 2006, Brencourt Advisors, LLC (“Brencourt”), 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 “Delaware Action”). The Delaware Action seeks to compel us pursuant to Section 211 of the Delaware General Corporation Law to convene an annual meeting of stockholders for the purpose of electing directors. We have not held an annual meeting of stockholders since September 23, 2003.
On November 29, 2006, we filed a motion with the Bankruptcy Court in response to the Brencourt Delaware Action. The motion we filed with the Bankruptcy Court seeks (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 Delaware Action.

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The trial of the Delaware Action in the Court of Chancery is scheduled for December 27, 2006. If that trial proceeds, we expect that the Court of Chancery will compel us to hold an annual meeting during the first three months of 2007. However, the Bankruptcy Court has scheduled a hearing date of December 21, 2006 for our motion in response to the Delaware Action. There can be no assurance that the Bankruptcy Court will grant us the relief that we seek in that motion, including the injunction preventing Brencourt from continuing the Delaware Action. If the Delaware Action is allowed to proceed and we are compelled to hold an annual meeting of stockholders, the election of directors at such meeting could result in a change of control of the majority of our Board of Directors. This change of control could adversely affect the success of our restructuring process, as well as our financial condition, results of operations and cash flows. Such a change would constitute an event of default under the DIP Facility and trigger significant claims under management continuity agreements with certain of our key senior executives in the event any of these executives is terminated within two years of the change in control.
In addition, the uncertainty created by the threat of a change of control of our Board of Directors as contemplated by the Delaware Action is undermining (i) our permanent CEO search process, (ii) the development of a credible long-term business plan for the Company based on current results, (iii) the exploration of potential availability of financing for the Company to facilitate a plan of reorganization to emerge from Chapter 11, (iv) our ability to regain lost customers and take advantage of new business opportunities and (v) the availability of adequate credit terms from our vendors and creditors. These activities are vital components of our restructuring process, and if such uncertainty persists, it could have an adverse affect on the success of our restructuring process, as well as our financial condition, results of operations and cash flows.
We are currently in discussions with the major constituent groups in our Chapter 11 proceedings to arrive at a consensual resolution that would result in the dismissal of the Delaware Action and a modification of our motion filed in the Bankruptcy Court in response to the Delaware Action. The consensual resolution being discussed contemplates that our modified motion would seek an order of the Bankruptcy Court reconstituting the Board of Directors to consist of several new members as well as several existing members of our Board of Directors. While there can be no assurance that a consensual resolution will be reached, if the parties are able to agree and the Bankruptcy Court grants the requested order on a reasonably prompt basis, we expect that the risks presented by the Delaware Action discussed above would no longer pose a significant threat to our restructuring process or our financial condition, results of operations and cash flows.
OVERVIEW OF CERTAIN TRENDS AND EVENTS AFFECTING OPERATIONS, FINANCIAL POSITION AND LIQUIDITY
We have experienced a significant decline in the demand for our products in recent years. Data from IRI indicates that the declining trend in bread and sweet goods was broadly evident in the industry in 2004, 2005 and 2006. During fiscal 2004, 2005 and 2006, our revenues, total unit volumes of branded bread and unit volumes of branded sweet goods all declined. We continue to experience reduced demand for our products in fiscal 2007 and expect that this trend will continue.
In light of our declining revenue and the significant upward cost pressure we are experiencing, discussed in more detail below, we have undertaken a detailed review of the competitive environment in all of our markets and for all of our product lines, including sweet goods, bread and buns and rolls, and implemented a significant price increase in many of our products and across virtually all markets in the fourth quarter of 2006 and second quarter of fiscal 2007. We cannot assure you that these steps will be effective in addressing declines in our revenues or maintaining our operating margins or will fully offset the cost pressure we are experiencing.
While consumer interest in low carbohydrate diets in 2004 and 2005 has historically contributed to the reduced demand for our products, IRI has reported declining sales of low carbohydrate bread products since February 2004 and we believe that the popularity of the low carbohydrate diet phenomenon is waning. However, we believe that the low carbohydrate trend, as well as the recent national awareness regarding obesity trends in children and adults and related issues, has had an impact on the eating habits of many consumers and, as a result, consumers have changed and will continue to change their consumption of bread products and sweet goods. While the long-term impact of consumers concerned about eating habits, including consumption of carbohydrates, calories, and fat is still unclear, changes in consumption habits could impact demand for our products going forward.
In addition, new dietary guidelines could result in further reduced demand for our products. The Department of Health and Human Services and Department of Agriculture released the 2005 Dietary Guidelines for Americans in January 2005. The Guidelines provide dietary advice aimed at promoting health and reducing the risk for major chronic diseases, and serve as the basis for federal food and nutrition education programs. The guidelines recommend limiting the intake of saturated and trans fats, cholesterol, added sugar, salt and alcohol. Although virtually all of our bread products and such key iconic Hostess sweet goods as Twinkies, Cupcakes and HoHos will have the “0 grams” trans fat label under the Food and Drug Administration’s new labeling regulations that became effective January 1, 2006, certain of our products, primarily those that are fried or Kosher, will have an amount of trans fat declared on the products’ label. With respect to our new product offerings, we intend to introduce only those new products that can properly be labeled with the “0 grams” trans fat declaration to assist those consumers

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concerned about their trans fat consumption. There can be no assurance that these and other actions that we may take will offset the effect, if any, of the guidelines’ recommendation to reduce the intake of saturated and trans fats and added sugar. The guidelines also recognize that whole grains are an important source of fiber and nutrients and recommend an increased consumption of whole grain products by substituting whole grain products for some enriched bread products. We have a number of whole grain products among our product offerings. However, the substantial majority of our bread revenues are from the sale of white bread and other refined grain bread products. There can be no assurance that, if consumers increase their consumption of whole grain products as a result of the new guidelines, they will increase consumption of our whole grain product offerings or that such consumption will offset any reduced consumption of our enriched bread products.
To address these and other market trends, increase sales and grow our earnings over time, we have introduced new products. In the third quarter of fiscal 2006, we introduced nationally three new white bread varieties, two of which incorporate a special 100% whole wheat flour milled from a white wheat. These varieties are targeted to people who prefer the taste and texture of white bread but who want to add more nutrition to their diets. In the first quarter of fiscal 2007, we introduced Wonder Wheat and Wonder Honey Wheat, both of which have whole grains. In the second quarter of fiscal 2007, we re-launched our line of super premium breads under the Baker’s Inn label. The re-launch included six full-sized loaves, in varieties including 100% Whole Wheat and Seven Grain; three short-sized loaves, in varieties including Cracked Wheat and Made with Whole Grain Rye, as well as new packaging. The short loaves are targeted to smaller households as well as families who prefer to have a variety of breads in the kitchen. Beginning in fiscal 2006, we also began to devote significant resources to strengthening the marketing of our products. We have hired new employees for our marketing department and updated the packaging of our snack cake and bread products. We plan to place a greater emphasis on regular sweet goods promotions and are considering ways to expand our existing product lines to appeal to changing consumer tastes.
We also face increasingly intense price competition. Declining unit sales in certain product categories (such as the premium white bread and private label segments) and more efficient production methods (including extended shelf life programs), have resulted in excess industry capacity. This and retail channel consolidation have increased the bargaining leverage of wholesale customers and resulted in increasingly intense price competition. Given the nature of the bakery market, the success of our planned price increases will be highly dependent on the response of consumers and our competitors.
Our production and distribution facilities represent substantial and largely fixed costs. Relatively robust utilization is needed to break even, and past this break even point, an increasing volume of production is normally increasingly profitable. The combined effects of recent net sales and unit volume declines and the success of our extended shelf life programs have, together with industry conditions described above, resulted in substantial unused capacity in our system. As a consequence, and in connection with our comprehensive review of our operations to determine the appropriate actions necessary to restructure our business following our Chapter 11 filing, we performed an exhaustive review of each of our PCs on an individual basis in order to address continued revenue declines and our high-cost structure. In part to address the unused capacity in our system, we have closed 10 bakeries since fiscal 2004. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Profit Center Review” for a discussion of the PC review.
Our other costs include ingredients, packaging, energy and labor. The ingredients and energy used to produce our products, and the energy used to distribute them (primarily motor vehicle fuels), are commodities that are generally widely available and that fluctuate in price, sometimes rapidly. We are unable to adjust product prices as often as the prices of these commodities change. In recent periods, the prices of our ingredients (particularly flour and sugar), packaging and energy have been generally increasing, reducing margins. Assuming current market conditions and historically high fuel prices continue, we may experience higher commodity costs and we have only limited protection against price increases. See “Item 1. Business — Sources and Availability of Raw Materials” for a discussion of our utilization of commodity hedging derivatives to reduce our exposure to commodity price movements for future ingredient and energy needs. However, there can be no assurance that our hedging strategies will be successful in mitigating fluctuations in the prices of such commodities.
Our largest cost is labor. As with many other highly unionized businesses, our labor costs have been rising. Since a very substantial portion of the workforce in our bakeries and distribution networks is unionized, our costs are generally higher and our ability to implement productivity improvements and effect savings with respect to health

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care, pension and other retirement costs is more restricted than in many nonunion operations as a result of various restrictions specified in our collective bargaining agreements. Where possible, we are taking steps to affect economies. For example, in connection with the PC review process, we have modified and extended approximately 275 IBT and BCT collective bargaining agreements, and approximately an additional 40 have been negotiated subject to documentation and ratification by the affected employees, together affecting approximately 86% of our unionized workers, to provide for increased savings with respect to wages and benefit obligations. While we are continuing to negotiate similar agreements with other IBT and BCT locals, there can be no assurance that the terms of any additional modified agreements will be on as favorable terms or that those agreements not yet ratified by the affected employees will be ratified. The collective bargaining agreements with our unions also stipulate the amount of contributions that we and other companies must make to union-sponsored, multi-employer pension plans in which our employees participate and, as a result, we may be obligated to make additional contributions or incur withdrawal liability with respect to such plans, as more fully discussed in “Item 1A. Risk Factors.”
As of November 18, 2006, we had approximately 84.0 million in available cash and 77.8 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. We cannot assure you that the amount of cash available 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 cash requirements, we may be required to seek additional financing. In addition, the maturity date of the DIP Facility has been extended from September 22, 2006 to June 2, 2007. We can provide no assurance that we will be able to negotiate a further extension of the maturity date with our lenders or that additional or replacement financing will be available prior to or following the DIP Facility maturity date or, if available, offered on acceptable terms. Failure to obtain such extension or additional or replacement financing will have a material adverse impact on our ability to operate as a going concern.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements included herein have been prepared assuming we can continue as a going concern. Because of the Chapter 11 process and the circumstances leading to the bankruptcy filing, it is possible that we may not be able to continue as a going concern.
Our significant accounting policies are discussed in Note 2. Description of Business and Significant Accounting Policies to our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. These estimates and assumptions are evaluated on an on-going basis and are based upon many factors, including historical experience, consultation with outside professionals, such as actuaries, and management’s judgment. Actual results could differ from any estimates made and results could be materially different if different assumptions or conditions were to prevail.
We believe the following represents our critical accounting policies and estimates, involving those areas of financial statement preparation which are most important to the portrayal of our financial condition and results and which require management’s most difficult, subjective and complex judgments.
Reserves for self-insurance and postretirement benefits. We maintain insurance programs covering our exposure to workers’ compensation, general and vehicle liability and health care claims. Such programs include the retention of certain levels of risks and costs through high deductibles and other risk retention strategies. Reserves for these exposures are estimated for reported but unpaid losses, as well as incurred but not reported losses, for our retained exposures and are calculated based upon actuarially determined loss development factors as well as other assumptions considered by management, including assumptions provided by our external insurance brokers, consultants and actuaries. The factors and assumptions used for estimating reserves are subject to change based upon historical experience, changes in expected cost and inflation trends, discount rates and other factors.
The reserves, including both the current and long-term portions, as well as the portion included in liabilities subject to compromise, recorded by us for these liabilities amounted to approximately $305.6 million and $313.2 million at June 3, 2006 and May 28, 2005, respectively.

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Pension obligations. We record the pension cost and the liability related to our defined benefit plan and the ABA Plan based on actuarial valuations. These valuations include key assumptions determined by management, including discount rate and expected long-term rate of return on plan assets. The expected long-term rate of return assumption considers the asset mix of the plan portfolio, past performance of these assets and other factors. Changes in pension cost may occur in the future due to changes in the number of plan participants, changes in discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plan and other factors, including recent pension reform legislation. Due to lack of historical data, we have immediately recognized the impacts of all prior service costs, plan amendments, and actuarial gains (losses) associated with ABA Plan.
Our pension liabilities for these plans, including both the current and long-term portions, amounted to approximately $62.2 million and $70.9 million at June 3, 2006 and May 28, 2005, respectively.
Long-lived assets. Property and equipment purchases are recorded at cost or fair market value when acquired as part of a business acquisition. These assets are depreciated based on useful lives, developed by historical experience and management’s judgment.
We periodically assess the net realizable value of our long-lived assets. The assessment of our intangible assets with indefinite lives is performed at least on an annual basis but more frequently whenever events occur which indicate that the carrying value of an asset may be impaired as these assets are not amortized. The assessment of all other long lived assets is performed only when an event occurs which indicates the carrying value of the asset may be impaired. This assessment involves comparing the asset’s estimated fair value to its carrying value, with the impairment loss measured as the amount by which the carrying value exceeds the fair value of the asset.
In fiscal 2006, we tested for impairment our intangible assets and our long-lived asset groups. Based upon the results of our testing, we determined that the carrying value of one asset group exceeded our estimate of the related fair value. Accordingly, we recorded an impairment loss of approximately $4.8 million related to the machinery and equipment in that asset group.
During fiscal 2005, we performed impairment tests on our goodwill and other intangible assets which resulted in the write-off of all of our goodwill in the amount of $215.3 million and $27.1 million of our other intangible assets.
When we plan to dispose of property by sale, the asset is carried in the financial statements at the lower of the carrying amount or estimated fair value, less cost to sell, and is reclassified to assets held for sale. Additionally, after such reclassification, there is no further depreciation taken on the asset. In order for an asset to be classified as held for sale, management must approve and commit to a formal plan, the expected sale must be completed during the ensuing year, the asset must be actively marketed, be available for immediate sale, and meet certain other specified criteria.
Long-lived assets recorded in our consolidated financial statements at June 3, 2006, include approximately $601.1 million of net property and equipment, $11.9 million of assets held for sale and $161.1 million of other intangible assets. At May 28, 2005, our consolidated financial statements include approximately $705.4 million of net property and equipment, $10.6 million of assets held for sale and $162.0 million of other intangible assets.
Restructuring (credits) charges. Costs associated with any plan to restructure our operational infrastructure are generally identified and reported as restructuring charges in our consolidated statements of operations. These restructuring efforts include the closure of a bakery; the partial shut down of a bakery’s production; the closing of distribution and bakery outlet operations; relocation of bakery equipment, production or distribution to another facility; centralization of work effort and other organizational changes.
Management judgments are made with regard to the incurrence of restructuring-related liabilities, as well as impairment of long-term assets as described above. Subsequent gains and losses on the sale of such assets are also included in restructuring (credits) charges. We incurred restructuring (credits) charges during fiscal 2006, 2005, and 2004 and anticipate additional (credits) charges in future years in connection with our restructuring efforts.

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Income taxes. The amount of income taxes we pay is subject to periodic audits by federal, state and local tax authorities, which from time to time result in proposed assessments. 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. 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.
Legal reserves. We are periodically involved in various legal actions. We are required to assess the probability of any adverse judgments as well as the potential range of loss. We determine the required accruals based on management’s judgment after a review of the facts of each legal action and the opinions of outside counsel.
Environmental liabilities. We are subject to certain environmental liabilities (see “Governmental Regulation; Environmental Matters”). We have recorded our best estimate of our probable liability under those obligations, with the assistance of outside consultants and other professionals. Such estimates and the recorded liabilities are subject to various factors, including the allocation of liabilities among other potentially responsible parties, the advancement of technology for means of remediation, possible changes in the scope of work at the contaminated sites, as well as possible changes in related laws, regulations and agency requirements.
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 obligations have been classified as liabilities subject to compromise in the fiscal 2006 and 2005 consolidated balance sheets except for secured debt and those other liabilities that we currently anticipate will not be impaired pursuant to a confirmed plan of reorganization.
Reorganization charges. Reorganization items are expense or income items that we incurred or realized because we are in bankruptcy. These items include professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings, loss accruals or gains or losses resulting from activities of the reorganization process, payroll related expenses to retain key employees during our reorganization, costs and claims, which stem from the rejection of leases, and interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities.
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 153, Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 is effective for the first fiscal period beginning after June 15, 2005, and was effective for us in the second quarter of fiscal 2006. The implementation of SFAS 153 did not have a significant impact on our consolidated results of operations, cash flows, and financial position.
In October 2005, the FASB issued FASB Staff Position (FSP) No. 13-1, Accounting for Rental Costs Incurred during a Construction Period, (FSP 13-1), which requires companies to expense rental costs associated with ground or building operating leases that are incurred during a construction period. As a result, entities that are currently capitalizing these rental costs are required to expense them beginning in its first reporting period commencing after December 15, 2005. FSP 13-1 was effective for us as of the fourth quarter of fiscal 2006. Our leases are structured such that we do not take possession and accordingly do not incur rental costs during the construction period and therefore, the implementation of FSP 13-1 did not have an impact on our consolidated results of operations, cash flows, and financial position.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143 (FIN 47). This interpretation clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143 Accounting for Asset Retirement Obligations and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. Asset retirement

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obligations covered by this interpretation include those for which an entity has a legal obligation to perform an asset retirement activity, however the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.
We adopted FIN 47 on June 3, 2006. Upon initial application, FIN 47 requires recognition of (1) a liability, adjusted for cumulative accretion from the date the obligation was incurred until the date of adoption of FIN 47 for existing asset retirement obligations; (2) an asset retirement cost capitalized as an increase to the carrying amount of the associated long-lived asset; and (3) accumulated depreciation on the capitalized asset retirement cost with the net difference recorded as a cumulative effect of a change in accounting principle.
We have conditional asset retirement obligations for the removal of underground storage tanks (USTs) utilized for refined petroleum products. There is no obligation to remove USTs while they remain in service. However, environmental laws require that unused USTs be removed within certain periods of time after the USTs no longer remain in service, usually six months to three years depending on the jurisdiction in which the USTs are located. As a result of adopting FIN 47, we recorded a cumulative effect from retirement obligations for our 45 USTs of an accounting change of approximately $1.0 million, $0.02 per share, and a liability of the same amount as the related asset values were fully depreciated as of June 3, 2006. Had the adoption of FIN 47 occurred at the beginning of the earliest period presented, our results of operations and loss per share would not have been significantly different from the amounts reported. Accordingly, pro forma financial information has not been provided.
We also have known conditional asset retirement obligations for asbestos remediation in many of our bakery buildings, ovens, and depots. Environmental regulations require us to handle and dispose of asbestos in a specific manner if the building or oven undergoes major renovations or is demolished. Otherwise, we are not required to remove the asbestos. We have determined that our practice of maintenance and improvements to our buildings and ovens has created indeterminate lives for the purpose of estimating asset retirement obligations. We are presently operating four bakeries that are in excess of one hundred years old and sixty percent of all of our bakeries are fifty years old or older. We cannot estimate the fair value of our asset retirement obligations for the asbestos in the 36 bakeries, as well as certain of our distribution centers and outlets, we have determined contain asbestos due to the fact that information is not available for us to reasonably estimate a date or range of dates over which these settlements may occur. Notwithstanding the foregoing, we performed calculations assuming a demolition settlement, with settlement dates ranging from 50 to 100 years. We determined that the present value of the net liability and the annual accretion amounts, under these various scenarios, were not material to our June 3, 2006 consolidated financial statements. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value. Although we have conducted a formal assessment in an effort to identify our asset retirement obligation, there may be conditional asset retirement obligations that we have not yet discovered (e.g. asbestos may exist in certain buildings or equipment), which has not been identified and therefore, these potential obligations also have not been included in the consolidated financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 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 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

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effective for us in 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 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 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 would 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.
In May 2005, the FASB issued 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 will be effective for us in the first quarter of fiscal 2007.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payment (SFAS 123R), which amends SFAS 123 and supersedes 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 will be effective for public companies as of the first interim or annual reporting period of the registrant’s first fiscal year that begins after June 15, 2005. Under the new rule, SFAS 123R will become effective for us in the first quarter of fiscal 2007. Based on our current outstanding stock options, the impact to our consolidated results of operations, cash flows, and financial position as a result of implementing SFAS 123R is not expected to be significant but could have a significant impact if we issue stock based compensation in future periods.
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 is 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

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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. We do not expect SFAS 151 to have a material impact on our consolidated results of operations, cash flows, and financial position.
RESULTS OF OPERATIONS
The following table sets forth, for fiscal years 2006, 2005, and 2004, the relative percentages that certain income and expense items bear to net sales:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
    June 3,     May 28,     May 29,  
    2006     2005     2004  
Net sales
    100.0 %     100.0 %     100.0 %
Cost of products sold (exclusive of items shown below)
    50.7       50.7       50.0  
Selling, delivery and administrative expenses
    49.1       47.9       47.4  
Restructuring (credits) charges
    (0.9 )     1.6       0.3  
Depreciation and amortization
    2.5       2.6       2.6  
Loss on sale or abandonment of assets
    0.2       0.3       0.2  
Property and equipment impairment
    0.2              
Goodwill impairment
    ––       6.3        
Other intangible assets impairment
    ––       0.4        
 
                 
 
                       
Operating loss
    (1.8 )     (9.8 )     (0.5 )
Interest expense
    1.7       1.2       1.1  
Reorganization charges
    1.2       1.2        
Other income
                 
 
                 
 
                       
Loss before income taxes and cumulative effect of accounting change
    (4.7 )     (12.2 )     (1.6 )
Provision (benefit) for income taxes
    (0.5 )     (1.1 )     (0.6 )
 
                 
 
                       
Loss before cumulative effect of accounting change
    (4.2 )     (11.1 )     (1.0 )
Cumulative effect of accounting change
                 
 
                 
 
                       
Net loss
    (4.2 )%     (11.1 )%     (1.0 )%
 
                 
Fiscal 2006 Compared to Fiscal 2005
Net Sales
                                         
    (dollars in thousands)                                
    Fifty-Three Weeks Ended     Fifty-Two Weeks Ended        
    June 3, 2006     May 28, 2005        
                                    Increase/  
    Amount     %     Amount     %     (Decrease)  
Wholesale operations
  $ 2,701,751       88.3 %   $ 2,995,481       88.0 %     (9.8 )%
Retail operations
    358,722       11.7       408,024       12.0       (12.1 )
 
                               
 
                                       
Total net sales
  $ 3,060,473       100.0 %   $ 3,403,505       100.0 %     (10.1 )
 
                               
Consolidated net sales. Net sales for the 53 weeks ended June 3, 2006, were approximately $3,060.5 million, representing a decrease of $343.0 million, or 10.1%, from net sales of approximately $3,403.5 million for the 52 weeks ended May 28, 2005.

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Wholesale operations net sales. Wholesale operations net sales for the 53 weeks ended June 3, 2006, were approximately $2,701.8 million, representing a decrease of approximately $293.7 million, or 9.8%. The decline reflected a total unit volume decline of approximately 16.9%, partially offset by a unit value increase of approximately 8.2% in fiscal 2006 as compared to the prior year. This unit value increase is related to selling price increases and product mix changes.
Retail operations net sales. Retail operations net sales for the 53 weeks ended June 3, 2006, were approximately $358.7 million, representing a decrease of approximately $49.3 million, or 12.1%. The decline in revenue is mainly attributable to the closing of retail outlets.
Gross profit (exclusive of depreciation and amortization). Gross profit was approximately $1,507.7 million, or 49.3% of net sales, for fiscal 2006, in comparison with approximately $1,679.5 million, or 49.3% of net sales in fiscal 2005. Total cost of products sold decreased by approximately $171.3 million when compared to fiscal 2005. A substantial amount of this cost decrease relates to reduced costs resulting from the effects of our restructuring activities. On a cost per pound basis, direct component costs per pound decreased approximately 2.6% when compared to fiscal 2005. These direct component costs when compared on a cost per pound of production with fiscal 2005 decreased 1.9% for ingredients and 1.5% for labor while packaging increased .8%. Overhead and administrative costs as a percent of sales increased approximately 1.1% when compared to fiscal 2005 due principally to the fixed nature of these costs relative to a declining net sales base. Additionally, we also have experienced an increase in route returns as a percent of route sales of approximately 1.1% when compared to fiscal 2005. The net effect of these increases offset by the favorable decline in direct per pound costs when compared to our sales declines resulted in our gross profit margin percentage remaining constant between fiscal 2006 and 2005.
Selling, delivery and administrative expenses. Selling, delivery and administrative expenses were approximately $1,504.0 million, or 49.1% of net sales, for fiscal 2006, representing a decrease of approximately $127.0 million from fiscal 2005’s selling, delivery and administrative expenses of approximately $1,630.9 million, or 47.9% of net sales. This dollar decrease results from the impact of our restructuring efforts to consolidate routes, depots, and outlets in fiscal 2006 and 2005. The 1.2% increase in selling, delivery, and administrative expenses as a percent of net sales is attributable to: (1) a 1.1% increase in distribution costs as a percent of net sales, due principally to higher energy costs; (2) a 0.5% increase in payroll and payroll-related costs as a percent of net sales; (3) a 0.3% decrease as a percent of net sales related to fiscal 2005 legal settlements; and (4) a 0.1% decrease in all other selling, delivery, and administrative expenses as a percent of net sales.
Restructuring charges. During fiscal 2006, we realized a net gain of approximately $27.2 million which included net gains on the sale of assets of $58.0 million and benefit plan gains of $0.7 million, partially offset by asset impairment charges of $19.4 million, severance costs of $6.1 million and other exit costs of $6.0 million. The other exit costs include facility closure costs such as clean up, security, relocation, utilities, and taxes. See Note 15. Restructuring (Credits) Charges to our consolidated financial statements for further information.
Property and equipment impairment. In fiscal 2006 we tested our long-lived assets for recoverability and determined that the carrying value of one of our asset groups exceeded our estimate of the related fair value. Accordingly we recorded an impairment loss of approximately $4.8 million.
Goodwill and other intangible assets impairment. In fiscal 2006 we had no goodwill and other intangible impairment write-offs. The decrease from 2005 is attributable to the goodwill impairment charge of $215.3 million and impairment charges for other intangible assets in the amount of $14.2 million recognized in fiscal 2005. See Note 6. Goodwill and Other Intangible Assets to our consolidated financial statements for further information.

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Operating Loss
                                         
    (dollars in thousands)                                
    Fifty-Three Weeks Ended     Fifty-Two Weeks Ended        
    June 3, 2006     May 28, 2005        
                                    Increase/  
    Amount     %     Amount     %     (Decrease)  
Wholesale operations
  $ (7,353 )     13.0 %   $ 43,874       (13.1 )%     (116.8 )%
Retail operations
    10,682       (18.9 )     7,264       (2.1 )     47.1  
 
                               
 
                                       
 
    3,329       (5.9 )     51,138       (15.2 )     (93.5 )
Corporate
    (59,697 )     105.9       (386,674 )     115.2       84.6  
 
                               
 
                                       
Total operating loss
  $ (56,368 )     100.0 %   $ (335,536 )     100.0 %     83.2  
 
                               
Consolidated operating loss. The operating loss for fiscal 2006 was approximately $56.4 million, representing a reduction of approximately $(279.1) million from the prior year’s operating loss of approximately $335.5 million. Included in the operating loss for fiscal 2006 is restructuring income of approximately $27.2 million and property and equipment impairment charges of approximately $4.8 million. The fiscal 2005 operating loss included restructuring charges of approximately $54.3 million and goodwill and other intangibles impairment of approximately $229.5 million.
Wholesale operating loss. Wholesale operating income declined by approximately $51.2 million from approximately $43.9 million in the prior year resulting in an operating loss of approximately $7.3 million. The loss was attributable to a $293.7 million, or 9.8% decrease in wholesale net sales partially offset by a $(242.5) million, or 8.2%, reduction in wholesale operating costs.
Retail operating income. Retail operating income for fiscal 2006 was approximately $10.7 million representing an improvement of approximately $3.4 million over the prior year. This gain was attributable to a $49.3 million, or 12.1%, decline in revenue which was offset by a $(52.7) million, or (13.2)% reduction of costs. This improvement is attributable to the closing of less profitable outlet locations in conjunction with our restructuring efforts.
Reorganization charges. In fiscal 2006, we incurred a net reorganization charge of $37.0 million. This charge relates to expense or income items that we incurred or realized related to our bankruptcy proceedings. The cost of these activities includes such items as (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings of $35.1 million; (2) payroll related expenses to retain key employees during our reorganization of $6.0 million; (3) losses realized as we rejected certain of our lease agreements covering equipment and real estate of $0.9 million; (4) interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities of $(4.5) million; and (5) gains realized on the sale of our excess properties of $(0.6) million.
Interest expense. Interest expense for fiscal 2006 was $52.5 million, representing an increase of $11.1 million from fiscal 2005’s expense of $41.4 million. The increase in interest expense is attributable in approximate amounts to: (1) a $10.7 million increase relating to an increased average interest rate and amount of debt; (2) a $1.7 million increase in DIP fees; (3) decreased financing fees of $(1.1) million; and (4) all other interest categories netting to a $(0.2) million decrease.
Provision (benefit) for income taxes. The effective income tax benefit rate for fiscal 2006 was 10.9% compared to an effective income tax benefit rate of 8.8% for fiscal 2005. The higher effective income tax benefit rate relates principally to a valuation allowance recorded against prior year and current year deferred tax assets in 2005. In 2006, we recorded a valuation allowance only against deferred tax assets arising in 2006. See Note 17. Income Taxes to our consolidated financial statements for further information.

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Fiscal 2005 Compared to Fiscal 2004
Net sales. Net sales for the 52 weeks ended May 28, 2005, were approximately $3,403.5 million, representing a decrease of $64.1 million, or 1.8%, from net sales of approximately $3,467.6 million for the 52 weeks ended May 29, 2004. The decline in net sales in fiscal 2005 reflected a total unit volume decline of approximately 5.4%, partially offset by a unit value increase of approximately 4.0% in fiscal 2005 as compared to the prior year. This unit value increase is related to selling price increases and mix changes.
Gross profit (exclusive of depreciation and amortization). Gross profit was approximately $1,679.5 million, or 49.3% of net sales, for fiscal 2005, representing a decrease from approximately $1,734.3 million, or 50.0% of net sales in fiscal 2004. Overall direct production costs per pound increased approximately 2.0% over the prior year due to cost increases per pound of 0.5% on ingredients, 1.9% on packaging, 2.3% on labor and labor-related costs and 6.1% on overhead costs.
Selling, delivery and administrative expenses. Selling, delivery and administrative expenses were approximately $1,630.9 million, or 47.9% of net sales, for fiscal 2005, representing a decrease of approximately $12.9 million from fiscal 2004’s selling, delivery and administrative expenses of approximately $1,643.8 million, or 47.4% of net sales. This decrease results from the impact of our bakery closings and resulting route reductions in fiscal 2005 and 2004 and other reorganization efforts during fiscal 2005. We experienced a decline in labor costs of approximately $22.7 million and a decline in worker’s compensation costs of approximately $25.1 million. The decrease in worker’s compensation is due principally to the $48.0 million adjustment made in fiscal 2004 of which $28.8 million was allocated to selling, delivery and administrative expenses. These two cost decreases were partially offset by energy cost increases of $17.1 million and a charge allocated to selling, delivery and administrative expense of $7.4 million resulting from a curtailment loss from the suspension of our Supplemental Employee Retirement Plan.
Restructuring and other charges. During fiscal 2005, we incurred charges of approximately $54.3 million which was composed of severance costs of $12.8 million, asset impairment charges of $43.7 million, a curtailment gain on benefit plans of $(6.9) million and other exit costs of $4.7 million. These charges relate principally to the closure of six bakeries and the related shifting of production to other bakeries and the consolidation of delivery routes, depots and bakery outlets. Certain of these charges are a result of the undertaking of a comprehensive review of operations since filing to restructure under Chapter 11. These charges also include $2.3 million related to 2004 restructurings initiated in the second and fourth quarters and consisted principally of cleanup costs, loss on equipment disposals and additional costs to ready a bakery for disposition. See the “Cash Resources and Liquidity” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding future expected restructuring charges.
During fiscal 2004, we incurred restructuring charges of approximately $12.1 million related to the closures of three bakeries, severance costs in connection with the centralization of certain finance and data maintenance administrative functions and the relocation of certain key management employees in conjunction with our new more centralized organizational structure. These charges were in conjunction with our Program SOAR initiative, which was designed to consolidate business functions, reduce headcount and achieve operating efficiencies. These charges also included costs related to certain closures and restructurings of several bakeries and bakery outlet locations initiated during fiscal 2003. Approximately $10.9 million represents severance and other cash costs and approximately $1.2 million represents impairment of bakery machinery and equipment.
Goodwill and other intangible assets impairment. Due to our declining operating profits and liquidity issues resulting from a decrease in sales, a high fixed cost structure, rising employee healthcare and pension costs and higher costs for ingredients and energy experienced during the first quarter of fiscal 2005, we tested our goodwill and other intangible assets for possible impairment. From the results of our testing we determined that our goodwill was fully impaired and took a goodwill impairment charge of $215.3 million. Certain other intangible assets were also tested for impairment. Based on our testing, we took an additional impairment charge for other intangible assets in the amount of $27.1 million, including $14.2 million of other intangible assets impairment and $12.9 million of restructuring charges. See Note 6. Goodwill and Other Intangible Assets to our consolidated financial statements for further information.
Operating loss. The operating loss for fiscal 2005 was approximately $335.5 million, representing a decrease in income of approximately $317.2 million from the prior year’s operating loss of approximately $18.3 million.

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Included in the operating loss for fiscal 2005 are restructuring charges of approximately $54.3 million, and goodwill and other intangibles impairment of approximately $229.5 million. The fiscal 2004 operating loss included restructuring charges of approximately $12.1 million.
Reorganization charges. Reorganization charges aggregated approximately $39.2 million in fiscal 2005 and relate to expense or income items that we incurred or realized because we are in reorganization under our bankruptcy proceedings. The cost of these activities includes such items as (1) professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings of $33.2 million; (2) payroll related expenses to retain key employees during our reorganization of $5.6 million; (3) gains realized as we rejected certain of our lease agreements covering equipment and real estate of $(0.4) million; (4) the write-off of debt fees related to our pre-petition debt of $3.0 million; (5) interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities of $(0.5) million; and (6) gains realized on the sale of our excess properties of $(1.7) million.
Interest expense. Interest expense for fiscal 2005 was $41.4 million, representing an increase of $3.9 million from fiscal 2004’s expense of $37.5 million. The year-over-year increase was due primarily to amortization of debt fees and legal costs incurred for the pre-petition credit facility and the DIP Facility totaling approximately $4.3 million and $0.7 million in interest expense related to the $100 million convertible bond issuance in August 2005.
Provision for income taxes. The effective income tax benefit rate for fiscal 2005 was 8.8% compared to an effective income tax benefit rate of 39.9% for fiscal 2004. The lower effective income tax benefit rate relates principally to a valuation allowance recorded against deferred tax assets in 2005, and to the goodwill impairment charge as the goodwill was primarily nondeductible for tax purposes. See Note 17. Income Taxes to our consolidated financial statements for further information.
CASH RESOURCES AND LIQUIDITY
CASH FLOWS
During the fiscal year ended June 3, 2006 the Company used $73.4 million of cash, which was the net impact of $57.7 million of cash used in operating activities, $27.4 million of cash used in investing activities, and $11.7 million of cash generated from financing activities.
Cash from (used in) operating activities. Cash used in operating activities for the fifty-three weeks ended June 3, 2006 was $57.7 million, which represents a decrease of $174.0 million from cash generated in fiscal 2005 of $116.3 million. While the company posted a net loss of $128.3 million in fiscal 2006, a number of items that contributed to the loss were non-cash items, including $77.8 million and $6.7 million for depreciation and amortization and non-cash interest expense, respectively. The positive cash effect of these non-cash items was offset by $30.5 million related to gains on asset sales included in investing activities. In addition, net changes in working capital components generated $15.4 million in cash in fiscal 2006 primarily due to (1) a reduction in accounts receivable of $26.3 million; (2) an increase in our long-term self insurance reserves of $15.6 million; (3) a decrease in inventory of $4.0 million; offset by (4) a reduction in accounts payable and accrued expenses of $22.3 million; and (5) other items totaling $8.2 million. Changes in working capital components generated cash equal to $85.4 million in fiscal 2005.
Cash used in investing activities. Cash used in investing activities for the fifty-three weeks ended June 3, 2006 was $27.4 million, $3.3 million, less than fiscal 2005 of $30.7 million. The net decrease is primarily attributable to higher sales of assets of $90.4 million compared to fiscal 2005 of $4.1 million offset by restricted cash deposits of $85.5 (excluding interest earned) million compared to $0 in fiscal 2005, and a decline in spending of $3.1 million in fiscal 2006 on purchases of property, equipment and software assets from that spent in fiscal 2005.
Cash from (used in) financing activities. Cash generated from financing activities for the fifty-three weeks ended June 3, 2006 was $11.7 million, $14.5 million, or 55.3%, less than fiscal 2005 of $26.2 million. During fiscal 2006 we increased our borrowings under the senior secured revolving credit facility by $13.4 million and reduced our long-term debt by $1.1 million. During 2005 we issued $100 million aggregate principal amount of our 6% senior subordinated convertible notes due August 15, 2014. During 2005 we reduced net long-term debt by $63.7 million in part due to the issuance of our 6% senior subordinated convertible notes and used $9.5 million to pay debt issuance costs. We did not pay dividends in fiscal 2006 or 2005.

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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 thrift stores, 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 material adverse impact on our operations.
At June 3, 2006 we owed $404.5 million under our pre-petition secured term loans and $85.3 million under our pre-petition secured revolving loan credit facility. In addition, at June 3, 2006 we had used our senior secured revolving credit facility to issue $122.3 million in letters of credit.
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. 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 June 2, 2007. All outstanding borrowings under the DIP Facility 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, operating budgets at specified intervals and cumulative minimum EBITDA requirements. Currently, we expect that we will not be able to remain in compliance with the minimum EBITDA covenant as early as prior to the end of our 2007 third fiscal quarter. We intend to negotiate with the lenders under our DIP Facility to obtain the necessary relief from this covenant. However, we can give no assurance that any relief will be obtained. 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 the debt

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on 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 June 2, 2007.
At June 3, 2006 we were in compliance with all financial covenants, terms and conditions of the DIP Facility.
As of June 3, 2006 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 $91.3 million primarily to support our workers’ compensation and auto liability insurance programs. These letters of credit were partially collateralized by $86.4 million of restricted cash as required by the DIP Facility. As calculated at June 3, 2006, additional borrowing availability under the DIP Facility was approximately $90.1 million.
As of June 3, 2006, $404.5 million in pre-petition secured term loans remained outstanding. In addition we owed $85.3 million under the pre-petition secured revolving loan credit facility. As of June 3, 2006, the pre-petition secured revolving loan facility was also utilized to support the issuance of $122.3 million letters of credit primarily to support our workers’ compensation, auto and general liability insurance programs. All principal payments required to be made after the Petition Date under the terms of the pre-petition term loans and revolving loans are stayed due to the bankruptcy filing.
Since the Petition Date, we have been actively engaged in restructuring our operations and selling assets no longer necessary to our operations. With the assistance of A&M, 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.
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. These sources will be used to fund the Company’s operations in fiscal 2007.
The maturity date of the DIP Facility has been extended from September 22, 2006 to June 2, 2007. 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.
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

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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.
Contractual Obligations. The following is a summary of certain of our contractual obligations as of June 3, 2006:
                                                         
Payments Due By Fiscal Year Under Certain Contractual Obligations (a) (g)
(dollars in thousands)
                    Senior Secured                             Unconditional  
Fiscal Years           DIP     Credit Facility     Subordinated     Capital     Operating     Purchase  
Ending   Total     Facility (b)     (c)     Notes (d)     Leases     Leases (e)     Obligations (f)  
 
                                                       
2007
  $ 744,499     $     $ 489,817     $ 100,000     $ 5,065     $ 28,914     $ 120,703  
2008
    33,139                               15,122       18,017  
2009
    21,808                               7,918       13,890  
2010
    8,845                               3,820       5,025  
2011
    6,442                               2,569       3,873  
Thereafter
    5,183                               5,176       7  
 
                                                       
 
                                         
 
                                                       
Total
  $ 819,916     $     $ 489,817     $ 100,000     $ 5,065     $ 63,519     $ 161,515  
 
                                                       
 
                                         
 
(a)   The commitments listed herein include significant pre-petition obligations. 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. In addition, under the Bankruptcy Code, we may reject certain executory contracts and leases, thus eliminating all or part of those future obligations.
 
(b)   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, as amended from time to time, provides for a secured revolving line of credit through June 2, 2007. The Commitment also may be used, with certain restrictions, for the issuance of letters of credit in the aggregate amount of $125.0 million, increased to $150.0 million by amendment in August 2006, of which $91.3 million was utilized at June 3, 2006. As of June 3, 2006, there were no borrowings outstanding under the revolving credit facility and we had $90.1 million available under the DIP Facility (of which up to $33.7 million could be used for additional letters of credit).
 
(c)   Borrowings under our variable rate senior secured credit facility are secured by all of our accounts receivable and a majority of our owned real property, intellectual property and equipment. The revolving credit line had a total capacity of $207.7 million of which $122.3 million was utilized to support the issuance of letters of credit and $85.3 million was borrowed. At June 3, 2006, there was no availability under the revolving credit line for additional borrowings or letters of credit. At June 3, 2006, we also had an aggregate $404.5 million borrowed under the Tranche A, B, and C term loans provided under the variable rate senior secured credit facility. We have presented this facility in our June 3, 2006 financial statements as amounts payable within one year due to our default under this facility.
 
(d)   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. As these notes are unsecured, they are included in liabilities subject to compromise and the accrual of interest has been suspended. See Note 7. Debt and Note 10. Liabilities Subject to Compromise to the accompanying consolidated financial statements.
 
(e)   At June 3, 2006, 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. FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, on its effective date required us 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. The effective date of this pronouncement was for all leases entered into or modified after December 31, 2002. At June 3, 2006, the maximum potential liability for all lease residual values guaranteed prior and subsequent to the effective date was $3.8 million and $3.6 million, respectively. At June 3, 2006, 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 $0.2 million.

52


 

(f)   The unconditional purchase obligations represent obligations as of June 3, 2006. This includes items such as ingredients, packaging, third party agreements to perform certain functions and other obligations.
 
(g)   We have not included estimated interest payments as a component of this contractual obligations table since interest on the senior secured credit facility is dependent upon the timing of emergence from bankruptcy, as well as the ultimate treatment of this type of obligation under any reorganization plan. See Note (d) above for a discussion of interest obligations related to the 6.0% senior subordinated convertible notes.
OFF-BALANCE SHEET FINANCING
We do not participate in, nor secure financings for, any unconsolidated, special purpose entities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, sweeteners, 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 derivatives positions as of June 3, 2006, an assumed 10% adverse change in commodity prices could potentially have a $1.4 million effect on our fair values, future earnings or cash flows.

53


 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
         
    Page  
    Number  
    55  
 
       
    57  
 
       
    58  
 
       
    59  
 
       
    61  
 
       
    62  
 
       
    62  
    64  
    71  
    72  
    72  
    73  
    75  
    77  
    77  
    78  
    79  
    86  
    87  
    87  
    89  
    93  
    94  
    95  
    101  
    101  
    101  
    102  
    103  
    104  
    104  

54


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Interstate Bakeries Corporation
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of Interstate Bakeries Corporation (Debtor-in-Possession) and subsidiaries, (the “Company”) as of June 3, 2006 and May 28, 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended June 3, 2006. Our audits also included the schedule of valuation and qualifying accounts listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 3, 2006 and May 28, 2005, and the results of its operations and its cash flows for each of the three years in the period ended June 3, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such consolidated financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

55


 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations, negative working capital, downward sales trends, the expected violation of DIP facility covenants during 2007, and the potential lack of liquidity should the Company be unable to successfully reorganize under its Chapter 11 bankruptcy filing, raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for conditional asset retirement obligations with the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143, effective June 3, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 3, 2006, based on the criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 20, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
December 20, 2006

56


 

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
                 
    June 3,     May 28,  
    2006     2005  
ASSETS
               
 
               
Current assets
               
Cash
  $ 78,178     $ 151,558  
Restricted cash
    86,353        
Accounts receivable, less allowance for doubtful accounts of $3,400 and $3,492, respectively
    150,507       176,781  
Inventories
    65,431       69,431  
Assets held for sale
    11,931       10,582  
Other current assets
    67,637       83,850  
 
       
 
               
Total current assets
    460,037       492,202  
 
Property and equipment, net
    601,101       705,373  
Other intangible assets
    161,128       162,043  
Other assets
    30,789       39,032  
 
       
 
               
Total assets
  $ 1,253,055     $ 1,398,650  
 
       
 
               
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
 
               
Liabilities not subject to compromise
               
Current liabilities
               
Long-term debt
  $ 494,882     $ 482,199  
Accounts payable
    117,044       101,141  
Accrued expenses
    244,166       260,442  
 
       
 
               
Total current liabilities
    856,092       843,782  
 
               
Other liabilities
    272,647       299,391  
Deferred income taxes
    77,819       90,172  
 
       
 
               
Total liabilities not subject to compromise
    1,206,558       1,233,345  
 
       
 
               
Liabilities subject to compromise
    287,080       282,229  
 
       
 
               
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, 45,295,000 and 45,337,000 shares outstanding, respectively
    816       816  
Additional paid-in capital
    585,631       586,089  
Accumulated deficit
    (142,711 )     (14,394 )
Treasury stock, 36,284,000 and 36,242,000 shares at cost, respectively
    (678,572 )     (678,379 )
Unearned restricted stock compensation
    (1,869 )     (3,521 )
Accumulated other comprehensive loss
    (3,878 )     (7,535 )
 
       
 
               
Total stockholders’ deficit
    (240,583 )     (116,924 )
 
       
 
               
Total liabilities and stockholders’ deficit
  $ 1,253,055     $ 1,398,650  
 
       
See accompanying notes.

57


 

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
                   
    June 3,     May 28,     May 29,  
    2006     2005     2004  
 
                       
Net sales
  $ 3,060,473     $ 3,403,505     $ 3,467,562  
 
           
 
                       
Cost of products sold (exclusive of items shown below)
    1,552,731       1,724,054       1,733,303  
Selling, delivery and administrative expenses
    1,504,038       1,630,921       1,643,757  
Restructuring (credits) charges
    (27,187 )     54,293       12,066  
Depreciation and amortization
    77,795       89,486       91,024  
Loss on sale or abandonment of assets
    4,671       10,744       5,738  
Property and equipment impairment
    4,793              
Goodwill impairment
          215,346        
Other intangible assets impairment
          14,197        
 
           
 
                       
 
    3,116,841       3,739,041       3,485,888  
 
           
 
                       
Operating loss
    (56,368 )     (335,536 )     (18,326 )
 
           
 
                       
Other (income) expense
                       
Interest expense (excluding unrecorded contractual interest expense of $6,033, $4,150, and $0, respectively)
    52,504       41,430       37,543  
Reorganization charges, net
    37,015       39,206        
Other income
    (2,994 )     (353 )     (331 )
 
           
 
                       
 
    86,525       80,283       37,212  
 
           
 
Loss before income taxes and cumulative effect of accounting change
    (142,893 )     (415,819 )     (55,538 )
Provision (benefit) for income taxes
    (15,593 )     (36,539 )     (22,168 )
 
           
 
                       
Loss before cumulative effect of accounting change (See Note 2)
    (127,300 )     (379,280 )     (33,370 )
Cumulative effect of accounting change, net of income taxes of $0
    (1,017 )            
 
           
 
                       
Net loss
  $ (128,317 )   $ (379,280 )   $ (33,370 )
 
           
 
                       
Basic and diluted loss per share
                       
Loss before cumulative effect of accounting change
  $ (2.82 )   $ (8.43 )   $ (0.74 )
Cumulative effect of accounting change
    (0.02 )            
 
           
 
                       
Total
  $ (2.84 )   $ (8.43 )   $ (0.74 )
 
           
See accompanying notes.

58


 

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
                   
    June 3,     May 28,     May 29,  
    2006     2005     2004  
Operating activities
                       
Net loss
  $ (128,317 )   $ (379,280 )   $ (33,370 )
Depreciation and amortization
    77,795       89,486       91,024  
Provision (benefit) for deferred income taxes
    (1,681 )     7,750       (5,336 )
Reorganization charges, net
    37,015       39,206        
Cash reorganization items
    (35,384 )     (26,473 )      
Non-cash bankruptcy-related credits
    (713 )            
Non-cash interest expense — deferred debt fees
    6,724       5,616       2,461  
Non-cash interest on swap agreements
          (655 )     (3,217 )
Non-cash restricted stock and deferred share compensation expense
    944       1,762       2,146  
Non-cash cumulative effect of accounting change
    1,017              
(Gain) loss on sale, write-down or abandonment of assets
    (30,473 )     34,302       7,146  
Write-off of goodwill and other intangibles
          242,410        
Write-down of software assets
          4,424        
Write-off prior service cost asset
          12,384        
Income tax benefit on employee stock transactions
                4  
Change in operating assets and liabilities
                       
Accounts receivable
    26,274       5,279       678  
Inventories
    4,000       2,470       2,780  
Other current assets
    5,541       (6,586 )     (15,354 )
Accounts payable and accrued expenses
    (22,313 )     51,490       25,817  
Long-term portion of self insurance reserves
    15,591       19,439       33,870  
Other
    (13,743 )     13,332       3,650  
 
           
 
                       
Net cash from (used in) operating activities
    (57,723 )     116,356       112,299  
 
           
 
                       
Investing activities
                       
Purchases of property and equipment
    (32,328 )     (29,175 )     (55,266 )
Proceeds from sale of assets
    90,367       4,156       4,701  
Restricted cash deposit
    (85,458 )            
Acquisition of other intangible assets
                (198 )
Acquisition and development of software assets
          (6,206 )     (14,758 )
Other
    56       513       (245 )
 
           
 
                       
Net cash used in investing activities
    (27,363 )     (30,712 )     (65,766 )
 
           
 
                       
Financing activities
                       
Reduction of long-term debt
    (1,067 )     (75,647 )     (41,145 )
Increase in revolving credit facility
    13,415       11,902        
Issuance of convertible bonds
          100,000        
Common stock dividends paid
                (9,479 )
Stock option exercise proceeds
    101             776  
Acquisition of treasury stock
    (1 )     (192 )     (53 )
Cash reorganization items
          (398 )      
Debt fees
    (742 )     (9,479 )     (1,865 )
 
                 
 
                       
Net cash from (used in) financing activities
    11,706       26,186       (51,766 )
 
           
 
                       
Net increase (decrease) in cash
    (73,380 )     111,830       (5,233 )
 
                       
Cash at the beginning of period
    151,558       39,728       44,961  
 
           
 
                       
Cash at the end of period
  $ 78,178     $ 151,558     $ 39,728  
 
           
 
                       
Cash payments (received)
                       
Interest
  $ 47,260     $ 41,587     $ 39,453  
Income taxes
    (15,705 )     (41,506 )     (2,339 )

59


 

                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
                   
    June 3,     May 28,     May 29,  
    2006     2005     2004  
Non-cash investing and financing activities
                       
Issuance of restricted stock
  $     $ 221     $ 7,840  
Accrued deferred share award liability settled through equity issuance
          1,371        
Equipment purchases financed with capital lease obligations
          409        
Long-term debt reduction from lease rejections
    890       1,560        
Asset disposals from lease rejections
    705       1,189        
Interest income earned on restricted cash deposit
    895              
See accompanying notes.

60


 

INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(dollars and shares in thousands, except per share data)
                                                                                         
                                                                         
                                            Treasury Stock              
    Common                             Held in Rabbi              
    Stock Issued         Retained     Treasury Stock     Trust     Unearned     Accumulated     Total  
                    Additional     Earnings                                     Restricted     Other     Stockholders’  
    Number     Par     Paid-in     (Accumulated     Number of             Number of           Stock     Comprehensive     Equity  
    of Shares     Value     Capital     Deficit)     Shares     Cost     Shares     Cost     Compensation     Loss     (Deficit)  
Balance May 31, 2003
    81,579     $ 816     $ 588,950     $ 407,735       (36,298 )   $ (680,913 )     (477 )   $ (8,946 )   $     $ (17,212 )   $ 290,430  
Comprehensive loss (a)
                      (33,370 )                                   12,600       (20,770 )
Restricted share award
                (2,098 )           530       9,938                   (7,840 )            
Restricted share compensation expense
                                                    800             800  
Restricted share forfeitures and other
                2             (4 )     (74 )                 58             (14 )
Stock options exercised and related income tax benefit
                (238 )           55       1,032                               794  
Dividends paid — $0.21 per share
                      (9,479 )                                         (9,479 )
Treasury stock acquired
                            (4 )     (53 )                             (53 )
Transfer of treasury stock from rabbi trust
                            (477 )     (8,946 )     477       8,946                    
                                 
 
                                                                                       
Balance May 29, 2004
    81,579       816       586,616       364,886       (36,198 )     (679,016 )                 (6,982 )     (4,612 )     261,708  
Comprehensive loss (a)
                      (379,280 )                                   (2,923 )     (382,203 )
Restricted share award
                (155 )           20       375                   (221 )           (1 )
Deferred share award
                407             51       965                               1,372  
Restricted share compensation expense
                                                    2,978             2,978  
Restricted share forfeitures and other
                (779 )           (87 )     (511 )                 704             (586 )
Treasury stock acquired
                            (28 )     (192 )                             (192 )
                                   
 
                                                                                       
Balance May 28, 2005
    81,579       816       586,089       (14,394 )     (36,242 )     (678,379 )                 (3,521 )     (7,535 )     (116,924 )
Comprehensive loss (a)
                      (128,317 )                                   3,657       (124,660 )
Stock options exercised
                (86 )           10       187                               101  
Restricted share compensation expense
                                                    1,486             1,486  
Restricted share forfeitures
                (372 )           (52 )     (379 )                 166             (585 )
Treasury stock acquired
                                  (1 )                             (1 )
                                   
 
                                                                                       
Balance June 3, 2006
    81,579     $ 816     $ 585,631     $ (142,711 )     (36,284 )   $ (678,572 )         $     $ (1,869 )   $ (3,878 )   $ (240,583 )
                                   
 
(a)   See Note 22. Comprehensive Loss to these consolidated financial statements for the reconciliations of net loss to comprehensive loss.
See accompanying notes.

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INTERSTATE BAKERIES CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 respective $2.4 million and $2.2 million minority interest in Mrs. Cubbison’s is reflected in other liabilities at June 3, 2006 and May 28, 2005, respectively, 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 and the eighth amendment to the DIP Facility on August 25, 2006 to reflect certain modifications. See Note 7. 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

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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 December 6, 2006, we have rejected over 420 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 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 and the filing of a plan of reorganization.
See Note 15. Restructuring (Credits) Charges to these 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, the expected violation of DIP Facility covenants during 2007, 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 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

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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. Any reference, unless otherwise noted, to “IBC,” “us,” “we” and “our” refers to Interstate Bakeries Corporation and its subsidiaries, taken as a whole.
Fiscal year end — Our fiscal year is a 52 or 53-week period ending on the Saturday closest to the last day of May. Fiscal year 2006 is a 53-week period and fiscal years 2005 and 2004 are 52-week periods.
Principles of consolidation — The 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 financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 bank balances totaling approximately $26.7 million and $17.5 million at June 3, 2006 and May 28, 2005, 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 7. Debt to these consolidated financial statements for related disclosures.
Inventories — Inventories are stated at the lower of cost or market. Specific first-in first-out invoiced costs are used with respect to ingredients and packaging and average costs are used for other inventory items.
The components of inventories are as follows:
                 
    June 3,     May 28,  
    2006     2005  
       
    (dollars in thousands)  
Ingredients and packaging
  $ 44,540     $ 47,617  
Finished goods
    20,891       21,814  
 
           
 
               
 
  $ 65,431     $ 69,431  
 
           
Property and equipment — Property and equipment are recorded at cost and depreciated over estimated useful lives of 4 to 35 years, using the straight-line method for financial reporting purposes. In order to maximize the efficiency of our operations, we remove and relocate equipment between bakeries. Such removal and relocation costs are expensed as incurred. Reinstallation costs are capitalized if the useful life is extended or the equipment is significantly improved. Otherwise, reinstallation costs are expensed as incurred.
Assets held for sale — Property that is no longer used and is to be disposed of by sale is recognized in the financial statements at the lower of the carrying amount or estimated fair value, less estimated cost to sell, and is not depreciated after being classified as held for sale.
Lease obligations — We lease office space, handheld computer equipment and real property used both for outlets for retail distribution of our bakery products and as depots and warehouses in our distribution system. All leases are accounted for under the guidance provided by Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases. These leases are classified as either capital leases or operating leases as appropriate. The amortization of assets under capital lease is included with depreciation expense.

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Software costs — Costs associated with computer software projects during the preliminary project stage are expensed as incurred. Once management authorizes and commits to funding a project, appropriate application development stage costs are capitalized. Capitalization ceases when the project is substantially complete and the software is ready for its intended use. Training and maintenance costs associated with software applications are expensed as incurred. As of June 3, 2006 and May 28, 2005, approximately $20.0 million and $22.0 million, respectively, of capitalized software costs were included in other assets in the consolidated balance sheets. Interest cost capitalized as part of the development stage was approximately zero, $0.3 million, and $ 0.8 million in fiscal 2006, 2005, and 2004, respectively. Software costs are amortized over an estimated useful life of seven years commencing when such assets are ready for their intended use, resulting in approximately $2.0 million and $2.2 million of amortization expense in fiscal 2006 and 2005, respectively. At June 3, 2006 and May 28, 2005, capitalized software cost included projects totaling approximately $10.1 million that were not yet ready for their intended use. The current expectation is that these assets will be ready for their intended use in late fiscal 2007.
Additionally, in fiscal 2005, a decision was made by management to cease all funding, work, and roll out of the final phase of a large software project. This event resulted in the abandonment of a software asset and consequently, it was determined that a portion of the asset was impaired and approximately $4.5 million of capitalized software costs were written-off in 2005.
Other intangible assets — Other intangible assets, such as trademarks and trade names, are defined as purchased assets that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.
Other intangible assets with indefinite useful lives are not amortized, and are required to be tested for impairment at least annually and more frequently if an event occurs which indicates the intangible asset may be impaired. Intangible assets which have finite lives are amortized over their estimated useful lives and are subject to impairment testing. We perform our annual impairment tests of other intangible assets with indefinite useful lives at the end of our fiscal third quarter. The performance of our impairment testing requires us to determine the fair value of our other intangible assets, principally trademarks and trade names, for which we utilized a relief from royalty approach.
See Note 6. Goodwill and Other Intangible Assets to these consolidated financial statements regarding the fiscal 2005 impairment of goodwill and other intangible assets.
Impairment of long-lived assets — Our long-lived assets are aggregated in ten profit centers (asset groups) that permit us to identify cash flows from such asset groups that are largely independent from other asset groups. We review and evaluate our asset groups for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the related asset group.
Environmental liabilities — Our environmental liabilities typically result from the remediation of soil contamination caused by hydraulic lift and underground storage tank leakage and fuel spills at and around depot refueling stations. To manage our environmental related liabilities, we utilize our own employees and outside environmental engineering experts. We estimate future costs for known environmental remediation requirements and accrue for environmental related liabilities on an undiscounted basis when it is probable that we have incurred a liability and the related costs can be reasonably estimated. The regulatory and government management of these projects is complex, which is one of the primary factors that make it difficult to assess the cost of potential and future remediation of contaminated sites. Adjustments to the liabilities are made when additional information becomes available that affects the estimated remediation costs. In fiscal 2006, 2005, and 2004, charges to income were approximately $2.0 million, $2.2 million and $5.1 million, respectively, for the cost of future remediation of contaminated sites. Accruals totaling approximately $6.6 million and $8.5 million were recorded at June 3, 2006 and May 28, 2005, respectively, for environmental related liabilities.
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 obligations, except for secured debt and those other liabilities that we currently anticipate will not be impaired pursuant to a confirmed plan of reorganization, have been classified as liabilities subject to compromise in the fiscal 2006 and 2005 consolidated balance sheets.

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Pension obligations — We record the pension costs and the liabilities related to our defined benefit plan and American Bakers Association Retirement Plan, or ABA Plan, based upon actuarial valuations. These valuations include the key assumptions determined by management, including discount rate and expected long-term rate of return on plan assets. The expected long-term rate of return assumption considers the asset mix of the plan portfolio, past performance of these assets and other factors. Changes in pension cost may occur in the future due to changes in the number of plan participants, changes in discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plan and other factors. Due to the lack of historical data, we have immediately recognized the impacts of all prior service costs, plan amendments, and actuarial gains (losses) associated with the ABA Plan. See Note 11. Employee Benefit Plans to these consolidated financial statements for related disclosures.
We also have a Supplemental Executive Retirement Plan (SERP), which provides retirement benefits to certain officers and other select employees. The SERP is an unfunded, non-tax qualified mechanism, which was used to enhance our ability to retain the services of certain employees. The operation of this plan was suspended as of November 11, 2004. See Note 12. Supplemental Executive Retirement Plan to these consolidated financial statements for related disclosures.
Reserves for self-insurance and postretirement benefits — We maintain insurance programs covering our exposure to workers’ compensation, general and vehicle liability and health care claims. Such programs include the retention of certain levels of risks and costs through high deductibles and other risk retention strategies. Reserves for these exposures are estimated for reported but unpaid losses, as well as incurred but not reported losses, for our retained exposures and are calculated based upon actuarially determined loss development factors as well as other assumptions considered by management, including assumptions provided by our external insurance brokers, consultants and actuaries. The factors and assumptions used for estimating reserves are subject to change based upon historical experience, changes in expected cost and inflation trends, discount rates and other factors.
Derivative instruments — Derivative instruments are recognized as assets or liabilities on the consolidated balance sheets at fair value. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive income (OCI), to the extent effective, depending on whether the derivative is designated and qualifies for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) during the current period. Changes in the fair value of derivative instruments recorded to OCI are reclassified to earnings in the period affected by the underlying hedged item. Any portion of the change in fair value of a derivative instrument determined to be ineffective under the rules is recognized in current earnings. We record the fair market value of our derivatives based on widely available market quotes, as well as information supplied by independent third parties. See Note 9. Derivative Instruments to these consolidated financial statements regarding our derivative hedging activities.
Other comprehensive income (loss) — OCI relates to revenue, expenses, gains and losses which we reflect in stockholders’ equity but exclude from net income. We reflect the effect of accounting for derivative instruments which qualify for cash flow hedge accounting and the effect of the recognition of the minimum pension liability in OCI. See Note 22. Comprehensive Income to these consolidated financial statements for related disclosures.
Revenue recognition — We recognize sales upon delivery of our products to the customer, net of estimated credits for dated and damaged products. These estimated credits are based upon historical experience.
Cost of products sold — Our cost of products sold consists of labor costs, ingredients, packaging, energy and other production costs. The primary ingredients used in producing our products are flour, sweeteners, edible oils, yeast, cocoa and the other ingredients used to produce our extended shelf life products.
Advertising and promotion costs — We record advertising and promotion costs in selling and delivery expenses. Advertising and promotion costs, through both national and regional media, are expensed in the period in which the costs are incurred. Such costs amounted to approximately $35.8 million, $35.1 million, and $47.5 million for fiscal 2006, 2005, and 2004, respectively.
Sales incentives — We record sales incentives such as discounts, coupons and rebates, as a reduction of net sales in our consolidated statements of operations.

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Consideration given to a customer — We record certain costs incurred by us to benefit the reseller of our products such as costs related to improved shelf space, improved shelf position and in-store marketing programs, as a reduction to net sales in our consolidated statements of operations.
Shipping and handling costs — We record shipping and handling costs in selling, delivery and administrative expenses. Such costs amounted to approximately $695.6 million, $736.8 million, and $778.2 million for fiscal 2006, 2005, and 2004, respectively.
Restructuring (credits) charges — Costs associated with any plan to restructure our operational infrastructure are reported as restructuring charges in our consolidated statements of operations. These restructuring efforts include the closure of a bakery; the partial shut down of a bakery’s production; the closing of distribution and bakery outlet operations; relocation of bakery equipment, production or distribution to another facility; centralization of work effort and other organizational changes. See Note 15. Restructuring (Credits) Charges to these consolidated financial statements for related disclosures.
Long-term asset impairments related to restructurings are determined and recorded as described in the section above entitled, “Impairment of long-lived assets.” Subsequent gains and losses on the sale of such assets are also included in restructuring (credits) charges.
Reorganization charges — Reorganization items are expense or income items that we incurred or realized because we are in bankruptcy. These items include professional fees and similar types of expenses incurred directly related to the Chapter 11 proceedings, loss accruals or gains or losses resulting from activities of the reorganization process, payroll related expenses to retain key employees during our reorganization, costs and claims, which stem from the rejection of leases, and interest earned on cash accumulated by us because we are not paying a substantial portion of our pre-petition liabilities. See Note 16. Reorganization Charges to these consolidated financial statements for related disclosures.
Income taxes — We account for income taxes using an asset and liability approach that is used to recognize deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax carrying amounts of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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. Our tax accrual requirements are periodically adjusted based upon events impacting our anticipated tax liabilities, such as the closing of examinations by taxing authorities. These adjustments are charged or credited to income in the period in which the determination is made. See Note 17. Income Taxes to these consolidated financial statements for related disclosures.
Stock-based compensation — We apply Accounting Principles Board Opinion (APB Opinion) No. 25, Accounting for Stock Issued to Employees (APB Opinion 25), and related interpretations in accounting for our 1996 Stock Incentive Plan (the Plan), and, therefore, no compensation expense is recognized for stock options issued under the Plan. For companies electing to continue the use of APB Opinion 25, SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, requires pro forma disclosures determined through the use of an option-pricing model as if the provisions of SFAS 123 had been adopted.
No stock options were granted during fiscal 2006 and 2005. The weighted average fair value at date of grant for options granted during fiscal 2004 was $4.75. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
         
    2004
Expected dividend yield
    2.0 %
Expected volatility
    46.4 %
Risk-free interest rate
    2.4 %
Expected term in years
    4.0  

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Had we adopted the provisions of SFAS 123, estimated pro forma net income and earnings per share would have been as follows:
                         
    Fifty-Three     Fifty-Two  
    Weeks     Weeks  
    Ended     Ended  
                   
    June 3,     May 28,     May 29,  
    2006     2005     2004  
       
    (dollars in thousands, except per share data)  
Net loss, as reported
  $ (128,317 )   $ (379,280 )   $ (33,370 )
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
    944       2,670       1,341  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (1,375 )     (4,157 )     (6,415 )
 
           
 
                       
Pro forma net loss
  $ (128,748 )   $ (380,767 )   $ (38,444 )
 
           
 
                       
Basic and diluted loss per share
                       
As reported
  $ (2.84 )   $ (8.43 )   $ (0.74 )
Pro forma
    (2.85 )     (8.46 )     (0.86 )
See Note 14. Stock-Based Compensation to these consolidated financial statements for related disclosures.
Earnings per share — Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects 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. See Note 21. Earnings (Loss) per Share to these consolidated financial statements for related disclosures.
Related party transactions — On September 21, 2004, we appointed Antonio C. Alvarez II as our Chief Executive Officer and John K. Suckow as our Executive Vice President and Chief Restructuring Officer. Messrs. Alvarez and Suckow, as employees of Alvarez & Marsal, or A&M, were designated as officers pursuant to a Letter Agreement. The terms and conditions of the Letter Agreement were approved by the Bankruptcy Court on October 25, 2004 for services to be provided by A&M. Under the terms of the Letter Agreement, expenses incurred for the services provided by A&M for the years ended June 3, 2006 and May 28, 2005, excluding out-of-pocket expenses, were approximately $9.8 million and $8.6 million, respectively.
On July 18, 2005, we entered into a supplemental letter agreement with A&M (the Incentive Fee Agreement), which sets forth the manner in which A&M’s incentive compensation is to be calculated under the Letter Agreement. Pursuant to the Bankruptcy Court’s October 25, 2004 order, notice of the Incentive Fee Agreement was provided to certain interested parties in our bankruptcy. Upon agreement of such parties, the time to object to the Incentive Fee Agreement has been repeatedly extended, most recently until February 15, 2007. Therefore, absent consent of such parties, the Incentive Fee Agreement remains subject to Bankruptcy Court approval and, accordingly, its terms will not become effective until such consent or approval has been obtained. Pursuant to the Incentive Fee Agreement, A&M is entitled to incentive compensation to be based on five percent of our Total Enterprise Value (as defined in the Incentive Fee Agreement) in excess of $723 million. Total Enterprise Value consists of two components: (1) our total cash balance as of the effective date of our plan of reorganization, less the normalized level of cash required by us in the ordinary course of business, plus (2) either (a) the midpoint enterprise value set forth in the disclosure statement with respect to our plan of reorganization as confirmed by the Bankruptcy Court or (b) the aggregate consideration received by us in a sale. Under all circumstances other than a liquidation of our company (in which case A&M will have no guaranteed incentive compensation), A&M’s incentive compensation will be a minimum of $3.9 million. The incentive compensation will be payable upon the consummation of our plan of reorganization.
We purchase flour at market prices from Cereal Food Processors, Inc., a long-standing supplier, in the regular course of our business. G. Kenneth Baum, a current director, beneficially owns not more than a 15% equity interest in Cereal Food Processors. Our flour purchases from Cereal Food Processors totaled approximately $85.5 million, $87.5 million, and $80.0 million for fiscal 2006, 2005, and 2004, respectively.

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In October 2006, The Andersons, Inc. was the successful bidder in a live auction we held to sell a purchase option we controlled as to 89 railcars we leased. Michael J. Anderson, a current director, is the President & Chief Executive Officer of The Andersons, Inc. We issued Request for Bids to eight railcar lessors, one of which was The Andersons, Inc. Seven bidders submitted bids. In the arms-length bidding process, each of the seven bidders was required to submit a bid that included specific terms, including buying our purchase option, immediately exercising the purchase option, purchasing the railcars, and thereafter leasing the railcars to our flour suppliers for a specified period of time. We held a live identity-preserved auction with the top three bidders, and The Andersons, Inc. was the highest bidder. The auction process and results were approved by the bankruptcy court in November 2006. The Andersons, Inc. paid IBC approximately $1.2 million for the right to exercise the purchase option with the lessor, all of which IBC recorded as other income in the second quarter of fiscal 2007.
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 18. Commitments and Contingencies to these consolidated financial statements for related disclosures.
Newly Adopted Accounting Pronouncements — In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 153, Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 is effective for the first fiscal period beginning after June 15, 2005, and was effective for us in the second quarter of fiscal 2006. The implementation of SFAS 153 did not have a significant impact on our consolidated results of operations, cash flows, and financial position.
In October 2005, the FASB issued FASB Staff Position (FSP) No. 13-1, Accounting for Rental Costs Incurred during a Construction Period, (FSP 13-1), which requires companies to expense rental costs associated with ground or building operating leases that are incurred during a construction period. As a result, entities that are currently capitalizing these rental costs are required to expense them beginning in its first reporting period commencing after December 15, 2005. FSP 13-1 was effective for us as of the fourth quarter of fiscal 2006. Our leases are structured such that we do not take possession and accordingly do not incur rental costs during the construction period and therefore, the implementation of FSP 13-1 did not have an impact on our consolidated results of operations, cash flows, and financial position.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143 (FIN 47). This interpretation clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143 Accounting for Asset Retirement Obligations and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. Asset retirement obligations covered by this interpretation include those for which an entity has a legal obligation to perform an asset retirement activity, however the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.
We adopted FIN 47 on June 3, 2006. Upon initial application, FIN 47 requires recognition of (1) a liability, adjusted for cumulative accretion from the date the obligation was incurred until the date of adoption of FIN 47 for existing asset retirement obligations; (2) an asset retirement cost capitalized as an increase to the carrying amount of the associated long-lived asset; and (3) accumulated depreciation on the capitalized asset retirement cost with the net difference recorded as a cumulative effect of a change in accounting principle.
We have conditional asset retirement obligations for the removal of underground storage tanks (USTs) utilized for refined petroleum products. There is no obligation to remove USTs while they remain in service. However, environmental laws require that unused USTs be removed within certain periods of time after the USTs no longer remain in service, usually six months to three years depending on the jurisdiction in which the USTs are located. As a result of adopting FIN 47, we recorded a cumulative effect from retirement obligations for our 45 USTs of an accounting change of approximately $1.0 million, $0.02 per share, and a liability of the same amount as the related asset values were fully depreciated as of June 3, 2006. Had the adoption of FIN 47 occurred at the beginning of the

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earliest period presented, our results of operations and loss per share would not have been significantly different from the amounts reported. Accordingly, pro forma financial information has not been provided.
We also have known conditional asset retirement obligations for asbestos remediation in many of our bakery buildings, ovens, and depots. Environmental regulations require us to handle and dispose of asbestos in a specific manner if the building or oven undergoes major renovations or is demolished. Otherwise, we are not required to remove the asbestos. We have determined that our practice of maintenance and improvements to our buildings and ovens has created indeterminate lives for the purpose of estimating asset retirement obligations. We are presently operating four bakeries that are in excess of one hundred years old and sixty percent of all of our bakeries are fifty years old or older. We cannot estimate the fair value of our asset retirement obligations for the asbestos in the 36 bakeries, as well as certain of our distribution centers and outlets, we have determined contain asbestos due to the fact that information is not available for us to reasonably estimate a date or range of dates over which these settlements may occur. Notwithstanding the foregoing, we performed calculations assuming a demolition settlement, with settlement dates ranging from 50 to 100 years. We determined that the present value of the net liability and the annual accretion amounts, under these various scenarios, were not material to our June 3, 2006 consolidated financial statements. A liability for these obligations will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value. Although we have conducted a formal assessment in an effort to identify our asset retirement obligation, there may be conditional asset retirement obligations that we have not yet discovered (e.g. asbestos may exist in certain buildings or equipment which has not been identified) and therefore, these potential obligations also have not been included in the consolidated financial statements.
Recently Issued Accounting Pronouncements — 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 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 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 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 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 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.

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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 would 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.
In May 2005, the FASB issued 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 will be effective for us in the first quarter of fiscal 2007.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payment (SFAS 123R), which amends SFAS 123 and supersedes 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 will be effective for public companies as of the first interim or annual reporting period of the registrant’s first fiscal year that begins after June 15, 2005. Under the new rule, SFAS 123R will become effective for us in the first quarter of fiscal 2007. Based on our current outstanding stock options, the impact to our consolidated results of operations, cash flows, and financial position as a result of implementing SFAS 123R is not expected to be significant but could have a significant impact if we issue stock based compensation in future periods.
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 is 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. We do not expect SFAS 151 to have a material impact on our consolidated results of operations, cash flows, and financial position.
3. Property and Equipment
Property and equipment consists of the following:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Land and buildings (lives ranging from 10 to 35 years)
  $ 390,573     $ 440,164  
Machinery and equipment (lives ranging from 4 to 15 years)
    931,408       1,023,527  
 
               
 
       
 
               
 
    1,321,981       1,463,691  
Less accumulated depreciation
    (720,880 )     (758,318 )
 
       
 
               
 
  $ 601,101     $ 705,373  
 
       

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Based upon our historical results of operations and the availability of newly projected financial information, in the fourth quarter of fiscal 2006, we tested our long-lived assets for recoverability. The results of our testing indicated that the carrying value of one asset group exceeded our estimate of the related fair value. Accordingly, we recorded an impairment loss of approximately $4.8 million related to the machinery and equipment in that asset group.
Depreciation expense was approximately $75.7 million, $87.0 million, and $90.3 million for fiscal 2006, 2005, and 2004, respectively. Interest cost capitalized as part of the construction cost of capital assets was approximately zero, $0.3 million, and $0.1 million in fiscal 2006, 2005, and 2004, respectively.
Included in depreciation and amortization expense is approximately $59.7 million, $70.2 million, and $71.6 million in fiscal 2006, 2005, and 2004, respectively, that relates to property and equipment used in our production process.
4. Assets Held for Sale
As part of our continuing efforts to address our revenue declines and high cost structure, we have commenced 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. Total assets held for sale at May 28, 2005 amounted to approximately $10.6 million; all of which were sold during fiscal 2006. Also, in fiscal 2006, additional excess assets amounting to approximately $29.4 million were identified and reclassified to assets held for sale with $11.9 million remaining at June 3, 2006.
Net gains realized on the sale of our assets held for sale amounted to approximately $59.1 million, $2.0 million and $0 for fiscal 2006, 2005 and 2004, respectively. Substantially all of the net gains realized in fiscal 2006 relate to restructuring activities and are classified as long-lived asset credits to our restructuring charges, see Note 15. Restructuring (Credits) Charges.
5. Lease Obligations
In the normal course of business, we enter into leases for office, transportation and delivery equipment as well as real estate used for both our retail outlets and as depots and warehouses in our distribution system. Future minimum lease payments under both operating and capital leases (exclusive of taxes, insurance, and all leases rejected as part of our reorganization process under our Chapter 11 proceedings as of June 3, 2006) are as follows:
                 
Fiscal Years Ending   Capital Leases     Operating Leases  
 
               
    (dollars in thousands)  
 
               
2007
  $ 1,446     $ 28,914  
2008
    1,333       15,122  
2009
    1,081       7,918  
2010
    945       3,820  
2011
    748       2,569  
Thereafter
    1,245       5,176  
 
       
 
               
Total minimum lease payments
    6,798     $ 63,519  
 
           
 
               
Amounts representing interest
    (1,733 )        
 
           
 
               
Present value of minimum lease payments
    5,065          
Less: Capital lease obligations, short-term
    (5,065 )        
 
           
 
               
Capital lease obligations, long-term
  $          
 
           
Net rental expense under operating leases was approximately $54.4 million, $66.2 million, and $69.1 million for fiscal 2006, 2005, and 2004, respectively. 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.

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At June 3, 2006, 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. FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others, on its effective date required us 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 June 3, 2006, the maximum potential liability for all guaranteed lease residual values was $7.4 million, including amounts guaranteed prior and subsequent to the December 31, 2002 effective date of the guidance of approximately $3.8 million and $3.6 million, respectively. At June 3, 2006 and May 28, 2005, 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 approximately $0.2 million for each year.
Certain of our leases for retail outlets and depots and warehouses in our distribution system are classified as capital leases. Included in land and buildings we had approximately $9.6 million and $8.8 million of asset cost under capital lease and related accumulated depreciation of approximately $5.5 million and $4.0 million at June 3, 2006 and May 28, 2005, respectively.
During fiscal 2003 we entered into a capital lease to acquire hand-held computers and related equipment for use in our bakery delivery system and recorded a capital lease obligation of approximately $11.7 million to finance the purchase of this equipment. In March of 2006, the bankruptcy court approved a motion to transfer from the lessor to us all right, title and interest in this leased equipment for a general unsecured claim in the amount of approximately $6.1 million, which has been reclassified to liabilities subject to compromise.
6. Goodwill and Other Intangible Assets
In fiscal 2006, our annual impairment testing of our other intangible assets indicated that no reduction in our carrying value was required.
During the first quarter of fiscal 2005, we tested our goodwill and other intangible assets for possible impairment following the guidance provided by SFAS No. 142, Goodwill and Other Intangible Assets, due to our declining operating profits and liquidity issues resulting from a decrease in sales, a high fixed cost structure, rising employee healthcare and pension costs and higher costs for ingredients and energy. From the results of our testing, we determined that our goodwill was fully impaired. Accordingly, we took a charge to expense during fiscal 2005 in the pre-tax amount of $215.3 million to eliminate our goodwill.
Additionally, in the third and fourth quarters of fiscal 2005, as a result of our restructuring and reorganization activities subsequent to our filing for bankruptcy, we further tested certain of our intangible assets for possible impairment. Such further testing revealed that certain of our other intangible assets were also impaired. A pre-tax impairment charge for $23.2 million was taken on certain of our indefinite lived assets and a pre-tax impairment charge of $3.9 million was taken on other finite lived assets. These charges resulted from plant closures and other activities which impaired the value of certain of our trademarks and trade names.

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Goodwill and other intangible assets consist of the following:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Goodwill
               
Gross carrying amount
  $     $ 215,346  
Impairment charge
          (215,346 )
 
       
 
               
Net carrying amount
  $     $  
 
       
 
               
Intangible assets with indefinite lives (generally trademarks and trade names)
               
Gross carrying amount
  $ 157,471     $ 180,662  
Impairment charge
          (23,191 )
 
       
 
               
Net carrying amount
  $ 157,471     $ 157,471  
 
       
 
               
Intangible assets with finite lives
               
Gross carrying amount
  $ 13,854     $ 19,484  
Less:
               
Accumulated amortization
    (10,197 )     (11,040 )
Impairment charge
          (3,872 )
 
       
 
               
Net carrying amount
  $ 3,657     $ 4,572  
 
       
The following is a reconciliation of the impairment charges related to our other intangible assets for fiscal 2005 and indicates where such items are reflected in the consolidated statement of operations:
         
    Fifty-Two Weeks Ended
    May 28, 2005
 
       
    (dollars in thousands)  
 
       
Intangible assets with indefinite lives impairment
  $ 23,191  
Intangible assets with finite lives impairment
    3,872  
 
   
 
       
Total impairment
    27,063  
 
       
Restructuring charges (A)
    (12,866 )  
 
   
 
       
Other intangible assets impairment
  $ 14,197  
 
   
(A) See Note 15. Restructuring (Credits) Charges to these consolidated financial statements for more information.
Intangible amortization expense for fiscal 2006, 2005, and 2004 was approximately $0.9 million, $1.3 million, and $1.5 million, respectively. Of these amounts, $0.8 million for each year was recorded as a reduction of net sales, with the remainder recorded to amortization expense in the consolidated statements of operations. Intangible amortization for each of the subsequent five fiscal years is estimated at $0.9 million for 2007 and 2008, $0.8 million for 2009, $0.4 million for 2010, and $49,000 for 2011, with virtually all to be recorded as a reduction of net sales.

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7. Debt
Long-term debt consists of the following:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Secured
               
Post-petition credit agreement
  $     $  
Senior secured credit facility – pre-petition
    489,817       476,402  
Unsecured
               
6% senior subordinated convertible notes – pre-petition
    100,000       100,000  
Capital leases
               
Real estate
    5,065       5,797  
Capital lease converted to pre-petition debt
    6,125       5,717  
 
       
 
               
 
    601,007       587,916  
Less:
               
Current portion
    (494,882 )     (482,199 )
Pre-filing date claims included in liabilities subject to compromise
    (106,125 )     (105,717 )
 
       
 
               
Long-term debt
  $     $  
 
       
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 June 2, 2007 pursuant to the eighth amendment. The Commitment additionally provides, with certain restrictions, for the issuance of letters of credit in the aggregate amount of $125.0 million (increased from the original limitation of $75.0 million as a result of prior amendments) of which $91.3 million was utilized at June 3, 2006. 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 June 3, 2006, there were no borrowings outstanding under the DIP Facility and we had $90.1 million available under the DIP Facility (of which up to $33.7 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 at specified intervals and cumulative minimum EBITDA covenants. Currently, we expect that we will not be able to remain in compliance with the minimum EBITDA covenant as early as prior to the end of our 2007 third fiscal quarter. We intend to negotiate with the lenders under the DIP Facility to obtain the necessary relief from this covenant. However, we can give no assurance that any relief will be obtained. 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 the debt on 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.
During fiscal year 2005, we completed three amendments with the DIP Facility lenders. The amendments included the following: (1) the specification of maximum capital expenditures permitted; (2) an increase in the maximum letter of credit facility from $75.0 million to $125.0 million; (3) the specification of minimum cumulative EBITDA performance goals; and (4) the specification of maximum cash restructuring charges permitted. Furthermore, during fiscal year 2006, we completed three additional amendments. We completed a fourth amendment in November 2005

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which authorized us to make payments up to $12.0 million for certain pre-petition real property claims and other secured claims which were prohibited by the DIP Facility that were accruing post-petition interest and or penalties. Our fifth amendment was completed in December 2005 and provided us with the flexibility needed to continue to seek a resolution regarding the status of the ABA Plan as either a multiple employer plan or an aggregate of single employer plans. Also this amendment restated the cumulative consolidated EBITDA required under the DIP Facility and provided for a “suspension period” from December 10, 2005 through June 3, 2006 where we would not be required to meet the cumulative EBITDA requirements if our letter of credit usage under the DIP Facility met certain prescribed limits. The sixth amendment was completed in March 2006 and provided us with (1) the option of extending the expiration date of the letters of credit issued under the DIP Facility for up to 365 days beyond September 22, 2006 concurrent with the posting of cash collateral (as described in the DIP Facility); (2) the extension of the delivery date for the consolidated financial statements for May 28, 2005, June 3, 2006 and the first, second and third quarters of fiscal 2006 to such time as the financial statements are available; and (3) the extension of the delivery of certain budget information from April 18, 2006 to June 30, 2006. In fiscal 2007, we completed two additional 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.
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 term loan A, repayable in quarterly installments; (2) a six-year $125.0 million term loan B, repayable in quarterly installments; (3) a five-year $100.0 million term loan C, repayable in quarterly installments; and (4) a five-year $300.0 million revolving credit facility, maturing in July 2006, which allowed for up to $215.0 million for letters of credit. At June 3, 2006, we owed $187.5 million, $120.0 million, $97.0 million and $85.3 million under the term loan A, term loan B, term loan C and the revolving credit facility, respectively. In fiscal 2006, certain insurance carriers drew upon selected letters of credit securing our insurance liabilities. As a result of these actions, our pre-petition secured revolving debt was increased by $13.4 million with a corresponding decrease in our reserves for insurance liabilities. At June 3, 2006, there was no availability for additional borrowing or issuance of letters of credit under the revolving credit facility. The Senior Secured Credit Facility is secured by all accounts receivable and a majority of owned real property, intellectual property and equipment. The outstanding borrowings bear interest at variable rates generally equal to LIBOR plus 3.0% on term loan A and the revolving credit facility (9.14% at June 3, 2006), LIBOR plus 3.25% on term loan B (9.37% at June 3, 2006) and LIBOR plus 3.0% on term loan C (9.16% at June 3, 2006). We also pay a facility fee of 0.50% on the revolving credit facility commitment. At June 3, 2006 we had $122.3 million in letters of credit outstanding. We pay fees ranging from 3.625% to 4.0% on the balance of all letters of credit outstanding under the senior secured credit facility.
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. 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

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exercised. 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. As these notes are unsecured, they are included in liabilities subject to compromise and the accrual of interest has been suspended.
Other Matters
At June 3, 2006 and May 28, 2005, we have classified all of our debt as payable within one year due to our default under credit agreements or due to the effects of our bankruptcy process.
We believe, based upon the variable nature of our interest terms that the carrying value of our senior secured credit facility as of June 3, 2006 and May 28, 2005 approximated fair value. We have suspended interest payments on our 6% subordinated convertible notes and have reclassified the notes to liabilities subject to compromise. Accordingly, there is no reasonable method to determine the fair value of these notes at June 3, 2006 and May 28, 2005.
In fiscal 2006, we incurred approximately $0.7 million in debt fees associated with the fifth and sixth amendments of the DIP Facility. In fiscal 2005, we incurred approximately $10.4 million in debt fees which included syndication and structuring fees on our DIP, placement fees on our $100.0 million 6% senior subordinated convertible bonds, and amendment fees on our senior secured credit facility agreement. Additionally, included in this balance is approximately $1.6 million in legal costs related to the above debt. Fees in the amount of $3.0 million for the placement of the $100.0 million 6% senior subordinated convertible bonds and legal expenses of $0.9 million were each written off to reorganization expense in accordance with Emerging Issues Task Force 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments. All other debt fees are classified as other assets in the consolidated balance sheets and are being amortized as interest expense over the term of the respective debt agreements.
8. Accrued Expenses and Other Liabilities
Included in accrued expenses are the following:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Self-insurance reserves
  $ 74,882     $ 91,170  
Payroll, vacation and other compensation
    66,560       73,267  
Current portion of postretirement benefit plan obligations
    43,245       19,301  
Pension and welfare accruals
    15,869       21,378  
Taxes other than income
    25,509       30,262  
Included in other liabilities are the following:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Accumulated postretirement benefit obligation
  $ 87,955     $ 94,522  
Self-insurance reserves
    131,421       118,758  
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

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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.
Historically, the majority of our derivative instruments related to wheat and natural gas have been designated and qualify as cash flow hedges under SFAS No. 133. The wheat instruments are designated as cash flow hedges under the long-haul method, which requires us to evaluate the effectiveness of the hedging relationships on an ongoing basis and to recalculate changes in fair value of the derivatives and the related hedged items independently. Unrealized gains or losses on cash flow hedges are recorded in OCI, to the extent the cash flow hedges are effective, and are reclassified to cost of products sold in the period in which the hedged forecasted transaction impacts earnings. For hedges of future commodities needs, earnings are impacted when our products are produced.
In addition, from time to time we enter into commodity derivatives, principally corn, soybean oil, and heating oil, 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 fiscal 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. 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.
At May 28, 2005, we had accumulated gains of $0.5 million related to commodity derivatives which were substantially realized and recorded in OCI, with offsetting entries to other current assets. During fiscal 2005, we recognized a loss of $0.7 million in cost of products sold resulting from hedge ineffectiveness of commodity hedges.
During fiscal 2004, we recognized a gain in earnings resulting from hedge ineffectiveness of commodity hedges of $1.0 million, net of income taxes, in cost of products sold.
At June 3, 2006, the fair value of our commodity derivatives was a loss of approximately $0.1 million based upon widely available market quotes. At May 28, 2005, the fair value of our commodity derivatives was de minimis based upon widely available market quotes.
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 2006 and 2005 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

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of claim form. As of December 6, 2006, 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 a contract 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 June 3, 2006 on these obligations was approximately $10.1 million. The unrecorded interest expense for fiscal 2006 and 2005 on these obligations was approximately $6.0 million and $4.1 million, respectively. See Note 7. Debt to these consolidated 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 sheet:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Accounts payable
  $ 129,951     $ 129,294  
Taxes payable
    7,966       10,264  
Retirement obligations (SERP and deferred compensation)
    14,598       13,821  
Legal reserve
    12,910       12,931  
Interest bearing debt and capital leases
    106,125       105,717  
Other
    15,530       10,202  
 
       
 
               
 
  $ 287,080     $ 282,229  
 
       
Liabilities subject to compromise for taxes payable decreased in 2006 for two primary reasons. During 2006, we received approval from a taxing jurisdiction for tax credits we had claimed for prior years, which offset other amounts previously recorded as payable to this jurisdiction. In addition, we also reached settlements with other taxing jurisdictions regarding amounts owed for prior periods, at amounts less than we had previously recorded.
The increase in other liabilities subject to compromise primarily reflects an increase of $2.9 million related to the settlement of various insurance claims and an increase of $1.2 million related to additional leases rejected in our bankruptcy proceedings.
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

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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 June 3, 2006, we have recorded a net pension benefit obligation liability of approximately $58.0 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.
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 $40.0 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 the table below. The ultimate outcome of this uncertainty cannot presently be determined.
In addition, we have received requests for additional corrective contributions 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.
The following tables detail our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans.
The components of the pension (credit) expense for the ABA Plan are as follows:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
 
               
    June 3,     May 28,     May 29,  
    2006     2005     2004  
 
               
    (dollars in thousands)  
 
               
Service cost
  $ 1,579     $ 2,051     $ 2,512  
Interest cost
    3,208       3,252       2,870  
Expected return on negative plan assets
    248       398       257  
Recognition of
                       
Prior service cost
          423       1,358  
Actuarial (gain) loss
    (5,555 )     7,708       (1,061 )
 
           
 
                       
Total periodic pension (credit) cost
    (520 )     13,832       5,936  
Curtailment gain
    (1,176 )     (2,641 )      
 
           
 
                       
Net pension (credit) expense
  $ (1,696 )   $ 11,191     $ 5,936  
 
           

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The aggregate changes in our benefit obligation and plan assets, along with actuarial assumptions used, related to the ABA Plan as an aggregate of single employer plans are as follows:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Benefit obligation at beginning of year
  $ 59,806     $ 51,463  
Service cost
    1,579       2,051  
Interest cost
    3,208       3,252  
Benefit and expense payments
    (3,405 )     (3,308 )
Plan amendment
          423  
Actuarial (gain) loss
    (4,469 )     8,566  
Curtailment gain
    (1,176 )     (2,641 )
 
       
 
               
Benefit obligation at end of year
    55,543       59,806  
 
       
 
               
Fair value of plan assets at beginning of year
    (2,444 )     (4,289 )
Employer contributions
    2,261       4,694  
Benefits and expense payments
    (3,405 )     (3,308 )
Actual return on plan assets
    838       459  
 
       
 
               
Fair value of plan assets at end of year
    (2,750 )     (2,444 )
 
       
 
               
Net benefit obligation liability at end of year
  $ 58,293     $ 62,250  
 
       
 
               
Weighted average actuarial assumptions (using a measurement date of May 31):
               
Discount rate
    6.3 %     5.5 %
Expected return on plan assets
    7.5 %     7.5 %
The ABA Plan’s net benefit obligation liability is recorded in other liabilities except for the current portion of $37.5 million and $12.0 million for June 3, 2006 and May 28, 2005, respectively, which is recorded in accrued expenses.
The ABA Plan is invested in a diversified portfolio of securities. The plan asset categories as of June 3, 2006 are as follows: domestic equities 57%, fixed income 40% and cash and cash equivalents 3%.
Based upon historical returns, current asset mix and the target asset allocation as determined by the plan’s trustees, we have used a weighted average expected return on plan assets of 7.5%.
In January, April, July, and October 2006, we failed to make four required quarterly minimum funding contributions for a total of approximately $13.9 million to the ABA Plan and filed the necessary report with the PBGC. In addition, in June 2006 we received notice of a corrective contribution of $13.9 million, which we did not pay. The status of future employer contributions is currently unknown. Our estimated future benefit payments required under the ABA Plan are as follows:
         
Fiscal Years Ending   (dollars in thousands)  
 
               
Benefit payments
         
2007
  $ 3,436  
2008
    3,461  
2009
    3,509  
2010
    3,592  
2011
    3,670  
2012-2016
    19,728  

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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:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
 
               
    June 3,     May 28,     May 29,  
    2006     2005     2004  
 
               
    (dollars in thousands)  
 
               
Service cost
  $ 904     $ 673     $ 704  
Interest cost
    4,038       3,728       3,715  
Expected return on plan assets
    (4,885 )     (4,347 )     (3,354 )
Recognition of
                       
Prior service cost
    285       173       177  
Actuarial loss
    542       200       1,441  
 
           
 
                       
Net pension expense
  $ 884     $ 427     $ 2,683  
 
           
The aggregate changes in our benefit obligation and plan assets, along with actuarial assumptions used, related to the defined benefit pension plan are as follows:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
Benefit obligation at beginning of year
  $ 68,722     $ 63,520  
Service cost
    904       673  
Interest cost
    4,038       3,728  
Amendments
          998  
Actuarial loss
    1,812       4,560  
Employee contributions
    61       58  
Benefits and expenses paid
    (5,047 )     (4,815 )
 
       
 
               
Benefit obligation at end of year
    70,490       68,722  
 
       
 
               
Fair value of plan assets at beginning of year
    59,174       54,473  
Actual return on plan assets
    10,500       5,256  
Employer contributions
    1,283       4,202  
Employee contributions
    61       58  
Benefits and expenses paid
    (5,047 )     (4,815 )
 
       
 
               
Fair value of plan assets at end of year
    65,971       59,174  
 
       
 
               
Plan assets less than benefit obligation
    4,519       9,548  
Unrecognized prior service cost
    (1,990 )     (2,275 )
Unrecognized net loss
    (7,335 )     (11,680 )
Additional minimum pension liability
    8,668       13,086  
 
       
 
               
Net benefit obligation liability at end of year
  $ 3,862     $ 8,679  
 
       
 
               
Intangible asset at end of year
  $ 1,990     $ 2,275  
 
       
 
               
Accumulated benefit obligation
  $ 69,833     $ 67,853  
 
       
 
               
Weighted average actuarial assumptions (using a measurement date of March 31):
               
Discount rate
    5.8 %     6.0 %
Expected return on plan assets
    8.5 %     8.5 %
Rate of compensation increase
    4.5 %     4.5 %

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We recorded a minimum pension liability in other liabilities of approximately $8.7 million at June 3, 2006 and $13.1 million at May 28, 2005, representing the excess of the unfunded accumulated benefit obligation over plan assets and accrued pension costs. Of the ending liability balances at June 3, 2006 and May 28, 2005, approximately $0 and $1.3 million, respectively, were included in accrued expenses with the remainder in other liabilities. An intangible asset equal to the unrecognized prior service costs of approximately $2.0 million at June 3, 2006 and $2.3 million at May 28, 2005 was also recorded. The remaining approximately $6.7 million at June 3, 2006 and $10.8 million at May 28, 2005 was recorded to equity in OCI.
The defined benefit pension plan is invested in a diversified portfolio of securities. The plan asset categories as of June 3, 2006 are as follows: equities 77%, bonds 21% and cash and cash equivalents 2%. The target asset allocation for the plan is as follows: equities 78% and bonds 22%.
Based upon historical returns, current asset mix and our target asset allocation which is focused on equities, we have used a weighted average expected return on plan assets of 8.5% for 2006 and 2005.
Our estimated future cash flows for the defined benefit pension plan are as follows:
         
Fiscal Years Ending   (dollars in thousands)  
 
               
Employer contributions
       
2007
  $    
 
       
Benefit payments
       
2007
  $ 4,430  
2008
    4,483  
2009
    4,542  
2010
    4,588  
2011
    4,667  
2012-2016
    24,739  
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 early December 2003, we announced a major revision to our nonunion postretirement health care plans that was effective on January 1, 2004. The revision required grandfathered participants and their dependents over 65 years of age, who generally have only supplemental benefits after Medicare eligibility, to contribute at levels intended to fully fund the coverage provided. In addition, the revision required participants and their dependents between ages 60 and 65 to contribute at levels intended to fund approximately 40% of the plan costs. These plan changes reduced our accumulated postretirement benefit obligation, which is unfunded, by approximately $70.0 million.
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 certain grandfathered retirees and dependents generally through age 65. This plan change reduced our accumulated postretirement benefit obligation by $9.2 million.
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.

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The components of the net postretirement benefit (credit) expense are as follows:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
 
               
    June 3,     May 28,     May 29,  
    2006     2005     2004  
 
               
    (dollars in thousands)  
 
               
Service cost
  $ 1,444     $ 2,773     $ 4,988  
Interest cost
    3,391       4,840       8,330  
Amortization:
                       
Unrecognized prior service benefit
    (7,392 )     (6,644 )     (3,473 )
Unrecognized net loss
    1,308       1,619       4,386  
 
           
 
                       
Total postretirement benefit (credit) expense
    (1,249 )     2,588       14,231  
Curtailment gain included in restructuring charges (See Note 15. Restructuring (Credits) Charges)
          (4,272 )      
 
           
 
                       
Net postretirement benefit (credit) expense
  $ (1,249 )   $ (1,684 )   $ 14,231  
 
             
The aggregate change in our accumulated postretirement benefit obligation (APBO), which is unfunded, is as follows:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
 
               
APBO at beginning of year
  $ 63,213     $ 76,367  
Service cost
    1,444       2,773  
Interest cost
    3,391       4,840  
Participant contributions
    2,134       5,071  
Plan amendment
          (9,152 )
Plan curtailment
          (2,870 )
Actuarial gain
    (4,113 )     (1,495 )
Benefits paid
    (7,724 )     (12,321 )
 
       
 
               
APBO at end of year
    58,345       63,213  
Unrecognized prior service benefit
    55,872       63,264  
Unrecognized net loss
    (20,517 )     (25,937 )
 
       
 
               
Accrued postretirement benefit
    93,700       100,540  
Less current portion
    (5,745 )     (6,018 )
 
       
 
               
APBO included in other liabilities
  $ 87,955     $ 94,522  
 
       
In determining the APBO, the weighted average discount rate was assumed to be 6.3%, 5.5%, and 6.5% for fiscal 2006, 2005, and 2004, respectively (using a May 31 measurement date). The assumed health care cost trend rate for fiscal 2006 was 9.0%, declining gradually to 5.5% over the next 8 years. A 1.0% increase in this assumed health care cost trend rate would increase the service and interest cost components of the net postretirement benefit expense for fiscal 2006 by approximately $0.6 million, as well as increase the June 3, 2006 APBO by approximately $5.4 million. Conversely, a 1.0% decrease in this rate would decrease the fiscal 2006 expense by approximately $0.5 million and the June 3, 2006 APBO by approximately $5.0 million.

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Our estimated future cash flows for the postretirement benefit plan are as follows:
         
Fiscal Years Ending   (dollars in thousands)  
 
         
Employer contributions (reduced by expected participant contributions)
       
2007
  $ 5,745  
 
       
Benefit payments
       
2007
  $ 7,500  
2008
    6,984  
2009
    6,573  
2010
    6,221  
2011
    6,213  
2012-2016
    29,763  
Employee Stock Purchase Plan
On September 21, 2004, in conjunction with our bankruptcy filing, we terminated our 1991 Employee Stock Purchase Plan. The Plan was noncompensatory, which allowed all eligible employees to purchase our common stock.
Defined Contribution Retirement Plan
We sponsor a defined contribution retirement plan for eligible employees not covered by union plans. Contributions are based upon voluntary employee contributions plus a discretionary company profit-driven contribution. We did not, nor do we intend to, make the discretionary company contribution under our defined contribution retirement plan for calendar years 2006, 2005 and 2004. Retirement expense related to this plan was approximately $5.2 million, $0.2 million and $17.8 million for fiscal 2006, 2005, and 2004, respectively. Fiscal 2005 retirement expense reflects a $5.0 million reversal of amounts accrued during fiscal 2004 related to the decision during fiscal 2005 to forgo the calendar year 2004 discretionary company contribution.
Negotiated Multi-Employer Pension Plans
Approximately 82% of our employees are covered by collective bargaining agreements. We contribute to approximately 40 multi-employer pension plans on behalf of employees covered by our collective bargaining agreements. Bakery and Confectionery Union and Industry International Pension Fund, which covers the largest number of our union employees, provides retirement benefits to approximately 9,500 of our total employees. Our collective bargaining agreements determine the amount of annual contributions we are required to make to the multi-employer pension plans in which our union employees participate. The pension plans provide defined benefits to retired participants and, in some cases, their beneficiaries. The multi-employer plans are managed by trustees, who are appointed by management of the employers participating in the plans (including our company, in some cases) and the affiliated unions, who have fiduciary obligations to act prudently and in the best interests of the plan’s participants. We recognize as net pension cost contractually required contributions and special periodic assessments, and recognize as a liability any contribution due or unpaid. Expense for these plans was approximately $125.8 million, $133.5 million and $132.0 million for fiscal 2006, 2005, and 2004, respectively. Based on the most recent information available to us, we believe that certain of the multi-employer pension plans to which we contribute are substantially underfunded.
Under current law regarding multi-employer pension plans, a termination, withdrawal or significant partial withdrawal from any such plan, which was underfunded, would render us liable for our proportionate share of that liability. This potential unfunded pension liability also applies ratably to other contributing employers, including our unionized competitors. Information regarding under-funding is generally not provided by plan administrators and trustees and when provided, is difficult to independently validate. Any public information available relative to multi-employer pension plans is often dated and of limited value as well. Accordingly, the necessary information is not reliably available to accurately estimate a dollar amount or a range of a potential contingent liability in the event we were to partially or fully withdraw from certain or all of our multi-employer pension plans.

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Multi-Employer Postretirement Health Care Benefit Plans
We also participate in a number of multi-employer plans which provide postretirement health care benefits to substantially all union employees not covered by our plans. Amounts reflected as benefit cost and contributed to such plans, including amounts related to health care benefits for active employees, totaled approximately $195.0 million, $205.7 million, and $193.5 million in fiscal 2006, 2005, and 2004, respectively.
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. In fiscal 2003, we entered into a rabbi trust agreement to protect the assets of the SERP for our participating employees. Included in other assets on the consolidated balance sheet as of June 3, 2006 and May 28, 2005 is approximately $5.9 million and $5.7 million, respectively, of restricted assets held in the rabbi trust.
Subsequent to our bankruptcy filing, we suspended the SERP as of November 11, 2004. The related suspension of payments and accruals of service credit under our SERP resulted in a net curtailment loss of approximately $10.3 million, which included a curtailment loss related to the write-off of prior service costs of approximately $12.4 million and a curtailment gain of approximately $2.1 million resulting from the reduction in the salary increase assumption to zero. An additional $1.5 million of the curtailment gain was offset to the actuarial loss not yet recognized at the date of the plan suspension. Approximately $10.6 million and $9.9 million representing the portion of the SERP liability, at June 3, 2006 and May 28, 2005, respectively, attributable to retired participants has been reclassified to liabilities subject to compromise.
The components of the SERP expense are as follows:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
 
               
    June 3,     May 28,     May 29,  
    2006     2005     2004  
 
               
    (dollars in thousands)  
 
               
Service cost
  $     $ 462     $ 1,066  
Interest cost
    1,354       1,494       1,508  
Recognition of
                       
Prior service cost
          1,259       2,729  
Actuarial loss
          58       103  
 
                 
 
                       
Net periodic pension cost
    1,354       3,273       5,406  
Net curtailment loss related to plan suspension
          10,341        
 
                 
 
                       
Total SERP expense
  $ 1,354     $ 13,614     $ 5,406  
 
                 

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The aggregate changes in our SERP, along with actuarial assumptions used, are as follows:
                 
    June 3,     May 28,  
    2006     2005  
 
               
    (dollars in thousands)  
SERP obligation at beginning of year
  $ 22,573     $ 26,928  
Service cost
          462  
Interest cost
    1,354       1,494  
Plan amendment
          (3,511 )
Actuarial (gain) loss
    (105 )     (2,619 )
Benefits paid
          (181 )
 
       
 
               
SERP obligation at end of year
    23,822       22,573  
 
       
 
               
Fair value of SERP assets at beginning of year
           
Employer contributions
          181  
Benefits paid
          (181 )
 
       
 
               
Fair value of SERP assets at end of year
           
 
       
 
               
Unfunded status
    23,822       22,573  
Unrecognized net actuarial gain
    666       561  
 
       
 
               
Total SERP liability
    24,488       23,134  
SERP liability classified as liabilities subject to compromise
    (10,621 )     (9,918 )
 
       
 
               
Net SERP liability included in other liabilities
  $ 13,867     $ 13,216  
 
       
 
               
Weighted average discount rate assumptions (using a measurement date of March 31)
    5.8 %     6.0 %
Due to the suspension of the SERP, we are not currently contributing funds or paying benefits out of the plan. Future contributions and benefit payments are dependent on the disposition of the plan in conjunction with the bankruptcy reorganization plan.
13. Key Employee Retention Plan
On February 17, 2005, the Bankruptcy Court approved a Key Employee Retention Plan which was designed to provide incentives to retain key employees of IBC during our reorganization and restructuring period. The plan provides first for a retention bonus which would compensate senior participants to remain with IBC during and throughout the reorganization and restructuring process. Second, there is a performance bonus element which rewards key management employees for successfully meeting or exceeding a predetermined range of earnings before interest, taxes, depreciation, amortization and restructuring (EBITDAR). Retention and performance bonus amounts are calculated upon varying percentages of annual compensation based upon management positions held within IBC and the degree to which the financial goal of EBITDAR is met or exceeded.
Expense is accrued ratably over the period of time that performance or service is expected. Expense under these two plans for fiscal 2006 and 2005 is classified as employee retention expense and is included in reorganization expense, see Note 16. Reorganization Charges. It is expected that the aggregate expense we will incur under these two incentive plans will be approximately $12.9 million.
14. Stock-Based Compensation
The 1996 Stock Incentive 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 deferred shares. A maximum of approximately 18.7 million shares was approved by our stockholders to be issued under the Plan. On June 3, 2006, shares totaling approximately 8.1 million were authorized but not awarded under the Plan.

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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. The changes in outstanding options are as follows:
                 
            Weighted  
            Average  
    Shares     Exercise Price  
    Under Option     Per Share  
 
               
    (in thousands)          
 
               
Balance May 31, 2003
    9,584     $ 21.96  
Issued
    20       13.59  
Surrendered
    (4,477 )     29.26  
Exercised
    (55 )     14.09  
 
           
 
               
Balance May 29, 2004
    5,072       15.57  
Options reinstated due to rescinds
    312       31.82  
Surrendered
    (866 )     16.90  
Exercised
           
 
           
 
               
Balance May 28, 2005
    4,518       16.43  
Issued
           
Surrendered
    (409 )     16.81  
Exercised
    (10 )     10.10  
 
           
 
               
Balance June 3, 2006
    4,099       16.41  
 
           
Stock options outstanding and exercisable as of June 3, 2006 are as follows:
                         
            Weighted     Weighted  
            Average     Average  
            Exercise     Remaining  
Range of Exercise   Shares     Price     Contractual  
Prices Per Share   Under Option     Per Share     Life In Years  
 
               
    (in thousands)                  
Outstanding:
                       
$10.00
    1,498     $ 10.00       6.73  
11.80 – $14.50
    1,120       14.22       4.56  
14.98 –   23.75
    925       20.87       2.00  
24.19 –   33.91
    556       30.66       3.03  
 
                     
 
                       
$10.00 - $33.91
    4,099       16.41       4.57  
 
                     
 
                       
Exercisable:
                       
$10.00
    1,498       10.00          
11.80 – 14.50
    1,120       14.22          
14.98 – 23.75
    924       20.88          
24.19 – 33.91
    556       30.66          
 
                     
 
                       
$10.00 – $33.91
    4,098       16.41          
 
                     
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 and recorded approximately $7.4 million of unearned compensation as a reduction to stockholders’ equity. The unearned compensation is being charged to expense over the vesting period, with approximately $1.4 million, $2.9 million, and $0.8 million recognized as expense in fiscal 2006, 2005 and 2004, respectively. In addition, lowered costs resulting from forfeited awards were approximately $0.5 million, $0.7 million, and $0.1 million in fiscal 2006, 2005 and 2004, respectively.

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During fiscal 2003, we granted the right to receive in the future up to approximately 0.2 million shares of our common stock under the Plan, with a weighted average fair value at the date of grant of $27.00 per share, to our then Chief Executive Officer. The deferred shares, which accrued dividends in the form of additional shares, were to vest ratably after one, two, and three years of continued employment. Upon his departure during fiscal 2005, an adjustment was made to compensation expense to reflect the vesting of only the first one-third of these shares and the remaining shares were forfeited. Compensation expense (benefit) related to this award was approximately $(0.9) million and $1.4 million for fiscal 2005 and 2004, respectively.
During the first quarter of fiscal 2005, in conjunction with his hiring, the Chief Financial Officer was granted 20,000 shares of restricted stock pursuant to the 1996 Stock Incentive Plan. The fair value of these restricted shares at the date of grant was $11.05 per share. These shares vest ratably after one, two, and three years of continued employment. We recorded approximately $74,000 in related compensation expense during fiscal 2006, which was subsequently offset by a $74,000 reversal of unearned compensation costs resulting from voluntarily forfeited awards. We recorded approximately $65,000 in related compensation expense during fiscal 2005.
During the first quarter of fiscal 2005, the Board of Directors were granted 31,675 shares of restricted stock with a fair value of $11.05 per share at the date of grant. The deferred shares, which are entitled to accrue dividends in the form of additional shares, vest ratably every quarter during the following twelve months. Compensation expense related to the award was $43,000 and $0.3 million for fiscal 2006 and 2005, respectively.
On June 3, 2006, approximately 12.7 million total shares of common stock were reserved for issuance under various employee benefit plans.
15. Restructuring (Credits) Charges
The following table summarizes the restructuring (credits) charges incurred in fiscal 2006, 2005, and 2004:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
 
               
    June 3,     May 28,     May 29,  
    2006     2005     2004  
 
               
    (dollars in thousands)  
Severance costs
  $ 6,101     $ 12,754     $ 3,617  
Long-lived asset (credits) charges
    (38,570 )     43,745       1,170  
Curtailment gain on a benefit plan
    (706 )     (6,913 )      
Other exit costs
    5,988       4,707       7,279  
 
                 
 
                       
Total
  $ (27,187 )   $ 54,293     $ 12,066  
 
                 
Fiscal 2006 Restructuring
In fiscal 2006, we continued our review of the operations in our various Profit Centers which was started in fiscal 2005. As a result of this continued review process, we closed an additional four bakeries and consolidated routes, depots and retail stores in the remaining seven PCs including Northern California, Southern California, the Pacific Northwest, North Central, South Central Southeast and the Upper Midwest. Along with our gains realized on the sales of our excess real estate and equipment, these restructuring activities resulted in a net restructuring credit of approximately $5.2 million. These restructurings resulted in the termination of approximately 2,080 employee positions for which we incurred approximately $6.2 million in severance charges. We also incurred other exit costs of approximately $3.0 million principally related to cleanup, taxes, security, utilities and equipment removal charges. We realized gains on the sale of certain real property during the year of approximately $31.5 million which was partially offset by equipment and real property impairment charges of approximately $17.1 million to reduce certain real property and equipment to fair value.
During fiscal 2006, we also initiated activities to close two of our accounting offices which resulted in severance charges of approximately $0.3 million. Additional charges will be incurred in fiscal 2007 related to additional planned office closings.

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Fiscal 2005 Restructuring
In the first three quarters of fiscal 2005, we continued the process of consolidating operations in order to achieve production efficiencies and more effectively allocate production capacity, as well as continue to serve most of our existing customers.
As a continuation of our fiscal 2004 activities, we closed three bakeries, 35 outlet stores and initiated some limited consolidation of operations all of which resulted in restructuring charges of approximately $12.2 million. We recorded severance charges of approximately $4.0 million for the elimination of approximately 365 employee positions and incurred approximately $6.1 million related to asset impairment at the bakery locations. Also we incurred approximately $2.1 million of other exit costs which included lease cancellation costs, utilities and taxes plus cleanup costs associated with readying the properties for sale. In addition to the closing of the bakeries and outlet stores, we also implemented a company-wide reduction in force of approximately 175 employees that resulted in the recognition of $1.6 million in additional severance expense.
In fiscal 2006, we experienced additional restructuring charges of approximately $0.7 million related to asset impairment charges of approximately $0.3 million related principally to two of our closed bakeries and approximately $0.4 million of charges related to security, taxes, utilities and cleanup costs.
In further reviewing the actions necessary to improve profitability and to address continuing revenue declines coupled with a high-cost structure, in late fiscal 2005 we undertook an extensive review of our ten PCs in order to consolidate production, delivery routes, depots and bakery outlets. This review of our Florida, Mid-Atlantic and North East PCs undertaken in fiscal 2005 resulted in the closure of three additional bakeries along with the consolidation of various delivery routes, depots, and bakery outlets as well as the shifting of production to other bakeries which resulted in restructuring charges of approximately $33.1 million. We recorded severance charges of approximately $7.6 million for the elimination of approximately 2,320 employee positions and incurred approximately $19.5 million primarily due to the write-down of real property and bakery equipment to fair value. As a result of these restructuring efforts, we abandoned certain trade names which resulted in an additional impairment charge of approximately $12.9 million. Offsetting these charges was approximately $6.9 million in credits as a result of curtailment gains on the pension and postretirement benefit plans related to this restructuring.
In fiscal 2006 we recorded a net credit of approximately $12.3 million for these restructuring activities. This included severance credits of approximately $0.4 million related to adjustments of severance accruals and net restructuring credits of approximately $15.7 million related to gains on the sale of equipment and real property offset by additional asset impairments of approximately $1.9 million. Other charges totaling approximately $2.6 million were incurred for taxes, cleanup, security and utilities, as well as certain relocation adjustments, offset by a $0.7 million curtailment gain on a pension plan.
Additionally, as part of the restructuring activity, a decision was made by management to cease all funding, work and roll-out of the final phase of a large software project. This event resulted in the abandonment of a long-lived software asset, and, consequently, it was determined that a portion of the asset was impaired and $4.5 million of capitalized software costs were written off in fiscal 2005.
Fiscal 2004 Restructuring
In fiscal 2004 we initiated a major company-wide project that was referred to as Program SOAR, an acronym for Systems Optimization And Re-engineering, that was to focus on re-engineering our business processes to increase efficiency and on rationalizing our investment in production, distribution and administrative functionality. Under Program Soar we recorded restructuring charges of approximately $4.1 million for the closure of three bakeries. This included asset impairment charges of approximately $0.9 million and security, utilities and cleanup costs to ready the properties for sale of approximately $0.8 million. Additionally, there were severance charges of approximately $2.4 million related to the elimination of approximately 250 employee positions. We also shifted production from one facility to another to gain efficiencies which resulted in an impairment charge of approximately $1.2 million to record the write down of certain effected equipment to fair value. Due to a new centralized organizational structure, we also recorded approximately $0.6 million of severance costs associated with the elimination of certain finance administrative functions involving 116 employees and approximately $4.0 million of additional costs associated with the relocation of key management employees.

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During fiscal 2005 we incurred additional restructuring costs of approximately $2.3 million. These costs resulted principally from additional bakery cleanup costs to ready the facilities for sale of approximately $2.4 million along with a loss on equipment sales of approximately $0.3 million offset by an adjustment to reduce severance costs by approximately $0.4 million
In fiscal 2006, we realized a net restructuring credit of approximately $10.7 million which primarily reflected the gain on the sale of a bakery of approximately $10.8 million.
Fiscal 2003 Restructuring
In fiscal 2003 we initiated restructuring activities for the closure of certain of our less efficient operations which included five bakeries and 96 outlets. In connection with this restructuring effort, during fiscal 2004, we incurred additional charges of approximately $2.1 million. Severance charges in the amount of approximately $0.6 were related to an additional 51 employees whose positions were eliminated. Also we realized a gain of approximately $1.7 million on the sale of a bakery which was partially offset by an additional asset impairment resulting from updated information on certain bakery equipment of approximately $0.8 million and additional exit costs of approximately $2.4 million related to security, utilities and cleanup for the closed bakeries. During fiscal 2005 we expensed an additional $0.6 million which was related to losses on equipment disposals and additional clean up costs.
The analysis of our restructuring costs activity is as follows:
                                 
            Long-Lived              
    Severance     Asset              
    and Related     Charges              
    Benefits     (Credits)     Other     Total  
                         
       
    (dollars in thousands)  
Fiscal 2003 Plan
                               
 
Balance May 31, 2003
$   1,205   $     $   2,039   $   3,244  
 
Expenses in Fiscal 2004
    646       (954 )     2,447       2,139  
Cash Paid in Fiscal 2004
    (1,851 )           (3,192 )     (5,043 )
Noncash Utilization in 2004
          954             954  
 
Balance May 29, 2004
                1,294       1,294  
 
Expensed in Fiscal 2005
          262       294       556  
Cash Paid in Fiscal 2005
                (555 )     (555 )
Noncash Utilization in 2005
          (262 )     (1,033 )     (1,295 )
 
Balance May 28, 2005
                       
 
Expensed in Fiscal 2006
          (34 )     32       (2 )
Cash Paid in Fiscal 2006
                (32 )     (32 )
Noncash Utilization in 2006
          34             34  
 
Balance June 3, 2006
                       
 
 
                               
 
                               
Fiscal 2004 Plan
                               
 
Balance May 31, 2003
                       
 
Expenses in Fiscal 2004
    2,971       2,124       4,832       9,927  
Cash Paid in Fiscal 2004
    (1,611 )           (1,723 )     (3,334 )
Noncash Utilization in 2004
          (2,124 )           (2,124 )
 
Balance May 29, 2004
    1,360             3,109       4,469  
 
Expensed in Fiscal 2005
    (434 )     429       2,267       2,262  
Cash Paid in Fiscal 2005
    (871 )           (5,376 )     (6,247 )
Noncash Utilization in 2005
          (429 )           (429 )
 
Balance May 28, 2005
    55                   55  
 
Expensed in Fiscal 2006
          (10,636 )     (97 )     (10,733 )
Cash Paid in Fiscal 2006
    (55 )           97       42  
Noncash Utilization in 2006
          10,636             10,636  
 
Balance June 3, 2006
                       
 
 
                               
 
                               

91


 

                                 
            Long-Lived              
    Severance     Asset              
    and Related     Charges              
    Benefits     (Credits)     Other     Total  
                         
       
    (dollars in thousands)  
Fiscal 2005 Consolidation &
RIF Plan
                               
 
Balance May 29, 2004
  $     $     $     $  
 
Expensed in Fiscal 2005
    5,575       6,119       2,145       13,839  
Cash Paid in Fiscal 2005
    (4,779 )           (1,534 )     (6,313 )
Noncash Utilization in 2005
          (6,119 )     (611 )     (6,730 )
 
Balance May 28, 2005
    796                   796  
 
Expensed in Fiscal 2006
          270       438       708  
Cash Paid in Fiscal 2006
    (597 )           (438 )     (1,035 )
Noncash Utilization in 2006
          (270 )           (270 )
 
Balance June 3, 2006
    199                   199  
 
 
                               
 
                               
 
Fiscal 2005 PC Review Plan
                               
 
Balance May 29, 2004
                       
 
Expensed in Fiscal 2005
    7,613       32,426       (6,912 )     33,127  
Cash Paid in Fiscal 2005
                (1 )     (1 )
Noncash Utilization in 2005
          (32,426 )     6,913       (25,513 )
 
Balance May 28, 2005
    7,613                   7,613  
 
Expensed in Fiscal 2006
    (407 )     (13,769 )     1,884       (12,292 )
Cash Paid in Fiscal 2006
    (6,313 )           (2,492 )     (8,805 )
Noncash Utilization in 2006
          13,769       706       14,475  
 
Balance June 3, 2006
    893             98       991  
 
 
                               
 
                               
 
Software Write-off
                               
 
Balance May 29, 2004
                       
 
Expensed in Fiscal 2005
          4,509             4,509  
Cash Paid in Fiscal 2005
                       
Noncash Utilization in 2005
          (4,509 )           (4,509 )
 
Balance May 28, 2005
                       
 
 
                               
 
                               
 
Fiscal 2006 PC Review Plan
                               
 
Balance May 28, 2005
                       
 
Expensed in Fiscal 2006
    6,163       (14,401 )     3,025       (5,213 )
Cash Paid in Fiscal 2006
    (5,163 )           (2,980 )     (8,143 )
Noncash Utilization in 2006
          14,401             14,401  
 
Balance June 3, 2006
    1,000             45       1,045  
 
 
                               
 
                               
 
Accounting Office Closings
                               
 
Balance May 28, 2005
                       
 
Expensed in Fiscal 2006
    345                   345  
Cash Paid in Fiscal 2006
                       
Noncash Utilization in 2006
                       
 
Balance June 3, 2006
    345                   345  
 
 
                               
 
                               
Consolidated
                               
 
Balance May 31, 2003
    1,205             2,039       3,244  
 
Expenses in Fiscal 2004
    3,617       1,170       7,279       12,066  
Cash Paid in Fiscal 2004
    (3,462 )           (4,915 )     (8,377 )
Noncash Utilization in 2004
          (1,170 )           (1,170 )
 
Balance May 29, 2004
    1,360             4,403       5,763  
 
Expensed in Fiscal 2005
    12,754       43,745       (2,206 )     54,293  
Cash Paid in Fiscal 2005
    (5,650 )           (7,466 )     (13,116 )
Noncash Utilization in 2005
          (43,745 )     5,269       (38,476 )
 
Balance May 28, 2005
    8,464                   8,464  
 
Expensed in Fiscal 2006
    6,101       (38,570 )     5,282       (27,187 )
Cash Paid in Fiscal 2006
    (12,128 )           (5,845 )     (17,973 )
Noncash Utilization in 2006
          38,570       706       39,276  
 
Balance June 3, 2006
  $ 2,437     $     $ 143     $ 2,580  
 

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Summarized below are the cumulative restructuring charges recognized through fiscal 2006 for all plans discussed, as well as expected remaining charges through plan completion. Most of the remaining costs are expected to be incurred during fiscal 2007.
Cumulative restructuring (credits) charges by plan (dollars in thousands):
                                 
            Long-Lived              
    Severance     Asset              
    and Related     Charges              
    Benefits     (Credits)     Other     Total  
Fiscal 2003 Plan
   $ 4,304      $ 1,474      $ 6,825      $ 12,603  
 
                               
Fiscal 2004 Plan
    2,537       (8,083 )     7,002       1,456  
 
                               
Fiscal 2005 Consolidation & RIF Plan
    5,575       6,389       2,583       14,547  
 
                               
Fiscal 2005 PC Review Plan
    7,206       18,657       (5,028 )     20,835  
 
                               
Software Write-off
          4,509             4,509  
 
                               
Fiscal 2006 PC Review Plan
    6,163       (14,401 )     3,025       (5,213 )
 
                               
Accounting Office Closings
    345                   345  
 
Expected remaining restructuring charges by plan (dollars in thousands):
                                 
            Long-Lived              
    Severance     Asset              
    and Related     Charges              
    Benefits     (1)     Other     Total  
Fiscal 2005 Consolidation & RIF Plan
   $      $      $ 374      $ 374  
 
                               
Fiscal 2005 PC Review Plan
          1,135       1,037       2,172  
 
                               
Fiscal 2006 PC Review Plan
                1,248       1,248  
 
                               
Accounting Office Closings
    400                   400  
 
(1) Excludes gains expected to be realized on subsequent sales of real property.
16. Reorganization Charges
For the years ended June 3, 2006 and May 28, 2005, reorganization charges are as follows:
                                 
    Fifty-Three Weeks Ended     Fifty-Two Weeks Ended  
             
    June 3, 2006     May 28, 2005  
             
    Reorganization   Cash   Reorganization   Cash
    Charges     Payments     Charges     Payments  
 
    (dollars in thousands)  
Professional fees
  $ 35,089     $ 35,211     $ 33,184     $ 27,269  
Employee retention expenses (See Note 13)
    6,047       4,332       5,641       1,934  
Lease rejections
    937             (427 )     (140 )
Interest income
    (4,461 )     (3,562 )     (537 )     (537 )
Gain on sale of assets
    (597 )     (597 )     (1,655 )     (1,655 )
Write-off of debt fees
                3,000        
 
               
 
                               
Reorganization charges, net
  $ 37,015     $ 35,384     $ 39,206     $ 26,871  
 
               

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17. Income Taxes
The reconciliation of the provision for income taxes to the statutory federal rate is as follows:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
                         
    June 3,     May 28,     May 29,  
    2006     2005     2004  
                         
Statutory federal tax rate
    35.0 %     35.0 %     35.0 %
State income tax, net
    1.1       2.6       1.8  
Non-deductible goodwill impairment
          (15.8 )      
Valuation allowance increase
    (25.9 )     (14.7 )      
Adjustments to prior year tax reserve and refundable credits
    1.8       2.0       3.2  
Other
    (1.1 )     (0.3 )     (0.1 )
 
           
 
                       
 
    10.9 %     8.8 %     39.9 %
 
           
The income tax benefit recorded during fiscal 2006 primarily consists of tax benefits realized during the year. We received state approval for additional refundable tax credits related to prior years. We also utilized a specific statutory federal net operating loss provision that permits a 10-year carryback in order to file a claim for refund of previously paid tax.
In fiscal 2006, 2005, and 2004, we adjusted our estimate for prior year tax accruals based upon a review of recently closed tax audits, amended filings, and the status of prior tax years relative to the statutes of limitation in the jurisdictions in which we conduct business.
The components of the provision for (benefit from) income taxes are as follows:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
                         
    June 3,     May 28,     May 29,  
    2006     2005     2004  
                         
    (dollars in thousands)  
Current
                       
Federal
  $ (9,759 )   $ (38,534 )   $ (14,023 )
State
    (4,153 )     (5,755 )     (2,809 )
 
           
 
                       
 
    (13,912 )     (44,289 )     (16,832 )
 
           
 
                       
Deferred
                       
Federal
    (1,508 )     6,953       (4,785 )
State
    (173 )     797       (551 )
 
           
 
                       
 
    (1,681 )     7,750       (5,336 )
 
           
 
                       
 
  $ (15,593 )   $ (36,539 )   $ (22,168 )
 
           

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Temporary differences and carryforwards which give rise to the deferred income tax assets and liabilities are as follows:
                 
    June 3,     May 28,  
    2006     2005  
       
    (dollars in thousands)  
Deferred tax liabilities:
               
Property and equipment
  $ (127,815 )   $ (143,426 )
Intangibles
    (43,415 )     (41,849 )
Other
    (9,908 )     (6,190 )
 
       
 
               
Gross deferred tax liabilities
    (181,138 )     (191,465 )
 
       
 
               
Deferred tax asset:
               
Payroll and benefits accruals
    87,189       96,509  
Self-insurance reserves
    79,835       78,503  
Net operating loss carryforwards
    41,302       16,945  
Other
    16,010       4,997  
 
       
 
               
Gross deferred tax assets
    224,336       196,954  
Less: Valuation allowance
    (98,193 )     (62,165 )
 
       
 
               
Net deferred tax asset
    126,143       134,789  
 
       
 
               
Net deferred tax liability
  $ (54,995 )   $ (56,676 )
 
       
Our deferred tax assets and liabilities are included in our consolidated balance sheets as follows:
                 
    June 3,     May 28,  
    2006     2005  
       
    (dollars in thousands)  
Other current assets
  $ 22,824     $ 33,496  
Deferred income taxes (non-current)
    (77,819 )     (90,172 )
 
       
 
               
Net deferred tax liability
  $ (54,995 )   $ (56,676 )
 
       
As of June 3, 2006, we have a federal net operating loss carryforward of $106.8 million which expires in May 2025 and May 2026 and state net operating loss carryforwards which expire by May 2026. We also have a federal Alternative Minimum Tax Credit which can be carried forward indefinitely of $0.7 million.
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 2005, we recorded a valuation allowance of $5.6 million related to deferred tax assets originating in prior years due to a change in circumstances causing a change in judgment about our ability to realize the value of the assets. During fiscal years 2006 and 2005 we recorded additional valuation allowances relating to deferred tax assets originating in those years.
18. Commitments and Contingencies
In the third quarter of fiscal 2004, we entered into a long-term arrangement with a third party to perform certain information technology functions. This agreement was subsequently amended in April 2005. The commitments under this amended agreement for fiscal 2007 through fiscal 2009 are approximately $8.9 million, $9.0 million and $6.8 million, respectively. Beginning in fiscal 2007, we may cancel this agreement upon six months’ notice, but in the event of our cancellation, we would be required to pay termination fees related to the third party’s initial costs

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and out-of-pocket costs associated with discontinuing those services. The termination fees decrease over the term of the agreement.
In the fourth quarter of fiscal 2004, we entered into a long-term arrangement with a third party to perform certain finance and data maintenance administrative functions. This agreement was subsequently amended in April 2005. The commitments under this amended agreement are approximately $5.0 million each for fiscal 2007 through fiscal 2010 and $3.9 million in fiscal 2011. Beginning in fiscal 2007, we may cancel this agreement upon six months’ notice.
We entered into a long-term arrangement with a third party to perform certain data center services functions. The commitments under this agreement are approximately $2.4 million each for fiscal 2007 and 2008 and $1.8 million for fiscal 2009.We may cancel this agreement upon six months’ notice, but in the event of our cancellation, we would be required to pay termination fees related to the third party’s initial costs and out-of-pocket costs associated with discontinuing those services. The termination fees decrease over the term of the agreement.
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.

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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 have continued to cooperate fully with the SEC’s investigation. On November 2, 2006, we announced that we had submitted an offer of settlement to the staff of the Division of Enforcement of the SEC in connection with the investigation. The proposed settlement is subject to approval by the Commission. IBC has been informed that the staff of the Division of Enforcement has determined to recommend the settlement to the Commission. However, IBC cannot give assurance that the Commission will approve the proposed settlement. As part of the proposed settlement, IBC will consent, without admitting or denying the allegations by the SEC, to the entry of a cease and desist order from the SEC against future violations of the record-keeping, internal controls and reporting provisions of the federal securities laws and related SEC rules. No fines would be imposed under the proposed settlement.
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 February and March 2003, seven putative class actions were brought against us and certain of our current or former officers and directors in the United States District Court for the Western District of Missouri. The lead case is known as Smith, et al. v. Interstate Bakeries Corp., et al., No. 4:03-CV-00142 FJG (W.D. Mo.). The seven cases have been consolidated before a single judge and a lead plaintiff has been appointed by the Court. On October 6, 2003, plaintiffs filed their consolidated amended class action complaint. The putative class covered by the complaint is made up of purchasers or sellers of our stock between April 2, 2002 and April 8, 2003. On March 30, 2004, we and our insurance carriers participated in a mediation with the plaintiffs. At the end of that session, the parties reached a preliminary agreement on the economic terms of a potential settlement of the cases in which our insurers would contribute $15.0 million and we would contribute $3.0 million. We also agreed with plaintiffs and our carriers to work towards the resolution of any non-economic issues related to the potential settlement, including documenting and implementing the parties’ agreement. On September 21, 2004, the parties executed a definitive settlement agreement consistent with the terms of the agreement reached at the mediation. The settlement agreement was subject to court approval after notice to the class and a hearing. In connection with the potential settlement, we recorded a charge of $3.0 million during fiscal 2004, which is classified in liabilities subject to compromise at June 3, 2006.
As a result of our Chapter 11 filing, further proceedings in the case were automatically stayed. The settlement agreement provided, however, that the parties would cooperate in seeking to have the Bankruptcy Court lift the automatic stay so that consideration and potential approval of the settlement could proceed. A motion to lift the stay was filed with the Bankruptcy Court on November 24, 2004, and the Bankruptcy Court entered an order granting this motion on April 8, 2005, so that the parties could seek final approval of the settlement agreement from the District Court where the litigation was pending. On September 8, 2005, the District Court entered a final order approving the settlement agreement. We understand that even though the settlement was approved, plaintiffs received an allowed, pre-petition unsecured claim in our Chapter 11 case that may be subject to subordination to the claims of other unsecured creditors.
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

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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.
On December 3, 2003, we were served with a state court complaint pending in the Superior Court of the State of California, County of Los Angeles, captioned Mitchell N. Fishlowitz v. Interstate Brands Corporation, Case No. BC305085. On December 31, 2003, Fishlowitz filed a first amended complaint in Los Angeles County Superior Court. On that date, the state court, at our request, removed the action from the state court to the United States District Court for the Central District of California. On January 8, 2004, we filed an answer to the first amended complaint. The action pending in the District Court was captioned Fishlowitz, et al., etc. v. Interstate Brands Corporation, Inc., Case No. CV03-9585 RGK (JWJx).
The plaintiff alleged violations of the Fair Labor Standards Act, various California Labor Code Sections, and violations of the California Business and Professions Code and California Wage Orders. The plaintiff sought class certification alleging that we failed to pay overtime wages to route sales representatives (RSRs) in California, that the wages of RSRs employed in California were not accurately calculated, that RSRs in California were not properly granted or compensated for meal breaks and that the plaintiff and other RSRs were required to pay part of the cost of uniforms, which the plaintiff alleged violates California state wage and hour laws. The plaintiff also asserted other minor claims with respect to California state wage and hours laws.
On February 16, 2005, the plaintiff, on behalf of the purported class of individuals similarly situated, filed a motion to lift the automatic stay to continue the prosecution of the underlying action in the California district court against us and non-debtor codefendants. The parties engaged in extensive settlement discussions in an attempt to resolve the action. On August 24, 2005, the parties engaged in mediation before a sitting bankruptcy court judge from the Western District of Missouri. During the course of mediation, the parties reached an agreement in principal regarding the economic terms of a settlement of the action. On September 29, 2005, we requested that the Bankruptcy Court approve the agreement between Fishlowitz, on behalf of himself individually, and as representative of a settlement class and Interstate Brands Corporation and conditionally approve (i) a $6 million general, prepetition unsecured class claim and (ii) a $2 million administrative expense class claim, which was paid in December 2006. On September 29, 2005, the Bankruptcy Court conditionally approved the relief requested, subject to (i) the relevant parties finalizing the settlement agreement and (ii) the Company and the constituents entering into and submitting to the Bankruptcy Court an agreed order on the motion. On October 28, 2005, the Bankruptcy Court entered a final order approving the settlement agreement, subject to entry of a final order from the California district court approving the settlement agreement. The California district court entered a final order approving the settlement on July 24, 2006. We have previously recorded the total amount of the settlement as a first quarter fiscal 2005 charge to operations.
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 this litigation.
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.
In February 1998, a class action was brought against us in the Circuit Court of Cook County, Illinois, Chancery Division captioned Dennis Gianopolous, et al. v. Interstate Brands Corporation and Interstate Bakeries Corporation, Case No. 98 C 1073. We obtained summary judgment on several of the class plaintiffs’ claims and in July 2003 the court decertified a class claim for medical monitoring. The remaining three claims all allege breach of warranty. The court entered summary judgment in favor of the individual named plaintiff as to liability on one of those claims, but denied plaintiff’s motion for summary judgment as to damages for that claim. In June 2004, the court decertified the class of non-Illinois consumers of the recalled snack cakes. On August 23, 2004, plaintiff’s counsel filed a second amendment to the complaint identifying proposed new class representative(s) for the purported Illinois class. As a result of our Chapter 11 filing, the case was automatically stayed. Pending Bankruptcy Court and Circuit Court approval, we agreed to settle the case by providing coupons to a class of consumers in twenty-three states. On

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March 3, 2005, the Bankruptcy Court granted relief from the automatic stay to allow the proposed settlement class and us to proceed in the Circuit Court of Cook County to seek approval and implementation of the settlement. On July 17, 2006, the Circuit Court held a final fairness hearing and approved the settlement. We recorded a charge of $0.8 million in the first quarter of fiscal 2005 based upon this settlement.
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.
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 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 June 3, 2006, we have recorded a net pension benefit obligation liability of approximately $58.0 million with respect to our respective interest in the ABA Plan, reflecting its characterization as an aggregate of single employer plans.

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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.
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. See Note 11. Employee Benefit Plans – American Bakers Association Retirement Plan to these consolidated financial statements for a discussion of these assessments from the ABA Plan.
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 October 30, 2006, Brencourt Advisors, LLC (“Brencourt”), 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 “Delaware Action”). The Delaware Action seeks to compel us pursuant to Section 211 of the Delaware General Corporation Law to convene an annual meeting of stockholders for the purpose of electing directors. We have not held an annual meeting of stockholders since September 23, 2003.
On November 29, 2006, we filed a motion with the Bankruptcy Court in response to the Brencourt Delaware Action. The motion we filed with the Bankruptcy Court seeks (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 Delaware Action.
The trial of the Delaware Action in the Court of Chancery is scheduled for December 27, 2006. If that trial proceeds, we expect that the Court of Chancery will compel us to hold an annual meeting during the first three months of 2007. However, the Bankruptcy Court has scheduled a hearing date of December 21, 2006 for our motion in response to the Delaware Action. There can be no assurance that the Bankruptcy Court will grant us the relief that we seek in that motion, including the injunction preventing Brencourt from continuing the Delaware Action. If the Delaware Action is allowed to proceed and we are compelled to hold an annual meeting of stockholders, the election of directors at such meeting could result in a change of control of the majority of our Board of Directors. This change of control could adversely affect the success of our restructuring process, as well as our financial condition, results of operations and cash flows. Such a change would constitute an event of default under the DIP Facility and trigger significant claims under management continuity agreements with certain of our key senior executives in the event any of these executives is terminated within two years of the change in control.
In addition, the uncertainty created by the threat of a change of control of our Board of Directors as contemplated by the Delaware Action is undermining (i) our permanent CEO search process, (ii) the development of a credible long- term business plan for the Company based on current results, (iii) the exploration of potential availability of financing for the Company to facilitate a plan of reorganization to emerge from Chapter 11, (iv) our ability to regain lost customers and take advantage of new business opportunities and (v) the availability of adequate credit terms from our vendors and creditors. These activities are vital components of our restructuring process, and if such uncertainty persists, it could have an adverse affect on the success of our restructuring process, as well as our financial condition, results of operations and cash flows.
We are currently in discussions with the major constituent groups in our Chapter 11 proceedings to arrive at a consensual resolution that would result in the dismissal of the Delaware Action and a modification of our motion filed in the Bankruptcy Court in response to the Delaware Action. The consensual resolution being discussed contemplates that our modified motion would seek an order of the Bankruptcy Court reconstituting the Board of Directors to consist of several new members as well as several existing members of our Board of Directors. While there can be no assurance that a consensual resolution will be reached, if the parties are able to agree and the Bankruptcy Court grants the requested order on a reasonably prompt basis, we expect that the risks presented by the Delaware Action discussed above would no longer pose a significant threat to our restructuring process or our financial condition, results of operations and cash flows.
Except as noted above, the Company cannot currently estimate a range of loss or gain for the items disclosed herein; however, the ultimate resolutions could have a material impact on our 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,

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we are not aware of any other items as of this filing which could have a material adverse effect on our consolidated financial statements.
19. Stock Repurchases
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 June 3, 2006, approximately 7.4 million shares of IBC common stock were available to be purchased under this stock repurchase program. As a result of our bankruptcy filing and restrictions imposed by the DIP Facility however, the program has been effectively suspended since the filing.
20. Stockholder Rights Plan
In May 2000, our Board of Directors adopted a stockholder rights plan which provided that a dividend of one preferred stock purchase right was declared for each share of our common stock outstanding and any common shares issued thereafter. The rights are not exercisable until ten business days following either 1) a public announcement that a person or group acquired 15% or more of our common stock (provided such threshold is not exceeded solely as a result of our purchase of stock by us and corresponding reduction in the number of shares outstanding) or 2) the announcement of a tender offer which could result in a person or group acquiring 15% or more of our common stock.
Each right, if exercisable, will entitle its holder to purchase one one-thousandth of a share of our Series A Junior Participating Preferred Stock at an exercise price of $80.00, subject to adjustment. If a person or group acquires 15% or more of our outstanding common stock, the holder of each right not owned by the acquiring party will be entitled to purchase shares of our common stock (or in certain cases, preferred stock, cash or other property) having a market value of twice the exercise price of the right. In addition, after a person or group has become an acquiring person, if we are acquired in a merger or other business combination or 50% or more of its consolidated assets or earning power are sold, each right will entitle its holder to purchase at the exercise price of the right, a number of the acquiring party’s common shares valued at twice the exercise price of the right.
The Board of Directors may redeem the rights at any time before they become exercisable for $0.001 per right and, if not exercised or redeemed, the rights will expire on May 25, 2010.
21. 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 (loss) per share computations:
                         
    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
       
    June 3,     May 28,     May 29,  
    2006     2005     2004  
       
    (in thousands)  
Weighted average common shares outstanding:
                       
Basic and diluted
    45,124       45,010       44,868  
 
                 
Diluted weighted average common shares outstanding exclude options on common stock, unvested restricted stock, deferred shares awarded, and our 6% senior subordinated convertible notes totaling approximately 14.5 million,

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13.3 million, and 6.8 million for fiscal 2006, 2005, and 2004, respectively, because their effect would have been antidilutive. Due to our reported net loss for fiscal 2006, 2005 and 2004, diluted loss per share amounts are not adjusted for the effect of dilutive stock awards.
Dividends per common share were zero for fiscal 2006 and 2005, and $0.21 for fiscal 2004. In March 2004, we announced that our Board of Directors had suspended the dividend on our common stock effective for the fourth quarter of fiscal 2004. 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.
22. Comprehensive Loss
Reconciliations of net loss to comprehensive loss are as follows:
                         
    Fifty-Three     Fifty-Two  
    Weeks     Weeks  
    Ended     Ended  
       
    June 3,     May 28,     May 29,  
    2006     2005     2004  
       
    (dollars in thousands)  
Net loss
  $ (128,317 )   $ (379,280 )   $ (33,370 )
 
           
Other comprehensive income (loss):
                       
Change in fair value of cash flow hedges, net of income taxes of $0, $0, and $2,410, respectively
          (96 )     4,017  
Loss on interest rate swaps reclassified to interest expense, net of income taxes of $0, $0, and $3,380, respectively
          816       5,634  
Commodity derivative (gains) losses reclassified to cost of products sold, net of income taxes of $0, $0, and $2,537, respectively
    (671 )     275       (4,229 )
Minimum pension liability adjustment, net of income taxes of $0, $0, and $4,316, respectively
    4,328       (3,918 )     7,178  
 
           
 
           
 
    3,657       (2,923 )     12,600  
 
           
 
           
Comprehensive loss
  $ (124,660 )   $ (382,203 )   $ (20,770 )
 
           
The balance of accumulated other comprehensive loss consists of the following:
                 
    June 3,     May 28,  
    2006     2005  
             
    (dollars in thousands)  
Derivative instruments
  $     $ 671  
Minimum pension liability adjustment
    (3,878 )     (8,206 )
 
       
 
               
Total
  $ (3,878 )   $ (7,535 )
 
       

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23. 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 the management 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.
In May 2004, we began a company-wide operational reorganization and implementation of a new accounting software system. These two events had a significant impact on our internal organization and our method of generating financial information. As a result, 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 88.3% and 88.0% of our fiscal 2006 and 2005, respectively, net sales 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 11.7% and 12.0% of our fiscal 2006 and 2005, respectively, net sales 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.
During fiscal 2006, one customer accounted for approximately $410.3 million or 15.2% and 13.4% of our wholesale operations and total consolidated 2006 fiscal net sales, respectively. In 2005, the same customer accounted for approximately $412.0 million or 13.8% and 12.1% of our wholesale operations and total consolidated 2005 fiscal net sales, respectively. No other customer accounted for 10% or more of our consolidated net sales. The top five customers accounted for approximately 29.2% and 25.7% of our wholesale operations and total consolidated 2006 fiscal net sales, respectively, compared to fiscal 2005 of 27.7% and 24.3%, respectively.
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.
Our products within both of our reportable segments are fresh baked goods. All of our revenues from external customers and all of our long–lived assets are in the United States of America.
The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies in Note 2. Description of Business and Significant Accounting Policies to these consolidated financial statements.
The measurement of reportable segment results is generally consistent with the presentation of the consolidated statement of operations. Intersegment transfers of products at cost aggregated approximately $120.7 million and $146.0 million for the fiscal years ended June 3, 2006 and May 28, 2005, respectively.
With the way we tracked and allocated expenses, along with our accounting software systems in use prior to June 2004, we did not have the ability to produce segment level income statement information other than net sales and to generate this information manually would be impracticable. Therefore, our segment information provided in the table below is for fiscal 2006 and 2005 only. For fiscal 2004, reportable segment net sales consisted of $3,036.3 million for Wholesale Operations and $431.3 million for Retail Operations, totaling $3,467.6 million.

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    Fifty-Three     Fifty-Two  
    Weeks Ended     Weeks Ended  
             
    June 3, 2006     May 28, 2005  
 
    (dollars in thousands)  
Net Sales
               
Wholesale operations
  $ 2,701,751     $ 2,995,481  
Retail operations
    358,722       408,024  
 
       
 
               
Total net sales
  $ 3,060,473     $ 3,403,505  
 
       
 
               
Operating Income (Loss)
               
Wholesale operations
  $ (7,353 )   $ 43,874  
Retail operations
    10,682       7,264  
 
       
 
               
 
    3,329       51,138  
Corporate
    (59,697 )     (386,674 )