Sept. 22 (Bloomberg) -- Interstate Bakeries Corp. filed for bankruptcy, a casualty of a changing American diet that cut demand for carbohydrate-rich breads and cakes such as the 74-year- old company's Wonder Bread and Hostess Twinkies.

Chief Executive Officer James R. Elsesser quit and was replaced by turnaround specialist Antonio C. Alvarez, according to Chapter 11 papers filed in U.S. Bankruptcy Court in Kansas City, Missouri, the company's hometown.

Interstate, the largest U.S. wholesale baker, listed $1.63 billion of assets and $1.32 billion of debts in the filing. The company, which makes breads and cakes under names including Home Pride, Sunbeam, Dolly Madison and Drake's, follows New World Pasta Co. and Jays Foods LLC into bankruptcy as the growing popularity of low-carbohydrate diets such as the Atkins program erodes revenue.

``Consumer interest in low-carbohydrate diets has contributed to the reduced demand for'' Interstate's products, Chief Financial Officer Ronald Hutchison said in court papers. ``Reduced carbohydrate consumption increased during the last fiscal year as a result of the popularity of diets such as the Atkins and South Beach diets.''

As many as 24 million Americans may be on low-carbohydrate diets including the one advocated by late author Robert Atkins, research firm Opinion Dynamics Inc. said in February. The diets limit calorie-laden foods such as bread, cakes, pasta and rice.

New World Pasta, the maker of Ronzoni and Creamette brand pastas, sought bankruptcy protection in May, and Jays Foods, which makes Jays potato chips, Krunchers and O-Ke-Doke popcorn, filed in March.

Fuel Costs, Pensions

Interstate, with 54 bakeries and 32,000 workers, also blamed higher energy costs, increased competition and rising employee pension obligations for its need to reorganize under court supervision. It started closing bakeries last year to cut costs and suspended its dividend in March as losses mounted.

The company twice this year missed deadlines for a required report to the U.S. Securities and Exchange Commission, citing a new financial data system and a government investigation of its workers' compensation accounts.

Not submitting the document by Sept. 26 might jeopardize the company's ability to draw on $778 million in loans from banks led by JPMorgan Chase & Co., Interstate said last month. On Sept. 10, the company said it had lined up $255 million in new financing.

Interstate has arranged a $200 million loan from lenders led by JPMorgan Chase to help fund operations during reorganization, according to the court filing.

Interstate hasn't reported earnings since April, when it announced a $6.6 million loss for the 16 weeks ended March 6. For the year ended May 29, the company had a $26 million loss on $3.47 billion in net sales, according to court filings.

Ding Dongs, Yodels

Founded in Kansas City in 1930 by Ralph Leroy Nafziger, Interestate grew through buying smaller competitors. It merged in 1937 with local rival, Schulze Baking, and acquired Supreme Baking of Los Angeles in 1943, and O'Rourke Baking of Buffalo, New York in 1950, according to Hoover's Inc.

In 1998, Interstate Bakeries bought John J. Nissen Baking, adding Drake's cakes sold under names such as Ring Dings and Yodels to the company's product line.

Wonder Bread is the top-selling U.S. bread brand and Home Pride is the top-selling wheat brand, according to the bankruptcy filing. Hostess products such as Ding Dongs, HoHos, Twinkies and Sno-Balls are among the top-selling snack cakes.

Interstate plans to use bankruptcy to improve its cost structure and profitability as well as ``evaluate opportunities to continue to improve their product mix to meet changing consumer tastes,'' Hutchison said.

Shares of Interstate Bakeries fell 13 cents to $3.27 in New York Stock Exchange composite trading yesterday. The shares have fallen 77 percent this year.

Bankruptcy Team

Preparing for a possible bankruptcy, Interstate in August hired Alvarez's turnaround firm, Alvarez & Marsal, and earlier this month retained investment bankers Miller, Buckfire, Lewis, Ying & Co. to help it reorganize.

Hutchison, who along with Miller Buckfire helped bring Kmart Corp. and Aurora Foods out of bankruptcy last year, was hired in July as chief financial officer.

Alvarez & Marsal is a New York-based company that helps corporations trying to avoid bankruptcy or reorganize under court supervision. Its latest clients include HealthSouth Corp., the largest U.S. operator of physical-therapy hospitals; Spiegel Inc., owner of the Eddie Bauer stores; and U-Haul International Inc. parent Amerco Inc.

Alvarez helped guide Warnaco Group Inc., the maker of Calvin Klein jeans and Speedo swimsuits, out of bankruptcy in 2003 as the New York-based company's chief executive officer.

Skadden, Arps, Slate, Meagher & Flom LLP, one of the biggest U.S. law firms, has been hired as Interstate's bankruptcy counsel, according to court papers.

Creditors

About 81 percent of Interstate's 32,000 employees are represented by unions, including the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, according to court filings.

Unions make Interstate's employee wages ``generally higher'' and the company's ``ability to implement productivity improvements and effect savings with respect to health-care, pension and other retirement costs is more restricted than that of many non-union competitors,'' Hutchison said in the filing.

Highbridge International LLC and Isotope Limited, each owed $35 million for convertible notes, are listed in the filing as Interstate Bakeries' largest unsecured creditors. The company has $100 million of 6 percent senior subordinated convertible notes maturing in 2014, that were issued last month, court papers show.

The case is In re Interstate Bakeries, Case no. 04-45814 in U.S. Bankruptcy Court in Kansas City, Missouri.

To contact the reporter on this story: Jeff St.Onge in Washington jstonge@bloomberg.net.

Last Updated: September 22, 2004 06:21 EDT