0001104659-03-006993.txt : 20030422 0001104659-03-006993.hdr.sgml : 20030422 20030422172201 ACCESSION NUMBER: 0001104659-03-006993 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20030308 FILED AS OF DATE: 20030422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERSTATE BAKERIES CORP/DE/ CENTRAL INDEX KEY: 0000829499 STANDARD INDUSTRIAL CLASSIFICATION: BAKERY PRODUCTS [2050] IRS NUMBER: 431470322 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11165 FILM NUMBER: 03658818 BUSINESS ADDRESS: STREET 1: 12 E ARMOUR BLVD CITY: KANSAS CITY STATE: MO ZIP: 64111 BUSINESS PHONE: 8165024000 MAIL ADDRESS: STREET 1: 12 E ARMOUR BLVD CITY: KANSAS CITY STATE: MO ZIP: 64111 FORMER COMPANY: FORMER CONFORMED NAME: IBC HOLDINGS CORP DATE OF NAME CHANGE: 19910612 10-Q 1 j9625_10q.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

(Mark One)


ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 8, 2003

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-11165

INTERSTATE BAKERIES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware						43-1470322
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

12 East Armour Boulevard, Kansas City, Missouri						64111
(Address of principal executive offices)						(Zip Code)

(Registrant’s telephone number, including area code) (816) 502-4000


(Former name, former address and former fiscal year, if changed since last report.)

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 ý

No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý

No o

There were 44,804,774 shares of common stock, $.01 par value per share, outstanding on April 14, 2003.

INTERSTATE BAKERIES CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 8, 2003

CONTENTS

Description

PART I - FINANCIAL INFORMATION (UNAUDITED)


	Consolidated Balance Sheets

	Consolidated Statements of Operations

	Consolidated Statements of Cash Flows

	Notes to Consolidated Financial Statements

	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Quantitative and Qualitative Disclosures About Market Risk

	Controls and Procedures

	Forward-Looking Statements

PART II - OTHER INFORMATION

	Legal Proceedings

	Exhibits and Reports on Form 8-K

	Signatures

	Certifications

INTERSTATE BAKERIES CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 8, 2003			June 1, 2002
	(In thousands)
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts of $4,384,000 ($4,200,000 at June 1)	$	184,540		$	197,083
Inventories	82,045			80,139
Other current assets	78,887			67,610
Total current assets	345,472			344,832

Property and equipment:
Land and buildings	451,179			426,322
Machinery and equipment	1,099,190			1,051,861

	1,550,369			1,478,183
Less accumulated depreciation	(690,414		)	(633,178		)
Net property and equipment	859,955			845,005
Goodwill	215,346			215,346
Intangibles	192,186			189,059
Other assets	7,461			8,700
	$	1,620,420		$	1,602,942

Liabilities and Stockholders’ Equity
Current liabilities:
Long-term debt payable within one year	$	51,328		$	39,500
Accounts payable	111,607			126,348
Accrued expenses	253,106			220,541
Total current liabilities	416,041			386,389

Long-term debt	535,228			581,438
Other liabilities	185,428			186,746
Deferred income taxes	144,803			147,139
Total long-term liabilities	865,459			915,323

Stockholders’ equity:
Preferred stock, par value $.01 per share; authorized - 1,000,000 shares; issued - none	—			—
Common stock, par value $.01 per share; authorized - 120,000,000 shares; issued - 81,579,000 shares (80,684,000 at June 1)	816			807
Additional paid-in capital	586,836			568,315
Retained earnings	451,093			428,434
Treasury stock, at cost - 36,775,000 shares (36,858,000 at June 1)	(689,858		)	(691,369		)
Accumulated other comprehensive loss	(9,967		)	(4,957		)
Total stockholders’ equity	338,920			301,230
	$	1,620,420		$	1,602,942

See accompanying notes (unaudited).

INTERSTATE BAKERIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Sixteen Weeks Ended						Forty Weeks Ended
	March 8, 2003			March 9, 2002			March 8, 2003			March 9, 2002
	(In thousands, except per share data)

Net sales	$	1,045,574		$	1,047,723		$	2,707,761		$	2,698,837

Cost of products sold	522,543			501,228			1,320,992			1,283,129
Selling, delivery and administrative expenses	487,489			480,097			1,223,072			1,212,616
Other charges	5,000			—			10,041			25,700
Depreciation and amortization	29,098			29,292			72,821			73,394
	1,044,130			1,010,617			2,626,926			2,594,839
Operating income	1,444			37,106			80,835			103,998

Other income	(32		)	(83		)	(78		)	(333		)
Interest expense	12,172			10,707			30,172			28,724
	12,140			10,624			30,094			28,391

Income(loss) before income taxes	(10,696		)	26,482			50,741			75,607
Provision for income taxes	(3,947		)	9,745			18,723			27,823
Net income(loss)	$	(6,749	)	$	16,737		$	32,018		$	47,784

Earnings(loss) per share:
Basic	$	(.15	)	$	.33		$	.72		$	.94

Diluted	$	(.15	)	$	.32		$	.71		$	.92

See accompanying notes (unaudited).

INTERSTATE BAKERIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Forty Weeks Ended
	March 8, 2003			March 9, 2002
	(In thousands)
Cash flows from operating activities:
Net income	$	32,018		$	47,784
Depreciation and amortization	72,821			73,394
Change in other assets-deferred financing fees	1,326			2,953
Non-cash common stock award	3,591			—
Loss on sale/write-down of property and equipment	1,633			8,322
Change in operating assets and liabilities:
Accounts receivable	12,543			6,136
Inventories	(1,906		)	(4,571		)
Other current assets	(11,277		)	(2,870		)
Accounts payable and accrued expenses	17,199			22,004
Long-term portion of self-insurance reserves	(402		)	(556		)
Other	(684		)	191
Cash from operating activities	126,862			152,787

Cash flows from investing activities:
Additions to property and equipment	(80,595		)	(53,987		)
Sale of assets	3,384			6,889
Purchase of intangibles	(4,522		)	(283		)
Other	331			(51		)
Cash from investing activities	(81,402		)	(47,432		)

Cash flows from financing activities:
Addition to long-term debt	—			555,000
Reduction of long-term debt	(46,070		)	(649,375		)
Common stock dividends paid	(9,359		)	(10,869		)
Stock option exercise proceeds	10,299			7,541
Acquisition of treasury stock	(188		)	(285		)
Debt issuance costs	(142		)	(7,367		)
Cash from financing activities	(45,460		)	(105,355		)

Change in cash and cash equivalents	—			—

Cash and cash equivalents:
Beginning of period	—			—

End of period	$	—		$	—

Cash payments made:
Interest	$	27,442		$	23,374
Income taxes	25,349			34,049

Non-cash investing and financing activities excluded above:
Accrued deferred share award liability settled through equity issuance	$	7,061		$	—
Equipment purchases financed with capital lease obligations	11,688			—

See accompanying notes (unaudited).

INTERSTATE BAKERIES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Accounting Policies and Basis of Presentation

The accompanying unaudited consolidated financial statements should be read in conjunction with our fiscal 2002 consolidated financial statements contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) on August 23, 2002. Any references, unless otherwise noted, to “us”, “we” and “our” refer to Interstate Bakeries Corporation and its subsidiaries (IBC), taken as a whole.

These consolidated financial statements include all adjustments, consisting only of normal recurring accruals (except for the accruals for other charges discussed in Note 5), which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year.

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.

Certain reclassifications have been made to our fiscal 2002 consolidated financial statements to conform to the fiscal 2003 presentation.

2. Inventories

The components of inventories are as follows:

	March 8, 2003		June 1, 2002
	(In thousands)

Ingredients and packaging	$	53,252	$	51,444
Finished goods	23,536		23,595
Other	5,257		5,100
	$	82,045	$	80,139

3. Income Taxes

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

	Forty Weeks Ended
	March 8, 2003		March 9, 2002

Statutory federal tax	35.0	%	35.0	%
State income tax	2.7		2.0
Other	(.8	)	(.2	)
	36.9	%	36.8	%

4. Earnings Per Share

Following is a reconciliation between basic and diluted weighted average shares outstanding used in our earnings per share computations:

	Sixteen Weeks Ended		Forty Weeks Ended
	March 8, 2003	March 9, 2002	March 8, 2003	March 9, 2002
	(In thousands)
Basic weighted average common shares outstanding	44,783	50,896	44,537	50,769

Effect of dilutive stock compensation	—	1,300	800	1,168

Dilutive weighted average common shares outstanding	44,783	52,196	45,337	51,937

Diluted weighted average common shares outstanding exclude options on common stock and deferred shares awarded of 6,621,000 and 2,867,000 for the third quarter of fiscal 2003 and 2002, respectively, and 5,384,000 and 3,773,000 on a year-to-date basis for fiscal 2003 and 2002, respectively, because their effect would have been antidilutive. The third quarter of fiscal 2003 does not have any effect of dilutive stock compensation because we reported a net loss.

Dividends per common share were $.07 for the third quarter of fiscal 2003 and 2002, and $.21 per common share for year-to-date fiscal 2003 and 2002.

On March 26, 2003, our Board of Directors declared a cash dividend of $.07 per common share. The dividend will be paid on May 1, 2003 to shareholders of record as of April 15, 2003.

5. Other Charges

Restructuring charges. During the third quarter of fiscal 2003, we incurred other charges (including severance, other exit costs and asset impairments) of $5,000,000 related to closures of four bakeries and 62 thrift stores and restructurings of several other bakeries. As part of various initiatives to reduce our manufacturing and distribution cost structures, the planned opening of our new bakery in Henderson, Nevada, as well as improvements to other facilities is allowing us to close less efficient operations. The severance charge is associated with the involuntary employee separation of approximately 475 employees. As of March 8, 2003, 129 employee separations had been completed. We expect these closings and separations to be completed by the second quarter of fiscal 2004. The other exit costs relate to lease cancellations, as well as charges for security, utilities and cleanup for a bakery that has been closed and is being readied for potential sale. Asset impairments primarily relate to the write-down to fair value of machinery and equipment in the bakeries to be closed.

The following table summarizes the restructuring charges incurred in the third quarter of fiscal 2003, with the related liability included in accrued expenses in the unaudited consolidated balance sheet:

	Restructuring Charge		Cash Payment		Non-Cash Adjustment		March 8, 2003 Liability Balance
	(In thousands)
Severance costs	$	2,509	$	—	$	—	$	2,509
Other exit costs	291		102		—		189
Asset impairments	2,200		—		2,200		—
Total	$	5,000	$	102	$	2,200	$	2,698

Certain other exit costs, principally maintenance and cleanup related to closed facilities, are being expensed as incurred and we expect to incur such costs related to these restructurings in future quarters. In addition, as we continue to evaluate opportunities to reduce our manufacturing and distribution cost structures, we may incur additional restructuring charges related to the closing of other bakeries, distribution facilities and thrift stores, including the relocation of some bakery equipment to more efficient facilities.

During the second quarter of fiscal 2003, we incurred restructuring charges of $1,450,000 related to cash severance costs in conjunction with the closing of a bakery. This bakery has been closed and all 164 separations have been completed as of the fourth quarter with $977,000 of the severance costs paid in the third quarter of fiscal 2003. The remaining liability of $473,000 is included in accrued expenses in the March 8, 2003 unaudited consolidated balance sheet.

Former CEO fully vested common stock award. Included in second quarter other charges was an October 1, 2002 fully vested common stock award of $3,591,000 to our former Chief Executive Officer.

Fiscal 2002 activities. During the first quarter of fiscal 2002, we incurred other charges of $25,700,000, representing costs related to the closure of a bakery, as well as settlement of an employment discrimination lawsuit. The bakery was closed and all separations were completed during fiscal 2002. We paid approximately 80% of the settlement amount in fiscal 2002, shortly following

the date of the settlement agreement, and paid the remaining 20% of the settlement amount in fiscal 2003.

6. Derivative Instruments

We use derivative instruments, principally commodity derivatives and interest rate swap agreements, to manage certain commodity price and interest rate risks. All financial instruments are used solely for hedging purposes and are not issued or held for speculative reasons.

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.

The majority of our derivative instruments are designated and qualify as cash flow hedges and we apply hedge accounting as allowed by Statement of Financial Accounting Standards, or SFAS, No. 133. Gains or losses on cash flow hedges are recorded to other comprehensive loss, or OCI, to the extent they are effective, and are reclassified to earnings in the period in which the hedged forecasted transaction impacts earnings. For hedges of future ingredient needs, earnings are impacted when our products are produced. However, we from time to time enter into commodity derivatives which economically hedge certain of our risks even though the criteria for hedge accounting are not met or we do not elect to apply hedge accounting. When such criteria are not met, any impact on earnings for these hedges is recorded in the consolidated statements of operations on the cost of products sold line.

We enter into interest rate swap agreements with major banks and institutional lenders to manage the interest rate risk associated with our variable rate debt. During the first quarter of fiscal 2003, we amended interest rate swap agreements with a notional amount of $170,000,000, extending the terms by one year and reducing the fixed interest rates. Neither party was required to make a cash payment to effect these amendments. At the date of the amendments, these instruments had a loss, net of income taxes, of $2,817,000 accumulated in other comprehensive loss, which will be reclassified into interest expense over the remaining term of the original hedged period. This reclassification will be offset by the change in fair value of the new swap agreements over the term of these agreements. The fiscal 2003 net-of-tax amounts reclassified into interest expense related to this item were $925,000 for the third quarter and $1,718,000 year-to-date. The amended swap agreements have been redesignated as cash flow hedges of variable rate debt.

Considering these amendments and based upon current debt ratings, our current interest rate swaps fix interest rates on $440,000,000 from 4.97% to 7.66% with termination dates ranging from April 2004 to August 2004. These swap agreements qualify for cash flow hedge accounting as defined by SFAS No. 133 with changes in fair value of the swap agreements recorded to OCI to the extent the hedge is effective on a quarterly basis.

At March 8, 2003, we had accumulated losses of $7,944,000, net of income taxes and amounts reclassified to earnings, related to interest rate swaps and recorded to OCI, with offsetting entries to accrued expenses and other liabilities.

The fair value of our interest rate swaps at March 8, 2003 was a loss of $9,662,000, net of income taxes. At March 8, 2003, we also had accumulated losses of $2,023,000, net of income taxes, related to commodity derivatives and recorded to OCI, with an offsetting entry to accrued expense for the unrealized loss of $339,000. In addition, at March 8, 2003, we had accumulated losses on commodity hedges that did not meet the criteria for hedge accounting or for which we did not elect to apply hedge accounting of $781,000, net of income taxes, that were recorded to cost of products sold and accrued expenses. We did not recognize any gain or loss in earnings resulting from hedge ineffectiveness. The fair value of all commodity derivatives at March 8, 2003 was a loss of $1,120,000, net of income taxes.

The changes to OCI related to hedging activities for the third quarter and the year-to-date periods of fiscal 2003 were as follows:

	Sixteen Weeks Ended March 8, 2003			Forty Weeks Ended March 8, 2003
	(In thousands)
Accumulated OCI at June 1, 2002, net of income taxes of $2,974,000	$	—		$	(4,957	)
Accumulated OCI at November 16, 2002, net of income taxes of $4,705,000	(7,775		)	—
Losses on interest rate swaps reclassified to interest expense	2,919			6,518
Commodity derivative losses reclassified to cost of products sold	—			178
Change in fair value of cash flow hedges	(5,111		)	(11,706		)
Accumulated OCI at March 8, 2003, net of income taxes of $6,032,000	$	(9,967	)	$	(9,967	)

The only item which is currently reflected in OCI is the effect of accounting for these derivative instruments. Comprehensive loss for the third quarter of fiscal 2003 was $8,941,000 and comprehensive income for the third quarter of fiscal 2002 was $18,538,000, while year-to-date comprehensive income was $27,008,000 and $40,572,000 for fiscal 2003 and 2002, respectively.

Of these losses recorded in OCI at March 8, 2003, approximately $8,732,000, net of income taxes, is expected to be reclassified to earnings during the next 12 months.

7. Goodwill and Other Intangibles

Included on our consolidated balance sheets as of March 8, 2003 and June 1, 2002 were the following acquired intangible assets:

	March 8, 2003					June 1, 2002
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
	(In thousands)

Goodwill	$	215,346				$	215,346
Intangibles with indefinite lives (principally trademarks and trade names)	$	180,316				$	176,044
Intangibles with finite lives	$	19,787	$	(7,917	)	$	19,812	$	(6,797	)

Intangible amortization for the third quarter of fiscal 2003 and 2002 was $453,000 and $482,000, respectively, while year-to-date intangible amortization for fiscal 2003 and 2002 was $1,120,000 and $1,214,000, respectively. Of these amounts, $246,000 for the third quarter and $615,000 year-to-date in both fiscal 2003 and 2002 were recorded as a reduction of net sales, with the remainder recorded to amortization expense in the consolidated statements of operations. Intangible amortization for fiscal 2003 through fiscal 2007 is estimated at $1,100,000 to $1,500,000 per year, of which approximately $800,000 per year will be recorded as a reduction of net sales.

8. Capital Lease Obligations

During the second quarter of fiscal 2003, we recorded capital lease obligations of $11,688,000 incurred to finance the purchase of machinery and equipment. The scheduled annual repayment of the capital lease obligations remaining at March 8, 2003, which are included in long-term debt on the consolidated balance sheets, amount to $589,000 in fiscal 2003, $2,446,000 in fiscal 2004, $3,747,000 in fiscal 2005, $2,186,000 in fiscal 2006 and $1,213,000 in fiscal 2007.

9. Deferred Share Award

During the second quarter of fiscal 2003, we granted the right to receive in the future up to 150,000 shares of our common stock under the 1996 Stock Incentive Plan, with a weighted average fair value at the date of grant of

$27.00 per share. The deferred shares, which are accruing dividends in the form of additional shares, vest ratably after one, two and three years of continued employment. Compensation expense related to this award was $414,000 for the third quarter of fiscal 2003 and $588,000 for year-to-date fiscal 2003.

10. Litigation, Claims and Assessments

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. Most of the complaints were brought on behalf of putative classes of shareholders who purchased or sold IBC stock between September 17, 2002 and December 17, 2002. One complaint, however, is brought on behalf of a putative class beginning in April 2002 and several complaints seek to include shareholders who purchased or sold stock through February 11, 2003. The complaints generally allege that certain of our press releases, SEC filings, and other public statements prior to a February 11, 2003 announcement reducing our guidance contained misrepresentations regarding our financial condition. The complaints further allege that certain officers and directors improperly sold IBC shares at artificially inflated prices during the class period. The cases seek compensatory damages (including interest), disgorgement of allegedly improper gains from insider stock sales, costs and expenses and any other relief deemed proper by the court. We have not yet been required to file answers to the complaints. The litigation is in its preliminary stages and the amount of potential loss, if any, cannot reasonably be estimated.

Our Board of Directors has received a shareholder derivative demand requesting legal action by us in connection with sales of IBC shares by certain current or former officers and directors. The Board of Directors has appointed a Special Review Committee to evaluate the demand and to report to the Board.

The New York Stock Exchange also has notified us that its Market Trading Analysis Department is reviewing transactions in the common stock of IBC occurring prior to our February 11, 2003 reduction in guidance. We have responded to the Exchange’s requests for information and expect to cooperate fully in that inquiry.

In November 1996 certain of our route sales representatives (“RSRs”) brought a class action on behalf of RSRs in the State of Washington, alleging that we had failed to pay required overtime wages under state law. The class in the case covers RSRs in the State of Washington who worked for us during all or part of the general period from November 1993 through the date of the settlement. The plaintiffs seek unpaid wages, with interest, and other relief deemed proper by the court. During the quarter, we tentatively settled this class action with the plaintiffs for approximately $6.1 million, subject to notice to the class and final court approval. A preliminary hearing regarding the settlement is scheduled for May 2, 2003, at which the court is expected to put in place a schedule for completing notice and holding a final hearing on the merits of the settlement. We have established reserves that are expected to sufficiently cover the anticipated costs of the settlement, if it is approved

by the court. The amount of potential loss, should the settlement not receive court approval, cannot reasonably be estimated. We also have negotiated and put into effect a new union contract with the RSRs in the State of Washington that we expect to address this issue. We have asked the State of Washington’s Department of Industry and Labor to review and approve the contract’s provision relating to overtime pay.

We are aware of two additional 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. We are also aware of an additional wage and hour case brought on behalf of a putative class of bakery production supervisors under federal law. These cases are in their preliminary stages and we have not filed answers to the complaints. We are evaluating these cases and the amount of potential loss, if any, cannot reasonably be estimated. No amount is currently reserved in the unaudited consolidated financial statements related to these matters.

On July 17, 2002, we were served with a state court complaint which is now pending in the United States District Court for the Northern District of Illinois, filed by one employee and one former employee. This complaint arises, in part, from our removal of insulation alleged to have contained asbestos at one of our bakeries in January 1998. We have also been a defendant in other civil actions arising out of the situation described above. These civil actions seek unspecified monetary damages, funds for medical monitoring and, in one case, damages under the Racketeer Influenced and Corrupt Organizations Act. In addition, in 1998 the U.S. Department of Labor cited us for alleged violation of the Occupational Safety and Health Act, and the office of the U.S. Attorney for the Northern District of Illinois in a joint investigation with Illinois officials began investigating the possibility of criminal violations of the Clean Air Act. The government closed the joint investigation without returning any indictments. In addition, the State of Illinois filed a civil complaint against us alleging the insulation removal violated various provisions of the Illinois Environmental Protection Act. This case was voluntarily dismissed; however, the State has recently sought to refile it pending settlement negotiations. In none of the foregoing cases has any court or governmental body made any factual finding of liability or violation of environmental regulations. Based upon our own investigation, including assistance from third party consultants, we believe that all of these matters are without merit. No amount is currently reserved in the unaudited consolidated financial statements related to these matters.

We are currently undergoing a multi-state abandoned property examination. We have provided and will continue to provide information requested by the states' representatives. No assessments related to this examination have been received at this point in time. We believe the ultimate outcome of this examination will not have a material adverse impact on our financial position or results of operations.

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. In management’s opinion, none of these other matters will have a material adverse effect on our financial

position, but could be material to net income or cash flows for a particular quarter or annual period.

11. Environmental Liabilities

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 extremely 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. There has been no additional accrual recorded for environmental related liabilities in fiscal 2003.

12. Subsequent Events

On April 22, 2003, a rating agency lowered our senior secured ratings. Due to the interest terms included in our senior credit facilities agreement, our annual pre-tax interest expense is expected to increase by approximately $2,200,000 based upon these new ratings.

13. Newly Adopted Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement, which supersedes SFAS No. 121 and was adopted by us at the beginning of fiscal 2003, provides revised guidance regarding the recognition and measurement of impairment losses related to certain long-lived assets and discontinued operations. The adoption of this statement had no impact on our financial position or net income.

Made to Satisfy Sinking-Fund Requirements.” In so doing, SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, unless the criteria in Accounting Principles Board Opinion, or APB, No. 30 are met. SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases” to require that certain lease modifications that have economic effects similar to sale-leaseback transactions are accounted for in the same manner as sale-leaseback transactions and amends other existing authoritative pronouncements to make various technical corrections. The provisions of SFAS No. 145 related to the amendment of SFAS No. 13 were effective for us for transactions occurring after May 15, 2002, while all other provisions of SFAS No. 145 were adopted by us effective with the beginning of fiscal 2003 on June 2, 2002. The adoption of the provisions of this statement had no impact on our financial position or net income.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and is effective for us for exit or disposal activities initiated after the beginning of the second quarter of fiscal 2003, the date of our adoption of this statement.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies disclosures required to be made by a guarantor in its interim and annual financial statements about obligations under certain of its issued guarantees. In addition, the interpretation clarifies that a guarantor is required to recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing these guarantees. The recognition and measurement provisions of this interpretation are applicable to guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for our third quarter fiscal 2003 consolidated financial statements. At March 8, 2003, we have in place various operating leases on equipment which guarantee the equipment’s residual fair market value at lease termination. These leases were entered into on dates from June 1, 1998 through December 16, 2002 and expire on dates from June 30, 2003 through December 15, 2007. The maximum potential amount of future guarantees is $12,896,000. In accordance with FASB Interpretation No. 45, these guarantees have not been recorded on the consolidated balance sheets as of March 8, 2003 as they were in existence prior to the effective date of the interpretation.

14. Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” which requires that the fair value of a liability for an asset retirement obligation be recognized when it is incurred. The related asset retirement costs are capitalized as part of the long-lived asset’s carrying value. SFAS No. 143 will be effective for us during fiscal 2004. We are currently assessing the impact which the adoption of this statement will have on our consolidated financial statements, but we do not expect the impact to be material.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation.” The provisions of this statement are effective for interim and annual financial statements for periods beginning after December 15, 2002. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Also, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We continue to apply APB No. 25 recognition and measurement principles, but will comply with the new disclosure requirements of this statement in the fourth quarter of fiscal 2003.

INTERSTATE BAKERIES CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are discussed in the notes to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended June 1, 2002. 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.

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, are discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended June 1, 2002. Readers are encouraged to review these critical accounting policies and estimates in conjunction with the review of this accompanying Form 10-Q for the quarter ended March 8, 2003.

RESULTS OF OPERATIONS

Net sales. Net sales for the third quarter of fiscal year 2003, the sixteen weeks ended March 8, 2003, were $1,045,574,000, a decrease of $2,149,000, or .2%, from net sales of $1,047,723,000 in fiscal year 2002. Year-to-date net sales for fiscal 2003 increased $8,924,000, or .3%, to $2,707,761,000, from net sales of $2,698,837,000, in fiscal 2002. The slight decline in net sales for the third quarter reflected a unit volume decline of approximately 2.1%, partially offset by price increases of less than 1.0% compared to third quarter of fiscal 2002. The year-to-date increase reflected a .6% reduction in overall unit volume and comparable selling prices.

Gross profit. Gross profit was 50.0% of net sales for the third quarter of fiscal year 2003, down from 52.2% of net sales in fiscal 2002. Year-to-date gross profit was 51.2% of net sales, compared to 52.5% in the prior year. Our fiscal 2003 gross profit margins were negatively impacted by higher ingredient costs, including cocoa, sweeteners, shortenings and the ingredient costs

associated with producing our extended shelf life products. The increase in ingredient costs accounted for 1.1% of our gross profit decline as a percent of net sales for the third quarter of fiscal 2003 and .9% of our gross profit decline for fiscal 2003. In addition, higher employee costs for health care and pension benefits were attributable to .4% of the gross profit decline as a percent of net sales for the third quarter of fiscal 2003 and .5% for fiscal 2003. Also, in the third quarter of fiscal 2003, higher energy costs accounted for .3% of our gross profit decline as a percent of net sales. The remaining variances for the third quarter and year-to-date periods were composed of items that represented .1% or less of net sales.

Selling, delivery and administrative expenses. Selling, delivery and administrative expenses were $487,489,000, representing 46.6% of net sales, for the third quarter of fiscal 2003, up somewhat from fiscal 2002’s selling, delivery and administrative expenses of $480,097,000, or 45.8% of net sales. Year-to-date selling, delivery and administrative expenses for fiscal 2003 amounted to $1,223,072,000, or 45.2% of net sales, increasing on a percent of net sales basis from $1,212,616,000, or 44.9% of net sales, in the prior year. Higher costs for employee benefits, principally health care and pension, were responsible for .6% of the increase as a percent of net sales for the third quarter and year-to-date fiscal 2003. Also, in the third quarter of fiscal 2003, higher energy costs accounted for ..4% of the percent of net sales increase. Partially offsetting these increases was a .2% reduction on a percent of net sales basis in advertising expense for the third quarter and year-to-date fiscal 2003. The remaining variances for the third quarter and year-to-date periods were composed of items that represented ..1% or less of net sales.

Other charges. During the third quarter of fiscal 2003, we incurred other charges of $5,000,000 related to closures of four bakeries and 62 thrift stores and restructurings of several other bakeries during fiscal 2003. Approximately $2,800,000 represents severance and other cash costs and $2,200,000 represents impairment of bakery machinery and equipment. As part of various initiatives to reduce our manufacturing and distribution cost structures, the planned opening of our new bakery in Henderson, Nevada, as well as improvements to several other facilities is allowing us to close less efficient operations.

The severance charge for the third quarter of fiscal 2003 is associated with the involuntary employee separation of approximately 475 employees. As of March 8, 2003, 129 employee separations had been completed. The restructuring should be completed by the end of the second quarter of fiscal 2004. 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 the second quarter of fiscal 2003, we incurred restructuring charges of $1,450,000 related to cash severance costs in conjunction with the announced closing of a bakery. This bakery has been closed and all 164 separations have been completed as of the fourth quarter of fiscal 2003.

Second quarter fiscal 2003 other charges included an October 1, 2002 fully vested common stock award of $3,591,000 to our former Chief Executive Officer.

Other charges of $25,700,000 in fiscal 2002 relate to the closure of a bakery and the settlement of employment discrimination litigation.

Operating income. Based upon the above factors, operating income for the third quarter of fiscal 2003 was $1,444,000, or .1% of net sales, down from the prior year’s operating income of $37,106,000, or 3.5% of net sales. As mentioned above, we incurred $5,000,000 in other charges in the third quarter of fiscal 2003. Year-to-date operating income was $80,835,000, or 3.0% of net sales, in fiscal 2003 compared to $103,998,000, or 3.9% of net sales, in fiscal 2002. On a year-to-date basis, we incurred other charges of $10,041,000 in fiscal 2003 and $25,700,000 in fiscal 2002.

Interest expense. Interest expense for the third quarter of fiscal 2003 was $12,172,000, up $1,465,000 from interest expense in fiscal 2002 of $10,707,000. Year-to-date interest expense in fiscal 2003 was $30,172,000, compared to interest expense of $28,724,000 in fiscal 2002. For these periods, the impact on interest expense of slightly higher borrowing levels during fiscal 2003 was offset by the impact of slightly lower interest rates. However, during fiscal 2003, we reclassified $1,485,000 and $2,758,000 for the third quarter and year-to-date periods, respectively, to interest expense from other comprehensive loss resulting from the amendment of some of our interest rate swap agreements (see Note 6 to the unaudited consolidated financial statements). Year-to-date interest expense for fiscal 2002 included debt fee amortization of approximately $2,000,000 related to our previous debt outstanding.

Income tax expense. The effective income tax rates were 36.9% and 36.8% for fiscal 2003 and fiscal 2002, respectively.

Net income. The net loss for the third quarter of fiscal 2003 was $6,749,000 or $.15 per diluted share, compared to net income of $16,737,000, or $.32 per diluted share in fiscal 2002. Included in the fiscal 2003 results were other charges amounting to $.07 per diluted share. Year-to-date net income in fiscal 2003 was $32,018,000, or $.71 per diluted share, compared to $47,784,000, or $.92 per diluted share, in the prior year. Year-to-date other charges included in net income were $.14 per diluted share for fiscal 2003 and $.31 per diluted share in fiscal 2002.

CAPITAL RESOURCES AND LIQUIDITY

Cash from operating activities for the forty weeks ended March 8, 2003 was $126,862,000, down $25,925,000 from cash generated in fiscal 2002 of $152,787,000. This decrease was primarily attributable to lower net income and working capital variances, notably the timing of payments on accounts payable and accrued expenses. Cash from operating activities, along with proceeds from stock option exercises, was used to fund capital expenditures of $80,595,000, pay common stock dividends of $9,359,000 and reduce debt outstanding by $46,070,000.

Our planned cash needs for fiscal 2003 include approximately $225,244,000, consisting of $39,500,000 of required debt repayments, $2,095,000 of obligations under capital leases, $68,849,000 of obligations under operating leases, $12,200,000 of common stock dividends, $7,600,000 for Program SOAR as detailed below and $95,000,000 of capital expenditures, including funds needed to establish a new bakery in Henderson, Nevada. We believe cash from ongoing operations, along with our borrowing capacity under our credit facilities, will be sufficient to fund our currently anticipated cash needs through fiscal 2003. If we are not able to fund our requirements through cash flow from operations, we may seek additional sources of financing. In either case, additional sources of financing may not be available when needed or may not be available on acceptable terms.

We have commenced a major, company-wide project internally referred to as Program SOAR, an acronym for Systems Optimization And Re-engineering. This program will focus on re-engineering our business processes to increase efficiency and on rationalizing our investment in production, distribution and administrative functionality to reduce the ongoing cost of supporting this infrastructure.

An operating team has been assigned to focus on nine initiatives that have been identified as major areas for profit improvement and cost reduction. The operating team is being supported by a national consulting firm with significant experience in these types of programs in the baking and food industry. The initial phase of this comprehensive review of operational processes has just been completed. Direct costs of the three-year program are expected to be in the $50,000,000 range, with the majority of these costs related to software and hardware acquisition and consulting. Fiscal 2003 cash needs for this program are estimated at $7,600,000. As part of the program, additional costs are anticipated as we identify and implement strategies which are expected to provide future savings. We plan to achieve positive cumulative cash flow from the program by the end of the third year.

During fiscal 2003, we are restructuring certain of our operations, closing five bakeries and 62 thrift stores. The remaining cash costs of $3,171,000 unpaid at March 8, 2003 related to these restructurings are expected to be paid by the second quarter of fiscal 2004. In addition, we expect to incur additional restructuring charges of approximately $4,000,000 during the fourth quarter of fiscal 2003 and further related costs in fiscal 2004 in connection with the restructurings and approximately 38 additional thrift store closings. Also, as we continue to evaluate opportunities to reduce our manufacturing and distribution cost structures, we may incur additional restructuring charges in future periods.

As a result of the fiscal 2003 restructurings, we estimate pre-tax annual savings to be approximately $10,000,000 to $12,000,000 (approximately $6,000,000 to $7,500,000, net of income taxes). Cost of products sold is anticipated to decline between $6,550,000 and $8,000,000, selling, delivery and administrative between $3,000,000 and $3,550,000 and approximately $450,000 will be a non-cash savings related to depreciation expense. Future savings are difficult to estimate and could change depending on market conditions, consolidation difficulties or other factors.

On April 21, 2003, we amended certain financial covenants on our senior credit facilities. While we were in compliance with all covenant requirements, recent performance had raised the possibility that these requirements might not be satisfied going forward. To avoid this possibility, we worked with our lenders to amend the credit facilities for future flexibility. As part of our covenants, we are required to satisfy certain ratios related to net worth, interest coverage and leverage. We have amended the interest coverage and leverage requirements for the next six quarters, or through the first quarter of fiscal 2005. After six quarters, the covenant requirements will revert to the original agreements. As a result of this amendment and a lowered senior security rating by a rating agency on April 22, 2003, we expect additional annual pre-tax interest expense of approximately $4,900,000. However, the favorable impact on interest expense for fiscal 2004 related to the fiscal 2003 reclassification to interest expense of the loss on amended swap agreements (see Note 6 to the unaudited consolidated financial statements) is expected to offset a substantial portion of this increased interest expense.

We amended and extended some of our interest rate swap agreements during the first quarter of fiscal 2003. Based upon current debt ratings, our current interest rate swap agreements fix interest rates on $440,000,000 from 4.97% to 7.66% with termination dates ranging from April 2004 to August 2004.

We have seen costs for some of our principal commodities, primarily sweeteners, cocoa, shortenings and natural gas, rise sharply during the past year and based upon current market conditions, we cannot be assured that these costs will return to more historically normal levels in the near future. We currently have coverage on the majority of our major commodities through the first quarter of fiscal 2004 at costs exceeding those experienced in the prior fiscal year. We have historically attempted to offset cost increases with selling price increases and operational efficiencies. However, if we are not successful in offsetting these increases with pricing and efficiencies, such cost increases could have an adverse effect on our financial results.

The following is a summary of certain of our contractual obligations as of March 8, 2003 and the anticipated impact these obligations will have on future cash flows:

Payments Due By Fiscal Year Under Certain Contractual Obligations

Fiscal Year	Total		Revolving Credit Line(a)		Long Term Debt(a)		Capital Leases		Operating Leases(c)		Unconditional Purchase Obligations(b)
	(In thousands)
2003	$	125,641	$	—	$	9,937	$	589	$	18,112	$	97,003
2004	218,329		—		53,813		2,446		55,928		106,142
2005	119,499		—		58,500		3,747		40,670		16,582
2006	189,395		—		156,937		2,186		26,450		3,822
2007	262,070		35,000		208,500		1,213		17,357		—
Thereafter	76,880		—		53,688		—		23,192		—
Total	$	991,814	$	35,000	$	541,375	$	10,181	$	181,709	$	223,549

(a) Borrowings under our senior secured credit facilities are secured by all of our accounts receivable and a majority of our owned real property, intellectual property and equipment. The revolving credit line has a total capacity of $300,000,000 and allows up to $175,000,000 for letters of credit. We had borrowings outstanding of $35,000,000 under the revolving credit line and $122,330,000 in letters of credit outstanding as of March 8, 2003.

(b) The unconditional purchase obligations represent advance purchase contracts for ingredients and packaging to assure supplies and limit price risks.

(c) At March 8, 2003, we have in place various operating leases on equipment which guarantee the equipment’s residual fair market value at lease termination. These leases were entered into on dates from June 1, 1998 through December 16, 2002 and expire on dates from June 30, 2003 through December 15, 2007. The maximum potential amount of future guarantees is $12,896,000. In accordance with FASB Interpretation No. 45, these guarantees have not been recorded on our consolidated balance sheet as of March 8, 2003, as they were in existence prior to the effective date of the interpretation.

NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In October 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement, which supersedes SFAS No. 121 and was adopted by us at the beginning of fiscal 2003, provides revised guidance regarding the recognition and measurement of impairment losses related to certain long-lived assets and discontinued operations. The adoption of this statement had no impact on our financial position or net income.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds both SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” In so doing, SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, unless the criteria in APB No. 30 are met. SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases” to require that certain lease modifications that have economic effects similar to sale-leaseback transactions are accounted for in the same manner as sale-leaseback transactions and amends other existing authoritative pronouncements to make various technical corrections. The provisions of SFAS No. 145 related to the amendment of SFAS No. 13 were effective for us for transactions occurring

after May 15, 2002, while all other provisions of SFAS No. 145 were adopted by us effective with the beginning of fiscal 2003. The adoption of the provisions of this statement had no impact on our financial position or net income.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We continue to apply APB No. 25 recognition and measurement principles, but will comply with the new disclosure requirements of this statement in the fourth quarter of fiscal 2003.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Commodity prices. Commodities we use in the production of our products are subject to wide price fluctuations, depending upon factors such as weather, crop production, worldwide market supply and demand and government regulation.

To reduce the risk associated with commodity price fluctuations, primarily for wheat, corn, sugar, soybean oil and certain fuels, we sometimes enter into forward purchase contracts and commodity futures and options in order to fix prices for future periods. A sensitivity analysis was prepared and, based upon our commodity-related derivatives positions as of March 8, 2003, an assumed 10% adverse change in commodity prices would not have a material effect on our fair values, future earnings or cash flows.

Interest rates. We enter into interest rate swap agreements to manage the interest rate risk associated with variable rate debt instruments. Based upon current debt ratings, our current interest rate swap agreements fix interest rates on $440,000,000 from 4.97% to 7.66% with termination dates ranging from April 2004 to August 2004. Based upon a sensitivity analysis at March 8, 2003, an assumed 10% adverse change in interest rates would not have a material impact on our fair values, future earnings or cash flows.

CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, we conducted an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date our principal executive officer and principal financial officer completed their evaluation.

FORWARD-LOOKING STATEMENTS

The statements in this Quarterly Report on Form 10-Q that are not historical statements are forward-looking statements within the meaning of federal securities laws. These forward-looking statements include statements relating to: the closure or restructuring of non-performing thrift stores and redundant or less efficient bakeries and the cost and savings associated therewith; availability and costs of raw materials, packaging, fuels and utilities; our cash needs, including capital expenditures, dividends, debt repayment, capital lease obligations, Program SOAR and operating lease commitments; compliance with our credit facilities covenants; Program SOAR; long-term profitability and efficiency; general economic conditions; and the outcome of legal proceedings to which we are or may become a party. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. Factors that could cause actual results to differ materially include, but are not limited to, increased costs or delays in the review of our business model or other problems related thereto; the recent bankruptcy filing by Fleming Companies and other potential similar filings by customers; actions of competitors, including pricing policy and promotional spending; effectiveness of advertising and marketing spending; the availability and costs of raw materials, packaging, fuels and utilities, and the ability to recover these costs in the pricing of products; the effectiveness of hedging activities; the availability of capital on acceptable terms; changes in our business strategies, including our ability to continue to participate in industry consolidation and to integrate successfully businesses we acquire; expenditures necessary to carry out cost-saving initiatives and savings derived from these initiatives; changes in general economic and business conditions (including in the bread and sweet goods markets); changes in consumer tastes or eating habits; further consolidation in the food retail industry; future product recalls or safety concerns; costs associated with environmental compliance and remediation; increased costs and uncertainties related to periodic renegotiation of union contracts; changes in our relationship with employees and the unions that represent them; actions of governmental entities, including regulatory requirements; the outcome of legal proceedings to which we are or may become a party; business disruption from terrorist acts, our nation’s response to such acts and acts of war; and other factors. 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. We have provided additional information in our Annual Report on Form 10-K for our fiscal year ended June 1, 2002 and Forms 10-Q for the quarters ended August 24, 2002 and November 16, 2002 filed with the Securities and Exchange Commission, which readers are encouraged to review, concerning other factors that could cause actual results to differ materially from those indicated in the forward-looking statements.

PART II

ITEM 1 - Legal Proceedings

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. Most of the complaints were brought on behalf of putative classes of shareholders who purchased or sold IBC stock between September 17, 2002 and December 17, 2002. One complaint, however, is brought on behalf of a putative class beginning in April 2002 and several complaints seek to include shareholders who purchased or sold stock through February 11, 2003. The complaints generally allege that certain of our press releases, SEC filings, and other public statements prior to a February 11, 2003 announcement reducing our guidance contained misrepresentations regarding our financial condition. The complaints further allege that certain officers and directors improperly sold IBC shares at artificially inflated prices during the class period. The cases seek compensatory damages (including interest), disgorgement of allegedly improper gains from insider stock sales, costs and expenses, and any other relief deemed proper by the court. We have not yet been required to file answers to the complaints. The litigation is in its preliminary stages and the amount of potential loss, if any, cannot reasonably be estimated.

In November 1996 certain of our route sales representatives (“RSRs”) brought a class action on behalf of RSRs in the State of Washington, alleging that we had failed to pay required overtime wages under state law. The case is captioned Santa Rosa, et al v. Interstate Brands Corp., No. 51574-8-1 (D. Wa.). The class in the case covers RSRs in the State of Washington who worked for us during all or part of the general period from November 1993 through the date of settlement. The plaintiffs

seek unpaid wages, with interest, and other relief deemed proper by the court. During the quarter, we tentatively settled this class action with the plaintiffs for approximately $6.1 million, subject to notice to the class and final court approval. A preliminary hearing regarding the settlement is scheduled for May 2, 2003, at which the court is expected to put in place a schedule for completing notice and holding a final hearing on the merits of the settlement. We have established reserves that are expected to sufficiently cover the anticipated costs of the settlement, if it is approved by the court. The amount of potential loss, should the settlement not receive court approval, cannot reasonably be estimated. We also have negotiated and put into effect a new union contract with the RSRs in the State of Washington that we expect to address this issue. We have asked the State of Washington’s Department of Industry and Labor to review and approve the contract’s provision relating to overtime pay.

We are aware of two additional 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. OCN-L-_03 (Sup. Ct., Ocean Cty, N.J.), and the other case is captioned McCourt, et al. v. Interstate Brands Corp., No. 03-220 (FLW) (D.N.J.). We are also aware of 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., No. 2:03 cv 00385 (WGB) (D.N.J.). These cases are in their preliminary stages and we have not filed answers to the complaints. We are evaluating these cases and the amount of potential loss, if any, cannot reasonably be estimated. No amount is currently reserved in the unaudited consolidated financial statements related to these matters.

On July 17, 2002, we were served with a state court complaint which is now pending in the United States District Court for the Northern District of Illinois, captioned Anael, et al. v. Interstate Brands Corporation and Interstate Bakeries Corporation, Case No. 2C 5192, filed by one employee and one former employee. This complaint arises, in part, from our removal of insulation alleged to have contained asbestos at one of our bakeries in January 1998. We have also been a defendant in other civil actions arising out of the situation described above. Of the civil actions, those remaining are Anael v. Interstate Brands Corporation, Case No. 00 C 6765, filed October 3, 2000, pending in the United States District Court, Northern District of Illinois; and a class action suit captioned Dennis Gianopolous, et al. v. Interstate Brands Corporation and Interstate Bakeries Corporation, Case No. 98 C 1073, filed February 2, 1998, pending in the Circuit Court of Cook County Illinois. These civil actions seek unspecified monetary damages, funds for medical monitoring and, in one case, damages under the Racketeer Influenced and Corrupt Organizations Act. In addition, related to the same facts, in 1998, the Des Plaines, Illinois office of the U.S. Department of Labor cited us, in Inspection Number 122496300, for alleged violation of

the Occupational Safety and Health Act, and the office of the U.S. Attorney for the Northern District of Illinois in a joint investigation with Illinois officials began investigating the possibility of criminal violations of the Clean Air Act. The government closed the joint investigation without returning any indictments. In addition, the State of Illinois filed a civil complaint against us alleging the insulation removal violated various provisions of the Illinois Environmental Protection Act. This case was voluntarily dismissed; however, the State has recently sought to refile it pending settlement negotiations. In none of the foregoing cases has any court or governmental body made any factual finding of liability or violation of environmental regulations. Based upon our own investigation, including assistance from third party consultants, we believe that all of these matters are without merit. No amount is currently reserved in the unaudited consolidated financial statements related to these matters.

We are currently undergoing a multi-state abandoned property examination. We have provided and will continue to provide information requested by the states' reprentatives. No assessments related to this examination have been received

at this point in time. We believe the ultimate outcome of this examination will not have a material adverse impact on our financial position or results of operations.

ITEM 6 - Exhibits and Reports on Form 8-K

a) Exhibits filed with this report:

Exhibit Number		Description

10.1		First Amendment, dated as of April 21, 2003, to the Amended and Restated Credit Agreement among Interstate Bakeries Corporation, as a Guarantor, Interstate Brands Corporation and Interstate Brands West Corporation, each as a Borrower, the several Lenders from time to time parties hereto, and The Chase Manhattan Bank, as Administrative Agent.
10.2		Employment Agreement dated as of March 8, 2003 by and between Michael D. Kafoure and Interstate Brands West Corporation.
10.3		Employment Agreement dated as of March 7, 2003 by and between Robert P. Morgan and Interstate Brands Corporation.
10.4		Employment Agreement dated as of March 18, 2003 by and between Richard D. Willson and Interstate Brands West Corporation.
10.5		Employment Agreement dated as of March 7, 2003 by and between Thomas S. Bartoszewski and Interstate Brands Corporation.
10.6		Management Continuity Agreement effective as of February 3, 2003 by and between James R. Elsesser and Interstate Bakeries Corporation.
10.7		Form of Management Continuity Agreement effective as of February 3, 2003 by and between Interstate Bakeries Corporation and Paul E. Yarick, Michael D. Kafoure, Kent B. Magill, Robert P. Morgan, Richard D. Willson and Thomas S. Bartoszewski.
99.1		Certification of James R. Elsesser pursuant to 18 U.S.C. Section 1350.
99.2		Certification of Paul E. Yarick pursuant to 18 U.S.C. Section 1350.

b) Reports on Form 8-K

A report on Form 8-K (item 9) was filed on December 18, 2002 regarding expected earnings for fiscal 2003, ending May 31, 2003.

A report on Form 8-K (item 9) was filed on December 20, 2002 regarding the certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

A report on Form 8-K (item 9) was filed on February 12, 2003 regarding expected earnings for fiscal 2003, ending May 31, 2003.

* * * * * * * * * *

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Interstate Bakeries Corporation
	(Registrant)


DATE: April 22, 2003	/s/ James R. Elsesser
	James R. Elsesser
	Chief Executive Officer (Principal Executive Officer)


DATE: April 22, 2003	/s/ Paul E. Yarick
	Paul E. Yarick, Senior Vice President - Finance and Treasurer (Principal Financial Officer)

CERTIFICATIONS

I, James R. Elsesser, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Interstate Bakeries Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 22, 2003

/s/ James R. Elsesser
James R. Elsesser
Chief Executive Officer

I, Paul E. Yarick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Interstate Bakeries Corporation;

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: April 22, 2003

/s/ Paul E. Yarick
Paul E. Yarick
Senior Vice President -Finance and Treasurer

EX-10.1 3 j9625_ex10d1.htm EX-10.1

Exhibit 10.1

EXECUTION COPY

FIRST AMENDMENT

FIRST AMENDMENT, dated as of April 21, 2003 (this “Amendment”), to the Amended and Restated Credit Agreement, dated as of April 25, 2002 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Interstate Bakeries Corporation, a Delaware corporation (“Holdings”), Interstate Brands Corporation, a Delaware corporation (“Brands”), Interstate Brands West Corporation, a Delaware corporation (“Brands West”; each of Brands and Brands West, a “Borrower” and, together, the “Borrowers”), the several banks and other financial institutions or entities from time to time parties thereto (the “Lenders”), THE BANK OF NOVA SCOTIA, BNP PARIBAS COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. “RABOBANK INTERNATIONAL”, NEW YORK BRANCH, and SUNTRUST BANK, each as a co-documentation agent, BANK OF AMERICA, N.A., as syndication agent, and JPMORGAN CHASE BANK, (f/k/a The Chase Manhattan Bank), as administrative agent (in such capacity, the “Administrative Agent”).

W I T N E S S E T H:

WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make, and have made, certain loans and other extensions of credit to the Borrowers;

WHEREAS, the Borrowers have requested, and, upon this Amendment becoming effective, the Lenders have agreed, that certain provisions of the Credit Agreement be amended as set forth below;

NOW, THEREFORE, the parties hereto hereby agree as follows:

SECTION 1. Defined Terms. Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

SECTION 2. Amendments to Credit Agreement.

(a) Amendments to Section 1. Section 1.1 of the Credit Agreement is hereby amended as follows:

(i) by deleting the proviso to clause (vi) of the defined term “Consolidated EBITDA” and substituting in lieu thereof the following new proviso:

provided, that the portion of such charges for non-recurring items representing cash charges so added to Consolidated Net Income shall not exceed a cumulative amount of $20,000,000 from and after August 24, 2002

(ii) by deleting the defined term “L/C Commitment” and substituting in lieu thereof the following:

“L/C Commitment”: $175,000,000.

(iii) by deleting the table set forth in the defined term “Pricing Grid” in its entirety and substituting in lieu thereof the table set forth in Annex 1 hereto.

(b) Amendments to Section 4. (i) Section 4.1 of the Credit Agreement is hereby amended by deleting such section in its entirety and substituting in lieu thereof the following:

4.1 Financial Condition. The audited consolidated balance sheets of Holdings and its Subsidiaries as at June 1, 2002, and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by and accompanied by an unqualified report from Deloitte & Touche, present fairly in all material respects the consolidated financial condition of Holdings and its consolidated Subsidiaries as at such date, and the consolidated results of its operations and its consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheets of Holdings as at August 24, 2002, November 16, 2002 and March 8, 2003, and the related unaudited consolidated statements of income and cash flows for the three-month periods ended on such dates, present fairly in all material respects the consolidated financial condition of Holdings and its consolidated Subsidiaries as at such dates, and the consolidated results of its operations and its consolidated cash flows for the periods then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). Such financial statements and the notes thereto disclose all material liabilities, direct or contingent, of the Group Members that are required to be so disclosed under GAAP. During the period from June 1, 2002 to and including the date hereof there has been no Disposition by any Group Member of any material part of its business or property.

(ii) Section 4.2 is amended by deleting such section in its entirety and substituting in lieu thereof the following:

4.2 No Change. There has been no material adverse change in the business, assets, operations or financial condition of Holdings and the Subsidiaries, taken as a whole, since June 1, 2002.

(c) Amendments to Section 7. (i) Section 7.1(a) of the Credit Agreement is hereby amended by deleting such section in its entirety and substituting in lieu thereof the following:

(a) Consolidated Leverage Ratio. Permit the Consolidated Leverage Ratio as at the last day of any period of four consecutive fiscal quarters of Holdings ending with any fiscal quarter set forth below to exceed the ratio set forth below opposite such fiscal quarter:

Fiscal Quarter		Consolidated Leverage Ratio
May 31, 2003		3.10 to 1.00
August 23, 2003		3.75 to 1.00
November 15, 2003		3.75 to 1.00
March 6, 2004		3.75 to 1.00
May 29, 2004		3.25 to 1.00
August 21, 2004		3.00 to 1.00
November 13, 2004 and thereafter		2.75 to 1.00

(ii) Section 7.1(b) of the Credit Agreement is hereby amended by deleting such subsection in its entirety and substituting in lieu thereof the following:

(b) Consolidated Interest Coverage Ratio. Permit the Consolidated Interest Coverage Ratio as at the last day of any period of four consecutive fiscal quarters of Holdings (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:

Fiscal Quarter		Consolidated Interest Coverage Ratio
May 31, 2003		4.75 to 1.00
August 23, 2003		3.75 to 1.00
November 15, 2003		3.55 to 1.00
March 6, 2004		3.55 to 1.00
May 29, 2004		4.00 to 1.00
August 21, 2004 and thereafter		5.00 to 1.00

SECTION 3. Conditions to Effectiveness of Amendment. This Amendment shall be effective on the date on which all of the following conditions precedent have been satisfied or waived (the “Effective Date”):

(a) The Administrative Agent (or its counsel) shall have received a counterpart of this Amendment, executed and delivered by a duly authorized officer of each of (i) Holdings, (ii) the Borrowers and (iii) each of the Lenders constituting the Required Lenders;

(b) The Borrowers shall have paid all fees and expenses of the Administrative Agent, including the reasonable fees and expenses of counsel to the Administrative Agent;

(c) After giving effect to the Amendment, no Default or Event of Default shall have occurred and be continuing; and

(d) The Administrative Agent shall have received an amendment fee for the account of each Lender that consents to this Amendment in an amount equal to 0.15% of each such Lender’s Commitment.

SECTION 4. Representations and Warranties. Each of the representations and warranties made by each of Holdings and the Borrowers in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of the date hereof as if made as of the date hereof, except for representations and warranties expressly stated to relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date; provided that each reference to the Credit Agreement therein shall be deemed to be a reference to the Credit Agreement after giving effect to this Amendment.

SECTION 5. Effect on the Loan Documents. (a) Except as specifically amended above, the Credit Agreement and all other Loan Documents shall continue to be in full force and effect and are hereby in all respects ratified and confirmed.

(b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

SECTION 6. Expenses. Holdings and the Borrowers agree to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and reasonable expenses incurred in connection with this Amendment, any other documents prepared in connection herewith and the transaction contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent.

SECTION 7. Affirmation of Guaranty and Credit Agreement. The Guarantors hereby consent to this Amendment and hereby confirm, reaffirm and restate that their obligations under or in respect of the Credit Agreement and the documents related thereto to which they are a party are and shall remain in full force and effect after giving effect to the foregoing Amendment.

SECTION 8. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

SECTION 9. Execution in Counterparts. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

[Remainder of page intentionally left blank.]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.

	INTERSTATE BAKERIES CORPORATION, as Guarantor

	By: /s/ Paul E. Yarick
	Name: Paul E. Yarick
	Title: Senior Vice President—Finance and Treasurer

	INTERSTATE BRANDS CORPORATION, as a Borrower

	By: /s/ Paul E. Yarick
	Name: Paul E. Yarick
	Title: Senior Vice President—Finance and Treasurer

	INTERSTATE BRANDS WEST CORPORATION, as a Borrower

	By: /s/ Paul E. Yarick
	Name: Paul E. Yarick
	Title: Senior Vice President—Finance and Treasurer

	JP MORGAN CHASE BANK, as Administrative Agent, an Issuing Lender and a Lender

	By: /s/ Martha Gurwit
	Name: Martha Gurwit
	Title: Vice President

	HARRIS TRUST & SAVINGS BANK, as an Issuing Lender and a Lender

	By: /s/ Karen L. Knudsen
	Name: Karen Knudsen
	Title: Vice President

	AGFIRST FARM CREDIT BANK

	By: /s/ Richard N. Thorpe
	Name: Richard N. Thorpe
	Title: Vice President

	AGSTAR FINANCIAL SERVICES, PCA

	By: /s/ James M. Grafing
	Name: James M. Grafing
	Title: SVP — Syndicated Finance

	AIG SUNAMERICA LIFE ASSURANCE CO.

	By: /s/ Steven S. Oh
	Name: Steven S. Oh
	Title: Authorized Agent

	AIMCO CDO SERIES 2000-A

	By: /s/ Chris Goergen
	Name: Chris Goergen
	Title: Authorized Signatory

	By: /s/ Jerry D. Zinkula
	Name: Jerry D. Zinkula
	Title: Authorized Signatory

	AIMCO CLO SERIES 2001-A

	By: /s/ Chris Goergen
	Name: Chris Goergen
	Title: Authorized Signatory

	By: /s/ Jerry D. Zinkula
	Name: Jerry D. Zinkula
	Title: Authorized Signatory

	ALLSTATE LIFE INSURANCE COMPANY

	By: /s/ Chris Goergen
	Name: Chris Goergen
	Title: Authorized Signatory

	By: /s/ Jerry D. Zinkula
	Name: Jerry D. Zinkula
	Title: Authorized Signatory

	BANCO ESPIRITO SANTO S.A., NASSAU BRANCH

	By: /s/ Andrew M. Orsen
	Name: Andrew M. Orsen
	Title: Vice President

	By: /s/ Terry R. Hull
	Name: Terry R. Hull
	Title: Senior Vice President

	BANK HAPOALIM B.M.

	By: /s/ James P. Surless
	Name: James P. Surless
	Title: Vice President

	By: /s/ Laura Anne Raffa
	Name: Laura Anne Raffa
	Title: Senior Vice President & Corporate Manager

	BANK OF AMERICA, N.A.

	By: /s/ William F. Sweeney
	Name: William F. Sweeney
	Title: Managing Director

	BNP PARIBAS

	By: /s/ Jo Ellen Bender
	Name: Jo Ellen Bender
	Title: Managing Director

	By: /s/ Peter Labrie
	Name: Peter Labrie
	Title: Central Region Manager

	BRYN MAWR CLO, LTD.

	By: /s/ Matt Stouffer
	Name: Matt Stouffer
	Title: Vice President

	CASTLE HILL I — INGOTS, LTD.
	By: Sankaty Advisors, LLC as Collateral Manager

	By: /s/ Diane J. Exter
	Name: Diane J. Exter
	Title: Managing Director & Portfolio Manager

	CASTLE HILL II — INGOTS, LTD.
	By: Sankaty Advisors, LLC as Collateral Manager

	By: /s/ Diane J. Exter
	Name: Diane J. Exter
	Title: Managing Director & Portfolio Manager

	CHINATRUST COMMERCIAL BANK NEW YORK BRANCH

	By: /s/ John Teng
	Name: John Teng
	Title: EVP & Branch Manager

	CoBANK, ACB

	By: /s/ S. Richard Dill
	Name: S. Richard Dill
	Title: Vice President

	COMERICA BANK

	By: /s/ James B. Haeffner
	Name: James B. Haeffner
	Title: First Vice President

	COMMERCE BANK, N.A.

	By: /s/ Lance Holden
	Name: Lance Holden
	Title: Vice President

	COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK, B.A., “RABOBANK INTERNATIONAL” NEW YORK BRANCH

	By: /s/ Brad Peterson
	Name: Brad Peterson
	Title: Executive Director

	By: /s/ Ian Reece
	Name: Ian Reece
	Title: Managing Director

	CREDIT LYONNAIS NEW YORK BRANCH

	By: /s/ Lee E. Greve
	Name: Lee E. Greve
	Title: First Vice President

	FARM CREDIT BANK OF WICHITA

	By: /s/ Patrick Zeka
	Name: Patrick Zeka
	Title: Vice President

	FARM CREDIT SERVICES OF AMERICA, PCA

	By: /s/ Bruce P. Rouse
	Name: Bruce P. Rouse
	Title: Vice President

	FARM CREDIT SERVICES OF MISSOURI, PCA

	By: /s/ Michael D. Scherer
	Name: Michael D. Scherer
	Title: Vice President, Agribusiness

	FRANKLIN CLO I, LIMITED

	By: /s/ David Ardini
	Name: David Ardini
	Title: Vice President

	FRANKLIN CLO III, LIMITED

	By: /s/ David Ardini
	Name: David Ardini
	Title: Vice President

	GALAXY CLO 1999-1 LTD.

	By: /s/ Steven S. Oh
	Name: Steven S. Oh
	Title: Authorized Agent

	HARBOUR TOWN FUNDING LLC

	By: /s/ Ann E. Morris
	Name: Ann E. Morris
	Title: Asst. Vice President

	IKB CAPITAL CORPORATION

	By: /s/ David Snyder
	Name: David Snyder
	Title: President

	INDOSUEZ CAPITAL FUNDING VI, LIMITED

	By: /s/ Andrew Brady
	Name: Andrew Brady
	Title: Vice President

	ING PRIME RATE TRUST

	By: /s/ Jeffrey A. Bakalar
	Name: Jeffrey A. Bakalar
	Title: Sr. Vice President

	ING SENIOR INCOME FUND

	By: /s/ Jeffrey A. Bakalar
	Name: Jeffrey A. Bakalar
	Title: Sr. Vice President

	LIBERTY FLOATING RATE ADVANTAGE FUND

	By: /s/ James R. Fellows
	Name: James R. Fellows
	Title: Sr. Vice President & Portfolio Manager

	LONG LANE MASTER TRUST
	By: Fleet National Bank as Trust Administrator

	By: /s/ Kevin Kearns
	Name: Kevin Kearns
	Title: Managing Director

	MAPLEWOOD (CAYMAN) LIMITED

	By: /s/ Mary Ann McCarthy
	Name: Mary Ann McCarthy
	Title: Managing Director

	MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY

	By: /s/ Mary Ann McCarthy
	Name: Mary Ann McCarthy
	Title: Managing Director

	MITSUBISHI TRUST AND BANKING CORPORATION

	By: /s/ Ryo Magome
	Name: Ryo Magome
	Title: Sr. Vice President

	ML CLO XII PILGRIM AMERICA (CAYMAN) LTD.

	By: /s/ Jeffrey A. Bakalar
	Name: Jeffrey A. Bakalar
	Title: Sr. Vice President

	ML CLO XX PILGRIM AMERICA (CAYMAN) LTD.

	By: /s/ Jeffrey A. Bakalar
	Name: Jeffrey A. Bakalar
	Title: Sr. Vice President

	MONUMENT CAPITAL LTD.

	By: /s/ Joel Serebransky
	Name: Joel Serebransky
	Title: Senior Vice President

	MOUNTAIN CAPITAL CLO I, LTD.

	By: /s/ Chris Siddons
	Name: Chris Siddons
	Title: Director

	MOUNTAIN CAPITAL CLO II, LTD.

	By: /s/ Chris Siddons
	Name: Chris Siddons
	Title: Director

	MUIRFIELD TRADING LLC

	By: /s/ Ann E. Morris
	Name: Ann E. Morris
	Title: Asst. Vice President

	NATIONAL BANK OF KUWAIT, S.A.K., GRAND CAYMAN BRANCH

	By: /s/ Muhannad Kamal
	Name: Muhannad Kamal
	Title: General Manager

	By: /s/ Robert J. McNeill
	Name: Robert J. McNeill
	Title: Executive Manager

	NUVEEN SENIOR INCOME FUND

	By: /s/ L. Mason
	Name: L. Mason
	Title: Portfolio Manger

	OLYMPIC FUNDING TRUST, SERIES 1999-1

	By: /s/ Ann E. Morris
	Name: Ann E. Morris
	Title: Authorized Agent

	PB CAPITAL

	By: /s/ Tyler J. McCarthy
	Name: Tyler J. McCarthy
	Title: Assistant Vice President

	By: /s/ Andrew Shipman
	Name: Andrew Shipman
	Title: Assistant Vice President

	PILGRIM AMERICA HIGH INCOME INVESTMENTS LTD.

	By: /s/ Jeffrey A. Bakalar
	Name: Jeffrey A. Bakalar
	Title: Sr. Vice President

	PILGRIM CLO 1999-1 LTD

	By: /s/ Jeffrey A. Bakalar
	Name: Jeffrey A. Bakalar
	Title: Sr. Vice President

	PROMETHEUS INVESTMENT FUNDING NO. 1 LTD.

	By: /s/ Charles P. Strause
	Name: Charles P. Strause
	Title: Associate Director

	By: /s/ Elizabeth Tallmadge
	Name: Elizabeth Tallmadge
	Title: Managing Director & Chief Investment Officer

	PROMETHEUS INVESTMENT FUNDING NO. 2 LTD.

	By: /s/ Charles P. Strause
	Name: Charles P. Strause
	Title: Associate Director

	By: /s/ Elizabeth Tallmadge
	Name: Elizabeth Tallmadge
	Title: Managing Director & Chief Investment Officer

	RACE POINT CLO, LIMITED
	By: Sankaty Advisors, LLC as Collateral Manager

	By: /s/ Diane J. Exter
	Name: Diane J. Exter
	Title: Managing Director & Portfolio Manager

	RACE POINT II CLO, LIMITED
	By: Sankaty Advisors, LLC as Collateral Manager

	By: /s/ Diane J. Exter
	Name: Diane J. Exter
	Title: Managing Director & Portfolio Manager

	SEQUILS-CUMBERLAND I, LTD.

	By: /s/ Matt Stouffer
	Name: Matt Stouffer
	Title: Vice President

	SEQUILS — PILGRIM I, LTD

	By: /s/ Jeffrey A. Bakalar
	Name: Jeffrey A. Bakalar
	Title: Sr. Vice President

	SMOKY RIVER CDO, L.P.

	By: /s/ Melissa Marano
	Name: Melissa Marano
	Title: Partner

	SRF 2000 LLC

	By: /s/ Ann E. Morris
	Name: Ann E. Morris
	Title: Asst. Vice President

	SRF TRADING, INC.

	By: /s/ Ann E. Morris
	Name: Ann E. Morris
	Title: Asst. Vice President

	STEIN ROE & FARNHAM CLO I, LTD.

	By: /s/ James R. Fellows
	Name: James R. Fellows
	Title: Sr. Vice President & Portfolio Manager

	SUNAMERICA LIFE INSURANCE CO.

	By: /s/ Steven S. Oh
	Name: Steven S. Oh
	Title: Authorized Agent

	SUNTRUST BANK

	By: /s/ Michael Lapresi
	Name: Michael Lapresi
	Title: Director

	THE BANK OF EAST ASIA, LIMITED

	By: /s/ David Loh
	Name: David Loh
	Title: Vice President

	By: /s/ Victor Li
	Name: Victor Li
	Title: Vice President & General Manger

	THE BANK OF NEW YORK

	By: /s/ John-Paul Marotta
	Name: John-Paul Marotta
	Title: Vice President

	THE BANK OF NOVA SCOTIA

	By: /s/ V. Gibson
	Name: V. Gibson
	Title: Assistant Agent

	THE DEVELOPMENT BANK OF SINGAPORE LTD., LOS ANGELES AGENCY

	By: /s/ Chee Kien, Ong
	Name: Chee Kien, Ong
	Title: General Manager

	THE SUMITOMO TRUST & BANKING CO., LTD.

	By: /s/ Elizabeth A. Quirk
	Name: Elizabeth A. Quirk
	Title: Vice President

	TORONTO DOMINION (NEW YORK), INC.

	By: /s/ Susan K. Strong
	Name: Susan K. Strong
	Title: Vice President

	UMB BANK, N.A.

	By: /s/ Thomas S. Terry
	Name: Thomas S. Terry
	Title: Sr. Vice President

	US BANK NATIONAL ASSOCIATION

	By: /s/ David F. Higbee
	Name: David F. Higbee
	Title: Vice President

	VAN KAMPEN CLO I, LIMITED

	By: /s/ William Lenga
	Name: William Lenga
	Title: Vice President

	VAN KAMPEN CLO II, LIMITED

	By: /s/ William Lenga
	Name: William Lenga
	Title: Vice President

	WACHOVIA BANK, NATIONAL ASSOCIATION

	By: /s/ Anthony D. Braxton
	Name: Anthony D. Braxton
	Title: Director

ANNEX I

PRICING GRID

Level (based on the senior secured debt rating of Holdings and the Borrowers)	Facility Fee Rate		Applicable Margin for Eurodollar Revolving Loans		Applicable Margin for ABR Revolving Loans		Applicable Margin for Eurodollar Tranche A Term Loans		Applicable Margin for ABR Tranche A Term Loans		Applicable Margin for Eurodollar Tranche B Term Loans		Applicable Margin for ABR Tranche B Term Loans		Applicable Margin for Eurodollar Tranche C Term Loans		Applicable Margin for ABR Tranche C Term Loans
Level I Equal to or greater than BBB and Baa2 by S&P and Moody’s	.375	%	0.875	%	0.000	%	1.250	%	0.250	%	2.250	%	1.250	%	2.000	%	1.000	%
Level II BBB- and Baa3 by S&P and Moody’s	.375	%	1.1250	%	0.1250	%	1.500	%	0.500	%	2.250	%	1.250	%	2.000	%	1.000	%
Level III BB+ and Ba1 by S&P and Moody’s	.500	%	1.500	%	0.500	%	2.000	%	1.000	%	2.500	%	1.500	%	2.250	%	1.250	%
Level IV BB and Ba2 by S&P and Moody’s	.500	%	2.000	%	1.000	%	2.500	%	1.500	%	2.750	%	1.750	%	2.500	%	1.500	%
Level V Less than or equal to BB- and Ba3 by S&P and Moody’s	.500	%	2.250	%	1.250	%	2.750	%	1.750	%	3.000	%	2.000	%	2.750	%	1.750	%

EX-10.2 4 j9625_ex10d2.htm EX-10.2

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement” or “Employment Agreement”) is made and entered into as of the 8th day of March, 2003, by and between INTERSTATE BRANDS WEST CORPORATION, a Delaware corporation (the “Company”), and Michael D. Kafoure (“Employee”).

The Company and Employee hereby mutually agree as follows:

1. Employment.

(a) The Company shall employ Employee, and Employee shall serve the Company on the terms and subject to the conditions set forth herein for a period commencing on January 1, 2003, and terminating on January 1, 2005 (the “Expiration Date”), except as provided in Section 1(b) below. Employee shall serve in the capacity of Chief Operating Officer. The duties, responsibilities and authority of Employee shall be those that are normally incident to the office to be held by Employee. Employee shall devote his best efforts and abilities and all his business time to the affairs and interests of the Company (except as may be otherwise authorized by the Board of Directors of the Company). Employee’s principal office shall be at Kansas City, Missouri.

(b) On the first anniversary of the Effective Time (as defined in paragraph 15) of the Employment Agreement and annually thereafter, the Employment Agreement shall be automatically extended for an additional one (1) year period unless terminated by either the Company or Employee by delivery, on or prior to June 1 of such year, of a termination notice to the other party.

2. Compensation. For his services to the Company, Employee shall be entitled:

(a) To receive (i) commencing January 1, 2003, an aggregate base annual salary in the amount not less than Four Hundred Sixty Thousand dollars ($460,000) and (ii) an annual bonus pursuant to the terms of the Incentive Compensation Plan (“Plan”) at the level specified for the Chief Operating Officer under the Plan, as the same may be amended from time to time. At annual or approximate annual intervals, the Company shall conduct, or cause to be conducted, a review of Employee’s salary, giving attention to all pertinent factors, including without limitation the performance of the Company, the performance of Employee and compensation practices inside and outside the Company. The Company shall, after such review, determine Employee’s base salary to be paid until the completion of the next review.

(b) To be covered by noncash benefit plans and programs of the Company that are the same as those that are provided to executives with comparable responsibilities and pay grade, including without limitation retirement plans and programs, health and medical insurance coverage, long-term disability insurance coverage and life insurance coverage.

(d) To receive perquisites that are the same as those that are provided to executives with comparable responsibilities and pay grade, including without limitation monthly club dues, a new company car every three (3) years, an annual allowance for financial counseling (any unused amount may be rolled over to the next

succeeding year provided that the amount available in any given year will not exceed twice the annual allowance) and paid vacations.

3. Termination; Effect of Termination.

(a) Employee’s employment hereunder shall be terminated prior to the Expiration Date if Employee dies or becomes permanently disabled under circumstances in which he would be entitled to the benefits therefor under the long-term disability insurance coverage referred to in Section 2(b), in which case the Company and Employee shall be released from all further obligations and liabilities hereunder (except as provided in this Section 3, for obligations accrued but not yet paid, for those set forth in Section 5, for liability arising from any breach of this Agreement occurring prior to such termination and except that Employee and his beneficiaries shall be entitled to receive all disability and other benefits payable upon his death or disability).

(b) If Employee’s employment hereunder is terminated by the Company without his consent or for any reason specified in Section 3(a) (each a “Termination Event”), then the Company shall be obligated for a period of time equal to the balance of the term of this Employment Agreement as set forth in Section 1 remaining as of such Termination Event (the “Severance Period”) to continue to make the full salary payments to Employee required by Section 2(a)(i). The Company shall also continue to provide to Employee during such Severance Period all health, medical, disability and insurance coverage provided for in Section 2(b).

(c) For purposes hereof, during the Severance Period Employee shall be deemed to be in service and shall continue to accrue benefits under any retirement plan of the Company and any supplemental retirement benefits agreement in effect between the Company and Employee immediately prior to the Severance Period. All

such payments shall be made without reference to or deduction for any subsequent employment obtained or obtainable by Employee. In the event that Employee would be ineligible to participate in or be covered by any noncash benefit plan or program by reason of such termination of his employment, the Company shall provide substantially similar benefits or coverage through other sources.

(d) During the Severance Period the Company shall continue to make all payments of their portion of the premiums for the life insurance in effect with respect to Employee’s life. Employee shall also be entitled to receive or exercise during the Severance Period all other benefits and rights available under any benefit plans or programs to terminated or discharged employees.

(e) Notwithstanding any of the other provisions of this Employment Agreement to the contrary, in the event that the Employee is convicted in a court of competent jurisdiction, or the Employee pleads guilty or makes a plea of nolo contendere of any felony crime, the Employee’s employment with the Company shall be terminated and all of the Employee’s rights to any and all compensation and benefits provided under and pursuant to the terms of this Employment Agreement, except to the extent protected by law, shall terminate.

4. Travel Expense. Employee’s duties under this Agreement may require a reasonable amount of travel and the incurrence of travel and other business expenses. The Company shall pay or reimburse Employee for all such reasonable expenses incurred or paid by him upon presentation of expense statements or vouchers and such other information as the Company may reasonably require.

5. Confidentiality. Employee shall not at any time during or after the term of this Agreement (and without regard to the circumstances under which this

Agreement or Employee’s employment hereunder may have terminated), directly or indirectly, disclose or permit those under his control to disclose, or use, or permit those under his control to use, except as shall be necessary in the performance of his duties hereunder, any trade secrets or other proprietary information owned by or confidential to the Company or any of its affiliates (as affiliate is defined in Rule 144 promulgated under the Securities Act of 1933 (“Affiliate”)) without the prior written consent of the Company including but not limited to (i) any confidential information concerning the business, affairs, properties, management or prospects (financial or otherwise) of the Company or any of its Affiliates that he may have acquired in the course of, or as an incident to, his employment by the Company or any of its Affiliates or predecessors or (ii) any confidential information entrusted to the Company or any of its Affiliates or predecessors which any such company is obligated to keep confidential.

6. Restrictions. The Employee agrees, as a condition of entering into this Employment Agreement, that during the Severance Period the Employee will not, as an individual or as a partner, employee, agent, advisor, consultant or in any other capacity of or to any person, firm, corporation or other entity (excluding the Company or one of its Affiliates), directly or indirectly, other than as a 2% or less shareholder of a publicly traded corporation, do any of the following:

(a) carry on any business, or become involved in any business activity, which is competitive with the business conducted by the Company (or one of its Affiliates) immediately prior to a Termination Event; or

(b) induce or attempt to induce, or assist anyone else to induce or attempt to induce, any customer of the Company (or one of its

Affiliates) to discontinue its business with the Company (or one of its Affiliates) or disclose to anyone else any confidential information relating to the identities, preferences, and/or requirements of any such customer.

The Employee agrees (i) that the restraints contained in this Section 6, both separately and in total, are reasonable in view of the legitimate interests of the Company in protecting its trade secret information and business relationships; and (ii) to disclose to any potential future employer during the Severance Period, the terms of the restrictions against competition contained in this Section 6.

If any provision or subpart of this Section 6 is adjudicated to be invalid or unenforceable under applicable law, the validity or enforceability of the remaining provisions and subparts shall be unaffected. If any provision or subpart of this Section 6 is adjudicated to be invalid or unenforceable because it is overbroad or unreasonable, that provision or subpart shall not be void but rather shall be limited to the extent required to make it reasonable and shall be enforced as so limited.

In the event of a breach of this Section 6, the Company (i) shall have no further liability for any of the severance benefits described in Section 3(b) that have not been paid as of the date of the breach, and (ii) shall be entitled, in addition to any other legal or equitable remedies it may have, to temporary, preliminary and permanent injunctive relief restraining such breach.

7. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach or asserted breach of its terms, will be settled by arbitration before a single arbitrator in Kansas City, Missouri, in accordance with the rules then in effect under the Federal Arbitration Act, and judgment upon the award rendered may be

entered in any court having jurisdiction thereof. No claim may be arbitrated unless written notice of the basis of the claim is received within 180 days after the party first knew of the existence of the general facts upon which the claim is based. All arbitration hearings must commence within 90 days after the written notice of the claim. Employee and the Company shall share equally any fees and expenses of any arbitrator. The arbitrator will decide what amount, if any, of the prevailing party’s legal fees and expenses will be paid by the non-prevailing party. For all purposes, this Agreement will be interpreted and enforced under Missouri and United States law, as respectively applicable.

8. Entire Agreement. This Agreement is the entire agreement between the parties hereto with respect to Employee’s employment and shall not be amended, altered or modified in any manner whatsoever, except by a written instrument executed by the parties hereto. This Agreement supersedes all prior agreements between the Company (or one of its Affiliates) and Employee and all such prior agreements shall be void and of no further force or effect as of the Effective Time.

9. No Continuous Waiver. The waiver by any party hereto of a breach of any provision of this Agreement by the other party hereto shall not operate or be construed as a waiver of any subsequent breach by such party.

10. Governing Law. This Agreement shall be subject to, and be governed by, the laws of the State of Missouri.

11. Transfer, Assignment, Modification, etc. This Agreement may not be transferred, assigned, modified, amended or waived without the prior written consent of all parties except that the Company may assign this Agreement without the consent of the Employee in the event any person, corporation or other entity, by merger,

consolidation, purchase of assets, liquidation, voluntary or involuntary assignment or otherwise, acquires all or a substantial part of the assets of the Company (or one of its Affiliates) or succeeds to one or more lines of business of the Company (or one of its Affiliates.)

12. Severability. If any one or more of the provisions of this Agreement, as applied to any party or any circumstance, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained in the Agreement. If any one or more of the provisions of this Agreement shall, for any reason, be held to be unenforceable as to duration, scope, activity or subject, such provision shall be construed by limiting and reducing it so as to make such provision enforceable to the extent compatible with the then existing applicable law.

13. Notices. All notices hereunder shall be in writing, shall be delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, or by overnight delivery utilizing a recognized national express delivery carrier such as FedEx, if to Employee, to his attention at the principal office of the Company, and if to the Company, to its principal office, Attention: General Counsel. No notice shall be effective if given otherwise than as provided herein.

14. Effect of Management Continuity Agreement. In the event of a Qualifying Termination, as defined under the Management Continuity Agreement dated February 3, 2003, by and between Interstate Bakeries Corporation, a Delaware corporation, and the Employee (the “Continuity Agreement”), all of the Employee’s

rights to any compensation and benefits to be provided to Employee in connection with such Qualifying Termination shall be solely governed by and paid pursuant to the terms of the Continuity Agreement and the Employee shall have no rights to any of the compensation and benefits provided for under this Agreement.

15. Effective Time. This Agreement may be signed in any number of counterparts each of which shall be an original and all of which, when taken together, shall constitute one and the same instrument and shall become effective as of January 1, 2003 (the “Effective Time”) upon the execution and delivery hereof by the parties hereto.

[The remainder of this page has intentionally been left blank.]

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day and year first above written.

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

					INTERSTATE BRANDS WEST CORPORATION

					By:	/s/ James R. Elsesser
					Title: Chief Executive Officer

					/s/ Michael D. Kafoure
					Michael D. Kafoure

EX-10.3 5 j9625_ex10d3.htm EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement” or “Employment Agreement”) is made and entered into as of the 7^th day of March, 2003, by and between INTERSTATE BRANDS CORPORATION, a Delaware corporation, (the “Company”) and Robert P. Morgan (“Employee”).

The Company and Employee hereby mutually agree as follows:

1. Employment.

(a) The Company shall employ Employee, and Employee shall serve the Company on the terms and subject to the conditions set forth herein for a period commencing on January 1, 2003, and terminating on January 1, 2005 (the “Expiration Date”), except as provided in Section 1(b) below. Employee shall serve in the capacity of Executive Vice President of the Central Division of the Company. The duties, responsibilities and authority of Employee shall be those that are normally incident to the office to be held by Employee. Employee shall devote his best efforts and abilities and all his business time to the affairs and interests of the Company (except as may be otherwise authorized by the Board of Directors of the Company). Employee’s principal office shall be at Kansas City, Missouri.

terminated by either the Company or Employee by delivery, on or prior to June 1 of such year, of a termination notice to the other party.

2. Compensation. For his services to the Company, Employee shall be entitled:

(a) To receive (i) commencing January 1, 2003, an aggregate base annual salary in the amount not less than Two Hundred Four Thousand dollars ($204,000) and (ii) an annual bonus pursuant to the terms of the Incentive Compensation Plan (“Plan”) at the level specified for an Executive Vice President under the Plan, as the same may be amended from time to time. At annual or approximate annual intervals, the Company shall conduct, or cause to be conducted, a review of Employee’s salary, giving attention to all pertinent factors, including without limitation the performance of the Company, the performance of Employee and compensation practices inside and outside the Company. The Company shall, after such review, determine Employee’s base salary to be paid until the completion of the next review.

allowance for financial counseling (any unused amount may be rolled over to the next succeeding year provided that the amount available in any given year will not exceed twice the annual allowance) and paid vacations.

3. Termination; Effect of Termination.

between the Company and Employee immediately prior to the Severance Period. All such payments shall be made without reference to or deduction for any subsequent employment obtained or obtainable by Employee. In the event that Employee would be ineligible to participate in or be covered by any noncash benefit plan or program by reason of such termination of his employment, the Company shall provide substantially similar benefits or coverage through other sources.

5. Confidentiality. Employee shall not at any time during or after the term of this Agreement (and without regard to the circumstances under which this Agreement or Employee’s employment hereunder may have terminated), directly or indirectly, disclose or permit those under his control to disclose, or use, or permit those under his control to use, except as shall be necessary in the performance of his duties hereunder, any trade secrets or other proprietary information owned by or confidential to the Company or any of its affiliates (as affiliate is defined in Rule 144 promulgated under the Securities Act of 1933 (“Affiliate”)) without the prior written consent of the Company including but not limited to (i) any confidential information concerning the business, affairs, properties, management or prospects (financial or otherwise) of the Company or any of its Affiliates that he may have acquired in the course of, or as an incident to, his employment by the Company or any of its Affiliates or predecessors or (ii) any confidential information entrusted to the Company or any of its Affiliates or predecessors which any such company is obligated to keep confidential.

(b) induce or attempt to induce, or assist anyone else to induce or attempt to induce, any customer of the Company (or one of its Affiliates) to discontinue its business with the Company (or one of its Affiliates) or disclose to anyone else any confidential information relating to the identities, preferences, and/or requirements of any such customer.

7. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach or asserted breach of its terms, will be settled by arbitration

before a single arbitrator in Kansas City, Missouri, in accordance with the rules then in effect under the Federal Arbitration Act, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. No claim may be arbitrated unless written notice of the basis of the claim is received within 180 days after the party first knew of the existence of the general facts upon which the claim is based. All arbitration hearings must commence within 90 days after the written notice of the claim. Employee and the Company shall share equally any fees and expenses of any arbitrator. The arbitrator will decide what amount, if any, of the prevailing party’s legal fees and expenses will be paid by the non-prevailing party. For all purposes, this Agreement will be interpreted and enforced under Missouri and United States law, as respectively applicable.

10. Governing Law. This Agreement shall be subject to, and be governed by, the laws of the State of Missouri.

11. Transfer, Assignment, Modification, etc. This Agreement may not be transferred, assigned, modified, amended or waived without the prior written

consent of all parties except that the Company may assign this Agreement without the consent of the Employee in the event any person, corporation or other entity, by merger, consolidation, purchase of assets, liquidation, voluntary or involuntary assignment or otherwise, acquires all or a substantial part of the assets of the Company (or one of its Affiliates) or succeeds to one or more lines of business of the Company (or one of its Affiliates.)

14. Effect of Management Continuity Agreement. In the event of a Qualifying Termination, as defined under the Management Continuity Agreement dated

February 3, 2003, by and between Interstate Bakeries Corporation, a Delaware corporation, and the Employee (the “Continuity Agreement”), all of the Employee’s rights to any compensation and benefits to be provided to Employee in connection with such Qualifying Termination shall be solely governed by and paid pursuant to the terms of the Continuity Agreement and the Employee shall have no rights to any of the compensation and benefits provided for under this Agreement.

[The remainder of this page has intentionally been left blank.]

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day and year first above written.

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

					INTERSTATE BRANDS CORPORATION


					By:	/s/ James R. Elsesser
					Title: Chief Executive Officer


					/s/ Robert P. Morgan
					Robert P. Morgan

EX-10.4 6 j9625_ex10d4.htm EX-10.4

Exhibit 10.4

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement” or “Employment Agreement”) is made and entered into as of the 18th day of March, 2003, by and between INTERSTATE BRANDS WEST CORPORATION, a Delaware corporation (the “Company”), and Richard D. Willson (“Employee”).

The Company and Employee hereby mutually agree as follows:

1. Employment.

(a) The Company shall employ Employee, and Employee shall serve the Company on the terms and subject to the conditions set forth herein for a period commencing on January 1, 2003, and terminating on January 1, 2005 (the “Expiration Date”), except as provided in Section 1(b) below. Employee shall serve in the capacity of Executive Vice President of the Western Division of the Company. The duties, responsibilities and authority of Employee shall be those that are normally incident to the office to be held by Employee. Employee shall devote his best efforts and abilities and all his business time to the affairs and interests of the Company (except as may be otherwise authorized by the Board of Directors of the Company). Employee’s principal office shall be at Kansas City, Missouri.

terminated by either the Company or Employee by delivery, on or prior to June 1 of such year, of a termination notice to the other party.

2. Compensation. For his services to the Company, Employee shall be entitled:

(a) To receive (i) commencing January 1, 2003, an aggregate base annual salary in the amount not less than One Hundred Eighty Six Thousand Five Hundred dollars ($186,500) and (ii) an annual bonus pursuant to the terms of the Incentive Compensation Plan (“Plan”) at the level specified for an Executive Vice President under the Plan, as the same may be amended from time to time. At annual or approximate annual intervals, the Company shall conduct, or cause to be conducted, a review of Employee’s salary, giving attention to all pertinent factors, including without limitation the performance of the Company, the performance of Employee and compensation practices inside and outside the Company. The Company shall, after such review, determine Employee’s base salary to be paid until the completion of the next review.

(d) To receive perquisites that are the same as those that are provided to executives with comparable responsibilities and pay grade, including without

limitation monthly club dues, a new company car every three (3) years, an annual allowance for financial counseling (any unused amount may be rolled over to the next succeeding year provided that the amount available in any given year will not exceed twice the annual allowance) and paid vacations.

3. Termination; Effect of Termination.

(c) For purposes hereof, during the Severance Period Employee shall be deemed to be in service and shall continue to accrue benefits under any retirement

plan of the Company and any supplemental retirement benefits agreement in effect between the Company and Employee immediately prior to the Severance Period. All such payments shall be made without reference to or deduction for any subsequent employment obtained or obtainable by Employee. In the event that Employee would be ineligible to participate in or be covered by any noncash benefit plan or program by reason of such termination of his employment, the Company shall provide substantially similar benefits or coverage through other sources.

7. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach or asserted breach of its terms, will be settled by arbitration

10. Governing Law. This Agreement shall be subject to, and be governed by, the laws of the State of Missouri.

11. Transfer, Assignment, Modification, etc. This Agreement may not be transferred, assigned, modified, amended or waived without the prior written

14. Effect of Management Continuity Agreement. In the event of a Qualifying Termination, as defined under the Management Continuity Agreement dated

[The remainder of this page has intentionally been left blank.]

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day and year first above written.

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

					INTERSTATE BRANDS WEST CORPORATION


					By:	/s/ James R. Elsesser
					Title: Chief Executive Officer


					/s/ Richard D. Willson
					Richard D. Willson

EX-10.5 7 j9625_ex10d5.htm EX-10.5

Exhibit 10.5

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement” or “Employment Agreement”) is made and entered into as of the 7th day of March, 2003, by and between INTERSTATE BRANDS CORPORATION, a Delaware corporation (the “Company”), and Thomas S. Bartoszewski (“Employee”).

The Company and Employee hereby mutually agree as follows:

1. Employment.

(a) The Company shall employ Employee, and Employee shall serve the Company on the terms and subject to the conditions set forth herein for a period commencing on January 1, 2003, and terminating on January 1, 2005 (the “Expiration Date”), except as provided in Section 1(b) below. Employee shall serve in the capacity of Executive Vice President of the Eastern Division of the Company. The duties, responsibilities and authority of Employee shall be those that are normally incident to the office to be held by Employee. Employee shall devote his best efforts and abilities and all his business time to the affairs and interests of the Company (except as may be otherwise authorized by the Board of Directors of the Company). Employee’s principal office shall be at Kansas City, Missouri.

terminated by either the Company or Employee by delivery, on or prior to June 1 of such year, of a termination notice to the other party.

2. Compensation. For his services to the Company, Employee shall be entitled:

(a) To receive (i) commencing January 1, 2003, an aggregate base annual salary in the amount not less than One Hundred Eighty Five Thousand dollars ($185,000) and (ii) an annual bonus pursuant to the terms of the Incentive Compensation Plan (“Plan”) at the level specified for an Executive Vice President under the Plan, as the same may be amended from time to time. At annual or approximate annual intervals, the Company shall conduct, or cause to be conducted, a review of Employee’s salary, giving attention to all pertinent factors, including without limitation the performance of the Company, the performance of Employee and compensation practices inside and outside the Company. The Company shall, after such review, determine Employee’s base salary to be paid until the completion of the next review.

3. Termination; Effect of Termination.

6. Restrictions. Period the Employee will not, as an individual or as a partner, employee, agent, advisor, consultant or in any other capacity of or to any person, firm, corporation or other entity (excluding the Company or one of its Affiliates), directly or indirectly, other than as a 2% or less shareholder of a publicly traded corporation, do any of the following:

7. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach or asserted breach of its terms, will be settled by arbitration

10. Governing Law. This Agreement shall be subject to, and be governed by, the laws of the State of Missouri.

11. Transfer, Assignment, Modification, etc. This Agreement may not be transferred, assigned, modified, amended or waived without the prior written

14. Effect of Management Continuity Agreement. In the event of a Qualifying Termination, as defined under the Management Continuity Agreement dated

[The remainder of this page has intentionally been left blank.]

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day and year first above written.

THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

					INTERSTATE BRANDS CORPORATION


					By:	/s/ James R. Elsesser
					Title: Chief Executive Officer


					/s/ Thomas S. Bartoszewski
					Thomas S. Bartoszewski

EX-10.6 8 j9625_ex10d6.htm EX-10.6

Exhibit 10.6

MANAGEMENT CONTINUITY AGREEMENT

This MANAGEMENT CONTINUITY AGREEMENT (this “Agreement”), is entered into by and between Interstate Bakeries Corporation (“IBC”), a Delaware corporation, and James R. Elsesser, an individual (the “Executive”).

WITNESSETH:

WHEREAS, the Compensation Committee, as defined herein, in action taken at a meeting held on February 3, 2003, and subsequently approved by the Board of Directors in action taken at a meeting on February 4, 2003, has authorized IBC and its wholly owned subsidiaries, Interstate Brands Corporation (“Brands”) and Interstate Brands West Corporation (“Brands West”) to enter into a Management Continuity Agreement (the “Agreement”) with certain key executives of IBC; and

WHEREAS, the Board of Directors believes it is imperative, in the event of an attempted Change in Control, as defined herein, that certain key executives continue employment with IBC or one of its Affiliates, and that IBC be able to receive and rely upon the advice of such executives on the best interests of IBC and its shareholders, without concern that the executives may be distracted by uncertainties as to their own position or security; and

WHEREAS, the Executive is a key executive of IBC or one of its Affiliates and has been selected by the Board of Directors to be offered this Agreement; and

WHEREAS, the Board of Directors believes that the payments, which may be made under this Agreement, constitute additional reasonable compensation for services to be rendered by the Executive in connection with a Change in Control;

NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, IBC and the Executive agree as follows:

Article 1. Definitions: For purposes of this Agreement, the following terms shall have the meanings set forth below:

a. Affiliate: An Affiliate shall mean any Person who, directly or indirectly or through one or more intermediaries, Controls another Person, is Controlled by another Person, or is under common Control with another Person.

b. Base Compensation: The Base Compensation shall mean the sum of:

(i) the Executive’s monthly gross salary paid by IBC or one of its Affiliates, whether paid or deferred, for the last full month preceding the Executive’s Qualifying Termination or for the last full month preceding the Change in Control, whichever is greater; and

(ii) a one (1) month portion (as if earned ratably over the relevant period) of the greater of (x) the Executive’s most recent annual (or, if applicable, pro rata portion of the annual) bonus received from IBC or one of its Affiliates, whether paid or deferred, preceding the Executive’s Qualifying Termination or the Change in Control, whichever is greater and (y) the target incentive award for the Executive under the Incentive Plan;

c. Beneficial Ownership: Beneficial Ownership shall mean “beneficial ownership” as defined in Rule 13d-3 promulgated under Section 13(d) of the Exchange Act.

d. Board of Directors: The Board of Directors shall mean the Board of Directors of IBC.

e. Buyer: A Person which, alone or with its Affiliates, purchases the business or businesses of IBC and/or one of IBC’s Affiliates in a transaction or transactions described in Article 2(c).

f. Change in Control: A Change in Control shall mean an occurrence set forth in Article 2.

g. Code: The Code shall mean the Internal Revenue Code of 1986, as amended or replaced from time to time and including any rulings and Treasury regulations issued thereunder.

h. Common Stock: Common Stock shall mean the $.01 par value common stock of IBC, and such other IBC voting stock that may be issued, prior to a Change in Control, in lieu of, or in addition to, the Common Stock, as a result of (i) a merger or consolidation of IBC, (ii) the creation of a class or classes of tracking stock, or (iii) the reclassification of any of the foregoing.

i. Compensation Committee: The Compensation Committee shall mean the Compensation Committee of IBC.

j. Continuing Director: A Continuing Director shall mean a member of the Board of Directors as of the date hereof, and any other director who was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors then in office.

k. Control: Control (including the terms “controlling”, “Controlled by” and “under common control with”) shall mean the possession of a power, directly or indirectly, whether through ownership of securities, by contract or otherwise:

(i) to elect a majority of the Board of Directors of a Person; or

(ii) to direct the business, management and policies of a Person or direct the sale of a substantial portion of its assets.

l. Disability: A Disability shall mean a condition where the Executive suffers a complete inability to perform the Executive’s work assignments because of injury or sickness, and such inability is expected to continue indefinitely. To determine Disability, IBC shall rely on a determination with respect to disability of the Executive made under the Interstate Brands Corporation Long Term Disability Plan or any successor disability plan. If no such determination has been made within seven (7) months after the Executive’s last day worked, or if the Executive is not enrolled in any such Long Term Disability Plan, the determination shall be made by a licensed physician jointly selected by IBC and the Executive. Fees and expenses of any physician, and all costs of examinations of the Executive, shall be paid by IBC or one of its Affiliates.

m. Discount Rate: The Discount Rate shall mean the “applicable interest rate” (and the mortality tables, if applicable) prescribed under Section 417(e)(3) of the Code at the time of the Executive’s Qualifying Termination.

n. Exchange Act: The Exchange Act shall mean the Securities Exchange Act of 1934, as amended.

o. Group: A Group shall mean “group” as defined in Section 13(d)(3) of the Exchange Act.

p. Incentive Plan: The Incentive Plan shall mean the Interstate Brands Corporation Incentive Compensation Plan for Corporate and Division Management as the same may be amended from time to time and all similar plans adopted during the term of this Agreement.

q. Payment Period: The Payment Period shall mean the period commencing with the first day of the month following the month in which a Qualifying Termination occurs and continuing for twenty-four (24) months thereafter.

r. Person: Person shall mean any natural person, firm, individual, company, corporation, partnership, joint venture, joint stock company, limited liability company, business trust, trust, association or any other business organization or entity, whether incorporated or unincorporated, or any division thereof.

s. Qualifying Termination: A Qualifying Termination shall mean the Executive’s termination of employment, within two (2) years after a Change in Control, from IBC, a Buyer or an Affiliate or a Successor of the foregoing; provided that, a Qualifying Termination shall not be deemed to occur on account of:

(i) the Executive’s transfer of employment at any time during the term of this Agreement between any two Persons comprised of IBC or its Successor, and any of their Affiliates, provided that, upon such a transfer after a Change in Control, the Executive has

Substantially the Same Employment after such transfer as immediately prior to the Change in Control; or

(ii) the Executive’s being employed by a Buyer or any Affiliate or Successor of such Buyer, in connection with a Change in Control described in Article 2(c), provided that, during the term of this Agreement, the Executive has Substantially the Same Employment as immediately prior to the Change in Control; or

(iii) the Executive’s death; or

(iv) the Executive’s voluntary termination of employment with IBC, a Buyer or an Affiliate or Successor of the foregoing within two (2) years after such Change in Control, if the Executive has, at all times, Substantially the Same Employment as immediately prior to the Change in Control.

It is expressly understood that Executive shall in no event be deemed to have waived his or her right to Severance Benefits under Article 4 of this Agreement if Executive remains employed during or after a time during which he or she ceased to have Substantially the Same Employment after a Change in Control, as long as the Executive incurs a termination of employment within two (2) years after such Change in Control and such termination of employment is not a termination as described in Article 1 s. (i), (ii) or (iii).

t. Retirement Plan: The Retirement Plan shall mean the Interstate Brands Corporation Retirement Income Plan, as amended, or any successor retirement plan adopted by IBC.

u. Spin-off: A Spin-off shall mean a spin-off, reverse spin-off or similar type of transaction, including a management-led leveraged buyout, resulting in the disposition to IBC’s shareholders, or to a management-led leveraged buyout group, of all or substantially all of the stock and/or assets of any business conducted by IBC and/or its Affiliates.

v. Substantially the Same Employment: Substantially the Same Employment shall mean employment where there is, at all times during the period of up to two (2) years after a Change in Control compared to immediately prior to a Change in Control:

(i) no reduction in the Executive’s base salary and no less than such annual increases in the Executive’s base salary as were customary with respect to the Executive prior to the Change in Control; and

(ii) no reduction in the annual bonus award opportunity below the performance target applicable to the Executive, for both personal

and company or business unit performance, unless a substantially equivalent arrangement (embodied in an ongoing substitute or alternative annual bonus award plan) has been made with respect to such annual bonus award, and such arrangement provides benefits not materially less favorable to the Executive (both in terms of the amount of benefits provided and the level of the Executive’s participation relative to other participants); and

(iii) no substantial reduction in Executive’s participation in any executive incentive compensation plans in which Executive participated immediately before the Change in Control, unless a substantially equivalent arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such executive incentive compensation plans, and such arrangement provides benefits not materially less favorable to the Executive (both in terms of the amount of benefits provided and the level of the Executive’s participation relative to other participants); and

(iv) no substantial reduction in employee pension benefits (including plans qualified under Section 401(a) of the Code and non-qualified plans) and welfare and fringe benefits applicable to the Executive, so that the benefit programs for which the Executive is eligible are, in the aggregate, substantially equivalent; and

(v) no reduction of a substantial nature in the Executive’s duties or responsibilities, or assignment of new duties inconsistent with the Executive’s skills, education and experience; and

(vi) no substantial reduction in the Executive’s access to administrative support services.

w. Successor: A Successor shall mean (i) the continuing, surviving or successor Person which is created, or remains in existence, upon the merger or consolidation of two Persons; or (ii) a Person which otherwise succeeds (by operation of law, contract or otherwise) to the rights, duties or interests of another Person.

x. Supplemental Plan: The Supplemental Plan shall mean the IBC Supplemental Executive Retirement Plan, as amended, or any successor supplemental retirement plan adopted by IBC.

Article 2. Change in Control: A Change in Control will occur if there is:

a. Such a change in the membership of the Board of Directors that Continuing Directors shall have ceased (for any reason) to constitute at least a majority of the Board of Directors; or

b. An acquisition by any Person or Group, or by a Person and its Affiliates or by a Group and Affiliates of members of such Group, of the Beneficial Ownership of fifty percent (50%) or more of the then-outstanding Common Stock of IBC (other than acquisitions by IBC, an IBC Affiliate, or any trustee or other fiduciary holding IBC Common Stock pursuant to the terms of any IBC benefit plan); or

c. Either of the following: (i) a sale of all or substantially all of the assets of IBC in a transaction subject to the provisions of Section 271 of the Delaware General Corporation Law; or (ii) a sale or other disposition to a Person or a Group, or to a Person and its Affiliates or to a Group and Affiliates of members of such Group, (excluding a sale or disposition to an Affiliate or Affiliates of IBC), of all or substantially all of the assets of those businesses of IBC and its Affiliates which, in the aggregate, accounted for (as of the end of the fiscal quarter ending coincident with or immediately preceding such sale) all or substantially all of IBC’s operating profit; or

d. A merger, share exchange, reorganization or consolidation of IBC with any other Person other than an Affiliate of IBC (a “Business Combination”), unless the voting power of the Common Stock outstanding immediately before such Business Combination continues to represent, immediately following such Business Combination (either by remaining outstanding or by being converted into voting securities of the Person surviving after such Business Combination or its Affiliate), more than 50% of the combined voting power of the then-outstanding voting securities of such surviving Person (or its Affiliate) including (if applicable) IBC; or

e. A finding by a majority of the Continuing Directors that a sale, disposition, merger or other transaction or event designated by such Continuing Directors in their sole discretion shall, under this Agreement, constitute a Change in Control with respect to the Executive.

Notwithstanding the foregoing, in no event shall a Spin-off be deemed to constitute a Change in Control.

Article 3. Operation of Agreement: This Agreement shall not create any obligation on the part of IBC or its Affiliates, or the Executive, to continue the Executive’s employment relationship. Anything in this Agreement to the contrary notwithstanding, the Executive shall not be entitled to Severance Benefits, as defined below, under this Agreement unless and until there has been a Change in Control and the Executive has had a Qualifying Termination. Except as hereinafter provided, this Agreement shall not affect any other benefit program (as such programs may be amended) applicable to the Executive; provided, that, by execution of this Agreement, the Executive hereby waives any and all claims to benefits under any termination or severance plan or similar severance arrangement offered by IBC or its Affiliates to all or some of their employees during the term of this Agreement, that would otherwise by payable to the Executive on account of, or coincident with, a Change in Control and termination of employment.

Article 4. Severance Benefits: If the Executive remains in the employ of IBC or one of its Affiliates until a Change in Control has occurred, then upon the Executive’s Qualifying Termination within two (2) years after a Change in Control, the Executive shall be entitled to the following benefits (“Severance Benefits”), subject to withholding of any federal, state or local taxes which, in the opinion of counsel for the payor of the Severance Benefits, are required to be withheld, and further subject to Article 5 of this Agreement:

a. Payment in a lump sum in cash, within sixty (60) days of the Executive’s Qualifying Termination, of an amount equal to the Executive’s Base Compensation multiplied by twenty-four (24); and

b. Continuation, from the date of the Executive’s Qualifying Termination and continuing during the Payment Period, of life, health, accident and disability benefits no less favorable than those provided to the Executive under life, health, accident and disability benefit plans and programs in effect immediately prior to the Change in Control (including, but not limited to, the Interstate Brands Corporation Welfare Benefit Plan), subject to all terms and conditions of such plans immediately prior to such Change in Control including, but not limited to, provisions regarding the extent and duration of spouse and dependent coverage, and subject to payment of premiums, if any, charged at rates no greater than those paid by active employees under the rate structure in effect immediately prior to the Change in Control; and further provided, that such health benefits shall not terminate at the end of the Payment Period but shall continue through the Executive’s sixty-fifth (65th) birthday and, with respect to the Executive’s spouse and dependents, for such period provided under the aforesaid provisions regarding the extent and duration of spouse and dependent coverage, and subject to payment of premiums charged at rates no greater than those paid by active employees under the rate structure in effect immediately prior to the Change in Control; and

c. Immediate and full vesting under the Supplemental Plan, subject only to forfeiture as provided in Section 3.2 (c)(ii) of the Supplemental Plan, and an additional two (2) Years of Credited Service (as defined in the Supplemental Plan), provided that in no event shall the Executive’s resulting Years of Credited Service, after adjustment as provided in this Article 4(c), exceed twenty (20).

d. During the Payment Period, the Executive may request in writing, and IBC or one of its Affiliates shall at its expense engage within a reasonable time following such written request, an outplacement counseling service of national reputation to assist the Executive in obtaining employment. The Executive shall be entitled to outplacement services which are customary for someone in the Executive’s position at a cost not to exceed $15,000.

Article 5. Excise Taxes and Gross-Up Payment:

a. Anything in this Agreement to the contrary notwithstanding, and except as set forth below, in the event it shall be determined under the provisions of Article 5(b) that any payment or distribution by IBC, a Buyer, or any Successor or Affiliate of the foregoing (“Payor”), to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, including without limitation any other plan, arrangement or agreement with such Payor, and including a determination (i) with regard to the value of any accelerated vesting of stock awards or other forms of compensation, if such vesting occurs as a result of a Change in Control; but (ii) without regard to any additional payments required under this Article 5) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”). This Gross-Up Payment shall be equal to an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, (i) any income and FICA taxes (and any interest and penalties imposed with respect thereto) and (ii) Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the payments. The obligation of IBC or one of its Affiliates to make Gross-Up Payments under this Article 5(a) shall not be conditioned upon the Executive’s Qualifying Termination of Employment. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in either the state and locality of the Executive’s place of employment at the time of the Change in Control or in the state and locality of residence at the time or times of payment, as applicable, net of the maximum reduction in federal income taxes that could be obtained from the deduction of the state and local taxes.

Notwithstanding the foregoing provisions of this Article 5(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110 percent of the greatest amount (the “Reduced Amount”) that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive, and the Payments, in the aggregate, shall be reduced to the Reduced Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Article 4(a) hereof, and in any event shall be made in such a manner as to maximize the value of all Payments actually made to the Executive. For purposes of reducing the payments to the Reduced Amount, only amounts payable under this Agreement (and no other

Payments) shall be reduced. If the reduction of amounts payable under this Agreement would not result in the payment of the Reduced Amount, no amounts payable under this Agreement shall be reduced.

b. IBC shall provide written notice to the Executive with respect to each Payment promptly after it occurs, setting forth the nature of such Payment. Subject to the provisions of Article 5(c), all determinations required to be made under this Article 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm as may be designated by the Executive (the “Accounting Firm”). Within 15 days after the Accounting Firm has been notified by the Executive or IBC that a Payment has occurred, the Accounting Firm shall provide detailed supporting calculations with respect to such Payment both to IBC and the Executive. All fees and expenses of the Accounting Firm shall be borne solely by IBC. Any Gross-Up Payment, as determined pursuant to this Article 5, shall be paid by IBC or one of its Affiliates to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon IBC or its Affiliate and the Executive. As a result of any uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by IBC or one of its Affiliates should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that IBC exhausts its remedies pursuant to Article 5(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by IBC or one of its Affiliates to or for the benefit of the Executive.

c. The Executive shall notify IBC in writing of any written communication from the Internal Revenue Service or other taxing authority concerning the Gross-Up Payment or other matters arising under this Agreement. Such notification shall be given as soon as practicable but no later than ten business days after the Executive receives such written communication and shall apprise IBC of the content of such communication. Failure to give timely notice shall not be deemed to prejudice the Executive’s rights to Gross-Up Payment and rights of indemnity hereunder. The Executive shall not pay any claim pursuant to such written communication prior to the expiration of the 30-day period following the date on which the Executive gives such notice to IBC (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If IBC notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall (i) give IBC any information reasonably requested by IBC relating to such claim, (ii) take such action in connection with contesting such claim as IBC shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by IBC, (iii) cooperate with IBC in good

faith in order to effectively contest such claim, and (iv) permit IBC to participate in any proceedings relating to such claim; provided, however, IBC or one of its Affiliates shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, such that after payment by the Executive of any and all income taxes, Excise Taxes and FICA taxes (including any interest and penalties imposed with respect thereto) (“Taxes”) that may be imposed as a result of such representation and payment of costs and expenses by IBC or one of its Affiliates, the Executive retains an amount equal to such Taxes. Without limitation on the foregoing provisions of this Article 5(c), IBC shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay Taxes claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as IBC shall determine; provided, however, that if IBC directs the Executive to pay such claim and sue for a refund, IBC or one of its Affiliates shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless such that, after payment by the Executive of Taxes imposed with respect to such advance or with respect to any imputed income with respect to such advance, the Executive retains an amount equal to such Taxes. Furthermore, IBC’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority unrelated to the subject matter of this Agreement.

d. If, after the receipt by the Executive of an amount advanced by IBC or one of its Affiliates pursuant to Article 5(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to IBC’s complying with the requirements of Article 5(c)) promptly pay to IBC or its Affiliate the amount of such refund (together with any interest paid or credited thereon after Taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by IBC or one of its Affiliates pursuant to Article 5(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and IBC does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be deemed to be a part of the Gross-Up Payment and shall not be required to be repaid.

Article 6. Designated Beneficiary: The Executive, by notice in accordance with Article 12 hereof, may designate a beneficiary or contingent beneficiaries to receive the Severance Benefits described in Article 4 and the Gross-Up Payment described in Article 5 in the event of the Executive’s death following the Executive’s Qualifying Termination

but prior to payment in full of said Severance Benefits and/or Gross-up Payments by IBC, one of its Affiliates, or their Successor or assigns. The Executive may, from time to time, revoke or change any such designation of beneficiary. Any designation of beneficiary made pursuant to this Agreement shall be controlling over any other designation made by the Executive, testamentary or otherwise; provided, that if IBC or one of its Affiliates shall be in doubt as to the right of a beneficiary to receive payments, it may determine in its sole discretion to pay such amounts to the legal representative of the Executive’s estate.

Article 7. Early Separation: In the event that, prior to a Change in Control, the Executive executes a separation agreement with IBC or any of its Affiliates during the term of this Agreement which, by its terms, specifically addresses issues related to the Executive’s termination of employment and benefits to be paid upon such termination, all of the Executive’s rights, claims and entitlements under this Agreement shall terminate even if, under the terms of such separation agreement, the Executive remains employed by IBC or one of its Affiliates for a period of time after execution of such separation agreement.

Article 8. Restrictions: The Executive agrees, as a condition of receiving the Severance Benefits described under Article 4 or the Gross-Up Payment described under Article 5, that during the Payment Period the Executive will not, as an individual or as a partner, employee, agent, advisor, consultant or in any other capacity of or to any person, firm, corporation or other entity (excluding IBC, a Buyer, or a Successor or Affiliate of the foregoing), directly or indirectly, other than as a 2% or less shareholder of a publicly traded corporation, do any of the following:

a. carry on any business, or become involved in any business activity, which is competitive with the business conducted by IBC or an Affiliate immediately prior to a Change in Control; or

b. induce or attempt to induce, or assist anyone else to induce or attempt to induce, any customer of IBC or any Affiliate to discontinue its business with IBC or any Affiliate or disclose to anyone else any confidential information relating to the identities, preferences, and/or requirements of any such customer.

The Executive agrees (i) that the restraints contained in this Article 8, both separately and in total, are reasonable in view of the legitimate interests of IBC in protecting its, and its Affiliates’, trade secret information and business relationships; and (ii) to disclose to any potential future employer during the Payment Period, the terms of the restrictions against competition contained in this Article 8. The requirement of this Article 8 will be waived by IBC in the event the Executive (i) does not receive any of the Severance Benefits described under Article 4 or the Gross-Up Payment described under Article 5 and (ii) voluntarily disclaims, in writing, all of his or her rights to receive any such Severance Benefits or Gross-Up Payment pursuant to the terms of this Agreement and any other severance payments and benefits in connection with the Executive’s Qualifying Termination.

If any provision or subpart of this Article 8 is adjudicated to be invalid or unenforceable under applicable law, the validity or enforceability of the remaining provisions and subparts shall be unaffected. If any provision or subpart of this Article 8 is adjudicated to be invalid or unenforceable because it is overbroad or unreasonable, that provision or subpart shall not be void but rather shall be limited to the extent required to make it reasonable and shall be enforced as so limited.

In the event of a breach of this Article 8, IBC (i) shall have no further liability for any of the Severance Benefits described in Article 4 and the Gross-Up Payment described in Article 5 that have not been paid as of the date of the breach, or (ii) shall be entitled, in addition to any other legal or equitable remedies it may have, to temporary, preliminary and permanent injunctive relief restraining such breach.

Article 9. Successors and Assigns: This Agreement shall inure to the benefit of, and be binding upon, IBC, its Affiliates and their Successors. IBC and its Affiliates may not assign this Agreement without the Executive’s prior written consent. IBC and its Affiliates will require any Person to which it assigns this Agreement to assume expressly the Agreement and agree to perform this Agreement in the same manner and to the same extent that IBC and its Affiliates would be required to perform it if no such assignment had taken place. No assignment of this Agreement shall relieve IBC or its Affiliates from liability for any of its obligations hereunder, and in the event of any such assignment, IBC, its Affiliates or their Successor shall continue to remain primarily liable for payment of the Severance Benefits described in Article 4 and the Gross-Up Payment in Article 5 and for the performance and observance of the agreements provided herein to be performed and observed by IBC and its Affiliates. The Executive shall have no right to transfer or assign the right to receive any Severance Benefits under Article 4 and the Gross-Up Payment under Article 5 of this Agreement, except as permitted under Article 6.

Article 10. Costs: Irrespective of the success of the Executive’s claim, IBC or one of its Affiliates will reimburse the Executive, or the legal representative of the Executive’s estate, for reasonable attorney’s fees and costs in the event that the Executive brings legal action to enforce payment by IBC, its Affiliates or assigns, or any Successors to any of the foregoing, of the Severance Benefits described in Article 4 and the Gross-Up Payment under Article 5 (plus interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code on payments of such Severance Benefits and the Gross-Up Payment due but not timely made).

Article 11. Term of Agreement: This Agreement shall expire upon the earliest of the following to occur:

a. five (5) years from its effective date, unless extended by the Board of Directors on or before such expiration date;

b. if a determination of the Executive’s Disability is made before a Change in Control while this Agreement is in effect, the day following such determination; or

c. if the Executive ceases to be employed with IBC and any of its Affiliates prior to a Change in Control, the last day of such employment; provided that, if the Executive and IBC or one of its Affiliates enters into a separation agreement as described in Article 7 while this Agreement is in effect, the effective date of such separation agreement.

After the expiration of this Agreement, the Executive shall have no rights to any Severance Benefits described in Article 4 and the Gross-Up Payment described in Article 5; provided, however, if a Change in Control occurs prior to the expiration of this Agreement, then the Executive shall be entitled to the Gross-Up Payment described in Article 5 and, upon a subsequent Qualifying Termination, Severance Benefits described in Article 4, and the term of this Agreement shall be extended until the latest to occur of the following: (a) the expiration of the Payment Period; (b) the date of the final Gross-Up Payment due under Article 5; or (c) the expiration of the period for which health benefits are to be provided under Article 4(b).

Article 12. Notice: Any notice or other communication required or permitted hereunder is deemed delivered when delivered in person; on the next business day when sent by an overnight delivery service; or on the third business day when sent by U.S. mail service, as follows:

To IBC:		Corporate Secretary Interstate Bakeries Corporation 12 East Armour Boulevard Kansas City, MO 64111




To the Executive:		James R. Elsesser Interstate Bakeries Corporation 12 East Armour Boulevard Kansas City, MO 64111

Article 13. Venue: ANY ACTION OR LEGAL PROCEEDING TO ENFORCE PAYMENT OF SEVERANCE BENEFITS DESCRIBED IN ARTICLE 4 OR COMPLIANCE WITH THE COVENANTS CONTAINED IN ARTICLES 5 OR 8 OF THIS AGREEMENT SHALL BE BROUGHT IN A FEDERAL OR STATE COURT LOCATED WITHIN THE WESTERN DISTRICT OF MISSOURI, AND THE PARTIES TO THIS AGREEMENT CONSENT TO THE JURISDICTION AND VENUE OF SUCH COURT.

Article 14. Missouri Law to Govern: This Agreement shall be governed by the laws of the State of Missouri without regard to its conflict of laws provisions.

Article 15. Entire Agreement: This Agreement, constitutes the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes and replaces any previous management continuity agreement or any employment contract (oral or written) between IBC or any of its Affiliates and the Executive relating to (i) a Qualifying Termination and (ii) Gross-Up Payments. Upon the execution of this Agreement, all parties agree that any prior agreement (other than stock option or equity award agreements) or employment contract covering severance payments (or other severance-type payments) shall be considered null and void and of no further effect in the event of a Qualifying Termination or with respect to IBC’s or an Affiliates’ obligation to make Gross-Up Payments.

IN WITNESS WHEREOF, IBC and the Executive have executed this Agreement effective as of the 3rd day of February, 2003.

ATTEST:			INTERSTATE BAKERIES CORPORATION


/s/ Linda L. Thompson			/s/ Kent. B. Magill
Linda L. Thompson			Kent B. Magill
Assistant Secretary			Vice President and General Counsel


WITNESS:


/s/ Jolyn J. Sebree			/s/ James R. Elsesser
			James R. Elsesser

EX-10.7 9 j9625_ex10d7.htm EX-10.7

Exhibit 10.7

MANAGEMENT CONTINUITY AGREEMENT

This MANAGEMENT CONTINUITY AGREEMENT (this “Agreement”), is entered into by and between Interstate Bakeries Corporation (“IBC”), a Delaware corporation, and , an individual (the “Executive”).

WITNESSETH:

WHEREAS, the Executive is a key executive of IBC or one of its Affiliates and has been selected by the Board of Directors to be offered this Agreement; and

NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, IBC and the Executive agree as follows: