##### 



Interstate Bakeries Corporation Key Employee Retention Plan
 
    
    Introduction. Interstate Bakeries Corporation, along with seven of its subsidiaries and
affiliates1 (collectively, Interstate Bakeries), currently is pursuing a
restructuring of its financial obligations and operations through chapter 11 proceedings (the
Restructuring) that Interstate Bakeries anticipates will result in the confirmation
of a plan of reorganization whereby Interstate Bakeries would emerge as a reorganized entity
on a stand alone basis (a Plan of Reorganization). However, notwithstanding
Interstate Bakeries current expectations, the Restructuring conceivably could involve the
sale of all or substantially all of Interstate Bakeries assets and operations as a going
concern (a Sale) followed by a plan of reorganization that distributes the proceeds
from the Sale, instead of a Plan of Reorganization. In connection with the Restructuring,
Interstate Bakeries has developed a key employee retention plan (the Retention
Plan), which will compensate certain critical employees in order to assure their
retention and availability to Interstate Bakeries during the Restructuring, whether the
ultimate result is a Plan of Reorganization or a Sale. Interstate Bakeries anticipates that
the Retention Plan will have two components: (1) retention bonuses that would reward critical
employees who remain with Interstate Bakeries during and through the completion of the
Restructuring (Retention Bonuses); and (2) in lieu of Interstate Bakeries existing
annual incentive plan, incentive bonuses that would reward key management employees upon
completion of the Restructuring if Interstate Bakeries fiscal 2005 EBITDAR2 meets
or exceeds a predetermined target range (Restructuring Performance Bonuses).
 
 1
    
    The subsidiaries and affiliates are: Armour and Main Redevelopment Corporation; Bakers Inn Quality Baked Goods, LLC;
IBC Sales Corporation; IBC Services, LLC; IBC Trucking LLC; Interstate Brands
Corporation; and New England Bakery Distributors, L.L.C.2
    
    Earnings Before Interest, Taxes, Depreciation, Amortization and Restructuring.




---



##### 




    
    Key Employees. Interstate Bakeries expects approximately four hundred ninety four
(494) critical employees (the Participants) to participate in the Retention Plan.
Such employees are divided into seven (7) tiers. The first tier (Tier One)
consists of up to five (5) executive vice presidents and senior vice presidents and one (1)
vice president (collectively, the Tier One Participants). The second tier
(Tier Two) consists of up to twenty (26) executive vice presidents, senior vice
presidents, directors,3 and also includes other key employees (the Tier Two
Participants). The third tier (Tier Three) consists of up to thirteen (13)
vice presidents, directors and managers (the Tier Three Participants). The fourth
tier (Tier Four) consists of up to eighty eight (88) vice presidents, directors
and managers (the Tier Four Participants). The fifth tier (Tier Five)
consists of up to twenty one (21) vice presidents, directors and managers (the Tier
Five Participants). The sixth tier (Tier Six) consists of up to forty eight
(48) plant managers (the Tier Six Participants, and collectively with the Tier One
Participants through Tier Five Participants, the Senior Participants). The
seventh tier (Tier Seven) consists of up to two hundred ninety two (292) other
managers (the Tier Seven Participants). Attached hereto as Exhibit A is a
chart setting forth the composition of each Tier of Participants. The Participants are
considered by Interstate Bakeries to be absolutely essential to its Restructuring efforts.
Specifically, these employees possess unique or critical knowledge of Interstate Bakeries
businesses and the fresh baked goods industry. Such institutional knowledge, which could
not readily be replaced on the open market, is necessary not only to secure Interstate
Bakeries ongoing business enterprise, but also to assure the successful completion of the
Restructuring.
    
    Retention Bonuses. Retention Bonuses are designed to encourage Senior Participants
to remain with Interstate Bakeries by providing cash bonuses to Senior Participants who remain
in Interstate Bakeries employ during and throughout the Restructuring. The Retention Bonuses
for Senior Participants would range from twenty percent (20.0%) to sixty percent (60.0%) of a
Senior Participants base salary as follows: (a) twenty percent (20.0%) of base salary for
Tier Six Participants; (b) twenty five percent (25.0%) of base salary for Tier Five
Participants; (c) thirty five percent (35.0%) of base salary for Tier Four Participants; (d)
forty percent (40.0%) of base salary for Tier Three Participants; (e) fifty percent (50.0%) of base salary for Tier Two Participants; and (f) sixty percent (60.0%) of base
salary for Tier One Participants. A Retention Bonus shall be in addition to any other
compensation that a Senior Participant may otherwise be entitled to receive. Retention
Bonuses will be paid in three (3) installments in the following amounts and on
 
 3
    
    The term directors refers to
Interstate Bakeries employees having the job title of
director, not to members of Interstate Bakeries Board of Directors. 2




---



##### 



the following
dates, if such Senior Participants are employed by Interstate Bakeries on such dates.
Senior Participants shall be paid twenty five percent (25.0%) of their Retention Bonus (the
First and Second Retention Installments) on each of May 1, 2005 and November 1,
2005 (together, the Initial Retention Installment Dates); provided, however, that
Tier One Participants shall receive their First Retention Installment on the later of (a)
May 1, 2005 and (b) the date on which (i) Interstate Bakeries delivers a budget, in a form
consistent with the first updated Budget required pursuant Section 5.1(i) of the Revolving
Credit Agreement, dated September 23, 2004 (the DIP Credit Agreement)), or (ii) the
requirement in Section 5.1(i) of the DIP Credit Agreement with respect to the first updated
Budget is satisfied or waived; provided furtherthat (a) Tier One Participants Second
Retention Installment shall not be subject to any limitation with respect to Section 5.1(i)
of the DIP Credit Agreement, and (b) in any event Tier One Participants shall receive their
First Retention Installment no later than the Final Retention Installment Date (defined
below). The remaining fifty percent (50.0%) of a Senior Participants Retention Bonus (the
Final Retention Installment) will be payable on the date (the Final Retention
Installment Date) that is thirty (30) days after the occurrence (the Effective
Date) of either (a) the substantial consummation of a confirmed Plan of Reorganization,
or (b) the closing of a Sale; provided, however, that in no event shall the Final Retention
Installment be paid prior to November 1, 2005. The maximum possible aggregate amount of
Retention Bonuses is approximately $7.7 million. Attached as Exhibit B is a chart
setting forth the calculations regarding the Retention Bonuses.
    
    Restructuring Performance Bonuses. Restructuring Performance Bonuses are designed to
encourage all Participants to increase Interstate Bakeries enterprise value, and thus
increase value and returns for all stakeholders, during the Restructuring, by paying cash
bonuses to Participants if Interstate Bakeries achieves certain predetermined financial
objectives. Restructuring Performance Bonuses are intended to replace Interstate Bakeries
prepetition incentive plans which will be terminated. Restructuring Performance Bonuses will
be based upon Interstate Bakeries achieving a target EBITDAR of $53 million for fiscal 2005
(the Target EBITDAR). If Interstate Bakeries achieves the Target EBITDAR (i.e.,
Interstate Bakeries actual EBITDAR for fiscal 2005 (Actual EBITDAR) equals the
Target EBITDAR), Participants would be eligible to receive a Restructuring Performance Bonus
(the Baseline Restructuring Performance Bonus) ranging from five percent (5.0%) to
thirty percent (30.0%) of his or her base salary as follows: (a) five percent (5.0%) of base
salary for Tier Seven Participants; (b) ten percent (10.0%) of base salary for Tier Six
Participants; (c) twelve and one half percent (12.5%) of base salary for Tier Five Participants; (d) seventeen and one half percent (17.5%) of base salary for Tier Four
Participants; (e) twenty percent (20.0%) of base salary for Tier Three Participants; (f)
twenty five percent (25.0%) of base salary for Tier Two Participants; and (g) thirty percent
(30.0%) of base salary for Tier One Participants. A Restructuring
 3




---



##### 



Performance Bonus shall
be in addition to any other compensation that a Participant may otherwise be entitled to
receive, but shall be reduced by the amount of any guaranteed bonus a Participant receives
pursuant to an employment contract. The aggregate amount of Baseline Restructuring
Performance Bonuses is approximately $5.0 million. The aggregate amount of the Baseline
Restructuring Performance Bonuses is equal to approximately 11% of the aggregate amount of
the Participantss base salaries. Attached hereto as Exhibit C is a chart setting
forth the calculation of the aggregate amount of the Baseline Restructuring Performance
Bonuses. Restructuring Performance Bonuses will decrease or increase proportionally if the
Actual EBITDAR is less than or exceeds the Target EBITDAR; provided that(a) no
Restructuring Performance Bonuses shall be payable if the Actual EBITDAR is less than eighty
percent (80%) of the Target EBITDAR, and (b) the aggregate amount of the Restructuring
Performance Bonuses shall be capped at approximately $6.2 million, which would be payable if
the Actual EBITDAR is 125% of the Target EBITDAR. Attached hereto as Exhibit D is a
chart setting forth the range of the aggregate amounts of potential Restructuring
Performance Bonuses.
    
    The amount of Restructuring Performance Bonuses payable to a Participant (the
Actual Restructuring Performance Bonuses) shall consist of (a) a fixed component
equal to sixty percent (60.0%) of the Participants earned Restructuring Performance Bonus
(the Fixed Amount) and (b) a discretionary component (the Discretionary
Amount) determined by the Compensation Committee of Interstate Bakeries Board of
Directors upon recommendations by Interstate Bakeries senior management (who are Tier One
Participants) within thirty (30) days after the Effective Date based upon their evaluation of
each Participants performance during the entire Restructuring; provided, however, that
Interstate Bakeries Chief Executive Officer, who is not a Participant, shall be responsible
for the evaluations of, and recommendations regarding Discretionary Amounts for, the Tier One
Participants and the Compensation Committee shall independently review such evaluations and
recommendations. Accordingly, forty percent (40.0%) of the aggregate amount of the earned
Restructuring Performance Bonuses shall be placed in a discretionary pool by Tiers (the
Discretionary Pool). Payments of Discretionary Amounts from the Discretionary Pool
shall be in amounts determined by the Compensation Committee; provided thatthe total of all
Discretionary Amounts paid to Participants in a particular Tier shall not exceed the amount
contributed to the Discretionary Pool by such Tier. Actual Restructuring Performance Bonuses
will be paid in two (2) installments in the following amounts and on the following dates to
Participants who remain employed by Interstate Bakeries on such dates: (a) fifty percent
(50.0%) of a Participants Actual Restructuring Performance Bonus (the Initia
l Performance Installment) shall be payable on the date (the Initial
Performance Installment Date) that is the earlier of (a) the date on which Interstate
Bakeries fiscal 2005 financial statements are complete (the Statements Completion
Date) or (b) August 15, 2005; and (b) the remaining fifty percent (50.0%) of a
Participants Actual
 4




---



##### 



Restructuring Performance Bonus (the Final Performance
Installment) shall be payable on the date (the Final Performance Installment Date,
and collectively with the Initial Retention Installment Dates, the Final Retention
Installment Date and the Initial Performance Installment Date, the Installment
Dates) that is the later of (a) thirty (30) days after the Effective Date or (b) the
Statements Completion Date; provided, however, that in the event that the Initial
Performance Installment is paid prior to the Statements Completion Date, the Final
Performance Installment shall reflect the amount of the difference, if any, between the
Actual Restructuring Performance Bonus calculated on each of the Performance Installment
Date and the Statements Completion Date.
    
    Termination, Resignation, Retirement, Death or Disability. Any Participant who is
terminated for Cause or voluntarily leaves Interstate Bakeries employment without Good Reason
prior to an Installment Date automatically will forfeit such Participants right to any and
all payments under the Retention Plan that may have accrued prior to, or be due subsequent to,
the Participants termination date (in the event of termination) or last day as employee of
Interstate Bakeries (in the event of voluntary resignation). In the event a Participant is
terminated prior to an Installment Date without Cause or resigns for Good Reason, Interstate
Bakeries shall pay such Participant (1) if the Participant is a Senior Participant, within
thirty (30) days after such termination, a pro-rated amount (as determined by the date of
termination pursuant to the formula set forth below) of such Participants Retention Bonus,
and (2) on the Initial Performance Installment Date and/or the Final Performance Installment
Date, a pro-rated amount (as determined by the date of termination pursuant to the formula set
forth below) of the portion of such Participants Actual Restructuring Performance Bonus, if
any, payable on such Installment Date. Upon the confirmation of a Participants death, total
disability or Retirement (as defined below) prior to an Installment Date, Interstate Bakeries
will pay such Participant or such Participants estate, as the case may be, (1) if the
Participant is a Senior Participant, within thirty (30) days after such confirmation, a
pro-rated amount (as determined by the date of death, total disability or Retirement pursuant
to the formula set forth below) of such Participants Retention Bonus, and (2) as soon as
reasonably practicable after the Initial Performance Installment Date and/or the Final
Performance Installment Date, a pro-rated share (as determined by the date of death, total
disability or Retirement pursuant to the formula set forth below) of the portion of such
Participants Actual Restructuring Performance Bonus, if any, payable on such Installment
Date. A pro-rated Retention Bonus shall be in proportion to the ratio determined by dividing
(1) the number of days from and after either (a) September 22, 2004 (the Petition
Date) or, (b) if either Initial Retention Installment Date has occurred, the last Initial Retention Installment Date, up to and including either (x) the
Participants last day as an employee of Interstate Bakeries or (y) the date of a
Participantss death, total disability or Retirement, as the case may be, by (2) the lesser
of five hundred forty (540) days or the actual number of days between the Petition Date and
the Effective Date, if the Effective Date is known or reasonably
 5




---



##### 



anticipated as of the Participants last day as an employee of Interstate Bakeries. A pro-rated Actual
Restructuring Performance Bonus, if any, shall be in proportion to the ratio determined by
dividing (1) the number of days from and after the Petition Date up to and including either
(a) the Participants last day as an employee of Interstate Bakeries or (b) the date of a
Participantss death, total disability or Retirement, as the case may be, by (2) the number
of days from and after the Petition Date up to and including either (A) with respect to the
Initial Performance Installment, the Initial Performance Installment Date, or (B) with
respect to the Final Performance Installment, the Final Performance Installment Date.For purposes of the Retention Plan, Cause means the Participants (1) continuing
failure to substantially perform his/her duties; (2) failure to observe material Interstate
Bakeries policies applicable to Interstate Bakeries employees generally; (3) reckless or
willful misconduct in the performance of his/her duties to Interstate Bakeries; (4)
commission of any act of fraud, embezzlement, misappropriation, or dishonesty against
Interstate Bakeries, its creditors, or shareholders; (5) indictment with respect to any
felony or criminal offense involving dishonesty or moral turpitude; or (6) material breach
of the terms of any written agreement between the Participant and Interstate Bakeries (in
cases (1), (2) and (6) above, after written notice from Interstate Bakeries and fifteen (15)
days thereafter for such Participant to cure) (in cases (3), (4) and (5) above, prior notice
is not required and cure is not possible). Good Reason means (1) a material reduction in
salary, unless such reduction occurs with respect to all or substantially all of Interstate
Bakeries similarly situated employees; (2) a material reduction in duties or
responsibilities; or (3) relocation of the Participants principal place of employment to a
location that is more than seventy five (75) miles away, except for employees in Interstate
Bakeries field organization who are requested to relocate in the ordinary course of
business (in each case, after written notice to Interstate Bakeries and fifteen (15) days
thereafter for Interstate Bakeries to cure); provided, however, that Good Reason shall in no
event apply upon the appointment of a chapter 11 trustee or examiner in Interstate Bakeries
chapter 11 cases, the dismissal of such cases, or the conversion of such cases to cases
under chapter 7 of the Bankruptcy Code. Retirement for purposes of the Retention Plan
shall mean retirement as defined by Interstate Bakeries in accordance with its existing
retirement plans and policies, and in each case shall be determined by Interstate Bakeries
and not the Participant. Notwithstanding anything herein to the contrary, the Retention
Plan will not prohibit or interfere with Interstate Bakeries right to assign projects,
tasks and responsibilities to any Participant or to alter the nature of Interstate Bakeries
rights with respect to the Participants employment relationship, including the right to terminate the
employment of any Participant at any time, with or without prior notice, and for any reason.
 6




---



##### 




    
    Vacancies in Critical Positions. If the position held by a
Participant becomes vacant prior to the successful completion of
the Restructuring and Interstate Bakeries promotes a current
employee or hires a new employee into that position, Interstate
Bakeries will offer the promoted employee a pro-rated amount of
the bonuses available hereunder for the Participant previously
holding that position.
    
    Calculation of Other Benefits. The payments made pursuant to the
Retention Plan are special payments for a limited time period and,
therefore, shall not be considered part of Interstate Bakeries
ongoing compensation structure and shall not be included as
compensation for purposes of other employee plans or benefits
provided by Interstate Bakeries.
    
    Administration.Interstate Bakeries has full power and authority,
in its sole discretion, to construe, interpret and administer the
Retention Plan and its decisions with respect to a Participants
rights under the Retention Plan shall be final, conclusive and
binding on all parties.
 7




---



##### 




    
    Assurances of Payment, Court Approval.Interstate Bakeries will
take such action as may be reasonably required to assure payment
of the bonuses under the Retention Plan. Interstate Bakeries
shall seek Court authority to implement the Retention Plan as soon
as is practicable and will seek to have all unpaid bonuses
thereunder treated as administrative claims in the Restructuring.
No amounts will be payable under the Retention Plan until it is
approved by the Bankruptcy Court.
    
    Amendment.Interstate Bakeries will amend the Retention Plan only
upon further order of the Bankruptcy Court.
 8




---



##### 



EXHIBIT A
 Restructuring Plan Participants
 Tier
    
    Employee Position
    
    Maximum ParticipantsI
    
    Executive Vice Presidents, 
Senior Vice Presidents
and a Vice President
    
    
    6II
    
    Executive Vice Presidents, 
Senior Vice Presidents, 
Vice Presidents, Directors and
other key employees
    
    
    26III
    
    Vice Presidents, Managers
and Directors
    
    
    13IV
    
    Vice Presidents, Managers
and Directors
    
    
    88V
    
    Vice Presidents, Managers
and Directors
    
    
    21VI
    
    Plant Managers
    
    
    48VII
    
    Other Managers
    
    
    292Total:
    
    
    494




---



##### 



EXHIBIT B
 Retention Bonuses
 Maximum
    
    Annual
    
    RetentionTier
    
    Employee Position
    
    Participants
    
    Salaries
    
    Bonus
    
    % of SalaryI
    
    Executive Vice
Presidents, 
Senior
Vice Presidents
and a Vice President
    
    
    6
    
    
    $
    1,641,932
    
    
    $
    985,159
    
    
    
    60.0
    %II
    
    Executive Vice
Presidents, Senior
Vice Presidents,
Vice Presidents,
Directors 
and other
key employees
    
    
    26
    
    
    $
    3,719,052
    
    
    $
    1,859,526
    
    
    
    50.0
    %III
    
    Vice Presidents,
Managers and
Directors
    
    
    13
    
    
    $
    1,576,340
    
    
    $
    630,536
    
    
    
    40.0
    %IV
    
    Vice Presidents,
Managers and
Directors
    
    
    88
    
    
    $
    8,411,050
    
    
    $
    2,924,617
    
    
    
    35.0
    %V
    
    Vice Presidents,
Managers and
Directors
    
    
    21
    
    
    $
    2,022,356
    
    
    $
    505,589
    
    
    
    25.0
    %VI
    
    Plant Managers
    
    
    48
    
    
    $
    4,211,218
    
    
    $
    842,244
    
    
    
    20.0
    %Total:
    
    
    202
    
    
    $
    21,581,948
    
    
    $
    7,747,671
    
    
    
    36.0
    %




---



##### 



EXHIBIT C
 Baseline Restructuring Performance Bonus
 RestructuringMaximum
    
    Annual
    
    Performance
    
    % ofTier
    
    Employee Position
    
    Participants
    
    Salaries
    
    Bonus
    
    SalaryI
    
    Executive Vice
Presidents,
Senior
Vice Presidents
and a Vice President
    
    
    6
    
    
    $
    1,641,932
    
    
    $
    492,580
    
    
    
    30.0
    %II
    
    Executive Vice
Presidents, 
Senior
Vice Presidents,
Vice Presidents,
Directors 
and other
key employees
    
    
    26
    
    
    $
    3,719,052
    
    
    $
    929,763
    
    
    
    25.0
    %III
    
    Vice Presidents,
Managers and
Directors
    
    
    13
    
    
    $
    1,576,340
    
    
    $
    315,268
    
    
    
    20.0
    %IV
    
    Vice Presidents,
Managers and
Directors
    
    
    88
    
    
    $
    8,411,050
    
    
    $
    1,471,934
    
    
    
    17.5
    %V
    
    Vice Presidents,
Managers and
Directors
    
    
    21
    
    
    $
    2,022,356
    
    
    $
    252,795
    
    
    
    12.5
    %VI
    
    Plant Managers
    
    
    48
    
    
    $
    4,211,218
    
    
    $
    421,122
    
    
    
    10.0
    %VII
    
    Other Managers
    
    
    292
    
    
    $
    22,673,552
    
    
    $
    1,133,678
    
    
    
    5.0
    %Total:
    
    
    494
    
    
    $
    44,255,500
    
    
    $
    5,017,138
    
    
    
    11
    %




---



##### 



EXHIBIT D
 Range of Potential Restructuring Performance Bonuses
 Actual EBITDAR
    
    % of Target($Thousands)
    
    EBITDAR
    
    Restructuring Performance Bonus$
    
    
    80
    %
    
    $
    4,013,711$
    
    
    85
    %
    
    $
    4,264,567$
    
    
    90
    %
    
    $
    4,515,424$
    
    
    93
    %
    
    $
    4,689,138$
    
    
    96
    %
    
    $
    4,812,138$
    
    
    100
    %
    
    $
    5,017,138$
    
    
    104
    %
    
    $
    5,222,138$
    
    
    108
    %
    
    $
    5,427,138$
    
    
    112
    %
    
    $
    5,632,138$
    
    
    117
    %
    
    $
    5,837,138$
    
    
    121
    %
    
    $
    6,042,138$
    
    
    125
    %
    
    $
    6,247,138