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1 Pg 1 of 71 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : In re : : Hostess Brands, Inc., et al., 1 : : Debtors. : : x Chapter 11 Case No. 12- ( ) (Jointly Administered) MOTION OF THE DEBTORS PURSUANT TO 11 U.S.C. 105(A) AND 363(B) TO EMPLOY AND RETAIN FTI CONSULTING, INC. TO PROVIDE THE DEBTORS AN INTERIM TREASURER AND ADDITIONAL PERSONNEL NUNC PRO TUNC TO THE PETITION DATE TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: Hostess Brands, Inc. and its five domestic direct and indirect subsidiaries, as debtors and debtors in possession (collectively, "Hostess" or the "Debtors"), hereby move the Court for the entry of an order pursuant to sections 105(a) and 363(b) of title 11 of the United States Code (the "Bankruptcy Code") (i) authorizing the Debtors, pursuant to the terms and conditions of that certain agreement between FTI Consulting, Inc. and the Debtors dated January 4, 2012 (as amended, the "Engagement Letter"), 2 to retain FTI Consulting, Inc. ("FTI") to provide an Interim Treasurer and Additional Personnel (as described below) for the Debtors nunc pro tunc to the date hereof (the "Petition Date"); 3 and (ii) granting certain related relief. In 1 The Debtors are the following six entities (the last four digits of their respective taxpayer identification numbers follow in parentheses): Hostess Brands, Inc. (0322), IBC Sales Corporation (3634), IBC Services, LLC (3639), IBC Trucking, LLC (8328), Interstate Brands Corporation (6705) and MCF Legacy, Inc. (0599). 2 A copy of the Engagement Letter is attached hereto as Exhibit A. 3 Nunc pro tunc retention is appropriate because this Motion was filed on the Petition Date, FTI will continue to provide services to the Debtors from and after the Petition Date and a hearing on this Motion will not be conducted, and an order will not be entered, until after the Petition Date. NYI v7

2 Pg 2 of 71 support of this Motion, the Debtors rely upon the declaration of J. Robert Medlin (the "Medlin Declaration") attached hereto as Exhibit C and incorporated herein by reference, and in further support thereof, the Debtors respectfully represent as follows; Background 1. On the Petition Date, the Debtors commenced their reorganization cases by filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code. By a motion filed on the Petition Date, the Debtors have requested that their chapter 11 cases be consolidated for procedural purposes only and administered jointly. 2. The Debtors are authorized to continue to operate their business and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 3. Hostess Brands, Inc. is a Delaware corporation. Hostess Brands, Inc. is the direct or indirect parent of the other Debtors, each of which is wholly-owned by Hostess Brands, Inc. or one of its Debtor subsidiaries. The Debtors maintain their corporate headquarters in Irving, Texas. Debtor IBC Sales Corporation owns principal real property assets in Elmsford, New York. 4. Founded in 1930, Hostess is one of the largest wholesale bakers and distributors of bread and snack cakes in the United States. Today, Hostess sells an array of popular products under new and iconic brands such as Butternut, Ding Dongs, Dolly Madison, Drake's, Home Pride, Ho Hos, Hostess, Merita, Nature's Pride, Twinkies and Wonder. The Debtors operate 36 bakeries, 565 distribution centers, approximately 5,500 delivery routes and 570 bakery outlet stores throughout the United States. 5. The Debtors operate in a mature industry with high levels of competition and related pricing pressures, thin operating margins and competitors with more sophisticated NYI v7 2

3 Pg 3 of 71 technology and significant cost advantages. Over the past several decades and continuing to the present, the industry has experienced significant consolidation. As a result of this consolidation, the Debtors' primary national and large regional competitors are, at once, expanding their market reach and consolidating operations through acquisitions and other means, thus widening their cost advantages. Importantly, the Debtors' competitors employ work forces that are not unionized or only partially unionized, which allow them to operate with significantly less burdensome operating restrictions and overall cost structures. As a direct result of their significant and long-standing unionized workforce, the Debtors have significant legacy costs, primarily in the form of pension and medical benefits obligations, that their competitors do not share. Whether the Debtors can achieve long-term viability depends directly and substantially on the Debtors' ability to achieve dramatic change to their labor agreements, with a corresponding material reduction in their cost structure and legacy pension and medical obligations, and a restructuring of their capital structure. That is the purpose and the focus of these chapter 11 cases. 6. The Debtors' production and distribution systems are heavily dependent on labor-intensive processes involving, among other things, complicated and extensive local route delivery systems that service nearly all of the continental United States and a national footprint of 36 bakeries. To staff this labor-intensive network, the Debtors employ approximately 19,000 people, of which 83% are members of unions who are subject to 372 collective bargaining agreements. The Debtors' unionized employees belong to 12 separate unions, but the overwhelming majority of the Debtors' unionized workforce are members of either the International Brotherhood of Teamsters (the "IBT") or the Bakery, Confectionery, Tobacco Workers & Grain Millers International Union (the "BCT"). NYI v7 3

4 Pg 4 of Because their workforce is heavily unionized, the Debtors also participate in 40 multiemployer pension plans, which, by law, exist only where one or more employers each contribute to a pension plan pursuant to one or more collectively-bargained agreements. The Debtors' cash contribution obligations to these plans go beyond amounts attributable to the retirement benefits for the Debtors' own workforce; they also encompass the contributions attributable to the retirement benefits of the workforces of other employers who have ceased to exist or have otherwise withdrawn from the plans. By statute, the plans are structured to place the financial burdens of all of a plan's retirees upon those remaining companies that have active union employees. Over the last several decades, the number of companies and the active employee base supporting these pension plans have shrunk significantly, thus increasing the burden on the companies, such as Hostess, that remain. 8. The Debtors' management team, which as currently comprised has only been in place for slightly more than a year, has taken a fresh look at, and has spent considerable time and energy analyzing, the Debtors' operations and cost structure. As a result of that review, management has developed a business plan that it believes will allow the Debtors to regain longterm viability. The business plan is premised upon achieving a competitive cost structure, including relief from uncompetitive pension and medical benefit legacy costs, re-emphasizing and funding the marketing of the Debtors' brands, streamlining and modernizing the distribution of product and obtaining relief from other restrictive work rules that limit the Debtors' flexibility and competitiveness. 9. In particular, the Debtors believe that their successful reorganization must encompass systemic, dramatic change, including: a. withdrawing completely from multiemployer pension plans to achieve relief from the crippling costs of these plans that are, in large part, a result NYI v7 4

5 Pg 5 of 71 of the required funding of retirees whose former employers no longer contribute to the plans; b. addressing the Debtors' legacy health and welfare costs to achieve a substantial reduction in the cost of providing benefits to bring such costs in line with current competitive market costs; c. modifying the Debtors' existing collective bargaining agreements to relax work rules and obtain other relief necessary to both bring the Debtors' labor costs in line with that of their competitors and provide the operating flexibility necessary to respond to changing customer requirements for delivery and service; d. securing new capital investment to modernize and automate the Debtors' production and distribution operations; and e. restructuring the Debtors' capital structure to significantly reduce debt and related expense. 10. This company has been down this road before. Hostess (then known as Interstate Bakeries Corporation ("IBC")) sought bankruptcy relief in 2004 (the "IBC Bankruptcy"). The complex and sometimes highly contentious IBC Bankruptcy lasted more than four and a half years and achieved only limited, incremental change to the company's cost structure leaving the multiemployer pension benefits and costs untouched, while allowing the company to emerge as a highly levered entity. As a result, the Debtors currently have four separate tranches of long-term secured debt, under which they have aggregate outstanding liabilities of approximately $860 million. The Debtors exited from the IBC Bankruptcy on February 3, 2009 as a privately-held company, whose largest equityholders are IBC Investors I, LLC, IBC Investors II, LLC and IBC Investors III, LLC (collectively, the "Sponsor Funds") and a subset of their then existing lenders. 4 4 The current stockholders of Hostess include, in addition to the Sponsor Funds: Craig D. Jung, SPCP Group, LLC, Monarch Debt Recovery Master Fund Ltd, Monarch Opportunities Master Fund Ltd, Monarch Income Master Fund Ltd, McDonnell Loan Opportunity Ltd., Arrow Distressed Securities Fund, Schultze Apex Master Fund, Ltd., Schultze Master Fund, Ltd., Gephardt Group Labor Advisory Services, Mars & Co. Consulting, LLC and Brian Driscoll. NYI v7 5

6 Pg 6 of Adjusting for one-off receipts, such as tax refunds and the proceeds from asset sales, the Debtors have consumed approaching $250 million in cash since exiting the IBC Bankruptcy in Accordingly, after developing their business plan, the Debtors initiated negotiations with their lenders and unions to effect the transformational changes required for their business. At the same time, the Debtors required additional liquidity to allow these discussions and negotiations to occur. Accordingly, the Debtors began active discussions with their lenders regarding additional financing. As a result of those discussions, in March 2011, Hostess issued $30 million of 10% Secured Convertible PIK-Election Series C Notes, due 2019 which were purchased by two of the Sponsor Funds. Additionally, in June 2011, two of the Sponsor Funds invested an additional $10 million in the form of equity. Finally, in late August, the Debtors were able to obtain an additional $20 million of financing from certain of their first lien term lenders. The purpose of these additional financings was to permit the Debtors time to negotiate with the unions outside of a chapter 11 filing. 13. After allowing the IBT and BCT to commence extensive due diligence in July and August of 2011 (which diligence continued thereafter), the Debtors initiated discussions with the IBT and the BCT in September and provided both unions with proposals for modification of their respective collective bargaining agreements. The Debtors provided the IBT and the BCT with access to a data room containing over 625 documents to enable them to evaluate the proposals. Additionally, the Debtors responded to over 160 diligence requests from the professionals representing the IBT and the BCT. NYI v7 6

7 Pg 7 of After months of bargaining, the Debtors were unable to reach agreement with their unions regarding pensions, health and welfare benefits and work rule changes before insufficient liquidity necessitated this filing. 15. Accordingly, the Debtors have filed these chapter 11 cases to conserve their remaining cash and access the additional debtor-in-possession funding required to continue to operate while seeking to finalize negotiations regarding the terms of their labor agreements and capital structure. 16. Additional information regarding the background of the Debtors, the need for the filing of these cases and the goals for the Debtors within chapter 11 are set forth in the Affidavit of Brian J. Driscoll, which is filed contemporaneously herewith. Jurisdiction 17. This Court has subject matter jurisdiction to consider this matter pursuant to 28 U.S.C This is a core proceeding pursuant to 28 U.S.C. 157(b). Venue is proper before this Court pursuant to 28 U.S.C and The FTI Consulting Engagement 18. On or about June 10, 2011, the Debtors appointed Mr. David Rush Interim Treasurer, as set forth in the Engagement Letter. The Engagement Letter further states that FTI will provide FTI employees to serve as temporary employees of the Debtors necessary to support the treasury activities ("Additional Treasury Personnel") and other business ("Additional Financial Personnel") of the Debtors (collectively, "Additional Personnel," and together with the Interim Treasurer, the "Retention Personnel") as set forth more fully herein and in the Engagement Letter. 19. The Debtors are familiar with the professional standing and reputation of FTI and Mr. Rush, as well as the other Additional Personnel, who the Debtors understand and NYI v7 7

8 Pg 8 of 71 recognize have a wealth of experience in providing consulting services in restructurings and reorganizations and enjoy an excellent national reputation for turnaround services they have rendered in bankruptcy cases on behalf of debtors and creditors throughout the United States. The Debtors have been advised by FTI that it will endeavor to coordinate with the other professionals retained in these bankruptcy cases to eliminate unnecessary duplication or overlap of work. Terms of Engagement 20. Pursuant to the terms of the Engagement Letter, 5 the Retention Personnel's activities would include, but not be limited to: Interim Treasury Management Function a. Provide comprehensive treasury services and coordinate and direct Company employees as necessary. David Rush, Senior Managing Director, will serve in the capacity of Interim Treasurer for a fixed monthly fee as described below; b. Work with management and employees to refine the Company's existing cash flow forecasts, related analyses and reporting. Provide any recommendations to existing practices and methodologies; and c. Provide additional FTI professionals to serve as Additional Treasury Personnel of the Company and provide support as required. Provide FTI professionals to serve as Additional Financial Personnel of the Company to provide services as follows and as may be requested by the Company from time to time: d. Assist with the Company's execution of planned liquidity enhancement initiatives, including working capital management and cost savings programs; e. Develop the Company's integrated multi-year financial projection model by brand, business unit and region through coordination and discussion with management and Company employees; 5 Capitalized terms used but not defined herein are ascribed the meanings given such terms in the Engagement Letter. NYI v7 8

9 Pg 9 of 71 f. Perform a detailed assessment of the Company's operations, identify performance improvement opportunities and assist management and Company employees in implementing and executing the identified initiatives; g. Prepare other financial analysis and reporting as needed to assist management in negotiations and discussions with the Company's stakeholders; h. Participate in meetings and negotiations/interface with stakeholders and/or their advisors as necessary. i. Prepare a comprehensive winddown plan and related liquidation analysis with supporting schedules, and assist the Company in implementation of such plan, as necessary; j. Develop with management detailed contingency planning related to potential liquidity shortfalls or planned restructuring programs; k. Prepare Schedules of Assets & Liabilities and Statements of Financial Affairs, claims reconciliations and settlements, appropriate financial and operational cut-off periods, development of a creditor matrix, and first day motions support; l. Provide testimony as required; and m. Perform any other interim management services as mutually agreed upon. Fees and Expenses 21. Fees in connection with this Engagement (other than the treasury advisory function described below) will be based upon time incurred by the Additional Financial Personnel providing the Services, multiplied by our standard hourly rates, illustrated below: Senior Managing Directors $ Directors / Managing Directors $ Consultants / Senior Consultants $ Administrative / Paraprofessionals $ The Debtors understand that FTI revises its rates for services periodically, and the Debtors will pay such rates as reasonably adjusted without altering or limiting the Debtors' obligation to compensate FTI in accordance with the Engagement Letter. The Debtors further understand that NYI v7 9

10 Pg 10 of 71 FTI does not provide any assurance regarding the outcome of its work and that its fees will not be contingent on the results of such work. 22. Prior to any increases in rates as set forth in paragraph 21 of the Motion, FTI shall file a supplemental affidavit with the Court and give ten business days' notice to the Debtors, the Office of the United States Trustee for the Southern District of New York (the "U.S. Trustee") and any official committee, which supplemental affidavit shall explain the basis for the requested rate increases in accordance with section 330(a)(3)(F) of the Bankruptcy Code and indicate whether the Debtors have received notice of and approved the proposed rate increase. Treasury Advisory Function Fixed Monthly Rate 23. For services rendered in connection with the treasury advisory function of the scope of services, the Debtors agree to pay FTI a monthly, non-refundable advisory fee of $65,000 for an Interim Treasurer (David Rush) and $55,000 per month each for two additional temporary employees serving as Additional Treasury Personnel (Larry Manning and Robert Molina). Payment of such fees is due and payable on the first business day of each month. 24. In addition to the fees outlined above, FTI will bill reasonable direct expenses which are likely to be incurred on the Debtors' behalf during this Engagement. Direct expenses include reasonable and customary out-of-pocket expenses which are billed directly to the engagement such as certain telephone, overnight mail, messenger, travel, meals, accommodations and other expenses specifically related to the engagement. Further, if FTI and/or any of its employees are required to testify or provide evidence at or in connection with any judicial or administrative proceeding relating to this matter, FTI will be compensated by the Debtors at its regular hourly rates and reimbursed for reasonable direct expenses with respect thereto. NYI v7 10

11 Pg 11 of 71 Completion Fee 25. In addition to the fixed monthly rate and hourly fees and expenses, and as more fully described in the Engagement Letter, subject to this Court's approval the Debtors have agreed to pay FTI a completion fee of $1,250,000 (the "Completion Fee"), upon the earliest occurrence of the following: a. Confirmation of a Chapter 11 plan of reorganization or liquidation; or b. The sale of substantially all of the Debtors' assets. 26. For the avoidance of any doubt, FTI acknowledges that the Completion Fee is subject to this Court's approval based on a reasonableness standard as provided in the Jay Alix Protocol. Retainer Cash on Account 27. Prior to the Petition Date, the Debtors provided FTI with a retainer of $350,000 (the "Retainer"). The Retainer shall be credited against any amounts due at the termination of the Engagement Letter and returned to the Debtors upon the satisfaction of all obligations owed to thereunder. Indemnification Provisions 28. The Engagement Letter contains standard indemnification language with respect to FTI's services. Notwithstanding such language, the Debtors and FTI have agreed that the Debtors shall only indemnify those FTI employees serving as executive officers of the Debtors on the same terms as provided to the Debtors' other officers and directors under the Debtors' by-laws and applicable state law, along with insurance coverage under the Debtors' directors' and officers' insurance policies, and the indemnification provisions of the Engagement Letter shall not apply to FTI. NYI v7 11

12 Pg 12 of 71 Reporting Requirements 29. To maintain transparency, FTI would file with the Court and serve on the Debtors, the U.S. Trustee, and any statutory committee(s) appointed in these cases (collectively, the "Committees," and together with the Debtors and the U.S. Trustee, the "Notice Parties") a report on staffing (the "Staffing Report") by the 20th of each month for the previous month, which report would include the names and tasks filled by all FTI personnel involved in this engagement. The Staffing Report (and FTI's staffing for this matter) would be subject to review by the Court in the event so requested by any of the Notice Parties. 30. Moreover, FTI would file with this Court, and serve upon the Notice Parties, reports of compensation earned and expenses (the "Compensation Reports") incurred on at least a quarterly basis. The Compensation Reports would summarize the service provided, identify the compensation earned, itemize expenses incurred and provide for an objection period. All such compensation would be subject to review by this Court if an objection is filed. Dispute Resolution Provisions 31. The Debtors and FTI have agreed, subject to the Court's approval of this Motion, that: (a) any controversy or claim with respect to, in connection with, arising out of, or in any way related to this Motion or the services provided by FTI to the Debtors as outlined in this Motion, including any matter involving a successor in interest or agent of any of the Debtors or of FTI, shall be brought in the Bankruptcy Court or the District Court for the Southern District of New York (if the reference is withdrawn); (b) FTI and the Debtors and any and all successors and assigns thereof, consent to the jurisdiction and venue of such court as the sole and exclusive forum (unless such court does not have or retain jurisdiction over such claims or controversies) for the resolution of such claims, causes of actions or lawsuits; (c) FTI and the Debtors, and any NYI v7 12

13 Pg 13 of 71 and all successors and assigns thereof, waive trial by jury, such waiver being informed and freely made; (d) if the Bankruptcy Court, or the District Court (if the reference is withdrawn), does not have or retain jurisdiction over the foregoing claims and controversies, FTI and the Debtors, and any and all successors and assigns thereof, will submit first to non-binding mediation; and, if mediation is not successful, then to binding arbitration, in accordance with the dispute resolution procedures set forth in Exhibit B to this Motion; and (e) judgment on any arbitration award may be entered in any court having proper jurisdiction. By this Motion, the Debtors seek approval of this agreement by the Court. Further, FTI has agreed not to raise or assert any defense based upon jurisdiction, venue, abstention or otherwise to the jurisdiction and venue of the Bankruptcy Court or the District Court for the Southern District of New York (if the reference is withdrawn) to hear or determine any controversy or claims with respect to, in connection with, arising out of, or in any way related to this Motion or the services provided hereunder. Legal Basis for Relief Requested The Debtors Have Exercised Their Sound and Prudent Business Judgment 32. Section 363 of the Bankruptcy Code provides that, after notice and a hearing, a Debtor may use property of the estate other than in the ordinary course of business. A Debtor's decision to use, sell or lease assets outside the ordinary course of business must be based upon the sound business judgment of the debtor. See In re Chateaugay Corp., 973 F.2d 141, 143 (2d Cir. 1992) (holding that a judge determining a section 363(b) application must find from the evidence presented before him a good business reason to grant such application); see also In re Ionosphere Clubs, Inc., 100 B.R. 670, 674 (Bankr. S.D.N.Y. 1989) (noting that the standard for determining a section 363(b) motion is a "good business reason"); Committee of Asbestos-Related Litigants v. Johns-Manville Corp. (In re Johns Manville Corp.), 60 B.R. 612, NYI v7 13

14 Pg 14 of (Bankr. S.D.N.Y. 1986) ("Where the debtor articulates a reasonable basis for its business decisions (as distinct from a decision made arbitrarily or capriciously), courts will generally not entertain objections to debtor's conduct"). 33. The retention of corporate officers is proper under section 363 of the Bankruptcy Code, and courts in this district and elsewhere have determined that such retention is an appropriate exercise of a debtor's business judgment. See, e.g., In re Archbrook Laguna Holdings LLC, No (SCC) (Bankr. S.D.N.Y. Aug. 3, 2011) (order authorizing retention of chief restructuring officer pursuant to sections 363(b) and 105(a) of the Bankruptcy Code); In re Calpine Corp., No (BRL) (Bankr. S.D.N.Y. Jan. 17, 2007) (order authorizing employment of interim chief financial officer pursuant to section 363 of the Bankruptcy Code); In re Dana Corp., Case No (BRL) (Bankr. S.D.N.Y. Mar. 29, 2006) (order designating chief restructuring officer and chief financial officer pursuant to section 363 of the Bankruptcy Code); In re Worldcom, et al., Case No (AJG) (Bankr. S.D.N.Y., Sept. 17, 2002) (order approving retention of crisis managers to provide chief financial officer, chief restructuring officer and additional temporary staff as needed pursuant to section 363 of the Bankruptcy Code); see also In re Harry & David Holdings, Inc., Case No (MFW) (Bankr. D. Del. Apr. 27, 2011) (order authorizing retention of Alvarez & Marsal to provide an interim chief executive officer and chief restructuring officer and certain additional officers and personnel). 34. Entry into the Engagement Letter and retaining the Interim Treasurer and Additional Personnel upon the terms set forth in the Engagement Letter, this Motion, and any order approving this Motion would enable the Debtors most efficiently to maximize value for their estates. Thus, the Debtors believe that it would be in their best interests and in the best NYI v7 14

15 Pg 15 of 71 interests of their respective estates, their creditors, and other parties-in-interest for the Court to approve the Engagement Letter and the retention of Mr. Rush as Interim Treasurer and the Additional Personnel in accordance with the Engagement Letter, with such retention being deemed effective as of the Petition Date. 35. The Debtors believe that FTI's fee structure is fair and reasonable in light of the type of services being provided and is comparable to those generally charged by firms of similar stature to FTI for comparable engagements. In addition, given the numerous issues FTI may be required to address in these cases, FTI's commitment to the variable level of time and effort necessary to address all such related issues as they arise, and the market prices for FTI's services for engagements of this nature in an out-of-court context, the Debtors believe that the FTI fee arrangement is fair and reasonable. The Proposed Retention Comports with the Bankruptcy Code 36. FTI will provide the Notice Parties with the Staffing Reports and the Compensation Reports. Because the Debtors are seeking to retain FTI and the Retention Personnel pursuant to section 363 of the Bankruptcy Code and not under section 327 of the Bankruptcy Code, FTI is not subject to the compensation requirements of sections 328, 330, and 331 of the Bankruptcy Code, and therefore, the Debtors request that fees and expenses of FTI incurred in the performance of the above-described services be treated as an administrative expense of the Debtors' chapter 11 estates and be paid by the Debtors in the ordinary course of business, without the need for FTI to file fee applications or otherwise seek Court approval for the compensation of its services and reimbursement of its expenses, other than those described above. NYI v7 15

16 Pg 16 of In addition, the Debtors are not seeking to retain FTI as a professional under section 327 of the Bankruptcy Code. Accordingly, there is no requirement that FTI or any of the Retention Personnel be disinterested. However, to the best of the Debtors' knowledge, information, and belief, FTI does not have any interest materially adverse to the Debtors' estates or any class of creditor or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the Debtors, or for any other reason. With that said, FTI believes it is disinterested because, to the best of FTI's knowledge, information, and belief, FTI has no connection with the Debtors, their creditors, or any other party-in-interest, except as disclosed in the Medlin Declaration. 38. Additionally, the Court's general equitable powers codified in section 105(a) of the Bankruptcy Code provide ample authority for the relief requested herein. Section 105(a) of the Bankruptcy Code empowers the Court to "issue any order, process, or judgment that is necessary to carry out the provisions of this title." See 11 U.S.C. 105(a); see also United States v. Energy Resources Co., 495 U.S. 545, 549 (1990); Adelphia Communications Corp. v. The American Channel (In re Adelphia Communications Corp.), 345 B.R. 69, 85 (Bankr. S.D.N.Y. 2006) ("Section 105(a) provides broad equitable power for a Bankruptcy Court to maintain its own jurisdiction and to facilitate the reorganization process."); In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000) ("Section 105(a) of the Bankruptcy Code supplements courts' specifically enumerated bankruptcy powers by authorizing orders necessary or appropriate to carry out provisions of the Bankruptcy Code.") Notice 39. No trustee or examiner has been appointed in these chapter 11 cases. Notice of this Motion has been provided to: (a) the U.S. Trustee; (b) counsel to the Debtors' postpetition lenders; (c) counsel to General Electric Capital Corporation, as agent under the NYI v7 16

17 Pg 17 of 71 Debtors' first lien asset-backed revolving credit facility; (d) counsel to Silver Point Finance, LLC, as agent under the Debtors' first lien term loan facility and third lien credit facility; (e) counsel to The Bank of New York Mellon Trust Company, as indenture trustee for the Debtors' fourth lien 5% secured convertible notes; (f) counsel to the Sponsor Funds; (g) counsel to the IBT; (h) counsel to the BCT; and (i) those creditors holding the 40 largest unsecured claims against the Debtors' estates. The Debtors submit that no other or further notice need be provided. No Prior Request 40. No prior request for the relief sought in this Motion has been made to this or any other Court in connection with these chapter 11 cases. WHEREFORE, for the reasons set forth herein, the Debtors respectfully request that the Court enter an order, substantially in the form attached hereto as Exhibit D, granting the relief requested herein and such other and further relief as may be just and proper under the circumstances. NYI v7 17

18 Pg 18 of 71 Dated: January 11, 2012 New York, New York Respectfully submitted, Hostess Brands, Inc., et al. Debtors and Debtors in Possession Filed by: /s/ John Stewart John Stewart Chief Financial Officer of Hostess Brands, Inc. /s/ Corinne Ball Corinne Ball Heather Lennox Lisa Laukitis Veerle Roovers JONES DAY 222 East 41st Street New York, New York Telephone: (212) Facsimile: (212) and - Ryan T. Routh JONES DAY North Point 901 Lakeside Avenue Cleveland, Ohio Telephone: (216) Facsimile: (216) PROPOSED ATTORNEYS FOR DEBTORS AND DEBTORS IN POSSESSION NYI v7 18

19 Pg 19 of 71 EXHIBIT A [Engagement Letter] NYI v7

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30 Pg 30 of 71 EXHIBIT B [Dispute Resolution Procedures] NYI v7

31 Pg 31 of 71 DISPUTE RESOLUTION PROCEDURES The following procedures shall be used to resolve any controversy or claim ("dispute") as provided in this Agreement. If any of these provisions are determined to be invalid or unenforceable, the remaining provisions shall remain in effect and binding on the parties to the fullest extent permitted by law. Mediation A dispute shall be submitted to mediation by written notice to the other party or parties. In the mediation process, the parties will try to resolve their differences voluntarily with the aid of an impartial mediator, who will attempt to facilitate negotiations. The mediator will be selected by agreement of the parties. If the parties cannot agree on a mediator, a mediator will be designated by the American Arbitration Association ("AAA") or JAMS/Endispute at the request of a party. Any mediator so designated must be acceptable to all parties. The mediation will be conducted as specified by the mediator and agreed upon by the parties. The parties agree to discuss their differences in good faith and to attempt, with the assistance of the mediator, to reach an amicable resolution of the dispute. The mediation will be treated as a settlement discussion and therefore will be confidential. The mediator may not testify for either party in any later proceeding relating to the dispute. No recording or transcript shall be made of the mediation proceedings. Each party will bear its own costs in the mediation. The fees and expenses of the mediator will be shared equally by the parties. Arbitration If a dispute has not been resolved within 90 days after the written notice beginning the mediation process (or a longer period, if the parties agree to extend the mediation), the mediation shall terminate and the dispute will be settled by arbitration and judgment on the award rendered NYI v7-2 -

32 Pg 32 of 71 by the arbitration may be entered in any Court having jurisdiction thereof. The arbitration will be conducted in accordance with the procedures in this document and the Arbitration Rules for Professional Accounting and Related Services Disputes of the AAA ("AAA Rules"). NYI v7-3 -

33 Pg 33 of 71 EXHIBIT C [Declaration of J. Robert Medlin] NYI v7

34 Pg 34 of 71 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : In re : : Hostess Brands, Inc., et al., 1 : : Debtors. : : x Chapter 11 Case No. 12- ( ) (Jointly Administered) DECLARATION OF J. ROBERT MEDLIN IN SUPPORT OF THE MOTION OF THE DEBTORS PURSUANT TO 11 U.S.C. 105(A) AND 363(B) TO EMPLOY AND RETAIN FTI CONSULTING, INC. TO PROVIDE THE DEBTORS AN INTERIM TREASURER AND ADDITIONAL PERSONNEL NUNC PRO TUNC TO THE PETITION DATE as follows: I, J. Robert Medlin, make this declaration pursuant to 28 U.S.C and state 1. I am a Senior Managing Director with FTI Consulting, Inc. ("FTI") 2 a financial advisory services and interim management firm with numerous offices throughout the country. I am duly authorized to make this declaration (the "Declaration") on behalf of FTI and submit this Declaration in support of the motion (the "Motion"), dated January 11, 2012, of the above captioned debtors and debtors in possession (collectively, the "Debtors") for entry of an order (the "Order") authorizing the Debtors to employ and retain FTI to provide the Debtors an Interim Treasurer and Additional Personnel nunc pro tunc to the Petition Date, pursuant to 11 U.S.C. 105(a) and 363(b) and under the terms and conditions set forth in the Motion. 1 The Debtors are the following six entities (the last four digits of their respective taxpayer identification numbers follow in parentheses): Hostess Brands, Inc. (0322), IBC Sales Corporation (3634), IBC Services, LLC (3639), IBC Trucking, LLC (8328), Interstate Brands Corporation (6705) and MCF Legacy, Inc. (0599). 2 Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Motion. NYI v7

35 Pg 35 of Except as otherwise stated in this Declaration, I have personal knowledge of the facts set forth herein and, if called as a witness, I would testify thereto. Certain of the disclosures set forth herein related to matters within the knowledge of other employees of FTI and are based on information provided by them. FTI's Qualifications 3. FTI has a wealth of experience in providing financial advisory services in restructurings and reorganizations and enjoys an excellent reputation for services it has rendered in large and complex chapter 11 cases on behalf of debtors and creditors throughout the United States. 4. Furthermore, as a result of the prepetition work performed on behalf of the Debtors over the past 6 months, FTI has acquired significant knowledge of the Debtors and their businesses and is intimately familiar with the Debtors' financial affairs and systems, capital structure, operations and related matters. Such experience and knowledge will be valuable to the Debtors in their efforts to reorganize. Accordingly, the Debtors wish to retain FTI to provide assistance during this case. 5. Prior to becoming a Senior Managing Director and Southwest Region Leader of FTI, I was a Partner and Southwest Region Leader of the U.S. division of PricewaterhouseCoopers' Business Recovery Services Practice. I have previously represented borrowers, debtors, lenders, creditors and equity holders in formal bankruptcies and out-of-court restructurings. Some of my engagements include: Enron; Capmark; Baylor College of Medicine; Pillowtex; Zale Corporation; Eljer Industries; Lomas Financial; Big West Oil; TXCO; Age Refining; Reliant Channelview; Sunrise Energy; Global Power Equipment; Bag n baggage; Braun's Fashions; CompuAdd; Encompass; General Wireless; Rubus Realty; Sun Healthcare; El NYI v7-2 -

36 Pg 36 of 71 Paso Electric Company; Greyhound; Harvest Foods; Minorplanet; Promedco; TWA; U.S. One Communications; and SageCrest. Services To Be Provided 6. Subject to this Court's approval, FTI has agreed to provide the Debtors with an Interim Treasurer, Additional Treasury Personnel and certain Additional Financial Personnel (collectively, the "Retention Personnel"). Among other things, the Retention Personnel will provide assistance to the Debtors with respect to the management of the overall restructuring process, including the development of ongoing business/financial plans and conducting restructuring negotiations with creditors with respect to an overall strategy for their chapter 11 cases. 7. Pursuant to the Engagement Letter, 3 FTI will provide such services as FTI and the Debtors shall deem appropriate and feasible in order to manage and advise the Debtors in the course of the chapter 11 cases, including, but not limited to; Interim Treasury Management Function a. Provide comprehensive treasury services and coordinate and direct Company employees as necessary. David Rush, Senior Managing Director, will serve in the capacity of Interim Treasurer for a fixed monthly fee as described below; b. Work with management and employees to refine the Company's existing cash flow forecasts, related analyses and reporting. Provide any recommendations to existing practices and methodologies; and c. Provide additional FTI professionals to serve as Additional Treasury Personnel of the Company and provide support as required. Provide FTI professionals to serve as Additional Financial Personnel of the Company to provide services as follows, and may be requested by the Company from time to time: 3 A copy of the Engagement Letter is attached as Exhibit A to the Motion. NYI v7-3 -

37 Pg 37 of 71 d. Assist with the Company's execution of planned liquidity enhancement initiatives, including working capital management and cost savings programs; e. Develop the Company's integrated multi-year financial projection model by brand, business unit and region through coordination and discussion with management and Company employees; f. Perform a detailed assessment of the Company's operations, identify performance improvement opportunities and assist management and Company employees in implementing and executing the identified initiatives; g. Prepare other financial analysis and reporting as needed to assist management in negotiations and discussions with the Company's stakeholders; h. Participate in meetings and negotiations/interface with stakeholders and/or their advisors as necessary. i. Prepare a comprehensive winddown plan and related liquidation analysis with supporting schedules, and assist the Company in implementation of such plan, as necessary; j. Develop with management detailed contingency planning related to potential liquidity shortfalls or planned restructuring programs; k. Prepare Schedules of Assets & Liabilities and Statements of Financial Affairs, claims reconciliations and settlements, appropriate financial and operational cut-off periods, development of a creditor matrix, and first day motions support; l. Provide testimony as required; and m. Perform any other interim management services as mutually agreed upon. FTI's Disinterestedness 8. In connection with the preparation of this Declaration, FTI conducted a review of its contacts with the Debtors, their affiliates and certain entities holding large claims against or interests in the Debtors that were made reasonably known to FTI. A listing of the parties reviewed is reflected on Schedule 1 to this Declaration. FTI's review, completed under my supervision, consisted of a query of the Schedule 1 parties within an internal computer database NYI v7-4 -

38 Pg 38 of 71 containing names of individuals and entities that are present or recent former clients of FTI. While this review remains underway, a summary of such relationships that FTI has identified thus far during this process is set forth on Schedule 2 to this Declaration. Upon completion of our review, FTI will supplement this Declaration for any additional relationships identified. 9. Except as discussed below, based on the results of its review thus far, FTI does not have a relationship with any of the parties on Schedule 1 in matters related to these proceedings. FTI has provided and could reasonably be expected to continue to provide services unrelated to the Debtors' chapter 11 cases for the various entities shown on Schedule 2. FTI's assistance to these parties has been related to providing various financial restructuring, litigation support and/or engineering and scientific investigation consulting services. To the best of my knowledge, no services have been provided to these parties in interest which involve their rights in the Debtors' Chapter 11 Cases, nor does FTI's involvement in these chapter 11 cases compromise its ability to continue such consulting services. 10. FTI provided financial advisory services to the Official Unsecured Creditors' Committee to Interstate Bakeries Corporation, the predecessor to Hostess Brands, Inc. FTI's services related to that engagement ended July 2, Judge Gropper is related to an FTI employee who serves as a senior consultant in our forensic and litigation consulting segment. He is not part of the engagement team and FTI will institute ethical wall procedures with respect to this FTI employee. 12. FTI provides litigation consulting services to Flowers Foods, Inc., which is adverse to the Debtors, in Flowers Bakeries Brands, Inc. v. Interstate Bakeries Corporation (No CV TWT), filed in the Northern District of Georgia. The FTI engagement team for that assignment is separate from the engagement team for this engagement. Since June 10, 2011, the Retention Personnel have been under an engagement confidentiality agreement. NYI v7-5 -

39 Pg 39 of 71 Additionally, by a date not later than August 11, 2011, FTI established an ethical wall agreement ("Ethical Wall") in order to faithfully uphold its fiduciary duties. FTI required each member of the respective engagement teams to execute and return to FTI's Conflicts Manager an ethical wall agreement indicating: a. There will be no discussions or communications (orally, electronically or otherwise) regarding the substances of the respective engagements between any persons who are or have been involved in the Engagement and the litigation matter described above; b. Only the persons working on matters involving the Engagement shall be provided access to non-public documents or information relating to the Engagement; and c. Further, FTI established electronic internal security walls to ensure that only FTI employees directly involved with or working on the Engagement may have access to the information, databases, s, schedules or any other information of or relating to the Engagement. The FTI Security Administrator will monitor these software walls and related security periodically for compliance with the Ethical Wall procedures described in this agreement, and any attempted or actual breaches will be reported immediately to the applicable engagement Senior Managing Director; Eric Miller, General Counsel; and Kim Cornell, Conflicts Manager. 13. As part of its diverse practice, FTI appears in numerous cases, proceedings and transactions that involve many different professionals, including attorneys, accountants and financial consultants, who may represent claimants and parties-in-interest in the Debtors' chapter 11 cases. Also, FTI has performed in the past, and may perform in the future, advisory consulting services for various attorneys and law firms, and has been represented by several attorneys and law firms, some of whom may be involved in these proceedings. In addition, FTI has in the past, may currently and will likely in the future be working with or against other professionals involved in these cases in matters unrelated to the Debtors and these cases. Based on our current knowledge of the professionals involved, and to the best of my knowledge, none of these relationships create interests materially adverse to the Debtors in matters upon which FTI is to be employed, and none are in connection with these cases. NYI v7-6 -

40 Pg 40 of It is FTI's policy and intent to update and expand its ongoing relationship search for additional parties in interest in an expedient manner. If any new material relevant facts or relationships are discovered or arise, FTI will promptly file a supplemental affidavit under Bankruptcy Rule 2014(a). Professional Compensation 15. As set forth in the Engagement Letter, fees in connection with this Engagement (other than the treasury advisory function described below) will be based upon time incurred by the Additional Financial Personnel providing the Services, multiplied by our standard hourly rates, illustrated below: Senior Managing Directors $ Directors / Managing Directors $ Consultants / Senior Consultants $ Administrative / Paraprofessionals $ The Debtors understand that FTI revises its rates for services periodically, and the Debtors will pay such rates as reasonably adjusted without altering or limiting the Debtors' obligation to compensate FTI in accordance with the Engagement Letter. FTI does not provide any assurance regarding the outcome of its work and that its fees will not be contingent on the results of such work. 16. Prior to any increases in rates as set forth in paragraph 15 of this Declaration, FTI shall file a supplemental affidavit with the Court and give ten business days' notice to the Debtors, the Office of the United States Trustee for the Southern District of New York (the "U.S. Trustee") and any official committee, which supplemental affidavit shall explain the basis for the requested rate increases in accordance with section 330(a)(3)(F) of the Bankruptcy Code and indicate whether the Debtors have received notice of and approved the proposed rate increase. NYI v7-7 -

41 Pg 41 of For services rendered in connection with the treasury advisor function of the scope of services, the Debtors agree to pay FTI a monthly, non-refundable advisory fee of $65,000 for an Interim Treasurer (David Rush) and $55,000 per month each for two additional temporary employees serving as Additional Treasury Personnel (Larry Manning and Robert Molina). Payment of such fees is due and payable on the first business day of each month. 18. In addition to the fees outlined above, FTI will bill reasonable direct expenses which are likely to be incurred on the Debtors' behalf during this Engagement. Direct expenses include reasonable and customary out-of-pocket expenses which are billed directly to the engagement such as certain telephone, overnight mail, messenger, travel, meals, accommodations and other expenses specifically related to the engagement. Further, if FTI and/or any of its employees are required to testify or provide evidence at or in connection with any judicial or administrative proceeding relating to this matter, FTI will be compensated by the Debtors at its regular hourly rates and reimbursed for reasonable direct expenses with respect thereto. 19. In addition to the fixed monthly rate and hourly fees and expenses, and as more fully described in the engagement letter, subject to this Court's approval the Debtors have agreed to pay FTI a completion fee of $1,250,000 (the "Completion Fee"), upon the earliest occurrence of the following: a. Confirmation of a Chapter 11 plan of reorganization or liquidation; or b. The sale of substantially all of the Debtors' assets. 20. For the avoidance of any doubt, FTI acknowledges that the Completion Fee is subject to this Court's approval based on a reasonableness standard as provided in the Jay Alix Protocol. NYI v7-8 -