SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | |
[x] | SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 19, 2003 | ||
OR |
[ ] | 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 1-16247
FLOWERS FOODS, INC.
GEORGIA (State or other jurisdiction of incorporation or organization) |
58-2582379 (I.R.S. Employer Identification Number) |
1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA
31757
(Zip Code)
229/226-9110
N/A
(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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
OUTSTANDING AT | ||
TITLE OF EACH CLASS Common Stock, $.01 par value with Preferred Share Purchase Rights |
May 23, 2003 30,051,071 |
FLOWERS FOODS, INC.
INDEX
PAGE | ||||||
NUMBER | ||||||
PART I. Financial Information |
||||||
Item 1. Financial Statements (unaudited) |
||||||
Condensed Consolidated Balance Sheet as of April 19, 2003 and December 28, 2002 |
3 | |||||
Condensed Consolidated Statement of Income for the Sixteen Weeks Ended April 19, 2003
and April 20, 2002 |
4 | |||||
Condensed Consolidated Statement of Cash Flows for the Sixteen Weeks Ended
April 19, 2003 and April 20, 2002 |
5 | |||||
Notes to Condensed Consolidated Financial Statements |
6 | |||||
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |
15 | |||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
21 | |||||
Item 4. Controls and Procedures |
21 | |||||
PART II. Other Information |
||||||
Item 1. Legal Proceedings |
22 | |||||
Item 4. Submission of Matters to a Vote of Security Holders |
22 | |||||
Item 5. Other Information |
22 | |||||
Item 6. Exhibits and Reports on Form 8-K |
22 | |||||
SIGNATURES |
23 | |||||
CERTIFICATIONS |
24 |
2
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share data)
(Unaudited)
APRIL 19, 2003 | DECEMBER 28, 2002 | |||||||||||
ASSETS |
||||||||||||
Current Assets: |
||||||||||||
Cash and cash equivalents |
$ | 27,008 | $ | 69,826 | ||||||||
Accounts and notes receivable, net of allowances of $3,112 and $1,475, respectively |
119,797 | 104,121 | ||||||||||
Inventories, net: |
||||||||||||
Raw materials |
9,040 | 7,872 | ||||||||||
Packaging materials |
7,912 | 7,806 | ||||||||||
Finished goods |
12,679 | 14,311 | ||||||||||
29,631 | 29,989 | |||||||||||
Spare parts and supplies |
19,501 | 19,840 | ||||||||||
Assets held for sale |
17,725 | 18,563 | ||||||||||
Assets to be disposed of discontinued
operations |
244,338 | 243,061 | ||||||||||
Deferred
taxes |
8,745 | | ||||||||||
Other |
9,466 | 10,009 | ||||||||||
476,211 | 495,409 | |||||||||||
Property, Plant and Equipment: |
||||||||||||
Land |
33,023 | 33,073 | ||||||||||
Buildings |
201,974 | 200,713 | ||||||||||
Machinery and equipment |
512,144 | 509,879 | ||||||||||
Furniture, fixtures and transportation equipment |
42,659 | 43,689 | ||||||||||
Construction in progress |
20,363 | 12,174 | ||||||||||
810,163 | 799,528 | |||||||||||
Less: accumulated depreciation |
(381,037 | ) | (363,403 | ) | ||||||||
429,126 | 436,125 | |||||||||||
Notes Receivable |
71,524 | 71,599 | ||||||||||
Deferred Taxes |
18,779 | 22,267 | ||||||||||
Other Assets |
2,966 | 10,225 | ||||||||||
Goodwill, net |
63,348 | 54,249 | ||||||||||
Other Intangible Assets, net |
7,982 | 6,506 | ||||||||||
$ | 1,069,936 | $ | 1,096,380 | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||
Current Liabilities: |
||||||||||||
Current maturities of long-term debt and capital leases |
$ | 235,892 | $ | 27,231 | ||||||||
Accounts payable |
71,340 | 82,827 | ||||||||||
Facility closing costs and severance |
5,639 | 4,516 | ||||||||||
Liabilities related to assets to be disposed of discontinued
operations |
2,902 | 2,553 | ||||||||||
Other accrued liabilities |
85,979 | 89,151 | ||||||||||
401,752 | 206,278 | |||||||||||
Long-Term Debt and Capital Leases |
5,213 | 223,133 | ||||||||||
Other Liabilities: |
||||||||||||
Facility closing costs and severance |
5,008 | 7,337 | ||||||||||
Postretirement/postemployment obligations |
57,812 | 54,486 | ||||||||||
Other |
14,894 | 12,150 | ||||||||||
77,714 | 73,973 | |||||||||||
Shareholders Equity: |
||||||||||||
Preferred stock-$100 par value, 100,000 authorized and none issued |
||||||||||||
Preferred stock-$.01 par value, 900,000 authorized and none issued |
||||||||||||
Common stock-$.01 par value, 100,000,000 authorized
29,985,375 shares issued |
300 | 300 | ||||||||||
Capital in excess of par value |
483,144 | 483,142 | ||||||||||
Retained earnings |
124,231 | 131,388 | ||||||||||
Accumulated other comprehensive loss |
(22,418 | ) | (21,834 | ) | ||||||||
585,257 | 592,996 | |||||||||||
$ | 1,069,936 | $ | 1,096,380 | |||||||||
(See Accompanying Notes to Condensed Consolidated Financial Statements)
3
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENT
(Amounts in thousands except per share data)
(Unaudited)
FOR THE SIXTEEN WEEKS ENDED | ||||||||
APRIL 19, 2003 | APRIL 20, 2002 | |||||||
Sales |
$ | 434,552 | $ | 396,158 | ||||
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below) | 213,637 | 190,392 | ||||||
Selling, marketing and administrative expenses |
182,485 | 167,834 | ||||||
Depreciation and amortization |
17,162 | 17,429 | ||||||
Income from continuing operations before interest, income taxes and cumulative effect of a change in accounting principle | 21,268 | 20,503 | ||||||
Interest income |
1,726 | 1,736 | ||||||
Interest expense |
(794 | ) | (897 | ) | ||||
Interest income, net |
932 | 839 | ||||||
Income from continuing operations before income taxes and cumulative effect of a change in accounting principle | 22,200 | 21,342 | ||||||
Income tax expense |
8,547 | 8,217 | ||||||
Income from continuing operations before cumulative effect of a
change in accounting principle |
13,653 | 13,125 | ||||||
Discontinued operations, net of tax |
(19,313 | ) | (11,402 | ) | ||||
(Loss) income before cumulative effect of a change in accounting
principle |
(5,660 | ) | 1,723 | |||||
Cumulative effect of a change in accounting principle, net of
tax |
| (23,078 | ) | |||||
Net loss |
$ | (5,660 | ) | $ | (21,355 | ) | ||
Net Loss Per Common Share: |
||||||||
Basic: |
||||||||
Income from continuing operations before cumulative effect of a
change in accounting principle |
$ | 0.46 | $ | 0.44 | ||||
Discontinued operations, net of tax |
(0.65 | ) | (0.38 | ) | ||||
Cumulative effect of a change in accounting principle, net of
tax |
| (0.78 | ) | |||||
Net loss per share |
(0.19 | ) | (0.72 | ) | ||||
Weighted average shares outstanding |
29,985 | 29,798 | ||||||
Diluted: |
||||||||
Income from continuing operations before cumulative effect of a
change in accounting principle |
$ | 0.44 | $ | 0.43 | ||||
Discontinued operations, net of tax |
(0.62 | ) | (0.37 | ) | ||||
Cumulative effect of a change in accounting principle, net of
tax |
| (0.75 | ) | |||||
Net loss per share |
(0.18 | ) | (0.69 | ) | ||||
Weighted average shares outstanding |
31,124 | 30,878 | ||||||
Cash Dividends Paid Per Common Share |
$ | 0.05 | |
(See Accompanying Notes to Condensed Consolidated Financial Statements)
4
FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
FOR THE SIXTEEN WEEKS ENDED | ||||||||||
APRIL 19, 2003 | APRIL 20, 2002 | |||||||||
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES: |
||||||||||
Net loss |
$ | (5,660 | ) | $ | (21,355 | ) | ||||
Adjustments to reconcile net loss to net cash disbursed for
operating activities: |
||||||||||
Discontinued operations |
6,170 | 4,474 | ||||||||
Goodwill impairment |
| 23,078 | ||||||||
Depreciation and amortization |
17,162 | 17,429 | ||||||||
Stock appreciation rights |
2,568 | 403 | ||||||||
Deferred income taxes |
5,846 | 1,079 | ||||||||
Provision for inventory obsolescence |
688 | 1,013 | ||||||||
Allowances for accounts receivable |
2,003 | 1,125 | ||||||||
Non-cash effect of derivative instruments |
(89 | ) | | |||||||
Changes in assets and liabilities: |
||||||||||
Accounts and notes receivable, net |
(17,687 | ) | (9,265 | ) | ||||||
Inventories, net |
(4,974 | ) | (11,253 | ) | ||||||
Other assets |
(933 | ) | (2,219 | ) | ||||||
Accounts payable and other accrued liabilities |
(10,813 | ) | (6,709 | ) | ||||||
Facility closing costs and severance |
(1,206 | ) | (1,437 | ) | ||||||
NET CASH DISBURSED FOR OPERATING ACTIVITIES |
(6,925 | ) | (3,637 | ) | ||||||
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES: |
||||||||||
Purchase of property, plant and equipment |
(11,037 | ) | (15,991 | ) | ||||||
Proceeds from notes receivable |
83 | 1,164 | ||||||||
Acquisition of business, net of cash received |
(14,534 | ) | | |||||||
Proceeds from property disposals |
| 409 | ||||||||
Other |
353 | (76 | ) | |||||||
NET CASH DISBURSED FOR INVESTING ACTIVITIES |
(25,135 | ) | (14,494 | ) | ||||||
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES: |
||||||||||
Dividends paid |
(1,499 | ) | | |||||||
Debt and capital lease obligation (payments) proceeds |
(9,259 | ) | 11,881 | |||||||
NET CASH (DISBURSED FOR) PROVIDED BY FINANCING ACTIVITIES |
(10,758 | ) | 11,881 | |||||||
Net decrease in cash and cash equivalents |
(42,818 | ) | (6,250 | ) | ||||||
Cash and cash equivalents at beginning of period |
69,826 | 12,280 | ||||||||
Cash and cash equivalents at end of period |
$ | 27,008 | $ | 6,030 | ||||||
(See Accompanying Notes to Condensed Consolidated Financial Statements)
5
FLOWERS FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements of Flowers Foods, Inc. (the company) have been prepared by the companys management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of April 19, 2003 and December 28, 2002, the results of operations for the sixteen week periods ended April 19, 2003 and April 20, 2002 and statement of cash flows for the sixteen week periods ended April 19, 2003 and April 20, 2002. The results of operations for the sixteen week periods ended April 19, 2003 and April 20, 2002 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the companys Annual Report on Form 10-K for the fiscal year ended December 28, 2002.
ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition, allowance for doubtful accounts, derivative instruments, reserves for obsolete and unmarketable inventory, valuation of long-lived assets and goodwill and other intangibles, deferred tax asset valuation allowances and pension obligations. These policies are the same as those summarized in the companys Annual Report on Form 10-K for the fiscal year ended December 28, 2002.
REPORTING PERIODS Fiscal 2003 will consist of 53 weeks, with the companys quarterly reporting periods as follows: first quarter ended April 19, 2003 (sixteen weeks), second quarter ending July 12, 2003 (twelve weeks), third quarter ending October 4, 2003 (twelve weeks) and fourth quarter ending January 3, 2004 (thirteen weeks).
RECLASSIFICATIONS Certain reclassifications of prior period data have been made to conform with the current period reporting.
SEGMENTS On April 24, 2003, the company announced it had completed the sale of substantially all the assets of its Mrs. Smiths Bakeries, LLC (Mrs. Smiths Bakeries) frozen dessert business to The Schwan Food Company (Schwan). The company retained the frozen bread and roll portion of the Mrs. Smiths Bakeries business. As a result, the frozen bread and roll business as well as the Birmingham, Alabama production facility formerly a part of Flowers Bakeries, LLC (Flowers Bakeries) became a part of our Flowers Snack, LLC (Flowers Snack) segment, with Flowers Snack being renamed Flowers Foods Specialty Group, LLC (Flowers Specialty). For purposes of this Form 10-Q, discussion will relate to our Flowers Bakeries and Flowers Specialty business units as such businesses are currently operated. The frozen dessert business of Mrs. Smiths Bakeries sold is reported as a discontinued operation. As Mrs. Smiths Bakeries dessert and frozen bread and roll businesses historically shared certain administrative and division expenses, certain allocations and assumptions have been made in order to present historical comparative information for them as separate segments. In most instances, administrative and division expenses have been allocated between the two segments based on cases of product sold. Management believes that the amounts are reasonable estimations of the costs that would have been incurred had Mrs. Smiths Bakeries dessert and frozen bread and rolls businesses performed these functions as separate divisions.
SIGNIFICANT CUSTOMER During the sixteen weeks ended April 19, 2003, sales to the companys largest customer, Wal-Mart, represented 11.5% of the consolidated companys sales with 10.3% attributable to Flowers Bakeries and 1.2% attributable to Flowers Specialty.
6
2. DISCONTINUED OPERATIONS
On January 30, 2003, the company entered into an agreement to sell its Mrs. Smiths Bakeries frozen dessert business to Schwan. Included in those assets are the Stilwell, Oklahoma and Spartanburg, South Carolina production facilities and a portion of the companys Suwanee, Georgia property. On that date, the assets and liabilities related to the portion of the Mrs. Smiths Bakeries business to be sold were classified as held for sale in accordance with SFAS 144 and recorded at estimable fair value less costs to dispose. On April 24, 2003, the company announced the completion of the sale of substantially all the assets of its Mrs. Smiths Bakeries frozen dessert business to Schwan. The transaction was valued at approximately $240 million. The value received by the company was determined on the basis of arms length negotiations between the parties. For accounting purposes, the frozen dessert business sold to Schwan is presented as discontinued operations for the sixteen weeks ended April 19, 2003 and April 20, 2002. Accordingly, the operations and certain transaction costs are included in Discontinued operations, net of tax in the Condensed Consolidated Statement of Income. An analysis of this line item is as follows:
For the Sixteen Weeks Ended | |||||||||
April 19, 2003 | April 20, 2002 | ||||||||
(amounts in thousands) | |||||||||
Operating loss |
$ | (18,790 | ) | $ | (12,667 | ) | |||
Financial advisor fees |
(1,870 | ) | | ||||||
Legal, accounting and other |
(1,336 | ) | | ||||||
Lease termination fees (see Note 7) |
(4,334 | ) | | ||||||
Interest (see Note 7) |
(5,545 | ) | (5,873 | ) | |||||
Derivative activity (see Note 6) |
471 | | |||||||
Pre-tax discontinued operations |
(31,404 | ) | (18,540 | ) | |||||
Tax benefit |
12,091 | 7,138 | |||||||
Discontinued operations, net of tax |
$ | (19,313 | ) | $ | (11,402 | ) | |||
Revenue related to the discontinued operation of $64.4 million and $67.5 million are included in the operating losses above for the sixteen weeks ended April 19, 2003 and April 20, 2002, respectively.
In addition, the following estimated transaction costs will be included in discontinued operations in the companys second quarter ending July 12, 2003 (amounts in thousands):
Loss on sale of assets |
$ | (6,860 | ) | ||
Deferred financing costs |
(4,190 | ) | |||
Interest rate swap terminations |
(4,765 | ) | |||
Separation
and severance payments |
(4,720 | ) | |||
SAP license transfer fees |
(1,210 | ) | |||
Indemnification insurance premium |
(2,690 | ) | |||
Other |
(450 | ) | |||
Pre-tax discontinued operations |
(24,885 | ) | |||
Tax benefit |
9,580 | ||||
Discontinued operations, net of tax |
$ | (15,305 | ) | ||
In addition to the above costs, operating results from the dessert business sold for the second quarter will be included in discontinued operations in the second quarter. The company is currently analyzing state net operating loss carryforwards in states in which it no longer transacts business as a result of the sale of Mrs. Smiths Bakeries frozen dessert business to Schwan. If the company is unable to utilize these loss carryforwards, for which a deferred tax asset has been recorded, a charge to discontinued operations in the second quarter will be necessary.
7
At April 19, 2003 and December 28, 2002, Net assets to be disposed of - discontinued operations and Liabilities related to assets to be disposed of discontinued operations were comprised of:
April 19, 2003 | December 28, 2002 | |||||||
(amounts in thousands) | ||||||||
Net assets to be disposed of: |
||||||||
Inventory |
$ | 55,304 | $ | 51,908 | ||||
Spare parts |
3,222 | 3,628 | ||||||
Prepaid assets |
5,413 | 5,844 | ||||||
Property, plant and equipment |
142,518 | 143,614 | ||||||
Intangible assets |
37,881 | 38,067 | ||||||
$ | 244,338 | $ | 243,061 | |||||
Liabilities related to assets to be disposed of: |
||||||||
Market
access fee liability |
$ | 2,902 | $ | 2,553 | ||||
3. COMPREHENSIVE INCOME
The company has other comprehensive income resulting from its accounting for derivative financial instruments and additional minimum pension liabilities. Total comprehensive loss, determined as net loss adjusted by other comprehensive loss, was $(6.2) million and $(19.5) million for the sixteen weeks ended April 19, 2003 and April 20, 2002, respectively.
During the first quarter of fiscal 2003, changes to accumulated other comprehensive income, net of tax, were as follows (amounts in thousands):
2003 | |||||
Accumulated other comprehensive loss, beginning balance |
$ | (21,834 | ) | ||
Derivative transactions: |
|||||
Net deferred gains on closed contracts, net of tax of $14 |
21 | ||||
Reclassified to earnings (materials, labor and other production costs), net of tax of
$14 |
20 | ||||
Effective portion of change in fair value of hedging instruments, net of tax of $(399) |
(625 | ) | |||
Accumulated other comprehensive loss ending balance |
$ | (22,418 | ) | ||
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the sixteen weeks ended April 19, 2003 are as follows (amounts in thousands):
Flowers | Flowers | ||||||||||||
Bakeries | Specialty | Total | |||||||||||
Balance as of December 28, 2002 |
$ | 53,362 | $ | 887 | $ | 54,249 | |||||||
Acquisition (see Note
12) |
| 9,099 | 9,099 | ||||||||||
Balance as of April 19, 2003 |
$ | 53,362 | $ | 9,986 | $ | 63,348 | |||||||
The company adopted Statement of Financial Accounting Standards No. 142, (SFAS 142), Goodwill and Other Intangible Assets on December 30, 2001 (the first day of fiscal 2002). A transitional impairment that resulted from the companys adoption of this statement was recorded as of December 30, 2001 at Mrs. Smiths Bakeries for $23.1 million, net of tax of $1.8, million as a cumulative effect of a change in accounting principle.
The changes in the carrying amount of intangible assets for the sixteen weeks ended April 19, 2003 are as follows (amounts in thousands):
Flowers | Flowers | ||||||||||||
Bakeries | Specialty | Total | |||||||||||
Balance as of December 28, 2002 |
$ | 6,506 | | $ | 6,506 | ||||||||
Purchase accounting adjustment |
1,850 | | 1,850 | ||||||||||
Amortization
expense
|
(374 | ) | | (374 | ) | ||||||||
Balance as of April 19, 2003 |
$ | 7,982 | | $ | 7,982 | ||||||||
The purchase accounting adjustment of $1.85 million was related to the completion of the final independent valuations prepared as a result of the Ideal Baking acquisition which occurred in fiscal 2002.
8
5. NEW ACCOUNTING PRONOUNCEMENTS
Asset Retirement. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS ) No. 143, Accounting for Asset Retirement Obligations which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement was effective for the company beginning in the first quarter of fiscal 2003. This statement did not effect net income.
Extraordinary Gain on Early Extinguishment of Debt. In April 2002, the FASB issued SFAS No. 145, (SFAS 145), Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement was effective for the company beginning in fiscal 2003. The application of this statement will result in the company reclassifying in its consolidated financial statements, the $6.4 million ($4.0 million, net of tax) fiscal 2001 extraordinary gain on the early extinguishment of debt to continuing operations in its January 3, 2004, Consolidated Financial Statements. This statement did not affect net income.
Guarantees. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 were effective for fiscal 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantors year-end. The company did not enter into any new guarantees in the first quarter of fiscal 2003. However, in the second quarter of fiscal 2003, the company entered into an eighteen month indemnification agreement, limited to $70.0 million, with Schwan as a result of the sale of Mrs. Smiths Bakeries frozen dessert business related to the inventory sold. The company has purchased insurance to cover possible claims (or occurrences) under this indemnification. In the second quarter of fiscal 2003, a liability of $2.7 million was recorded to discontinued operations representing the fair value of the indemnification agreement (see Note 2). The fair value was determined as the insurance premium paid by the company. A related prepaid asset was recorded for the payment of the insurance premium and, together with the indemnification liability, will be amortized over the eighteen month indemnification period.
Stock Based Compensation. In December 2002, the FASB issued SFAS No. 148 (SFAS 148), Accounting for Stock-Based Compensation Transition and Disclosure, Amendment of FASB Statement No. 123. SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation. Furthermore, SFAS 148 mandates new disclosures in both interim and year-end financial statements. The company has elected not to adopt the recognition provisions of SFAS 123, as amended by SFAS 148. However, as permitted by SFAS 123, the company continues to apply intrinsic value accounting for its stock option plans under Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Compensation cost for stock options, if any, is measured as the excess of the market price of the companys common stock at the date of grant over the exercise price to be paid by the grantee to acquire the stock. The companys pro forma net earnings and pro forma earnings per share based upon the fair value at the grant dates for awards under the companys plans are disclosed below.
9
If the company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under these plans, the companys net loss and loss per share would have increased as follows:
April 19, 2003 | April 20, 2002 | ||||||||
Net loss, as reported |
$ | (5,660 | ) | $ | (21,355 | ) | |||
Deduct: Total additional stock-based
employee compensation cost, net of tax,
that would have been included in net
loss under fair value method |
(648 | ) | (673 | ) | |||||
Pro forma net loss |
$ | (6,308 | ) | $ | (22,028 | ) | |||
Basic loss per share as reported |
$ | (0.19 | ) | $ | (0.72 | ) | |||
Pro forma |
(0.21 | ) | (0.74 | ) | |||||
Diluted loss per share as reported |
$ | (0.18 | ) | $ | (0.69 | ) | |||
Pro forma |
(0.20 | ) | (0.71 | ) |
Variable Interest Entities. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities (VIEs) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. The company currently has an interest in one potential VIE. The assets and liabilities of this entity are not consolidated within the companys consolidated financial statements. Flowers Bakeries maintains a transportation agreement with this entity, which represents substantially all of the entitys revenue. We are in the process of assessing the impact of FIN 46 on the companys relationship with this entity. If it is determined that this entity is a VIE, the company has the following options under FIN 46: (i) consolidate the VIE into the companys financial statements; (ii) purchase selected assets from the VIE; or (iii) modify or replace the financing sources currently being utilized. None of these options, if required, are expected to have a material impact on the companys consolidated financial position, liquidity, or results of operations.
In April 2003, the FASB issued SFAS No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The company is currently assessing the impact of this statement.
In May 2003, the FASB issued SFAS No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The company is currently assessing the impact of this statement.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The company enters into commodity derivatives, designated as cash flow hedges of existing or future exposure to changes in commodity prices. The companys primary raw materials are flour, sugar, shortening and dairy products, along with pulp and paper and petroleum-based packaging products. The company also enters into interest rate derivatives to hedge exposure to changes in interest rates.
Of the $5.1 million in accumulated other comprehensive loss, approximately $4.7 million and $0.4 million were related to instruments expiring in fiscal 2003 and 2004, respectively, and an immaterial amount was related to deferred gains and losses on cash-flow hedge positions.
As of April 19, 2003, the companys hedge portfolio contained commodity derivatives with a fair value of $(3.1) million which is primarily recorded in other current liabilities and other long term liabilities. The positions held in the portfolio are used to hedge economic exposure to
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changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2004. Under SFAS 133, instruments with a fair value of $(3.1) million on April 19, 2003 are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income, and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. An immaterial amount of commodity derivatives at April 19, 2003 is related to hedge instruments that do not qualify for hedge accounting under SFAS 133. For these instruments, changes in fair value are recorded each period in selling, marketing and administrative expense. During the sixteen weeks ended April 19, 2003, an immaterial amount was recorded to current earnings due to changes in fair value of these instruments.
In April 2001, the company entered into an interest rate swap transaction with a notional amount of $150.0 million, expiring on December 31, 2003, in order to effectively convert a designated portion of its borrowings under its credit agreement dated March 26, 2001 to a fixed rate instrument. On December 26, 2002, that swap was amended to reduce the notional value to $105.0 million. In addition, the company entered into a new interest rate swap with a notional amount of $45.0 million, expiring on December 31, 2003, in order to effectively convert variable rate interest payments on a designated portion of its capital lease obligations to fixed rate payments. In accordance with SFAS 133, on January 30, 2003, pursuant to the announcement of the sale of Mrs. Smiths Bakeries frozen dessert business, hedge accounting was discontinued for these swaps, as the hedged debt and capital leases would be paid off at the close of the transaction. The existing balance in other comprehensive income of $3.2 million, net of tax, at April 19, 2003, was reclassified to earnings at the close of the transaction on April 24, 2003. The change in fair values of the interest rate swaps from January 30, 2003 to April 19, 2003 of $0.5 million was recognized in discontinued operations in the first quarter of fiscal 2003.
Additionally, on October 25, 2002, in conjunction with the acquisition of Ideal Baking Company, the company acquired two interest rate swaps with notional amounts of $1.7 million each, designated as cash flow hedges of the outstanding borrowings of that company.
The interest rate swap agreements result in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts. The interest rate differential to be paid or received is accrued as interest rates change and is recorded as interest expense. Under SFAS 133, these swap transactions are designated as cash-flow hedges. Accordingly, the effective portion of the change in the fair value of the swap transaction is recorded each period in other comprehensive income. The ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. The fair value of the interest rate swap on April 19, 2003 was a liability of $4.9 million which is recorded in other accrued liabilities and other long term liabilities. During the sixteen weeks ended April 19, 2003, $0.2 million of additional interest expense was recognized due to periodic settlements of the swaps. In addition, $1.9 million of interest expense was recognized in discontinued operations as a result of periodic settlements of the swaps. An immaterial amount was recorded to current earnings related to the interest rate swap.
7. DEBT AND OTHER OBLIGATIONS
Long-term debt consisted of the following at April 19, 2003 and December 28, 2002 (amounts in thousands):
INTEREST | ||||||||||||||||
RATE | MATURITY | APRIL 19, 2003 | DECEMBER 28, 2002 | |||||||||||||
Senior secured credit facilities |
3.96 | % | 2007 | $ | 173,388 | $ | 180,258 | |||||||||
Capital lease obligations |
3.65 | % | 2008 | 55,055 | 56,887 | |||||||||||
Other notes payable |
5.93 | % | 2013 | 12,662 | 13,219 | |||||||||||
241,105 | 250,364 | |||||||||||||||
Less
current maturities |
235,892 | 27,231 | ||||||||||||||
Total long-term debt |
$ | 5,213 | $ | 223,133 | ||||||||||||
The companys credit agreement provides for total borrowings of up to $303.4 million, consisting of Term Loan A of $28.0 million and Term Loan B of $145.4 million and a revolving loan facility of $130.0 million (the revolving loan facility).
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As of December 28, 2002, the company was not in compliance with certain restrictive financial covenants under the credit agreement. Subsequent to December 28, 2002, the company completed an amendment to the credit agreement, which among other things, permitted the company to exclude the effects of the SFAS 142 and SFAS 144 impairment charges from its fiscal 2002 covenant calculations, bringing the company into compliance with all financial covenants under the credit agreement. The credit agreement was also amended to allow for completion of the sale of Mrs. Smiths Bakeries frozen dessert assets to Schwan, an increase in the amount of dividends the company can pay, an increase in the companys ability to repurchase its common stock and make acquisitions within certain limits and an increase in the amount of allowable capital expenditures. With the completion of the amendment, the company was in compliance with all covenants under the credit agreement and believes that, given its current cash position, its cash flow from operating activities and its available credit facilities, it can comply with the current terms of its credit facilities and can meet presently foreseeable financial requirements. Pursuant to the amendment to the companys credit agreement, upon the closing of the transaction with Schwan, proceeds from the sale, net of certain outstanding debt and lease obligations, transaction costs and post closing adjustments, were applied to the outstanding Term Loan A and Term Loan B balances on a pro rata basis. On April 24, 2003, $159.7 million of the net proceeds from the Schwan transaction and $13.7 million of the companys cash were used to pay off Term Loan A and Term Loan B. Therefore, the balance on the credit facility was zero as of April 24, 2003. Also on April 24, 2003, proceeds from the Schwan transaction were used to pay-off $54.8 million in capital leases and $6.1 million in other notes payable. As such, debt of approximately $6.8 million remains outstanding at April 24, 2003.
In anticipation of the pending transactions, during the first quarter of fiscal 2003, the company gave notice to lessors of its intent to pay off its equipment leases. As a result, the company accrued $4.3 million in lease termination fees which were included in discontinued operations during the first quarter of fiscal 2003.
Interest expense related to the debt required to be repaid of $5.5 million and $5.9 million in the first quarter of fiscal 2003 and fiscal 2002, respectively, was included in discontinued operations (see Note 2).
8. FACILITY CLOSING COSTS AND SEVERANCE
The company has continuing obligations in connection with certain plant closings completed in the current and prior years. Activity with respect to these obligations is as follows (amounts in thousands):
December 28, 2002 | Spending | April 19, 2003 | ||||||||||
Noncancelable lease
obligations and other
facility closing costs |
$ | 10,195 | $ | (1,062 | ) | $ | 9,133 | |||||
Severance |
537 | (88 | ) | 449 | ||||||||
Other |
1,121 | (56 | ) | 1,065 | ||||||||
Total |
$ | 11,853 | $ | (1,206 | ) | $ | 10,647 | |||||
9. LITIGATION
The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, including personal injury, commercial, contract, environmental, antitrust, product liability, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.
On March 25, 2002, in Trans American Brokerage, Inc. (TAB) vs. Mrs. Smiths Bakeries, Inc., an arbitration brought before the American Arbitration Association, an arbitrator found against Mrs. Smiths Bakeries and issued an interim award for damages in the amount of $9.8 million plus approximately $0.8 million representing costs and attorneys fees incurred relating to an alleged breach of a distributorship agreement. The company recorded a $10.0 million charge ($6.2 million after tax) against its results for the fiscal year ended December 29, 2001 for estimated total probable costs (including attorneys fees and expenses) of this dispute. On June 11, 2002 an arbitrator issued a final award for damages in the amount of the interim award. The award also provided for the accrual of interest until it was settled or paid. As of December 28, 2002, the company had accrued a total of $11.5 million related to this award. On April 24, 2003, the company announced it had concluded settlement of the arbitration award in return for payment of $9.0 million to TAB. As a result, the company reversed $2.5 million from accrued reserves into discontinued operations under Mrs. Smiths Bakeries operating loss.
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10. EARNINGS PER SHARE
The following table calculates basic earnings per common share and diluted earnings per common share at April 19, 2003 and April 20, 2002.
FOR THE SIXTEEN WEEKS ENDED | ||||||||
APRIL 19, 2003 | APRIL 20, 2002 | |||||||
Basic Earnings Per Common Share: |
||||||||
Income from continuing operations |
$ | 13,653 | $ | 13,125 | ||||
Basic weighted average shares outstanding |
29,985 | 29,798 | ||||||
Basic earnings per common share |
$ | 0.46 | $ | 0.44 | ||||
Diluted Earnings Per Common Share: |
||||||||
Income from continuing operations |
$ | 13,653 | $ | 13,125 | ||||
Basic weighted average shares outstanding |
29,985 | 29,798 | ||||||
Add: Shares of common stock assumed upon
exercise of stock options |
1,063 | 1,080 | ||||||
Add: Shares of common stock assumed upon
contingent stock agreement |
76 | | ||||||
Diluted weighted average shares outstanding |
31,124 | 30,878 | ||||||
Diluted earnings per common share |
$ | 0.44 | $ | 0.43 | ||||
11. SEGMENT REPORTING
On April 24, 2003, the company announced it had completed the sale of substantially all the assets of Mrs. Smiths Bakeries frozen dessert business to Schwan. The company retained the frozen bread and roll portion of the Mrs. Smiths Bakeries business. As a result, the frozen bread and roll business as well as the Birmingham, Alabama production facility formerly a part of Flowers Bakeries became a part of our Flowers Snack segment, with Flowers Snack being renamed Flowers Specialty. For purposes of this Form 10-Q, discussion will relate to our Flowers Bakeries and Flowers Specialty business units as such businesses are currently operated. Prior year data has been restated to reflect the segment reorganization.
The segments are managed as strategic business units due to their distinct production processes and marketing strategies. The company evaluates each segments performance based on income or loss before interest and income taxes, excluding unallocated expenses and charges which the companys management deems to be unusual and not reflective of the segments core operating businesses. Information regarding the operations in these reportable segments is as follows (amounts in thousands):
FOR THE SIXTEEN WEEKS ENDED | |||||||||
APRIL 19, 2003 | APRIL 20, 2002 | ||||||||
SALES: |
|||||||||
Flowers Bakeries |
$ | 338,015 | $ | 315,672 | |||||
Flowers Specialty |
96,537 | 80,486 | |||||||
$ | 434,552 | $ | 396,158 | ||||||
DEPRECIATION AND AMORTIZATION: |
|||||||||
Flowers Bakeries |
$ | 13,549 | $ | 13,492 | |||||
Flowers Specialty |
3,488 | 3,879 | |||||||
Unallocated corporate expenses |
125 | 58 | |||||||
$ | 17,162 | $ | 17,429 | ||||||
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES: |
|||||||||
Flowers Bakeries |
$ | 26,241 | $ | 26,189 | |||||
Flowers Specialty |
3,460 | 1,400 | |||||||
Unallocated corporate expenses |
(8,433 | ) | (7,086 | ) | |||||
Unallocated interest income, net |
932 | 839 | |||||||
$ | 22,200 | $ | 21,342 | ||||||
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12. ACQUISITION
On December 30, 2002 (fiscal 2003), the company acquired all the assets of Bishop Baking Company, Inc. from Kellogg Company. Bishop has annual sales of approximately $30 million from its sole bakery in Cleveland, Tennessee. Bishops products, which include a line of snack cake items that the company did not previously produce, are distributed nationwide.
13. SUBSEQUENT EVENTS
On April 24, 2003, the company announced the completion of the sale of substantially all the assets of Mrs. Smiths Bakeries frozen dessert business to Schwan. The transaction was valued at approximately $240 million. See Note 2 for additional information.
On April 24, 2003, the company announced it had concluded settlement of an arbitration award of $9.0 million in Trans American Brokerage, Inc. vs. Mrs. Smiths Bakeries, Inc. See Note 9 for additional information.
On April 24, 2003, the company paid all outstanding borrowings under its senior secured credit facilities, substantially all its capital lease obligations and a portion of other notes payable, leaving a debt balance of approximately $6.8 million outstanding. Proceeds from the sale of Mrs. Smiths Bakeries frozen dessert business to Schwan, as well as a portion of the companys cash holdings were used for these payments. See note 7 for additional information.
On May 30, 2003, the board of directors declared a 3 for 2 stock split of the companys common stock in the form of a stock dividend. The record date for the split will be June 13, 2003 and new shares will be issued on a payment date of June 27, 2003. Pro forma earnings (loss) per common share, giving retroactive effect to the stock split, are as follows:
For the Sixteen Weeks Ended | ||||||||
April 19, 2003 | April 20, 2002 | |||||||
Net Loss Per Common Share: |
||||||||
Basic: |
||||||||
Income from continuing operations |
$ | .30 | $ | .29 | ||||
Discontinued operations, net of tax |
(.43 | ) | (.25 | ) | ||||
Cumulative effect of a change in
accounting principle, net of tax |
| (.52 | ) | |||||
Net loss per share |
$ | (.13 | ) | $ | (.48 | ) | ||
Net Loss Per Common Share: |
||||||||
Diluted: |
||||||||
Income from continuing operations |
$ | .29 | $ | .28 | ||||
Discontinued operations |
(.41 | ) | (.24 | ) | ||||
Cumulative effect of a change in
accounting principle, net of tax |
| (.50 | ) | |||||
Net loss per share |
$ | (.12 | ) | $ | (.46 | ) | ||
On May 30, 2003, the Board of Directors declared a dividend of $.10 per share (post stock split discussed above) on the companys common stock to be paid on June 27, 2003 to shareholders of record on June 13, 2003.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of the results of operations of the company for the sixteen week period ended April 19, 2003 and its financial condition should be read in conjunction with the companys annual report on Form 10-K for the fiscal year ended December 28, 2002.
CRITICAL ACCOUNTING POLICIES:
Our financial statements are prepared in accordance with generally accepted accounting principles (GAAP). These principles are numerous and complex. Our significant accounting policies are summarized in the companys annual report on Form 10-K for the fiscal year ended December 28, 2002. In many instances, the application of GAAP requires management to make estimates or to apply subjective principles to particular facts and circumstances. A variance in the estimates used or a variance in the application or interpretation of GAAP could yield a materially different accounting result. In our Form 10-K for the fiscal year ended December 28, 2002, we discuss the areas where we believe that the estimations, judgments or interpretations that we have made, if different, would have yielded the most significant differences in our financial statements and we urge you to review that discussion.
MATTERS AFFECTING ANALYSIS:
On April 24, 2003, the company announced it had completed the sale of substantially all the assets of its Mrs. Smiths Bakeries, LLC (Mrs. Smiths Bakeries) frozen dessert business to The Schwan Food Company (Schwan). The company retained the frozen bread and roll portion of the Mrs. Smiths Bakeries business. As a result, the frozen bread and roll business as well as the Birmingham, Alabama production facility formerly a part of Flowers Bakeries, LLC (Flowers Bakeries) became a part of our Flowers Snack, LLC (Flowers Snack) segment, with Flowers Snack being renamed Flowers Foods Specialty Group, LLC (Flowers Specialty). For purposes of this Form 10-Q, discussion will relate to our Flowers Bakeries and Flowers Specialty business units as such businesses are currently operated. The frozen dessert business of Mrs. Smiths Bakeries sold is reported as a discontinued operation. As Mrs. Smiths Bakeries dessert and frozen bread and roll businesses historically shared certain administrative and division expenses, certain allocations and assumptions have been made in order to present historical comparative information for them as separate segments. In most instances, administrative and division expenses have been allocated between the two segments based on cases of product sold. Management believes that the amounts are reasonable estimations of the costs that would have been incurred had Mrs. Smiths Bakeries dessert and frozen bread and rolls businesses performed these functions as separate divisions.
RESULTS OF OPERATIONS:
Results of operations, expressed as a percentage of sales, for the sixteen week periods ended April 19, 2003 and April 20, 2002, are set forth below:
FOR THE SIXTEEN WEEKS ENDED | ||||||||
APRIL 19, 2003 | APRIL 20, 2002 | |||||||
Sales |
100.00 | % | 100.00 | % | ||||
Gross margin |
50.84 | 51.94 | ||||||
Selling, marketing and administrative expenses |
41.99 | 42.37 | ||||||
Depreciation and amortization |
3.95 | 4.40 | ||||||
Interest income, net |
0.21 | 0.21 | ||||||
Income from continuing operations before income taxes |
5.11 | 5.39 | ||||||
Income tax expense |
1.97 | 2.07 | ||||||
Discontinued operations |
(4.44 | ) | (2.88 | ) | ||||
Cumulative effect of a change in accounting principle, net of tax |
| (5.83 | ) | |||||
Net loss |
(1.30 | ) | (5.39 | ) |
CONSOLIDATED AND SEGMENT RESULTS
SIXTEEN WEEKS ENDED APRIL 19, 2003 COMPARED TO SIXTEEN WEEKS ENDED APRIL 20, 2002
Sales. For the first quarter ended April 19, 2003, sales were $434.6 million, or 9.7% higher than sales in the comparable quarter of the prior year, which were $396.2 million.
15
Flowers Bakeries sales for the first quarter of fiscal 2003 were $338.0 million, an increase of 7.1% from sales of $315.7 million reported for the first quarter of fiscal 2002. Flowers Bakeries had volume increases of 5.4% and pricing increases of 1.7%. The acquisition of Ideal Baking Company, completed by the company during fiscal 2002, contributed 1.4% of the 5.4% increase in volume. Branded products distributed through the companys DSD system to supermarkets, convenience stores, mass merchandisers and club stores represent approximately 67% of Flowers Bakeries sales. These sales, driven by the companys Natures Own brand of soft variety breads, increased approximately 9% over the same period in the prior year. This increase is primarily attributable to increased volume. Sales in the foodservice channel represent approximately 16% of Flowers Bakeries sales and were relatively flat as compared to the first quarter of fiscal 2002. Store branded retail sales represent approximately 13% of Flowers Bakeries sales. These sales increased approximately 8% from the same period in the prior year. This increase was primarily a result of volume increases.
Flowers Specialtys sales for the first quarter of fiscal 2003 were $96.5 million, an increase of 19.9% from its sales of $80.5 million for the first quarter of fiscal 2002, primarily as a result of the acquisition of Bishop Baking Company in the first quarter of fiscal 2003. Sales in the foodservice channel represent approximately 30% of Flowers Specialtys sales. These sales increased approximately 11% from the same period in the prior year primarily due to volume increases. Branded sales distributed to supermarkets, convenience stores, mass merchandisers and club stores represent approximately 17% of Flowers Specialtys sales. These sales increased approximately 5% from the same period in the prior year primarily due to volume increases related to the Bishop acquisition. Sales in the vending channel represent approximately 16% of Flowers Specialtys sales. These sales increased approximately 31% from the same period in the prior year primarily as a result of volume and price increases. Sales to non-affiliated food companies under contract production arrangements represent approximately 24% of Flowers Specialtys sales. These sales increased by approximately 12% over the same period in the prior year primarily due to volume and price increases. Sales to in-store bakeries and store branded retail sales represent approximately 14% of Flowers Specialtys sales. These sales increased significantly as a result of an expanded presence in the market due to the Bishop acquisition.
Gross Margin (defined as net sales less materials, supplies, labor and other production costs excluding depreciation, amortization and distributor discounts). Gross margin for the first quarter of fiscal 2003 was $220.9 million, or 7.3% higher than gross margin reported in the same period of the prior year of $205.8 million. As a percent of sales, gross margin decreased to 50.8% for the first quarter of fiscal 2003, as compared to 51.9% for the first quarter of fiscal 2002.
Flowers Bakeries gross margin decreased to 56.7% of sales for the first quarter of fiscal 2003, compared to 57.5% of sales for the first quarter of fiscal 2002. This decrease was primarily attributable to start-up costs at the Batesville, Arkansas facility acquired during the fourth quarter of fiscal 2002 in the Ideal acquisition and higher ingredient, packaging and labor costs.
Flowers Specialtys gross margin decreased to 30.4% of sales for the first quarter of fiscal 2003, compared to 31.2% of sales for the first quarter of fiscal 2002. The decrease in margin was primarily attributable to higher ingredient and labor costs.
Selling, Marketing and Administrative Expenses. During the first quarter of fiscal 2003, selling, marketing and administrative expenses were $182.5 million, or 42.0% of sales, as compared to $167.8 million, or 42.4% of sales reported for the first quarter of fiscal 2002.
Flowers Bakeries selling, marketing and administrative expenses include discounts paid to the companys independent distributors in its DSD system. Flowers Bakeries selling, marketing and administrative expenses were $151.9 million, or 44.9% of sales during the first quarter of fiscal 2003 as compared to $141.9 million, or 45.0% of sales during the first quarter of fiscal 2002. The decrease as a percent of sales was primarily a result of lower bad debt expense partially offset by increased advertising, distributor discounts and labor costs.
Flowers Specialtys selling, marketing and administrative expenses were $22.4 million, or 23.2% of sales during the first quarter of fiscal 2003 as compared to $19.8 million, or 24.6% of sales during the first quarter of fiscal 2002. The decrease as a percent of sales was primarily attributable to increased sales and the reduction in headcount and shared administrative functions resulting from the segment reorganization discussed above.
16
Depreciation and Amortization. Depreciation and amortization expense was $17.2 million for the first quarter of fiscal 2003, a decrease of 1.5% from the same period in the prior year, which was $17.4 million.
Flowers Bakeries depreciation and amortization expense for the first quarter of fiscal 2003 of $13.5 million remained relatively unchanged from the first quarter of fiscal 2002.
Flowers Specialtys depreciation and amortization expense for the first quarter of fiscal 2003 of $3.5 million remained relatively unchanged from the first quarter of fiscal 2002.
Net Interest Income. For the first quarter of fiscal 2003, net interest income was $0.9 million, an increase of $0.1 million from the same period in the prior year, which was $0.8 million. The increase was primarily related to a decrease in interest expense as a result of lower debt outstanding.
Income from Continuing Operations Before Income Taxes. Income from continuing operations before income taxes for the first quarter of fiscal 2003 was $22.2 million, an improvement of $0.9 million from the $21.3 million reported in the first quarter of fiscal 2002.
The increase was primarily a result of improvements in the operating results of Flowers Bakeries and Flowers Specialty of $0.1 million and $2.1 million, respectively. Contributing to the increase was an increase in interest income of $0.1 million. Partially offsetting these increases in continuing income was an increase in unallocated corporate expenses of $1.4 million.
Income Taxes. The income tax expense during the first quarter of fiscal 2003 was provided for at an estimated effective rate of 38.5%. The effective rate differs from the statutory rate primarily due to state income taxes.
Discontinued Operations. The loss from discontinued operations for the first quarter of fiscal 2003 increased $7.9 million to $19.3 million as compared to $11.4 million for the first quarter of fiscal 2002. The increase was primarily attributable to the recording of $4.6 million, net of tax, in transaction costs associated with the sale to Schwan recorded in the first quarter of fiscal 2003 and increased operating losses at Mrs. Smiths Bakeries.
Cumulative Effect of a Change in Accounting Principle. The company adopted Statement of Financial Accounting Standards No. 142, (SFAS 142), Goodwill and Other Intangible Assets on December 30, 2001 (the first day of fiscal 2002). A transitional impairment that resulted from the companys adoption of this statement was recorded as of December 30, 2001 at Mrs. Smiths Bakeries for $23.1 million, net of tax of $1.8 million.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity represents our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments as well as our ability to obtain appropriate financing and convert into cash those assets that are no longer required to meet existing strategic and financing objectives. Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving long range business objectives. Currently, the companys liquidity needs arise primarily from working capital requirements and capital expenditures.
Flowers Foods cash and cash equivalents decreased to $27.0 million at April 19, 2003 from $69.8 million at December 28, 2002. The decrease resulted from $6.9 million, $25.1 million and $10.8 million disbursed for operating activities, investing activities and financing activities, respectively.
Net cash of $6.9 million disbursed for operating activities consisted primarily of $5.7 million in net loss, adjusted for certain non-cash items of $34.4 million. These positive items were partially offset by cash disbursed for working capital and other activities of $35.6 million. Net cash disbursed for working capital and other activities resulted primarily from an increase in accounts and notes receivable of $15.7 million and a decrease in accounts payable of $11.5 million.
17
Net cash disbursed for investing activities during the sixteen weeks ended April 19, 2003 of $25.1 million included capital expenditures of $11.0 million. Capital expenditures at Flowers Bakeries and Flowers Specialty were $7.8 million and $2.5 million, respectively. In addition, cash disbursed for investing activities included $14.5 million for the purchase of Bishop Baking in Cleveland, Tennessee.
Net cash disbursed for financing activities of $10.8 million consisted of payments on debt and capital lease obligations of $9.2 million and dividends paid of $1.5 million.
As of December 28, 2002, the company was not in compliance with certain restrictive financial covenants under the credit agreement. Subsequent to December 28, 2002, the company completed an amendment to the credit agreement, which among other things, permitted the company to exclude the effects of the SFAS 142 and SFAS 144 impairment charges from its fiscal 2002 covenant calculations, bringing the company into compliance with all financial covenants under the credit agreement. The credit agreement was also amended to allow for completion of the sale of Mrs. Smiths Bakeries frozen dessert assets to Schwan, an increase in the amount of dividends the company can pay, an increase in the companys ability to repurchase its common stock and make acquisitions within certain limits and an increase in the amount of allowable capital expenditures. With the completion of the amendment, the company was in compliance with all covenants under the credit agreement and believes that, given its current cash position, its cash flow from operating activities and its available credit facilities, it can comply with the current terms of its credit facilities and can meet presently foreseeable financial requirements. Pursuant to the amendment to the companys credit agreement, upon the closing of the transaction with Schwan, proceeds from the sale, net of certain outstanding debt and lease obligations, transaction costs and post closing adjustments, were applied to the outstanding Term Loan A and Term Loan B balances on a pro rata basis. On April 24, 2003, $159.7 million of the net proceeds from the Schwan transaction and $13.7 million of the companys cash were used to pay off Term Loan A and Term Loan B. Therefore, the balance on the credit facility was zero as of April 24, 2003. Also on April 24, 2003, proceeds from the Schwan transaction were used to pay-off $54.8 million in capital leases and $6.1 million in other notes payable. As such, debt of approximately $6.8 million related to the acquisition of Ideal Baking remains outstanding at April 24, 2003.
In anticipation of the pending transactions, during the first quarter of fiscal 2003, the company gave notice to lessors of its intent to pay off its equipment leases. As a result, the company accrued $4.3 million in lease termination fees which were included in discontinued operations during the first quarter of fiscal 2003.
Interest expense related to the debt required to be repaid of $5.5 million and $5.9 million in the first quarter of fiscal 2003 and fiscal 2002, respectively, was included in discontinued operations.
The companys credit rating by Standard and Poors as of April 19, 2003 was BBB-. The companys credit rating by Fitch as of April 19, 2003 was BB+. The companys credit rating by Moodys as of April 19, 2003 was Ba2. Changes in the companys credit ratings do not trigger a change in the companys available borrowings or costs under the credit agreement discussed above, but could effect future credit availability.
NEW ACCOUNTING PRONOUNCEMENTS:
Asset Retirement. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS ) No. 143, Accounting for Asset Retirement Obligations which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement was effective for the company beginning in the first quarter of fiscal 2003. This statement did not effect net income.
Extraordinary Gain on Early Extinguishment of Debt. In April 2002, the FASB issued SFAS No. 145, (SFAS 145), Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". SFAS 145 also rescinds FASB Statement No. 13, Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing
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authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement was effective for the company beginning in fiscal 2003. The application of this statement will result in the company reclassifying in its consolidated financial statements, the $6.4 million ($4.0 million, net of tax) fiscal 2001 extraordinary gain on the early extinguishment of debt to continuing operations in its January 3, 2004, Consolidated Financial Statements. This statement did not affect net income.
Guarantees. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 were effective for fiscal 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantors year-end. The company did not enter into any new guarantees in the first quarter of fiscal 2003. However, in the second quarter of fiscal 2003, the company entered into an eighteen month indemnification agreement, limited to $70.0 million, with Schwan as a result of the sale of Mrs. Smiths Bakeries frozen dessert business related to the inventory sold. The company has purchased insurance to cover possible claims (or occurrences) under this indemnification. In the second quarter of fiscal 2003, a liability of $2.7 million was recorded to discontinued operations representing the fair value of the indemnification agreement (see Note 2). The fair value was determined as the insurance premium paid by the company. A related prepaid asset was recorded for the payment of the insurance premium and, together with the indemnification liability, will be amortized over the eighteen month indemnification period.
Stock Based Compensation. In December 2002, the FASB issued SFAS No. 148 (SFAS 148), Accounting for Stock-Based Compensation Transition and Disclosure, Amendment of FASB Statement No. 123. SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation. Furthermore, SFAS 148 mandates new disclosures in both interim and year-end financial statements. The company has elected not to adopt the recognition provisions of SFAS 123, as amended by SFAS 148. However, as permitted by SFAS 123, the company continues to apply intrinsic value accounting for its stock option plans under Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Compensation cost for stock options, if any, is measured as the excess of the market price of the companys common stock at the date of grant over the exercise price to be paid by the grantee to acquire the stock. The companys pro forma net earnings and pro forma earnings per share based upon the fair value at the grant dates for awards under the companys plans are disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements.
Variable Interest Entities. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities (VIEs) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. The company currently has an interest in one potential VIE. The assets and liabilities of this entity are not consolidated within the companys consolidated financial statements. Flowers Bakeries maintains a transportation agreement with this entity, which represents substantially all of the entitys revenue. We are in the process of assessing the impact of FIN 46 on the companys relationship with this entity. If it is determined that this entity is a VIE, the company has the following options under FIN 46: (i) consolidate the VIE into the companys financial statements; (ii) purchase selected assets from the VIE; or (iii) modify or replace the financing sources currently being utilized. None of these options, if required, are expected to have a material impact on the companys consolidated financial position, liquidity, or results of operations.
In April 2003, the FASB issued SFAS No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The company is currently assessing the impact of this statement.
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In May 2003, the FASB issued SFAS No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The company is currently assessing the impact of this statement.
FORWARD-LOOKING STATEMENTS:
Statements contained in this filing and certain other written or oral statements made from time to time by the company and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our future financial condition and results of operations and are often identified by the use of words and phrases such as anticipate, believe, continue, could, estimate, expect, intend, may, plan, predict, project, should, will, would, is likely to, is expected to or will continue, or the negative of these terms or other comparable terminology.
Forward-looking statements are based on current information, and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results to differ materially from those projected are discussed in this report and may include, but are not limited to:
| unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including changes in pricing, advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability; (v) relationships with our employees and independent distributors; and (vi) laws and regulations (including health-related issues), accounting standards or tax rates in the markets in which we operate; | ||
| our ability to execute our business strategy, which may involve integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values; | ||
| our ability to operate existing, and any new, manufacturing lines according to schedule; | ||
| the level of success we achieve in developing and introducing new products and entering new markets; | ||
| the credit and business risks associated with our customers which operate in the highly competitive retail food industry, including the amount of consolidation in that industry; and | ||
| any business disruptions due to political instability, armed hostilities, incidents of terrorism or the responses to or repercussions from any of these or similar events or conditions. |
The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company.
We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the Securities and Exchange Commission or in company press releases) on related subjects.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company uses derivative financial instruments as part of an overall strategy to manage market risk. The company uses forward, futures, swap and option contracts to hedge existing or future exposure to changes in interest rates and commodity prices. The company does not enter into these derivative financial instruments for trading or speculative purposes. If actual market conditions are less favorable than those anticipated, raw material prices could increase significantly, adversely affecting the margins from the sale of our products.
COMMODITY PRICE RISK
The company enters into commodity forward, futures and option contracts and swap agreements for wheat and, to a lesser extent, other commodities in an effort to provide a predictable and consistent commodity price and thereby reduce the impact of volatility in its raw material and packaging prices. At April 19, 2003, the fair market value of the companys commodity derivative portfolio was $(3.2) million. Of this fair value, $(1.3) million is based on quoted market prices and $(1.9) million is based on models and other valuation methods. Additionally, of this fair value, $(2.6) million and $(0.6) million relate to instruments that will be utilized in fiscal 2003 and 2004, respectively. A sensitivity analysis has been prepared to estimate the companys exposure to commodity price risk. Based on the companys derivative portfolio as of April 19, 2003, a hypothetical ten percent increase in commodity prices under normal market conditions could potentially have a $3.1 million effect on the fair value of the derivative portfolio. The analysis disregards changes in the exposures inherent in the underlying hedged item; however, the company expects that any loss in fair value of the portfolio would be substantially offset by reductions in raw material and packaging prices.
INTEREST RATE RISK
The company enters into interest rate swap agreements in order to reduce its overall interest rate risk. At April 19, 2003, the fair market value of the companys interest rate swaps was a liability of $4.9 million. The fair value of the swap is based on a valuation model using quoted market prices. Of this fair value, $5.0 million and $(0.1) million expire in 2003 and 2004, respectively. A sensitivity analysis has been prepared to estimate the companys exposure to interest rate risk. Assuming a 10% increase in interest rates, the fair value of the companys interest rate swap agreement at April 19, 2003, with a total notional amount of $152.8 million, would increase by $0.1 million. A 10% decrease in interest rates would reduce the fair value by $0.1 million.
Based on the companys floating rate debt at April 19, 2003, including the effect of the interest rate swap agreement, assuming a 10% increase in interest rates, the companys interest expense would increase by $0.2 million, while the impact of a 10% decrease in interest rates would reduce interest expense by $0.2 million.
ITEM 4. CONTROLS AND PROCEDURES
The company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Within the 90-day period prior to the filing of this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the companys management, including the Chairman and Chief Executive Officer and Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the companys disclosure controls and procedures are effective.
Subsequent to the date of their evaluation, there have been no significant changes in the companys internal controls or in other factors that could significantly affect these controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 25, 2002, in Trans American Brokerage, Inc. (TAB) vs. Mrs. Smiths Bakeries, Inc., an arbitration brought before the American Arbitration Association, an arbitrator found against Mrs. Smiths Bakeries and issued an interim award for damages in the amount of $9.8 million plus approximately $0.8 million representing costs and attorneys fees incurred relating to an alleged breach of a distributorship agreement. The company recorded a $10.0 million charge ($6.2 million after tax) against its results for the fiscal year ended December 29, 2001 for estimated total probable costs (including attorneys fees and expenses) of this dispute. On June 11, 2002 an arbitrator issued a final award for damages in the amount of the interim award. The award also provided for the accrual of interest until it was settled or paid. As of December 28, 2002, the company had accrued a total of $11.5 million related to this award. On April 24, 2003, the company announced it had concluded settlement of the arbitration award in return for payment of $9.0 million to TAB. As a result, the company reversed $2.5 million from accrued reserves into discontinued operations under Mrs. Smiths Bakeries operating loss.
In addition to the proceeding described above, we are engaged in various legal proceedings that arise in the ordinary course of our business. We believe it is remote that the amount of any ultimate liability with respect to those proceedings will be material to our financial position, results of operations, or cash flow. However, the company can not give any assurances regarding the ultimate outcome of these lawsuits and any resolution could be material to the companys operating results for any particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the Exhibit Index attached hereto.
(b) The company did not file any reports on Form 8-K during the quarter ended April 19, 2003.
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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.
FLOWERS FOODS, INC |
By: /s/ Amos R. McMullian |
Name: Amos R. McMullian |
Title: Chairman of the Board and |
Chief Executive Officer |
By: /s/ Jimmy M. Woodward |
Name: Jimmy M. Woodward |
Title: Senior Vice President, |
Chief Financial Officer and Chief Accounting Officer |
Date: June 3, 2003 |
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CERTIFICATIONS
I, Amos R. McMullian, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Flowers Foods, Inc.; | |
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 registrants 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 registrants 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 registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants 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 registrants ability to record, process, summarize and report financial data and have identified for the registrants 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 registrants internal controls; and |
6. | The registrants 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: June 3, 2003 | /s/ Amos R. McMullian | |
|
||
Amos R. McMullian | ||
Chairman of the Board and Chief Executive Officer |
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CERTIFICATIONS
I, Jimmy M. Woodward, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Flowers Foods, Inc.; | |
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 registrants 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 registrants 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 registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants 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 registrants ability to record, process, summarize and report financial data and have identified for the registrants 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 registrants internal controls; and |
6. | The registrants 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: June 3, 2003 | /s/ Jimmy M. Woodward | |
|
||
Jimmy M. Woodward | ||
Senior Vice President, Chief Financial Officer and | ||
Chief Accounting Officer |
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EXHIBIT INDEX
Exhibit | ||||||
No. | Name of Exhibit | |||||
2.1 | - - | Distribution Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc., dated as of October 26, 2000 (Incorporated by reference to Flowers Foods Registration Statement on Form 10, dated February 9, 2001, File No. 1-16247). | ||||
2.2 | - - | Amendment No. 1 to Distribution Agreement, dated as of March 12, 2001, between Flowers Industries, Inc. and Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | ||||
2.3 | - - | Asset Purchase Agreement dated January 29, 2003 by and among The Schwan Food Company, Flowers Foods, Inc. and Mrs. Smiths Bakeries, LLC (Incorporated by reference to Flowers Foods Current Report on Form 8-K dated May 9, 2003). | ||||
2.4 | - - | First Amendment to Asset Purchase Agreement dated April 24, 2003 by and among The Schwan Food Company, Flowers Foods, Inc. and Mrs. Smiths Bakeries, LLC (Incorporated by reference to Flowers Foods Current Report on Form 8-K dated May 9, 2003). | ||||
3.1 | - - | Restated Articles of Incorporation of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | ||||
*3.2 | - - | Amended and Restated Bylaws of Flowers Foods, Inc. | ||||
4.1 | - - | Share Certificate of Common Stock of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | ||||
4.2 | - - | Rights Agreement between Flowers Foods, Inc. and First Union National Bank, as Rights Agent, dated March 23, 2001 (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | ||||
4.3 | - - | Amendment No. 1, dated November 15, 2002, to Rights Agreement between Flowers Foods, Inc. and Wachovia Bank, N.A. (as successor in interest to First Union National Bank), as rights agent, dated March 23, 2001. (Incorporated by reference to Flowers Foods Registration Statement on Form 8-A, dated November 18, 2002, File No. 1-16247). | ||||
10.1 | - - | Employee Benefits Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc., dated as of October 26, 2000 (Incorporated by reference to Flowers Foods Registration Statement on Form 10, dated February 9, 2001, File No. 1-16247). | ||||
10.2 | - - | First Amendment to Employee Benefits Agreement by and between Flowers Industries, Inc. and Flowers Foods, Inc., dated as of February 6, 2001 (Incorporated by reference to Flowers Foods Registration Statement on Form 10, dated February 9, 2001, File No. 1-16247). | ||||
10.3 | - - | Flowers Foods, Inc. Retirement Plan No. 1 (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). |
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Exhibit | |||||
No. | Name of Exhibit | ||||
10.4 | - - | Flowers Foods, Inc. 2001 Equity and Performance Incentive Plan (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | |||
10.5 | - - | Credit Agreement, dated as of March 26, 2001, among Flowers Foods, Inc., the Lenders party thereto from time to time, SunTrust Bank, as Syndication Agent and Bankers Trust Company, as Administrative Agent (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | |||
10.6 | - - | Debenture Tender Agreement, dated as of March 12, 2001, by and among Flowers Industries, Inc., Flowers Foods, Inc. and the Holders (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 30, 2001, File No. 1-16247). | |||
10.7 | - - | Employment Agreement, effective as of December 31, 2001, by and between Flowers Foods, Inc. and G. Anthony Campbell. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 27, 2002, File No. 1-6247). | |||
10.8 | - - | Flowers Foods, Inc. Stock Appreciation Rights Plan. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 27, 2002, File No. 1-6247). | |||
10.9 | - - | Flowers Foods, Inc. Annual Executive Bonus Plan. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 27, 2002, File No. 1-6247). | |||
10.10 | - - | Flowers Foods, Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 27, 2002, File No. 1-6247). | |||
10.11 | First Amendment, dated as of May 10, 2001, among Flowers Foods, Inc., the Lenders party to the Credit Agreement, dated as of March 26, 2001, SunTrust Bank, as syndication agent, and Bankers Trust Company, as administrative agent (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 28, 2003). | ||||
10.12 | Second Amendment, dated as of May 10, 2001, among Flowers Foods, Inc., the Lenders party to the Credit Agreement, dated as of March 26, 2001, SunTrust Bank, as syndication agent, and Bankers Trust Company, as administrative agent (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 28, 2003). | ||||
10.13 | Third Amendment, Waiver and Consent, dated as of February 21, 2003, among Flowers Foods, Inc., the Lenders party to the Credit Agreement, dated as of March 26, 2001, SunTrust Bank, as syndication agent, and Deutsche Bank Trust Company Americas (f/n/a Bankers Trust Company), as administrative agent (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 28, 2003). | ||||
10.14 | Form of Indemnification Agreement, by and between Flowers Foods, Inc., certain executive officer and the directors of Flowers Foods, Inc. (Incorporated by reference to Flowers Foods Annual Report on Form 10-K, dated March 28, 2003). | ||||
*21 | - - | Subsidiaries of Flowers Foods, Inc. | |||
*99 | - - | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Amos R. McMullian, Chief Executive Officer, and Jimmy M. Woodward, Chief Financial Officer, for the Fiscal Period Ended April 19, 2003. |
* | Filed herewith |
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