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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report Filed Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934

LANCE, INC.

704-554-1421
(Registrant’s telephone number, including area code)

     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 o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  x    No  o.

     The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of July 22, 2003, was 29,133,682 shares.

LANCE, INC. AND SUBSIDIARIES

INDEX

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LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
As of June 28, 2003 (Unaudited) and December 28, 2002
(In thousands, except share data)

See notes to condensed consolidated financial statements (unaudited).

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LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)
For the Thirteen and Twenty-Six Weeks Ended June 28, 2003 and June 29, 2002
(In thousands, except share and per share data)

See notes to condensed consolidated financial statements (unaudited).

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LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited)
For the Twenty-Six Weeks Ended June 28, 2003 and June 29, 2002
(In thousands, except share data)

See notes to condensed consolidated financial statements (unaudited).

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LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Twenty-Six Weeks Ended June 28, 2003 and June 29, 2002
(In thousands)

See notes to condensed consolidated financial statements (unaudited).

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LANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.		The accompanying unaudited consolidated financial statements of Lance, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 28, 2002 filed with the Securities and Exchange Commission on February 21, 2003. In the opinion of the Company, these financial statements reflect all adjustments (consisting of only normal, recurring accruals) necessary to present fairly the consolidated financial position of the Company and its subsidiaries as of June 28, 2003 and December 28, 2002, and the consolidated statements of income for the thirteen and twenty-six weeks ended June 28, 2003 and June 29, 2002 and the statements of stockholders’ equity and comprehensive income and cash flows for the twenty-six weeks ended June 28, 2003 and June 29, 2002. Certain prior year amounts shown in the accompanying consolidated financial statements have been reclassified for consistent presentation.
2.		The consolidated results of operations for the twenty-six weeks ended June 28, 2003 are not necessarily indicative of the results to be expected for a full year.
3.		Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include customer programs, customer returns and promotions, provisions for bad debts, inventories, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, investments, intangible assets, incentive compensation, income taxes, insurance, post-retirement benefits, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
4.		The principal raw materials used in the manufacture of the Company’s snack food products are flour, potatoes, vegetable oils, sugar, peanut butter, peanuts, cheese and seasonings. The principal supplies used are flexible film, cartons, trays, boxes and bags. These raw materials and supplies are generally available in adequate quantities in the open market either from sources in the United States or from other countries and are generally contracted up to a year in advance.
5.		The Company utilizes the dollar value last-in, first-out (LIFO) method of determining the cost of the majority of its inventories. Because inventory calculations under the LIFO method are based on annual determinations, the determination of interim LIFO valuations requires that estimates be made of year-end costs and levels of inventories. The possibility of variation between estimated year-end costs and levels of LIFO inventories and the actual year-end amounts may materially affect the results of operations as finally determined for the full year.

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LANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Inventories consist of (in thousands):

6.

The following table provides a reconciliation of the denominator used in computing basic earnings per share to the denominator used in computing diluted earnings per share for the thirteen weeks ended June 28, 2003 and June 29, 2002 (there were no reconciling items for the numerator amounts of basic and diluted earnings per share):

7.		During the twenty-six weeks ended June 28, 2003 and June 29, 2002, the Company included in accumulated other comprehensive income/(loss) an unrealized gain due to foreign currency translation of $1,709,000 and $254,000, respectively. Income taxes on the foreign currency translation adjustment in other comprehensive income were not recognized because the earnings are intended to be indefinitely reinvested in those operations. Also included in accumulated other comprehensive income/(loss) for the twenty-six weeks ended June 28, 2003 and June 29, 2002, was an unrealized (loss)/gain of ($60,000), net of tax effect of ($36,000), and $356,000, net of tax effect of $210,000, respectively, related to an interest rate swap accounted for in accordance with SFAS No. 133.
8.		During the twenty-six weeks ended June 28, 2003, the Company recorded severance charges of $1.2 million related to a workforce reduction. The workforce reduction involved the elimination of 57 positions. Severance charges are included in general and administrative expenses ($0.7 million), costs of goods sold ($0.2 million) and selling, marketing and delivery expenses ($0.3 million) on the Condensed Consolidated Statement of Income. Of the $1.2 million, approximately $0.9 million was paid as of June 28, 2003 and the remaining $0.3 million will be paid in the third quarter.

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LANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

9.		During the twenty-six weeks ended June 28, 2003, the Company discontinued distribution of its mini sandwich cracker product line through its route sales system. The discontinuation resulted in pre-tax charges of approximately $8.4 million for the thirteen weeks ended March 29, 2003. These charges include a fixed asset impairment of $6.4 million, which is shown as a loss on asset impairment on the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows. The assets are classified as held for use and are included in Property, Plant and Equipment in the accompanying Condensed Consolidated Balance Sheets. In addition, provisions for inventory-related items of $1.4 million were included in cost of sales, provisions for sales returns of $0.5 million were included in net sales and other operating revenues and provisions for selling and marketing expenses of $0.1 million were included in selling, marketing and delivery expenses. The fixed asset impairment was accounted for under the provisions of Statements of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Discontinuation of the product line resulted in the performance of a recoverability test to determine if an impairment charge was needed. The fair value of the impaired assets was determined based on historical sales of comparable assets.
10.		In 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The new criteria provided in SFAS No. 142 require the testing of impairment based on fair value. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values.
		SFAS No. 142 requires the Company to evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination and to make any necessary reclassifications for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company was required to reassess the useful lives and residual values of all intangible assets acquired and make any necessary amortization period adjustments by the end of the first quarter of 2002. In addition, to the extent an intangible asset is identified as having an indefinite life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. The Company has tested goodwill and intangible assets for impairment under the provision of SFAS No. 142. These tests indicated that there was no impairment of goodwill or intangible assets.
		Under the provisions of SFAS No. 142, for fiscal years beginning after 2001, the Company is no longer recording amortization expense on goodwill.

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LANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of June 28, 2003, the Company had the following acquired intangible assets recorded:

		The noncompetition agreements are being amortized over the life of the agreements. These agreements had an original term of 5 years. The trademarks are deemed to have an indefinite useful life because they are expected to generate cash flows indefinitely. Therefore, under the provisions of SFAS 142, the trademarks are no longer being amortized.
		The changes in the carrying amount of goodwill for the twenty-six weeks ended June 28, 2003 are as follows:

11.		In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
		In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company has included the required interim disclosures in footnote 14.
		In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, and interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB

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LANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

		Interpretation No. 34”. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
		In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal use of the asset. The Company adopted SFAS No. 143 on January 1, 2003 and the adoption did not have a material impact on the Company’s consolidated financial statements.
		In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This Statement amends and clarifies the accounting and reporting for derivative instruments, including embedded derivatives, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. Statement 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company’s accounting for derivative instruments is in compliance with SFAS No. 149 and SFAS No. 133. Therefore, the adoption of SFAS No. 149 is not expected to have an impact on the Company’s consolidated financial statements.
12.		Sales to the Company’s largest customer (Wal-Mart Stores, Inc.) were approximately 14.0% of revenues for the twenty-six weeks ended June 28, 2003 and 11.5% of revenues for the twenty-six weeks ended June 29, 2002. Accounts receivable at June 28, 2003 and December 28, 2002 included receivables from Wal-Mart Stores, Inc. totaling $10.3 million and $6.4 million, respectively.
13.		The Company’s total bad debt expense for the thirteen weeks ended June 28, 2003 and June 29, 2002 was $0.4 million and $0.3 million, respectively. For the twenty-six weeks ended June 28, 2003 and June 29, 2002, total bad debt expense was $0.5 million and $1.4 million, respectively.
14.		The Company has adopted SFAS No. 123, “Accounting for Stock-Based Compensation,” which permits entities to recognize as expense over the vesting period the fair value of all stock option awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the intrinsic value-based method of accounting prescribed by APB Opinion No. 25 and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Based Compensation, an interpretation of APB Opinion No. 25.” The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma net income and pro forma earnings per share disclosures for employee stock options as if the fair value based method defined under the provisions of SFAS No. 123 had been applied.

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LANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company applies APB Opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. The table below presents the pro-forma net income effect of the options using the Black-Scholes option pricing model prescribed under SFAS No. 123.

15.

The Company entered into a long-term guaranteed payment commitment during 2000 with a supplier. Under the terms of this agreement, to the extent the Company’s purchases exceed an agreed upon amount, no additional amount is due from the Company. However, if purchases are below this amount, the Company is required to compensate the supplier. In addition, the Company has provided a guarantee to a third party for fixed asset financing for the supplier. The maximum annual payment guarantees to both the supplier and third party are $0.8 million per year through 2007 and $0.2 million in 2008. The total amount outstanding under these guarantees was $3.8 million as of June 28, 2003.

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LANCE, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. The Company routinely evaluates its estimates, including those related to customer programs, customer returns and promotions, bad debts, inventories, fixed assets, hedge transactions, supplemental retirement benefits, investments, intangible assets, incentive compensation, income taxes, insurance, other post-retirement benefits, contingencies and litigation. Actual results may differ from these estimates.

Results of Operations

Thirteen Weeks Ended June 28, 2003 Compared to Thirteen Weeks Ended June 29, 2002

Revenues for the thirteen weeks ended June 28, 2003 increased $2.3 million or 1.6% compared to the thirteen weeks ended June 29, 2002. The Company’s branded product revenues declined $2.6 million or 2.7% and the Company’s non-branded product revenues increased $4.9 million or 10.5%. The branded product decline was due primarily to sales of cakes (down $1.2 million), sandwich crackers including mini-sandwich crackers (down $1.1 million), mints and gum (down $0.7 million) and food service products (down $0.6 million). These declines were partially offset by increased revenues from nuts (up $0.6 million) and meat products (up $0.4 million). The non-branded increase was due primarily to increased private label revenues (up $5.1 million) and third party brands (up $0.3 million), slightly offset by lower sales to other manufacturers (down $0.5 million).

For the thirteen weeks ended June 28, 2003 and June 29, 2002 the Company’s branded products represented 64% and 67% of total revenues, respectively. Private label sales increased to 23% of total revenues compared to 20% in the prior year and sales of the Company’s other non-branded

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LANCE, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

products represented 13% of total revenues for the thirteen weeks ended June 28, 2003 and June 29, 2002.

Gross margin for the thirteen weeks ended June 28, 2003 declined 0.7 points as a percentage of revenues, but remained relatively flat in dollar terms compared to the thirteen weeks ended June 29, 2002. Sales price increases ($2.5 million), manufacturing efficiencies ($1.6 million), and increased volume ($1.3 million) were offset by sales of products with lower gross margins ($3.4 million), including direct shipment products which increased 8.6%, higher commodity costs ($1.3 million) and increased promotional spending ($0.8 million).

Selling, marketing and delivery expenses decreased $1.2 million compared to the prior year. This decrease was primarily a result of reduced salaries, insurance and other employee benefits of $2.3 million partially offset by increased route truck expenses of $1.1 million.

General and administrative expenses remained relatively flat compared to the prior year as lower employee-related expenses were largely offset by increases in professional fees.

The provision for employees’ retirement plans was relatively unchanged compared to the prior year.

Other income includes foreign currency gains and losses and gains on the disposition of fixed assets. Net interest expense was relatively unchanged from the prior year. See discussion in “Liquidity and Capital Resources” section below.

The effective income tax rate decreased to 35.4% in the current year from 36.3% in the prior year due to changes in earnings among the consolidated entities.

Twenty-Six Weeks Ended June 28, 2003 Compared to Twenty-Six Weeks Ended June 29, 2002