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SECURITIES AND EXCHANGE COMMISSION | |
Washington, D.C. 20549 | |
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FORM 10-K | |
(Mark One) |
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 28, 2002 |
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
58-2582379
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1919 Flowers Circle
Thomasville, Georgia
(Address of principal executive
offices)
31757
(Zip Code)
Registrants telephone number, including
area code:
(229) 226-9110
Securities registered pursuant to
Section 12(b) of the Act:
Name of each exchange
Title of each class
on which registered
Common Stock, $.01 per share, together
with Preferred Share Purchase Rights
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated herein by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2) Yes x No o
Based on the closing sales price on the New York Stock Exchange on July 12, 2002 the aggregate market value of the voting and non-voting common stock held by nonaffiliates of the registrant was $555,230,344.
On March 21, 2003 the number of shares outstanding of the registrants Common Stock, $.01 par value, was 29,985,375.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants Proxy Statement for the 2003 Annual Meeting of Shareholders to be held May 30, 2003, which will be filed with the Securities and Exchange Commission on or prior to April 28, 2003, have been incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
FORM 10-K REPORT
Page | ||||||
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PART I | ||||||
Item 1.
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Business | 1 | ||||
Item 2.
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Properties | 12 | ||||
Item 3.
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Legal Proceedings | 12 | ||||
Item 4.
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Submission of Matters to a Vote of Security Holders | 13 | ||||
PART II | ||||||
Item 5.
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Market for the Registrants Common Stock and Related Stockholder Matters | 13 | ||||
Item 6.
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Selected Financial Data | 15 | ||||
Item 7.
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Managements Discussion and Analysis of Results of Operations and Financial Condition | 15 | ||||
Item 7A
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Quantitative and Qualitative Disclosures About Market Risk | 33 | ||||
Item 8.
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Financial Statements and Supplementary Data | 35 | ||||
Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | 35 | ||||
PART III | ||||||
Item 10.
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Directors and Executive Officers of the Registrant | 35 | ||||
Item 11.
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Executive Compensation | 35 | ||||
Item 12.
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Security Ownership of Certain Beneficial Owners and Management of Flowers Foods | 35 | ||||
Item 13.
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Certain Relationships and Related Transactions | 36 | ||||
Item 14.
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Controls and Procedures | 36 | ||||
PART IV | ||||||
Item 15.
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Exhibits, Financial Statement Schedules and Reports on Form 8-K | 36 | ||||
Signatures | 39 | |||||
Certifications | 41 |
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PART I
Item 1. Business
Corporate Information
Flowers Foods, Inc., a successor to Flowers Industries, Inc. (FII), was incorporated in Georgia in October, 2000 and, prior to March 26, 2001, was a wholly-owned subsidiary of FII. On October 26, 2000, FII and Kellogg Company (Kellogg) entered into an agreement and plan of restructuring and merger pursuant to which a wholly-owned subsidiary of Kellogg merged with FII on March 26, 2001. This merger facilitated FIIs sale of its equity interest in Keebler Foods Company (Keebler) to Kellogg, which was completed at the same time. As a condition to the merger, FII transferred its bakery operations, and certain other corporate assets and liabilities, to Flowers Foods and distributed all of the outstanding shares of Flowers Foods common stock to FII shareholders on March 26, 2001.
As used herein, references to we, our, us, the company or Flowers Foods include the historical operating results and activities of the business operations which comprised Flowers Foods as of December 28, 2002.
Recent Developments
On January 30, 2003, the company announced it had entered into an agreement to sell its Mrs. Smiths Bakeries frozen dessert business to The Schwan Food Company (Schwan). A closing date for the transaction has not been determined pending approval of the transaction by the Federal Trade Commission and the satisfaction of all other closing conditions. The company will retain the frozen bread and roll portion of the Mrs. Smiths Bakeries business, which complements our core fresh bread business and will become a part of the Flowers Snack segment, with Flowers Snack being renamed Flowers Foods Specialty Group. For purposes of this Form 10-K, discussion will relate to our Flowers Bakeries, Mrs. Smiths Bakeries and Flowers Snack business units as such businesses were operated as of December 28, 2002. In the first quarter of fiscal 2003, the frozen dessert business of Mrs. Smiths Bakeries being sold to Schwan will be reported as a discontinued operation and the frozen bread and roll business of Mrs. Smiths Bakeries to be retained will be reported as a part of Flowers Foods Specialty Group.
The Company
Flowers Foods is one of the largest producers and marketers of bakery products in the United States. Flowers Foods consists of the following businesses:
| Flowers Bakeries, LLC (Flowers Bakeries); | |
| Mrs. Smiths Bakeries, LLC (Mrs. Smiths Bakeries); and | |
| Flowers Snack, LLC (Flowers Snack). |
Our core strategy is to be one of the nations leading producers and marketers of bakery products available to customers through multiple channels of distribution. Our strategy focuses on responding to current market trends for our products and changing consumer preferences. To assist in accomplishing our core strategy, we have aggressively invested capital to modernize and expand our production and distribution capacity and increase efficiency.
We have established customers in multiple distribution channels where bakery products are sold, including traditional supermarkets and their in-store deli/bakeries, foodservice distributors, convenience stores, mass merchandisers, club stores, wholesalers, restaurants, fast food outlets, schools, hospitals and vending machines.
Our Flowers Bakeries business focuses on the production and marketing of bakery products to customers in the super-regional 16 state area in and surrounding the southeastern United States. We have devoted significant resources to modernizing production facilities, improving our distribution capabilities and enhanc-
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Our Mrs. Smiths Bakeries business produces and markets frozen desserts as well as bread, rolls and buns for sale to retail and foodservice customers. Retail frozen pie sales are heavily concentrated in the third and fourth fiscal quarters, which fall during the traditional holiday season. In an effort to enhance sales outside of the holiday season, we focus on expanding non-seasonal sales in the frozen dessert product line and frozen breads and rolls by extending the well-recognized Mrs. Smiths brand name to existing and related retail and foodservice products. Examples of significant product line extensions include Mrs. Smiths Restaurant Classics and Mrs. Smiths Soda Shoppe frozen pies in the retail channel and Grand Finales frozen pies in the foodservice channel.
Our Flowers Snack business produces snack cakes for sale to co-pack, retail and vending customers. Flowers Snack was formed in July 2002 when it was separated from Mrs. Smiths Bakeries. Snack cake sales have long been a part of the companys operations, and Flowers Snacks purpose is to grow sales and expand distribution in the snack cake category. Flowers Snacks facilities are state-of-the-art with high-speed equipment that allows us to be very competitive in the marketplace. During fiscal 2002, Flowers Snack reformulated its products to improve quality and taste as well as to provide for an extended shelf life. A significant product line that is distributed by our customers on a national basis is Mrs. Freshleys fresh snack cakes in the vending channel and convenience stores. Flowers Snack also produces snack cake under the BlueBird brand for distribution at retail outlets using Flowers Bakeries DSD system. In fiscal 2003, the company acquired all the assets of Bishop Baking Company, Inc. from Kellogg. 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 the company did not previously produce, are distributed nationwide. In fiscal 2003, the frozen bread and roll business previously operated by Mrs. Smiths Bakeries will be combined with Flowers Snack to form the new Flowers Foods Specialty Group.
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We have a leading presence in each of the major
product categories in which we compete. Our Flowers
Bakeries brands have a leading share of fresh packaged
branded sales measured in both dollars and units in the 22 major
metropolitan markets we serve. Our major branded products
include, among others, the following:
Flowers Bakeries
Flowers
Natures Own
Cobblestone Mill
BlueBird
ButterKrust
Mary Jane
Evangeline Maid
Ideal
Flowers Bakeries Regional
Franchised Brands
Sunbeam
Roman Meal
Bunny
Holsum
Mrs. Smiths Bakeries Desserts
Mrs. Smiths
Oregon Farms
Stilwell
Oronoque Orchard
Pour a Quiche
Grand Finales
Pet-Ritz
Mrs. Smiths Bakeries Bread
and Rolls
European Bakers
Our Special Touch
Danish Kitchen
Flowers Snack
Mrs. Freshleys
Bishop
We are committed to producing high quality products at the lowest cost in all of our operations, and we have made significant capital investments in recent years to modernize, automate and expand our production and distribution capabilities and enhance our information technology. We believe these facilities will give us the ability to exploit many opportunities in the foodservice and mass merchandiser channels and continue our growth in the retail channel.
In order to provide prompt and responsive service to customers, we tailor our distribution systems to the marketing and production aspects of our major product lines. Flowers Bakeries distributes its baked foods through its DSD system which utilizes approximately 2,800 independent distributors who, as owners of their territories, are motivated by financial incentives to maintain and build retail brand shelf space and to monitor product quality and assortment, which is essential in the marketing of short shelf life products such as fresh bread, rolls and buns. Mrs. Smiths Bakeries distributes its frozen foods through two strategically-located frozen distribution facilities, as well as through additional commercial frozen warehouse space throughout the United States in order to accommodate demands in the retail channel for seasonal products and to provide staging to expedite distribution throughout the year. We utilize a centralized distribution facility for Flowers Snacks snack cake products.
Industry Overview
The United States food industry is comprised of a number of distinct product lines and distribution channels for bakery products. Consumer preferences for food purchases continue to move away from the traditional grocery store aisles to supermarket in-store deli/bakeries and to non-supermarket channels, such as mass merchandisers, convenience stores, club stores, restaurants and other convenience channels. Non-supermarket channels of distribution are increasingly important throughout the food industry.
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Non-Frozen Bakery Products
Retail sales of bakery products continue to experience modest growth, with expansion within the category occurring in a variety of premium and specialty breads. Sales of bakery products to mass merchandisers (such as Wal-Mart) continue to grow at a faster rate than traditional retail supermarket sales. In addition to Flowers Foods, several large baking and diversified food companies market bakery products in the United States. Competitors in this category include Interstate, Sara Lee, Weston, Bimbo and Pepperidge Farm. There are also a number of smaller, regional companies. We believe that the larger companies enjoy several competitive advantages over smaller operations due principally to greater brand awareness and economies of scale in areas such as purchasing, distribution, production, information technology, advertising and marketing.
Consolidation has been a significant trend in the baking industry over the last several years. It continues to be driven by factors such as capital constraints on smaller companies that limit their ability to avoid technological obsolescence, to increase productivity or to develop new products, generational changes at family-owned businesses and the need to serve the consolidated retail customers and the foodservice channel. We believe that the consolidation trend in the baking, food retailing and foodservice industries will continue to present opportunities for strategic acquisitions that complement our existing businesses and that extend our super-regional presence.
Frozen Bakery Products
Sales of frozen desserts, breads and rolls to foodservice institutions and other distribution channels, including restaurants and in-store bakeries, have grown at a rate faster than sales to retail channels. Primary competitors in the frozen dessert market include Sara Lee, Pepperidge Farm, Marie Callendar and Pillsbury.
Strategy
Our core strategy is to be one of the nations leading producers and marketers of bakery products available to customers through multiple channels of distribution. Our Flowers Bakeries, Mrs. Smiths Bakeries and Flowers Snack businesses each develop strategies based on the production, distribution and marketing requirements of their particular food categories. We employ the following five overall strategies:
| Strong Brand Recognition. We intend to capitalize on the success of our well-recognized brand names, which communicate product consistency and quality, by extending those brand names to additional products and channels of distribution. Certain of our brands, including Natures Own bread and Cobblestone Mill bread are the top-selling brands in their categories. Many of our other white bread brands are category leaders in the geographical area where they are sold. | |
| Efficient Production and Distribution Facilities. We intend to maintain a continuing level of capital improvements that will permit us to fulfill our commitment to remaining among the most efficient bakery producers in the United States. | |
| Customer Service-Oriented Distribution. We intend to expand and refine our distribution systems to respond quickly and efficiently to changing customer service needs, consumer preferences and seasonal demands. We have distribution systems that are tailored to the nature of each of our food product categories and are designed to provide the highest levels of service to our retail and foodservice customers. We have a DSD system that utilizes approximately 2,800 independent distributors for delivery of our Flowers Bakeries products. Our Mrs. Smiths Bakeries business utilizes a network of strategically located storage and distribution facilities for our frozen bakery and dessert products. Flowers Snack uses a centralized facility for distribution of snack cake products. | |
| Broad Range of Products Sold Through Multiple Distribution Channels. We intend to continue to expand our product lines and distribution channels. Our product lines now include many varieties of bakery and dessert products. These products generally can be found in traditional supermarkets and in their in-store deli/bakeries, convenience stores, mass merchandisers, club stores, wholesalers, restaurants, fast food outlets, schools, hospitals and vending machines. |
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| Strategic Acquisitions. We have consistently pursued growth in sales, geographic markets and products through strategic acquisitions. We intend to pursue growth through strategic acquisitions and investments that will complement and expand our existing markets, product lines and product categories. |
Products
We produce fresh packaged bakery, frozen dessert and frozen bakery products.
Flowers Bakeries
We market our fresh packaged bakery products in the super-regional 16 state area in and surrounding the southeastern United States. Our soft variety and premium specialty breads are marketed throughout this entire area under our Natures Own and Cobblestone Mill brands. We also market regional franchised brands such as Sunbeam, Bunny and Holsum, and regional brands we own such as ButterKrust, Mary Jane, Evangeline Maid and Ideal. Natures Own is the best selling brand by volume of soft variety bread in the United States, despite being marketed solely in the super-regional 16 state area. Flowers Bakeries branded products (including thrift store sales) account for approximately 70% of its sales.
In addition to our branded products, we also produce and distribute fresh packaged bakery products under private labels for retailers. While private label products carry lower margins than our branded products, we use our private label offerings to help the independent distributors in the DSD system expand total retail shelf space and to effectively utilize production and distribution capacity.
We also utilize our DSD system to supply bakery products to quick serve restaurants and other outlets.
Mrs. Smiths Bakeries
Mrs. Smiths Bakeries frozen desserts are marketed throughout the United States. Mrs. Smiths Bakeries frozen desserts are sold at retail under the Mrs. Smiths, Pet Ritz and Oronoque Orchard brand names. Frozen desserts in the foodservice channel are sold under the Grand Finales and Restaurant Classics brands and under private labels for foodservice customers. We also produce and distribute frozen bakery products such as bread, rolls and buns for sale to foodservice customers. In addition, our frozen bread and roll products under the European Bakers and Our Special Touch brands are distributed for retail sale in super market deli-bakeries.
Flowers Snack
Flowers Snack produces and sells pastries, doughnuts and bakery snack products under the Mrs. Freshleys brand to customers for re-sale through multiple channels of distribution, including vending and convenience stores. In addition, we produce pastries, doughnuts and bakery snack products for distribution by Flowers Bakeries DSD system under the BlueBird brand and for sale to other food companies for re-sale under their brand names. We also co-pack snack products under various private and branded labels for sale through the retail channel. Some of our co-pack customers are also our competitors.
Production and Distribution
We design our production facilities and distribution systems to meet the marketing and production demands of our major product lines. Through a significant program of capital improvements and careful planning of plant locations, which, among other things, allows us to establish reciprocal baking or product transfer arrangements among our bakeries, we seek to remain a low cost producer and marketer of a full line of bakery products on a national and super-regional basis. In addition to the DSD system for our fresh baked products, we also use both owned and public warehouses and distribution centers in central locations for the distribution of certain of our Flowers Snack and Mrs. Smiths Bakeries products.
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Extended Shelf Life
For several years, the company has considered the introduction of products with an extended shelf life (ESL). ESL products are formulated to enhance taste, quality and freshness. While ESL is not a new concept, progress has been made in recent years, and it has become a focus in our industry. After reformulating certain products and extensive testing, we selectively implemented ESL in fiscal 2002. We extended the length of time certain products remain on the retail customers shelf and the sell by date. We continue to use ESL in fiscal 2003 and expect to continue to do so in the future. Financial benefits of ESL have been recognized through reduced stale costs and reduced out-of-stock conditions. We have not, and do not intend, to reduce service days or the number of route territories used to service our customers.
Flowers Bakeries
We operate 27 fresh packaged bakery production facilities in ten states. Throughout our history, we have devoted significant resources to modernizing our production facilities and improving our distribution capabilities. We believe that these investments have made us the most efficient major producer of packaged bakery products in the United States. We believe that our capital investment yields long-term benefits in the form of more consistent product quality, highly sanitary processes, and greater production volume at a lower cost per unit. We intend to continue to invest in our production facilities and equipment to maintain high levels of efficiency.
Distribution of fresh packaged bakery products involves determining appropriate order levels, delivery of the product from the production facility to the independent distributor for direct store delivery to the customer, stocking the product on the shelves, visiting the customer daily to ensure that inventory levels remain adequate and removing stale goods. The company also utilizes scan based trading. Through scan based trading, we are able to track and monitor sales and inventories more effectively. The fresh packaged bakery industry relies on scan based trading to provide information that allows the company to produce and distribute products at high levels of efficiency. We utilize a network of approximately 2,800 independent distributors who own the rights to distribute certain brands of our fresh packaged bakery products in their geographic territories. The company has sold the majority of its territories to independent distributors under long-term financing arrangements, which are managed and serviced by the company.
The company leases hand-held computer hardware, which contains our proprietary software, and charges independent distributors an administrative fee for its use. This fee reduces the companys selling, marketing and administrative expenses and amounted to $1.2 million, $1.3 million and $1.3 million for fiscal 2002, fiscal 2001 and fiscal 2000, respectively. The software permits distributors to track and communicate inventory data to the production facilities and to calculate recommended order levels based on historical sales data and recent trends. These orders are electronically transmitted to the appropriate production facility on a nightly basis. This system is designed to ensure that the distributor has an adequate supply of product and the right mix of products available to meet the retail and foodservice customers immediate needs. We believe our system minimizes returns of unsold goods. In addition to the hand-held computers, we utilize a software system that permits tracking of sales, product returns and profitability by selling location, plant, day and other bases. This provides real-time, on-line access to sales and gross margin reports on a daily basis, allowing prompt operational adjustments when appropriate.
We believe the independent distributor system is unique in the industry both as to its size and with respect to its geographic coverage. The system is designed to provide retail and foodservice customers with superior service because independent distributors, highly motivated by financial incentives from their route ownership, strive to increase sales by maximizing service. In turn, independent distributors have the opportunity to benefit directly from the enhanced value of their routes resulting from higher branded sales volume.
Mrs. Smiths Bakeries
We operate four production facilities for our frozen desserts and frozen bakery products . Since we acquired Mrs. Smiths Bakeries, we have devoted significant resources to modernizing and realigning our
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Our distribution facilities are strategically located near our production facilities to simplify distribution logistics. Our plant in Stilwell, Oklahoma is our primary producer of frozen fruit and custard pies. This facility also serves as a principal point of distribution for our frozen desserts. Our Spartanburg, South Carolina plant is our primary producer of cream pies. Our Suwanee, Georgia and Montgomery, Alabama facilities are our primary producers of frozen bread and rolls. Our Suwanee, Georgia freezer facility contains such innovations as five 78-foot tall, laser-guided cranes specifically designed for the facility, a six million cubic foot freezer and computer-controlled bar-coding and inventory control. The automation of this facility enables us to move extremely large volumes of product without a significant labor component and enables the facility to operate with extremely cold temperatures that preserve high product quality. These features allow our Suwanee freezer facility to better serve customers by processing customer orders much more quickly than conventional freezer facilities. Production capacity was added to this facility as part of the overall realignment project, enhancing operating efficiencies by having contiguous production and frozen storage and distribution.
In addition to our two strategically-located freezer and distribution facilities in Suwanee and Stilwell, we own and lease additional freezer and distribution facilities throughout the United States to facilitate distribution of our products nationwide. These owned and leased facilities allow us to build and store necessary inventory of raw materials and finished dessert products and to expedite the national distribution of both our seasonal and non-seasonal products.
Flowers Snack
We operate four production facilities that produce packaged bakery snack products. We distribute our packaged bakery snack products from a centralized distribution facility located near Knoxville, Tennessee, which allows us to achieve both production and distribution efficiencies. The production facilities are able to operate longer, more efficient production runs of a single product, which are then shipped to the centralized distribution facility. Products coming from different production facilities are then cross-docked and shipped directly to customer warehouses.
In fiscal 2003, the company acquired all the assets of Bishop Baking Company, Inc. from Kellogg. 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 the company did not previously produce, are distributed nationwide.
Customers
Our top 10 customers in fiscal 2002 accounted for 42.7% of sales. During fiscal 2002, our largest customer, Wal-Mart, represented 10.5% of the companys sales.
Flowers Bakeries
Our fresh baked foods have a highly diversified customer base, which includes mass merchandisers, grocery retailers, restaurants, fast-food chains, food wholesalers, institutions and vending companies. We also sell returned and surplus product through a system of thrift outlets. We supply numerous restaurants, institutions and foodservice companies with bakery products, including buns for outlets such as Burger King, Wendys, Krystal, Hardees, Whataburger and Outback Steakhouse. We also sell packaged bakery products to wholesale distributors for ultimate sale to a wide variety of food outlets.
Mrs. Smiths Bakeries
Our frozen desserts are marketed to traditional retail outlets, such as grocery stores, as well as non-traditional outlets, ranging from club stores and mass merchandisers to wholesalers, foodservice distributors and restaurants. Our branded frozen desserts are sold primarily through grocery retailers. Our frozen bakery products are sold to foodservice distributors, institutions, retail in-store bakeries and restaurants.
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Flowers Snack
Our packaged bakery snack products under the Mrs. Freshleys brand are sold primarily to customers who distribute the product through vending outlets. We produce packaged bakery snack products for Flowers Bakeries DSD system under our BlueBird brand. In certain circumstances, we enter into co-packing arrangements with other food companies, some of which are competitors.
Marketing
Our marketing and advertising campaigns are conducted through targeted television and radio advertising and printed media coupons. We also incorporate promotional tie-ins with other sponsors, on-package promotional offers and sweepstakes into our marketing efforts. Additionally, we focus our marketing and advertising campaigns on specific products throughout the year, such as buns for Memorial Day, Independence Day and Labor Day and pies during the Thanksgiving and Christmas holiday season.
Competition
Flowers Bakeries
The United States packaged bakery category is intensely competitive and is comprised of large food companies, large independent bakeries with national distribution, and smaller regional and local bakeries. Primary national competitors include Interstate, Sara Lee, Weston, Bimbo and Pepperidge Farm. We also face competition from private label brands produced by the company and its competitors. Competition is based on product availability, product quality, brand loyalty, price effective promotions and the ability to target changing consumer preferences. Customer service, including frequent delivery and well-stocked shelves through the efforts of the independent distributors, is an increasingly important competitive factor. While we experience price pressure from time to time, primarily as a result of competitors promotional efforts, we believe that our distributor and customer relationships, which are enhanced by our information technology and the consumers brand loyalty, as well as our diversity within our region in terms of geographic markets, products, and sales channels, limit the effects of such competition. Recent consolidation in the industry has further enhanced the ability of the larger firms to compete with small regional bakeries. We believe we have significant competitive advantages over smaller regional bakeries due to greater brand awareness and economies of scale in areas such as purchasing, distribution, production, information technology, advertising and marketing.
Mrs. Smiths Bakeries
Mrs. Smiths Bakeries, Sara Lee, Pepperidge Farm, Marie Callendar and Pillsbury lead the frozen baked dessert category. In addition, Mrs. Smiths Bakeries competes with private label brands. Competition for frozen desserts depends primarily on brand recognition and loyalty, product quality, effective promotions and price. For the frozen bakery products manufactured by Mrs. Smiths Bakeries and sold to foodservice customers, competition is based upon the ability to meet production and distribution demands at a competitive price.
Flowers Snack
Competitors for packaged bakery snack products produced by Flowers Snack include Interstate (Hostess and Dolly Madison) and many regional companies who produce both branded and private label product. For the fresh bakery snack products manufactured by Flowers Snack, competition is based upon the ability to meet production and distribution demands of retail and vending customers at a competitive price.
Intellectual Property
We own a number of trademarks and trade names, as well as certain patents and licenses. Such trademarks and trade names are considered to be important to our business since they have the effect of developing brand identification and maintaining consumer loyalty. We are not aware of any fact that would
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Raw Materials
Our primary baking ingredients are flour, sugar, shortening, fruits and dairy products. We also use paper products, such as corrugated cardboard, aluminum products, such as pie plates, and films and plastics to package our baked foods. In addition, we are dependent upon natural gas and propane as fuel for firing ovens. Our independent distributors and third party shipping companies are dependent upon gasoline and diesel as fuel for distribution vehicles. We maintain diversified sources for all of our baking ingredients and packaging products.
Commodities, such as our baking ingredients, periodically experience price fluctuations and, for that reason, we continually monitor the market for these commodities. From time to time, we enter into forward purchase agreements and derivative financial instruments to reduce the impact of volatility in raw material prices.
Research and Development
Although not material to our operations, we engage in research and development activities that principally involve developing new products, improving the quality of existing products and improving and modernizing production processes. We also develop and evaluate new processing techniques for both current and proposed product lines.
Regulation
As a producer and marketer of food items, our operations are subject to regulation by various federal governmental agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Environmental Protection Agency and the Department of Commerce, as well as various state agencies, with respect to production processes, product quality, packaging, labeling, storage and distribution. Under various statutes and regulations, these agencies prescribe requirements and establish standards for quality, purity, and labeling. Failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines or compulsory withdrawal of products from store shelves.
In addition, advertising of our businesses is subject to regulation by the Federal Trade Commission, and we are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act.
Our operations, like those of similar businesses, are subject to various federal, state, and local laws and regulations with respect to environmental matters, including air and water quality and underground fuel storage tanks, as well as other regulations intended to protect public health and the environment. Our operations and products also are subject to state and local regulation through such measures as licensing of plants, enforcement by state health agencies of various state standards and inspection of facilities. We believe that we are currently in material compliance with applicable laws and regulations.
Employees
We employ approximately 8,100 persons, approximately 545 of whom are covered by collective bargaining agreements. We believe that we have good relations with our employees.
Executive Offices
The address and telephone number of our principal executive offices are 1919 Flowers Circle, Thomasville, Georgia 31757, (229) 226-9110.
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Executive Officers of Flowers Foods
The following table sets forth certain
information regarding the persons who currently serve as the
executive officers of Flowers Foods. Our Board of Directors
elects all executive officers for one-year terms with the
exception of the positions of President and Chief Operating
Officer Flowers Bakeries, President and Chief
Operating Officer Mrs. Smiths Bakeries
and President and Chief Operating Officer Flowers
Snack, which are appointed by the President and Chief Operating
Officer until they resign or are removed.
EXECUTIVE OFFICERS
Name, Age and Office
Business Experience
Age 65
Chairman of the Board and
Chief Executive Officer
Mr. McMullian has been Chairman of the Board
of Directors and Chief Executive Officer of Flowers Foods since
November 2000. Mr. McMullian previously served as Chairman
of the Board of Directors of Flowers Industries from 1985 to
March 2001 and as its Chief Executive Officer from 1981 to March
2001. Mr. McMullian also previously served as a director of
Keebler Foods Company from 1996 to March 2001.
Age 57
President and Chief Operating
Officer
Mr. Deese has been President and Chief
Operating Officer of Flowers Foods since May 2002.
Mr. Deese previously served as President and Chief
Operating Officer of Flowers Bakeries from January 1997 until
May 2002. Prior to that, he served as President and Chief
Operating Officer, Baked Products Group of Flowers Industries
from 1983 to January 1997, Regional Vice President, Baked
Products Group of Flowers Industries from 1981 to 1983 and
President of Atlanta Baking Company from 1980 to 1981.
Age 42
Senior Vice President and Chief
Financial Officer
Mr. Woodward has been Senior Vice President
and Chief Financial Officer of Flowers Foods since September
2002. Mr. Woodward previously served as Vice President and
Chief Financial Officer from November 2000 until September 2002.
Prior to that, he served as Vice President and Chief Financial
Officer at Flowers Industries from March 2000 to March 2001. Mr.
Woodward also served as Treasurer and Chief Accounting Officer
of Flowers Industries from October 1997 to March 2000 and
Assistant Treasurer of Flowers Industries for more than five
years prior to that time. Mr. Woodward previously served as
a director of Keebler Foods Company from 1998 to March 2001.
Age 55
President and Chief Operating
Officer Flowers Bakeries
Mr. Lord has been President and Chief
Operating Officer of Flowers Bakeries since July 2002.
Mr. Lord previously served as a Regional Vice President of
Flowers Bakeries from January 1997 until July 2002. Prior to
that, he served as Regional Vice President, Baked Products Group
of Flowers Industries from May 1987 until January 1997 and as
President of Atlanta Baking Company from February 1981 until May
1987. Prior to that time, Mr. Lord served in various sales
positions at Flowers Bakeries.
Age 47
President and Chief Operating Officer
Flowers Snack
Mr. Shiver has been President and Chief
Operating Officer of Flowers Snack since July 2002.
Mr. Shiver previously served as Executive Vice President of
Flowers Bakeries from 1998 until 2002. Prior to that, he served
as a Regional Vice President of Flowers Bakeries in 1998 and as
President of Flowers Baking Company of Villa Rica from 1995
until 1998. Prior to that time, Mr. Shiver served in
various sales and marketing positions at Flowers Bakeries.
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Name, Age and Office
Business Experience
Age 48
President and Chief Operating Officer
Mrs. Smiths Bakeries
Mr. Strenglis has been President and Chief
Operating Officer of Mrs. Smiths Bakeries since
January 2002. Mr. Strenglis previously served as Executive
Vice President of Mrs. Smiths Bakeries from October 1999
to January 2002 and as Division Vice President from January 1999
to October 1999. Prior to that time Mr. Strenglis served in
various executive positions at Mrs. Smiths Bakeries.
Age 46
Secretary and General Counsel
Mr. Avera has been Secretary and General Counsel
of Flowers Foods since February 2002. Mr. Avera previously
served as Vice President and General Counsel of Flowers Bakeries
from July 1998 to February 2002. Mr. Avera also previously
served as an associate and assistant general counsel of Flowers
Industries from February 1986 to July 1998.
Age 49
Vice President of Communications and
Investor Relations
Ms. Turner has been Vice President of
Communications and Investor Relations of Flowers Foods since
November 2000. Ms. Turner previously served as Vice
President of Communications and Investor Relations at Flowers
Industries from January 2000 to March 2001. She also served as
Vice President of Public Affairs of Flowers Industries from
September 1997 until January 2000 and Director of Public Affairs
of Flowers Industries for more than five years prior to that
time.
Other Available Information
The company makes available free of charge through its Internet website (http://www.flowersfoods.com) the companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after the company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC).
11
Item 2. Properties
Currently 34 of our production facilities are
owned and one facility is leased. We consider that our
properties are well maintained and sufficient for our present
operations. Our production plant locations are:
Flowers Bakeries
Baton Rouge, Louisiana
Lafayette, Louisiana
New Orleans, Louisiana
Goldsboro, North Carolina
Jamestown, North Carolina
Morristown, Tennessee
El Paso, Texas
Houston, Texas
San Antonio, Texas
Tyler, Texas
Lynchburg, Virginia
Norfolk, Virginia
Bluefield, West Virginia
Mrs. Smiths Bakeries(1)
Stilwell, Oklahoma
Spartanburg, South Carolina
Flowers Snack
Cleveland, Tennessee
Crossville, Tennessee
(1) | The Stilwell, Oklahoma, Spartanburg, South Carolina and Suwanee, Georgia facilities will be sold as part of the sale of Mrs. Smiths Bakeries frozen dessert business to Schwan, and a portion of the Suwanee facility will be leased back to the company. The Montgomery, Alabama facility will be retained by the company and, along with the Flowers Bakeries Birmingham, Alabama facility, will become part of the Flowers Snack division, which will be renamed Flowers Foods Specialty Group. |
Item 3. Legal Proceedings
On March 25, 2002, in Trans American Brokerage, Inc. 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 relating to an alleged breach of a distributorship agreement. The company recorded a $10.0 million charge ($6.2 million after tax) to 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 provides for the accrual of interest until it is settled or paid. During the fifty two weeks ended December 28, 2002, the company recorded $0.7 million in interest expense related to this award.
On January 21, 2003, the District Court confirmed the final award and entered a judgment against Mrs. Smiths Bakeries in the amount of the arbitration award. The District Court also awarded Trans American Brokerage its attorneys fees in connection with the confirmation proceedings. The company has appealed the decision of the District Court to the United States Court of Appeals for the Third Circuit. In
12
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
No matters were submitted for a vote of the security holders in the fourth quarter of fiscal 2002.
PART II
Item 5.
Market
for the Registrants Common Stock and Related Stockholder
Matters
Shares of Flowers Foods common stock have been
quoted on the New York Stock Exchange under the symbol
FLO since March 28, 2001. The following table
sets forth for the fiscal quarters indicated the high and low
closing sale prices of the companys common stock on the
New York Stock Exchange as reported in published sources.
Market Price
Market Price
FY 2002
FY 2001
Quarter
High
Low
High
Low
$
28.99
$
22.25
$
15.33
$
12.97
26.50
20.18
23.87
14.98
24.45
18.17
27.83
20.83
24.89
16.76
28.96
22.47
On November 16, 2001, the Board of Directors declared a 3 for 2 stock split payable on January 2, 2002, which resulted in the issuance of 9.9 million shares of our common stock . All references to number of shares (other than the Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income for fiscal years ended December 30, 2000 and January 1, 2000) or per share amounts herein, unless otherwise noted, reflect the 3 for 2 stock split on a retroactive basis.
As of March 21, 2003, there were approximately 5,557 holders of record of our common stock.
Dividends
On November 15, 2002, the Board of Directors declared a dividend of $0.05 per share on the companys common stock to shareholders of record on November 29, 2002. This dividend of $1.5 million was paid on December 13, 2002 . On February 21, 2003, the Board of Directors declared a dividend of $0.05 per share on the companys common stock to shareholders of record on March 7, 2003. This dividend of $1.5 million was paid on March 21, 2003.
The declaration and payment of dividends is subject to the discretion of our Board of Directors. The Board of Directors bases its decisions regarding dividends on, among other things, general business conditions, our financial results, contractual, legal and regulatory restrictions regarding dividend payments and any other factors the Board may consider relevant. Under the terms of our credit agreement for fiscal 2002, the maximum cash dividend permitted was equal to $5.0 million, plus an amount not to exceed the Cumulative Retained Excess Cash Flow Amount, as defined under the credit agreement, provided certain leverage ratios and unutilized revolving commitments were met. On February 21, 2003, the credit agreement was amended to provide that, for fiscal years commencing after fiscal 2002, the maximum cash dividend permitted is $12.5 million. Additional cash dividends may be paid provided that certain leverage ratios and unutilized revolving commitments are met.
13
Securities Authorized for Issuance under
Compensation Plans
The following chart sets forth the amounts of
securities authorized for issuance under the companys
compensation plans.
Number of securities to
Weighted average
Number of securities remaining
be issued upon exercise
exercise price of
available for future issuance under
of outstanding options,
outstanding options,
equity compensation plans (excluding
warrants and rights
warrants and rights
securities reflected in column (a))
Plan Category
(a)
(b)
(c)
(Amounts in thousands, except per share data)
1,606
$
14.22
1,379
1,606
$
14.22
1,379
14
Item 6. Selected Financial Data
The selected consolidated historical financial
data presented below as of and for the fiscal years 2002, 2001,
2000, 1999 and 1998 have been derived from the audited
consolidated financial statements of the company. The results of
operations presented below are not necessarily indicative of
results that may be expected for any future period and should be
read in conjunction with Managements Discussion and
Analysis of Results of Operations and Financial Condition, and
our Consolidated Financial Statements and the accompanying Notes
to Consolidated Financial Statements in this Form 10-K.
For the 52 Weeks Ended
December 28, 2002
December 29, 2001
December 30, 2000
January 1, 2000
January 2, 1999
(Amounts in thousands, except per share data)
$
1,652,162
$
1,627,004
$
1,562,879
$
1,507,424
$
1,483,148
910,369
888,824
900,198
883,882
795,084
613,020
622,132
585,434
582,616
527,613
73,965
73,815
67,102
53,890
53,544
26,500
17,383
1,111
43,898
321
(5,994
)
64,461
(7,473
)
(17,193
)
22,167
36,466
68,373
44,691
42,225
(5,686
)
(4,278
)
10,716
(26,380
)
(58,739
)
(51,661
)
221
4,593
(8,137
)
(16,457
)
(16,915
)
1,429
6,123
(18,243
)
(42,282
)
(34,746
)
(1,208
)
87,809
42,040
46,238
(40,482
)
6,123
(18,243
)
5,045
7,294
45,030
3,950
(23,078
)
(3,131
)
$
(16,955
)
$
(14,293
)
$
5,045
$
7,294
$
41,899
0.20
(.61
)
(1.41
)
(1.16
)
(.04
)
0.05
1.74
1.68
1.59
$
1,096,380
$
1,099,691
$
1,562,646
$
1,566,963
$
1,382,877
$
223,133
$
242,057
$
247,847
$
303,955
$
215,233
$
592,996
$
621,637
$
502,460
$
538,754
$
572,961
(1) | Reflects reclassification of slotting fees and coupon expenses from selling, marketing and administrative expenses to net sales of $2.0 million, $6.1 million, $4.0 million and $3.8 million, in fiscal 2001, 2000, 1999 and 1998, respectively. Fiscal 2002 slotting and coupon fees were $5.6 million. |
(2) | Goodwill impairment charge resulting from adoption of SFAS 142 for the 52 weeks ended December 28, 2002 and the adoption of Statement of Position 98-5, Reporting on the Costs of Start-Up Activities for the 52 weeks ended January 2, 1999. |
(3) | Includes net assets of discontinued operations of $567.4 million, $496.7 million and $461.1 million at December 30, 2000, January 1, 2000 and January 2, 1999, respectively. |
(4) | Excludes amounts settled by others of $540.0 million, $486.0 million and $282.0 million at December 30, 2000, January 1, 2000 and January 2, 1999, respectively. |
Item 7. Managements Discussion and Analysis of Results of Operations and Financial Condition
The following discussion should be read in conjunction with Selected Financial Data included herein and our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial State-
15
General
The company produces and markets fresh baked breads, rolls and snack foods and frozen baked breads and desserts. Sales are principally affected by pricing, quality, brand recognition, new product introductions and product line extensions, marketing and service. The company manages these factors to achieve a sales mix favoring its higher-margin branded products, while using private label products to control overhead costs and maximize use of production capacity.
Effective July 14, 2002 (the first day of the third quarter of fiscal 2002), the companys two operating segments, Flowers Bakeries and Mrs. Smiths Bakeries, were restructured to form three operating segments. These segments are Flowers Bakeries, Mrs. Smiths Bakeries and Flowers Snack. Flowers Snack consists of the snack business previously operated by Mrs. Smiths Bakeries. Because Mrs. Smiths Bakeries and Flowers Snack historically shared certain administrative and division expenses, certain allocations and assumptions have been made in order to present comparative historical information for Mrs. Smiths Bakeries and Flowers Snack 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 and Flowers Snack performed these functions as separate divisions.
The principal elements comprising the companys production costs are ingredients, packaging materials, labor and overhead. The major ingredients used in the production of the companys products are flour, sugar, shortening, fruits and dairy products. The company also uses paper products, such as corrugated cardboard, aluminum products, such as pie plates, and plastic, to package its products. The prices of these materials are subject to significant volatility. The company has mitigated the effects of such price volatility in the past through its hedging programs, but may not be successful in protecting itself from fluctuations in the future. In addition to the foregoing factors, production costs are affected by the efficiency of production methods and capacity utilization.
The companys selling, marketing and administrative expenses are comprised mainly of distribution, logistics and advertising expenses. Distribution and logistics costs represent the largest component of the companys cost structure, other than production costs, and are principally influenced by changes in sales volume. Additionally, the independent distributors receive a percentage of the wholesale price of sales to retailers and other customers. The company records these amounts as selling, marketing and administrative expense.
Depreciation and amortization expenses for the company are comprised of depreciation of property, plant and equipment and amortization of certain costs in excess of net tangible assets associated with acquisitions. The company does not allocate depreciation and amortization to cost of goods sold.
Critical Accounting Policies and Estimates
The companys discussion and analysis of its results of operations and financial condition are based upon the Consolidated Financial Statements of the company, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires the company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues and expenses during the reporting period. On an on-going basis, the company evaluates its estimates, including those related to customer programs and incentives, bad debts, raw materials, inventories, long-lived assets, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits and contingencies and litigation. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
16
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 obsolescence and unmarketable inventory; | |
| valuation of long-lived assets, goodwill and other intangibles; | |
| deferred tax asset valuation allowance; and | |
| pension obligations. |
Revenue Recognition. The company recognizes revenue from the sale of its products at the time of delivery when title and risk of loss pass to the customer. The company records estimated reductions to revenue for customer programs and incentive offerings, including special pricing agreements, price protection, promotions and other volume-based incentives, at the time the incentive is offered or at the time of revenue recognition for the underlying transaction that results in progress by the customer towards earning the incentive. If market conditions were to decline, the company may take actions to increase incentive offerings, possibly resulting in an incremental reduction of revenue. Independent distributors receive a discount equal to a percentage of the wholesale price of product sold to retailers and other customers. The company records such amounts as selling, marketing and administrative expenses. If market conditions were to decline, the company may take actions to increase distributor discounts, possibly resulting in an incremental increase in selling, marketing and administrative expenses at the time the discount is offered.
The consumer packaged goods industry has utilized scan-based trading technology over several years to share information between the supplier and retailer. An extension of this technology allows the retailer to pay the supplier when the consumer purchases the goods rather than at the time they are delivered to the retailer. This technology is referred to in the industry as pay by scan (PBS). During 2001, the industry saw a sharp increase in the use of scan-based trading. In response to this demand, the company began a pilot program in fiscal 2001, working with certain retailers to develop the technology to execute PBS. The company believes it is an industry leader in PBS and is aggressively working with its larger customers, such as Wal-Mart, Winn-Dixie, Kroger and Food Lion, to expand the use of PBS. In fiscal 2002, the company recorded approximately $116.9 million in sales through PBS. The company estimates that by the end of fiscal 2003, it will have approximately $243.0 million in PBS sales. While PBS modestly delays the timing of revenue recognition, given the quick turn of our products, the company does not expect PBS to have a material adverse effect on reported revenues in any period.
Allowance for Doubtful Accounts. The company maintains allowances for doubtful accounts for estimated losses resulting from non-payment by our customers. While the company believes its current allowance for doubtful accounts is reasonable, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Derivative Instruments. The companys cost of primary raw materials is highly correlated to the commodities markets. Commodities, such as our baking ingredients, experience price fluctuations. From time to time, we enter into forward purchase agreements and derivative financial instruments to reduce the impact of volatility in raw material prices. If actual market conditions become significantly different than those anticipated, raw material prices could increase significantly, adversely affecting our results of operations. The company may from time to time enter into contracts that do not qualify for hedge accounting treatment under GAAP. These contracts must, under GAAP, be marked to market as of the end of each quarter, which may result in significant volatility in our results of operations.
17
Reserves for Obsolescence and Unmarketable Inventory. The company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions become less favorable than those projected by management, additional inventory write-downs may be required.
Valuation of Long-Lived Assets, Goodwill and Other Intangibles. The company records an impairment charge to property, plant and equipment assets, goodwill and intangible assets in accordance with applicable accounting standards when, based on certain indicators of impairment, it believes such assets have experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of these underlying assets could result in losses or an inability to recover the carrying value of the asset that may not be reflected in the assets current carrying value, thereby possibly requiring impairment charges in the future.
Deferred Tax Asset Valuation Allowance. The company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
Pension Obligations. The company records pension costs and the liabilities related to its defined benefit plan based on actuarial valuations. These valuations include key assumptions determined by management, including the discount rate and expected long-term rate of return on plan assets. The expected long-term rate of return assumption considers the asset mix of the plan portfolio, past performance of these assets and other factors. Material changes in pension costs may occur in the future due to changes in these assumptions. Future annual amounts could be impacted by changes in the number of plan participants, changes in the discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plan and other factors. There are no new participants in the companys defined benefit plan as participation was frozen as of December 31, 1998. The companys fiscal 2002 pension expense was $5.9 million. The company expects its fiscal 2003 pension expense to increase by approximately $4.4 million. This increase is largely attributed to unrecognized losses on pension assets related to weakness in the equity markets. A quarter percentage point change in the discount rate would impact the companys fiscal 2002 expense by approximately $0.2 million on a pre-tax basis. A quarter percentage point change in the long-term expected rate of return would impact the companys fiscal 2002 pension expense by approximately $0.4 million on a pre-tax basis.
During fiscal 2002 and fiscal 2001, the company contributed $6.2 million and $2.5 million, respectively, to the defined benefit plan. The companys pension plan assets have declined due to the recent weakness in the equity markets, while pension liabilities and benefit payments have continued to grow. The value of the companys plan assets were below the accumulated benefit obligation (ABO) at its most recent plan measurement date. Accounting rules require that, if the ABO exceeds the fair value of pension plan assets, the employer must recognize a liability that is at least equal to the unfunded ABO. In the fourth quarter of fiscal 2002, the company recorded a minimum pension liability adjustment that impacted other comprehensive income by $17.3 million, net of tax. Other comprehensive income captures certain items excluded from net income, such as unrealized gains or losses related to derivative financial instruments, as well as additional minimum pension liabilities not yet recognized in the Consolidated Statement of Income as part of net pension cost. Other balance sheet accounts impacted include deferred tax assets (increase of $10.8 million), unfunded pension liability (increase of $28.6 million), and an intangible asset related to unrecognized prior service costs (increase of $0.5 million). Future pension contributions will depend on market conditions. If weak market conditions persist, the company expects to make future cash contributions to the pension plan. In assessing different scenarios, the company believes its strong cash flow and balance sheet will allow it to fund future pension needs without affecting the business strategy of the company.
18
Matters Affecting Analysis
Keebler Transaction in Fiscal 2001. On March 26, 2001, FII completed a transaction that resulted in the spin-off of Flowers Foods and the merger of FII with a wholly-owned subsidiary of Kellogg. In the transaction, FII transferred the stock of its two wholly-owned subsidiaries, Flowers Bakeries, Inc. and Mrs. Smiths Bakeries, Inc. and all other assets and liabilities directly held by FII (except for its majority interest in Keebler and certain debt, other liabilities and transaction costs) to Flowers Foods. FII distributed all of the outstanding shares of common stock of Flowers Foods to then existing FII shareholders such that FII shareholders received one share of Flowers Foods common stock for every five shares of FII they owned. FII, which consisted solely of its majority interest in Keebler and the aforementioned liabilities, was simultaneously merged with a wholly-owned subsidiary of Kellogg. The cash purchase price paid by Kellogg, less the aforementioned liabilities and certain other transaction costs, resulted in net proceeds paid directly to FII shareholders of $1,241.6 million.
In addition, in connection with the spin-off and merger transaction, various separation and other contractual payments under FIIs stock and incentive programs of $39.0 million were paid to executive and non-executive officers and employees. Of this amount, $5.7 million was accrued at March 26, 2001, and $5.3 million was amortized to earnings prior to March 26, 2001. Accordingly, in the first quarter of fiscal 2001, a charge of $28.0 million was recorded as an unusual charge to the companys continuing operations, with a corresponding credit to capital in excess of par value, as a result of payments being settled from the proceeds of the spin-off and merger transaction.
On March 26, 2001, the company completed a tender offer for the $200 million aggregate principal amount of 7.15% Debentures due 2028 (the debentures) and repurchased substantially all the debentures at a discount. Accordingly, in the first quarter of fiscal 2001, the company recorded an extraordinary gain of $5.0 million, net-of-tax, related to the early extinguishment of these debentures. The discount of $12.3 million was partially offset by $4.2 million in debt issuance costs and $3.1 million in taxes.
On March 26, 2001, the company entered into a credit agreement that provided for total borrowings of up to $380.0 million, consisting of Term Loan A of $100.0 million, Term Loan B of $150.0 million and a revolving loan facility of $130.0 million. In December 2001, the company made a voluntary debt payment of $50.0 million that, in combination with contractually required debt reductions during fiscal 2001 of $10.8 million, resulted in a total permanent reduction of Term Loan A and Term Loan B borrowings of $58.0 million and $2.8 million, respectively. As a result of the voluntary debt payment, the company reduced its unamortized financing costs resulting in an early extinguishment of debt charge of $1.1 million, net of tax, which was recorded in the fourth quarter of fiscal 2001 as an extraordinary loss. Also on March 26, 2001, the company purchased the notes receivable (the distributor notes) from the independent distributors that had previously been owned by a third party financial institution and serviced by the company or a wholly-owned subsidiary of the company. The principal balance of the distributor notes at that date was $77.6 million. In addition, in fiscal 2001 the company purchased certain fixed assets which were previously leased under operating leases. The purchase of the debentures, distributor notes and fixed assets were financed from borrowings under the credit agreement discussed above.
Acquisitions. On October 25, 2002, Flowers Bakeries acquired Ideal Baking Company, Inc. (Ideal) for cash, shares of Flowers Foods common stock and the assumption of debt. Ideal, which had annual sales of approximately $15 million in 2001, employs 280 people and operates approximately 75 sales routes from its Batesville, Arkansas bakery that serve customers in northern Arkansas, southern Missouri and Memphis, Tennessee.
In September 2001, Flowers Bakeries acquired The Kotarides Baking Companys (Kotarides) business in the Norfolk, Virginia area and certain other assets. The acquisition involved the purchase of approximately 70 Kotarides sales routes that supply fresh breads, buns, and snack cakes to customers in the Virginia area, two Kotarides distribution centers in Norfolk and the Mary Jane brand name and certain other intangibles. Under the agreement, Flowers Bakeries Norfolk, Virginia bakery will operate the routes and will produce and market breads and buns under the Mary Jane brand. This acquisition was recorded under the purchase method of accounting.
19
In January 2000, Flowers Bakeries completed the purchase of The Kroger Companys Memphis, Tennessee bakery. This facility produced breads, buns and rolls, for Kroger stores in Tennessee, northern Arkansas and southern Missouri. During the second quarter of fiscal 2001, the decision was made to close this facility in order to consolidate production efforts in this geographical area. This area is now served from other production facilities within the company. This acquisition was recorded under the purchase method of accounting.
Sale of Mrs. Smiths Bakeries Dessert Business. On January 30, 2003 the company announced it had entered into an agreement to sell its Mrs. Smiths Bakeries frozen dessert business to Schwan. A closing date for the transaction has not been determined pending approval of the transaction by the Federal Trade Commission and the satisfaction of all other closing conditions. The company will retain the frozen bread and roll portion of the Mrs. Smiths Bakeries business, which complements our core fresh bread business, and it will become a part of our Flowers Snack segment, with Flowers Snack being renamed Flowers Foods Specialty Group. For purposes of this Form 10-K, discussion will relate to our Flowers Bakeries, Mrs. Smiths Bakeries and Flowers Snack business units as such businesses were operated as of December 28, 2002. In the first quarter of fiscal 2003, the frozen dessert business of Mrs. Smiths Bakeries being sold will be reported as a discontinued operation and the frozen bread and roll business of Mrs. Smiths Bakeries to be retained will be reported as a part of Flowers Foods Specialty Group.
Adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. 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). This standard provides accounting and disclosure guidance for acquired intangibles. Under this standard, goodwill and indefinite-lived intangibles are no longer amortized, but are tested at least annually for impairment. If an asset is determined to be impaired, an impairment loss would be recognized to reduce carrying value to fair value. Transitional impairment tests of goodwill and non-amortized intangibles are also performed upon adoption of SFAS 142, with any recognized impairment loss reported as the cumulative effect of an accounting change at the date of adoption.
SFAS 142 requires that goodwill be tested
annually for impairment using a two-step process. The first step
is to identify a potential impairment and, in transition, this
step must be measured as of the beginning of the fiscal year.
The second step of the impairment test measures the amount of
the impairment loss as of the beginning of the fiscal year. The
company recorded a goodwill impairment charge at
Mrs. Smiths Bakeries of $23.1 million, net of tax of
$1.8 million, as of December 30, 2001 (the first day of
fiscal 2002) as a cumulative effect of a change in accounting
principle. Further, the adoption of SFAS 142 reduced the
companys amortization expense for goodwill and other
intangibles by $4.0 million in fiscal year 2002.
Information on Unusual Charges
Fiscal
2002 Charges
Asset Impairment
Charge.
In the fourth quarter of
fiscal 2002, the company recorded a non-cash asset impairment
charge of $26.5 million under SFAS No. 144 (SFAS
144), Accounting for the Impairment or Disposal of
Long-Lived Assets. This charge consisted of $0.3 million
at Flowers Bakeries, $24.4 million at
Mrs. Smiths Bakeries and $1.8 million at Flowers
Snack as described in the chart below.
Flowers
Flowers Bakeries
Mrs. Smiths Bakeries
Snack
Total
(Amounts in millions)
$
$
20.7
$
$
20.7
0.3
1.2
1.5
3.7
0.6
4.3
$
0.3
$
24.4
$
1.8
$
26.5
20
The impairment of Mrs. Smiths Bakeries assets held and used was based on an analysis of projected undiscounted cash flows, which were no longer deemed adequate to support the carrying value of the fixed assets. This analysis was performed at the completion of the seasonal frozen pie season, which is typically during the Thanksgiving and Christmas holiday season, or during the companys fourth fiscal quarter. This is historically Mrs. Smiths Bakeries peak business period of the year. During this peak time in fiscal 2002, sales and operating earnings were well below projections. Therefore, based upon these factors, the analysis was performed at the end of fiscal 2002. As a result of the analysis, these fixed assets were written down to their estimated fair values, which were based primarily on values identified in the negotiations with Schwan to sell certain assets of Mrs. Smiths Bakeries frozen dessert business. At December 28, 2002, these fixed assets did not meet the held for sale criteria of SFAS 144. The impairment of systems costs represents the net book value of certain enterprise-wide information system (SAP) costs that were determined to be impaired as a result of the fiscal 2002 internal operating segment reorganization previously discussed. In the fourth quarter of fiscal 2002, the company converted four former Mrs. Smiths Bakeries production facilities from the SAP version used at Mrs. Smiths Bakeries to the SAP version used at Flowers Bakeries. Fixed assets to be abandoned consist of certain machinery and equipment that the company has decided will no longer be used in production. As such, the impairment recorded represents the full net book value of those assets.
Segment Reorganization Charge. As a result of the reorganization of segments previously discussed, the company eliminated approximately 70 positions and recorded a charge of $1.3 million during the second quarter of fiscal 2002. The charge consisted of $1.0 million in severance and $0.3 million in legal and other contract termination fees. During the fourth quarter of fiscal 2002, a $0.2 million reduction was recorded to this charge, as a result of lower than anticipated payments of contract termination fees. Segment data prior to the third quarter of fiscal 2002 has been restated to reflect the restructuring.
Fiscal 2001 Charges
Legal Settlement Charge. On March 25, 2002, in Trans American Brokerage, Inc. 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 reasonable attorneys fees incurred by the plaintiff. The company recorded a $10.0 million charge ($6.2 million after tax) to its results for the fiscal year ended December 29, 2001 for estimated total probable costs (including attorneys fees and expenses) of this dispute.
Mrs. Smiths Bakeries Facility Closing Charge. During the fourth quarter of fiscal 2001, Mrs. Smiths Bakeries recorded an unusual charge of $2.6 million to close the Pembroke, North Carolina production facility. The facility was closed in order to consolidate production efforts. Production for this facility was transferred to the Spartanburg, South Carolina and Stilwell, Oklahoma facilities. This charge consisted of $2.0 million in accelerated depreciation to write-off certain machinery and equipment that was used in production during the fourth quarter of fiscal 2001 but was planned for abandonment at December 29, 2001 and $0.6 million in severance for 172 employees and other related exit costs of closing the facility. Additionally, costs of moving equipment to the other production facilities and the write-down of certain machine parts of $1.0 million were expensed as incurred in materials, supplies, labor and other production costs in fiscal 2001. This plan was completed in fiscal 2001.
Flowers Bakeries Facility Closing Charge. During the second quarter of fiscal 2001, Flowers Bakeries recorded an unusual charge of $3.1 million as a result of the decision to close its Memphis, Tennessee production facility. In the fourth quarter of fiscal 2001, an increase of $0.3 million was made to this charge as a result of more accurate information regarding the fair value of certain assets. The facility was closed in order to consolidate production efforts in this geographical area. The area is served from other production facilities. Severance costs of $1.4 million provided for the termination of 123 employees. Asset impairment charges of $1.0 million and $0.6 million, respectively, were recorded to write-off certain fixed assets and reduce goodwill. Additionally, other related exit costs of $0.4 million were recorded. This plan was completed in fiscal 2001.
Keebler Transaction. In connection with the spin-off and merger transaction previously discussed, various separation and other contractual payments under FIIs stock and incentive programs of $39.0 million
21
Fiscal 2000 Charges
Mrs. Smiths Bakeries Asset Impairment. During the fourth quarter of fiscal 2000, Mrs. Smiths Bakeries recorded an asset impairment charge of $17.4 million representing the impairment of goodwill and other identifiable intangible assets relating to the Pet-Ritz and Banquet lines, both of which were acquired in fiscal 1998. The impairment of these intangible assets is a result of the companys decision to discontinue certain products under the Banquet product line and the decreased forecasted sales volumes for the Pet-Ritz and Banquet product lines.
Mrs. Smiths Bakeries Facility Closing Charge. During the fourth quarter of fiscal 2000, Mrs. Smiths Bakeries implemented a plan to transfer production from its facility in Forest Park, Georgia to an existing facility in Spartanburg, South Carolina. This decision was made to take advantage of more highly automated production capacities at the Spartanburg plant. As a direct result, Mrs. Smiths Bakeries recorded a charge of $1.5 million, which consisted of $1.0 million of non cash asset impairments and $0.5 million of severance and other employee costs. This plan was completed in fiscal 2001.
Flowers Bakeries Facility Closing
Charge.
During fiscal 2000, Flowers
Bakeries recorded a $1.2 million adjustment to the fiscal 1998
restructuring reserve. This adjustment was the result of Flowers
Bakeries decision to reopen a closed bakery located in
Norfolk, Virginia in order to meet the demands of our
foodservice customers. This bakery was operational in the spring
of fiscal 2001.
Results of
Operations
The companys results of operations,
expressed as a percentage of sales, are set forth below:
Fifty-Two Weeks Ended December 28, 2002
Compared to Fifty-Two Weeks Ended December 29,
2001
Consolidated
and Segment Results
Sales.
For the
fiscal year ended December 28, 2002, sales were $1,652.2
million, or 1.5% higher than sales in the comparable period of
the prior year, which were $1,627.0 million.
Flowers Bakeries sales for the fiscal year
ended December 28, 2002, were $1,066.7 million, an increase
of 1.0% from sales of $1,055.9 million reported for the same
period in the prior year. Total volume increases of 2.1% were
partially offset by price decreases of 1.1%. The Kotarides and
Ideal acquisitions contributed slightly over half of the volume
increase. Branded products distributed through the
companys DSD system to
22
Mrs. Smiths Bakeries sales for
the fiscal year ended December 28, 2002 were $435.2
million, an increase of 3.8% from sales of $419.5 million
reported during the same period in the prior year. Branded
products distributed frozen to supermarkets, convenience stores,
mass merchandisers and club stores represent approximately 34%
of Mrs. Smiths Bakeries sales. These sales
decreased approximately 7.1% from the same period in the prior
year. This decrease was primarily the result of increased
promotional activity recorded as a reduction of sales and just
in time inventory buying programs by retailers. In addition,
product cuts made to customer orders due to production equipment
start up issues at the Spartanburg, South Carolina facility
during the first quarter of fiscal 2002 contributed to the
decrease. The start up issues were a result of the closing of
the Pembroke, North Carolina facility and the resulting shift of
production to Spartanburg. Although the company built up
finished-goods inventory in anticipation of this move, the
company did not have sufficient inventory of the right product
at the right time to fully fill orders. Sales to foodservice
customers represent approximately 40% of Mrs. Smiths
Bakeries sales. Foodservice sales increased approximately
9.7% over the same period in the prior year. This increase was
primarily attributable to custom frozen bread and roll products
for various customers. Sales to in-store bakery customers
represent approximately 25% of Mrs. Smiths
Bakeries sales. In-store bakery sales increased
approximately 10.7% over the same period in the prior year. This
increase is primarily attributable to volume related to
increased sales to existing customers.
Flowers Snacks sales for the fiscal year
ended December 28, 2002, were $150.3 million, a decrease of
0.9% from sales of $151.7 million reported for the same period
in the prior year.
Mrs. Freshleys
retail sales
represent approximately 19% of Flowers Snacks sales. These
sales increased approximately 3.6% from the same period in the
prior year. The increase was primarily due to volume. Store
branded retail sales represent approximately 11% of Flowers
Snacks sales. These sales decreased 2.8% from the same
period in the prior year. The decrease was primarily due to a
decrease in volume. Sales to customers who distribute in the
vending channel represent approximately 29% of Flowers
Snacks sales. These sales decreased 3.3% from the same
period in the prior year. This decrease was primarily the result
of volume decreases with certain existing customers. Sales to
non-affiliated food companies under contract production
arrangements represent approximately 41% of Flowers Snacks
sales. These sales were relatively flat compared to fiscal 2001.
Gross Margin (defined as net sales less
materials, supplies, labor and other production costs, excluding
depreciation, amortization and distributor
discounts).
Gross margin for the
fiscal year ended December 28, 2002, was $741.8 million, or
0.5% higher than gross margin reported for the prior year of
$738.2 million. As a percent of sales, gross margin decreased to
44.9% from 45.4% reported for the fiscal year ended
December 29, 2001.
Flowers Bakeries gross margin increased to
56.8% of sales for the fiscal year ended December 28, 2002,
compared to 56.7% of sales for the same period in the prior
year. This increase can be attributed to lower utility and
packaging costs as well as a more favorable product mix.
Additionally, there were reductions in lease costs due to the
buyout of certain leases as a part of the spin-off and merger
transaction. These improvements were partially offset by higher
ingredient and labor costs. The increase in labor costs can
primarily be attributed to increases in welfare benefit expenses.
Mrs. Smiths Bakeries gross
margin decreased to 22.2% of sales for the fiscal year ended
December 28, 2002, compared to 23.6% of sales for the same
period in the prior year. Improvements due to increased
production in the Suwanee facility and favorable variances in
overhead expenses were more than offset by the continued cost
overruns at Spartanburg mentioned above. Additionally, a lower
net selling price resulting from higher promotional activities
and a shift in product mix also adversely impacted the gross
margin.
23
Flowers Snacks gross margin decreased to
29.8% of sales for the fiscal year ended December 28, 2002,
compared to 30.8% of sales for the same period in the prior
year. This decrease was primarily related to higher ingredient
and labor costs.
Selling, Marketing and Administrative
Expenses.
For the fiscal year ended
December 28, 2002, selling, marketing and administrative
expenses were $613.0 million, or 37.1% of sales as compared to
$622.1 million, or 38.2% of sales reported for the fiscal year
ended December 29, 2001.
Flowers Bakeries selling, marketing and
administrative expenses include discounts paid to the
independent distributors utilized in our DSD system. Flowers
Bakeries selling, marketing and administrative expenses
were $472.9 million, or 44.3% of sales during the fiscal year
ended December 28, 2002, as compared to $480.0 million, or
45.5% of sales during the same period in the prior year. The
decrease was comprised of decreases in labor and utility
expenses. In addition, Flowers Bakeries administrative
expenses have decreased as a result of the continued
consolidation of accounts payable and accounts receivable
functions to a shared services processing center. These
decreases were partially offset by increases in advertising and
thrift store discounts.
Mrs. Smiths Bakeries selling,
marketing and administrative expenses were $91.8 million, or
21.1% of sales during the fiscal year ended December 28,
2002 as compared to $94.1 million, or 22.4% of sales during the
same period in the prior year. As a part of the companys
decision to restructure its segments, Mrs. Smiths
Bakeries eliminated approximately 70 administrative positions
during the second quarter of fiscal 2002.
Flowers Snacks selling, marketing and
administrative expenses were $28.1 million, or 18.7% of sales
during the fiscal year ended December 28, 2002 as compared
to $29.7 million, or 19.6% of sales during the same period in
the prior year. This decrease was primarily attributable to
lower administrative expenses resulting from the segment
restructuring and shared administrative functions discussed
above.
Depreciation and Amortization.
Depreciation and amortization expense
was $74.0 million for the fiscal year ended December 28,
2002, an increase of 0.2% from the same period in the prior
year, which was $73.8 million.
Flowers Bakeries depreciation and
amortization expense decreased to $45.2 million for the fiscal
year ended December 28, 2002 from $46.8 million in the same
period in the prior year. The decrease was primarily
attributable to a decrease in amortization expense of $2.2
million as a result of the implementation of SFAS 142 discussed
above. Partially offsetting this decrease was the depreciation
of assets purchased that were leased in the prior year as well
as depreciation on capital projects placed in service in the
current year.
Mrs. Smiths Bakeries
depreciation and amortization expense for the fiscal year ended
December 28, 2002 was $23.0 million as compared to $22.2
million in the same period in the prior year. The increase in
depreciation expense, primarily the result of an increase in
capital expenditures and the purchase of assets that were leased
in the prior year, was partially offset by a decrease in
amortization expense of $1.8 million as a result of the
implementation of SFAS 142.
Flowers Snacks depreciation and
amortization expense increased to $5.6 million for the fiscal
year ended December 28, 2002 from $4.6 million in the prior
year. The increase in depreciation expense was a result of
capital expenditures.
Proceeds From Insurance
Policies.
The company maintains
insurance for property damage, mechanical breakdown, product
liability, product contamination and business interruption
applicable to its production facilities. During fiscal 1999,
Mrs. Smiths Bakeries incurred substantial costs
related to mechanical breakdown and product contamination at
certain plants. Mrs. Smiths Bakeries filed claims
under the companys insurance policies for a portion of
these costs that it believed to be insured. During fiscal 2001
and 2000, the company received settlement amounts of $7.5
million and $17.2 million, respectively.
Asset Impairment and Unusual
Charges.
In fiscal 2002, the company
recorded $27.6 million in asset impairment and unusual
charges compared to $43.9 million recorded in fiscal 2001.
These charges are discussed above in Information on
Unusual Charges.
24
Interest Expense.
For the fiscal year ended
December 28, 2002, net interest expense was $16.5 million,
a decrease of $15.7 million from the same period in the prior
year, which was $32.2 million. The decrease was primarily
related to a reduction in debt that resulted from the spin-off
and merger transaction. In addition, the company made a
voluntary debt payment of $50.0 million in the fourth quarter of
fiscal 2001, resulting in decreased interest expense. This
decrease in interest was partially offset by a $0.7 million
accrual of interest related to the Trans American Brokerage,
Inc. vs. Mrs. Smiths Bakeries, Inc. arbitration
discussed above in Part I-Item 3: Legal Proceedings.
Income (Loss) From Continuing Operations
Before Income Taxes, Extraordinary Net Gain on Early
Extinguishment of Debt and Cumulative Effect of a Change in
Accounting Principle.
Income before
income taxes, extraordinary net gain on early extinguishment of
debt and cumulative effect of a change in accounting principle
for the fiscal year ended December 28, 2002 was $10.7
million, an improvement of $37.1 million from the $26.4 million
loss reported for the prior year.
The improvement was primarily the result of three
factors: (i) a decrease in unusual charges of $16.3
million; (ii) significant improvements in the operating
results of Flowers Bakeries of $15.5 million; and (iii) a
decrease in interest expense of $15.7 million as a result of the
decrease in debt discussed above. Partially offsetting these
positive items was an increase in Mrs. Smiths
Bakeries and other unallocated operating losses of $0.5
million and $1.1 million, respectively. In addition, there was a
decrease in insurance proceeds of $7.5 million and a decrease in
Flowers Snacks operating income of $1.3 million.
Income Taxes.
Income
tax expense for the fiscal year ended December 28, 2002,
was provided for at an estimated effective rate of 42.9%. The
effective rate differs from the statutory rate primarily due to
state income taxes.
Extraordinary Net Gain on Early Extinguishment
of Debt.
During December 2001, the
company made a $50.0 million voluntary debt payment which, in
combination with contractually required debt reductions during
fiscal 2001 of $10.8 million, resulted in a total permanent
reduction of Term Loan A and Term Loan B borrowings of $58.0
million and $2.8 million, respectively. As a result of the
voluntary debt payment, the company reduced its unamortized loan
costs, resulting in an early extinguishment of debt charge, net
of tax, of $1.1 million which was recorded in the fourth quarter
of fiscal 2001 as an extraordinary loss.
During the first quarter of fiscal 2001, the
company completed a tender offer for the $200 million aggregate
principal amount of the debentures and repurchased substantially
all the debentures at a discount. Accordingly, the company
recorded an extraordinary gain of approximately $5.0 million,
net of tax, related to the early extinguishment of these
debentures. The discount of $12.3 million was partially offset
by the write-off of $4.2 million in debt issuance costs and $3.1
million in taxes.
Cumulative Effect of a Change in Accounting
Principle.
As a result of SFAS 142,
the company recorded a goodwill impairment charge at
Mrs. Smiths Bakeries of $23.1 million, net of tax of
$1.8 million, as of December 30, 2001 (the first day of
fiscal 2002) as a cumulative effect of a change in accounting
principle.
Fifty-Two Weeks Ended December 29, 2001
Compared to Fifty-Two Weeks Ended December 30,
2000
Consolidated and
Segment Results
Sales.
For the
fiscal year ended December 29, 2001, sales were $1,627.0
million, or 4.1% higher than sales in the prior year, which were
$1,562.9 million.
Flowers Bakeries sales for fiscal 2001 were
$1,055.9 million, an increase of 3.9% over sales of $1,016.2
million reported for fiscal 2000. Branded and private label
products distributed through the companys DSD system to
supermarkets, convenience stores, mass merchandisers and club
stores represent approximately 82% of Flowers Bakeries
sales. These sales, driven by the companys
Natures Own
brand of soft variety breads, increased approximately 3.9%
over fiscal 2000. This increase was primarily attributable to
increased selling prices and a favorable product mix. The
balance of Flowers Bakeries sales was primarily to
foodservice customers. Foodservice sales increased approximately
4.3% over fiscal 2000. This increase was primarily due to
favorable pricing.
25
Mrs. Smiths Bakeries sales for
fiscal 2001 were $419.5 million, an increase of 3.0% over sales
of $407.1 million, reported during fiscal 2000. Branded and
private label products distributed to supermarkets, convenience
stores, mass merchandisers, club stores and the vending trade
represent approximately 61% of Mrs. Smiths
Bakeries sales. These sales increased approximately 6.0%
over the prior year. This increase was primarily due to
favorable pricing and volume. Sales to foodservice customers
represent approximately 38% of Mrs. Smiths
Bakeries sales. Foodservice sales decreased approximately
1.7% from the prior year. This decrease was primarily
attributable to decreased volume due to economic conditions in
the foodservice industry.
Flowers Snacks sales for fiscal 2001 were
$151.7 million, an increase of 8.7% from sales of $139.5 million
reported for the same period in the prior year. Branded sales
distributed to supermarkets, convenience stores, mass
merchandisers and club stores represent approximately 18% of
Flowers Snacks sales. These sales increased approximately
14.0% from the same period in the prior year. The increase was
primarily due to volume. Store branded retail sales represent
approximately 11% of Flowers Snacks sales. These sales
increased approximately 18.3% from the same period in the prior
year. The increase was primarily due to increased volume with
several key customers. Sales in the vending channel represent
approximately 30% of Flowers Snacks sales. These sales
increased 7.1% from the same period in the prior year. This
increase was due to increased volume as a result of aggressively
developing and growing this sales channel. Sales to
non-affiliated food companies under contract production
arrangements represent approximately 41% of Flowers Snacks
sales. These sales increased by approximately 5.3% from the same
period in the prior year. This increase was due to increased
volume to a major customer.
Gross Margin (defined as net sales less
materials, supplies, labor and other production costs, excluding
depreciation, amortization and distributor
discounts).
Gross margin for fiscal
2001 was $738.2 million, or 11.4% higher than gross margin
reported a year ago of $662.7 million. As a percent of sales,
gross margin was 45.4% for fiscal 2001, compared to 42.4% for
fiscal 2000.
Flowers Bakeries gross margin increased to
56.7% of sales for fiscal 2001, compared to 54.5% of sales for
fiscal 2000. This increase can be attributed to improved pricing
and lower packaging and ingredient costs as well as a more
favorable product mix. Additionally, there were significant
reductions in lease costs due to the buyout of certain leases as
a part of the spin-off and merger transaction. These
improvements were partially offset by higher labor and energy
costs. The increase in labor costs can primarily be attributed
to increases in insurance expenses.
Mrs. Smiths Bakeries gross
margin increased to 23.6% of sales for fiscal 2001, compared to
19.0% of sales for fiscal 2000. This increase was attributable
to lower ingredient costs due to improved scrap rates at our
highly automated facilities and a reduction in labor costs due
to the use of fewer temporary employees as a result of the
correction of the mechanical problems at the Stilwell plant.
Flowers Snacks gross margin increased to
30.8% of sales for fiscal 2001, compared to 27.5% of sales for
fiscal 2000. This increase is attributable to better
efficiencies gained at our manufacturing facilities.
Selling, Marketing and Administrative
Expenses.
During fiscal 2001, selling,
marketing and administrative expenses were $622.1 million, or
38.2% of sales, as compared to $585.4 million, or 37.5% of sales
reported for fiscal 2000.
Flowers Bakeries selling, marketing and
administrative expenses were $480.0 million, or 45.5% of sales
during fiscal 2001 as compared to $450.3 million, or 44.3%
during fiscal 2000. The increase in absolute terms as well as a
percent of sales was comprised of increases in labor and
distribution costs. These increases were partially offset by
decreases in expenses as compared to the prior year associated
with the rollout of an enterprise-wide information system, which
was completed in fiscal 2002.
Mrs. Smiths Bakeries selling,
marketing and administrative expenses were $94.1 million, or
22.4% of sales during fiscal 2001 as compared to
$91.6 million, or 22.5% of sales during fiscal 2000. This
increase in dollars was primarily a result of an increase in
advertising expense of $6.8 million in fiscal 2001
resulting from television promotions run during the fiscal 2001
pie season. Partially offsetting this increase were lower
distribution expenses and lower trade promotion expenses. Trade
promotion expenses decreased primarily as a
26
Flowers Snacks selling, marketing and
administrative expenses were $29.7 million, or 19.6% of
sales during fiscal 2001 as compared to $26.1 million, or
18.7% during fiscal 2000. The increase was primarily a result of
higher administrative costs.
Depreciation and
Amortization.
Depreciation and
amortization expense was $73.8 million for fiscal 2001, an
increase of 10.0% over the prior year, which was
$67.1 million.
Flowers Bakeries depreciation and
amortization expense increased to $46.8 million in fiscal
2001 from $39.7 million in fiscal 2000. The increase was
primarily attributable to the depreciation of costs capitalized
in prior years associated with information technology projects
and increased depreciation as a result of the purchase of assets
that were leased in the prior year.
Mrs. Smiths Bakeries
depreciation and amortization expense in fiscal 2001 was
$22.2 million as compared to $20.8 million in fiscal
2000. The increase in depreciation expense was the result of an
increase in capital expenditures and the purchase of assets that
were leased in the prior year. Partially offsetting this
increase, was a decrease in amortization as a result of the
write-down of goodwill and other identifiable intangible assets
related to the
Pet-Ritz
and
Banquet
brands which
was recorded in the fourth quarter of fiscal 2000.
Flowers Snacks depreciation and
amortization expense decreased to $4.6 million in fiscal
2001 from $6.1 million in fiscal 2000. The decrease was
primarily attributable to a reduction of allocated expenses from
our Mrs. Smiths Bakeries division.
Proceeds From Insurance
Policies.
The company maintains
insurance for property damage, mechanical breakdown, product
liability, product contamination and business interruption
applicable to its production facilities. During fiscal 1999,
Mrs. Smiths Bakeries incurred substantial costs
related to mechanical breakdown and product contamination at
certain plants. Mrs. Smiths Bakeries filed claims
under the companys insurance policies for a portion of
these costs that it believed to be insured.
Mrs. Smiths Bakeries recovered net insurance proceeds
of $7.5 million and $17.2 million in fiscal 2001 and
2000, respectively.
Asset Impairment and Unusual
Charges.
In fiscal 2001, the company
recorded $43.9 million in asset impairments and unusual
charges compared to $17.7 million recorded in fiscal 2000.
These charges are discussed above in Information on
Unusual Charges.
Interest Expense.
For fiscal 2001, net interest expense was $32.2 million, a
decrease of $36.2 million from the prior year, which was
$68.4 million. The decrease is due to a reduction in debt
that resulted from the spin-off and merger transaction.
(Loss) Before Income Taxes, Discontinued
Operations and Extraordinary Gain.
The
loss before income taxes, discontinued operations and
extraordinary gain for fiscal 2001 was $26.4 million, an
improvement of $32.3 million from the $58.7 million
loss reported in fiscal 2000.
The improvement is primarily a result of
significant improvements in the operating results of
Mrs. Smiths Bakeries of $17.6 million and a
decrease in interest expense of $36.2 million as a result
of the decrease in debt resulting from the spin-off and merger
transaction. In addition, Flowers Bakeries and Flowers
Snacks operating income increased by $8.1 million and
$6.3 million, respectively. Partially offsetting these
positive items were increases in unusual charges of
$26.2 million and a decrease in insurance proceeds of
$9.7 million.
Income Taxes.
The
income tax benefit during fiscal 2001 was provided for at an
estimated effective rate of 31%. The effective rate differs from
the statutory rate due to non-deductible expenses, principally
amortization of intangibles, including trademarks, trade names
and goodwill.
Discontinued
Operations.
As a result of the
spin-off and merger transaction, FII, whose assets and
liabilities then consisted of its holding of Keebler common
stock and certain debt and other liabilities, was acquired by
Kellogg on March 26, 2001. For accounting purposes, the
company is presented as the continuing
27
Extraordinary Net Gain on the Early
Extinguishment of Debt.
During
December 2001, the company made a $50.0 million voluntary
debt payment which, in combination with contractually required
debt reductions during fiscal 2001 of $10.8 million,
resulted in a total permanent reduction of Term Loan A and Term
Loan B borrowings of $58.0 million and $2.8 million,
respectively. As a result of the voluntary debt payment, the
company reduced its unamortized loan costs, resulting in an
early extinguishment of debt charge, net of tax, of
$1.1 million which was recorded in the fourth quarter of
fiscal 2001 as an extraordinary loss.
On March 26, 2001, the company completed a
tender offer for the debentures and repurchased substantially
all the debentures at a discount. Accordingly, the company
recorded an extraordinary gain in the first quarter of fiscal
2001 of approximately $5.0 million, net of tax, related to
the early extinguishment of these debentures. The discount of
$12.3 million was partially offset by $4.2 million in
debt issuance costs and $3.1 million in taxes.
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 those assets that are no
longer required to meet existing strategic and financing
objectives into cash. 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 and debt service commitments.
Currently, our liquidity needs arise primarily from debt
service, working capital requirements and capital expenditures.
Flowers Foods cash and cash equivalents
increased to $69.8 million at December 28, 2002 from
$12.3 million at December 29, 2001. The increase resulted
from $122.8 million provided by operating activities,
offset by $46.9 million and $18.3 million used for
investing and financing activities, respectively.
Cash Flows Provided by Operating
Activities.
Net cash of
$122.8 million provided by operating activities consisted
primarily of a $17.0 million net loss adjusted for certain
non-cash items of $133.7 million and working capital and
other activities of $6.1 million.
Pension Obligation.
During fiscal 2002, the company contributed $6.2 million to
its defined benefit plan. The companys pension plan assets
have declined due to weakness in the equity market, while
pension liabilities and benefit payments have continued to grow.
The value of the companys plan assets were below the
accumulated benefit obligation (ABO) at its
most recent plan measurement date. Accounting rules require
that, if the ABO exceeds the fair value of pension plan assets,
the employer must recognize a liability that is at least equal
to the unfunded ABO. In the fourth quarter of fiscal 2002, the
company recorded a minimum pension liability adjustment that
impacted other comprehensive income by $17.3 million, net of
tax. Other comprehensive income captures certain items excluded
from net income, such as unrealized gains or losses related to
derivative financial instruments, as well as additional minimum
pension liabilities not yet recognized in the Consolidated
Statement of Income as part of net pension cost. Other balance
sheet accounts impacted include deferred tax assets (increase of
$10.8 million), unfunded pension liability (increase of $28.6
million), and an intangible asset related to unrecognized prior
service costs (increase of $0.5 million). Future pension
contributions will depend on market conditions. If weak market
conditions persist, the company expects to make future cash
contributions to the pension plan. In assessing different
scenarios, the company believes its strong cash flow and balance
sheet will allow it to fund future pension needs without
affecting the business strategy of the company.
Cash Flows Disbursed for Investing and
Financing Activities.
Net cash
disbursed for investing activities for fiscal 2002 of $46.9
million included capital expenditures of $48.8 million. Capital
expenditures at Flowers Bakeries, Mrs. Smiths
Bakeries and Flowers Snack were $27.4 million, $18.0 million and
$3.1 million,
28
Credit Facility.
The
companys credit agreement provides for total borrowings of
up to $310.3 million consisting of Term Loan A of $34.2 million
and Term Loan B of $146.1 million and a revolving loan facility
of $130.0 million. The credit agreement includes certain
restrictions, which, among other things, require maintenance of
financial covenants, restrict encumbrance of assets and creation
of indebtedness and limit capital expenditures, purchases of
common shares and dividends that can be paid. Restrictive
financial covenants include such ratios as a consolidated
interest coverage ratio, a consolidated fixed charge coverage
ratio and a maximum leverage ratio. Annual capital expenditures
are restricted between $50.0 million and $57.5 million during
the periods beginning in fiscal 2001 and ending with fiscal 2005
unless certain conditions are met. No dividends were allowed to
be paid in fiscal 2001. Generally, for fiscal 2002, the maximum
amount of dividends payable by the company could not exceed
$5.0 million. Loans under the credit agreement are
collateralized by substantially all of the assets of the
company, excluding real property. 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 allowable amount of capital expenditures
and an increase in the companys ability to repurchase its
own common stock within certain limits and make acquisitions
within certain limits. The company 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,
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, are required to
be applied to the outstanding Term Loan A and Term
Loan B balances on a pro rata basis.
Interest is due quarterly on outstanding
borrowings under the new credit agreement at the eurodollar rate
or base rate plus applicable margin. This underlying rate is
defined as either rates offered in the interbank eurodollar
market or the higher of the prime rate or federal funds rate
plus 0.5%. The applicable margin is based on the companys
leverage ratio and can range from 2.5% 0.5% for Term
Loan A and the revolving loan facility and 2.75%
1.75% for Term Loan B. In addition, a commitment fee of
0.5% 0.375% is due quarterly on all commitments not
utilized under the credit agreement. At December 28, 2002,
the interest rates for Term Loan A and Term Loan B were 4.125%
and 4.625%, respectively. At December 28, 2002, the
outstanding balances of Term Loan A and Term Loan B were $34.2
million and $146.1 million, respectively. No amounts were
outstanding under the revolving loan facility.
From March 26, 2001 to December 29,
2001, the company made contractually determined debt payments of
$10.8 million on its term loans. In addition, during that period
the company made a voluntary debt prepayment of $50.0 million.
These payments resulted in a permanent debt reduction of $58.0
million in Term Loan A and $2.8 million in Term Loan B. As
a result of the voluntary payment, the unamortized financing
costs associated with this portion of the debt were written off.
Accordingly, in the fourth quarter of fiscal 2001, the company
recorded an extraordinary loss of approximately $1.1 million,
net of tax, related to the early extinguishment of this debt. As
discussed above, on March 26, 2001, the company completed a
tender offer for the debentures and repurchased substantially
all the debentures at a discount. Accordingly, the company
recorded an extraordinary gain of $5.0 million, net of tax,
related to the early extinguishment of these debentures in the
first quarter of fiscal 2001.
The companys credit rating by Standard and
Poors as of December 28, 2002 was BBB-. The
companys credit rating by Fitch as of December 28,
2002 was BB+. The companys credit rating by Moodys
as of December 28, 2002 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 affect future credit
availability.
29
Distributor Arrangements.
The company offers long-term financing
to independent distributors for the purchase of their
territories, and substantially all of the independent
distributors use this financing. Prior to March 26, 2001,
the purchases of these territories were financed by a
third-party financial institution. The distributor notes have a
ten year term, and the distributors pay principal and interest
weekly. Each independent distributor has the right to require
the company to repurchase the territories at the original price
in the six-month period following the sale of a territory to the
independent distributor. If the company had been required to
repurchase these territories, the company would have been
obligated to pay $0.6 million and $0.6 million for
fiscal 2002 and fiscal 2001, respectively. After the six-month
period expires, the company retains a right of first refusal to
repurchase these territories. In the event the company exits a
territory, it is obligated to repurchase the territory from the
independent distributor for the greater of the original purchase
price or a multiple of average weekly branded sales. If the
company acquires a territory from an independent distributor,
company employees operate the territory until it can be resold.
The company held $79.4 million and $80.9 million for
fiscal 2002 and 2001, respectively, of distributor notes and
approximately $17.2 million and $15.0 million for
fiscal 2002 and 2001, respectively, of territories held for sale.
Certain of the independent distributors lease
trucks through a third-party. In certain instances, the company
has guaranteed the leases. In fiscal 2001, the company ceased
its practice of guaranteeing leases to third party financial
institutions for certain independent distributors. There were
$4.5 million and $6.8 million for fiscal 2002 and
fiscal 2001, respectively, of leases subject to these
guarantees. No liability is recorded in the Consolidated
Financial Statements with respect to such guarantees. When an
independent distributor terminates its relationship with the
company, the company, although not legally obligated, generally
purchases and operates that territory utilizing the truck of the
former distributor. To accomplish this, the company continues
the payments under the former distributors truck lease.
Once the territory is resold, the truck lease is assumed by the
new independent distributor. At December 28, 2002 and
December 29, 2001, the company operated 480 and 429 such
territories, respectively. Assuming the company does not resell
these territories to new independent distributors, at
December 28, 2002 and December 29, 2001, the maximum
obligation associated with these truck leases was approximately
$13.6 million and $13.7 million, respectively. There
is no liability recorded in the Consolidated Financial
Statements with respect to such leases. The company does not
anticipate operating these territories over the life of the
lease as it intends to resell these territories to new
independent distributors.
Special Purpose Entities.
At December 28, 2002 and
December 29, 2001, the company did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Contractual Obligations and
Commitments.
The following table
summarizes the companys contractual obligations and
commitments at December 28, 2002, and the effect such
obligations are expected to have on its liquidity and cash flow
in the indicated future periods (amounts in thousands):
30
Guarantees and Indemnification
Obligations.
Our company has provided
various representations, warranties and other standard
indemnifications in various agreements with customers, suppliers
and other parties as well as in agreements to sell business
assets or lease facilities. In general, these provisions
indemnify the counterparty for matters such as breaches of
representations and warranties, certain environmental conditions
and tax matters, and, in the context of sales of business
assets, any liabilities arising prior to the closing of the
transactions. Non-performance under a contract could trigger an
obligation of the company. The ultimate effect on future
financial results is not subject to reasonable estimation
because considerable uncertainty exists as to the final outcome
of any potential claims. We do not believe that any of these
commitments will have a material effect on our results of
operations or financial condition. As of December 28, 2002,
the company does not have any accruals for potential payments to
be made for guarantees or indemnification obligations included
in any such agreements.
New Accounting Pronouncements
Asset Retirement.
In
June 2001, the FASB issued 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 is effective for the
company beginning in the first quarter of fiscal 2003.
Management is currently assessing the effect the adoption of
this statement will have on the companys results of
operations or financial condition.
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 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 is effective for the
company beginning in fiscal 2003. The application of
SFAS 145 will result in the company reclassifying, in its
fiscal 2003 Consolidated Financial Statements, the $3.95 million
extraordinary net gain on the early extinguishment of debt to
continuing operations in fiscal 2001. This statement will not
affect net income.
Disposal Activities.
In July 2002, the FASB issued SFAS
No. 146 (SFAS 146), Accounting for
Costs Associated with Exit or Disposal Activities. SFAS
146 addresses the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement
or an individual deferred-compensation contract. SFAS 146
supersedes EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring), which recognizes certain exit costs when
management commits to a plan and
31
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 are effective for fiscal 2002. However, 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 is in the process of
assessing the impact of this interpretation.
Stock Based Compensation.
In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure, amendment of FASB Statement
No. 123. This Statement provides additional
transition guidance for those entities that elect to voluntarily
adopt the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Furthermore, SFAS No. 148
mandates new disclosures in both interim and year-end financial
statements within Note 2, Summary of Significant
Accounting Policies, to the companys Consolidated
Financial Statements. The company has elected not to adopt the
recognition provisions of SFAS No. 123, as amended by SFAS
No. 148. However, the company has adopted the disclosure
provisions for the current fiscal year and has included this
information in Note 2 to the companys Consolidated
Financial Statements. The company continues to account for stock
based compensation under the provisions of APB 25.
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.
Information Regarding Non-GAAP Financial
Measures
The company prepares its consolidated financial
statements in accordance with GAAP. However, from time to time,
the company may present in its public statements, press releases
and SEC filings, EBITDA, a non-GAAP measure, to measure the
performance of the company and its operating divisions. The
company defines EBITDA as earnings from continuing operations
before interest, income taxes, depreciation, amortization and
unusual items. The company believes that EBITDA is a useful tool
for managing the operations of its business and is an indicator
of the companys ability to incur and service indebtedness
and generate free cash flow. Furthermore, pursuant to the terms
of our credit agreement, EBITDA (as adjusted in accordance with
the credit agreement), is used to determine the companys
compliance with certain financial covenants. The company also
believes that EBITDA measures are commonly reported and widely
used by investors and other interested parties as measures of a
companys operating performance and debt servicing ability
because they assist in comparing performance on a consistent
basis without regard to depreciation or amortization, which
32
EBITDA should not be considered an alternative to
(a) income from operations or net income (loss) as a
measure of operating performance; (b) cash flows provided
by operating, investing and financing activities (as determined
in accordance with GAAP) as a measure of the companys
ability to meet its cash needs; or (c) any other indicator
of performance or liquidity that has been determined in
accordance with GAAP. Our method of calculating EBITDA may
differ from the methods used by other companies, and,
accordingly, our measure of EBITDA may not be comparable to
similarly titled measures used by other companies.
For the 52 Weeks Ended
December 28, 2002
December 29, 2001
December 30, 2000
100.00
%
100.00
%
100.00%
44.90
45.37
42.40
37.10
38.24
37.46
4.48
4.54
4.29
1.00
1.98
4.37
0.65
(1.62
)
(3.76
)
(1.03
)
(0.88
)
0.32
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Payments Due by Fiscal Year
2007 and
2003
2004
2005
2006
Thereafter
$
21,414
$
22,876
$
58,060
$
54,579
$
36,547
5,817
5,057
4,751
4,570
36,693
19,166
16,231
14,965
10,984
37,586
73,426
9,061
$
119,823
$
53,225
$
77,776
$
70,133
$
110,826
Table of Contents
Amounts Expiring by Fiscal Year
2007 and
2003
2004
2005
2006
Thereafter
$
24,979
$
$
$
$
1,198
1,237
1,010
746
313
$
26,177
$
1,237
$
1,010
$
746
$
313
(1)
Does not include lease payments expected to be
incurred in fiscal year 2003 related to distributor vehicles and
other short-term or cancelable operating leases.
Table of Contents
Table of Contents
Item 7A. 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 December 28, 2002, the fair market value of the companys commodity derivative portfolio was a liability of $0.8 million. Of this fair value, $0.7 million is based on quoted market prices and $0.1 million is based on models and other valuation methods. Additionally, of this fair value, $0.7 million and $0.1 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 December 28, 2002, a hypothetical ten percent adverse change in commodity prices under normal market conditions could potentially have a $(2.6) 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 December 28, 2002, the fair market value of the companys interest rate swaps was a liability of $6.8 million. The fair value of the swaps is based on a valuation model using quoted market prices. Most of this fair value is related to portions of instruments to be utilized in fiscal 2003 and an immaterial amount to portions of instruments to be utilized in fiscal 2004. 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 agreements at December 28, 2002, with a notional amount of $152.8 million, would increase by $0.3 million. A 10% decrease in interest rates would reduce the fair value by $0.3 million.
Based on the companys floating rate debt at December 28, 2002, including the effect of the interest rate swap agreements, assuming a 10% increase in interest rates, the companys interest expense would increase by $0.1 million, while the impact of a 10% decrease in interest rates would reduce interest expense by $0.1 million.
In June 1998, the FASB issued SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. The standard, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of SFAS No. 133, an amendment of SFAS No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133, was adopted by the company on December 31, 2000 (the first day of fiscal 2001).
33
In accordance with SFAS 133, all derivatives are recognized on the Consolidated Balance Sheet in current or other assets or other accrued liabilities or other liabilities at their fair value. On the date the company enters into a derivative contract, it designates the derivative as (1) a hedge of the fair value of (a) a recognized asset or liability or (b) an unrecognized firm commitment (a fair value hedge) or (2) a hedge of the variability of cash flows that are to be received or paid in connection with (a) a forecasted transaction or (b) a recognized asset or liability (a cash flow hedge). Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash-flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g., until periodic settlements of a variable-rate asset or liability are recorded in earnings or when the underlying commodity being hedged is used in production and recorded to earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceeds the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings in selling, marketing and administrative expenses. The company may from time to time enter into contracts that do not qualify for hedge accounting treatment under GAAP. These contracts must, under GAAP, be marked to market as of the end of each quarter, which may result in significant volatility in our results of operations. Changes in the fair value of derivative instruments that do not qualify for hedge accounting are also reported in current-period earnings in selling, marketing and administrative expenses.
While SFAS 133 provides a significant change in the accounting guidance related to derivative instruments and hedging activities, the company has determined that the more stringent accounting and documentation requirements under SFAS 133 do not cause any significant changes in its overall risk management strategy and in its overall hedging activities.
The cash effects of the companys commodity derivatives and interest rate swap are included in the Consolidated Statement of Cash Flows as cash flow from operating activities.
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; |
34
| 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.
Item 8. | Financial Statements and Supplementary Data |
Refer to the Index to Consolidated Financial Statements and the Financial Statement Schedule for the required information.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
PART III
Item 10. | Directors and Executive Officers of the Registrant |
The information required by this item with respect to directors of the company is incorporated herein by reference to the information set forth under the captions Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance in the companys definitive proxy statement for the 2003 Annual Meeting of Shareholders expected to be filed with the Securities and Exchange Commission on or prior to April 28, 2003. The information required by this item with respect to executive officers of the company is set forth in Part I of this Form 10-K.
Item 11. | Executive Compensation |
The information required by this item is incorporated herein by reference to the information set forth under the caption Executive Compensation in the companys definitive proxy statement for the 2003 Annual Meeting of Shareholders expected to be filed with the Securities and Exchange Commission on or prior to April 28, 2003.
Item 12. | Security Ownership of Certain Beneficial Owners and Management of Flowers Foods |
The information required by this item is incorporated herein by reference to the information set forth under the captions Principal Shareholders and Security Ownership of Management in the companys definitive proxy statement for the 2003 Annual Meeting of Shareholders expected to be filed with the Securities and Exchange Commission on or prior to April 28, 2003. The information required by this item with respect to securities authorized under compensation plans is set forth in Part I, Item 5 of this Form 10-K.
35
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the information set forth under the caption Transactions with Management and Others in the companys definitive proxy statement for the 2003 Annual Meeting of Shareholders expected to be filed with the Securities and Exchange Commission on or prior to April 28, 2003.
Item 14. 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 annual report on Form 10-K, 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.
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) List of documents filed as part of this report.
1. Financial Statements of the Registrant
2. Financial Statement Schedule of the Registrant
Report of Independent Accountants on Financial Statement Schedule | |
Schedule II Valuation and Qualifying Accounts for the fifty-two weeks ended December 28, 2002, December 29, 2001 and December 30, 2000. |
36
3.
Exhibits.
The following documents
are filed as exhibits hereto:
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).
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
Restated Bylaws of Flowers Foods, Inc.
(Incorporated by reference to Flowers Foods Quarterly
Report on Form 10-Q, dated November 19, 2002, File
No. 1-16247).
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 as of November 15, 2002,
to the Rights Agreement dated as of March 23, 2001, between
Flowers Foods, Inc. and Wachovia Bank, N.A. (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).
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, Inc.
Annual Report on Form 10-K, dated March 29, 2002, File No.
1-16247).
10.8
Flowers Foods, Inc. Stock Appreciation Rights
Plan (Incorporated by reference to Flowers Foods, Inc. Annual
Report on Form 10-K, dated March 29, 2002, File No. 1-16247).
10.9
Flowers Foods, Inc. Annual Executive Bonus Plan
(Incorporated by reference to Flowers Foods, Inc. Annual Report
on Form 10-K, dated March 29, 2002, File No. 1-16247).
10.10
Flowers Foods, Inc. Supplemental Executive
Retirement Plan (Incorporated by reference to Flowers Foods,
Inc. Annual Report on Form 10-K, dated March 29, 2002, File No.
1-16247).
*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.
*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.
37
Exhibit
No.
Name of Exhibit
*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.
*10.14
Form of Indemnification Agreement, by and between
Flowers Foods, Inc. certain executive officers and the directors
of Flowers Foods, Inc.
*21
Subsidiaries of Flowers Foods, Inc.
*23
Consent of PricewaterhouseCoopers LLP
*99
Certification Pursuant to 18 U.S.C. 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 year ended
December 28, 2002.
* | Filed herewith |
(b) Reports on Form 8-K :
A Form 8-K was filed by the company on November 19, 2002 under Item 5 relating to the approval of Amendment No. 1, dated as of November 15, 2002, to the Rights Agreement, dated as of March 23, 2001, between the company and Wachovia Bank, N.A. (as successor in interest to First Union National Bank), as rights agent.
38
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, Flowers Foods, Inc. has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 28th day of March, 2003.
FLOWERS FOODS, INC. | |
/s/ AMOS R. MCMULLIAN | |
|
|
Amos R. McMullian | |
Chairman of the Board and | |
Chief Executive Officer | |
/s/ JIMMY M. WOODWARD | |
|
|
Jimmy M. Woodward | |
Senior Vice President, Chief Financial | |
Officer and Chief Accounting Officer |
39
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of Flowers Foods, Inc. and in the capacities and on the dates indicated.
Signature | Title | Date | ||
|
|
|
||
/s/ AMOS R. MCMULLIAN
Amos R. McMullian |
Chairman of the Board and Chief Executive Officer
|
March 28, 2003 | ||
/s/ JIMMY M. WOODWARD
Jimmy M. Woodward |
Senior Vice President, Chief Financial Officer
and Chief Accounting Officer
|
March 28, 2003 | ||
/s/ JOE E. BEVERLY
Joe E. Beverly |
Director
|
March 28, 2003 | ||
/s/ FRANKLIN L. BURKE
Franklin L. Burke |
Director
|
March 28, 2003 | ||
/s/ ROBERT P. CROZER
Robert P. Crozer |
Director
|
March 28, 2003 | ||
/s/ LANGDON S. FLOWERS
Langdon S. Flowers |
Director
|
March 28, 2003 | ||
/s/ JOSEPH L. LANIER, JR.
Joseph L. Lanier, Jr. |
Director
|
March 28, 2003 | ||
/s/ J.V. SHIELDS, JR.
J.V. Shields, Jr. |
Director
|
March 28, 2003 | ||
/s/ JACKIE M. WARD
Jackie M. Ward |
Director
|
March 28, 2003 | ||
/s/ C. MARTIN WOOD III
C. Martin Wood III |
Director
|
March 28, 2003 |
40
CERTIFICATIONS
I, Amos R. McMullian, certify that:
1. I have reviewed this annual report on Form 10-K of Flowers Foods, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the Evaluation Date); and | |
(c) Presented in this annual 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 functions):
(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 annual report whether 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.
/s/ AMOS R. MCMULLIAN | |
|
|
Amos R. McMullian | |
Chairman of the Board and Chief Executive Officer |
Date: March 28, 2003
41
CERTIFICATIONS
I, Jimmy M. Woodward, certify that:
1. I have reviewed this annual report on Form 10-K of Flowers Foods, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the Evaluation Date); and | |
(c) Presented in this annual 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 functions):
(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 annual report whether 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.
/s/ JIMMY M. WOODWARD | |
|
|
Jimmy M. Woodward | |
Senior Vice President, Chief Financial Officer | |
and Chief Accounting Officer |
Date: March 28, 2003
42
FLOWERS FOODS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
|
||||
Report of Independent Accountants
|
F-2 | |||
Consolidated Statement of Income for the
fifty-two weeks ended December 28, 2002, December 29,
2001 and December 30, 2000
|
F-3 | |||
Consolidated Balance Sheet at December 28,
2002 and December 29, 2001
|
F-4 | |||
Consolidated Statement of Changes in
Stockholders Equity and Comprehensive Income for the
fifty-two weeks ended December 28, 2002, December 29,
2001 and December 30, 2000
|
F-5 | |||
Consolidated Statement of Cash Flows for the
fifty-two weeks ended December 28, 2002, December 29,
2001 and December 30, 2000
|
F-6 | |||
Notes to Consolidated Financial Statements
|
F-7 |
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Stockholders of Flowers Foods, Inc.:
In our opinion, the Consolidated Financial Statements listed in the index appearing under Item 15(a)(1) on page 36 present fairly, in all material respects, the financial position of Flowers Foods, Inc. and its subsidiaries at December 28, 2002 and December 29, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the companys management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 2 and 5 of Notes to Consolidated Financial Statements, on December 30, 2001, Flowers Foods, Inc. adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
As discussed in Note 8 of the Notes to Consolidated Financial Statements, on December 31, 2000, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
/s/ PricewaterhouseCoopers LLP |
Atlanta, Georgia
F-2
FLOWERS FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands, except per share data)
$
1,652,162
$
1,627,004
$
1,562,879
910,369
888,824
900,198
613,020
622,132
585,434
73,965
73,815
67,102
(7,473
)
(17,193
)
26,500
17,383
1,111
43,898
321
27,197
5,808
9,634
(5,686
)
(4,278
)
22,167
36,466
68,373
10,716
(26,380
)
(58,739
)
4,593
(8,137
)
(16,457
)
6,123
(18,243
)
(42,282
)
87,809
(40,482
)
6,123
(18,243
)
5,045
3,950
(23,078
)
$
(16,955
)
$
(14,293
)
$
5,045
$
0.20
$
(0.61
)
$
(1.41
)
1.58
0.13
(0.77
)
$
(0.57
)
$
(0.48
)
$
0.17
29,836
29,798
30,036
$
0.20
$
(0.61
)
$
(1.41
)
1.58
0.13
(0.76
)
$
(0.56
)
$
(0.48
)
$
0.17
30,528
29,798
30,036
See accompanying Notes to Consolidated Financial Statements.
F-3
FLOWERS FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 28,
December 29,
2002
2001
(Amounts in thousands,
except share data)
ASSETS
$
69,826
$
12,280
104,121
104,104
21,575
18,593
11,620
13,942
48,702
56,466
81,897
89,001
23,468
20,981
18,563
18,025
12,689
8,149
310,564
252,540
36,950
33,324
272,618
267,184
628,015
656,727
60,629
67,797
12,174
8,570
1,010,386
1,033,602
(430,647
)
(423,170
)
579,739
610,432
22,267
16,084
13,390
22,015
71,599
72,940
54,249
79,975
44,572
45,705
$
1,096,380
$
1,099,691
LIABILITIES AND STOCKHOLDERS
EQUITY
$
27,231
$
15,648
82,827
83,980
4,516
4,830
89,945
81,756
204,519
186,214
223,133
242,057
54,486
25,466
7,337
11,571
13,909
12,746
75,732
49,783
300
298
483,142
476,401
131,388
149,842
(21,834
)
(4,904
)
592,996
621,637
$
1,096,380
$
1,099,691
See accompanying Notes to Consolidated Financial Statements.
F-4
FLOWERS FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY
Common Stock
Accumulated
Capital
Other
Treasury Stock
Comprehensive
Number of
in Excess
Comprehensive
Stock
Income
Shares
Par
of Par
Retained
Income
Number of
Compensation
(Loss)
Issued
Value
Value
Earnings
(Loss)
Shares
Cost
Adjustments
Total
(Amounts in thousands, except share data)
100,863,848
$
63,040
$
291,377
$
219,279
$
0
(567,160
)
$
(10,594
)
$
(24,348
)
$
538,754
$
5,045
5,045
5,045
3,752
3,752
(1,658
)
188,709
3,488
1,830
(325,541
)
(204
)
(3,652
)
(33,685
)
(659
)
7,446
2,931
(2,810
)
(41
)
(41
)
22,500
14
255
(270
)
(1
)
(36,595
)
(22
)
(1,022
)
(28,945
)
(288
)
940
(392
)
102
2,852
2,954
(52,372
)
(52,372
)
(80,658,248
)
(62,629
)
62,352
(7,817
)
443,891
8,094
0
19,865,964
$
199
$
351,506
$
164,135
$
0
0
$
0
$
(13,380
)
$
502,460
(14,293
)
(14,293
)
(14,293
)
(4,904
)
(4,904
)
(4,904
)
$
(19,197
)
(567,449
)
(567,449
)
662,368
662,368
27,952
13,380
41,332
2,152
2,152
9,931,549
99
(128
)
(29
)
29,797,513
$
298
$
476,401
$
149,842
$
(4,904
)
0
$
0
$
0
$
621,637
(16,955
)
(16,955
)
(16,955
)
355
355
355
(17,285
)
(17,285
)
(17,285
)
$
(33,885
)
172,862
2
6,498
6,500
15,000
243
243
(1,499
)
(1,499
)
29,985,375
$
300
$
483,142
$
131,388
$
(21,834
)
0
$
0
$
0
$
592,996
See accompanying Notes to Consolidated Financial Statements.
F-5
FLOWERS FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
(16,955
)
$
(14,293
)
$
5,045
(3,950
)
(47,327
)
73,965
73,815
67,102
5,923
(114
)
26,500
17,383
23,078
(154
)
1,377
2,890
(7,496
)
(19,328
)
30
2,634
115
(217
)
(569
)
3,077
3,709
2,558
4,152
3,910
3,353
6,665
2,808
(3,099
)
13,037
4,435
4,379
(3,764
)
12,076
9,280
13,875
22,465
(6,200
)
(2,496
)
(79
)
5,053
(5,819
)
1,914
(3,359
)
(4,353
)
(4,316
)
122,752
79,923
70,040
(48,811
)
(49,514
)
(39,925
)
1,231
(80,892
)
(1,023
)
(6,506
)
(22,070
)
1,719
558
17,983
5,197
20,788
23
(1,451
)
(1,389
)
(46,861
)
(132,608
)
(24,613
)
(1,499
)
(52,372
)
(41
)
213
337
4,567
251,000
(193,776
)
(9,978
)
(17,059
)
(67,562
)
(4,401
)
73,099
(18,345
)
53,120
(52,247
)
57,546
435
(6,820
)
12,280
11,845
18,665
$
69,826
$
12,280
$
11,845
$
$
$
2,972
$
$
59,665
$
$
20,255
$
43,233
$
65,182
$
(3,475
)
$
870
$
(14,772
)
See accompanying Notes to Consolidated Financial Statements.
F-6
FLOWERS FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. Basis
of Presentation
Recent Developments.
On January 30, 2003, the company announced it had entered
into an agreement to sell its Mrs. Smiths Bakeries,
LLC (Mrs. Smiths Bakeries) frozen dessert
business to The Schwan Food Company (Schwan). A
closing date for the transaction has not been determined pending
approval of the transaction by the Federal Trade Commission and
the satisfaction of all other closing conditions. The company
will retain the frozen bread and roll portion of the
Mrs. Smiths Bakeries business, which complements our
core fresh bread business and it will become a part of our
Flowers Snack, LLC (Flowers Snack) segment, with
Flowers Snack being renamed Flowers Foods Specialty Group, LLC
(Flowers Foods Specialty Group). For purposes of
this Form 10-K, discussion will relate to our Flowers
Bakeries, LLC (Flowers Bakeries), Mrs. Smiths
Bakeries and Flowers Snack business units as such businesses
were operated as of and for the fiscal year ended
December 28, 2002. In the first quarter of fiscal 2003, the
frozen dessert business of Mrs. Smiths Bakeries being
sold will be reported as a discontinued operation and the frozen
bread and roll business of Mrs. Smiths Bakeries will
be reported as a part of Flowers Foods Specialty Group.
Segments.
Effective
July 14, 2002 (the first day of the third quarter of fiscal
2002), the companys two operating segments, Flowers
Bakeries and Mrs. Smiths Bakeries, were restructured to
form three operating segments. These segments are Flowers
Bakeries, Mrs. Smiths Bakeries and Flowers Snack.
Flowers Snack consists of the snack business previously operated
by Mrs. Smiths Bakeries. As Mrs. Smiths
Bakeries and Flowers Snack historically shared certain
administrative and division expenses, certain allocations and
assumptions have been made in order to present historical
comparative information for Mrs. Smiths Bakeries and
Flowers Snack as separate segments. In most instances,
administrative and division expenses have been allocated between
the two segments based on cases of product sold. In the opinion
of management, the allocations have been made on a reasonable
basis. Management believes that the amounts are reasonable
estimations of the costs that would have been incurred had
Mrs. Smiths Bakeries and Flowers Snack performed
these functions as separate divisions.
Spin-Off and Merger
Transaction.
On March 26, 2001,
Flowers Industries, Inc. (FII) shareholders approved
a transaction that resulted in the spin-off of the company and
the merger of FII with a wholly-owned subsidiary of Kellogg
Company (Kellogg). In the transaction, FII
transferred the stock of its two wholly-owned subsidiaries,
Flowers Bakeries and Mrs. Smiths Bakeries and all other
assets and liabilities directly held by FII (except for its
majority interest in Keebler Foods Company (Keebler)
and certain debt and other liabilities and transaction costs) to
a new corporation, Flowers Foods, Inc. (Flowers
Foods). FII distributed all of the outstanding shares of
common stock of Flowers Foods to existing FII shareholders such
that FII shareholders received one share of Flowers Foods common
stock for every five shares of FII they owned. FII, which
consisted solely of its majority interest in Keebler and the
aforementioned liabilities, was simultaneously merged with a
wholly-owned subsidiary of Kellogg. The cash purchase price paid
by Kellogg, less the aforementioned liabilities and certain
other transaction costs, resulted in net proceeds paid directly
to FII shareholders of $1,241.6 million.
The result of the spin-off and merger transaction
described above was the disposal of a segment of a business,
Keebler. Accordingly, at December 30, 2000, the company was
presented as the continuing entity that included the historical
financial information of Flowers Bakeries and
Mrs. Smiths Bakeries with Keebler presented as a
discontinued operation. As such, the company classified all
income and expense activity (including amortization of Keebler
goodwill and other intangible assets recorded at FII) of Keebler
for the fiscal year ended December 30, 2000 under the
caption Income from discontinued operations, less
applicable taxes of $59,822 in the Consolidated Statement
of Income. In addition, costs related to the transactions, less
all estimated income and expense activity of Keebler from the
period December 31, 2000 through March 26, 2001, is
included under the caption Transaction costs less
phase-out income, less applicable taxes in the
F-7
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated Statement of Income for the fiscal
year ended December 30, 2000. For further information, see
Note 3 below.
Note 2. Summary
of Significant Accounting Policies
Principles of
Consolidation.
The Consolidated
Financial Statements include the accounts of Flowers Foods and
its wholly-owned subsidiaries. Intercompany transactions and
balances are eliminated in consolidation.
Fiscal Year End.
The
companys fiscal year end is the Saturday nearest
December 31.
Reclassifications.
Certain reclassifications of prior year information were made to
conform with the current presentation.
Revenue Recognition.
The company recognizes revenue from the sale of product at the
time of delivery when title and risk of loss pass to the
customer. The company records estimated reductions to revenue
for customer programs and incentive offerings, including special
pricing agreements, price protection, promotions and other
volume-based incentives at the time the incentive is offered or
at the time of revenue recognition for the underlying
transaction that results in progress by the customer towards
earning the incentive. Independent distributors receive a
percentage of the wholesale price of product sold to retailers
and other customers. The company records such amounts as
selling, marketing and administrative expenses. During fiscal
2002, sales to the companys largest customer, Wal-Mart,
were 10.5% of the consolidated companys sales with 7.4%
attributable to Flowers Bakeries and 3.1% attributable to
Mrs. Smiths Bakeries. During fiscal 2001 and 2000, no
sales to a single customer accounted for more than 10% of the
companys sales.
The consumer packaged goods industry has utilized
scan-based trading technology over several years to share
information between the supplier and retailer. An extension of
this technology allows the retailer to pay the supplier when the
consumer purchases the goods rather than at the time they are
delivered to the retailer. This technology is referred to as pay
by scan (PBS). During fiscal 2001, the industry saw
a sharp increase in the use of scan-based trading. In response
to this demand, the company began a pilot program in fiscal
2001, working with certain retailers to develop the technology
to execute PBS. The company believes it is an industry leader in
PBS and is aggressively working with its larger customers, such
as Wal-Mart, Winn-Dixie, Kroger and Food Lion, to expand the use
of PBS. In fiscal 2002, the company recorded approximately
$116.9 million in sales through PBS. The company estimates
that by the end of fiscal 2003, it will have approximately
$243.0 million in PBS sales. While PBS modestly delays the
timing of revenue recognition, given the quick turn of our
products, the company does not expect PBS to have a material
adverse effect on reported revenues in any period.
Effective December 30, 2001 (the first day
of fiscal 2002), the company applied the consensus reached by
the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) in Issue
No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendors
Products. EITF Issue No. 01-9 codifies and reconciles
the Task Force consensuses on all or specific aspects of EITF
Issues No. 00-14, Accounting for Certain Sales
Incentives, No. 00-22, Accounting for
Points and Certain Other Time-Based or Volume-Based
Sales Incentives Offers, and Offers for Free Products or
Services to be Delivered in the Future, and
No. 00-25, Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendors
Products and identifies other related interpretive issues.
The company adopted the provisions of EITF Issue
No. 00-22 on December 31, 2000. Prior to fiscal 2001,
the company recorded such sales incentives as selling, marketing
and administrative expenses. In accordance with this consensus,
these expenses have been reclassified as a reduction of net
sales. Such sales incentives presented as reduction of net sales
were $58.0 million, $51.5 million and $51.1 million for
fiscal 2002, fiscal 2001 and fiscal 2000, respectively. The
adoption of this consensus did not affect net income.
F-8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
EITF Issue No. 01-9 requires certain selling
expenses incurred by the company, not previously reclassified
(primarily coupon and slotting costs), to be classified as
reductions of sales. The adoption of the remaining items
included in EITF Issue No. 01-9 (EITF 00-14 and EITF 00-25)
resulted in the company reducing both sales and selling,
marketing and administrative expenses by an aggregate of
approximately $5.6 million, $2.0 million and $6.1 million for
fiscal years 2002, 2001 and 2000, respectively. The prior year
expenses have been reclassified to reflect this change. These
reclassifications have no impact on net income.
If market conditions were to decline, the company
may take actions to increase such customer incentive offerings,
possibly resulting in an incremental reduction of revenue.
Shipping and
Handling.
The company recognizes
shipping and handling costs as a part of selling, marketing and
administrative expense. Shipping and handling expense was $33.8
million, $31.1 million and $27.1 million, in fiscal 2002, fiscal
2001 and fiscal 2000, respectively.
Cash and Cash
Equivalents.
The company considers
deposits in banks, certificates of deposits and short-term
investments with original maturities of three months or less as
cash and cash equivalents.
Accounts Receivable.
Accounts receivable consists of trade receivables, current
portions of notes receivable and miscellaneous receivables. The
company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make
required payments. Allowances of $1.5 million and $1.3 million
were recorded at December 28, 2002 and December 29,
2001, respectively. If the financial condition of the
companys customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required.
Concentration of Credit
Risk.
The company performs periodic
credit evaluations and grants credit to customers, who are
primarily in the grocery and foodservice markets, and generally
does not require collateral.
Inventories.
Inventories at December 28, 2002 and December 29,
2001, are valued using the first-in-first-out method. The
company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon
assumptions about future demand and market conditions. At
December 28, 2002 and December 29, 2001, inventories
are shown net of reserves for estimable obsolescence and
unmarketable product of $1.7 million and $1.9 million,
respectively. If actual market conditions are less favorable
than those projected by management, additional inventory
write-downs may be required.
Property, Plant and Equipment and
Depreciation.
Property, plant and
equipment is stated at cost. Depreciation expense is computed
using the straight-line method based on the estimated useful
lives of the depreciable assets. Certain equipment held under
capital leases are classified as property, plant and equipment
and the related obligations are recorded as liabilities.
Amortization of assets held under capital leases is included in
depreciation expense. Total accumulated depreciation for leased
assets was $23.7 million and $22.1 million at December 28,
2002 and December 29, 2001, respectively.
Buildings are depreciated over ten to forty
years, machinery and equipment over three to twenty-five years,
and furniture, fixtures and transportation equipment over three
to fifteen years. Property under capital leases is amortized
over the shorter of the lease term or the estimated useful life
of the property. Interest capitalized during fiscal 2002, 2001
and 2000, was $0.1 million, $0.5 million and $1.0 million,
respectively. Depreciation expense for fiscal 2002, 2001 and
2000 was $69.8 million, $65.5 million and $59.7 million,
respectively.
Goodwill and Other Intangible
Assets.
Previous to the companys
adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets (SFAS 142), goodwill related
to purchases of businesses was amortized over twenty to forty
years from the acquisition date using a straight-line basis. The
company accounts for goodwill in a purchase business combination
as the excess of the cost over the fair value of net assets
acquired. Business combinations can also result in other
intangible assets
F-9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
being recognized. Amortization of intangible
assets, if applicable, occurs over their estimated useful lives.
On December 30, 2001, the company adopted SFAS 142 which
requires companies to cease amortizing goodwill that existed at
June 30, 2001 and establishes a new two-step method for
testing goodwill for impairment on an annual basis (or an
interim basis if an event occurs that might reduce the fair
value of a reporting unit below its carrying value). The company
conducts this review during the fourth quarter of each fiscal
year. The transitional impairment that resulted from the
companys adoption of this statement has been reported as a
change in accounting principle see Note 5. No
impairment resulted from the annual review performed in 2002.
SFAS 142 also requires that an identifiable intangible
asset that is determined to have an indefinite useful economic
life not be amortized, but separately tested for impairment
using a one-step fair value based approach.
Impairment of Long-Lived
Assets.
In the first quarter of fiscal
2002, the company adopted SFAS No. 144
(SFAS 144), Accounting for Impairment or
Disposal of Long-lived Assets which superceded SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of . The
company determines whether there has been an impairment of
long-lived assets, excluding goodwill and identifiable
intangible assets that are determined to have indefinite useful
economic lives, when certain indicators of impairment are
present. In the event that facts and circumstances indicate that
the cost of any long-lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is
required, the estimated future gross, undiscounted cash flows
associated with the asset would be compared to the assets
carrying amount to determine if a write-down to market value is
required. Future adverse changes in market conditions or poor
operating results of underlying long-lived assets could result
in losses or an inability to recover the carrying value of the
long-lived assets that may not be reflected in the assets
current carrying value, thereby possibly requiring an impairment
charge in the future.
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, fruits and dairy products, along with pulp and
paper, aluminum and petroleum based packaging products. The
company also enters into interest rate derivatives to hedge
exposure to changes in interest rates. See Note 8 below for
further details.
Treasury Stock.
The
company records acquisitions of its common stock for treasury at
cost. Differences between proceeds for reissuances of treasury
stock and average cost are credited or charged to capital in
excess of par value to the extent of prior credits and
thereafter to retained earnings.
Advertising and Consumer
Promotion.
Advertising and consumer
promotion costs are generally expensed as incurred or no later
than when the advertisement appears or the event is run.
Advertising and consumer promotion expense was approximately
$32.2 million, $29.9 million and $16.3 million for fiscal 2002,
fiscal 2001 and fiscal 2000, respectively.
Stock-Based
Compensation.
As permitted by SFAS
No. 123 Accounting for Stock-Based
Compensation, 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 company has adopted
disclosure-only provisions of SFAS No. 123 and SFAS
No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
an Amendment of FASB Statement No. 123. 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.
F-10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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) income and (loss) income per share would have
been reduced as follows:
For option awards granted during fiscal 2001, the
following weighted average assumptions were used to determine
fair value using the Black-Scholes option-pricing model:
dividend yield 0%, expected volatility 35.5%-41.5%, risk-free
interest rate 5.65% and an expected option life of 10 years.
Software Development
Costs.
The company expenses software
development costs incurred in the preliminary project stage,
and, thereafter, capitalizes costs incurred in developing or
obtaining internally used software. Certain costs, such as
maintenance and training, are expensed as incurred. Capitalized
costs are amortized over a period of three to eight years and
are subject to impairment evaluation. The net balance of
capitalized software development costs included in plant,
property and equipment was $23.4 million and
$25.0 million at December 28, 2002 and
December 29, 2001, respectively. Amortization expense of
capitalized software development costs was $4.5 million,
$4.3 million and $3.4 million in fiscal 2002, fiscal
2001 and fiscal 2000, respectively.
Income Taxes.
The
company accounts for income taxes using an asset and liability
approach that is used to recognize deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
bases of assets and liabilities. The company records a valuation
allowance to reduce its deferred tax assets to the amount that
is more likely than not to be realized. While the company has
considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance, in the event the company were to determine
that it would be able to realize its deferred tax assets in the
future in excess of its net recorded amount, an adjustment to
the deferred tax asset would increase income in the period such
determination was made. Likewise, should the company determine
that it would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred
tax asset would be charged to income in the period such
determination was made.
Net Income Per Common
Share.
Basic net income per share is
computed by dividing net income by weighted average common
shares outstanding for the period. Diluted net income per share
is computed by dividing net income by weighted average common
and common equivalent shares outstanding for the period. Common
stock equivalents consist of the incremental shares associated
with the companys stock option plans, as determined under
the treasury stock method. Basic weighted average shares
outstanding are the same as diluted weighted average shares
outstanding for fiscal 2001 and fiscal 2000 because the effect
of the common stock equivalents were anti-dilutive. Such common
stock equivalents for fiscal 2001 and fiscal 2000 amounted to
118,193 and 60,635 shares, respectively.
F-11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of 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, lower
of cost or market for obsolete and unmarketable inventory,
valuation of long-lived assets, intangibles and goodwill,
deferred tax asset valuation allowances and pension obligations.
Note 3. New
Accounting Pronouncements
Asset Retirement.
In
June 2001, the FASB issued 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 is effective for the
company beginning in the first quarter of fiscal 2003.
Management is currently assessing the impact adoption of this
statement may have on the companys results of operations
or financial position.
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 is effective for the
company beginning in fiscal 2003. The application of SFAS 145
will result in the company reclassifying, in its fiscal 2003
consolidated financial statements, the $3.95 million
extraordinary net gain on the early extinguishment of debt to
continuing operations in fiscal 2001. This statement will not
affect net income.
Disposal Activities.
In July 2002, the FASB issued SFAS No. 146 (SFAS
146), Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 146 addresses the recognition,
measurement, and reporting of costs that are associated with
exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS 146
supersedes EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring), which recognizes certain exit costs when
management commits to a plan and requires liabilities associated
with exit and disposal activities to be expensed as incurred.
SFAS 146 will be effective for exit or disposal activities of
the company that are initiated after December 31, 2002.
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 are
effective for fiscal 2002, and the company has included this
information in Note 11. However, 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
F-12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
company has not assessed the impact, if any, of
the adoption of FIN 45. The company is in the process of
assessing the impact of this interpretation.
Stock Based
Compensation.
In December 2002, the
FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, amendment of
FASB Statement No. 123. This Statement provides
additional transition guidance for those entities that elect to
voluntarily adopt the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.
Furthermore, SFAS No. 148 mandates new disclosures in both
interim and year-end financial statements within Note 2 of
Notes to Consolidated Financial Statements. The company has
elected not to adopt the recognition provisions of SFAS
No. 123, as amended by SFAS No. 148. However, the
company has adopted the disclosure provisions for the current
fiscal year and has included this information in Note 2.
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.
Note 4. Discontinued
Operations
On March 26, 2001, FII completed a
transaction that resulted in the spin-off to its existing
shareholders of the stock of a new corporation, Flowers Foods.
FII, whose assets and liabilities then consisted solely of its
majority interest in Keebler common stock and certain debt and
other liabilities, was simultaneously acquired by Kellogg.
For accounting purposes, Flowers Foods is
presented as the continuing entity that includes the historical
financial information of Flowers Bakeries and
Mrs. Smiths Bakeries, with Keebler presented as a
discontinued operation as of December 30, 2000.
Accordingly, the operations (including amortization of Keebler
goodwill and other intangible assets of $7.4 million for fiscal
2000) of Keebler are included in Income from discontinued
operations, net of tax of $59,822 in the Consolidated
Statement of Income. In addition, costs related to the
transaction less all estimated income and expense activity of
Keebler from the period December 31, 2000 through
March 26, 2001 are included under the caption
Transaction costs less phase-out income, less applicable
taxes in the Consolidated Statement of Income.
F-13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Transaction Costs Less Phase-out
Income
A reconciliation of the caption Transaction
costs less phase-out income, net of tax included in the
Consolidated Statement of Income for the fiscal year ended
December 30, 2000 is presented as follows (amounts in
thousands):
In connection with the spin-off and merger
transaction, various transaction costs were incurred by FII and
Keebler. These costs are included in discontinued operations,
net of tax, at December 30, 2000 with a corresponding
credit to Liabilities to be Settled by Others
(amounts in thousands):
Net Assets of Discontinued Operations and
Liabilities to be Settled by Others
In accordance with the transaction described
above, Net Assets of Discontinued Operations and
Liabilities to be Settled by Others at
March 26, 2001, of $567.4 million and $662.4 million,
respectively, were relieved from the Consolidated Balance Sheet
with a corresponding adjustment to capital in excess of par
value.
Separation and Other Contractual
Payments
In addition, in connection with the spin-off and
merger transaction, various separation and other contractual
payments under FIIs stock and incentive programs of
$39.0 million were paid to executive and non-executive
officers and employees. Of this amount, $5.7 million was accrued
at March 26, 2001 and $5.3 million was previously
amortized to earnings prior to March 26, 2001. Accordingly,
in the first quarter of fiscal 2001, a charge of
$28.0 million was recorded as an unusual charge to the
companys continuing operations, with a corresponding
credit to capital in excess of par value as a result of the
payments being settled from the proceeds of the spin-off and
merger transaction.
Note 5. Goodwill
and Other Intangible Assets
The changes in the carrying amount of goodwill
for the fiscal year ended December 28, 2002 are as follows:
F-14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The adoption of SFAS 142 resulted in the
company recording a transitional goodwill impairment charge at
Mrs. Smiths Bakeries of $23.1 million, net of
tax of $1.8 million, as of December 30, 2001 (the
first day of fiscal 2002) as a cumulative effect of a change in
accounting principle.
During the first quarter of fiscal 2002,
Mrs. Smiths Bakeries recorded a $1.2 million
adjustment to reduce certain exit cost liabilities with
offsetting entries of $0.7 million and $0.5 million,
to goodwill and deferred taxes, respectively. These liabilities
and the related goodwill and deferred taxes were recorded in
fiscal 1996 as a result of the purchase of
Mrs. Smiths Bakeries and the subsequent closure of
its Pottstown, Pennsylvania production facility. This adjustment
is the result of more accurate information regarding medical and
workers compensation expenses.
The following table sets forth information for
other intangible assets:
Intangible assets deemed to have an indefinite
useful life were tested for impairment using a one-step process
that compares the fair value of the asset to the carrying amount
of the asset as of the date of adoption (the beginning of this
fiscal year). Pursuant to the requirements of SFAS 142,
this transitional impairment test was completed during the first
quarter of fiscal 2002 and no impairment losses were required to
be recognized.
Amortization expense for fiscal 2002, fiscal 2001
and fiscal 2000 was $4.1 million, $8.4 million and
$7.4 million, respectively. Estimated amortization expense
for fiscal 2003, 2004, 2005, 2006 and 2007 are
$0.8 million, $0.5 million, $0.5 million,
$0.5 million and $0.5 million, respectively. The
company has excluded from the estimated amortization expense any
amortization related to the Mrs. Smiths Bakeries
dessert business to be sold to Schwan.
F-15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provisions of SFAS No. 142 are adopted
prospectively and prior-period financial statements are not
restated. Comparative earnings information for prior periods is
presented in the following tables:
F-16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 6. Notes
Receivable
Between September 1996 and March 26, 2001,
the independent distributor notes, made in connection with the
purchase of the distributors territories (the
distributor notes), were made directly between the
distributor and a third party financial institution. Pursuant to
an agreement, the company or a wholly-owned consolidated
subsidiary of the company, acted as the servicing agent for the
financial institution and received a fee for those services. The
amount recorded as a reduction of selling, marketing and
administrative expenses, was $3.4 million in fiscal 2000. In
conjunction with the spin-off and merger transaction, on
March 26, 2001, the company purchased the aggregate
outstanding distributor note balance of $77.6 million from the
third party financial institution. Accordingly, beginning
March 26, 2001, the company has provided direct financing
to independent distributors for the purchase of the
distributors territories and records the notes receivable
on the Consolidated Balance Sheet. The territories are financed
over ten years bearing an interest rate of 12.0%. A portion of
this amount is recorded as a reduction of selling, marketing and
administrative expense representing the companys cost of
servicing the loan; the remaining amount is recorded as interest
income. In fiscal 2002 and fiscal 2001, $4.0 million and $3.8
million, respectively, were recorded as a reduction of selling,
marketing and administrative expenses and $5.7 million and $4.3
million, respectively, were recorded as interest income. The
distributor notes are collateralized by the independent
distributors territories. At December 28, 2002 and
December 29, 2001, the outstanding balance of the
distributor notes was $79.4 million and $80.9 million,
respectively, of which $7.8 million and $8.0 million,
respectively, is recorded in accounts and notes receivable.
Note 7. Distributor
Routes Held for Sale
In the normal course of business, the company
purchases territories from and sells territories to independent
distributors. The company repurchases territories from
independent distributors in circumstances when the company
decides to exit a territory or when the distributor elects to
terminate its relationship with the company. In the event the
company decides to exit a territory, it is obligated to
repurchase the territory from the independent distributor for
the greater of the original purchase price or a multiple of
average weekly branded sales. In the event an independent
distributor terminates its relationship with the company, the
company, although not legally obligated, normally repurchases
and operates that territory as a company-owned territory.
Territories purchased from the independent distributors are
recorded on the companys Consolidated Balance Sheet as
Assets Held for Sale as the company actively seeks
another distributor to purchase the territory. At
December 28, 2002 and December 29, 2001, territories
recorded as held for sale were $17.2 million and $15.0 million,
respectively. The company held and operated 480 and 429 such
independent distributor territories for sale at
December 28, 2002 and December 29, 2001, respectively.
The carrying value of the each territory is recorded as an asset
held for sale, is not amortized and is evaluated for impairment
on at least an annual basis in accordance with the provisions of
SFAS 142.
Territories held for sale and operated by the
company are sold to independent distributors at a multiple of
average weekly branded sales. Subsequent to the purchase of a
territory by the distributor, in accordance with
F-17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the terms of the distributor arrangement, the
independent distributor has the right to require the company to
repurchase the territory at the original purchase price within
the six-month period following the date of sale. If the company
had been required to repurchase these territories, the company
would have been obligated to pay $0.6 million and
$0.6 million for fiscal 2002 and fiscal 2001, respectively.
As such, the company either records a gain on the sale of a
territory to the independent distributor after the six-month
period, recognized as income, as a reduction of selling,
marketing and administrative expenses over the term of the
respective purchase arrangement, or records a loss in current
period earnings at the date of the sale. Should the independent
distributor wish to sell the territory after the six-month
period has expired, the company has the right of first refusal.
Note 8. 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, fruits and dairy
products, along with pulp and paper, aluminum and petroleum
based packaging products. The company also enters into interest
rate derivatives to hedge exposure to changes in interest rates.
In accordance with the transition provisions of
SFAS 133, the company recorded the following net-of-tax
cumulative-effect transition adjustment to other comprehensive
income on December 31, 2000 (amounts in thousands):
During fiscal 2001, the company reclassified this
transition adjustment to earnings in materials, labor and other
production costs, which represented the usage of raw materials
under previously designated commodity hedging instruments.
As of December 28, 2002, the fair value of
the companys commodity derivatives was a liability of
$0.8 million, and, under SFAS 133, these instruments
are designated as cash-flow hedges. The positions held in the
portfolio are used to hedge economic exposure to changes in
various raw material prices and effectively fix or limit
increases in prices for a period of time extending into fiscal
2004. 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 fair value of
commodity derivatives at December 28, 2002 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 fiscal 2002, $0.4 million was recorded as income
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
F-18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to effectively convert variable rate interest
payments on a designated portion of its capital lease
obligations to fixed rate payments. Additionally, on
October 25, 2002, in conjunction with the acquisition of
Ideal Baking Company, Inc. (See Note 9), 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 Ideal Baking Company, Inc. 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 transactions is recorded
each period in other comprehensive income. The ineffective
portions of the changes in fair value are recorded to current
period earnings in selling, marketing and administrative
expenses. The fair value of the interest rate swaps on
December 28, 2002 and December 29, 2001 was a
liability of $6.8 million and $5.8 million, respectively. During
fiscal 2002 and fiscal 2001, $6.3 million and $2.6 million,
respectively, of additional interest expense was recognized due
to periodic settlements of the swaps. There was no
ineffectiveness recorded to current earnings related to the
interest rate swaps.
Of the $4.5 million recorded in other accumulated
comprehensive income at December 28, 2002, related to
derivative financial instruments, approximately $4.4 million and
$0.1 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.
The companys various commodity and
ingredient purchase agreements, which meet the normal purchases
exception under SFAS 133, effectively commit the company to
purchase approximately $82.5 million of raw materials at
December 28, 2002. Of these commitments, approximately
$73.4 million and $9.1 million are expected to be used in
production in fiscal 2003 and fiscal 2004, respectively.
Note 9. Acquisitions
On October 25, 2002, Flowers Bakeries
acquired Ideal Baking Company, Inc., in Batesville, Arkansas for
cash, shares of Flowers Foods common stock and the assumption of
debt. Ideal, which had annual sales of approximately $15 million
in 2001, employs 280 people and operates approximately 75 sales
routes from its Batesville, Arkansas bakery that serve customers
in northern Arkansas, southern Missouri and Memphis, Tennessee.
In September 2001, Flowers Bakeries acquired The
Kotarides Baking Companys business in the Norfolk,
Virginia area and certain other assets. The acquisition involved
the purchase of approximately 70 Kotarides sales routes that
supplied fresh breads, buns, and snack cakes to customers in the
Virginia area, two Kotarides distribution centers in Norfolk and
the
Mary Jane
brand name and certain other intangibles.
Under the agreement, Flowers Bakeries Norfolk, Virginia
bakery will operate the routes and will produce and market
breads and buns under the
Mary Jane
brand. This
acquisition was recorded under the purchase method of accounting.
In January 2000, Flowers Bakeries completed the
purchase of The Kroger Companys Memphis, Tennessee bakery.
This facility produced breads, buns and rolls, for Kroger stores
in Tennessee, northern Arkansas and southern Missouri. During
the second quarter of fiscal 2001, the decision was made to
close this facility in order to consolidate production efforts
in this geographical area. This area is now served from other
production facilities within the company. This acquisition was
recorded under the purchase method of accounting.
F-19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 10. Other
Accrued Liabilities
Other accrued liabilities consist of:
Note 11. Debt,
Lease and Other Commitments
Long-term debt consisted of the following at
December 28, 2002 and December 29, 2001:
The companys credit agreement provides for
total borrowings of up to $310.3 million, consisting of Term
Loan A of $34.2 million and Term Loan B of $146.1
million and a revolving loan facility of $130 million (the
revolving loan facility).
Term Loan A required quarterly principal payments
of $5.0 million which began on September 30, 2001.
Beginning on March 31, 2002, the principal payments
decreased to $2.6 million as a result of the prepayment
discussed below. Beginning March 31, 2003 through maturity
on March 26, 2005, the quarterly principal payments are
scheduled to be $3.5 million. Term Loan B requires quarterly
principal payments of $0.4 million which began September
30, 2001. Beginning March 31, 2005 and through maturity on
March 26, 2007, the quarterly payments are scheduled to be
$13.6 million with a final payment of $34.3 million at maturity.
Under the revolving loan facility the company may borrow up to
$130.0 million through March 26, 2005.
Interest is due quarterly on outstanding
borrowings under the new credit agreement at the eurodollar rate
or base rate plus applicable margin. This underlying rate is
defined as either rates offered in the interbank eurodollar
market or the higher of the prime rate or federal funds rate
plus 0.5%. The applicable margin is based on the companys
leverage ratio and can range from 2.5% 0.5% for Term
Loan A and the revolving loan facility and 2.75%
1.75% for Term Loan B. In addition, a commitment fee of
0.5% 0.375% is due quarterly on all commitments not
utilized under the credit agreement. At December 28, 2002,
the interest rates for Term Loan A and Term Loan B
were 4.125% and 4.625%, respectively. At December 28, 2002,
the outstanding balances of Term Loan A and Term Loan B were
$34.2 million and $146.1 million, respectively.
F-20
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were no amounts outstanding under the
revolving loan facility at December 28, 2002. The company
paid financing costs of $9.9 million in connection with the
credit agreement. These costs were deferred on the balance sheet
and are being amortized over the term of the agreement using the
effective interest method.
The credit agreement includes certain
restrictions, which, among other things, require maintenance of
financial covenants, restrict encumbrance of assets and creation
of indebtedness and limit capital expenditures, repurchase of
common shares and dividends that can be paid. Restrictive
financial covenants include such ratios as a consolidated
interest coverage ratio, a consolidated fixed charge coverage
ratio and a maximum leverage ratio. Capital expenditures could
not exceed $50.0 million in fiscal 2002. No dividends were
allowed to be paid in fiscal 2001. For fiscal 2002, the maximum
amount of dividends payable by the company could not exceed $5.0
million, unless certain conditions were met. Loans under the
credit agreement are collateralized by substantially all of the
assets of the company, excluding real property. 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 our 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, are required to
be applied to the outstanding Term Loan A and Term
Loan B balances on a pro rata basis.
During the fourth quarter of fiscal 2001, the
company made a voluntary debt payment of $50.0 million. As
a result, unamortized financing costs of $1.7 million associated
with this portion of the debt were written off. Accordingly, the
company recorded an extraordinary loss of approximately
$1.1 million, net of tax, related to the early
extinguishment of this debt in the fourth quarter of fiscal 2001.
The company has also guaranteed, through their
respective terms, approximately $4.5 million and
$6.8 million in leases at December 28, 2002 and
December 29, 2001, respectively, that certain independent
distributors have entered into with third party financial
institutions related to distribution vehicle financing. In
fiscal 2001, the company ceased its practice of guaranteeing
leases to third party financial institutions for certain
independent distributors. In the ordinary course of business,
when an independent distributor terminates his relationship with
the company, the company, although not legally obligated,
generally operates the territory until it is resold. The company
uses the former independent distributors vehicle to
operate these territories and makes the lease payments to the
third party financial institution in place of the former
distributor. These payments are recorded as selling, marketing
and administrative expenses and amounted to $2.7 million,
$2.3 million and $2.4 million for fiscal years 2002,
2001 and 2000, respectively. The payments are not included in
the operating lease table set forth below. Assuming the company
does not resell the territories to new independent distributors,
the maximum obligation for the vehicles being used by the
company at December 28, 2002 and December 29, 2001,
was approximately $13.6 million and $13.7 million,
respectively. The company does not anticipate operating these
territories over the life of the lease as it intends to resell
these territories to new independent distributors. Therefore, no
liability is recorded on the Consolidated Balance Sheet at
December 28, 2002 and December 29, 2001 related to
this obligation.
F-21
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The company also had standby letters of credit
(LOCs) outstanding of $25.0 million at
December 28, 2002, which reduce the availability of funds
under our credit agreement. One of the LOCs outstanding of
$18.3 million supports one of the companys capital
lease obligations. This LOC does not represent an obligation in
excess of the amounts discussed below in capital leases. The
remaining LOCs of $6.7 million at December 28,
2002, are with certain insurance companies. None of the
LOCs are recorded as a liability on the Consolidated
Balance Sheet.
Assets recorded under capital lease agreements
included in property, plant and equipment consist of machinery
and equipment.
Aggregate maturities of debt outstanding,
including capital leases as of December 28, 2002, are as
follows (amounts in thousands):
Leases
The company leases certain property and equipment
under various operating and capital lease arrangements that
expire over the next 25 years. Most of the operating leases
provide the company with the option, after the initial lease
term, either to purchase the property at the then fair value or
renew its lease at the then fair value for periods from one
month to ten years. The capital leases provide the company with
the option to purchase the property at fair value at the end of
the lease term. The majority of the capital lease agreements
contain cross default provisions to restrictions under the
companys credit agreement. Future minimum lease payments
under scheduled leases that have initial or remaining
noncancelable terms in excess of one year are as follows
(amounts in thousands):
Rent expense for all operating leases amounted to
$27.4 million for fiscal 2002, $28.5 million for fiscal
2001 and $52.2 million for fiscal 2000.
F-22
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Guarantees and Indemnification
Obligations
Our company has provided various representations,
warranties and other standard indemnifications in various
agreements with customers, suppliers and other parties as well
as in agreements to sell business assets or lease facilities. In
general, these provisions indemnify the counterparty for matters
such as breaches of representations and warranties, certain
environmental conditions and tax matters, and, in the context of
sales of business assets, any liabilities arising prior to the
closing of the transactions. Non-performance under a contract
could trigger an obligation of the company. The ultimate effect
on future financial results is not subject to reasonable
estimation because considerable uncertainty exists as to the
final outcome of any potential claims. We do not believe that
any of these commitments will have a material effect on our
results of operations or financial condition. As of
December 28, 2002, the company does not have any accruals
for potential payments to be made for guarantees or
indemnification obligations included in any such agreements.
The carrying value of cash and cash equivalents,
accounts and notes receivable and short-term debt approximates
fair value, because of the short-term maturity of the
instruments. The fair value of the companys long-term debt
at December 28, 2002 approximates the recorded value due to
the variable nature of the stated interest rates. The fair value
of the companys outstanding derivative financial
instruments based on valuation models using quoted market prices
as of December 28, 2002 and December 29, 2001, was
$(7.6) million and $(8.7) million, respectively.
Note 13. Asset
Impairment and Unusual Charges
Fiscal 2002 Charges
Asset Impairment Charge.
In the fourth quarter of fiscal 2002,
the company recorded a non-cash asset impairment charge of
$26.5 million under SFAS 144. This charge consisted of
the following:
The impairment of Mrs. Smiths
Bakeries assets held and used was based on an analysis of
projected undiscounted cash flows, which were no longer deemed
adequate to support the carrying value of the fixed assets. This
analysis was performed at the completion of the seasonal frozen
pie season, which is typically during the Thanksgiving and
Christmas holiday season, or during the companys fourth
fiscal quarter. This is historically Mrs. Smiths
Bakeries peak business period of the year. During this
peak time in fiscal 2002, sales and operating earnings were well
below projections. Therefore, based upon these factors, the
analysis was performed at the end of fiscal 2002. As a result of
the analysis, these fixed assets were written down to their
estimated fair values, which were based primarily on values
identified in the negotiations with Schwan to sell certain
assets of the Mrs. Smiths Bakeries frozen
dessert business. At December 28, 2002, these fixed assets
did not meet the held for sale criteria of SFAS 144.
The impairment of systems costs represents the
net book value of certain enterprise-wide information system
(SAP) costs that were determined to be impaired as a
result of the fiscal 2002 internal operating segment
reorganization previously discussed in Note 1. In the
fourth quarter of fiscal 2002, the company
F-23
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
converted four former Mrs. Smiths
Bakeries production facilities from the SAP version used at
Mrs. Smiths Bakeries to the SAP version used at
Flowers Bakeries.
Fixed assets to be abandoned consist of certain
machinery and equipment that the company has decided will no
longer be used in production. As such, the impairment recorded
represents the full net book value of those assets.
Segment Reorganization Charge.
Effective July 14, 2002 (the
first day of the third quarter of fiscal 2002), the
companys two operating segments, Flowers Bakeries, and
Mrs. Smiths Bakeries, were restructured to form three
operating segments. These segments are Flowers Bakeries,
Mrs. Smiths Bakeries and Flowers Snack. Flowers Snack
consists of the snack business previously operated by
Mrs. Smiths Bakeries. The three operating segments
share certain administrative services, and, as a result, the
company eliminated approximately 70 positions and recorded a
charge of $1.3 million during the second quarter of fiscal 2002.
The charge consisted of $1.0 million in severance and $0.3
million in legal and other contract termination fees. During the
fourth quarter of fiscal 2002, a $0.2 million reduction was
recorded to this charge as a result of lower than anticipated
payments of contract termination fees.
Purchase Accounting Reserve
Adjustment.
During the first quarter
of fiscal 2002, Mrs. Smiths Bakeries recorded a $1.2
million adjustment to reduce certain exit cost liabilities
recorded in fiscal 1996 as a result of the purchase of
Mrs. Smiths Bakeries and subsequent closure of its
Pottstown, Pennsylvania production facility. This adjustment is
a result of more accurate information regarding medical and
workers compensation expenses.
Legal Settlement
Charge.
On March 25, 2002, in
Trans American Brokerage, Inc. 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 relating to
an alleged breach of a distributorship agreement. The company
recorded a $10.0 million charge ($6.2 million after tax) to 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 provides for the accrual of
interest until it is settled or paid. During the fifty-two weeks
ended December 28, 2002, the company recorded $0.7 million
in interest expense related to this award.
Fiscal 2001 Charges
Mrs. Smiths Bakeries Facility
Closing Charge.
During the fourth
quarter of fiscal 2001, Mrs. Smiths Bakeries recorded
an unusual charge of $2.6 million to close the Pembroke, North
Carolina production facility. The facility was closed in order
to consolidate production efforts. Production for this facility
was transferred to the Spartanburg, South Carolina and Stilwell,
Oklahoma facilities. This charge consisted of $2.0 million in
accelerated depreciation to write-off certain machinery and
equipment that was used in production during the fourth quarter
of fiscal 2001 but was planned for abandonment at December 29,
2001 and $0.6 million in severance for 172 employees and other
related exit costs of closing the facility. Additionally, costs
of moving equipment to the other production facilities and the
write-down of certain machine parts of $1.0 million were
expensed as incurred in materials, supplies, labor and other
production costs in fiscal 2001. This plan was completed in
fiscal 2001.
Flowers Bakeries Facility Closing
Charge.
During the second quarter of
fiscal 2001, Flowers Bakeries recorded an unusual charge of $3.1
million as a result of the decision to close its Memphis,
Tennessee production facility. In the fourth quarter of 2001, an
increase of $0.3 million was made to this charge as a result of
more accurate information regarding the fair value of certain
assets. The facility was closed in order to consolidate
production efforts in this geographical area. The area is served
from other production facilities. Severance costs of $1.4
million provided for the termination of 123 employees. Asset
impairment charges of
F-24
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1.0 million and $0.6 million, respectively, were
recorded to write-off certain fixed assets and reduce goodwill.
Additionally, other related exit costs of $0.4 million were
recorded. This plan was completed at the end of fiscal 2001.
Keebler Transaction.
In connection with the spin-off and merger transaction described
above, various separation and other contractual payments under
FIIs stock and incentive programs of $39.0 million were
paid to executive and non-executive officers and employees. Of
this amount, $5.7 million was accrued at March 26, 2001 and
$5.3 million was previously amortized to earnings prior to
March 26, 2001. Accordingly, in the first quarter of fiscal
2001, a charge of $28.0 million was recorded as an unusual
charge to the companys continuing operations, with a
corresponding credit to capital in excess of par value as a
result of the payments being settled from the proceeds of the
spin-off and merger transaction
Fiscal 2000 Charges
Mrs. Smiths Bakeries Asset
Impairment.
During the fourth quarter
of fiscal 2000, Mrs. Smiths Bakeries recorded an
asset impairment charge of $17.4 million representing the
impairment of goodwill and other identifiable intangible assets
relating to the
Pet-Ritz
and
Banquet
lines, both
of which were acquired in fiscal 1998. The impairment of these
intangible assets is a result of the companys decision to
discontinue certain products under the
Banquet
product
line and the decreased forecasted sales volumes for the
Pet-Ritz
and
Banquet
product lines.
Mrs. Smiths Bakeries Facility
Closing.
During the fourth quarter of
fiscal 2000, Mrs. Smiths Bakeries implemented a
plan to transfer production from its facility in Forest Park,
Georgia to an existing facility in Spartanburg, South Carolina.
This decision was made to take advantage of more highly
automated production capacities at the Spartanburg plant. As a
direct result, Mrs. Smiths Bakeries recorded a charge of
$1.5 million, which consisted of $1.0 million of non
cash asset impairments and $0.5 million of severance and
other employee costs. This plan was complete in fiscal 2001.
Flowers Bakeries Facility Closing.
During fiscal 2000, Flowers
Bakeries recorded a $1.2 million adjustment to the
fiscal 1998 restructuring reserve. This adjustment was the
result of Flowers Bakeries decision to reopen a closed
bakery located in Norfolk, Virginia in order to meet the demands
of our growing foodservice business. This bakery was operational
in the spring of fiscal 2001.
The company has continuing obligations in
connection with certain plant closings completed in the current
and prior fiscal years (primarily regarding payments on a
$27.6 million obligation associated with
Mrs. Smiths Bakeries noncancelable leased
equipment and facility and other ongoing exit costs recorded in
fiscal 1996). Activity with respect to these obligations is
as follows (amounts in thousands):
F-25
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 14. Insurance
Proceeds
The company maintains insurance for property
damage, mechanical breakdown, product liability, product
contamination and business interruption applicable to its
production facilities. During fiscal 1999,
Mrs. Smiths Bakeries incurred substantial costs
related to mechanical breakdown and product contamination at
certain plants. Mrs. Smiths Bakeries filed claims
under the companys insurance policies for a portion of
these costs that it believed to be insured.
Mrs. Smiths Bakeries recovered insurance proceeds of
$7.5 million and $17.2 million in fiscal 2001 and fiscal 2000,
respectively. The payments received in fiscal 2001 represented
the final settlement of this insurance claim.
Flowers Foods articles of incorporation
provide that its authorized capital consist of 100,000,000
shares of common stock having a par value of $.01 per share and
1,000,000 shares of preferred stock of which (a) 100,000
shares have been designated by the Board of Directors as
Series A Junior Participating Preferred Stock, having a par
value per share of $100 and (b) 900,000 shares of preferred
stock, having a par value per share of $.01, have not been
designated by the Board of Directors. No shares of preferred
stock have been issued by Flowers Foods.
Common
Stock
The holders of Flowers Foods common stock are
entitled to one vote for each share held of record on all
matters submitted to a vote of shareholders. Subject to
preferential rights of any issued and outstanding preferred
stock, including the Series A Preferred Stock, holders of
common stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors of the company
out of funds legally available. In the event of a liquidation,
dissolution or winding-up of the company, holders of common
stock are entitled to share ratably in all assets of the
company, if any, remaining after payment of liabilities and the
liquidation preferences of any issued and outstanding preferred
stock, including the Series A Preferred Stock. Holders of
common stock have no preemptive rights, no cumulative voting
rights and no rights to convert their shares of common stock
into any other securities of the company or any other person.
Preferred
Stock
The Board of Directors has the authority to issue
up to 1,000,000 shares of preferred stock in one or more series
and to fix the designations, relative powers, preferences,
rights, qualifications, limitations and restrictions of all
shares of each such series, including without limitation,
dividend rates, conversion rights, voting rights, redemption and
sinking fund provisions, liquidation preferences and the number
of shares constituting each such series, without any further
vote or action by the holders of Flowers Foods common stock.
Pursuant to such authority, the Board of Directors has
designated 100,000 shares of preferred stock as Series A
Junior Participating Preferred Stock in connection with the
adoption of the rights plan described below. Although the Board
of Directors does not presently intend to do so, it could issue
from the 900,000 undesignated preferred
F-26
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares, additional series of preferred stock,
with rights that could adversely affect the voting power and
other rights of holders of Flowers Foods common stock without
obtaining the approval of Flowers Foods shareholders. In
addition, the issuance of preferred shares could delay or
prevent a change in control of Flowers Foods without further
action by its shareholders.
Shareholder
Rights Plan
The Flowers Foods Board of Directors has approved
and adopted a shareholder rights plan that provides that one
right will be issued for each share of Flowers Foods common
stock held by shareholders of record on March 26, 2001.
Under the plan, the rights will initially trade together with
the common stock and will not be exercisable. In the absence of
further board action the rights generally will become
exercisable, and allow the holder to acquire additional common
stock, if a person or group acquires 15% or more of the
outstanding shares of Flowers Foods common stock. Rights held by
persons who exceed the applicable threshold will be void.
Flowers Foods Board of Directors may, at its option,
redeem all rights for $.01 per right generally at any time
prior to the rights becoming exercisable. The rights will expire
on March 26, 2011, unless earlier redeemed, exchanged or
amended by the Board of Directors.
On November 15, 2002, the Board of Directors
of Flowers Foods approved an amendment to the companys
shareholder rights plan allowing certain investors, including
existing investors and qualified institutional investors, to
beneficially own up to 20% of the companys outstanding
common stock without triggering the exercise provisions.
Stock
Repurchase Plan
On December 19, 2002, the Board of Directors
approved a plan that allows stock repurchases of up to
5.0 million shares of the companys common stock.
Under the plan, the company may repurchase its common stock in
open market or privately negotiated transactions at such times
and at such prices as determined to be in the companys
best interest. These purchases may be commenced or suspended
without prior notice depending on then-existing business or
market conditions and other factors. Any stock purchases made
under this plan will be subject to compliance with, or waiver
of, applicable limitations contained in the companys
credit facilities. As of December 28, 2002, the company had
not purchased any of its common stock under this plan.
Dividends
On November 15, 2002, the Board of Directors
declared a dividend of $0.05 per share on the
companys common stock payable on December 13, 2002,
to shareholders of record on November 29, 2002. On
February 21, 2003, the Board of Directors declared a
dividend of $0.05 per share on the companys common
stock to be paid on March 21, 2003 to shareholders of
record on March 7, 2003.
Effects
of Merger and Spin-off Transaction
On March 26, 2001, in conjunction with the
transactions described in Note 3, Flowers Foods issued one
share of its common stock for each five shares of FII common
stock outstanding. For accounting purposes, this has been
treated as a one for five reverse stock split. The split
resulted in the retirement of 80,658,248 shares of common
stock and is reflected in the December 30, 2000 financial
statements as a decrease of $62.6 million in common stock
at par value with a corresponding increase in capital in excess
of par value.
In addition to the transactions described in
Note 3, all FII treasury shares were cancelled. This
cancellation is reflected in the December 30, 2000
financial statements as a decrease in common stock at par value
of $0.3 million representing the par value of the treasury
shares. The remainder of $7.8 million
F-27
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
represents treasury shares at cost over par value
and is recorded as a decrease to retained earnings at
December 30, 2000.
Note 16. Stock
Based Compensation
Stock Incentive
Plans
Flowers Foods has one stock incentive plan that
authorizes the compensation committee of the Board of Directors
to grant to eligible employees and non-employee directors stock
options, restricted stock, deferred stock and performance stock
and performance units. The Flowers Foods, Inc. 2001 Equity and
Performance Incentive Plan (EPIP) is authorized to
grant to eligible employees and non-employee directors up to
3,000,000 shares of common stock. No option under this plan may
be exercised later than ten years after the date of grant.
Employee options generally become exercisable four years from
the date of grant and generally fully vest at that date or upon
a change in control of Flowers Foods. Non-employee options
generally become exercisable one year from the date of grant and
vest at that time.
There were no awards granted during fiscal 2002.
During fiscal 2001, non-qualified stock options
(NQSOs) to purchase 1,531,200 shares of Flowers
Foods common stock were granted to eligible employees. Pursuant
to the EPIP, the NQSOs vest at the end of four years and expire
ten years after the date of grant. Additionally, NQSOs to
purchase 135,000 shares of Flowers Foods common stock were
granted to non-employee directors. The optionees are required to
pay the market value, determined as of the grant date, which was
$14.22 on the grant date of April 6, 2001. As of
December 28, 2002, there were 1,605,600 NQSOs outstanding.
During fiscal 2002, the stock option activity
pursuant to the EPIP is set forth below:
As of December 28, 2002, all options
outstanding under the EPIP had an average exercise price of
$14.22 and a weighted average remaining contractual life of
8.4 years.
Because the company applies APB 25 in
accounting for the EPIP, and the option exercise price is the
market price of the companys common stock at the date of
grant, no compensation expense has been recognized for options
granted under the EPIP.
Stock
Appreciation Rights Plan
The company periodically awards stock
appreciation rights to certain key employees. These rights vest
over four years. The company is required to record compensation
expense for these rights on measurement dates based on changes
between the grant price and fair market value of the rights. In
fiscal 2002, the
F-28
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
company recorded a benefit of $0.2 million
as a result of a decrease in its stock price from fiscal 2001.
In fiscal 2001, the company recorded $1.4 million in
compensation expense related to these rights.
The company also allows non-employee directors to
convert their retainers and committee chairman fees into stock
appreciation rights. These rights vest after one year and can be
exercised over ten years. The company is required to recognize
compensation expense for these rights at a measurement date
based on changes between the grant price and fair market value
of the rights. During fiscal 2002 and 2001, the company did not
recognize any expense related to these rights because the
exercise price exceeded the fair market value.
Note 17. Comprehensive
Income
The company had other comprehensive losses
resulting from its accounting for derivative financial
instruments and additional minimum liability related to its
defined benefit pension plans. Total comprehensive income
(loss), determined as net income (loss) adjusted by other
comprehensive loss, was $(33.9) million, $(19.2) million
and $5.0 million for the fiscal years 2002, 2001 and 2000,
respectively.
During fiscal 2002 and fiscal 2001, changes to
accumulated other comprehensive income, net of tax, were as
follows:
For fiscal 2000, net income equaled comprehensive
income.
Note 18. Earnings
Per Share
Net (loss) income per share is calculated
using the weighted average number of common and common
equivalent shares outstanding during each period. The common
stock equivalents consists primarily of the
F-29
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
incremental shares associated with the
companys stock option plans. The following table sets
forth the computation of basic and diluted net income per share:
F-30
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock options to purchase 118,193 and 72,251
shares of common stock for fiscal 2001 and fiscal 2000,
respectively, were not included in the computation of diluted
earnings per share because their effect would have been
anti-dilutive.
Note 19. Postretirement
Plans
Defined Benefit Plans
The company has trusteed, noncontributory defined
benefit pension plans covering certain employees. The benefits
are based on the employees years of service and career
earnings. The plans are funded at amounts deductible for income
tax purposes but not less than the minimum funding required by
the Employee Retirement Income Security Act of 1974
(ERISA). As of December 28, 2002 and
December 29, 2001, the assets of the plans included
certificates of deposit, marketable equity securities, mutual
funds, corporate and government debt securities and annuity
contracts. The marketable equity securities include 547,209 and
547,209 shares of the companys common stock with a fair
value of approximately $10.7 million and $14.5 million
at December 28, 2002 and December 29, 2001,
respectively. In addition to the pension plans, the company also
has an unfunded supplemental retirement plan for certain highly
compensated employees. Benefits provided by this supplemental
plan are reduced by benefits provided under the defined benefit
pension plan.
The net periodic pension cost for the
companys plans include the following components:
The funding status and the amounts recognized in
the Consolidated Balance Sheet for the companys plans are
as follows:
F-31
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumptions used in accounting for the
companys plans at each of the respective period-ends are
as follows:
Additional Minimum Pension Liability
The companys pension plan assets have
declined due to the recent equity market weakness while pension
liabilities and benefit payments have continued to grow. The
value of the companys plan assets were below the
accumulated benefit obligation (ABO) at its
most recent plan measurement date. Accounting rules require
that, if the ABO exceeds the fair value of pension plan assets,
the employer must recognize a liability that is at least equal
to the unfunded ABO. In the fourth quarter of fiscal 2002, the
company recorded a minimum pension liability adjustment that
impacted other comprehensive income by $17.3 million, net of tax
of $10.8 million. Other comprehensive income captures certain
items excluded from net income, such as unrealized gains or
losses related to derivative financial instruments, as well as
additional minimum pension liabilities not yet recognized in the
Consolidated Statement of Income as part of net pension cost.
Postretirement Benefit Plan
The company provides certain medical and life
insurance benefits for eligible retired employees. The medical
plan covers eligible retirees under the active medical and
dental plans. The plan incorporates an up-front deductible,
coinsurance payments and employee contributions at COBRA premium
levels. Eligibility
F-32
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and maximum period of coverage is based on age
and length of service. The life insurance plan offers coverage
to a closed group of retirees.
The net periodic postretirement benefit expense
for the company includes the following components:
The unfunded status and the amounts recognized in
the Consolidated Balance Sheet for the companys
postretirement obligation are as follows:
F-33
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumptions used in accounting for the
companys postretirement plans that are not fully funded at
each of the respective period-ends are as follows:
Other Plans
The company contributes to various multiemployer,
union-administered defined benefit and defined contribution
pension plans. Benefits provided under the multiemployer pension
plans are generally based on years of service and employee age.
Expense under these plans was $0.5 million for fiscal 2002, $0.8
million for fiscal 2001 and $1.0 million for fiscal 2000.
The Flowers Foods 401(k) Retirement Savings Plan
covers substantially all of the companys non-union
employees who have completed certain service requirements.
Generally, the cost and contributions for those employees who
also participate in the defined benefit pension plan is 25% of
the first $400 contributed by the employee. Effective
April 1, 2001, the costs and contributions for employees
who do not participate in the defined benefit pension plan is 2%
of compensation and 50% of the employees contributions, up
to 6% of compensation. Prior to April 1, 2001, costs and
contributions for employees who do not participate in the
defined benefit plan were 2% of compensation and 25% of the
employees contributions, up to 6% of compensation. During
fiscal 2002, 2001 and 2000, the total cost and contributions
were $4.3 million, $3.9 million and $2.1 million, respectively.
Note 20. Income
Taxes
The companys provision for income taxes
consists of the following:
F-34
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) are comprised
of the following:
The deferred tax valuation allowance relates
primarily to state net operating losses. The net decrease in the
valuation allowance for deferred tax assets of $0.5 million is a
result of changes in the companys expected utilization of
separate company state net operating losses in the future.
Should the company determine at a later date that certain of
these losses which have been reserved for may be utilized, a
benefit may be recognized in the Consolidated Statement of
Income. Likewise, should the company determine at a later date
that certain of these net operating losses for which a deferred
tax asset has been recorded may not be utilized, a charge to the
Consolidated Statement of Income may be necessary.
The provision for income taxes differs from the
amount computed by applying the U.S. federal income tax rate
(35%) because of the effect of the following items:
The amount of federal net operating loss carried
forward is $118.4 million with expiration dates through fiscal
2020. The company expects to utilize the carryforwards prior to
their expiration. Various subsidiaries have state net operating
loss carryforwards of $366.5 million with expiration dates
through fiscal 2015. The utilization of these losses could be
limited in the future and the company has provided a valuation
allowance for this limitation as discussed above.
During fiscal 2000 and fiscal 2001, the company
was under examination by the Internal Revenue Service
(IRS) with respect to fiscal 2000, fiscal 1999 and
fiscal 1998, the twenty-seven weeks ended January 3,
F-35
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1998 and fiscal 1997. The company reached an
agreement with the IRS to settle the audit in fiscal 2001. As a
result of this agreement, the company was assessed $5.5 million
in taxes and interest. The results were reflected in the fiscal
2001 Consolidated Financial Statements. The significant issues
raised by the IRS did not have a material effect on the
Consolidated Statement of Income. In fiscal 2002, the company
applied for a refund of $8.3 million as a result of net
operating loss carryback claims. The taxes and interest assessed
in fiscal 2001 were applied against the refund request and the
company received the net amount as a refund in fiscal 2002.
Note 21. Contingencies
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, including the Trans American Brokerage litigation
described below, 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
provides for the accrual of interest until it is settled or
paid. During the fifty-two weeks ended December 28, 2002,
the company recorded $0.7 million in interest expense related to
this award.
On January 21, 2003, the District Court
confirmed the arbitrators final award. The District Court
also awarded TAB its attorneys fees in connection with the
court proceedings. The company has appealed the decision of the
District Court to the United States Court of Appeals for the
Third Circuit. In connection with the appeal, the company has
filed a supersedeas bond with the District Court in the amount
of $12.5 million in order to stay the execution of the judgment
by the plaintiff pending the outcome of the appeal. As of
December 28, 2002, the company had recorded a liability of
$11.4 million for this award.
Note 22. Segment
Reporting
At the end of fiscal 2002, the company had three
reportable segments, Flowers Bakeries, Mrs. Smiths
Bakeries and Flowers Snack. Flowers Bakeries produces breads and
rolls, Mrs. Smiths Bakeries produces baked desserts,
snacks, breads and rolls and Flowers Snack produces snacks. 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 an overall corporate cost or unusual and
F-36
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
not reflective of the segments core
operating businesses. Information regarding the operations in
these reportable segments is as follows :
F-37
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In fiscal 2003, upon the closing of the Schwan
transaction, the company will return to a two segment structure.
The existing Flowers Bakeries division will continue in its
present form except that the company expects to move the frozen
bun business of the Birmingham, Alabama facility to the Flowers
Foods Specialty Group. The existing Flowers Snack division will
absorb the frozen bread and roll business of
Mrs. Smiths Bakeries and become Flowers Foods
Specialty Group.
Note 23. Unaudited
Quarterly Financial Information
Results of operations for each of the four
quarters in the respective fiscal years are as follows (each
quarter represents a period of twelve weeks, except the first
quarter, which includes sixteen weeks):
F-38
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 24. Subsequent
Events
Sale of Mrs. Smiths Bakeries
Frozen Dessert Business.
On
January 30, 2003, the company entered into an agreement to
sell its Mrs. Smiths Bakeries frozen dessert business
to Schwan. A closing date for the transaction has not been
determined pending approval of the transaction by the Federal
Trade Commission and the satisfaction of all closing conditions.
Included in those assets are the Stilwell, Oklahoma and
Spartanburg, South Carolina production facilities and a portion
of the Suwanee, Georgia real estate. Subsequent to
December 28, 2002, the assets and liabilities related to
the portion of the Mrs. Smiths Bakeries business to
be sold have been classified as held for sale in accordance with
SFAS 144 and recorded at estimable fair value less costs to
dispose. As such, in the first quarter of fiscal 2003, the
operations of the Mrs. Smiths Bakeries frozen dessert
business will be reported as a discontinued operation.
Acquisition.
On
December 30, 2002, 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.
Dividend.
On
February 21, 2003, the Board of Directors declared a
dividend of $0.05 per share on the companys common stock
to be paid on March 21, 2003 to shareholders of record on
March 7, 2003.
F-39
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To the Board of Directors
Our audits of the consolidated financial
statements referred to in our report dated February 21,
2003 also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. In our
opinion, the financial statement schedule presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements.
Atlanta, Georgia
Table of Contents
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For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands,
except per share amounts)
$
(16,955
)
$
(14,293
)
$
5,045
(1,956
)
(1,886
)
$
(18,911
)
$
(16,179
)
$
5,045
(0.57
)
(0.48
)
0.17
(0.63
)
(0.54
)
0.17
(0.56
)
(0.48
)
0.17
(0.62
)
(0.54
)
0.17
Table of Contents
Table of Contents
Table of Contents
$
(51,282
)
10,800
$
(40,482
)
$
32,374
11,480
4,861
2,567
$
51,282
Flowers
Mrs. Smiths
Flowers
Bakeries
Bakeries
Snack
Total
(Amounts in thousands)
$
53,029
$
26,059
$
887
$
79,975
333
(1,189
)
(856
)
(24,870
)
(24,870
)
$
53,362
$
$
887
$
54,249
Table of Contents
December 28,
December 29,
2002
2001
(Amounts in thousands)
$
29,538
$
29,538
903
903
4,305
3,237
6,540
8,056
2,287
2,567
999
1,404
$
44,572
$
45,705
Table of Contents
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
6,123
$
(18,243
)
$
5,045
2,136
2,310
610
783
$
6,123
$
(15,497
)
$
8,138
$
0.20
$
(0.61
)
$
0.17
0.07
0.08
0.02
0.03
$
0.20
$
(0.52
)
$
0.28
$
0.20
$
(0.61
)
$
0.17
0.07
0.08
0.02
0.03
$
0.20
$
(0.52
)
$
0.28
$
(16,955
)
$
(14,293
)
$
5,045
2,136
2,310
610
783
$
(16,955
)
$
(11,547
)
$
8,138
$
(0.57
)
$
(0.48
)
$
0.17
0.07
0.08
0.02
0.03
$
(0.57
)
$
(0.39
)
$
0.28
Table of Contents
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
(0.56
)
$
(0.48
)
$
0.17
0.07
0.08
0.02
0.03
$
(0.56
)
$
(0.39
)
$
0.28
Table of Contents
Dr./(Cr.)
$
(454
)
6,283
5,829
(2,332
)
$
3,497
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Table of Contents
December 28,
December 29,
2002
2001
(Amounts in thousands)
$
27,533
$
26,659
453
739
2,793
2,967
8,594
7,042
16,098
12,708
4,039
1,946
11,375
10,000
19,060
19,695
$
89,945
$
81,756
Interest
Rate at
December 28,
Final
December 28,
December 29,
2002
Maturity
2002
2001
(Amounts in thousands)
4.45%
2007
$
180,258
$
189,250
3.90%
2008
56,887
60,389
5.98%
2013
13,219
8,066
250,364
257,705
27,231
15,648
$
223,133
$
242,057
Table of Contents
Table of Contents
$
27,231
27,933
62,811
59,149
38,823
34,417
$
250,364
Capital Leases
Operating Leases
$
7,739
$
19,166
7,068
16,231
7,081
14,965
6,984
10,984
6,616
7,944
33,183
29,642
68,671
$
98,932
11,784
56,887
5,817
$
51,070
Table of Contents
Note 12.
Fair Value of Financial Instruments
Mrs. Smiths
Flowers Bakeries
Bakeries
Flowers Snack
Total
(Amounts in millions)
$
$
20.7
$
$
20.7
0.3
1.2
1.5
3.7
0.6
4.3
$
0.3
$
24.4
$
1.8
$
26.5
Table of Contents
Table of Contents
Balance at
Balance at
December 29,
December 28,
2001
Provision
Adjustments
Spending
2002
$
13,489
$
$
$
(3,294
)
$
10,195
239
963
(665
)
537
2,673
148
(1,189
)
(511
)
1,121
$
16,401
$
1,111
$
(1,189
)
$
(4,470
)
$
11,853
Table of Contents
Balance at
Balance at
December 30,
Non-Cash
December 29,
2000
Provision
Reductions
Spending
2001
$
16,801
$
160
$
$
(3,472
)
$
13,489
1,652
(1,413
)
239
3,471
(3,471
)
2,555
640
(522
)
2,673
$
19,356
$
5,923
$
(3,471
)
$
(5,407
)
$
16,401
Note 15.
Stockholders Equity
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Table of Contents
For the 52 Weeks Ended
December 28, 2002
Weighted Average
Options
Exercise Price
(Amounts in thousands,
except per share data)
1,666
$
14.22
(15
)
$
14.22
(45
)
$
14.22
1,606
$
14.22
120
$
14.22
Table of Contents
2002
2001
(Amounts in
thousands)
$
4,904
$
3,497
297
(85
)
(255
)
(3,685
)
(397
)
5,177
17,285
$
21,834
$
4,904
Table of Contents
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands, except per share
data)
$
6,123
$
(18,243
)
$
(42,282
)
47,327
3,950
(23,078
)
$
(16,955
)
$
(14,293
)
$
5,045
29,836
29,798
30,036
691
1
30,528
29,798
30,036
$
0.20
$
(0.61
)
$
(1.41
)
1.58
0.13
(0.77
)
$
(0.57
)
$
(0.48
)
$
0.17
$
0.20
$
(0.61
)
$
(1.41
)
1.58
0.13
(0.76
)
$
(0.56
)
$
(0.48
)
$
0.17
Table of Contents
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
6,508
$
6,905
$
6,988
14,399
13,857
12,909
(14,218
)
(14,791
)
(13,565
)
(792
)
(841
)
(841
)
47
47
48
(149
)
(25
)
$
5,944
$
5,028
$
5,514
December 28,
December 29,
2002
2001
(Amounts in thousands)
$
189,708
$
170,065
6,508
6,905
14,399
13,857
184
19,083
7,475
(9,222
)
(8,594
)
220,660
189,708
Table of Contents
December 28,
December 29,
2002
2001
(Amounts in thousands)
159,406
168,049
(8,645
)
(2,545
)
6,200
2,496
(9,222
)
(8,594
)
147,739
159,406
(72,921
)
(30,302
)
48,613
6,667
476
339
2
(790
)
(23,830
)
(24,086
)
242
229
(24,072
)
(24,315
)
(28,584
)
478
28,106
$
(23,830
)
$
(24,086
)
December 28,
December 29,
December 30,
2002
2001
2000
9/30/2002
9/30/2001
9/30/2000
6.75%
7.50%
8.00%
9.00%
9.00%
9.00%
4.25%
5.00%
5.50%
Table of Contents
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
191
$
176
$
181
341
341
299
389
388
389
(5
)
(10
)
$
916
$
895
$
869
December 28,
December 29,
2002
2001
(Amounts in thousands)
$
4,514
$
4,226
191
176
341
341
301
332
(704
)
64
(524
)
(625
)
$
4,119
$
4,514
223
293
301
332
(524
)
(625
)
(4,119
)
(4,514
)
(868
)
(169
)
2,915
3,303
(2,072
)
(1,380
)
(2,072
)
(1,380
)
$
(2,072
)
$
(1,380
)
Table of Contents
December 28,
December 29,
December 30,
2002
2001
2000
9/30/2002
9/30/2001
9/30/2000
6.75%
7.50%
8.00%
N/A
N/A
N/A
N/A
N/A
N/A
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
$
$
1,703
(641
)
2,871
1,703
(641
)
2,871
$
4,452
$
(5,998
)
$
(18,131
)
(1,562
)
(1,498
)
(1,197
)
2,890
(7,496
)
(19,328
)
$
4,593
$
(8,137
)
$
(16,457
)
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December 28,
December 29,
2002
2001
(Amounts in thousands)
$
6,038
$
4,998
24,935
12,491
10,970
15,255
7,050
6,205
53,695
61,389
6,943
6,660
6,501
8,848
(7,846
)
(8,298
)
108,286
107,548
(82,350
)
(82,848
)
(3,669
)
(8,616
)
(86,019
)
(91,464
)
$
22,267
$
16,084
For the 52 Weeks Ended
?
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
3,751
$
(9,233
)
$
(20,558
)
974
(3,126
)
(1,528
)
(452
)
1,551
3,735
1,191
468
981
1,455
320
499
(29
)
$
4,593
$
(8,137
)
$
(16,457
)
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For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
1,066,674
$
1,055,867
$
1,016,235
463,861
454,248
443,924
175,704
178,697
165,145
(28,635
)
(34,766
)
(36,791
)
(25,442
)
(27,042
)
(25,634
)
$
1,652,162
$
1,627,004
$
1,562,879
$
45,158
$
46,830
$
39,711
23,024
22,157
20,781
5,593
4,640
6,124
190
188
486
$
73,965
$
73,815
$
67,102
$
337
$
11,653
$
(1,154
)
25,479
17,393
18,858
1,795
1,727
13,125
$
27,611
$
43,898
$
17,704
$
(7,473
)
$
(17,193
)
$
87,563
$
72,015
$
63,911
(18,108
)
(17,459
)
(35,142
)
11,132
12,390
6,118
(25,779
)
(24,713
)
(24,742
)
0
7,473
17,193
(27,611
)
(43,898
)
(17,704
)
$
27,197
$
5,808
$
9,634
$
16,481
$
32,188
$
68,373
$
10,716
$
(26,380
)
$
(58,739
)
Table of Contents
For the 52 Weeks Ended
December 28,
December 29,
December 30,
2002
2001
2000
(Amounts in thousands)
$
27,406
$
24,888
$
19,476
17,984
23,065
17,726
3,118
1,549
2,696
303
12
27
$
48,811
$
49,514
$
39,925
December 28,
December 29,
2002
2001
$
597,815
$
600,557
333,743
378,701
62,466
64,723
102,356
55,710
$
1,096,380
$
1,099,691
(1)
Reflects reclassification required by EITF 01-09
as described in Note 2.
(2)
Represents Flowers Foods corporate head
office amounts.
(3)
Represents Flowers Foods corporate head
office assets including primarily, cash and cash equivalents,
deferred taxes and deferred financing costs
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(Amounts in thousands, except per share data)
2002
$
463,613
$
378,340
$
389,839
$
420,370
2001
$
466,015
$
368,461
$
385,699
$
406,829
2002
$
214,532
$
174,508
$
177,904
$
174,849
2001
$
212,523
$
172,466
$
180,172
$
173,019
Table of Contents
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(Amounts in thousands, except per share data)
2002
$
1,723
$
6,049
$
8,203
$
(9,852
)
2001
$
(25,681
)
$
3,702
$
8,476
$
(4,740
)
2002
2001
$
5,000
$
(1,050
)
2002
$
(23,078
)
2001
2002
$
(21,355
)
$
6,049
$
8,203
$
(9,852
)
2001
$
(20,681
)
$
3,702
$
8,476
$
(5,790
)
2002
$
(0.72
)
$
0.20
$
0.28
$
(0.33
)
2001
$
(0.69
)
$
0.12
$
0.28
$
(0.19
)
2002
$
(0.69
)
$
0.20
$
0.27
$
(0.34
)
2001
$
(0.69
)
$
0.12
$
0.28
$
(0.19
)
(1)
Reflects reclassifications required by EITF 01-09
described in Note 2.
Table of Contents
/s/ PricewaterhouseCoopers LLP
Table of Contents
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Those valuation and qualifying accounts which are
deducted in the balance sheet from the assets to which they
apply:
Beginning
Additions Charged
Ending
Balance
to Expenses
Deductions
Balance
(Amounts in thousands)
$
1,271
3,152
2,948
$
1,475
$
1,896
3,077
3,230
$
1,743
$
8,298
452
$
7,846
$
1,261
3,910
3,900
$
1,271
$
3,146
3,709
4,959
$
1,896
$
6,747
1,551
$
8,298
$
3,955
3,353
6,047
$
1,261
$
6,312
2,558
5,724
$
3,146
$
3,012
3,735
$
6,747
[CONFORMED AS EXECUTED]
EXHIBIT 10.11
FIRST AMENDMENT
FIRST AMENDMENT (this "Amendment"), dated as of May 10, 2001, among FLOWERS FOODS, INC., a Georgia corporation (the "Borrower"), the Lenders party to the Credit Agreement referred to below (the "Lenders"), SUNTRUST BANK, as syndication agent (the "Syndication Agent"), and BANKERS TRUST COMPANY, as administrative agent (the "Administrative Agent" and, together with the Syndication Agent, the "Agents" and each, an "Agent"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the Credit Agreement referred to below.
WHEREAS, the Borrower, the Lenders and the Agents are parties to the Credit Agreement, dated as of March 26, 2001 (as amended, modified, restated and/or supplemented through, but not including, the date hereof, the "Credit Agreement");
WHEREAS, the Borrower has requested, and the Agents and the Lenders have agreed to, the amendments and waivers provided herein on the terms and conditions set forth herein;
NOW, THEREFORE, it is agreed:
I. Amendments to the Credit Agreement
1. Section 11 of the Credit Agreement is hereby amended by inserting in the definition of "Consolidated EBITDA" appearing therein the following new clause (w) immediately preceding clause (x) thereto:
"(w) change of control and severance payments made in cash on the Initial Borrowing Date by the Borrower and its Subsidiaries in connection with the Transaction, solely to the extent such payments are deducted in the calculation of Consolidated Net Income for such period,".
2. Section 11 of the Credit Agreement is hereby further amended by
amending the definition of "Applicable Margin" appearing therein by (x) deleting
(i) the reference to "2.00%" appearing in clause (ii)(x) thereof and inserting a
reference to "1.75%" in lieu thereof and (ii) the reference to "3.00%" appearing
in clause (ii)(y) thereof and inserting a reference to "2.75%" in lieu thereof
and (y) deleting (i) each reference to "3.00%" appearing in the column entitled
"B Term Loans maintained as Eurodollar Loans" appearing in the table set forth
therein and inserting references to "2.75%" in lieu thereof and (ii) each
reference to
"2.00%" appearing in the column entitled "B Term Loans maintained as Base Rate Loans" appearing in the table set forth therein and inserting references to "1.75%" in lieu thereof.
It is understood and agreed that the amendments contained in this
Section 2 shall be effective as of the First Amendment Effective Date and that
interest accruing in respect of B Term Loans prior to the First Amendment
Effective Date shall accrue in accordance with the terms of the Credit Agreement
prior to giving effect to this Amendment.
3. Section 9.07(a) of the Credit Agreement is hereby amended by inserting the text ", but, in any event, shall not include Capital Expenditures relating to the purchase of equipment under operating leases made on the Initial Borrowing Date and constituting part of the Transaction" immediately preceding the period at the end thereof.
4. Section 13.12(a) of the Credit Agreement is hereby amended by deleting the reference to "Section 13.19(b)" appearing in clause (x) thereof and inserting a reference to "Section 13.19(c)" in lieu thereof.
II. Waivers to the Credit Agreement
1. The Lenders hereby (i) agree to extend the time for completion of the post-closing items specified on Schedule IX to the Credit Agreement to June 4, 2001 and (ii) waive any Default or Event of Default that has arisen pursuant to Section 13.18 of the Credit Agreement solely as a result of the non-completion of the actions described on Schedule IX to the Credit Agreement prior to the date of this Amendment, it being understood that such waiver shall be in effect only until June 4, 2001, at which time any failure to comply with the requirements of said Section 13.18 shall become an immediate Event of Default.
III. Miscellaneous
1. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document.
2. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent.
3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
4. This Amendment shall become effective on the date (the "First Amendment Effective Date") when the Borrower and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered
(including by way of facsimile transmission) the same to the Administrative Agent at the Notice Office.
5. In order to induce the Lenders to enter into this Amendment, the Borrower hereby represents and warrants that (i) no Default or Event of Default exists as of the First Amendment Effective Date, after giving effect to this Amendment, and (ii) on the First Amendment Effective Date, after giving effect to this Amendment, all representations and warranties contained in the Credit Agreement and in the other Credit Documents are true and correct in all material respects (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be true and correct in all material respects only as of such specified date).
6. From and after the First Amendment Effective Date, all references in the Credit Agreement and each of the Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as modified hereby. This Amendment shall constitute a Credit Document for all purposes under the Credit Agreement and the other Credit Documents.
* * *
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written.
FLOWERS FOODS, INC.
By: /s/ Thomas B. Jones, Jr. -------------------------------------- Title: Treasurer |
BANKERS TRUST COMPANY,
Individually and as Administrative
Agent
By: /s/ Scottye D. Lindsey -------------------------------------- Title: Vice President |
SUNTRUST BANK, Individually and as Syndication Agent
By: /s/ Michael Pugsley -------------------------------------- Title: Vice President |
[CONFORMED AS EXECUTED]
EXHIBIT 10.12
SECOND AMENDMENT
SECOND AMENDMENT (this "Amendment"), dated as of June 15, 2001, among FLOWERS FOODS, INC., a Georgia corporation (the "Borrower"), the Lenders party to the Credit Agreement referred to below (the "Lenders"), SUNTRUST BANK, as syndication agent (the "Syndication Agent"), and BANKERS TRUST COMPANY, as administrative agent (the "Administrative Agent" and, together with the Syndication Agent, the "Agents" and each, an "Agent"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the Credit Agreement referred to below.
WHEREAS, the Borrower, the Lenders and the Agents are parties to the Credit Agreement, dated as of March 26, 2001 (as amended, modified, restated and/or supplemented through, but not including, the date hereof, the "Credit Agreement");
WHEREAS, the Borrower has requested, and the Agents and the Lenders have agreed to, the amendments and waivers provided herein on the terms and conditions set forth herein;
NOW, THEREFORE, it is agreed:
1. Section 11 of the Credit Agreement is hereby amended by amending the definition of "Test Period" appearing therein by (i) deleting the first reference to "April 1, 2002" appearing therein and inserting a reference to "July 1, 2002" in lieu thereof and (ii) deleting the first reference to "March 31, 2001" appearing therein and inserting a reference to "June 30, 2001" in lieu thereof.
2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the "Second Amendment Effective Date") when the Borrower and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at the Notice Office.
6. In order to induce the Lenders to enter into this Amendment, the Borrower hereby represents and warrants that (i) no Default or Event of Default exists as of the Second Amendment Effective Date, after giving effect to this Amendment, and (ii) on the Second Amendment Effective Date, after giving effect to this Amendment, all representations and warranties contained in the Credit Agreement and in the other Credit Documents are true and correct in all material respects (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be true and correct in all material respects only as of such specified date).
7. From and after the Second Amendment Effective Date, all references in the Credit Agreement and each of the Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as modified hereby. This Amendment shall constitute a Credit Document for all purposes under the Credit Agreement and the other Credit Documents.
* * *
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written.
FLOWERS FOODS, INC.
By: /s/ Thomas B. Jones, Jr. ------------------------------------- Title: Treasurer |
BANKERS TRUST COMPANY, Individually and as Administrative Agent
By: /s/ Scottye D. Lindsey ------------------------------------- Title: Vice President |
SUNTRUST BANK, Individually and as Syndication Agent
By: /s/ Michael Pugsley ------------------------------------- Title: Vice President |
AG FIRST FARM CREDIT BANK
By: /s/ John W. Burnside, Jr. ------------------------------------- Title: Vice President |
LANDMARK CDO LIMITED
By: Aladdin Asset Management LLC
as Manager
By: /s/ T. Eggoschasik ------------------------------------- Title: Vice President |
ALLIED IRISH BANKS, P.L.C.
By: /s/ Rima Terradista ------------------------------------- Title: Vice President |
ALLSTATE LIFE INSURANCE COMPANY
ARES LEVERAGED INVESTMENT FUND II, L.P.
By: Ares Management II L.P.
its General Partner
By: /s/ David Sail ------------------------------------- Title: Unknown |
ARES IV CLO, LTD.
By: ARES CLO Management IV, L.P.,
as Investment Manager
By: ARES CLO GP IV, LLC,
its Investment Manager
By: /s/ David Sail ------------------------------------- Title: Unknown |
BAVARIA TRR CORPORATION
GRAYSTON CLO 2001-1 LTD.
By: Bear Streans Asset Management,
Inc. as its Collateral Manager
BANK HAPOALIM B.M.
THE BANK OF NOVA SCOTIA
By: /s/ William E. Zarrett ------------------------------------- Title: Managing Director |
CHEVY CHASE FEDERAL SAVINGS BANK
By: /s/ Carlos L. Heard ------------------------------------- Title: Assistant Vice President |
ELT LTD.
COBANK
By: /s/ Brian J. Klatt ------------------------------------- Title: Vice President |
CREDIT LYONNAIS
EATON VANCE CDO III
By: Eaton Vance Management,
as Investment Advisor
EATON VANCE CDO IV
By: Eaton Vance Management,
as Investment Advisor
EATON VANCE CDO V
By: Eaton Vance Management,
as Investment Advisor
Title:
EATON VANCE SENIOR INCOME TRUST
By: Eaton Vance Management,
as Investment Advisor
EATON VANCE GRAYSON & CO.
By: Boston Management and Research,
as Investment Advisor
SENIOR DEBT PORTFOLIO
By: Boston Management and Research
as Investment Advisor
FARM CREDIT BANK OF WICHITA
By: /s/ Patrick Zeka ------------------------------------- Title: Assistant Vice President |
FARM CREDIT SERVICES OF AMERICA
By: /s/ Bruce P. Rouse ------------------------------------- Title: Vice President |
FLAGSHIP CLO-2001-1
By: /s/ James T. Anderson ------------------------------------- Title: Managing Director |
FRANKLIN CLO II, LTD.
FRANKLIN FLOAT RATE MASTER SERIES
FRANKLIN FLOATING RATE DAILY ACCESS FUND
APEX (IDM) CDO I, LTD.
By: /s/ John W. Stelwagon ------------------------------------- Title: Managing Director |
FIRST UNION NATIONAL BANK
By: /s/ Charles B. Edmondson ------------------------------------- Title: Vice President |
HARCH CLO I LIMITED
By: /s/ Michael E. Lewitt ------------------------------------- Title: Authorized Signatory |
HARRIS TRUST AND SAVINGS BANK
By: /s/ William R. Corya ------------------------------------- Title: Vice President |
THE INDUSTRIAL BANK OF JAPAN, LTD.
By: /s/ James W. Masters ------------------------------------- Title: Senior Vice President |
RIVIERA FUNDING LLC
By: /s/ Ann E. Morris ------------------------------------- Title: Assistant Vice President |
FLEET NATIONAL BANK
As Trust Administrator For Long Lane
Master Trust IV
THE MITSUBISHI TRUST AND BANKING
CORPORATION
NATEXIS BANQUE POPULARIES
NUVEEN FLOATING RATE FUND |
By: Nuveen senior Loan Asset
Management, Inc.
By: /s/ Lisa M. Mincheski ------------------------------------- Title: Managing Director |
NUVEEN FLOATING RATE FUND
By: Nuveen senior Loan Asset
Management, Inc.
By: /s/ Lisa M. Mincheski ------------------------------------- Title: Managing Director |
OAK HILL CLO MANAGEMENT I, LLC
as Investment Manager for Oak Hill
Credit Partners I, Limited
By: /s/ Scott D. Krase ------------------------------------- Title: Authorized Signatory |
OAK HILL SECURITIES FUND, L.P.
By: Oak Hill Securities GenPar, L.P.
its General Partner
By: Oak Hill Securities MGP, Inc.,
its General Partner
By: /s/ Scott D. Krase ------------------------------------- Title: Vice President |
OAK HILL SECURITIES FUND II, L.P.
By: Oak Hill Securities GenPar II,
L.P. its General Partner
By: Oak Hill Securities MGP II, Inc.,
its General Partner
By: /s/ Scott D. Krase ------------------------------------- Title: Vice President |
OPPENHEIMER SENIOR FLOATING RATE FUND
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments Inc.,
as its Investment Manager
PILGRIM SENIOR INCOME FUND
By: Pilgrim Investments, Inc.,
as its investment manager
KZH LANGDALE LLC
By: /s/ Virginia Conway ------------------------------------- Title: Authorized Agent |
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. RABOBANK
INTERNATIONAL NEW YORK BRANCH
By: /s/ Juliana Sagona Long ------------------------------------- Title: Vice President By: /s/ James S. Cunningham ------------------------------------- Title: Managing Director Chief Risk Manager |
REGIONS BANK
By: /s/ James Schmalz ------------------------------------- Title: Vice President |
SANKATY HIGH YIELD PARTNER II, LP
By: /s/ Tim Barns ------------------------------------- Title: Vice President |
SANKATY HIGH YIELD PARTNER III, LP
By: /s/ Tim Barns ------------------------------------- Title: Vice President |
Sankaty Advisors, Inc. as Collateral Manager for GREAT POINT CLO 1999-1 LTD, as Term Lender
By: /s/ Tim Barns ------------------------------------- Title: Vice President |
STANFIELD CLO, LTD.
By: Stanfield Capital Partners LLC
as its Collateral Manager
By: /s/ Christopher A. Bondy ------------------------------------- Title: Partner |
STANFIELD ARBITRAGE CDO, LTD.
By: Stanfield Capital Partners LLC
as its Collateral Manager
By: /s/ Christopher A. Bondy ------------------------------------- Title: Partner |
STEIN ROE FLOATING RATE LIMITED
LIABILITY COMPANY
LIBERTY - STEIN ROE ADVISOR FLOATING RATE
ADVANTAGE FUND
By: Stein Roe & Farnham Incorporated
as Advisor
SRF TRADING, INC.
STEIN ROE - SRF 2000 LLC
STEIN ROE & FARNHAM CLO I LTD.
THE SUMITOMO TRUST & BANKING CO, LTD.
THERMOPYLAE FUNDING CORP.
TORONTO DOMINION (NEW YORK), INC.
TRANSAMERICA BUSINESS CREDIT
COLUMBUS LOAN FUNDING LTD.
By: Travelers Asset Management
International Company, LLC
By: /s/ Tesresa M. Torrey ------------------------------------- Title: Second Vice President |
TRAVELERS CORPORATE LOAN FUND, INC.
By: Travelers Asset Management
International Company, LLC
By: /s/ Tesresa M. Torrey ------------------------------------- Title: Second Vice President |
THE TRAVELERS INSURANCE COMPANY
By: /s/ Tesresa M. Torrey ------------------------------------- Title: Second Vice President |
TRYON CLO LTD. 2000-1
By: /s/ John W. Stelwagon ------------------------------------- Title: Managing Director |
TYLER TRADING, INC.
By: /s/ Johnny E. Graves ------------------------------------- Title: President |
[CONFORMED AS EXECUTED]
EXHIBIT 10.13
THIRD AMENDMENT, WAIVER AND CONSENT
THIRD AMENDMENT, WAIVER AND CONSENT (this "Amendment"), dated as of February 21, 2003, among FLOWERS FOODS, INC., a Georgia corporation (the "Borrower"), the Lenders party to the Credit Agreement referred to below (the "Lenders"), SUNTRUST BANK, as syndication agent (the "Syndication Agent"), and DEUTSCHE BANK TRUST COMPANY AMERICAS (f/k/a Bankers Trust Company), as administrative agent (the "Administrative Agent" and, together with the Syndication Agent, the "Agents" and each, an "Agent"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the Credit Agreement referred to below.
WHEREAS, the Borrower, the Lenders and the Agents are parties to the Credit Agreement, dated as of March 26, 2001 (as amended, modified, restated and/or supplemented through, but not including, the date hereof, the "Credit Agreement");
WHEREAS, the Borrower has entered into an agreement whereby it will cause Mrs. Smith's Bakeries, LLC ("Mrs. Smith's"), Mrs. Smith's Bakeries of Stillwell, LLC, Mrs. Smith's Bakeries of Spartanburg, LLC, Mrs. Smith's Brands, Inc., Mrs. Smith's Bakeries Sales Support Group, LLC, Mrs. Smith's Bakeries Frozen Distributors, LLC, Flowers Snack of Crossville, LLC, Mrs. Smith's Foil Company, LLC and Flowers Snack of London, LLC (collectively, the "Selling Subsidiaries"), to sell (such sale, the "Mrs. Smith's Sale") each of their Businesses (as defined in the Mrs. Smith's Asset Purchase Agreement (as defined below)) and assets to The Schwan Food Company ("Schwan") pursuant to the terms of that certain Asset Purchase Agreement, dated as of January 29, 2003, among the Borrower, Mrs. Smith's and Schwan (as in effect on the Third Amendment Effective Date (as defined below), the "Mrs. Smith's Asset Purchase Agreement"); and
WHEREAS, the Borrower has requested, and the Agents and the Lenders are willing to grant (subject to the terms and conditions hereof), a consent to permit the Mrs. Smith's Sale, and the parties hereto have further agreed to amend and waive certain provisions of the Credit Agreement as set forth herein;
NOW, THEREFORE, it is agreed:
1. The Lenders hereby waive any Default or Event of Default that may
have arisen solely as a result of the Borrower's failure to comply with (x)
Section 9.02(xi) of the Credit Agreement in connection with the execution of the
Mrs. Smith's Asset Purchase Agreement (as defined below), (y) Sections 9.08 and
9.09 of the Credit Agreement for each of the Test Periods ended closest to March
31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, solely to the
extent such Default or Event of Default would not have
occurred had the amendment set forth in Section 14 of this Amendment been in effect prior to the end of such periods and (z) Section 9.10 of the Credit Agreement for the period commencing March 31, 2002 and ending on the Third Amendment Effective Date, solely to the extent such Default or Event of Default would not have occurred had the amendment set forth in Section 14 of this Amendment been in effect prior to the end of such periods.
2. Notwithstanding anything to the contrary contained in the Credit
Agreement, the Lenders hereby consent to the Mrs. Smith's Sale on the terms and
conditions set forth in the Mrs. Smith's Asset Purchase Agreement, so long as
(i) no Default or Event of Default exists at the time of consummation of the
Mrs. Smith's Sale or would result therefrom, (ii) the Administrative Agent shall
have received on or prior to the date of the consummation of the Mrs. Smith's
Sale a certificate from an Authorized Representative of the Borrower certifying
(x) as to the total amount of Mrs. Smith's Net Asset Sale Proceeds to be
received therefrom by the Borrower and its Subsidiaries on the closing date of
the Mrs. Smith's Sale (the "Mrs. Smith's Closing Date"), (y) that the preceding
clause (i) of this Section 2 shall be true and correct as of the Mrs. Smith's
Closing Date and (z) that the total amount of Mrs. Smith's Net Asset Sale
Proceeds received by the Borrower and its Subsidiaries therefrom shall be
applied in accordance with the following clause (iii) of this Section 2, (iii)
100% of the Mrs. Smith's Net Asset Sale Proceeds received by the Borrower and
its Subsidiaries therefrom are applied upon receipt by the Borrower and/or such
Subsidiary (A) first, pro rata to each Tranche of Term Loans based upon the then
outstanding principal amount of A Term Loans and B Term Loans until all
outstanding Term Loans have been repaid in full (it being understood and agreed
that the provisions of Section 4.02(k) of the Credit Agreement shall not apply
to any such repayment pursuant to this clause (A)), (B) second, to the extent
that Mrs. Smith's Net Asset Sale Proceeds received by the Borrower and its
Subsidiaries remain after the repayment referred to in the preceding clause (A),
to repay outstanding Swingline Loans (with no corresponding reduction to the
Total Revolving Loan Commitment) and (C) third, to the extent that Mrs. Smith's
Net Asset Sale Proceeds received by the Borrower and its Subsidiaries remain
after the repayments referred to in the preceding clauses (A) and (B), to repay
outstanding Revolving Loans (with no corresponding reduction to the Total
Revolving Loan Commitment), and (iv) any amendments and/or modifications to the
Mrs. Smith's Asset Purchase Agreement after the Third Amendment Effective Date
are reasonably satisfactory to the Administrative Agent. In addition, (I) it is
acknowledged and agreed that no portion of the Mrs. Smith's Net Asset Sale
Proceeds received by the Borrower and its Subsidiaries from the Mrs. Smith's
Sale shall be permitted to be reinvested pursuant to Section 4.02(e) of the
Credit Agreement until such time as all Term Loans, Swingline Loans and
Revolving Loans outstanding on the date of the receipt of any such Mrs. Smith's
Net Asset Sale Proceeds have been repaid in full, (II) the consummation of the
Mrs. Smith's Sale shall not reduce the amount of asset sales permitted to be
made pursuant to Section 9.02(i) of the Credit Agreement and (III)
notwithstanding anything to the contrary contained in Section 9.11 of the Credit
Agreement, the Borrower and/or any Subsidiary of the Borrower shall be permitted
to make voluntary prepayments of its obligations under the Smuckers Note and the
Lease Program Obligations, in each case, to the extent that Net Asset Sale
Proceeds received by the Borrower and its Subsidiaries from the Mrs. Smith's
Sale are (A) excluded from the definition of "Mrs. Smith's Net Asset Sale
Proceeds" pursuant to clauses (I) and (II) thereof and (B) used to make
voluntary prepayments of the obligations as described in such clauses (I) and
(II). In addition, to the extent Collateral is sold in connection with the
preceding provisions of this Section 2, such Collateral shall be sold free and
clear of the Liens
created by the respective Security Documents and the Lenders hereby authorize the Administrative Agent and the Collateral Agent to take any actions deemed appropriate in order to effect such releases. For purposes of this Amendment, the term "Mrs. Smith's Net Asset Sale Proceeds" shall mean the aggregate amount of Net Asset Sale Proceeds received by the Borrower and its Subsidiaries from the Mrs. Smith's Sale either on the date of consummation of the Mrs. Smith's Sale or thereafter pursuant to post-closing adjustments (including, without limitation, as set forth in Section 4.2 of the Mrs. Smith's Asset Purchase Agreement), other than Net Asset Sale Proceeds (I) in an amount not to exceed $57,250,000, solely to the extent that all such amounts are paid to General Electric Capital Corporation ("GECC") in satisfaction of certain of the Borrower's and/or its Subsidiaries' Lease Program Obligations, (II) in an amount not to exceed $6,500,000, solely to the extent that all such amounts are paid to the J.M. Smuckers Company in satisfaction of Mrs. Smith's obligations under the Smuckers Note and (III) in an amount not to exceed $24,000,000, solely to the extent that all such amounts are paid in satisfaction of certain operating lease obligations and Capitalized Lease Obligations of the Borrower and its Subsidiaries relating to assets sold under the Mrs. Smith's Asset Purchase Agreement (but excluding such operating lease obligations and Capitalized Lease Obligations to the extent set forth in clause (I) of this definition).
3. Section 4.02(g) of the Credit Agreement is hereby amended by (x) inserting the text "the remainder of (I)" immediately prior to the text "25% of the Excess Cash Flow" appearing therein and (y) inserting the text "minus (II) the amount of all voluntary prepayments of Term Loans made after the Excess Cash Payment Date immediately preceding such Excess Cash Payment Date to and including such Excess Cash Payment Date" immediately following the text "Excess Cash Flow Payment Period" appearing therein.
4. Section 9.03(iii) of the Credit Agreement is hereby amended by deleting the amount "$5,000,000" appearing therein and inserting the new amount "$12,500,000" in lieu thereof.
5. Section 9.03 of the Credit Agreement is hereby further amended by deleting subsection (v) thereof in its entirety and inserting the following new subsection (v) in lieu thereof:
"(v) so long as there shall exist no Default or Event of Default (both before and after giving effect to the payment thereof), the Borrower may pay additional cash Dividends (whether as dividends to shareholders or through repurchases of its Equity Interests), provided that (x) the Leverage Ratio (as set forth in the most recent compliance certificate delivered by the Borrower to the Administrative Agent and each Lender pursuant to Section 8.01(f)(1)) is less than or equal to (I) in the case of any such payment or repurchase made prior to September 30, 2003, 2.25:1.00 and (II) in the case of any such payment or repurchase made on and after September 30, 2003, 2.00:1.00 and (y) the Total Unutilized Revolving Loan Commitment (after giving effect to any such payment or repurchase) shall equal or exceed (I) in the event that the Mrs. Smith's Sale has been consummated, $20,000,000 and (II) in the event that the Mrs. Smith's Sale has not been consummated, $40,000,000".
6. Section 9.04(iii) of the Credit Agreement is hereby amended by
(x) deleting the word "and" appearing at the end of clause (x) thereof and
inserting a comma in lieu thereof and (y) inserting the following text
immediately following clause (y) thereof:
"and (z) the SunTrust Swap Agreement".
7. Section 9.05(v)(a) of the Credit Agreement is hereby amended by deleting the text "three" appearing therein and inserting the new text "five" in lieu thereof.
8. Section 9.05(v)(e) of the Credit Agreement is hereby amended by
(x) inserting the text "(x)" immediately following the text "(e) (i)" appearing
therein and (y) inserting the text "and (y)(I) in the case of any such proposed
acquisition consummated prior to September 30, 2003, the Leverage Ratio shall be
less than or equal to 2.25:1.00 and (II) in the case of any such proposed
acquisition consummated on or after September 30, 2003, the Leverage Ratio shall
be less than or equal to 2.00:1.00, in each case," immediately prior to the text
"on a Pro Forma Basis" appearing therein.
9. Section 9.05(v)(g) of the Credit Agreement is hereby amended by deleting the text "three" appearing therein and inserting the new text "five" in lieu thereof.
10. Section 9.05(v)(h) of the Credit Agreement is hereby amended by deleting the text set forth therein in its entirety and inserting the text "[Intentionally Deleted]" in lieu thereof.
11. Section 9.05(v)(i) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 9.05(v)(i) in lieu thereof:
"(i) after giving effect to such acquisition and the payment of all amounts (including fees and expenses) owing in connection therewith, the Total Unutilized Revolving Loan Commitment shall equal or exceed the sum of (x) (I) in the event that the Mrs. Smith's Sale has been consummated, $20,000,000 or (II) in the event that the Mrs. Smith's Sale has not been consummated, $40,000,000 and (y) an amount equal to the aggregate amount as determined by the Borrower in good faith as the amount reasonably likely to be payable in respect of all post-closing purchase price adjustments required or which will be required in connection with such acquisition (and all other acquisitions for which such purchase price adjustments may be required to be made) and the amount of all Capital Expenditures reasonably anticipated by the Borrower to be made in the business acquired pursuant to such acquisition within the 180-day period (such period for any acquisition, a "Post-Closing Period") following such acquisition (and in the businesses acquired pursuant to all other acquisitions with Post-Closing Periods ended during the Post-Closing Period of such acquisition); and".
12. Section 9.05(xi) of the Credit Agreement is hereby amended by deleting the amount "$5,000,000" appearing therein and inserting the new amount "$10,000,000" in lieu thereof.
13. Section 9.07(c) of the Credit Agreement is hereby amended by deleting said Section in its entirety and inserting the following new Section 9.07(c) in lieu thereof:
(c) In addition to Capital Expenditures permitted pursuant to preceding clauses (a) and (b), the Borrower and its Subsidiaries may make additional Capital Expenditures at any time, provided that, at such time there shall exist no Default or Event of Default (both before and after giving effect to any such Capital Expenditure) and (x) the Leverage Ratio (as set forth in the most recent compliance certificate delivered by the Borrower to the Administrative Agent and each Lender pursuant to Section 8.01(f)(1)) is less than or equal to (I) in the case of any such Capital Expenditure made prior to September 30, 2003, 2.25:1.00 and (II) in the case of any such Capital Expenditure made on and after September 30, 2003, 2.00:1.00 and (y) the Total Unutilized Revolving Loan Commitment (after giving effect to any such Capital Expenditure) shall equal or exceed (I) in the event that the Mrs. Smith's Sale has been consummated, $20,000,000 and (II) in the event that the Mrs. Smith's Sale has not been consummated, $40,000,000".
14. The definition of "Consolidated EBITDA" appearing in Section 11.01 of the Credit Agreement is hereby amended by inserting the following new clauses (u) and (v) immediately preceding clause (w) appearing in said definition:
"(u) non-cash charges taken by Mrs. Smith's Bakeries, LLC in connection with their writedown of goodwill during the fiscal quarter of the Borrower ended closest to March 31, 2002 in an aggregate amount not to exceed $24,900,000 (to the extent that a charge in respect thereof was taken against Consolidated Net Income and same reduced Consolidated EBIT for such period), (v) non-cash charges taken by Mrs. Smith's Bakeries, LLC in connection with the impairment in the value of their assets during the fiscal quarter of the Borrower ended closest to December 31, 2002 in an aggregate amount not to exceed $26,600,000 (to the extent that a charge in respect thereof was taken against Consolidated Net Income and same reduced Consolidated EBIT for such period),".
15. The definition of "Consolidated Fixed Charges" appearing in
Section 11.01 of the Credit Agreement in hereby amended by inserting the text
"(other than Dividends consisting of repurchases of Equity Interests permitted
pursuant to Sections 9.03(iii) or (v))" immediately after the text "basis for
such period" appearing in clause (iv) thereof.
16. The definition of "Excess Cash Flow" appearing in Section 11.01 of the Credit Agreement is hereby amended by (x) deleting the text "and any consideration justified pursuant to the proviso to Section 9.05(v)(h)" appearing in the first parenthetical at the end of clause (ii)(b) of said definition, (y) deleting the text "with internally generated funds (but in the case of a voluntary prepayment of Revolving Loans or Swingline Loans," appearing in the proviso to the parenthetical in clause (ii)(c) of said definition and inserting the text "of Revolving Loans or Swingline Loans with internally generated funds (but" in lieu thereof, and (z) deleting clause (ii)(d) of said definition in its entirety and inserting the following new clause (ii)(d) in lieu thereof:
"(d) the amount of all dividends paid and repurchases of Equity Interests made pursuant to Sections 9.03(ii), (iii) and (v) during such period,".
17. The definition of "Excess Cash Payment Date" appearing in
Section 11.01 of the Credit Agreement is hereby restated in its entirety as
follows:
"Excess Cash Payment Date" shall mean with respect to any Excess Cash Flow Payment Period, any one date on or after the delivery of the financial statements by the Borrower required pursuant to Section 8.01(c) (accompanied by the officer's certificate required to be delivered pursuant to Section 8.01(f) setting forth in reasonable detail the amount of (and the calculations required to establish the amount of) Excess Cash Flow for the respective Excess Cash Flow Payment Period), but in no event shall the Excess Cash Payment Date in respect of any Excess Cash Flow Payment Period occur after March 31 of the immediately succeeding Excess Cash Flow Payment Period.
18. The definition of "Indebtedness" appearing in Section 11.01 of the Credit Agreement is hereby amended by inserting the text ", the SunTrust Swap Agreement" immediately following the text "Interest Rate Protection Agreement" appearing in said definition.
19. The definition of "Tranche" appearing in Section 11.01 of the Credit Agreement is hereby amended by deleting the text "three" appearing therein and inserting the text "four" in lieu thereof.
20. Section 11.01 of the Credit Agreement is hereby further amended by (x) deleting the definitions of "Applicable Permitted Acquisition Amount" and "Cumulative Retained Excess Cash Flow Amount" appearing therein and (y) inserting therein the following new definition in the appropriate alphabetical order:
"SunTrust Swap Agreement" shall mean that certain Interest Rate Protection Agreement, dated as of April 20, 2001, between SunTrust and the Borrower.
21. Notwithstanding anything to the contrary contained in Section 4.02(g) of the Credit Agreement, it is acknowledged and agreed that on and after the date on which all Term Loans have been repaid in full, the Borrower shall no longer be required to apply any portion of Excess Cash Flow as a mandatory repayment and/or commitment reduction in accordance with Sections 4.02(g), (h) and (i) of the Credit Agreement.
22. This Amendment shall become effective on the date (the "Third Amendment Effective Date") when (i) the Borrower, the Majority Lenders of the Revolving Loan Tranche and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at the Notice Office and (ii) the Borrower shall have paid to the Administrative Agent for the account of each Lender that has executed a counterpart hereof and delivered same to the Administrative Agent at the Notice Office on or prior to 5:00 P.M. (New York time) on February 21, 2003 (or, if later, on the Third Amendment Effective Date), an amendment fee equal to 0.05% of the sum of such Lender's outstanding A Term Loans, B Term Loans and Revolving Loan Commitments, in each case at such time. Furthermore, in the event that either (x) the Mrs. Smith's Asset Purchase Agreement is terminated (other than with respect to ongoing indemnities, confidentiality provisions and similar
provisions) or (y) the Mrs. Smith's Asset Sale is not consummated on or prior to 5:00 P.M. (New York time) on July 28, 2003, the Borrower shall, on or prior to 5:00 P.M. (New York time) on the earlier to occur of such termination date or July 28, 2003, pay to the Administrative Agent for the account of each Lender that has executed a counterpart hereof and delivered same to the Administrative Agent at the Notice Office on or prior to 5:00 P.M. (New York time) on the Third Amendment Effective Date, an additional fee equal to 0.10% of the sum of such Lender's outstanding A Term Loans, B Term Loans and Revolving Loan Commitments on the Third Amendment Effective Date (it being understood that any violation by the Borrower of its obligations pursuant to this sentence shall constitute an Event of Default pursuant to Section 10.01 of the Credit Agreement).
23. In order to induce the Lenders to enter into this Amendment, the Borrower hereby represents and warrants that (i) no Default or Event of Default exists as of the Third Amendment Effective Date, after giving effect to this Amendment, and (ii) all representations and warranties contained in the Credit Agreement and in the other Credit Documents are true and correct in all material respects on and as of the Third Amendment Effective Date, after giving effect to this Amendment (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be true and correct in all material respects only as of such specified date).
24. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent.
25. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
26. From and after the Third Amendment Effective Date, all references in the Credit Agreement and each of the Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as modified hereby. This Amendment shall constitute a Credit Document for all purposes under the Credit Agreement and the other Credit Documents.
27. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document.
* * *
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written.
FLOWERS FOODS, INC.
By: /s/ Thomas B. Jones, Jr. ------------------------------------- Title: Treasurer |
DEUTSCHE BANK TRUST COMPANY AMERICAS,
Individually and as Administrative
Agent
By: /s/ Scottye Lindsey ------------------------------------- Title: Vice President |
SUNTRUST BANK, Individually and as Syndication Agent
By: /s/ Michael Laprissi ------------------------------------- Title: Director |
AG FIRST FARM CREDIT BANK
By: /s/ John W. Burnside, Jr. ------------------------------------- Title: Vice President |
ALLIED IRISH BANKS, P.L.C.
By: /s/ Illegible ------------------------------------- Title: |
AIMCO CLO SERIES 2001-A
By: /s/ Chris Georgen ------------------------------------- Title: Authorized Signatory By: /s/ Jerry D. Zinkula ------------------------------------- Title: Authorized Signatory |
ALLSTATE LIFE INSURANCE COMPANY
By: /s/ Chris Georgen ------------------------------------- Title: Authorized Signatory By: /s/ Jerry D. Zinkula ------------------------------------- Title: Authorized Signatory |
ELC (CAYMAN) LTD. CDO SERIES 1999-1
By: David Babson & Company
as Collateral Manager
APEX (IDM) CDO I, LTD.
By: David Babson & Company
as Collateral Manager
TRYON CLO LTD. 2000-1.
By: David Babson & Company
as Collateral Manager
BANK HAPOALIM B.M.
By: /s/ Marc Bosc ------------------------------------- Title: Vice President By: /s/ Lewroy Harkins ------------------------------------- Title: Vice President |
ELT LTD.
By: /s/ Ann E. Morris ------------------------------------- Title: Authorized Agent |
HORBOUR TOWN FUNDING LLC
By: /s/ Ann E. Morris ------------------------------------- Title: Assistant Vice President |
RIVIERA FUNDING LLC
By: /s/ Ann E. Morris ------------------------------------- Title: Assistant Vice President |
THE BANK OF NOVA SCOTIA
By: /s/ Chris J. Allen ------------------------------------- Title: Managing Director & Office Head |
GRAYSTON CLO 2001-1 LTD.
By: Bear Streans Asset Management,
Inc. as its Collateral Manager
By: /s/ Niall D. Rosenzwig ------------------------------------- Title: Associated Director |
GALLATIN FUNDING I LTD.
By: Bear Streans Asset Management,
Inc. as its Collateral Manager
By: /s/ Niall D. Rosenzwig ------------------------------------- Title: Associated Director |
CHEVY CHASE BANK
By: /s/ Dory Halati ------------------------------------- Title: Assistant Vice President |
COLUMBUS LOAN FUNDING LTD.
By: Travelers Asset Management
International Company, LLC
By: /s/ Denise T. Duffee ------------------------------------ Title: Investment Officer |
CITIGROUP INVESTMENTS CORPORATE LOAN
FUND INC. (fka TRAVELERS CORPORATE
LOAN FUND, INC.)
By: Travelers Asset Management
International Company, LLC
By: /s/ Denise T. Duffee ------------------------------------ Title: Investment Officer |
THE TRAVELERS INSURANCE COMPANY
By: /s/ Denise T. Duffee ------------------------------------ Title: Investment Officer |
COBANK
By: /s/ Brian J. Klatt ------------------------------------- Title: Senior Vice President |
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. "RABOBANK
INTERNATIONAL", NEW YORK BRANCH
By: /s/ Theodore W. Cox ------------------------------------- Title: Executive Director By: /s/ Edware J. Pevser ------------------------------------- Title: Managing Director |
CREDIT LYONNAIS
By: /s/ Lee E. Greve ------------------------------------- Title: First Vice President |
BIG SKY LOAN FUND, LTD.
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
COSTANITNUS EATON VANCE CDO V, LTD.
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
EATON VANCE CDO III, LTD.
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
EATON VANCE CDO IV, LTD.
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
EATON VANCE INSTITUTIONAL SENIOR LOAN
FUND
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
EATON VANCE SENIOR INCOME TRUST
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
GRAYSON & CO.
By: Boston Management and Research,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
OXFORD STRATEGIC INCOME FUND
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
SENIOR DEBT PORTFOLIO
By: Boston Management and Research
as Investment Advisor
By: /s/ Scott H. Page ------------------------------------- Title: Vice president |
FARM CREDIT BANK OF WICHITA
By: /s/ Greg Reno ------------------------------------ Title: Vice President |
FARM CREDIT SERVICES OF AMERICA, PCA
By: /s/ Bruce P. Rouse ------------------------------------- Title: Vice President |
LONG LANE MASTER TRUST II
By: Fleet National Bank as Trust
Administrator, with Respect to
Series Eclipse
By: /s/ Roger Ackerman ------------------------------------- Title: Director |
LONG LANE MASTER TRUST IV
By: Fleet National Bank as Trust
Administrator
By: /s/ Roger Ackerman ------------------------------------- Title: Director |
GOLDMAN SACKS CREDIT PARTNERS, L.P.
By: /s/ Sandra Stulberger ------------------------------------- Title: Authorized Signatory |
GREENSTONE FARM CREDIT SERVICES, FLCA
By: /s/ Alfred S. Compton, Jr. ------------------------------------- Title: Vice President/Senior Lending Officer |
HARCH CLO I LIMITED
By: /s/ Michael E. Lewitt ------------------------------------- Title: Authorized Signatory |
HARRIS TRUST AND SAVINGS BANK
By: /s/ William R. Corya ------------------------------------- Title: Vice President |
ING PRIME RATE TRUST
By: ING Investments, LLC
as its Investment Manager
By: /s/ Jason Groom ------------------------------------- Title: Vice President |
ING SENIOR INCOME FUND
By: ING Investments, LLC
as its Investment Manager
By: /s/ Jason Groom ------------------------------------- Title: Vice President |
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: /s/ Yasushi Ishikawa ------------------------------------- Title: Senior Vice President |
NATEXIS BANQUE POPULARIES
By: /s/ Frank H. Madden, Jr. ------------------------------------- Title: Vice President & Group Manager By: /s/ Kristen Brainard ------------------------------------- Title: Associate |
NUVEEN FLOATING RATE FUND
By: Symphony Asset Management LLC
By: /s/ Lisa M. Mincheski ------------------------------------- Title: Managing Director |
OAK HILL SECURITIES FUND, L.P.
By: Oak Hill Securities GenPar, L.P.
its General Partner
By: Oak Hill Securities MGP, Inc.,
its General Partner
By: /s/ Scott D. Krase ------------------------------------- Title: Vice President |
OAK HILL SECURITIES FUND II, L.P.
By: Oak Hill Securities GenPar II,
L.P. its General Partner
By: Oak Hill Securities MGP II,
Inc., its General Partner
By: /s/ Scott D. Krase ------------------------------------- Title: Vice President |
OAK HILL CREDIT PARTNERS I, LLC
By: Oak Hill CLO Management I, LLC
as Investment Manager
By: /s/ Scott D. Krase ------------------------------------- Title: Authorized Signatory |
HARBOURVIEW CLO Ii
By: /s/ Bill Campbell ------------------------------------- Title: Manager |
HARBOURVIEW CLO IV
By: /s/ Bill Campbell ------------------------------------- Title: Manager |
OPPENHEIMER SENIOR FLOATING RATE FUND
By: /s/ Bill Campbell ------------------------------------- Title: Manager |
REGIONS BANK
By: /s/ James W. Newport ------------------------------------- Title: Senior Vice President |
Sankaty Advisors, LLC as Collateral Manager for CASTEL HILL I- INGOTS, LTD., as Term Lender
By: /s/ Timothy M. Barns ------------------------------------- Title: Senior Vice President |
Sankaty Advisors, LLC as Collateral Manager for CASTEL HILL II- INGOTS, LTD., as Term Lender
By: /s/ Timothy M. Barns ------------------------------------- Title: Senior Vice President |
Sankaty Advisors, Inc. as Collateral Manager for GREAT POINT CLO 1999-1 LTD, as Term Lender
By: /s/ Timothy M. Barns ------------------------------------- Title: Senior Vice President |
SANKATY HIGH YIELD PARTNER III, LP
By: /s/ Timothy M. Barns ------------------------------------- Title: Senior Vice President |
HAMILTON CDO, LTD.
By: Stanfield Capital Partners LLC
as its Collateral Manager
By: /s/ Christopher E. Jansen ------------------------------------- Title: Managing Partner |
STANFIELD ARBITRAGE CDO, LTD.
By: Stanfield Capital Partners LLC
as its Collateral Manager
By: /s/ Christopher E. Jansen ------------------------------------- Title: Managing Partner |
STANFIELD CLO, LTD.
By: Stanfield Capital Partners LLC
as its Collateral Manager
By: /s/ Christopher E. Jansen ------------------------------------- Title: Managing Partner |
STEIN ROE & FARNHAM CLO I LTD.
By: Stein Roe & Farnham Incorporated
as Portfolio Manager
THE SUMITOMO TRUST & BANKING CO, LTD.
By: /s/ Elizabeth A. Quirk ------------------------------------- Title: Vice President |
TORONTO DOMINION (NEW YORK), INC.
By: /s/ Stacey L. Malek ------------------------------------- Title: Vice President |
TRANSAMERICA BUSINESS CREDIT
By: /s/ Stephen K. Goetschius ------------------------------------- Title: Senior Vice President |
EXHIBIT 10.14
FORM OF INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, dated as of November 15, 2002 (this "AGREEMENT"), is made by and between Flowers Foods, Inc., a Georgia corporation (the "COMPANY"), and __________________ ("INDEMNITEE").
W I T N E S S E T H
WHEREAS, it is important to the Company to attract and retain as directors and officers the most capable persons reasonably available;
WHEREAS, Indemnitee is a member of the Board of Directors of the Company (the "Board") and/or an officer of the Company and in such capacity is performing a valuable service to the Company;
WHEREAS, both the Company and Indemnitee acknowledge the increased risk of litigation and other claims being asserted against directors and officers of companies in today's environment;
WHEREAS, Sections 14-2-850 through 14-2-859 of the Georgia Business Corporation Code, as amended to date (the "STATUTE") provide for the indemnification of the officers and directors of the Company and specifically contemplate that contracts may be entered into between the Company and the members of the Board and officers with respect to indemnification of such directors and officers;
WHEREAS, the Company's Restated Articles of Incorporation (the "ARTICLES") and Restated Bylaws (the "BYLAWS"): (i) provide that the Company will indemnify its directors and officers and will advance expenses in connection therewith, and Indemnitee's willingness to serve as a director and/or officer of the Company is based in part on Indemnitee's reliance on such provisions and (ii) specifically contemplate that contracts may be entered into between the Company and the members of the Board and officers with respect to indemnification of such directors and officers; and
WHEREAS, in order to provide to the Indemnitee assurances with respect to the protection provided against personal liabilities that he or she may incur in the performance of his or her duties to the Company, and to thereby induce the Indemnitee to continue to serve as a member of the Board and/or as an officer of the Company, the Company has determined and agreed to enter into this Agreement.
NOW, THEREFORE, in consideration of the Indemnitee's continued service as a director and/or an officer after the date hereof, the parties hereto agree as follows:
1. Indemnification.
(a) Subject only to the terms and conditions set forth in this Agreement and applicable laws, and in addition to any other indemnity to which the Indemnitee may be entitled under the Statute, the Articles and any Bylaw, resolution or agreement (but without duplication of payments with respect to indemnified amounts), the Company hereby further agrees to hold harmless and indemnify the Indemnitee, to the fullest extent permitted by applicable laws and the Articles in effect on the date hereof or as such laws or Articles may from time to time be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than applicable laws and Articles permitted the Company to provide before such amendment), including, but not limited to, holding harmless and indemnifying the Indemnitee against any and all expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by the Indemnitee (collectively, "LOSSES") in connection with any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative or investigative and whether formal or informal (an "ACTION"), to which the Indemnitee is, was, or at any time becomes a party, or is threatened to be made a party, by reason of the fact that the Indemnitee is, was, or at any time becomes a director, officer, partner, trustee, employee or agent of the Company, or a predecessor corporation, or is or was serving or at any time serves at the request of the Company as a director, officer, partner, trustee, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, if the Indemnitee conducted himself or herself in good faith and the Indemnitee reasonably believed: (i) in the case of conduct in his or her official capacity, that such conduct was in the best interests of the Company; (ii) in all other cases that such conduct was at least not opposed to the best interests of the Company and (iii) in the case of any criminal proceeding, that the Indemnitee had no reasonable cause to believe such conduct was unlawful.
(b) The right to indemnification conferred in this Agreement, the Articles and the Bylaws shall be presumed to have been relied upon by Indemnitee in agreeing to continue to serve the Company as a director and/or an officer of the Company and shall be enforceable as a contract right.
(c) For purposes of this Agreement, the Indemnitee shall be presumed to have conducted himself or herself in good faith if he or she relied on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by:
(i) one or more officers or employees of the Company whom the Indemnitee reasonably believes to be reliable and competent in the matters presented;
(ii) legal counsel, public accountants, investment bankers or other persons as to matters the Indemnitee reasonably believes are within the person's professional or expert competence; or
(iii) a committee of the board of directors of the Company of which the Indemnitee is not a member if the Indemnitee reasonably believes the committee merits confidence.
(d) In the instances described in SECTION 1(C) of this Agreement, the Indemnitee shall not be entitled to rely on such information, opinions, reports or statements if he or she has knowledge concerning the matter in question that makes such reliance unreasonable.
(e) The termination of a proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendre or its equivalent is not, of itself, determinative that the Indemnitee did not meet the standard of conduct set forth in SECTION 1(A) hereof.
2. Limitations of Liability. No indemnity pursuant to SECTION 1 hereof shall be paid by the Company:
(a) with respect to any proceeding in which the Indemnitee is adjudged, by final judgment not subject to further appeal, liable to the Company or is subjected to injunctive relief in favor of the Company:
(i) for any appropriation, in violation of his or her duties, of any business opportunity of the Company;
(ii) for acts or omissions which involve intentional misconduct or a knowing violation of law;
(iii) for the types of liability set forth in Section 14-2-832 of the Georgia Business Corporation Code; or
(iv) for any transaction from which the Indemnitee received an improper personal benefit, whether or not involving action in his or her official capacity;
(b) with respect to any suit in which final judgment is rendered against the Indemnitee for an accounting of profits, made from the purchase or sale by the Indemnitee of securities of the Company, pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 or similar provisions of any federal, state, or local statutory law, or on account of any payment by the Indemnitee to the Company in respect of any claim for such an accounting;
(c) in connection with a proceeding by or in the right of the Company, except for reasonable expenses incurred in connection with the proceeding if it is determined that the Indemnitee has met the standard of conduct set forth in SECTION 1(A) hereof;
(d) in connection with any proceeding brought by the Indemnitee against the Company, except in the case of court-ordered indemnification pursuant to Section 14-2-854 of the Georgia Business Corporation Code; or
(e) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful.
3. Contribution. If the indemnification provided in SECTION 1 is unavailable, then in respect of any Action in which the Company is jointly liable with the Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute, to the extent it is not
lawfully prevented from doing so, to the amount of Losses paid or payable by the Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and the Indemnitee on the other hand from the transaction from which such Action arose and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other in connection with the events which resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnitee, on the other, shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent the circumstances resulting in such Losses. The Company agrees that it would not be just and equitable if contribution pursuant to this SECTION 3 were determined by pro rata allocation or any other method of allocation that does not take account of the foregoing equitable considerations.
4. Mandatory Payment of Expenses. In accordance with Section 14-2-852 of the Georgia Business Corporation Code, to the extent that the Indemnitee has been wholly successful on the merits or otherwise, in the defense of any Action, the Indemnitee shall be indemnified against reasonable expenses incurred by the Indemnitee in connection therewith. No determination of the Indemnitee's entitlement to indemnification hereunder is required prior to the Company's obligation to make mandatory indemnification under Section 14-2-852 of the Georgia Business Corporation Code.
5. Continuation of Obligations. All agreements and obligations of the Company contained herein shall continue during the period the Indemnitee is a director, officer, partner, trustee, employee or agent of the Company (or is serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter for so long as the Indemnitee shall be subject to any possible Action, by reason of the fact that the Indemnitee was a director and/or an officer of the Company or serving in any other capacity referred to herein.
6. Notification and Defense of Claims.
(a) Promptly after receipt by the Indemnitee of notice of the commencement of any Action, the Indemnitee will, if a claim for indemnification in respect thereof is to be made against the Company under this Agreement, notify the Company in writing of the commencement thereof, but the omission to so notify the Company will not relieve the Company from any liability which it may have to the Indemnitee otherwise than under this Agreement. With respect to any such Action as to which the Indemnitee so notifies the Company:
(i) the Company will be entitled to participate therein at its sole expense; and
(ii) subject to SECTION 7 hereof, and if the Indemnitee shall have provided a written affirmation that: (i) he or she believes in good faith that his or her conduct conformed with the standard set forth in SECTION 1(A) hereof and did not constitute behavior of the kind described in SECTION 2(A) hereof and (ii) that he or she is entitled to indemnification hereunder, the Company may assume the defense thereof.
(b) After notice from the Company to the Indemnitee of its election to assume such defense, the Company will not be liable to the Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. The Indemnitee shall have the right to employ separate counsel in such Action, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the sole expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) counsel designated by the Company to conduct such defense shall not be reasonably satisfactory to the Indemnitee, or (iii) the Company shall not have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of such counsel shall be at the sole expense of the Company. For the purposes of clause (ii) above, the Indemnitee shall be entitled to determine that counsel designated by the Company is not reasonably satisfactory if, among other reasons, the Indemnitee shall have been advised by qualified counsel that, because of actual or potential conflicts of interest in the matter between the Indemnitee, other officers or directors similarly indemnified by the Company and/or the Company, representation of the Indemnitee by counsel designated by the Company is likely to materially and adversely affect the Indemnitee's interest or would not be permissible under applicable canons of legal ethics.
(c) The Company shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any Action not defended by the Company effected without the Company's written consent. The Company may settle any Action for which it has assumed the defense without the consent of the Indemnitee if the Company accepts full responsibility and the settlement releases the Indemnitee from potential liability. The Company shall not settle any Action in any manner that would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. Neither the Company nor the Indemnitee will unreasonably withhold consent to any proposed settlement.
7. Advancement and Repayment of Expenses. Upon written request therefor, accompanied by (i) reasonably itemized evidence of expenses incurred or to be incurred; (ii) a written affirmation that: (x) the Indemnitee believes in good faith that his or her conduct conformed with the standard set forth in SECTION 1(A) hereof and did not constitute behavior of the kind described in SECTION 2(A) hereof and (y) that he is entitled to indemnification hereunder, and (iii) the Indemnitee's written undertaking to repay any unused funds advanced and any funds advanced if it is ultimately determined that the Indemnitee is not entitled to indemnification hereunder, the Company shall promptly advance to the Indemnitee the reasonable expenses (including attorneys' fees and costs of investigation and defense (including the fees of expert witnesses, other professional advisors, and private investigators)) incurred, or reasonably expected to be incurred, by the Indemnitee in defending any Action for which the Indemnitee is entitled to indemnification pursuant to this Agreement. Any such advances and the Indemnitee's undertaking to repay shall be unsecured and interest-free. The undertaking described in clause (iii) of this SECTION 7 shall be accepted by the Company without reference to the Indemnitee's financial ability to make the repayments set forth therein.
8. Partial Indemnification. In the event that the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any
Losses but not for the total amount thereof, the Company shall indemnify the Indemnitee for the portion thereof to which the Indemnitee is entitled.
9. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Losses incurred by the Indemnitee to the extent Indemnitee has otherwise actually received payment of the amounts otherwise indemnifiable hereunder (net of reasonable expenses actually incurred by the Indemnitee in connection therewith) under any insurance policy, the Articles or Bylaws, applicable law or any other source.
10. Subrogation. In the event of payment pursuant to the terms of this Agreement, the Company will be subrogated to the extent of such payment to all of the related rights of recovery of the Indemnitee against other persons or entities (other than the Indemnitee's successors). The Indemnitee will execute all documents reasonably required to evidence such rights.
11. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce the Indemnitee to continue to serve as a director and/or officer of the Company and acknowledges that the Indemnitee will in the future be relying upon this Agreement in continuing to serve in such capacity.
(b) In the event the Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse the Indemnitee for all of the Indemnitee's reasonable fees and expenses in bringing and pursuing such action.
12. Miscellaneous.
(a) Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered in person or when dispatched by electronic facsimile transfer (if confirmed in writing by mail simultaneously dispatched) or one business day after having been dispatched by a nationally recognized overnight courier service to the appropriate party at the address or facsimile number specified below:
If to the Company to:
Flowers Foods, Inc.
1919 Flowers Circle
U.S. Highway 19 South
Thomasville, Georgia 31757
Attention: Stephen R. Avera, Esq.
Facsimile No.: (229) 225-5426
If to the Indemnitee to:
(b) Partial Invalidity. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable.
(c) Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Georgia, without regard to its conflict of law principles.
(d) Successors. This Agreement shall be binding upon the Indemnitee and the Company and its successors and assigns (including any transferee of all or substantially all of its assets and any successor by merger or otherwise by operation of law), and shall inure to the benefit of the Indemnitee, his heirs, personal representatives, and assigns and to the benefit of the Company and its successors and assigns.
(e) Amendment. No amendment, modification, termination, or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto.
[SIGNATURES ON FOLLOWING PAGE]
IN WITNESS WHEREOF, Indemnitee has executed and the Company has caused its duly authorized representative to execute this Agreement as of the date first above written.
FLOWERS FOODS, INC.
By:____________________________________
Name:
Title
[INDEMNITEE]
.
.
.
EXHIBIT 21
SUBSIDIARIES OF
FLOWERS FOODS, INC.
NAME OF SUBSIDIARY JURISDICTION OF INCORPORAITON OR ORGANIZAITON ------------------ --------------------------------------------- Flowers Finance, LLC Delaware Flowers Bakeries, LLC Georgia Flowers Bakeries Brands, Inc. Delaware Flowers Baking Co. of Opelika, LLC Alabama Hardins's Bakers, LLC Alabama Bailey Street Bakery, LLC Alabama Home Baking Company, LLC Alabama Flowers Baking Co. of Texarkana, LLC Arkansas Holsum Baking Company, LLC Arkansas Shipley Baking Company, LLC Arkansas Ideal Baking Company, Inc. Arkansas Flowers Baking Co. of Florida, LLC Florida Flowers Baking Co. of Miami, LLC Florida Flowers Baking Co. of Jacksonville, LLC Florida Flowers Baking Co. of Bradenton, LLC Florida Flowers Baking Co. of Thomasville, LLC Georgia Flowers Baking Co. of Villa Rica, LLC Georgia Flowers Baking Co. of Tyler, LLC Georgia Flowers Bakery of Tucker, LLC Georgia Table Pride, LLC Georgia Huval Bakery, LLC Louisiana Bunny Bread, LLC Louisiana Flowers Baking Co. of Baton Rouge, LLC Louisiana Flowers Baking Co. of Jamestown, LLC North Carolina |
Franklin Baking Company, LLC North Carolina Flowers Baking Co. of Memphis, LLC Tennessee Flowers Baking Co. of Morristown, LLC Tennessee East Tennessee Baking Co., LLC Tennessee West Tennessee Baking Co., LLC Tennessee Schott's Bakery, LLC Texas Flowers Baking Co. of Texas, LLC Texas Butterkrust Bakery, LLC Texas El Paso Baking Co., LLC Texas El Paso Baking Company de Mexico, S.A. de C.V. Mexico San Antonio Baking Co., LLC Texas Austin Baking Co., LLC Texas Corpus Christi Baking Co., LLC Texas Hampton Roads Baking Company, LLC Virginia Flowers Baking Co. of Norfolk, LLC Virginia Flowers Baking Co. of Lynchburg, LLC Virginia Flowers Baking Co. of West Virginia, LLC West Virginia The Donut House, LLC West Virginia Storck Baking Company, LLC West Virginia Flowers Snack, LLC Georgia Flowers Snack of Atlanta, LLC Georgia Flowers Snack of Crossville, LLC Tennessee Flowers Snack Distributors, Inc. Tennessee Flowers Snack of London, LLC Kentucky Flowers Snack of Cleveland, TN., LLC Tennessee Mrs. Smith's Bakeries, LLC Georgia Mrs. Smith's Bakery of Montgomery, LLC Alabama Mrs. Smith's Bakeries Sales Support Group, LLC Georgia Mrs. Smith's Foil Company, LLC Georgia Dan-co Bakery, LLC Georgia Mrs. Smith's Bakery of Pembroke, LLC North Carolina Mrs. Smith's Bakeries Frozen Distributors, Inc. Georgia |
Mrs. Smith's Bakery of Suwanee, LLC Georgia Mrs. Smith's Bakeries of Pennsylvania, LLC Georgia Mrs. Smith's Bakery of Stilwell, LLC Oklahoma Flowers Baking Co. of Fountain Inn, LLC South Carolina Mrs. Smith's Bakery of Spartanburg, LLC South Carolina Mrs. Smith's Brands, Inc. South Carolina |
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-58320) of Flowers Foods, Inc. of our reports dated February 21, 2003, relating to the financial statements and the financial statement schedule, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP Atlanta, Georgia March 27, 2003 |
EXHIBIT 99
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Flowers Foods, Inc. (the "company") on Form 10-K for the fiscal year ended December 28, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
March 28, 2003
/s/ Amos R. McMullian --------------------------- Amos R. McMullian Chairman of the Board and Chief Executive Officer /s/ Jimmy M. Woodward --------------------------- Jimmy M. Woodward Senior Vice President and Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.