FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D C 20549

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended April 21, 2001

[ ] 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 1-6247

FLOWERS FOODS, INC.
-------------------
(Exact name of registrant as specified in its charter)

GEORGIA 58-2582379
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)

1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA
-----------------------------------------
(Address of principal executive offices)

31757
-----
(Zip Code)

229/226-9110
------------
(Registrant's telephone number, including area code)

N/A
---
(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

TITLE OF EACH CLASS OUTSTANDING AT JUNE 1, 2001
------------------- ----------------------------
COMMON STOCK, $.01 PAR VALUE
WITH PREFERRED SHARE PURCHASE RIGHTS 19,865,968

A-1
2

FLOWERS FOODS, INC.

INDEX

Page Number
-----------

PART I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheet
April 21, 2001 and December 30, 2000 A-3

Consolidated Statement of Income
Sixteen Weeks Ended
April 21, 2001 and April 22, 2000 A-4

Consolidated Statement of Cash Flows
Sixteen Weeks Ended April 21, 2001
and April 22, 2000 A-5

Notes to Consolidated Financial Statements A-6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations A-12

Item 3. Quantitative and Qualitative Disclosures
About Market Risk A-16

PART II. Other Information A-16

Item 1. Legal Proceedings A-16

Item 4. Submission of Matters to a Vote of Security Holders A-16

Item 5. Other Information A-16

Item 6. Exhibits and Reports on Form 8-K A-17

A-2
3

FLOWERS FOODS, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands, Except Share Data)
(Unaudited)

April 21, 2001 December 30, 2000
-------------- -----------------

ASSETS
Current Assets:
Cash and cash equivalents............................................. $ 11,330 $ 11,845
Accounts and notes receivable, net of allowances of $17,215 and
$19,288, respectively............................................... 130,086 113,099
Inventories, net:
Raw materials....................................................... 20,738 26,583
Packaging materials................................................. 11,804 12,048
Finished goods...................................................... 66,849 49,276
Other............................................................... 4,164 2,524
----------- -----------
103,555 90,431
Other................................................................. 51,599 51,925
----------- -----------
296,570 267,300
----------- -----------

Property, Plant and Equipment:
Land.................................................................. 32,900 33,386
Buildings............................................................. 263,733 264,889
Machinery and equipment............................................... 624,493 567,682
Furniture, fixtures and transportation equipment...................... 64,476 64,596
Construction in progress.............................................. 14,789 1,081
----------- -----------
1,000,391 931,634
Less: accumulated depreciation........................................ (378,556) (362,160)
----------- -----------
621,835 569,474
----------- -----------
Notes Receivable......................................................... 70,588 0
----------- -----------
Net Assets of Discontinued Operations.................................... 0 567,449
----------- -----------
Other Assets............................................................. 43,001 31,880
----------- -----------
Cost in Excess of Net Tangible Assets:
Cost in excess of net tangible assets................................. 167,425 167,425
Less: accumulated amortization........................................ (42,817) (40,882)
----------- -----------
124,608 126,543
----------- -----------
$ 1,156,602 $ 1,562,646
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt................................... $ 27,852 $ 7,515
Accounts payable....................................................... 88,475 100,775
Facility closing costs and severance................................... 6,356 5,465
Other accrued liabilities.............................................. 76,034 68,612
----------- -----------
198,717 182,367
----------- -----------
Long-Term Debt and Capital Leases........................................ 295,048 247,847
----------- -----------

Other Liabilities:
Facility closing costs and severance................................... 11,755 13,891
Postretirement/postemployment obligations.............................. 23,619 22,331
Liabilities to be settled by others.................................... 0 584,198
Other.................................................................. 11,175 9,552
----------- -----------
46,549 629,972
----------- -----------

Shareholders' Equity:
Preferred stock-$100 par value, 100,000 authorized and none issued
Preferred stock-$.01 par value, 900,000 authorized and none issued
Common stock-$.01 par value, 900,000 authorized and
19,865,968 and 19,865,964 issued, respectively........................ 199 199
Capital in excess of par value......................................... 476,529 351,506
Retained earnings...................................................... 143,455 164,135
Other comprehensive income............................................. (3,895) 0
Stock compensation related adjustments................................. 0 (13,380)
----------- -----------
616,288 502,460
----------- -----------
$ 1,156,602 $ 1,562,646
=========== ===========

(See Accompanying Notes to Consolidated Financial Statements)

A-3
4

FLOWERS FOODS, INC.
CONSOLIDATED STATEMENT OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

For the Sixteen Weeks Ended
----------------------------------
April 21, 2001 April 22, 2000
-------------- --------------

Sales....................................................................... $ 467,239 $ 450,101
Materials, supplies, labor and other production costs....................... 253,492 244,345
Selling, marketing and administrative expenses.............................. 188,688 177,787
Depreciation and amortization............................................... 21,022 19,541
Insurance proceeds, net..................................................... (6,789) 0
Separation and other contractual payment expense............................ 27,952 0
--------- ---------
(Loss) income from operations............................................... (17,126) 8,428

Interest (income)........................................................... (435) 0
Interest expense............................................................ 18,013 19,255
--------- ---------
Interest expense, net....................................................... 17,578 19,255
--------- ---------

Loss before income taxes, extraordinary gain and discontinued operations.... (34,704) (10,827)
Income tax benefit.......................................................... (9,023) (3,531)
--------- ---------
Loss before extraordinary gain and discontinued operations.................. (25,681) (7,296)
Extraordinary gain on early extinguishment of debt.......................... 5,000 0
Net income from discontinued operations..................................... 0 24,053
--------- ---------
Net (loss) income........................................................... $ (20,681) $ 16,757
========= =========

Net (Loss) Income Per Common Share:
Basic:
Net (loss) income per share............................................... $ (1.04) $ 0.84
Weighted average shares outstanding....................................... 19,866 20,034

Diluted:
Net (loss) income per share............................................... $ (1.04) $ 0.83
Weighted average shares outstanding....................................... 19,866 20,079

Cash Dividends Paid Per Common Share........................................ $ 0.0000 $ 0.1325

(See Accompanying Notes to Consolidated Financial Statements)

A-4
5

FLOWERS FOODS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)

For the Sixteen Weeks Ended
--------------------------------
April 21, 2001 April 22, 2000
-------------- --------------

Cash flows disbursed for operating activities:
Net loss from continuing operations..................... $ (20,681) $ (7,296)
Adjustments to reconcile net loss to net cash
disbursed for operating activities:
Depreciation and amortization...................... 21,022 19,541
Deferred income taxes.............................. (9,023) (4,298)
Provision for inventory obsolesence................ 395 3,005
Allowances for accounts receivable................. (2,073) (657)
Other.............................................. (13) (8)
Changes in assets and liabilities:
Accounts and notes receivable, net................. (14,914) (4,719)
Inventories, net................................... (13,518) (13,252)
Other assets....................................... 5,925 685
Accounts payable and other accrued liabilities..... (1,967) (3,299)
Facility closing costs and severance............... (1,245) (1,853)
Other.............................................. 0 (1,442)
--------- --------
Net cash disbursed for operating activities............. $ (36,092) $(13,593)
--------- --------
Cash flows disbursed for investing activities:
Purchase of property, plant and equipment.......... (13,765) (26,042)
Purchase of notes receivable....................... (77,646) 0
Acquisitions net of divestitures................... 0 (22,046)
Dividends received................................. 5,197 5,197
Proceeds from property disposals................... 50 12,394
Other.............................................. 1,294 (1,655)
--------- --------
Net cash disbursed for investing activities............. $ (84,870) $(32,152)
--------- --------
Dividends paid..................................... 0 (13,030)
Treasury stock purchases........................... 0 (41)
Stock compensation and warrants exercised.......... (504) 119
Proceeds from new credit agreement................. 251,000 0
Purchase of debentures............................. (193,776) 0
Other debt and capital lease obligation (payments)/
proceeds........................................ (1,317) 41,222
Other net changes in debt and other liabilities in
connection with the spin-off and merger
transaction..................................... 65,044 0
--------- --------
120,447 28,270
--------- --------
Net decrease in cash and cash equivalents................ (515) (17,475)
Cash and cash equivalents at beginning of period......... 11,845 18,665
--------- --------
Cash and cash equivalents at end of period............... $ 11,330 $ 1,190
========= ========
Schedule of non cash investing and financing activities:
Stock compensation.................................. $ 500 $ 142
Capital lease obligations........................... $ 17,390 $ 0
Fixed assets........................................ $ 51,784 $ 0

(See Accompanying Notes to Consolidated Financial Statements)

A-5
6

FLOWERS FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Interim Financial Statements - The accompanying unaudited condensed
consolidated financial statements of Flowers Foods, Inc. ("the
company") have been prepared by the company's management in accordance
with generally accepted accounting principles for interim financial
information and applicable rules and regulations of the Securities
Exchange Act of 1934. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for annual financial statements. The unaudited consolidated
financial statements included herein contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of April 21, 2001 and December 30,
2000, the results of operations for the sixteen week periods ended
April 21, 2001 and April 22, 2000 and statement of cash flows for the
sixteen weeks ended April 21, 2001 and April 22, 2000. The results of
operations for the sixteen week periods ended April 21, 2001 and April
22, 2000, are not necessarily indicative of the results to be expected
for a full year. These financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto included in the company's Annual Report on Form 10-K for
the fiscal year ended December 30, 2000.

Reporting Periods - The company's quarterly reporting periods for
fiscal 2001 are as follows: first quarter ended April 21, 2001 (sixteen
weeks), second quarter ending July 14, 2001 (twelve weeks), third
quarter ending October 6, 2001 (twelve weeks) and fourth quarter ending
December 29, 2001 (twelve weeks).

Reclassifications - Certain reclassifications of prior period data have
been made to conform with the current period reporting.

2. 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 the Kellogg
Company ("Kellogg"). In the transaction, FII transferred the stock of
its two wholly-owned subsidiaries, Flowers Bakeries, Inc. ("Flowers
Bakeries") and Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"),
and all other assets and liabilities directly held by FII (except for
its majority interest in Keebler Foods Company ("Keebler") and certain
debt, other liabilities and transaction costs) to the company. FII
distributed all of the outstanding shares of common stock of the
company to existing FII shareholders such that FII shareholders
received one share of the company's 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 proceeds paid directly to FII
shareholders of $1,241.6 million.

The result of the spin-off and merger transaction described above is
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. Smith's Bakeries with Keebler presented as a discontinued
operation. As such, the company classified all balance sheet
information relating to the spin-off and merger transaction for the
years ended December 30, 2000 and January 1, 2000 under the captions
"Net Assets of Discontinued Operations" and "Liabilities to be Settled
by Others" in the consolidated balance sheet.

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 $662.3 million, respectively, were
relieved from the balance sheet with a corresponding adjustment to
capital in excess of par value.

In addition, in connection with the spin-off and merger transaction,
various separation and other contractual payments under FII's 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 to the company's
continuing operations.

A-6
7

Changes in shareholders' equity as a result of the spin-off and merger
transaction are as follows (amounts in thousands):

OTHER
COMMON PAID IN RETAINED COMPREHENSIVE STOCK TOTAL
STOCK CAPITAL EARNINGS INCOME COMPENSATION EQUITY
------ ---------- ---------- ------------- ------------ -----------

12/30/2000 $ 199 $ 351,506 $ 164,135 $ -- $ (13,380) $ 502,460
Net Assets of Discontinued Operations (567,449) (567,449)
Net Liabilities Settled by Others 662,368 662,368
Separation and other contractual
payment expense 27,952 13,380 41,332
Stock Compensation Transactions 2,152 2,152
FAS 133 Adjustments (3,895) (3,895)
First Quarter 2001 Loss (20,680) (20,680)
------ ---------- ---------- --------- --------- ----------

04/21/2001 $ 199 $ 476,529 $ 143,455 $ (3,895) $ -- $ 616,288
====== ========== ========== ========= ========= ==========

3. RECLASSIFICATION OF CERTAIN MARKETING COSTS

In January 2001, the Emerging Issues Task Force ("EITF") reached a
consensus on how a vendor should account for an offer to a customer to
rebate or refund a specified amount of cash only if the customer
completes a specified cumulative level of revenue transactions or
remains a customer for a specified time period. This issue is one of
many issues contained in EITF 00-22, "Accounting for "Points" and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and
Offers for Free Products or Services to be Delivered in the Future".
This consensus states that a vendor should recognize a liability for
the rebate at the point of revenue recognition for the underlying
revenue transactions that result in progress by the customer toward
earning the rebate. Measurement of the liability should be based on the
estimated number of customers that will ultimately earn and claim
rebates or refunds under the offer. The vendor should classify the cost
of the rebate as a reduction of sales in the income statement. This
consensus became effective and was implemented by the company in the
first quarter of fiscal 2001. The company previously recorded such
sales incentives as selling, marketing and administrative expenses.
Accordingly, such expenses of $10.1 million and $11.5 million for the
first quarter of fiscal 2001 and fiscal 2000, respectively, were
recorded as reductions to arrive at sales. Additionally, such expenses
were $51.4 million and $56.9 million for fiscal years 2000 and 1999,
respectively. This consensus does not affect net income.

A-7
8

4. DERIVATIVE FINANCIAL INSTRUMENTS

On December 31, 2000, the company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended ("FAS 133"). In accordance with the
transition provisions of FAS 133, the company recorded the following
net-of-tax cumulative-effect transition adjustment to other
comprehensive income on December 31, 2000:

Dr. / (Cr.)
-----------

Related to previously designated cash flow hedging relationships:
Fair value of hedging instruments.................................... $ (454)
Previously deferred hedging losses................................... 6,283
--------
Total cumulative effect of adoption on other comprehensive
income................................................................ 5,829
Income tax.............................................................. (2,332)
--------
Total cumulative effect of adoption on other comprehensive
income, net of tax.................................................... $ 3,497
========

During the quarter ended April 21, 2001, the company reclassified a
portion of this transition adjustment to earnings which represents the
usage of raw materials under previously designated commodity hedging
instruments. The company expects to reclassify to earnings the
remaining transition adjustment amount within the next six months.

All derivatives are recognized on the balance sheet at their fair
value. On the date that the company enters into a derivative contract,
it designates the derivative as (1) a hedge of (a) the fair value of a
recognized asset or liability or (b) an unrecognized firm commitment (a
"fair value" hedge) or (2) a hedge of (a) a forecasted transaction or
(b) the variability of cash flows that are to be received or paid in
connection with 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 or gains and losses of closed
derivatives 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 of a closed
hedge position 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. Changes in the fair value of derivative non-hedging
instruments are also reported in current-period earnings.

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 credit agreement dated March 26, 2001 to a fixed rate
instrument. The interest rate swap agreement results 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 FAS
133, this swap transaction is designated as a cash-flow hedge and,
additionally, the company assumes no ineffectiveness in the hedging
relationship in accordance with FAS 133. Accordingly, the change in the
fair value of swap transaction is recorded each period in other
comprehensive income.

During the quarter ended April 21, 2001, net of tax changes to other
comprehensive income resulting from hedging activities were as follows:

Dr. / (Cr.)
-----------

December 30, 2000............................... $ 3,497
Net deferred gains on closed contracts.......... (594)
Reclassified to earnings........................ (1,664)
Effective portion of change in fair value of
hedging instruments........................... 2,656
-------
April 21, 2001.................................. $ 3,895
=======

The fair value of the company's cash flow commodity hedging instruments
and the interest rate swap was approximately $(0.5) million and $(4.1)
million, respectively, at April 21, 2001.

During the quarter ended April 21, 2001, the ineffective portion of the
change in fair value of its cash flow hedging instruments was not
material to net income.

A-8
9

5. DEBT

Long-term debt consisted of the following at April 21, 2001 and
December 30, 2000, respectively:

Interest Rate Maturity April 21, 2001 December 30, 2000
------------- -------- -------------- -----------------
(amounts in thousands)

Senior Secured Credit Facilities...... 7.99% 2007 $ 251,000 $ --
Debentures............................ 7.15% 2028 -- 200,000
Capital Lease Obligations............. 7.78% 2008 62,672 45,282
Other................................. 7.48% 2004 9,228 10,080
----------- ---------
322,900 255,362
----------- ---------
Less current maturities............ 27,852 7,515
----------- ---------
Total long term debt............... $ 295,048 $ 247,847
=========== =========

On March 26, 2001, the company completed a tender offer for the $200.0
million aggregate principle amount of 7.15% Debentures due 2028 (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. The discount of $12.3 million was partially offset by $4.2
million of debt issuance costs and $3.1 million of taxes. In addition,
the company purchased outstanding notes payable to SunTrust Bank from
certain of the company's independent distributors originally incurred
in connection with the independent distributors' purchase of routes.

The purchase of the debentures and distributor notes were financed
primarily from the proceeds of a new credit agreement entered into on
March 26, 2001. The new credit agreement provides for total borrowing
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.

The new 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. The covenant tests will begin in the second quarter of fiscal
2001. 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
cannot exceed $50.0 million in fiscal 2001 and 2002. No dividend can be
paid in fiscal 2001. Commencing in fiscal 2002, the maximum amount of
dividends that can be paid cannot exceed $5.0 million, unless certain
requirements are met. Loans under the credit agreement are secured by
substantially all assets of the company, excluding real property.

6. FACILITY CLOSING COSTS AND SEVERANCE

The company has continuing obligations in connection with certain plant
closings completed in prior years. Activity with respect to these
obligations are as follows (amounts in thousands):

12/30/2000 Prov/Adj Spending 04/21/2001
---------------------------------------------

Noncancelable lease obligations
and other facility closing costs $16,801 $0 $(1,083) $15,718
Other 2,555 0 (161) 2,394
--------------------------------------------
Total $19,356 $0 $(1,244) $18,112
============================================

A-9
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7. SEGMENT REPORTING

The company has two reportable segments, Flowers Bakeries and Mrs.
Smith's Bakeries. Flowers Bakeries produces fresh breads and rolls and
Mrs. Smith's Bakeries produces fresh and frozen baked desserts, snacks,
breads and rolls. The segments are managed as strategic business units
due to their distinct production processes and marketing strategies.

The company evaluates each segment's performance based on income or
loss before interest and income taxes, excluding corporate and other
unallocated expenses and non-recurring charges. Information regarding
the operations in these reportable segments is as follows (amounts in
thousands):

For the Sixteen Weeks Ended
----------------------------------
April 21, 2001 April 22, 2000
-------------- --------------
(Unaudited)

Sales:
Flowers Bakeries $ 321,565 $ 307,957
Mrs. Smith's Bakeries 166,735 161,484
Elimination (1) (21,061) (19,340)
--------- ---------
$ 467,239 $ 450,101
========= =========

Depreciation and Amortization:
Flowers Bakeries $ 12,547 $ 10,947
Mrs. Smith's Bakeries 8,417 8,266
Corporate 58 328
--------- ---------
$ 21,022 $ 19,541
========= =========

Income (Loss) from Operations:
Flowers Bakeries $ 20,438 $ 24,299
Mrs. Smith's Bakeries (7,096) (9,953)
Corporate (9,305) (5,918)
Insurance proceeds 6,789 0
Non-recurring charge (27,952) 0
--------- ---------
$ (17,126) $ 8,428
========= =========

- ---------------
(1) Represents elimination of intersegment sales from Mrs. Smith's
Bakeries to Flowers Bakeries.

8. COUPON EXPENSE

On May 18, 2000, the EITF reached consensus on Issue No. 00-14
"Accounting for Certain Sales Incentives." This issue addresses the
recognition, measurement, and income statement classification of sales
incentives offered by vendors (including manufacturers) that have the
effect of reducing the price of a product or service to a customer at
the point of sale. For cash sales incentives within the scope of this
issue, costs are generally recognized at the date on which the related
revenue is recorded by the vendor and are to be classified as a
reduction of revenue. For non-cash sales incentives, such as package
inserts, costs are to be classified within cost of sales. This issuance
is effective for the first quarter of fiscal 2002. Management has
assessed the impact of this guidance and determined that adoption will
not result in a material reclassification between sales and selling,
marketing, and administrative expense. The company currently records
coupon expenses as selling, marketing and administrative expenses.
Coupon expenses were $2.6 million and $2.2 million for the fiscal years
2000 and 1999, respectively. Upon adoption of EITF 00-14, the company
will record coupon expense as a reduction to arrive at sales. This
issuance will not affect net income.

A-11
11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:

Matters Affecting Analysis:
- --------------------------

The following discussion of the financial condition and results of operations
for the sixteen weeks ended April 21, 2001 should be read in conjunction with
Flowers Foods, Inc.'s (the "company's") annual report on Form 10-K for the
fiscal year ended December 30, 2000, filed with the Securities and Exchange
Commission on March 30, 2001.

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, Inc. ("Flowers Bakeries") and Mrs. Smith's Bakeries, Inc.
("Mrs. Smith's 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 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 the
company's 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 proceeds paid directly to FII shareholders
of $1,241.6 million.

The result of the spin-off and merger transaction described above is 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. Smith's Bakeries with Keebler
presented as a discontinued operation. As such, the company classified all
balance sheet information relating to the spin-off and merger transaction for
the years ended December 30, 2000 and January 1, 2000 under the captions "Net
Assets of Discontinued Operations" and "Liabilities to be Settled by Others" in
the consolidated balance sheet.

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 $662.3 million, respectively, were relieved from the balance
sheet with a corresponding adjustment to capital in excess of par value.

In addition, in connection with the spin-off and merger transaction, various
separation and other contractual payments under FII's 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, a charge of $28.0 million was recorded to the company's continuing
operations with a corresponding credit to capital in excess of par value in the
first quarter of 2001.

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, 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 provides 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. Also on March 26, 2001, the company purchased the notes receivable
("distributor notes") from its independent distributors which had previously
been owned by SunTrust Bank and serviced by Flowers Bakeries. The principal
balance of the distributor notes at this date was $77.6 million. This purchase
was financed from the proceeds of the credit agreement discussed above.

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. Smith's Bakeries incurred
substantial costs related to mechanical breakdown and product contamination at
certain plants. Mrs. Smith's Bakeries filed claims under the company's insurance
policies for a portion of these costs that it believed to be insured. During
fiscal 2000, Mrs. Smith's Bakeries recovered net insurance proceeds of $17.2
million. During the first quarter of fiscal 2001, the company finalized these
insurance claims and received additional net proceeds of $6.8 million as a final
settlement.

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12

Results of Operations:

Results of operations, expressed as a percentage of sales, for the sixteen weeks
ended April 21, 2001 and April 22, 2000, are set forth below:

For the Sixteen Weeks Ended
---------------------------------
April 21, 2001 April 22, 2000
-------------- --------------
(Unaudited)

Sales....................................................... 100.00% 100.00%
Gross margin................................................ 45.75% 45.71%
Selling, marketing and administrative expenses.............. 40.38% 39.50%
Depreciation and amortization............................... 4.50% 4.34%
Insurance proceeds.......................................... -1.45% 0.00%
Non-recurring charge........................................ 5.98% 0.00%
Interest.................................................... 3.76% 4.28%
Income (loss) before income taxes, extraordinary gain and
discontinued operations..................................... -7.43% -2.41%
Income taxes............................................... -1.93% -0.78%
Net income (loss)........................................... -4.43% 3.72%

CONSOLIDATED AND SEGMENT RESULTS

SIXTEEN WEEKS ENDED APRIL 21, 2001 COMPARED TO SIXTEEN WEEKS ENDED APRIL 22,
2000

Sales. For the sixteen weeks ended April 21, 2001, sales were $467.2 million, or
- ------
3.8% higher than sales for the comparable period in the prior year, which were
$450.1 million.

Flowers Bakeries' sales for the first quarter of fiscal 2001 were $321.6
million, an increase of 4.4% over sales of $308.0 million reported during the
same period a year ago. Of the 4.4% increase, 3.0% was due to pricing and 1.4%
was due to volume. Branded sales, which account for 63% of Flowers Bakeries'
total sales, increased by 6.6% over the same period in the prior year. Food
service sales, which account for 18% of Flowers Bakeries' total sales, increased
by 5.3% over the same period in the prior year.

Mrs. Smith's Bakeries' sales for the first quarter of fiscal 2001, excluding
intersegment sales of $21.0 million, were $145.7 million, an increase of 2.5%
over sales of $142.1 million reported during the same period a year ago. This
increase is due to better pricing and improved mix. Branded sales, which account
for 39% of Mrs. Smith's Bakeries' total sales, increased by 22.8% over the same
period in the prior year. This increase was partially offset by decreases in
in-store bakery sales of 10.8%. In-store bakery sales account for 13.5% of Mrs.
Smith's Bakeries' total sales.

Gross Margin. Gross margin for the first quarter of fiscal 2001 was $213.7
- -------------
million, or 3.9% higher than quarterly gross margin reported a year ago of
$205.8 million. As a percent of sales, gross margin was 45.8% for the first
quarter of fiscal 2001, compared to 45.7% for the first quarter of fiscal 2000.

Flowers Bakeries' gross margin increased to 55.7% of sales for the first quarter
of fiscal 2001, compared to 54.6% of sales for the comparable period in the
prior year. Lower ingredient costs, lease costs and improved pricing were
partially offset by higher labor and energy costs.

Mrs. Smith's Bakeries' gross margin increased to 25.8% of sales for the first
quarter of fiscal 2001, compared to 25.3% of sales for the comparable period in
the prior year. This increase is due to improved efficiencies as a result of the
correction of production facility breakdowns that resulted during the fiscal
year 1999 realignment.

Selling, Marketing and Administrative Expenses. During the first quarter of
- -----------------------------------------------
fiscal 2001, selling, marketing and administrative expenses were $188.7 million,
or 40.4% of sales, as compared to $177.8 million, or 40.0% of sales reported for
the comparable quarter a year ago.

Flowers Bakeries' selling, marketing and administrative expenses were $146.0
million or 45.4% of sales during the first quarter of fiscal 2001 as compared to
$133.0 million or 43.2% in the first quarter of fiscal 2000. The increase in
absolute terms as well as a percent of sales was composed of increases in labor
and fuel costs, and integration costs associated with the Kroger market
expansion. Additionally, with the continued rollout of the enterprise wide
information system (SAP), implementation costs including installation,
consulting, training and travel were higher compared to the prior year.

A-13
13
Mrs. Smith's Bakeries' selling, marketing and administrative expenses were $36.2
million or 24.9% of sales during the first quarter of fiscal 2001 as compared to
$37.7 million or 26.5% of sales during the same period a year ago. This decrease
is a result of lower distribution expenses and lower slotting fees. The slotting
fees decreased primarily as a result of the fact that higher costs were incurred
in the prior year related to the introduction of a new line of pies, Mrs.
Smith's "Cookies and Cream" pies.

Depreciation and Amortization. Depreciation and amortization expense was $21.0
- ------------------------------
million for the first quarter of fiscal 2001, an increase of 7.6% over the
corresponding period in the prior year, which was $19.5 million.

Flowers Bakeries' depreciation and amortization increased to $12.5 million in
the first quarter of fiscal 2001 from $10.9 million in the same period last
year. The increase is primarily attributable to the depreciation of costs
capitalized in prior years associated with SAP and increased depreciation as a
result of capital expenditures in the prior year.

Mrs. Smith's Bakeries' depreciation and amortization expense in the first
quarter of fiscal 2001 was $8.4 million as compared to $8.3 million in the same
period of last year. This increase is primarily due to capital expenditures
however, it was partially offset by 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 lines which was recorded in the fourth quarter of
fiscal 2000.

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. Smith's Bakeries incurred substantial costs related to mechanical
breakdown and product contamination at certain plants. Mrs. Smith's Bakeries
filed claims under the company's insurance policies for a portion of these costs
that it believed to be insured. During the first quarter of fiscal 2001, Mrs.
Smith's Bakeries recovered net insurance proceeds of $6.8 million as a final
settlement.

Non-recurring Charge. During the first quarter of fiscal 2001, in connection
- ---------------------
with the spin-off and merger transaction, various separation and other
contractual payments under FII's stock and incentive programs of $39.0 million
were paid to executive and non-executive officers and employees. Of this amount,
$11.0 million had already been expensed as of December 30, 2000. Accordingly, a
charge of $28.0 million was recorded in the company's continuing operations in
the first quarter of 2001.

Interest Expense. For the first quarter of fiscal 2001, net interest expense was
- -----------------
$17.6 million, a decrease of $1.7 million over the corresponding period in the
prior year, which was $19.3 million. The decrease is a due to a decrease in debt
that resulted from the spin-off and merger transaction which occurred on March
26, 2001.

Income (Loss) Before Income Taxes, Extraordinary Gain and Discontinued
- ----------------------------------------------------------------------
Operations. The loss before income taxes, extraordinary gain and discontinued
- -----------
operations for the first quarter of fiscal 2001 was $34.7 million, an increase
of $23.9 million from the $10.8 million loss reported in the first quarter of
fiscal 2000. The increased loss is primarily a result of the expense of $28.0
million associated with separation and other contractual payments resulting from
the spin-off merger transaction. In addition, the company had an increase in
unallocated costs of $3.4 million which was primarily the result of the
implementation of FAS 133. Flowers Bakeries operating income decreased by $3.9
million. Partially offsetting these negative items were insurance proceeds of
$6.8 million, an increase in Mrs. Smith's Bakeries' operating income of $2.9
million and a decrease in interest expense of $1.7 million.

Income Taxes. The income tax benefit during the first quarter of fiscal 2001 was
- -------------
provided for at an estimated effective rate of 26%. The effective rate differs
from the statutory rate due to nondeductible expenses, principally amortization
of intangibles, including trademarks, trade names, other intangibles and
goodwill.

Extraordinary Gain on the Early Extinguishment of Debt. 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, 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 $4.2 million in debt issuance costs and $3.1 million in
taxes.

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 entity that includes the historical financial information of Flowers
Bakeries and Mrs. Smith's Bakeries with Keebler presented as a discontinued
operation. FII's share of Keebler's net income from December 30, 2000 through
March 26, 2001 was included in phase-out income from discontinued operations in
fiscal year 2000. The company's share of Keebler's net income ($24.1 million)
for the first quarter of fiscal year 2000 is presented as discontinued
operations.

Net Income (Loss). The net loss for the first quarter of fiscal 2001 was $20.7
- ------------------
million as compared to net income of $16.8 million for the first quarter of
fiscal 2000.

A-14
14
Liquidity and Capital Resources:

Net cash disbursed for operating activities for the sixteen weeks ended April
21, 2001 was $36.1 million. Accounts receivable and inventory increased $14.9
million, and $13.5 million, respectively. In addition, accounts payable and
facility closing cost reserves decreased $2.0 million and $1.2 million,
respectively.

Net cash disbursed for investing activities for the sixteen weeks ended April
21, 2001 of $84.9 million included capital expenditures of $13.8 million.
Capital expenditures at Flowers Bakeries and Mrs. Smith's Bakeries were $5.6
million and $8.2 million, respectively. In addition, $77.6 million was used to
purchase outstanding notes payable to SunTrust Bank from certain of the
company's independent distributors. Partially offsetting these items was a
dividend of $5.2 million received from FII's 55% ownership of Keebler before it
was sold on March 26, 2001.

The purchase of the debentures and distributor notes was financed primarily from
the proceeds of a new credit agreement entered into on March 26, 2001. The
credit agreement provides for total borrowing of up to $380.0 million consisting
of Term Loan A of $100.0 million and Term Loan B of $150.0 million and a
revolving loan facility of $130.0 million. In addition, the company purchased
outstanding notes payable to SunTrust Bank from certain of the company's
independent distributors originally incurred in connection with the independent
distributors' purchase of routes.

The new 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. Capital expenditures
cannot exceed $50.0 million in fiscal 2001 and 2002. No dividend can be paid in
fiscal 2001. Commencing in fiscal 2002, the maximum amount of dividends that can
be paid cannot exceed $5.0 million, unless certain requirements are met. Loans
under the credit agreement are secured by substantially all assets of the
company, excluding real property. These covenant tests will begin in the second
quarter of fiscal 2001.

At April 21, 2001, cash equivalents were $11.3 million. Consolidated long-term
debt was $295.0 million and current maturities of long-term debt were $27.9
million at April 21, 2001. The company believes that, in light of its current
cash position and its cash flow from operating activities, it can meet presently
foreseeable financial requirements.

New Accounting Pronouncements:

A-15
15
In January 2001, the Emerging Issues Task Force reached a consensus on how a
vendor should account for an offer to a customer to rebate or refund a specified
amount of cash only if the customer completes a specified cumulative level of
revenue transactions or remains a customer for a specified time period. This
issue is one of many issues contained in EITF 00-22, "Accounting for "Points"
and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers
for Free Products or Services to be Delivered in the Future". This consensus
states that a vendor should recognize a liability for the rebate at the point of
revenue recognition for the underlying revenue transactions that result in
progress by the customer toward earning the rebate. Measurement of the liability
should be based on the estimated number of customers that will ultimately earn
and claim rebates or refunds under the offer. The vendor should classify the
cost of the rebate as a reduction of revenue in the income statement. This
consensus became effective and was adopted by the company in the first quarter
of fiscal 2001. The company previously recorded such sales incentives as
selling, marketing and administrative expenses. Accordingly, such expenses of
$10.1 million and $11.5 million for the first quarter of fiscal 2001 and fiscal
2000, respectively were recorded as reductions to arrive at sales. Additionally,
such expenses were $51.4 million and $56.9 million for fiscal years 2000 and
1999, respectively. This consensus does not affect net income.

On May 18, 2000, the EITF reached consensus on Issue No. 00-14 "Accounting for
Certain Sales Incentives." This issuance addresses the recognition, measurement,
and income statement classification of sales incentives offered by vendors
(including manufacturers) that have the effect of reducing the price of a
product or service to a customer at the point of sale. For cash sales incentives
within the scope of this issue, costs are generally recognized at the date on
which the related revenue is recorded by the vendor and are to be classified as
a reduction of revenue. For non-cash sales incentives, such as package inserts,
costs are to be classified within cost of sales. This issuance is effective for
the first quarter of fiscal 2002. Management has assessed the impact of this
guidance and determined that adoption will not result in a material
reclassification between net sales and selling, marketing, and administrative
expense. The company currently records coupon expenses as selling, marketing and
administrative expenses. Coupon expenses were $2.6 million and $2.2 million for
the fiscal years 2000 and 1999, respectively. Upon adoption of EITF 00-14, the
company will record coupon expense as a reduction to arrive at sales. This
issuance will not affect net income.

Forward-Looking Statements:

Statements contained in this filing that are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ from those
projected. Other factors that may cause actual results to differ from
forward-looking statements and that may affect the company's prospects in
general include, but are not limited to, changes in general economic and
business conditions (including the baked foods markets), energy and raw
materials costs, the company's ability to operate the manufacturing lines
according to schedule, actions of competitors and customers and the extent to
which the company is able to develop new products and markets for its products.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

In the normal course of business, the company is exposed to commodity price and
interest rate risks, primarily related to the purchase of raw materials and
packaging supplies and changes in interest rates. The company's primary raw
materials are flour, sugar, shortening, fruits and dairy products. All
derivatives are recognized on the balance sheet at their fair value. On the date
that the company enters into a derivative contract, it designates the derivative
as (1) a hedge of (a) the fair value of a recognized asset or liability or (b)
an unrecognized firm commitment (a "fair value" hedge) or (2) a hedge of (a) a
forecasted transaction or (b) the variability of cash flows that are to be
received or paid in connection with 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 or gains and losses of closed derivatives 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 of a closed
hedge position is used in product 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. Changes in the
fair value of derivative non-hedging instruments are also reported in
current-period earnings. The company manages its exposure to these risks through
the use of various financial instruments, none of which are entered into for
trading purposes. The company has established policies and procedures governing
the use of financial instruments, specifically as it relates to the type and
volume of financial instruments entered into. Financial instruments can only be
used to hedge an economic exposure, and speculation is prohibited.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None

A-16
16

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

On April 2, 2001, Flowers Foods filed a current report on Form 8-K under
Item 5, announcing (a) the completion of its spin-off from Flowers
Industries and the simultaneous acquisition of Keebler Foods Company through
the merger of Flowers Industries with a wholly owned subsidiary of Kellogg
Company and (b) that Flowers Industries shareholders would receive a cash
payment of $12.50 per share in connection with the merger of Flowers
Industries.

A-17
17

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

FLOWERS FOODS, INC.

/s/ Amos R. McMullian
--------------------------------
By: Amos R. McMullian
Chairman of the Board

/s/ Jimmy M. Woodward
--------------------------------
By: Jimmy M. Woodward
Vice President and
Chief Financial Officer

June 5, 2001
- ---------------
Date

A-18