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 July 14, 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 (I.R.S. Employer Identification
of 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 AUGUST 24, 2001
------------------- ------------------------------

Common Stock, $.01 par value with Preferred
Share Purchase Rights..................... 19,865,968

A-1
2

FLOWERS FOODS
INDEX

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

PART I. Financial Information......................................................................... A-3

Item 1. Financial Statements.......................................................................... A-3

Condensed Consolidated Balance Sheet July 14, 2001 and December 30, 2000........................ A-3

Condensed Consolidated Statement of Income Twelve and Twenty-Eight Weeks Ended July 14, 2001
and July 15, 2000............................................................................... A-4

Condensed Consolidated Statement of Cash Flows Twenty-Eight Weeks Ended July 14, 2001
and July 15, 2000............................................................................... A-5

Notes to Condensed 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-19

PART II. Other Information............................................................................ A-20

Item 1. Legal Proceedings............................................................................. A-20

Item 4. Submission of Matters to a Vote of Security Holders........................................... A-20

Item 5. Other Information............................................................................. A-20

Item 6. Exhibits and Reports on Form 8-K.............................................................. A-20

A-2
3

FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share data)

JULY 14, 2001 DECEMBER 30, 2000
------------- -----------------
(Unaudited)

ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 7,708 $ 11,845
Accounts and notes receivable, net of allowances.......................
of $16,324 and $19,288, respectively................................... 121,050 113,099
Inventories, net:
Raw materials....................................................... 20,508 26,583
Packaging materials................................................. 14,202 12,048
Finished goods...................................................... 83,433 49,276
Other............................................................... 2,709 2,524
----------- -----------
120,852 90,431
Other.................................................................. 47,304 51,925
----------- -----------
296,914 267,300
----------- -----------

Property, Plant and Equipment:
Land................................................................... 33,221 33,386
Buildings.............................................................. 264,241 264,889
Machinery and equipment................................................ 637,387 567,682
Furniture, fixtures and transportation equipment....................... 66,643 64,596
Construction in progress............................................... 13,502 1,081
----------- -----------
1,014,994 931,634
Less: accumulated depreciation......................................... (395,485) (362,160)
----------- -----------
619,509 569,474
----------- -----------
Notes Receivable.......................................................... 71,748 0
----------- -----------
Net Assets of Discontinued Operations..................................... 0 567,449
----------- -----------
Other Assets.............................................................. 41,056 31,880
----------- -----------
Cost in Excess of Net Tangible Assets:
Cost in excess of net tangible assets.................................. 160,055 167,425
Less: accumulated amortization......................................... (37,495) (40,882)
----------- -----------
122,560 126,543
----------- -----------
$ 1,151,787 $ 1,562,646
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt................................... $ 29,540 $ 7,515
Accounts payable....................................................... 81,969 100,775
Facility closing costs and severance................................... 7,988 5,465
Other accrued liabilities.............................................. 73,438 68,612
----------- -----------
192,935 182,367
----------- -----------

Long-Term Debt and Capital Leases......................................... 291,981 247,847
----------- -----------

Other Liabilities:
Facility closing costs and severance................................... 10,993 13,891
Postretirement/postemployment obligations.............................. 24,444 22,331
Liabilities to be settled by others.................................... 0 584,198
Other.................................................................. 10,008 9,552
----------- -----------
45,445 629,972
----------- -----------

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, 100,000,000 authorized and
19,865,968 and 19,865,964 shares issued, respectively................. 199 199
Capital in excess of par value......................................... 476,529 351,506
Retained earnings...................................................... 147,157 164,135
Other comprehensive income............................................. (2,459) 0
Stock compensation related adjustments................................. 0 (13,380)
----------- -----------
621,426 502,460
----------- -----------
$ 1,151,787 $ 1,562,646
=========== ===========

(See Accompanying Notes to Condensed Consolidated Financial Statements)

A-3
4

FLOWERS FOODS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENT
(Amounts in thousands except per share data)
(Unaudited)

For the Twelve Weeks Ended For the Twenty-Eight Weeks End
----------------------------- ------------------------------
July 14, 2001 July 15, 2000 July 14, 2001 July 15, 2000
------------- ------------- ------------- -------------

Sales............................................................. $ 368,938 $ 353,523 $ 836,177 $ 803,624
Materials, supplies, labor and other production costs............. 195,995 204,472 449,487 448,817
Selling, marketing and administrative expenses.................... 142,940 135,984 331,628 313,771
Depreciation and amortization..................................... 16,893 15,431 37,915 34,972
Insurance proceeds, net........................................... (684) (1,669) (7,473) (1,669)
Non-recurring charges............................................. 3,135 0 31,087 0
---------- ---------- ---------- ----------
Income (Loss) from operations..................................... 10,659 (695) (6,467) 7,733

Interest (income)................................................. (1,261) 0 (1,696) 0
Interest expense.................................................. 6,914 16,215 24,927 35,470
---------- ---------- ---------- ----------
Interest expense, net............................................. 5,653 16,215 23,231 35,470
---------- ---------- ---------- ----------

Income (Loss) before income taxes, extraordinary gain and
discontinued operations......................................... 5,006 (16,910) (29,698) (27,737)
Income tax expense (benefit)...................................... 1,304 (5,939) (7,720) (9,470)
---------- ---------- ---------- ----------
Income (Loss) before extraordinary gain and discontinued
operations...................................................... 3,702 (10,971) (21,978) (18,267)
Extraordinary gain on early extinguishment of debt................ 0 0 5,000 0
Net income from discontinued operations........................... 0 16,500 0 40,553
---------- ---------- ---------- ----------
Net income (loss)................................................. $ 3,702 $ 5,529 $ (16,978) $ 22,286
========== ========== ========== ==========

Net Income (Loss) Per Common Share:
Basic:
Income (Loss) from continuing operations before
extraordinary gain on early extinguishment of
debt and income from discontinued operations.................. $ 0.19 $ (0.55) $ (1.11) $ (0.91)
Extraordinary gain on early extinguishment of debt.............. 0.00 0.00 0.26 0.00
Net income from discontinued operations......................... 0.00 0.83 0.00 2.02
---------- ---------- ---------- ----------
Net income (loss) per share..................................... 0.19 0.28 (0.85) 1.11
========== ========== ========== ==========

Weighted average shares outstanding............................. 19,866 20,014 19,866 20,029

Diluted:
Income (Loss) from continuing operations before
extraordinary gain on early extinguishment of debt
and income from discontinued operations....................... $ 0.18 $ (0.55) $ (1.10) $ (0.91)
Extraordinary gain on early extinguishment of debt.............. 0.00 0.00 0.26 0.00
Net income from discontinued operations......................... 0.00 0.83 0.00 2.02
---------- ---------- ---------- ----------
Net income (loss) per share..................................... 0.18 0.28 (0.85) 1.11
========== ========== ========== ==========

Weighted average shares outstanding............................. 20,146 20,057 20,006 20,074

Cash Dividends Paid Per Common Share.............................. $ 0.0000 $ 0.1325 $ 0.0000 $ 0.2650

(See Accompanying Notes to Condensed Consolidated Financial Statements)

A-4
5

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

For the Twenty-Eight Weeks Ended
--------------------------------
July 14, 2001 July 15, 2000
------------- -------------

CASH FLOWS (DISBURSED FOR) RECEIVED FROM OPERATING ACTIVITIES:
Net (loss) income........................................................... $ (16,978) $ 22,286
Adjustments to reconcile net loss to net cash
(disbursed for) received from operating activities:
Extraordinary gain, net of taxes........................................ (5,000) 0
Income from discontinued operations, net of taxes....................... 0 (40,553)
Non-recurring charge.................................................... 3,135 0
Depreciation and amortization........................................... 37,915 34,972
Deferred income taxes................................................... (7,720) (12,373)
Allowances for accounts receivable...................................... 1,162 1,183
Other................................................................... 3,071 820
Changes in assets and liabilities:
Accounts and notes receivable, net...................................... (1,291) (2,509)
Inventories, net........................................................ (30,421) (13,111)
Other assets............................................................ 10,931 19,328
Accounts payable and other accrued liabilities.......................... (10,847) 932
Facility closing costs and severance.................................... (2,241) (2,676)
---------- -----------
NET CASH (DISBURSED FOR) RECEIVED FROM OPERATING ACTIVITIES................. $ (18,284) $ 8,299
---------- -----------
CASH FLOWS (DISBURSED FOR) RECEIVED FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............................... (26,815) (33,767)
Purchase of notes receivable............................................ (77,646) 0
Acquisitions, net of divestitures....................................... 0 (22,070)
Dividends received...................................................... 5,197 10,394
Proceeds from property disposals........................................ 57 12,949
Other................................................................... (737) (338)
---------- -----------
NET CASH DISBURSED FOR INVESTING ACTIVITIES................................. $ (99,944) $ (32,832)
---------- -----------
CASH FLOWS (DISBURSED FOR) RECEIVED FROM FINANCING ACTIVITIES:
Dividends paid.......................................................... 0 (26,111)
Treasury stock purchases................................................ 0 (41)
Stock compensation and warrants exercised............................... 337 4,454
Proceeds from new credit agreement...................................... 251,000 0
Purchase of debentures.................................................. (193,776) 0
Payment of financing fees............................................... (9,978) 0
Other debt and capital lease obligation (payments)/proceeds............. (2,696) 28,632
Other net changes in debt and other liabilities in connection with
the spin-off and merger............................................... 69,204 0
---------- -----------
NET CASH RECEIVED FROM FINANCING ACTIVITIES................................. $ 114,091 $ 6,934
---------- -----------
Net decrease in cash and cash equivalents................................... (4,137) (17,599)
Cash and cash equivalents at beginning of period............................ 11,845 18,665
---------- -----------
Cash and cash equivalents at end of period.................................. $ 7,708 $ 1,066
========== ===========

(See Accompanying Notes to Condensed Consolidated Financial Statements)

A-5
6

FLOWERS FOODS, INC.
NOTES TO CONDENSED 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 condensed
consolidated financial statements included herein contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position as of July 14, 2001 and December 30, 2000, the results of
operations for the twelve and twenty-eight week periods ended July 14, 2001 and
July 15, 2000 and statement of cash flows for the twenty-eight week periods
ended July 14, 2001 and July 15, 2000. The results of operations for the twelve
and twenty-eight week periods ended July 14, 2001 and July 15, 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 ended 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 fiscal 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. Changes in shareholders' equity
as a result of the spin-off and merger transaction, FAS 133 adoption and
operational results for the first half of fiscal year 2001 are as follows
(amounts in thousands):

A-6
7

OTHER
COMMON PAID IN RETAINED COMPREHENSIVE STOCK
STOCK CAPITAL EARNINGS INCOME COMPENSATION TOTAL 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 Payments...... 27,952 13,380 41,332
Stock Compensation Transactions................ 2,152 2,152
FAS 133 Adjustments............................ (2,459) (2,459)
Net Loss....................................... (16,978) (16,978)
-------- ---------- ------------ -------- ---------- ----------

07/14/2001..................................... $ 199 $ 476,529 $ 147,157 $ (2,459) $ -- $ 621,426
======== ========== ============ ======== ========== ==========

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, for the quarters
ended July 14, 2001 and July 15, 2000, respectively, expenses of $6.4 million
and $10.0 million were recorded as reductions to arrive at net sales. For the
twenty-eight weeks ended July 14, 2001 and July 15, 2000, respectively, expenses
of $16.5 million and $21.5 million were recorded as reductions to arrive at net
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.

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 (amounts in thousands):

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 twenty-eight weeks ended July 14, 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 three months.

A-7
8

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 are
highly effective as, and that are designated and qualify 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 the swap transaction is recorded
each period in other comprehensive income.

During the twenty-eight weeks ended July 14, 2001, net of tax changes to other
comprehensive income resulting from hedging activities were as follows:

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

December 31, 2000 .................................................... $ 3,497
Net deferred gains on closed contracts ............................... (476)
Reclassified to earnings ............................................. (2,930)
Effective portion of change in fair value of hedging instruments ..... 2,368
--------
July 14, 2001 ........................................................ $ 2,459
========

The fair value of the company's cash flow commodity hedging instruments and the
interest rate swap was approximately $0.1 million and $(3.6) million,
respectively, at July 14, 2001.

During the quarter ended July 14, 2001, the ineffective portion of the change in
fair value of the company's cash flow hedging instruments was not material to
net income.

5. DEBT

Long-term debt consisted of the following at July 14, 2001 and December 30,
2000, respectively:

INTEREST RATE MATURITY JULY 14, 2001 DECEMBER 30, 2000
------------- -------- ------------- -----------------
(Amounts in thousands)

Senior Secured Credit Facilities ....... 6.63% 2007 $250,000 $ --
Debentures ............................. 7.15% 2028 -- 200,000
Capital Lease Obligations .............. 6.70% 2008 62,676 45,282
Other .................................. 7.48% 2004 8,845 10,080
-------- --------
321,521 255,362
Less current maturities ........... 29,540 7,515
-------- --------
Total long-term debt .............. $291,981 $247,847
======== ========

A-8
9
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 a
financial institution 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. Restrictive financial covenants
include such ratios as a consolidated interest coverage ratio, a consolidated
fixed charge coverage ratio and a maximum leverage ratio. As of July 14, 2001,
the company is in compliance with these covenants. Capital expenditures cannot
exceed $50.0 million in fiscal 2001 and 2002. No dividends 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

During the second quarter of fiscal 2001, Flowers Bakeries recorded a
non-recurring charge of $3.1 million as a result of the decision to close its
Memphis, Tennessee production facility. The facility is being closed in order to
rationalize production efforts in this geographical area. The area will continue
to be served from other production facilities. Severance costs of $1.4 million
provided for the termination of 123 employees. Asset impairment charges of $0.7
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 is expected to be substantially complete in
the third quarter of fiscal 2001.

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

12/30/2000 PROVISION SPENDING 07/14/2001
---------- --------- -------- ----------

Noncancelable lease obligations
and other facility closing costs.... $16,801 $ 160 $(1,832) $15,129
Severance............................ 0 1,413 (98) 1,315
Asset impairment..................... 0 1,269 (1,269) 0
Other................................ 2,555 293 (311) 2,537
------- ------- ------- -------
Total $19,356 $ 3,135 $(3,510) $18,981
======= ======= ======= =======

A-9
10

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 unallocated expenses and non-recurring charges. Information regarding
the operations in these reportable segments is as follows (amounts in
thousands):

FOR THE TWELVE WEEKS ENDED FOR THE TWENTY-EIGHT WEEKS ENDED
--------------------------- --------------------------------
JULY 14, 2001 JULY 15, 2000 JULY 14, 2001 JULY 15, 2000
------------- ------------- ------------- -------------
(Unaudited)

SALES:
Flowers Bakeries.................. $ 250,517 $ 240,729 $ 572,082 $ 548,686
Mrs. Smith's Bakeries............. 132,643 127,365 299,378 288,849
Elimination(1).................... (14,222) (14,571) (35,283) (33,911)
---------- ---------- ---------- ----------
$ 368,938 $ 353,523 $ 836,177 $ 803,624
========== ========== ========== ==========

DEPRECIATION AND AMORTIZATION:
Flowers Bakeries.................. $ 10,369 $ 8,699 $ 22,916 $ 19,646
Mrs. Smith's Bakeries............. 6,481 6,685 14,898 14,951
Unallocated expenses.............. 43 47 101 375
---------- ---------- ---------- ----------
$ 16,893 $ 15,431 $ 37,915 $ 34,972
========== ========== ========== ==========

INCOME (LOSS) FROM OPERATIONS:
Flowers Bakeries.................. $ 19,161 $ 20,394 $ 39,599 $ 44,693
Mrs. Smith's Bakeries............. (409) (15,522) (7,505) (25,475)
Unallocated expenses.............. (5,642) (7,236) (14,947) (13,154)
Insurance proceeds................ 684 1,669 7,473 1,669
Non-recurring charges............. (3,135) 0 (31,087) 0
---------- ---------- ---------- ----------
$ 10,659 $ (695) $ (6,467) $ 7,733
========== ========== ========== ==========

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

8. NEW ACCOUNTING PRONOUNCEMENTS

In May 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 issuance, 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. The company currently
records coupon expenses as selling, marketing and administrative expenses. For
the quarters ended July 14, 2001 and July 15, 2000, respectively, coupon
expenses of $0.6 million and $0.9 million were recorded. For the twenty-eight
weeks ended July 14, 2001 and July 15, 2000, respectively, coupon expenses of
$2.8 million and $1.6 million were recorded. Additionally, coupon expenses were
$2.6 million and $2.2 million for fiscal years 2000 and 1999, respectively.
Upon adoption of EITF 00-14, the company will record coupon expenses as a
reduction to arrive at net sales. This issuance will not affect net income.

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In April 2001, the EITF reached consensus on Issue No. 00-25 "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendors
Products or Services." This issuance provides guidance primarily on income
statement classification of consideration from a vendor to a purchaser of the
vendor's products. Generally, cash consideration is to be classified as a
reduction of revenue, unless specific criteria are met regarding goods or
services that the vendor may receive in return for this consideration. The
company has historically classified certain costs covered by the provisions of
EITF 00-25 as selling expenses. This consensus is effective for the first
quarter of fiscal year 2002. For the quarters ended July 14, 2001 and July 15,
2000, respectively, expenses covered by EITF 00-25 were $0.0 million and $1.1
million. For the twenty-eight weeks ended July 14, 2001 and July 15, 2000,
respectively, these expenses were $0.0 million and $1.9 million. Additionally,
these expenses were $3.4 million and $1.8 million for fiscal years 2000 and
1999, respectively. Upon adoption, these expenses will be reclassified as a
reduction to arrive at sales. This issuance will not affect net income.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets."
SFAS No. 141, which replaces Accounting Principles Board Opinion 16, "Business
Combinations", requires business combinations initiated after June 30, 2001 to
be accounted for using the purchase method of accounting and broadens the
criteria for recording intangible assets separate from goodwill. SFAS No. 142,
which replaces APB 17, "Intangible Assets", requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down when appropriate under the criteria of SFAS 142.
The provisions of each statement which apply to goodwill and intangible assets
acquired prior to June 30, 2001 will be adopted by the company in the first
quarter of fiscal year 2002. Management is currently evaluating the impact of
these statements on the company's results of operations and financial position.

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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 twelve and twenty-eight week periods ended July 14, 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.

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 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 a financial institution and serviced by Flowers Bakeries. The
principal balance of the distributor notes at that date was $77.6 million. The
purchase of the debentures and the distributor notes were financed from the
proceeds of the credit agreement discussed above.

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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 twenty-eight weeks ended July 14, 2001, the company
finalized these insurance claims and received additional net proceeds of $7.5
million, $0.7 million of which was received in the second quarter.

RESULTS OF OPERATIONS:

Results of operations, expressed as a percentage of sales, for the twelve and
twenty-eight week periods ended July 14, 2001 and July 15, 2000, are set forth
below:

For the Twelve Weeks Ended For the Twenty-Eight Weeks Ended
--------------------------- --------------------------------
July 14, 2001 July 15, 2000 July 14, 2001 July 15, 2000
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)

Sales...................................................... 100.00% 100.00% 100.00% 100.00%
Gross margin............................................... 46.88% 42.16% 46.24% 44.15%
Selling, marketing and administrative expenses............. 38.74% 38.47% 39.66% 39.04%
Depreciation and amortization.............................. 4.58% 4.36% 4.53% 4.35%
Insurance proceeds......................................... -0.19% -0.47% -0.89% -0.21%
Non-recurring charge....................................... 0.85% 0.00% 3.72% 0.00%
Interest................................................... 1.53% 4.59% 2.78% 4.41%
Income (loss) before income taxes, extraordinary gain
and discontinued operations................................ 1.36% -4.78% -3.55% -3.45%
Income taxes............................................... 0.35% -1.68% -0.92% -1.18%
Net income (loss).......................................... 1.00% 1.56% -2.03% 2.77%

CONSOLIDATED AND SEGMENT RESULTS

TWELVE WEEKS ENDED JULY 14, 2001 COMPARED TO TWELVE WEEKS ENDED JULY 15, 2000

SALES. For the twelve weeks ended July 14, 2001, sales were $368.9 million, or
4.4% higher than sales for the comparable period in the prior year, which were
$353.5 million.

Flowers Bakeries' sales for the second quarter of fiscal 2001 were $250.5
million, an increase of 4.1% over sales of $240.7 million reported during the
same period a year ago. Branded and private label products distributed through
the company's direct store door delivery system to supermarkets, convenience
stores, mass merchandisers and club stores represent approximately 80% of
Flowers Bakeries' sales. These sales, driven by the company's "Natures Own"
brand of soft variety breads, increased approximately 4% over the comparable
period in the prior year. This increase is primarily attributable to increased
selling prices and a favorable product mix. The balance of Flowers Bakeries'
sales is primarily to foodservice customers. Foodservice sales increased
approximately 3% over the comparable period in the prior year. This increase is
primarily due to favorable pricing.

Mrs. Smith's Bakeries' sales for the second quarter of fiscal 2001, excluding
intersegment sales of $14.2 million, were $118.4 million, an increase of 5.0%
over sales of $112.8 million, excluding intersegment sales of $14.6 million,
reported during the same period a year ago. Branded and private label products
distributed frozen and non-frozen to supermarkets, convenience stores, mass
merchandisers, club stores and the vending trade represent approximately 60% of
Mrs. Smith's Bakeries' sales. These sales increased approximately 4% over the
comparable period in the prior year. This increase is primarily due to
favorable pricing and volume. Sales to foodservice customers represent
approximately 30% of Mrs. Smith's Bakeries' sales. Foodservice sales increased
approximately 1% over the comparable period in the prior year. This increase is
primarily due to favorable pricing. The balance of Mrs. Smith's Bakeries' sales
is primarily to non-affiliated food companies under contract production
arrangements. These sales increased approximately 21% over the comparable
period in the prior year primarily due to volume increases.

GROSS MARGIN. Gross margin for the second quarter of fiscal 2001 was $172.9
million, or 16.0% higher than comparable quarterly gross margin reported a year
ago of $149.1 million. As a percent of sales, gross margin was 46.9% for the
second quarter of fiscal 2001, compared to 42.2% for the second quarter of
fiscal 2000.

Flowers Bakeries' gross margin increased to 56.5% of sales for the second
quarter of fiscal 2001, compared to 54.8% of sales for the comparable period in
the prior year. Improved pricing and lower ingredient and lease costs were
partially offset by higher labor and energy costs.

Mrs. Smith's Bakeries' gross margin increased to 28.4% of sales for the second
quarter of fiscal 2001, compared to 18.4% 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 occurred during the fiscal
year 1999 realignment.

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SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. During the second quarter of
fiscal 2001, selling, marketing and administrative expenses were $142.9 million,
or 38.7% of sales, as compared to $136.0 million, or 38.5% of sales reported for
the comparable quarter a year ago.

Flowers Bakeries' selling, marketing and administrative expenses were $112.0
million or 44.7% of sales during the second quarter of fiscal 2001 as compared
to $102.9 million or 42.7% in the second quarter of fiscal 2000. The increase in
absolute terms as well as a percent of sales was composed of increases in labor
costs, and integration costs associated with the Memphis, Tennessee market
expansion.

Mrs. Smith's Bakeries' selling, marketing and administrative expenses were $27.6
million or 23.3% of sales during the second quarter of fiscal 2001 as compared
to $29.6 million or 26.3% of sales during the same period a year ago. This
decrease is a result of lower distribution expenses and lower trade promotional
expenses. The trade promotional expenses decreased primarily as a result of the
fact that higher costs were incurred in the prior year period related to the
introduction of Mrs. Smith's "Cookies and Cream" pies.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $16.9
million for the second quarter of fiscal 2001, an increase of 9.7% over the
corresponding period in the prior year, which was $15.4 million.

Flowers Bakeries' depreciation and amortization expense increased to $10.4
million in the second quarter of fiscal 2001 from $8.7 million in the same
period last year. The increase is 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 which were
accounted for as operating leases in the prior year.

Mrs. Smith's Bakeries' depreciation and amortization expense in the second
quarter of fiscal 2001 was $6.5 million as compared to $6.7 million in the same
period of last year. This slight decrease is primarily due to 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. This decrease was partially offset by
increases in depreciation resulting from 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. 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 second quarter of fiscal 2001, Mrs.
Smith's Bakeries recovered net insurance proceeds of $0.7 million.

NON-RECURRING CHARGE. During the second quarter of fiscal 2001, Flowers Bakeries
recorded a non-recurring charge of $3.1 million as a result of the decision to
close its Memphis, Tennessee production facility. The facility is being closed
in order to rationalize production efforts in this geographical area. The area
will continue to be served from other production facilities. Severance costs of
$1.4 million provided for the termination of 123 employees. Asset impairment
charges of $0.7 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 is expected to be
substantially complete in the third quarter of fiscal 2001.

INTEREST EXPENSE. For the second quarter of fiscal 2001, net interest expense
was $5.7 million, a decrease of $10.5 million from the corresponding period in
the prior year, which was $16.2 million. The decrease is 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 income before income taxes, extraordinary gain and discontinued
operations for the second quarter of fiscal 2001 was $5.0 million, an increase
of $21.9 million from the $16.9 million loss reported in the second quarter of
fiscal 2000. The increase is primarily a result of a decrease in Mrs. Smith's
Bakeries' operating loss of $15.1 million and decreases in interest and other
non operating expenses related to the accounting of the company's hedging
program under FAS 133 of $10.5 million and $1.6 million, respectively. These
positive results were partially offset by decreases in Flowers Bakeries'
operating income and decreases in Mrs. Smith's Bakeries' insurance proceeds of
$1.2 million and $1.0 million, respectively, and an increase in non-recurring
charges of $3.1 million.

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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 financial reporting 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. The company's share of Keebler's net income ($16.5
million) for the second quarter of fiscal 2000 is presented as discontinued
operations.

NET INCOME (LOSS). The net income for the second quarter of fiscal 2001 was $3.7
million as compared to net income of $5.5 million for the second quarter of
fiscal 2000.

TWENTY-EIGHT WEEKS ENDED JULY 14, 2001 COMPARED TO TWENTY-EIGHT WEEKS ENDED JULY
15, 2000

SALES. For the twenty-eight weeks ended July 14, 2001, sales were $836.2
million, or 4.1% higher than sales for the comparable period in the prior year,
which were $803.6 million.

Flowers Bakeries' sales for the twenty-eight weeks ended July 14, 2001, were
$572.1 million, an increase of 4.3% over sales of $548.7 million reported during
the same period a year ago. Branded and private label products distributed
through the company's direct store door delivery system to supermarkets,
convenience stores, mass merchandisers and club stores represent approximately
80% of Flowers Bakeries' sales. These sales, driven by the company's "Natures
Own" brand of soft variety breads, increased approximately 4% over the
comparable period in the prior year. This increase is primarily attributable to
increased selling prices and a favorable product mix. The balance of Flowers
Bakeries' sales is primarily to foodservice customers. Foodservice sales
increased approximately 4% over the comparable period in the prior year. This
increase is primarily due to favorable pricing.

Mrs. Smith's Bakeries' sales for the twenty-eight weeks ended July 14, 2001,
excluding intersegment sales of $35.3 million, were $264.1 million, an increase
of 3.6% over sales of $254.9 million, excluding intersegment sales of $33.9
million, reported during the same period a year ago. Branded and private label
products distributed frozen and non-frozen to supermarkets, convenience stores,
mass merchandisers, club stores and the vending trade represent approximately
60% of Mrs. Smith's Bakeries' sales. These sales increased approximately 5% over
the comparable period in the prior year. This increase is primarily due to
favorable pricing and volume. Sales to foodservice customers represent
approximately 30% of Mrs. Smith's Bakeries' sales. Foodservice sales decreased
approximately 1% over the comparable period in the prior year. This decrease is
primarily due to inventory reductions at certain major foodservice customers.
The balance of Mrs. Smith's Bakeries' sales is primarily to non-affiliated food
companies, under contract production arrangements. These sales increased
approximately 9% over the comparable period in the prior year. This increase is
primarily due to volume increases.

GROSS MARGIN. Gross margin for the twenty-eight weeks ended July 14, 2001 was
$386.7 million or 9.0% higher than gross margin reported a year ago of $354.8
million. As a percent of sales, gross margin was 46.2% for the twenty-eight
weeks ended July 14, 2001, compared to 44.2% for the same period a year ago.

Flowers Bakeries' gross margin increased to 56.0% of sales for the twenty-eight
weeks ended July 14, 2001, compared to 54.7% of sales for the comparable period
in the prior year. Improved pricing and lower ingredient and lease costs were
partially offset by higher labor and energy costs.

Mrs. Smith's Bakeries' gross margin increased to 27.0% of sales for the
twenty-eight weeks ended July 14, 2001, compared to 22.3% 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 occurred during the fiscal year 1999 realignment.

SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. During the twenty-eight weeks
ended July 14, 2001, selling, marketing and administrative expenses were $331.6
million, or 39.7% of sales, as compared to $313.8 million or 39.0% of sales
reported for the same period a year ago.

Flowers Bakeries' selling, marketing and administrative expenses were $258.0
million or 45.1% of sales during the twenty-eight weeks ended July 14, 2001 as
compared to $235.9 million or 43.0% in the same period a year ago. 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 Memphis,
Tennessee market expansion. Additionally, with the continued rollout of the
enterprise-wide information system (SAP), Flowers Bakeries incurred increased
implementation expenses in the first half of fiscal 2001.

Mrs. Smith's Bakeries' selling, marketing and administrative expenses were $63.8
million or 24.2% of sales during the twenty-eight weeks ended July 14, 2001 as
compared to $67.3 million or 26.4% of sales during the same period a year ago.
This decrease is a result of lower distribution expenses and lower trade
promotional expenses. The trade promotional expenses decreased primarily as a
result of the fact that higher costs were incurred in the prior year period
related to the introduction of Mrs. Smith's "Cookies and Cream" pies.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $37.9
million for the twenty-eight weeks ended July 14, 2001, an increase of 8.3% over
the corresponding period in the prior year, which was $35.0 million.

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Flowers Bakeries' depreciation and amortization expense increased to $22.9
million in the twenty-eight weeks ended July 14, 2001 from $19.6 million in the
same period last year. The increase is 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 accounted for as operating leases in the prior year.

Mrs. Smith's Bakeries' depreciation and amortization expense in the twenty-eight
weeks ended July 14, 2001 was $14.9 million as compared to $15.0 million in the
same period of last year. This decrease is primarily due to 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. Partially offsetting this decrease was an
increase in depreciation resulting from 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. 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 half of fiscal 2001, Mrs.
Smith's Bakeries recovered net insurance proceeds of $7.5 million as a final
settlement.

NON-RECURRING CHARGE. During the second quarter of fiscal 2001, Flowers
Bakeries recorded a non-recurring charge of $3.1 million as a result of the
decision to close its Memphis, Tennessee production facility. The facility is
being closed in order to rationalize production efforts in this geographical
area. The area will continue to be served from other production facilities.
Severance costs of $1.4 million provided for the termination of 123 employees.
Asset impairment charges of $0.7 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 is expected
be substantially complete in the third quarter of fiscal 2001.

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, $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 in the
company's continuing operations in the first quarter of 2001.

INTEREST EXPENSE. For the twenty-eight weeks ended July 14, 2001, net interest
expense was $23.2 million, a decrease of $12.2 million over the corresponding
period in the prior year, which was $35.5 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 twenty-eight weeks ended July 14, 2001 was $29.7 million, an
increase of $2.0 million from the $27.7 million loss reported in the same period
a year ago. The increased loss is primarily a result of the non-recurring
charges of $31.1 million associated with separation and other contractual
payments resulting from the spin-off merger transaction as well as, the closing
of Flowers Bakeries' Memphis, Tennessee production facility. In addition,
Flowers Bakeries' operating income decreased by $5.1 million and non operating
expenses related to the accounting of the company's hedging program under FAS
133 increased by $1.8 million. Partially offsetting these negative items was an
increase in insurance proceeds of $5.8 million, a decrease in Mrs. Smith's
Bakeries' operating loss of $18.0 million and a decrease in interest expense of
$12.2 million.

INCOME TAXES. The income tax benefit during the twenty-eight weeks ended July
14, 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.

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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
2000. The company's share of Keebler's net income ($40.6 million) for the
twenty-eight weeks ended July 15, 2000 is presented as discontinued operations.

NET INCOME (LOSS). The net loss for the twenty-eight weeks ended July 14, 2001
was $17.0 million as compared to net income of $22.3 million for the same period
a year ago.

LIQUIDITY AND CAPITAL RESOURCES:

Net cash disbursed for operating activities for the twenty-eight weeks ended
July 14, 2001 was $18.3 million. Inventory increased $30.4 million and accounts
payable and facility closing cost reserves decreased $10.8 million and $2.2
million, respectively.

Net cash disbursed for investing activities for the twenty-eight weeks ended
July 14, 2001 of $100.0 million included capital expenditures of $26.8 million.
Capital expenditures at Flowers Bakeries and Mrs. Smith's Bakeries were $12.0
million and $14.8 million, respectively. In addition, $77.6 million was used to
purchase outstanding notes payable to a financial institution 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
the spinoff and merger transaction 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.

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 dividends 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. As of July 14, 2001, the company was in
compliance with all covenants.

At July 14, 2001, cash equivalents were $7.7 million. Consolidated long-term
debt was $292.0 million and current maturities of long-term debt were $29.5
million at July 14, 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.

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NEW ACCOUNTING PRONOUNCEMENTS:

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
$6.4 million and $10.0 million for the second 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.

In May 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 issuance, 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. The company currently
records coupon expenses as selling, marketing and administrative expenses. For
the quarters ended July 14, 2001 and July 15, 2000, respectively, coupon
expenses of $0.6 million and $0.9 million were recorded. For the twenty-eight
weeks ended July 14, 2001 and July 15, 2000, respectively, coupon expenses of
$2.8 million and $1.6 million were recorded. Additionally, coupon expenses were
$2.6 million and $2.2 million for fiscal years 2000 and 1999, respectively.
Upon adoption of EITF 00-14, the company will record coupon expenses as a
reduction to arrive at net sales. This issuance will not affect net income.

In April 2001, the EITF reached consensus on Issue No. 00-25 "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendors
Products or Services." This issuance provides guidance primarily on income
statement classification of consideration from a vendor to a purchaser of the
vendor's products. Generally, cash consideration is to be classified as a
reduction of revenue, unless specific criteria are met regarding goods or
services that the vendor may receive in return for this consideration. The
company has historically classified certain costs covered by the provisions of
EITF 00-25 as selling expenses. This consensus is effective for the first
quarter of fiscal year 2002. For the quarters ended July 14, 2001 and July 15,
2000, respectively, expenses covered by EITF 00-25 were $0.0 million and $1.1
million. For the twenty-eight weeks ended July 14, 2001 and July 15, 2000,
respectively, these expenses were $0.0 million and $1.9 million. Additionally,
these expenses were $3.4 million and $1.8 million for fiscal 2000 and 1999,
respectively. Upon adoption, these expenses will be reclassified as a reduction
to arrive at sales. This issuance will not affect net income.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets."
SFAS No. 141, which replaces Accounting Principles Board Opinion 16, "Business
Combinations", requires business combinations initiated after June 30, 2001 to
be accounted for using the purchase method of accounting and broadens the
criteria for recording intangible assets separate from goodwill. SFAS No. 142,
which replaces APB 17, "Intangible Assets", requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down when appropriate under the criteria of SFAS 142.
The provisions of each statement which applies to goodwill and intangible assets
acquired prior to June 30, 2001 will be adopted by the company in the first
quarter of fiscal year 2002. Management is currently evaluating the impact of
these statements on the company's results of operations and financial position.

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19

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.

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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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

10.1 First Amendment dated as of May 10, 2001 to Credit Agreement dated as of
March 26, 2001 among Flowers Foods, Inc., the Lenders party thereto,
SunTrust Bank as syndication agent and Bankers Trust Company, as
administrative agent.

10.2 Second Amendment dated as of June 15, 2001 to Credit Agreement dated as
of March 26, 2001 among Flowers Foods, Inc. the Lenders party thereto,
SunTrust Bank, as syndication agent and Bankers Trust Company, as
administrative agent.

10.3 Flowers Foods, Inc. Stock Appreciation Rights Plan

10.4 Flowers Foods, Inc. Annual Executive Bonus Plan

10.5 Flowers Foods, Inc. Executive Deferred Compensation Plan

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SIGNATURES

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

FLOWERS FOODS, INC.

/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

August 27, 2001
------------------------
Date

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