þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

1919 FLOWERS CIRCLE, THOMASVILLE, GEORGIA

31757

229/226-9110

N/A

     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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     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 NOVEMBER 12, 2010
	Common Stock, $.01 par value with Preferred Share Purchase Rights			91,275,331

 

 

FLOWERS FOODS, INC.

INDEX

		PAGE
		NUMBER
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of October 9, 2010 and January 2, 2010			4
Condensed Consolidated Statements of Income for the Twelve and Forty Weeks Ended October 9, 2010 and October 10, 2009			5
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the Forty Weeks Ended October 9, 2010			6
Condensed Consolidated Statements of Cash Flows for the Forty Weeks Ended October 9, 2010 and October 10, 2009			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			34
PART II. Other Information
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 6. Exhibits			35
Signatures			36
Exhibit index
EX-31.1
EX-31.2
EX-31.3
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Forward-Looking Statements

Statements contained in this filing and certain other written or oral statements made from time to time by the company and its representatives that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to current expectations regarding our future financial condition and results of operations and are often identified by the use of words and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would,” “is likely to,” “is expected to” or “will continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are based upon assumptions we believe are reasonable.

Forward-looking statements are based on current information and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected. Certain factors that may cause actual results, performance, and achievements to differ materially from those projected are discussed in this report and may include, but are not limited to:

•

unexpected changes in any of the following: (i) general economic and business conditions; (ii) the competitive setting in which we operate, including, advertising or promotional strategies by us or our competitors, as well as changes in consumer demand; (iii) interest rates and other terms available to us on our borrowings; (iv) energy and raw materials costs and availability and hedging counter-party risks; (v) relationships with our employees, independent distributors and third party service providers; and (vi) laws and regulations (including environmental and health-related issues), accounting standards or tax rates in the markets in which we operate;

•

the loss or financial instability of any significant customer(s);

•

our ability to execute our business strategy, which may involve integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values;

•

our ability to operate existing, and any new, manufacturing lines according to schedule;

•

the level of success we achieve in developing and introducing new products and entering new markets;

•

changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward more inexpensive store-branded products;

•

our ability to implement new technology as required;

•

the credit and business risks associated with our independent distributors and customers which operate in the highly competitive retail food and foodservice industries, including the amount of consolidation in these industries;

•

changes in pricing, customer and consumer reaction to pricing actions, and the pricing environment among competitors within the industry;

•

any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters or the responses to or repercussions from any of these or similar events or conditions and our ability to insure against such events; and

•

regulation and legislation related to climate change that could affect our ability to procure our commodity needs or that necessitate additional unplanned capital expenditures.

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the company (such as in our other filings with the Securities and Exchange Commission (“SEC”) or in company press releases) for other factors that may cause actual results to differ materially from those projected by the company. Please refer to Part I, Item 1A., Risk Factors, of the company’s Form 10-K filed on March 3, 2010 for additional information regarding factors that could affect the company’s results of operations, financial condition and liquidity.

We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law. You are advised, however, to consult any further public disclosures by the company (such as in our filings with the SEC or in company press releases) on related subjects.

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)

		OCTOBER 9, 2010				JANUARY 2, 2010
ASSETS
Current Assets:
Cash and cash equivalents		$	7,107			$	18,948
Accounts and notes receivable, net of allowances of $1,636 and $469, respectively			177,143				178,708
Inventories, net:
Raw materials			20,468				20,952
Packaging materials			13,961				12,065
Finished goods			31,865				27,979
			66,294				60,996
Spare parts and supplies			36,542				35,437
Deferred taxes			1,107				20,714
Other			42,959				24,152
Total current assets			331,152				338,955
Property, Plant and Equipment, net of accumulated depreciation of $677,126 and $652,587, respectively			599,106				602,576
Notes Receivable			91,888				94,457
Assets Held for Sale — Distributor Routes			10,457				6,535
Other Assets			5,612				4,157
Goodwill			200,153				201,682
Other Intangible Assets, net			98,428				103,080
Total assets		$	1,336,796			$	1,351,442
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt and capital leases		$	26,817			$	25,763
Accounts payable			107,280				92,692
Other accrued liabilities			115,670				103,317
Total current liabilities			249,767				221,772
Long-Term Debt and Capital Leases			116,545				225,905
Other Liabilities:
Post-retirement/post-employment obligations			66,515				68,140
Deferred taxes			61,319				63,748
Other			44,948				43,851
Total other liabilities			172,782				175,739
Commitments and Contingencies
Flowers Foods, Inc. Stockholders’ 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, 500,000,000 authorized shares, 101,659,924 shares and 101,659,924 shares issued, respectively			1,017				1,017
Treasury stock — 10,386,436 shares and 10,200,387 shares, respectively			(198,538	)			(189,250	)
Capital in excess of par value			536,514				531,326
Retained earnings			490,435				437,524
Accumulated other comprehensive loss			(31,726	)			(64,672	)
Total Flowers Foods, Inc. stockholders’ equity			797,702				715,945
Noncontrolling interest			—				12,081
Total stockholders’ equity			797,702				728,026
Total liabilities and stockholders’ equity		$	1,336,796			$	1,351,442

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 9, 2010				OCTOBER 10, 2009				OCTOBER 9, 2010				OCTOBER 10, 2009
Sales		$	597,894			$	602,570			$	2,000,636			$	2,024,025
Materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately below)			316,141				322,245				1,049,492				1,085,046
Selling, distribution and administrative expenses			215,222				210,185				725,679				720,809
Depreciation and amortization			19,778				19,064				65,436				61,997
Gain on acquisition			—				—				—				3,013
Income from operations			46,753				51,076				160,029				159,186
Interest expense			(1,791	)			(2,858	)			(6,559	)			(9,258	)
Interest income			2,918				2,956				9,773				9,995
Income before income taxes			47,880				51,174				163,243				159,923
Income tax expense			16,714				18,150				57,634				57,969
Net income			31,166				33,024				105,609				101,954
Less: net income attributable to noncontrolling interest			—				(1,098	)			—				(2,306	)
Net income attributable to Flowers Foods, Inc.		$	31,166			$	31,926			$	105,609			$	99,648
Net Income Per Common Share:
Basic:
Net income attributable to Flowers Foods, Inc. common shareholders		$	0.34			$	0.35			$	1.15			$	1.08
Weighted average shares outstanding			91,629				91,995				91,576				92,330
Diluted:
Net income attributable to Flowers Foods, Inc. common shareholders		$	0.34			$	0.34			$	1.14			$	1.07
Weighted average shares outstanding			92,276				92,597				92,241				92,827
Cash dividends paid per common share		$	0.200			$	0.175			$	0.575			$	0.50

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Amounts in thousands except share data)(Unaudited)

														Capital
						Common Stock								in								Accumulated
						Number of								Excess								Other				Treasury Stock
		Comprehensive				Shares				Par				of Par				Retained				Comprehensive				Number of								Noncontrolling
		Income				Issued				Value				Value				Earnings				Loss				Shares				Cost				interest				Total
Balances at January 2, 2010							101,659,924			$	1,017			$	531,326			$	437,524			$	(64,672	)			(10,200,387	)		$	(189,250	)		$	12,081			$	728,026
Deconsolidation of Variable Interest Entity (Note 8)																																			(12,081	)			(12,081	)
Net income		$	105,609																105,609																				105,609
Derivative transactions, net			31,958																				31,958																31,958
Amortization of prior service credit			(82	)																			(82	)															(82	)
Reduction in minimum pension liability			68																				68																68
Amortization of actuarial loss			1,002																				1,002																1,002
Comprehensive income		$	138,555
Exercise of stock options															(1,202	)											472,637				8,811								7,609
Deferred stock vesting															(631	)											33,920				631								—
Issuance of restricted stock award															(4,102	)											220,640				4,102								—
Amortization of share-based payment compensation															10,035																								10,035
Tax benefits related to share based payment awards															1,018																								1,018
Share-based payment forfeitures															70												(3,775	)			(70	)							—
Stock repurchases																											(909,471	)			(22,762	)							(22,762	)
Dividends paid — $0.575 per common share																			(52,698	)																			(52,698	)
Balances at October 9, 2010							101,659,924			$	1,017			$	536,514			$	490,435			$	(31,726	)			(10,386,436	)		$	(198,538	)		$	—			$	797,702

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

		FOR THE FORTY WEEKS ENDED
		OCTOBER 9, 2010				OCTOBER 10, 2009
CASH FLOWS PROVIDED BY (DISBURSED FOR) OPERATING ACTIVITIES:
Net income		$	105,609			$	101,954
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation			10,343				9,207
Loss reclassified from accumulated other comprehensive income to net income			22,589				44,707
Depreciation and amortization			65,436				61,997
Gain on acquisition			—				(3,013	)
Deferred income taxes			(2,637	)			(3,675	)
Provision for inventory obsolescence			967				652
Allowances for accounts receivable			1,093				2,614
Pension and postretirement plans expense			1,417				3,932
Other			(89	)			224
Changes in assets and liabilities:
Accounts and notes receivable, net			121				(359	)
Pension contributions			(772	)			(450	)
Inventories, net			(6,576	)			(8,655	)
Other assets			20,807				(5,755	)
Accounts payable and other accrued liabilities			10,499				(37,149	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			228,807				166,231
CASH FLOWS PROVIDED BY (DISBURSED FOR) INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(74,239	)			(47,276	)
Proceeds from sale of property, plant and equipment			719				3,040
Issuance of notes receivable			(7,023	)			(8,350	)
Proceeds from notes receivable			9,618				9,282
Acquisitions, net of cash acquired			—				(8,842	)
Deconsolidation of variable interest entity (See Note 8)			(8,804	)			—
Other			—				(208	)
NET CASH DISBURSED FOR INVESTING ACTIVITIES			(79,729	)			(52,354	)
CASH FLOWS PROVIDED BY (DISBURSED FOR) FINANCING ACTIVITIES:
Dividends paid			(52,698	)			(46,157	)
Exercise of stock options			7,609				2,560
Income tax benefit related to stock awards			974				1,386
Stock repurchases			(22,762	)			(27,625	)
Change in book overdraft			1,236				(7,904	)
Proceeds from debt borrowings			409,000				650,600
Debt and capital lease obligation payments			(504,278	)			(689,937	)
Other			—				(670	)
NET CASH DISBURSED FOR FINANCING ACTIVITIES			(160,919	)			(117,747	)
Net decrease in cash and cash equivalents			(11,841	)			(3,870	)
Cash and cash equivalents at beginning of period			18,948				19,964
Cash and cash equivalents at end of period		$	7,107			$	16,094

(See Accompanying Notes to Condensed Consolidated Financial Statements)

FLOWERS FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     INTERIM FINANCIAL STATEMENTS — The accompanying unaudited condensed consolidated financial statements of Flowers Foods, Inc. (“the company”) have been prepared by the company’s management in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the company’s financial position, the results of its operations and its cash flows. The results of operations for the twelve and forty week periods ended October 9, 2010 and October 10, 2009 are not necessarily indicative of the results to be expected for a full fiscal year. The balance sheet at January 2, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.

     ESTIMATES — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company believes the following critical accounting estimates affect its more significant judgments used in the preparation of its condensed consolidated financial statements: revenue recognition, derivative instruments, valuation of long-lived assets, goodwill and other intangibles, self-insurance reserves, income tax expense and accruals and pension obligations. These estimates are summarized in the company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.

     REPORTING PERIODS — The company operates on a 52-53 week fiscal year ending the Saturday nearest December 31. Fiscal 2010 consists of 52 weeks, with the company’s quarterly reporting periods as follows: first quarter ended April 24, 2010 (sixteen weeks), second quarter ended July 17, 2010 (twelve weeks), third quarter ended October 9, 2010 (twelve weeks) and fourth quarter ending January 1, 2011 (twelve weeks).

     SEGMENTS — The company consists of two business segments: direct-store-delivery (“DSD”) and warehouse delivery. The DSD segment focuses on producing and marketing bakery products to U.S. customers in the Southeast, Mid-Atlantic, and Southwest, as well as, selected markets in California and Nevada. The warehouse delivery segment produces snack cakes for sale to retail, vending and co-pack customers nationwide as well as frozen bread, rolls and buns for sale to retail and foodservice customers primarily through warehouse distribution.

     SIGNIFICANT CUSTOMER — Following is the effect our largest customer, Wal-Mart/Sam’s Club, had on the company’s sales for the twelve and forty weeks ended October 9, 2010 and October 10, 2009. No other customer accounted for 10% or more of the company’s sales.

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 9, 2010				OCTOBER 10, 2009				OCTOBER 9, 2010				OCTOBER 10, 2009
		(Percent of Sales)								(Percent of Sales)
DSD			18.1	%			17.8	%			18.4	%			18.1	%
Warehouse delivery			4.2				3.0				3.5				2.9
Total			22.3	%			20.8	%			21.9	%			21.0	%

SIGNIFICANT ACCOUNTING POLICIES — The following discussion provides the significant changes to our significant accounting policies from those disclosed in our Form 10-K filed for the year ended January 2, 2010.

     Variable Interest Entities. In 2009, the Financial Accounting Standards Board (“FASB”) amended the consolidation principles associated with variable interest entities (“VIE”). The new accounting guidance caused a change in our accounting policy effective January 3, 2010. Generally, the new qualitative approach replaced the quantitative-based risks and rewards calculation for determining

which enterprise, if any, has a controlling financial interest in the VIE. The qualitative approach is focused on identifying which company has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. As a result of applying this qualitative analysis, effective January 3, 2010, the company is no longer required to consolidate the VIE that delivers a significant portion of its fresh bakery products from the company’s production facilities to outlying distribution centers under a transportation agreement. The company has elected to prospectively deconsolidate the VIE. Please see Note 8, Variable Interest Entity, for additional disclosure.

2. COMPREHENSIVE INCOME (LOSS)

     The company’s total comprehensive income presently consists of net income, adjustments for our derivative financial instruments accounted for as cash flow hedges, and various pension and other postretirement benefit related items. Total comprehensive income attributable to Flowers Foods, Inc., determined as net income adjusted by other comprehensive income and net income attributable to noncontrolling interest, was $52.0 million and $138.6 million for the twelve and forty weeks ended October 9, 2010, respectively. Total comprehensive income attributable to Flowers Foods, Inc. was $26.2 million and $111.8 million for the twelve and forty weeks ended October 10, 2009, respectively.

     During the forty weeks ended October 9, 2010, changes to accumulated other comprehensive loss, net of income tax, were as follows (amounts in thousands):

Accumulated other comprehensive loss, January 2, 2010		$	(64,672	)
Derivative transactions:
Net deferred gains (losses) on closed contracts, net of income tax of $(417)			(667	)
Reclassified to earnings, net of income tax of $10,085			16,110
Effective portion of change in fair value of hedging instruments, net of income tax of $10,338			16,515
Amortization of actuarial loss, net of income tax of $628			1,002
Minimum pension liability, net of income tax of $42			68
Amortization of prior service credits, net of income tax of $(52)			(82	)
Accumulated other comprehensive loss, October 9, 2010		$	(31,726	)

3. ACQUISITIONS

     On October 17, 2009, the company acquired 100% of the outstanding shares of capital stock of Leo’s Foods, Inc. (“Leo’s”). Leo’s operates one tortilla facility in Ft. Worth, Texas and makes an extensive line of flour and corn tortillas and tortilla chips that are sold to foodservice and institutional customers nationwide. This acquisition is recorded in the company’s warehouse delivery segment and resulted in goodwill of $2.6 million, none of which is deductible for tax purposes.

     On May 15, 2009, the company acquired substantially all the assets of a bakery mix operation in Cedar Rapids, Iowa. Based on the purchase price allocation, the fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration paid. As a result, we recognized a gain of $3.0 million in the second quarter of fiscal 2009, which is included in the line item “Gain on acquisition” within income from operations in the condensed consolidated statement of income for the forty weeks ended October 10, 2009. We believe the gain on acquisition resulted from the seller’s strategic intent to exit a non-core business operation. This acquisition is recorded in the company’s warehouse delivery segment.

4. GOODWILL AND OTHER INTANGIBLES

     The changes in the carrying amount of goodwill for the forty weeks ended October 9, 2010, are as follows (amounts in thousands):

		DSD				Warehouse delivery				Total
Balance as of January 2, 2010		$	194,581			$	7,101			$	201,682
Adjustment for deconsolidation of VIE (Note 8)			(1,529	)			—				(1,529	)
Balance as of October 9, 2010		$	193,052			$	7,101			$	200,153

     As of October 9, 2010 and January 2, 2010, the company had the following amounts related to amortizable intangible assets (amounts in thousands):

		October 9, 2010												January 2, 2010
						Accumulated												Accumulated
Asset		Cost				Amortization				Net Value				Cost				Amortization				Net Value
Trademarks		$	35,268			$	4,331			$	30,937			$	35,268			$	3,144			$	32,124
Customer relationships			75,434				12,766				62,668				75,434				9,738				65,696
Non-compete agreements			1,874				1,343				531				1,874				1,309				565
Distributor relationships			2,600				373				2,227				2,600				240				2,360
Supply agreement			1,050				485				565				1,050				215				835
Total		$	116,226			$	19,298			$	96,928			$	116,226			$	14,646			$	101,580

     There is an additional $1.5 million indefinite life intangible asset separately identified from goodwill.

     Net amortization expense for the twelve and forty weeks ended October 9, 2010 and October 10, 2009 were as follows (amounts in thousands):

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 9, 2010				OCTOBER 10, 2009				OCTOBER 9, 2010				OCTOBER 10, 2009
Amortizable intangible assets expense		$	1,396			$	1,404			$	4,652			$	4,509
Amortizable intangible liabilities (income)			(10	)			(10	)			(34	)			(34	)
Total, net		$	1,386			$	1,394			$	4,618			$	4,475

     Estimated net amortization of intangibles for the remainder of fiscal 2010 and the next four years is as follows (amounts in thousands):

		Amortization of
		Intangibles, net
Remainder of 2010		$	1,385
2011		$	5,948
2012		$	5,677
2013		$	5,488
2014		$	5,389

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying value of cash and cash equivalents, accounts receivable and short-term debt approximates fair value because of the short-term maturity of the instruments. Notes receivable are entered into in connection with the purchase of distributors’ territories by independent distributors. These notes receivable are recorded in the condensed consolidated balance sheet at carrying value which represents the closest approximation of fair value. In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As a result, the appropriate interest rate that should be used to estimate the fair value of the distributor notes is the prevailing market rate at which similar loans would be made to distributors with similar credit ratings and for the same maturities. However, the company utilizes approximately 3,600 independent distributors all with varied financial histories and credit risks. Considering the diversity of credit risks among the independent distributors, the company has no method to accurately determine a market interest rate to apply to the notes. The territories are generally financed over ten years bearing an interest rate of 12% and the distributor notes are collateralized by the independent distributors’ territories.

     Interest income for the distributor notes receivable was as follows (amounts in thousands):

		Interest Income
For the twelve weeks ended October 9, 2010		$	2,918
For the twelve weeks ended October 10, 2009		$	2,956
For the forty weeks ended October 9, 2010		$	9,773
For the forty weeks ended October 10, 2009		$	9,996

     At October 9, 2010 and January 2, 2010, respectively, the carrying value of the distributor notes was as follows (amounts in thousands):

		October 9, 2010				January 2, 2010
Distributor notes receivable		$	104,471			$	107,067
Current portion of distributor notes receivable recorded in accounts and notes receivable, net			12,583				12,610
Long-term portion of distributor notes receivable		$	91,888			$	94,457

     At October 9, 2010 and January 2, 2010, the company evaluated the collectibility of the distributor notes and determined that a reserve is not necessary. Payments on these distributor notes are collected by the company weekly in the distributor settlement process.

6. DERIVATIVE FINANCIAL INSTRUMENTS

     In the first fiscal quarter of fiscal 2008, the company began measuring the fair value of its derivative portfolio using the fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1: Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets

Level 2: Modeled fair value with model inputs that are all observable market values

Level 3: Modeled fair value with at least one model input that is not an observable market value

This change in measurement technique had no material impact on the reported value of our derivative portfolio.

COMMODITY PRICE RISK

     The company enters into commodity derivatives, designated as cash-flow hedges of existing or future exposure to changes in commodity prices. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity input to production.

     As of October 9, 2010, the company’s hedge portfolio contained commodity derivatives with a net fair value of $24.5 million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

		Level 1				Level 2				Level 3				Total
Assets:
Other current		$	23.0			$	4.3			$	—			$	27.3
Other long-term			0.4				—				—				0.4
Total			23.4				4.3				—				27.7
Liabilities:
Other current			—				(2.6	)			—				(2.6	)
Other long-term			—				(0.6	)			—				(0.6	)
Total			—				(3.2	)			—				(3.2	)
Net Fair Value		$	23.4			$	1.1			$	—			$	24.5

     The positions held in the portfolio are used to hedge economic exposure to changes in various raw material prices and effectively fix the price, or limit increases in prices, for a period of time extending into fiscal 2012. These instruments are designated as cash-flow hedges. The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss),

and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. The company held no commodity derivatives at October 9, 2010 or January 2, 2010 that did not qualify for hedge accounting.

     As of October 9, 2010, the balance in accumulated other comprehensive loss related to commodity derivative transactions was $(25.1) million. Of this total, approximately $(2.2) million, $(13.1) million and $0.2 million were related to instruments expiring in 2010, 2011 and 2012, respectively, and $(10.0) million was related to deferred losses on cash flow hedge positions.

INTEREST RATE RISK

     The company entered interest rate swaps with initial notional amounts of $85.0 million and $65.0 million to fix the interest rate on the $150.0 million term loan entered into on August 1, 2008 to fund the acquisitions of ButterKrust and Holsum. The notional amounts match the scheduled quarterly principal payments on the $150.0 million term loan so that the remaining outstanding term loan balance at any reporting date is fully covered by the swap arrangements through the August 2013 maturity of the term loan. In addition, on October 27, 2008, the company entered an interest rate swap with a notional amount of $50.0 million to fix the interest rate through September 30, 2009 on $50.0 million of borrowings outstanding under the company’s unsecured credit facility.

     The interest rate swap agreements result in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amount. The interest rate differential to be paid or received will be recorded as interest expense. These swap transactions are designated as cash-flow hedges. Accordingly, the effective portion of changes in the fair value of the swaps is recorded each period in other comprehensive income. Any ineffective portions of changes in fair value are recorded to current period earnings in selling, marketing and administrative expenses.

     As of October 9, 2010, the fair value of the interest rate swaps was $(8.1) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

		Level 1				Level 2				Level 3				Total
Assets:
Other current		$	—			$	—			$	—			$	—
Other long-term			—				—				—				—
Total			—				—				—				—
Liabilities:
Other current			—				(4.1	)			—				(4.1	)
Other long-term			—				(4.0	)			—				(4.0	)
Total			—				(8.1	)			—				(8.1	)
Net Fair Value		$	—			$	(8.1	)		$	—			$	(8.1	)

     During the twelve weeks ended October 9, 2010 and October 10, 2009, interest expense of $1.0 million and $1.3 million, respectively, was recognized due to periodic settlements of the swaps. During the forty weeks ended October 9, 2010 and October 10, 2009, interest expense of $3.6 million and $4.0 million, respectively, was recognized due to periodic settlements of the swaps.

     As of October 9, 2010, the balance in accumulated other comprehensive loss related to interest rate derivative transactions was $4.9 million. Of this total, approximately $0.6 million, $2.3 million, $1.6 million, and $0.4 million were related to instruments expiring in fiscal 2010 through 2013, respectively.

     The company has the following derivative instruments located on the condensed consolidated balance sheet, utilized for risk management purposes detailed above (amounts in thousands):

		Derivative Assets												Derivative Liabilities
		October 9, 2010						January 2, 2010						October 9, 2010						January 2, 2010
Derivatives designated as		Balance						Balance						Balance						Balance
hedging		Sheet		Fair				Sheet		Fair				Sheet		Fair				Sheet		Fair
instruments		location		Value				location		Value				location		Value				location		Value
Interest rate contracts		—		$	—			—		$	—			Other current liabilities		$	4,085			Other current liabilities		$	4,271
Interest rate contracts		—			—			—			—			Other long term liabilities			4,017			Other long term liabilities			2,459
Commodity contracts		Other current assets			27,274			Other current assets			2,501			Other current liabilities			2,627			Other current liabilities			6,143
Commodity contracts		Other long term assets			393			Other long term assets			—			Other long term liabilities			535			Other long term liabilities			78
Total				$	27,667					$	2,501					$	11,264					$	12,951

     The company has the following derivative instruments located on the condensed consolidated statements of income, utilized for risk management purposes detailed above (amounts in thousands and net of tax):

		Amount of Gain or (Loss)										Amount of Gain or (Loss) Reclassified
		Recognized in OCI on								Location of Gain or (Loss)		from Accumulated OCI into Income
Derivatives in		Derivative (Effective Portion)								Reclassified from AOCI into		(Effective Portion)
Cash Flow Hedge		For the twelve weeks ended								Income		For the twelve weeks ended
Relationships		October 9, 2010				October 10, 2009				(Effective Portion)		October 9, 2010				October 10, 2009
Interest rate contracts		$	852			$	(1,061	)		Interest expense		$	(619	)		$	(817	)
Commodity contracts			—				—			Selling, distribution and administrative			—				(325	)
Commodity contracts			(18,672	)			(13,113	)		Production costs(1)			(2,027	)			(6,878	)
Total		$	(17,820	)		$	(14,174	)				$	(2,646	)		$	(8,020	)
		Amount of Gain or (Loss)										Amount of Gain or (Loss) Reclassified
		Recognized in OCI on								Location of Gain or (Loss)		from Accumulated OCI into Income
Derivatives in		Derivative (Effective Portion)								Reclassified from AOCI into		(Effective Portion)
Cash Flow Hedge		For the forty weeks ended								Income		For the forty weeks ended
Relationships		October 9, 2010				October 10, 2009				(Effective Portion)		October 9, 2010				October 10, 2009
Interest rate contracts		$	3,061			$	(1,248	)		Interest expense		$	(2,218	)		$	(2,462	)
Commodity contracts			—				—			Selling, distribution and administrative			—				(1,200	)
Commodity contracts			(18,909	)			(18,050	)		Production costs(1)			(13,892	)			(26,295	)
Total		$	(15,848	)		$	(19,298	)				$	(16,110	)		$	(29,957	)

				Amount of Gain or (Loss)
				Recognized in Income on
				Derivative (Ineffective Portion
		Location of Gain or (Loss) Recognized		and Amount Excluded from
		in Income on Derivative (Ineffective		Effectiveness Testing)(net of tax)
Derivatives in Cash		Portion and Amount Excluded from		For the forty weeks ended
Flow Hedge Relationships		Effectiveness Testing)		October 9, 2010				October 10, 2009
Interest rate contracts		Selling, distribution and administrative expenses		$	—			$	—
Commodity contracts		Selling, distribution and administrative expenses			—				(617	)
Total				$	—			$	(617	)

     As of October 9, 2010, the company had the following outstanding financial contracts that were entered to hedge commodity and interest rate risk:

		Notional amount
Derivative in Cash Flow Hedge Relationship		(millions)
Interest rate contracts		$	120.0
Wheat contracts			139.2
Soybean oil contracts			14.8
Natural gas contracts			14.2
Total		$	288.2

     The interest rate contracts have multiple settlements to match the amortization of the term loan. The notional amount of $120.0 million represents the current settlement notional amount. Note 7, Debt and Other Obligations, below provides details on the term loan. The company’s derivative instruments contain no credit-risk-related contingent features at October 9, 2010.

7. DEBT AND OTHER OBLIGATIONS

     Long-term debt and capital leases consisted of the following at October 9, 2010 and January 2, 2010 (amounts in thousands):

		OCTOBER 9, 2010				JANUARY 2, 2010
Unsecured credit facility		$	9,500			$	89,000
Unsecured term loan			120,000				131,250
Capital lease obligations			11,376				26,555
Other notes payable			2,486				4,863
			143,362				251,668
Less current maturities			26,817				25,763
Total long-term debt and capital leases		$	116,545			$	225,905

     On August 1, 2008, the company entered into a Credit Agreement (“term loan”) with various lending parties for the purpose of completing acquisitions. The term loan provides for an amortizing $150.0 million of borrowings through the maturity date of August 4, 2013. Principal payments are due quarterly under the term loan beginning on December 31, 2008 at an annual amortization of 10% of the principal balance for the first two years, 15% during the third year, 20% during the fourth year, and 45% during the fifth year. The term loan includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the term loan and can meet presently foreseeable financial requirements. As of October 9, 2010 and January 2, 2010, the company was in compliance with all restrictive financial covenants under the term loan.

     Interest is due quarterly in arrears on outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as the rate offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 1.375% for base rate loans and from 0.875% to 2.375% for Eurodollar loans and is based on the company’s leverage ratio. The company paid financing costs of $0.8 million in connection with the term loan, which is being amortized over the life of the term loan.

     The company has a five-year, $250.0 million unsecured revolving loan facility (the “credit facility”) expiring October 5, 2012. Proceeds from the credit facility may be used for working capital and general corporate purposes, including acquisition financing, refinancing of indebtedness and share repurchases. The credit facility includes certain customary restrictions, which, among other things, require maintenance of financial covenants and limit encumbrance of assets and creation of indebtedness. Restrictive financial covenants include such ratios as a minimum interest coverage ratio and a maximum leverage ratio. The company believes that, given its current cash position, its cash flow from operating activities and its available credit capacity, it can comply with the current terms of the credit facility and can meet presently foreseeable financial requirements. As of October 9, 2010 and January 2, 2010, the company was in compliance with all restrictive financial covenants under its credit facility.

     Interest is due quarterly in arrears on any outstanding borrowings at a customary Eurodollar rate or the base rate plus the applicable margin. The underlying rate is defined as rates offered in the interbank Eurodollar market or the higher of the prime lending rate or federal funds rate plus 0.5%. The applicable margin ranges from 0.0% to 0.30% for base rate loans and from 0.40% to 1.275% for Eurodollar loans. In addition, a facility fee ranging from 0.10% to 0.35% is due quarterly on all commitments under the credit facility. Both the interest margin and the facility fee are based on the company’s leverage ratio. Financing costs of $0.9 million were deferred and are being amortized over the term of the credit facility.

     Book overdrafts occur when checks have been issued but have not been presented to the bank for payment. These bank accounts allow us to delay funding of issued checks until the checks are presented for payment. The delay in funding results in a temporary source of financing from the bank. The activity related to book overdrafts is shown as a financing activity in our condensed consolidated statements of cash flows. Book overdrafts are included in other current liabilities on our condensed consolidated balance sheets. As of October 9, 2010 and January 2, 2010, the book overdraft balance was $12.3 million and $11.1 million, respectively.

8. VARIABLE INTEREST ENTITY

     The company maintains a transportation agreement with an entity that transports a significant portion of the company’s fresh bakery products from the company’s production facilities to outlying distribution centers. The company represents a significant portion of the entity’s revenue. This entity qualifies as a VIE. Under previous accounting guidance, we consolidated the VIE in our condensed consolidated financial statements from the first quarter of 2004 through the fourth quarter of 2009 because during that time the company was considered to be the primary beneficiary. Under the revised principles, which became effective January 3, 2010, we have determined that the company is no longer the primary beneficiary and we deconsolidated the VIE in our financial statements. The VIE does not affect the line item Net income attributable to Flowers Foods, Inc. since the company has no interest in any net earnings or losses of the VIE through equity participation. The VIE has collateral that is sufficient to meet its capital lease and other debt obligations and the owner of the VIE personally guarantees the obligations of the VIE. The VIE’s creditors have no recourse against the general credit of the company.

     The company has no exposure to gains or losses of the VIE in reporting its net income. In addition, the company does not have explicit or implied power over any of the significant activities to operate the VIE. The primary beneficiary of the VIE realizes the economic benefits and losses incurred and has the power to direct most of the significant activities. The VIE is permitted to pass along increases in their costs, with company approval, at a capped increase of 2% per year. The company and the VIE also agree on a rebate paid or credited to the company depending on the profitability of the VIE in the preceding year. We do not guarantee the VIE’s specific returns or performance benchmarks. In addition, if a manufacturing facility closes or there is a loss of market share causing the VIE to have to move their equipment the company will make an effort to move the equipment to another manufacturing facility. If the company is unable to do so, we will reimburse the VIE for any losses incurred in the disposal of the equipment and will pay the cost to transfer the equipment. The company’s maximum loss exposure for the truck disposals is the difference in the estimated fair value of the trucks from the book value.

     As part of the deconsolidation of the VIE, the company concluded that certain of the trucks and trailers the VIE uses for distributing our products from the manufacturing facilities to the distribution centers qualify as right to use leases. The amount for property, plant and equipment and capital lease obligations was $11.9 million at January 3, 2010. As of October 9, 2010, there was $10.4 million in net property, plant and equipment and capital lease obligations associated with the right to use leases.

     Following is the effect of the VIE during the twelve and forty weeks ended October 10, 2009:

		TWELVE WEEKS ENDED								FORTY WEEKS ENDED
		OCTOBER 10, 2009								OCTOBER 10, 2009
						% OF								% OF
		VIE				TOTAL				VIE				TOTAL
		(Dollars in thousands)
Assets as of respective period ends		$	33,715				2.5	%		$	33,715				2.5	%
Sales		$	3,851				0.6	%		$	8,466				0.4	%
Income before income taxes		$	1,098				2.1	%		$	2,306				1.4	%

     The assets consisted primarily of $22.9 million of transportation equipment on October 10, 2009 recorded as capital lease obligations.

9. LITIGATION

     The company and its subsidiaries from time to time are parties to, or targets of, lawsuits, claims, investigations and proceedings, which are being handled and defended in the ordinary course of business. While the company is unable to predict the outcome of these matters, it believes, based upon currently available facts, that it is remote that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations or cash flows in the future. However, adverse developments could negatively impact earnings in a particular future fiscal period.

     On July 23, 2008, a wholly-owned subsidiary of the company filed a lawsuit against Hostess Brands, Inc. (“Hostess”) (formerly Interstate Bakeries Corporation) in the United States District Court for the Northern District of Georgia. The complaint alleges that Hostess is infringing upon Flowers’ Nature’s Own trademarks by using or intending to use the Nature’s Pride trademark. Flowers asserts that Hostess’ sale or intended sale of baked goods under the Nature’s Pride trademark is likely to cause confusion with, and likely to

dilute the distinctiveness of, the Nature’s Own mark and constitutes unfair competition and deceptive trade practices. Flowers is seeking actual damages, an accounting of Hostess’ profits from its sales of Nature’s Pride products, and injunctive relief. Flowers sought summary judgment for its claims, which was denied by the court. Unless our motion for reconsideration is granted and changes that ruling, we expect this case to proceed to trial in 2011.

     The company’s facilities are subject to various federal, state and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The company is not a party to any material proceedings arising under these regulations. The company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition or the competitive position of the company. The company is currently in substantial compliance with all material environmental regulations affecting the company and its properties.

10. EARNINGS PER SHARE

     The following is a reconciliation of net income attributable to Flowers Foods, Inc. and weighted average shares for calculating basic and diluted earnings per common share for the twelve and forty weeks ended October 9, 2010 and October 10, 2009 (amounts in thousands, except per share data):

		FOR THE TWELVE WEEKS ENDED								FOR THE FORTY WEEKS ENDED
		OCTOBER 9, 2010				OCTOBER 10, 2009				OCTOBER 9, 2010				OCTOBER 10, 2009
Net income attributable to Flowers Foods, Inc.		$	31,166			$	31,926			$	105,609			$	99,648
Dividends on restricted shares not expected to vest*			—				—				—				—
Net income attributable to common and participating shareholders		$	31,166			$	31,926			$	105,609			$	99,648
Basic Earnings Per Common Share:
Weighted average shares outstanding for common stock			91,426				91,581				91,348				91,917
Weighted average shares outstanding for participating securities			203				414				228				413
Basic weighted average shares outstanding per common share			91,629				91,995				91,576				92,330
Basic earnings per common share attributable to Flowers Foods, Inc. common shareholders		$	0.34			$	0.35			$	1.15			$	1.08
Diluted Earnings Per Common Share:
Basic weighted average shares outstanding per common share			91,629				91,995				91,576				92,330
Add: Shares of common stock assumed issued upon exercise of stock options and vesting of restricted stock			647				602				665				497
Diluted weighted average shares outstanding per common share			92,276				92,597				92,241				92,827
Diluted earnings per common share attributable to Flowers Foods, Inc. common shareholders		$	0.34			$	0.34			$	1.14			$	1.07

     Stock options to purchase 1,129,817 shares and 1,841,417 shares of common stock were not included in the computation of diluted earnings per share for the twelve weeks ended October 9, 2010 and October 10, 2009, respectively, because their effect would have been anti-dilutive. Stock options to purchase 2,119,163 shares and 1,841,417 shares of common stock were not included in the computation of diluted earnings per share for the forty weeks ended October 9, 2010 and October 10, 2009, respectively, because their effect would have been anti-dilutive.

11. STOCK BASED COMPENSATION

     Our 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009, (“EPIP”) authorizes the compensation committee of the Board of Directors to make awards of options to purchase our common stock, restricted stock,

performance stock and units and deferred stock. Our officers, key employees and non-employee directors (whose grants are generally approved by the full Board of Directors) are eligible to receive awards under the EPIP. The aggregate number of shares that may be issued or transferred under the EPIP is 18,625,000 shares. Over the life of the EPIP, the company has only issued options, restricted stock and deferred stock. The following is a summary of stock options, restricted stock, and deferred stock outstanding under the EPIP. Information relating to the company’s stock appreciation rights which are not issued under the EPIP is also disclosed below.

Stock Options

     The following non-qualified stock options (“NQSOs”) have been granted under the EPIP with service period remaining. The Black-Scholes option-pricing model was used to estimate the grant date fair value (amounts in thousands, except price data and as indicated):

Grant date		2/9/2010				2/9/2009				2/4/2008
Shares granted			1,136				993				850
Exercise price			25.01				23.84				24.75
Vesting date			2/9/2013				2/9/2012				2/4/2011
Fair value per share ($)			5.54				5.87				5.80
Dividend yield (%)(1)			3.00				2.20				1.90
Expected volatility (%)(2)			30.60				31.80				27.30
Risk-free interest rate (%)(3)			2.35				2.00				2.79
Expected option life (years)(4)			5.00				5.00				5.00
Outstanding at October 9, 2010			1,130				989				844

     The stock option activity for the forty weeks ended October 9, 2010 pursuant to the EPIP is set forth below (amounts in thousands, except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Options				Exercise Price				Contractual Term				Intrinsic Value
Outstanding at January 2, 2010			3,734			$	20.34
Granted			1,136			$	25.01
Exercised			(473	)		$	16.10
Forfeited			(13	)		$	24.58
Outstanding at October 9, 2010			4,384			$	21.99				4.57			$	15,169
Exercisable at October 9, 2010			1,420			$	16.66				2.77			$	12,488

     As of October 9, 2010, there was $6.7 million of total unrecognized compensation expense related to outstanding stock options. This cost is expected to be recognized on a straight-line basis over a weighted-average period of 1.7 years.

     The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for the forty weeks ended October 9, 2010 and October 10, 2009 were as follows (amounts in thousands):

		OCTOBER 9, 2010				OCTOBER 10, 2009
Cash received from option exercises		$	7,609			$	2,560
Cash tax windfall, net		$	777			$	910
Intrinsic value of stock options exercised		$	4,311			$	2,933

     Generally, if the employee dies, becomes disabled or retires, the nonqualified stock options immediately vest and must be exercised within two years. In addition, nonqualified stock options will vest if the company undergoes a change in control.

Performance-Contingent Restricted Stock

     Certain key employees have been granted performance-contingent restricted stock. The 2009 and 2010 awards generally vest two years from the date of grant and the 2009 award requires the “return on invested capital” to exceed the weighted average “cost of capital” by 2.5% (the “ROI Target”) over the two fiscal years immediately preceding the vesting date. The 2010 award requires the ROI target to be 3.75% over the two fiscal years immediately preceding the vesting date. If the ROI Target is not met the awards are forfeited. Furthermore, each grant of performance-contingent restricted stock will be adjusted as set forth below:

•

If the ROI Target is satisfied, then the performance-contingent restricted stock grant may be adjusted based on the company’s total return to shareholders (“Company TSR”) percent rank as compared to the total return to shareholders of the S&P Packaged Food & Meat Index (“S&P TSR”) in the manner set forth below:

	•		If the Company TSR rank is equal to the 50th percentile of the S&P TSR, then no adjustment;
	•		If the Company TSR rank is less than the 50th percentile of the S&P TSR, the grant shall be reduced by 1.3% for each percentile below the 50th percentile that the Company TSR is less than the 50th percentile of S&P TSR, but in no event shall such reduction exceed 20%; or
	•		If the Company TSR rank is greater than the 50th percentile of the S&P TSR, the grant shall be increased by 1.3% for each percentile above the 50th percentile that Company TSR is greater than the 50th percentile of S&P TSR, but in no event shall such increase exceed 20%.

     In connection with the vesting of 209,950 shares of restricted stock granted in February 2008, during the forty weeks ended October 9, 2010, an additional 41,990 common shares were issued in the aggregate to these certain key employees because the company exceeded the S&P TSR by the maximum amount.

     The performance-contingent restricted stock generally vests immediately if the grantee dies or becomes disabled. However, at retirement the grantee will receive a pro-rata number of shares through the grantee’s retirement date at the normal vesting date. In addition, the performance-contingent restricted stock will immediately vest at the grant date award level without adjustment if the company undergoes a change in control. During the vesting period, the grantee is treated as a normal shareholder with respect to dividend and voting rights on the restricted shares for the 2009 grant. The 2010 grant does not include the right to receive dividends until vesting. Dividends declared and paid during the vesting period will accrue and will be paid at vesting. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) total stockholder return from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ total stockholder return. The inputs are based on historical capital market data.

     The following restricted stock awards have been granted under the EPIP since fiscal 2007 (amounts in thousands, except price data):

Grant date		2/9/2010				2/9/2009				2/4/2008
Shares granted			179				204				210
Vesting date			2/9/2012				2/9/2011				2/4/2010
Fair value per share		$	26.38			$	24.96			$	27.03

     A summary of the status of the company’s nonvested shares as of October 9, 2010, and changes during the forty weeks ended October 9, 2010, is presented below (amounts in thousands, except price data):

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Nonvested at January 2, 2010			414			$	26.01
Granted*			221			$	21.36
Vested*			(252	)		$	22.53
Forfeited			(4	)		$	25.92
Nonvested at October 9, 2010			379			$	25.62

     As of October 9, 2010, there was $4.0 million of total unrecognized compensation cost related to nonvested restricted stock granted by the EPIP. That cost is expected to be recognized over a weighted-average period of 0.8 years. The total fair value of shares vested during the forty weeks ended October 9, 2010 was $6.1 million which includes the incremental shares issued when the 2008 award exceeded the S&P TSR maximum amount discussed above.

Stock Appreciation Rights

     Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chairman fees into rights. These rights vest after one year and can be exercised over nine years. The company records compensation expense for these rights at a measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model.

     The fair value of the rights at October 9, 2010 ranged from $8.95 to $21.55. The following assumptions were used to determine fair value of the rights discussed above using the Black-Scholes option-pricing model at October 9, 2010: dividend yield 3.0%; expected volatility 30.0%; risk-free interest rate 1.14% and expected life of 0.45 years to 2.85 years. During the twelve weeks ended October 9, 2010 and October 10, 2009 the company recorded expense of $0.2 million and $0.4 million, respectively, related to these rights. During the forty weeks ended October 9, 2010 and October 10, 2009 the company recorded expense of $0.3 million and $0.2 million, respectively, related to these rights.

     The rights activity for the forty weeks ended October 9, 2010 is set forth below (amounts in thousands except price data):

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Current
						Grant Date				Contractual				Intrinsic
		Rights				Fair Value				Term				Value
Outstanding at January 2, 2010			231			$	11.14
Rights exercised			—				—
Rights forfeited			—				—
Outstanding at October 9, 2010			231			$	11.14				3.15			$	3,326

Deferred Stock

     Pursuant to the EPIP, the company allows non-employee directors to convert their retainers into deferred stock. The deferred stock has a minimum two year vesting period and will be distributed to the individual at a time designated by the individual at the date of conversion. During the first quarter of fiscal 2010 an aggregate of 17,960 shares were converted. The company records compensation expense for this deferred stock over the two-year minimum vesting period based on the closing price of the company’s common stock on the date of conversion. During the first and second quarter of fiscal 2010 a total of 5,540 shares were exercised for non-employee retainer conversions granted in 2008.

     Pursuant to the EPIP non-employee directors also receive annual grants of deferred stock. This deferred stock vests over one year from the grant date. During the second quarter of fiscal 2010, non-employee directors were granted an aggregate of 44,220 shares of deferred stock. There was an additional grant of 1,860 shares during the first quarter of fiscal 2010 based on a pro-rated share amount for a new director whose term began on January 1, 2010. The deferred stock will be distributed to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one year minimum vesting period. During the first and second quarter of fiscal 2010 a total of 28,380 shares were exercised for deferred shares issued under the fiscal 2009 grant.

     The deferred stock activity for the forty weeks ended October 9, 2010 is set forth below (amounts in thousands, except price data):

						Weighted				Weighted Average
						Average				Remaining				Aggregate
		Shares				Grant Price				Contractual Term (Years)				Intrinsic Value
Outstanding at January 2, 2010			130			$	21.90
Deferred stock issued			64			$	23.11
Deferred stock exercised			(34	)		$	20.57
Outstanding at October 9, 2010			160			$	22.66				0.36			$	4,072