2003 L a n c e, I n c. A n n u a l R e p o r t

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1 03 20 L a n c e, I n c. Annual Report

2 s t h g i l , , ,759 Earnings before interest and income taxes 31,704 34,574 41,395 Net income 18,278 19,913 23,777 Cash flows from operations 57,397 55,637 63,560 Depreciation and amortization 29,389 28,689 29,323 Capital expenditures 17,785 25,513 30,918 h 2003 g Financial data except per share Operations For The Year: Return on equity 10.0% 11.0% 13.4% Debt to capital 19.3% 16.7% 21.9% Per Share Of Common Stock: Net income (diluted) Cash dividends Stockholders equity Shares used in computing diluted earnings per share (in millions) F i n a n c i a l Net sales and other operating revenue H i amounts and return percentages in thousands

3 L E T T E R Dear Fellow Stockholders, F R O M T H E 2003 was a very encouraging year. Despite getting off to a slow start in the first quarter, we rebounded strongly and achieved solid revenue growth and excellent earnings improvements during the C H A I R M A N rest of the year. Early in 2003 we made the difficult, but necessary decisions to discontinue our mini-sandwich cracker product line and reduce our workforce by 6%. Resulting charges for asset impairment, severance and other costs reduced full-year earnings by 0.18 per share. However, these moves allowed us to focus on areas with greater potential, reduce costs and drive improved performance during the last three quarters of the year. Highlights for 2003 included: Total revenue growth of 4%; Successful integration of Cape Cod potato chips into our route sales system. IN 2003 WE BEGAN THE REALIGN- MENT OF OUR ROUTE SALES SYSTEM TO IMPROVE ROUTE ECONOMICS AND CUSTOMER SERVICE. Strong market share gains for Lance sandwich crackers; Beginning the realignment of our route sales system to improve route economics and customer service; Continued flow of new products, including the introduction of Texas Pete flavored potato chips marketed under the Lance Thunder brand and Don Pablo s brand tortilla chips; Outstanding manufacturing performance, driving significant increases in labor efficiencies and production yields while delivering excellent quality; and, Our company-wide focus on asset utilization drove a 22 million increase in cash. These achievements are the result of the significant investments we have made in recent years in OUTSTANDING MANUFACTURING PER- FORMANCE DROVE SIGNIFICANT INCREASES IN LABOR EFFICIENCIES AND PRODUCTION YIELDS WHILE DELIVERING EXCELLENT QUALITY. our facilities, systems and employees. I am especially pleased with the strides we have made in improving execution and teamwork. Despite a challenging first quarter, our team pulled together to turn performance around in the last three quarters of the year, a great reflection on them. I would like to thank our dedicated employees for their positive attitudes, enthusiasm and contributions during the year. As we move into 2004, it is important to remember that it will be a transitional year in which we plan to complete comprehensive sales route realignments in the majority of our sales districts. This is a major effort that is time consuming, disruptive and costly. However, these efforts are essential for sustainable branded product growth. While we are still early in the process, the preliminary results in the realigned districts are encouraging. Here are a few examples: 2

4 First, the overall customer service rating has improved significantly. Second, the average sale per stop is up more than 25%. Third, average sales per route are up more than 20%. This is driving higher route sales representative compensation, which is one of the keys to attracting and retaining an effective sales force. Fourth, the rate at which we are rebuilding volume, after dropping unprofitable, low-volume accounts, is Paul A. Stroup, III, Chairman, President and Chief Executive Officer above expectations. Last, selling expense ratios are tracking in the right direction. We are moving forward aggressively to complete the realignment and establish a cost-effective route sales system that provides superior customer service and delivers profitable, sustainable branded sales growth. We believe that completing this task will position Lance as the leading regional snack food company in America! As such, Lance will be primed for both internal core growth and external development. Complementing the opportunities in branded snacks is our non-branded presence, led by private WE BELIEVE THAT COMPLETING THE ROUTE REALIGNMENTS WILL POSI- TION LANCE AS THE LEADING REGIONAL SNACK FOOD COMPANY IN AMERICA! label cookies and crackers was a record-setting year for our private label sales. The outlook remains encouraging and we plan to continue investing to support private label growth opportunities. Behind all of this is our commitment to improve financial performance and build value for our stockholders. We were pleased to see our stock price recover meaningfully during the year and we will continue to pursue value-enhancing strategies. Finally, I would like to extend our sincere thanks and appreciation to James H. Hance, Jr. and Nancy Van Every McLaurin, who resigned from Lance s Board of Directors in April, The counsel and support they provided throughout their tenures on the Board was of great value to everyone affiliated with Lance. We wish them the best. As always, we thank our stockholders, employees, customers, consumers, suppliers and friends for their continuing support. Sincerely, Paul A. Stroup, III Chairman, President and Chief Executive Officer 3

5 s r W H Y I S L A N C E S R O U T E S A L E S S Y S T E M S O I M P O R TA N T TO I T S F U T U R E? e Our route sales system provides a customer service level for impulse snack foods that is unmatched snack products are fresh and properly displayed, which is what our retail customers and today s consumers demand. & A n s w by other distribution systems. Hands on attention by our sales representatives ensures that our W H AT A R E T H E M O S T P R O M I S I N G G R O W T H O P P O R T U N I T I E S F O R L A N C E? Branded sales growth is our top priority. Our leading positions in sandwich crackers and kettle cooked potato chips provide Lance with a solid foundation for branded growth. The successful completion of our route realignment is key to our branded strategy. Additionally, our private label sales have s been growing rapidly and we plan to add private label capacity in 2004 to support these profitable i t our radio advertising campaign for Lance branded snacks. The ads, featuring the slogan I got Lance in s my pants, were aired last fall in two test markets and we were very pleased with the market response. We also plan to continue introducing new products to help keep our snack products fresh and contemporary in the eyes of consumers. Q In 2004, we are increasing marketing spending to support brand development. This includes expanding e W H AT I S L A N C E D O I N G TO D E V E L O P I T S B R A N D S? u o n growth opportunities. W H AT A R E L A N C E S S P E N D I N G P R I O R I T I E S F O R ? We anticipate capital spending to be in the million range for Top priorities include private label capacity expansion, further productivity enhancements and spending in support of our route sales system, which includes employee development. IS LANCE LOOKING FOR ACQUISITIONS? Our primary objectives in 2004 are to complete our route realignments and strengthen our core operations. However, we remain attentive to developments in the market that could present opportunities to strengthen our strategic position and build stockholder value. Our balance sheet strength gives us excellent flexibility to pursue both internal and external growth opportunities. 4

6 WHAT IS LANCE DOING TO CAPITALIZE ON THE SIGNIFICANT CHANGES IN THE RETAIL INDUSTRY? Larger retailers with greater influence and purchasing power are continuing to expand their presence in the marketplace. Our wide variety of snack products and strong consumer demand present retailers with attractive sales opportunities. Our route realignments will improve Lance s service capabilities and further strengthen relationships with major customers. Additionally, many large retailers are increasing their emphasis on private label offerings and we will continue to support their needs with our private label cookie and cracker products. HOW DOES PRIVATE LABEL FIT INTO LANCE S OVERALL GROWTH STRATEGY? Private label is important to Lance. While branded growth is our top priority, our strong private label position continues to present Lance with attractive opportunities. Our efficient manufacturing facilities and reputation for value and quality are strengths we are using to drive profitable private label growth. ARE THERE OPPORTUNITIES FOR LANCE TO DO BUSINESS INTERNATIONALLY? Our greatest potential is in the United States where we have brand strength and the opportunity to increase distribution coverage. We do have a presence in Canada and Europe and will continue to evaluate international growth opportunities. WHERE ARE YOU TRYING TO DRIVE LANCE OVER THE NEXT THREE TO FIVE YEARS? For Lance to be successful longer term, we must attain the critical mass to allow us to compete effectively with the leaders in the snack food industry. This will be accomplished through a combination of organic growth and external development. We intend to expand our portfolio of brands and products as we respond to consumer demand and use our powerful route sales system to leverage our position at retail. Also, it is vital that we continue to improve productivity, move aggressively to reduce operating costs and maintain disciplined investments in strategic areas that drive growth. 5

7 COMMITMENT TO CONSUMER SATISFACTION F or over 90 years Lance has provided consumers with high quality snack foods that are fresh, great tasting and convenient. Lance s wide variety of products and distribution coverage provide busy consumers with fresh snack choices that hit the spot. Lance sandwich crackers and Cape Cod potato chips are the nation s leading brands of sandwich crackers and kettle cooked potato chips. These products lead the way for Lance today. Consumer satisfaction is at the heart of Lance s drive to improve existing products and develop new ones to reach new consumers and markets.

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9 FOCUSED ON CUSTOMER SERVICE Lance s route sales system provides a level of customer service that we believe is unmatched by other distribution methods. At each account, the Company s sales representatives ensure that snack products are fresh and well displayed. This provides great value to retail customers and allows Lance to work with them to reach consumers. Lance s route realignment activities are focused on strengthening customer service, improving route economics and developing accounts with high growth potential. Continuous improvement is key as Lance explores ways to improve responsiveness to ever changing customer needs.

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11 D E D I C A T I O N T O Q U A L I T Y V ital to Lance s success is its ability to deliver products with the consistent taste, appearance and overall quality that consumers demand. Lance is dedicated to quality in its employees, products and services to support long-term growth and profitability. Quality is the driving force behind Lance s great tasting snack products and ongoing efforts to improve operations and customer service. Quality remains at the heart of Lance s dedication to providing value to customers, consumers and stockholders. You can almost taste the salt air. But it helps if you open the bag.

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13 O i r e c t o r s & f f i c e r s D DIRECTORS Paul A. Stroup, III, 52, Chairman of the Board of Directors of the Company; President and Chief Executive Officer of the Company David L. Burner, 64, Director of the Company; retired Chairman of the Board and Chief Executive Officer, Goodrich Corp. (Aerospace systems) Alan T. Dickson, 72, Director of the Company and Chairman of the Board of Directors of Ruddick Corporation. (Diversified holding company) J. W. Bill Disher, 70, Director of the Company and retired Chairman of the Board of Directors of the Company William R. Holland, 65, Director of the Company and retired Chairman and Chief Executive Officer of United Dominion Industries Limited (Diversified manufacturing company) Scott C. Lea, 72, Director of the Company; retired Chairman of the Board of Directors of the Company and retired Chief Executive Officer of Rexham, Inc. (Manufacturer of packaging and coated laminated products) Wilbur J. Prezzano, 63, Lead Independent Director of the Company and retired Vice Chairman of the Board of Eastman Kodak, Inc. David V. Singer, 48, Director of the Company and Executive Vice President and Chief Financial Officer, Coca-Cola Bottling Co. Consolidated. (Soft drink bottling and distribution) Robert V. Sisk, 68, Director of the Company and private investor. EXECUTIVE OFFICERS Paul A. Stroup, III President and Chief Executive Officer H. Dean Fields Vice President and President, Vista Bakery, Inc. L. Rudy Gragnani Vice President of Information Systems Earl D. Leake Vice President of Human Resources Frank I. Lewis Vice President of Sales B. Clyde Preslar Vice President, Chief Financial Officer and Secretary David R. Perzinski Treasurer Margaret E. Wicklund Corporate Controller and Assistant Secretary Isaiah Tidwell, 59, Director of the Company; Georgia Wealth Management Director and Executive Vice President of Wachovia Bank, N.A. S. Lance, Van Every, 56, Director of the Company and private investor 12

14 Lance, Inc. P.O. Box Charlotte, North Carolina Phone Fax