<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
 
                                   FORM 10-K
 
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<C>               <S>
   (MARK ONE)
      [  ]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED
                                               OR
      [X]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE TRANSITION PERIOD FROM JUNE 29, 1997 TO JANUARY 3,
                  1998
</TABLE>
 
                         COMMISSION FILE NUMBER 1-9787
 
                            FLOWERS INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)
 
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<S>                                            <C>
                   GEORGIA                                       58-0244940
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                     Identification Number)
 
             1919 FLOWERS CIRCLE
             THOMASVILLE, GEORGIA                                  31757
   (Address of principal executive offices)                      (Zip Code)
</TABLE>
 
       Registrant's telephone number, including area code: (912) 226-9110
          Securities registered pursuant to Section 12(b) of the Act:
 
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<CAPTION>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
        COMMON STOCK, $.625 PAR VALUE,
TOGETHER WITH PREFERRED SHARE PURCHASE RIGHTS             NEW YORK STOCK EXCHANGE
</TABLE>
 
       Securities registered pursuant to Section 12(g) of the Act:  None

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     Aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price on the New York
Stock Exchange on March 23, 1998: $2,137,422,400
 
     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
 
<TABLE>
<CAPTION>
             TITLE OF EACH CLASS                       OUTSTANDING AT MARCH 23, 1998
             -------------------                       -----------------------------
<S>                                            <C>
        COMMON STOCK, $.625 PAR VALUE                            90,809,227
</TABLE>
 
DOCUMENTS INCORPORATED BY REFERENCE:  PORTIONS OF THE ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 OF KEEBLER FOODS COMPANY, A DELAWARE
CORPORATION.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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<PAGE>   2
 
                          FORM 10-K TRANSITION REPORT
 
                               TABLE OF CONTENTS
 
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                                                                             SEQUENTIAL
                                                                                PAGE
                                                                             ----------
<C>            <S>                                                           <C>
                                        PART I
    ITEM NO.
          1.   Business....................................................       1
          2.   Properties..................................................      12
          3.   Legal Proceedings...........................................      13
          4.   Submission of Matters to a Vote of Security Holders.........      13
 
                                        PART II
    ITEM NO.
          5.   Market for Registrant's Common Equity and Related
               Stockholder Matters.........................................      13
          6.   Selected Financial Data.....................................      14
          7.   Management's Discussion and Analysis of Financial Condition
               and Results of Operations...................................      15
          8.   Financial Statements and Supplementary Data.................      21
          9.   Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure....................................      21
 
                                       PART III
    ITEM NO.
         10.   Directors and Executive Officers of the Registrant..........      22
         11.   Executive Compensation......................................      25
         12.   Security Ownership of Certain Beneficial Owners and
               Management..................................................      30
         13.   Certain Relationships and Related Transactions..............      32
 
                                        PART IV
    ITEM NO.
         14.   Exhibits, Financial Statement Schedules, and Report on Form
               8-K.........................................................      32
</TABLE>
 
                                       (i)
<PAGE>   3
 
               INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
 
     The registrant incorporates by reference into this Transition Report on
Form 10-K for the transition period ended January 3, 1998, certain portions of
the Annual Report on Form 10-K of Keebler Foods Company for its fiscal year
ended January 3, 1998, filed with the Securities and Exchange Commission on
March 20, 1998 (File No. 001-13705) (the "Keebler Form 10-K"), as follows:
 
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<CAPTION>
                                                    ITEM OF FLOWERS TRANSITION
      ITEM OF KEEBLER ANNUAL REPORT                  REPORT ON FORM 10-K INTO
           ON FORM 10-K BEING                       WHICH INFORMATION IS BEING
        INCORPORATED BY REFERENCE                    INCORPORATED BY REFERENCE
      -----------------------------                 --------------------------
<S>                                  <C>     <C>                                  <C>
PART I                                       PART I
Item 1.  Business..................          Item 1.  Business
Item 2.  Properties................          Item 2.  Properties
 
PART II                                      PART II
Item 6.  Selected Financial Data...          Item 6.  Selected Financial Data
Item 7.  Management's Discussion             Item 7.  Management's Discussion
         and Analysis of Financial                    and Analysis of Financial
         Condition and Results of                     Condition and Results of
         Operations................                   Operations
</TABLE>
 
                                      (ii)
<PAGE>   4
 
                                     PART I
 
ITEM 1.  BUSINESS
 
     As used herein, unless the context otherwise indicates, (i) "Flowers" means
Flowers Industries, Inc., a Georgia corporation and its consolidated
subsidiaries, excluding Keebler Foods Company, a Delaware corporation, and its
consolidated subsidiaries ("Keebler"); and (ii) the "Company" means Flowers and
Keebler, collectively. Unless stated otherwise, figures provided for market
share percentages and rank in any market are based on retail sales (measured in
dollars) in 1997 as reported by Information Resources, Inc. ("IRI"), which
tracks retail sales through scanner data in United States grocery stores with
annual revenue greater than $2.0 million. The IRI data excludes sales through
other channels in which the Company operates and, therefore, may overstate or
understate the Company's share of particular product lines in the baked foods
market. See "Business -- Products." In January 1998, the Company changed its
fiscal year end from the Saturday nearest June 30 to the Saturday nearest
December 31. Unless stated otherwise, all references to (i) "fiscal year 1997"
shall mean Flowers' full fiscal year ended June 28, 1997, (ii) "fiscal year
1998" shall mean Flowers' full fiscal year ending January 2, 1999, and (iii)
"transition period 1998" shall mean Flowers' 27 week transition period from June
29, 1997 through January 3, 1998.
 
                                  THE COMPANY
 
     The Company is the largest nationally branded producer and marketer of a
full line of baked foods in the United States, with products which include
Flowers Bakeries' fresh breads and rolls, Mrs. Smith's Bakeries' fresh and
frozen baked desserts, snacks, breads and rolls, as well as Keebler's cookies
and crackers. Since its founding in 1919 in Thomasville, Georgia, the Company
has dramatically expanded the diversity and geographic scope of its operations
and is now a leader in the market for baked foods throughout the United States.
 
     The Company's core strategy is to be the country's leading low-cost
producer and marketer of a full line of branded fresh and frozen baked products
on a national and super-regional basis, serving all possible customers, through
all channels of distribution. This strategy is focused on responding to current
market trends for the Company's products and changing consumer preferences,
which now increasingly favor purchases of ready-made convenience food products
as opposed to traditional home-prepared foods. To assist in accomplishing this
core strategy, the Company has aggressively invested capital to modernize and
expand its plant and equipment capacity and has acquired nationally branded
businesses which complement its traditional strengths. It has also continually
improved its distribution systems and has established a presence in all
distribution channels where baked foods are sold, including restaurants,
fast-food chains, food wholesalers, institutions and vending machines, as well
as grocery stores.
 
     In the fresh baked product line (Flowers Bakeries), the Company focuses on
the production and marketing of baked foods to customers in the super-regional
19 state area in and surrounding the southeastern United States. In this effort,
the Company has devoted significant resources to modernizing production
facilities and improving its distribution capabilities, as well as actively
marketing well-recognized brands such as Nature's Own and Cobblestone Mill
bread. Since 1980, the Company has acquired 24 local bakery operations which are
generally within or contiguous to its existing region and which can be served
with its extensive direct-to-store sales and distribution system (a "DSD
system"). The Company's strategy is to use acquisitions to better serve new and
existing customers, principally by increasing the productivity and efficiency of
newly acquired plants, establishing reciprocal baking arrangements among its
bakeries, and by extending its DSD system. Flowers Bakeries' DSD system utilizes
approximately 3,100 independent distributors who own the right to sell the
Company's fresh baked products within their respective territories.
 
     The Company's frozen baked foods operations (Mrs. Smith's Bakeries) began
in the mid-1970s with the acquisition of the Stilwell business, with frozen
products initially marketed to customers in the southeastern and southwestern
United States. In 1989, the Company entered the frozen bread and dough market in
the southeastern United States with its acquisition of the bakery operations of
Winn-Dixie, Inc. In 1991, the
 
                                        1
<PAGE>   5
 
Company undertook its first significant entry into the national market for
frozen baked dessert products with the acquisition of Pies, Inc., a
midwest-based producer of premium pies for the restaurant and foodservice
markets, and further expanded its national presence by acquiring the Oregon
Farms branded frozen carrot cake line. In May 1996, the Company obtained a
leading presence in the frozen baked dessert category with the acquisition of
the business of Mrs. Smith's Inc., which is the leading national brand of frozen
pies sold at retail. In January 1998, the Company launched "Operation 365," a
strategy aimed at significantly expanding year-round sales in the frozen dessert
baked product category through product line extensions designed to take
advantage of nationwide consumer recognition of the Mrs. Smith's brand name.
Examples of significant product line extensions that are underway include Mrs.
Smith's retail frozen fruit cobblers and Mrs. Smith's "Restaurant Classics"
retail frozen pies.
 
     The Company entered the cookies and crackers marketplace in January 1996 by
acquiring for $62.5 million an approximate 45% stake in Keebler, the number two
producer and marketer of cookies and crackers in the United States with net
sales of approximately $2.1 billion for the fiscal year ended January 3, 1998.
In June 1996, Keebler acquired Sunshine Biscuits, Inc. ("Sunshine"), the third
largest cookie and cracker producer in the United States. By the end of 1996,
Keebler completed its planned integration of Sunshine's operations, achieving
efficiencies in administration, purchasing, production, marketing, sales and
distribution. Under the control of Flowers and its co-investors, Keebler's
results of operations have improved from a net loss of $158.3 million for its
fiscal year ended December 30, 1995, to a net income of $57.0 million for its
fiscal year ended January 3, 1998. On February 3, 1998, Keebler completed its
initial public offering in which Flowers' co-investors sold a portion of their
shares to the public. Concurrent with that offering, Flowers purchased an
additional 11% of Keebler from its co-investors for approximately $309 million,
thereby increasing its ownership to approximately 55% of the total Keebler
shares outstanding (the "Keebler Acquisition").
 
     The Company has a leading presence in each of the major product categories
in which it competes. Flowers Bakeries' fresh baked branded bread and roll sales
rank first in ten of its 15 major metropolitan markets and second in its
remaining five such markets, and its Nature's Own brand is the number one volume
brand of wheat/variety bread in the country despite being marketed solely in the
super-regional 19 state area in and surrounding the southeastern United States.
Mrs. Smith's Bakeries is one of the leading frozen baked dessert producers and
marketers in the United States, and its Mrs. Smith's pies are the leading
national brand of frozen pies sold at retail. Keebler is the number two producer
and marketer of branded cookies and crackers, the number one producer and
marketer of private label cookies and the number one producer and marketer of
cookies and crackers for the foodservice market. The Company's major branded
products include, among others, the following:
 
<TABLE>
<CAPTION>
    FLOWERS BAKERIES              MRS. SMITH'S BAKERIES                  KEEBLER
  FRESH BAKED PRODUCTS       FRESH AND FROZEN BAKED PRODUCTS       COOKIES AND CRACKERS
  --------------------       -------------------------------       --------------------
<S>                       <C>                                    <C>
Flowers                   Mrs. Smith's                           Keebler Brands:
Nature's Own              Mrs. Smith's Restaurant Classics       - Chips Deluxe
Whitewheat                Mrs. Smith's Special Recipe            - Pecan Sandies
Cobblestone Mill          Mrs. Freshley's                        - Fudge Shoppe
Dandee                    Oregon Farms                           - Town House
Evangeline Maid           European Bakers, Ltd.                  - Club
Betsy Ross                Stilwell                               - Graham Selects
ButterKrust               Our Special Touch                      - Wheatables
BlueBird                  Danish Kitchen                         - Zesta
Licensed Brands:          Pour-A-Quiche                          Cheez-It
- Sunbeam                                                        Carr's
- Roman Meal                                                     Vienna Fingers
- Country Hearth                                                 Hydrox
- Bunny                                                          Sunshine Krispy
- Holsum                                                         Hi-Ho
                                                                 Ready Crust
</TABLE>
 
     The Company is committed to being the low cost producer in all of its
operations and has made significant capital investments in recent years to
modernize, automate and expand its production and
                                        2
<PAGE>   6
 
distribution capabilities. Flowers has invested approximately $377 million over
the past six years, of which approximately $227 million was used to expand and
modernize existing production facilities for Flowers Bakeries, including the
addition of twelve new highly-automated production lines in nine facilities. The
remaining approximately $150 million was used primarily to build a
state-of-the-art distribution facility, and to add 13 highly-automated
production lines in nine facilities for Mrs. Smith's Bakeries. Since Flowers'
initial investment in Keebler in January 1996, Keebler has invested
approximately $78 million to streamline and rationalize its production
operations in order to better support its national DSD system.
 
     In order to provide prompt and responsive service to its consumers, the
Company tailors its distribution systems to the marketing and production aspects
of its major product lines. Flowers Bakeries distributes its fresh baked foods
through an extensive DSD system of approximately 3,100 independent distributors
who, as owners of their territories, are motivated to maintain and build shelf
space and to monitor product freshness, which is essential in the marketing of
short shelf life products such as fresh bread, rolls and buns. These
distributors make an aggregate of approximately 70,000 stops per day. Mrs.
Smith's Bakeries' frozen foods are distributed through its two
strategically-located frozen distribution facilities, as well as through
additional commercial frozen warehouse space throughout the United States, in
order to accommodate inventory growth in seasonal products and to provide
staging to expedite distribution throughout the year. Keebler's cookies and
crackers are distributed through a DSD system designed to maximize customer
service and Keebler's control over the availability and presentation of
products. Keebler's DSD system employees distribute products to approximately
30,000 retail locations, principally supermarkets. Keebler is one of only two
cookie and cracker companies that own and operate a national DSD system.
 
INDUSTRY OVERVIEW
 
     The United States baked foods industry is comprised of a number of distinct
product lines, including fresh baked foods (fresh breads, rolls and buns),
refrigerated and frozen baked foods (desserts, snacks, breads and doughs) and
cookies and crackers. Changes in consumer preferences have shifted food
purchases away from the traditional grocery store aisles for home preparation
and consumption, and toward home meal replacement purchases, either in
supermarkets' in-store deli/bakeries or in non-supermarket channels, such as
mass merchandisers, convenience stores, club stores, restaurants and other
convenience channels. Non-supermarket channels of distribution are becoming
increasingly important throughout the baked foods industry.
 
  Fresh Baked Foods
 
     In 1997, retail bread sales in the United States were approximately $5
billion, according to IRI, which tracks retail sales through scanner data in
United States grocery stores with annual revenue greater than $2.0 million. In
the last decade, retail sales of fresh breads have experienced modest growth,
with expansion occurring primarily in a variety of premium and specialty breads.
 
     In addition to Flowers Bakeries, several large baking and diversified food
companies market fresh baked foods in the United States. Competitors in this
category include Interstate Bakeries Corporation ("Interstate"), The Earthgrains
Company ("Earthgrains"), Bestfoods, formerly CPC International Inc.
("Bestfoods") and Pepperidge Farm Inc. ("Pepperidge Farm"). There are also a
number of smaller, regional baking companies. The Company believes that the
larger companies enjoy several competitive advantages over smaller operations,
due principally to economies of scale in areas such as purchasing, production,
advertising, marketing and distribution, as well as through greater brand
awareness.
 
     A significant trend in the fresh baked foods industry over the last several
years has been the consolidation of smaller bakeries into larger baking
businesses. Consolidation, which has reduced industry capacity, continues to be
driven by factors such as capital constraints on smaller bakeries, which limit
their ability to avoid technological obsolescence, to increase productivity or
to develop new products, generational changes at family-owned businesses, and
the need to serve super-regional grocery store chains. The Company believes that
the consolidation trend in the fresh baked foods industry will continue to
present opportunities for strategic acquisitions that complement its existing
businesses and that extend its regional presence.
 
                                        3
<PAGE>   7
 
  Frozen Baked Foods
 
     The United States frozen and refrigerated baked foods industry, including
desserts, breads, rolls and doughs, had 1997 sales of approximately $7 billion,
according to estimates compiled for the February 1998 edition of Refrigerated
and Frozen Foods, an industry trade publication. While retail sales of frozen
baked desserts have declined by approximately 9% since 1992, sales of frozen
baked foods to other distribution channels, including restaurants and other
foodservice institutions, have grown significantly over the same period,
including a cumulative 23% increase in sales of foodservice desserts and a 50%
increase in sales at in-store deli/bakeries. Primary competitors in the frozen
baked desserts category include The Pillsbury Co. ("Pillsbury"), Sara Lee Bakery
("Sara Lee"), Rich Products Corp. ("Rich Products"), Edwards Baking Co.
("Edwards") and Pepperidge Farm.
 
  Cookies and Crackers
 
     The United States cookie and cracker industry had 1997 retail sales of
approximately $8.3 billion. Since 1992, consumption per person of cookies and
crackers in the United States has remained stable. The cookie and cracker
industry is comprised of distinct product segments. Cookie segments include,
among others, sandwich cookies, chocolate chip cookies and fudge-covered
cookies. Cracker segments include among others, saltine crackers, graham
crackers and snack crackers.
 
     Supermarkets accounted for approximately 78% of 1996 retail sales in the
cookie and cracker industry with mass merchandisers, convenience stores, and
drug stores accounting for most of the balance. Since 1992, United States annual
dollar supermarket sales of cookies and crackers have increased an average of
1.5% per year.
 
     Keebler and Nabisco, Inc. ("Nabisco") are the two largest national
participants in the cookie and cracker industry. Keebler and Nabisco have a
combined market share of approximately 58%, with Keebler having approximately
24% and Nabisco having approximately 34%. Other participants in the industry
generally operate only in certain regions of the United States or only
participate in a limited number of segments of the industry.
 
BUSINESS STRATEGY
 
     The Company's strategy is to be the country's leading low-cost producer and
marketer of a full-line of branded fresh and frozen baked foods products on a
national and super-regional basis serving all possible customers through all
channels of distribution. Flowers Bakeries, Mrs. Smith's Bakeries and Keebler
each develop separate strategies based on the production, distribution and
marketing requirements of its particular baked foods category. The Company
employs the following five overall strategies:
 
     - Strong Brand Recognition.  The Company intends to capitalize on the
      success of its well-recognized brand names, which communicate product
      consistency and high quality, through extending those brand names to
      additional products and categories. Among other strategies, the Company
      will continue to extend the Mrs. Smith's brand to additional frozen baked
      products, expand the use of the Cheez-It brand name and develop new
      products under the Keebler brand name. Many of the Company's products,
      including its Nature's Own bread, Mrs. Smith's retail frozen baked pies
      and Cheez-It snack crackers, are the top-selling brands in their
      categories. Flowers Bakeries' fresh baked branded bread and roll sales
      rank first in ten of its 15 major metropolitan markets and second in its
      remaining five such markets. Keebler brand cookies rank second overall in
      the United States, with eight of the 25 best-selling cookies and ten of
      the 25 best-selling crackers in the United States based on dollar sales.
 
                                        4
<PAGE>   8
 
     - State-of-the-Art Production and Distribution Facilities.  The Company
      intends to maintain a continuing level of capital improvements that will
      permit it to fulfill its commitment to remain among the most modern and
      efficient baked foods producers in the United States. Toward this goal,
      Flowers has invested approximately $377 million in Flowers Bakeries and
      Mrs. Smith's Bakeries in the six-year period ended June 28, 1997 to build
      several modern and highly efficient production facilities and a
      state-of-the-art distribution facility, as well as to automate and
      modernize its existing facilities. Since Flowers' initial investment in
      Keebler in January 1996, Keebler has spent approximately $78 million to
      keep its operations modern and efficient and has lowered its operating
      costs by closing plants, consolidating production and reducing overhead.
 
     - Efficient and Customer Service-Oriented Distribution.  The Company
      intends to expand and refine its distribution systems to allow it to
      respond quickly and efficiently to changing customer service needs,
      consumer preferences and seasonal demands. In the last decade, the Company
      has developed distribution systems that are tailored to the nature of each
      of its three baked food product categories and are designed to provide the
      highest levels of service to retail and foodservice customers. Flowers
      Bakeries has developed a DSD network of approximately 3,100 independent
      distributors for its fresh baked products, who make an aggregate of
      approximately 70,000 stops per day. Mrs. Smith's Bakeries operates a
      network of strategically located storage and distribution facilities for
      its frozen baked products and a centralized distribution facility for its
      fresh baked snack products. Keebler operates its own national DSD system
      for its cookie and cracker products, enabling it to provide frequent
      service to over 30,000 retail customers.
 
     - Broad Range of Products and Sales Channels.  In recognition that
      consumers are increasingly seeking home meal replacements and other
      convenience food products, the Company intends to continue to emphasize
      expansion of its product lines and sales channels to meet those
      preferences. The Company's product lines now include virtually every
      category of baked foods, including fresh and frozen bread, buns, rolls,
      pies, cakes, and other baked snacks and desserts, as well as cookies and
      crackers. The Company's products generally can be found in all baked food
      distribution channels, including traditional supermarkets and their
      in-store deli/bakeries, convenience stores, mass merchandisers, club
      stores, wholesalers, restaurants, fast food outlets, schools, hospitals
      and vending machines. The Company intends to continue to increase its
      focus on non-supermarket channels, such as restaurants, mass merchandisers
      and convenience stores.
 
     - Strategic Acquisitions.  The Company intends to continue to pursue growth
      through strategic acquisitions and investments that will complement and
      expand its existing markets, product lines and product categories. The
      Company has consistently pursued growth in sales, geographic markets and
      products through strategic acquisitions and has completed over 75
      acquisitions in 30 years. Most recently, Flowers continued its regional
      expansion in fresh baked foods with its January 1998 acquisition of
      Franklin Baking Company, a regional bakery based in North Carolina. The
      Company expanded its frozen baked foods product line with the 1996
      acquisition of Mrs. Smith's, Inc. and the well-recognized Mrs. Smith's
      national brand. In February 1998, the Company obtained a controlling
      interest in Keebler, the second largest cookie and cracker producer and
      marketer in the United States.
 
PRODUCTS
 
     The Company produces baked foods in three product lines: fresh baked foods,
frozen baked foods and cookies and crackers.
 
  Fresh Baked Foods -- Flowers Bakeries
 
     In 1997, Flowers Bakeries was the leading producer of fresh baked foods in
ten of its major markets and second in five of its major markets and was
developing its presence in the other markets it has recently entered. The
Company's fresh baked foods market includes 19 states in the eastern,
southeastern and south central United States.
 
                                        5
<PAGE>   9
 
     The Company markets its fresh soft variety and white breads under numerous
brand names, including Flowers, Nature's Own, Whitewheat, Cobblestone Mill,
Dandee, Evangeline Maid, Betsy Ross, ButterKrust and Purity, among others.
Within licensed geographic territories, the Company also markets fresh bread
under the Sunbeam, Roman Meal, Country Hearth, Bunny and Holsum trademarks.
Nature's Own is the best selling brand by volume of soft variety bread in the
United States, despite being marketed solely in the 19 state super-region in and
surrounding the southeastern United States. Rolls and buns are marketed under
the Cobblestone Mill, European Bakers, Ltd., Breads International and other
brand names. Flowers Bakeries has used its strong brand recognition to expand to
new product lines, such as the successful introduction of Cobblestone Mill
Breakfast Breads. Fresh baked snack cakes, doughnuts, pastries and other sweet
snacks are sold primarily under the BlueBird brand, as well as ButterKrust,
Sunbeam, and Holsum.
 
     In addition to its branded products, Flowers Bakeries also packages baked
foods under private labels for such retailers as Winn-Dixie. While private label
products carry lower margins than its branded products, Flowers Bakeries is able
to use its private label offerings to expand its total shelf space and to
effectively maximize capacity utilization.
 
     The Company also supplies numerous restaurants, institutions and
foodservice companies with fresh bread products, including Burger King, Krystal,
Arby's, Outback Steakhouse, Olive Garden, Dairy Queen and Chili's. In May 1995,
the Company became a preferred supplier to Burger King and currently supplies
baked products to approximately 1,700 Burger King restaurants in the Southeast.
The Company also sells fresh baked products to wholesale distributors for
ultimate sale to a wide variety of food outlets.
 
  Frozen Baked Foods -- Mrs. Smith's Bakeries
 
     Mrs. Smith's Bakeries and Sara Lee each have an approximately 25% market
share of the frozen baked dessert market, representing the two largest shares of
that market. Mrs. Smith's frozen baked pies were the number one retail frozen
brand pies in the U.S. for 1997 with an approximate 53% market share, according
to IRI. The Company's frozen baked foods are marketed throughout the United
States, and, based on consumer surveys commissioned by the Company, Mrs. Smith's
enjoys a 94% brand awareness in United States households.
 
     The Company's frozen pies, cakes, cobblers and other baked desserts are
sold under the Mrs. Smith's, Mrs. Smith's Restaurant Classics, Mrs. Smith's
Special Recipe, Oregon Farms and Stilwell brand names in the frozen foods
sections of supermarkets, as are the Company's frozen pie shells, mixed fruits
and quiche fillings. The Company has also introduced a line of frozen baked
desserts and cobblers that feature low fat crusts and no-sugar-added fruit
fillings. The Company's frozen baked products also include specialty baked and
parbaked (partially baked) breads, buns, and rolls marketed under the European
Bakers, Ltd. and Our Special Touch brands, which are sold at retail. The Company
also co-packs these and other fresh bakery snack food products on behalf of
other industry participants who sell these products under their own proprietary
brand names.
 
     The Company produces frozen pies, cakes and desserts as well as bread,
rolls and buns for sale to foodservice customers, wholesalers, such as Sysco,
and markets fresh and frozen hearth-baked specialty bread, breadsticks and rolls
to chain restaurants such as Outback Steakhouse and Olive Garden.
 
     Traditionally, frozen pie sales are heavily concentrated throughout the
year-end holiday season. The Company has recently launched "Operation 365," a
strategy aimed at significantly expanding non-seasonal sales in the frozen baked
product line by introducing new products under the Mrs. Smith's brand, thereby
extending the well-recognized Mrs. Smith's brand name to existing and related
products. The Company's newest introduction is Mrs. Smith's Restaurant Classics,
which are frozen premium, restaurant-quality cream pies sold at retail.
 
     Mrs. Smith's Bakeries also produces fresh baked snack products under the
Mrs. Freshley's brand, such as donuts, honeybuns, cream horns, pecan spins,
jelly rolls and cinnamon buns for sale as single packs in vending machines and
in multi-packs marketed through grocery stores and mass merchandisers as center
aisle promotions. In addition, Mrs. Smith's Bakeries sells these same products
to Flowers, which distributes them
 
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<PAGE>   10
 
under its BlueBird brand. Mrs. Smith's Bakeries produces fresh baked snack foods
at some of its production facilities in order to maximize the use of capacity.
 
  Cookies and Crackers -- Keebler
 
     Keebler is the second largest cookie and cracker producer in the United
States with annual net sales of approximately $2.0 billion and an approximate
24% share of the United States cookie and cracker market. In the United States,
Keebler is the number two producer and marketer of branded cookies and crackers,
the number one producer of private label cookies and the number one producer of
cookies and crackers for the foodservice market. Keebler produces eight of the
25 best-selling cookies and ten of the 25 best-selling crackers in the United
States based on dollar sales. Keebler's branded cookie and cracker products
include, among others, Chips Deluxe cookies, Pecan Sandies cookies, Fudge Shoppe
cookies, Town House crackers, Club crackers, Graham Selects crackers, Wheatables
crackers, Zesta crackers, Cheez-It crackers, Cheez-It party mix, Nacho Cheez-It
crackers, Carr's biscuits, Vienna Fingers cookies, Hydrox cookies, Sunshine
Krispy crackers and Hi-Ho crackers. In addition, Keebler is the number one
producer and marketer of retail branded ice cream cones in the United States,
and a major producer of retail branded pie crusts. Keebler also produces
custom-baked products, such as Nutri-Grain breakfast bars, for other marketers
of branded food products, and private label cookies and crackers to be sold by
retailers under their own brands.
 
MANUFACTURING AND DISTRIBUTION
 
     The Company designs its production facilities and distribution systems to
meet the marketing and production demands of its major product lines. Through a
significant program of capital improvements and careful planning of plant
locations, which, among other things, allows the Company to establish reciprocal
baking arrangements among its bakeries, the Company seeks to remain the
country's leading low cost producer and marketer of branded fresh and frozen
baked products on a national and super-regional basis and to provide the highest
quality customer service. In addition to the independent distributor system for
its fresh baked products and the DSD system used for Keebler, the Company also
uses both owned and public warehouses and distribution centers in central
locations for the distribution of certain of its frozen and other shelf stable
products.
 
  Fresh Baked Foods -- Flowers Bakeries
 
     Flowers owns and operates 27 fresh bread and bun bakeries in 10 states.
Flowers has invested approximately $227 million over the past six years,
primarily to build new state-of-the-art baking facilities and to significantly
upgrade existing facilities. During this period, Flowers has added twelve new
highly-automated production lines in nine of its facilities. The Company
believes that these investments, undertaken at a time when many competitors were
minimizing capital improvements due to leverage or earnings pressure, have made
Flowers the most efficient major producer of fresh baked foods in the United
States. Flowers believes that its capital investment yields long-term benefits
in the form of more consistent product quality, highly sanitary processes, and
greater production volume at a lower cost per unit. While its major capital
improvement program is largely complete, Flowers intends to continue to invest
in its plant and equipment to maintain the highest levels of efficiency.
 
     Distribution of fresh baked foods involves determining appropriate order
levels, delivering the product from the plant to the customer, stocking the
product on the shelves, visiting the customer one to three times daily to ensure
that inventory levels remain adequate, and removing stale goods. In 1986,
Flowers Bakeries began converting its bakery sales routes from employees
operating company-owned vehicles to a DSD system of exclusive independent
distributors. The Company effected this change by selling its sales routes
primarily to its sales employees. The Company initially financed these purchases
over ten years, which obligations were sold to a financial institution in 1996.
Currently, all distributor purchase arrangements are made directly with a
financial institution, and, pursuant to an agreement, the Company manages and
services these arrangements.
 
     The distributors lease hand-held computers from the Company, which contain
software proprietary to the Company. The software permits distributors to track
and communicate inventory data to the production
 
                                        7
<PAGE>   11
 
facilities and to calculate recommended order levels based on historical sales
data and recent trends. These orders are electronically transmitted to the
appropriate production facility on a nightly basis. This system, which
management believes is more sophisticated than comparable tracking programs
currently used in the industry, is designed to ensure that adequate product, and
the right mix of products, are available to meet the retail and foodservice
customer's immediate needs. Management believes the system minimizes returns of
unsold goods. In addition to the hand-held distributor units, the Company's main
computer system permits tracking of sales, product returns and profitability by
customer location, plant, day and other bases. Managers receive sales and
profitability reports on a weekly basis, allowing prompt operational adjustments
when appropriate.
 
     Management believes that the Company's independent distributor system is
unique in the industry as to its size, with approximately 3,100 distributors,
and with respect to its super-regional scope. In Flowers Bakeries' DSD System,
an aggregate of over 70,000 stops are made each day. The program is designed to
provide the Company's retailers with superior service because distributors,
highly motivated by route ownership, strive to increase sales by maximizing
service. In turn, distributors have the opportunity to benefit directly from the
enhanced value of their routes resulting from higher sales volume.
 
  Frozen Baked Foods -- Mrs. Smith's Bakeries
 
     Mrs. Smith's Bakeries operates 13 production facilities with 67 production
lines for its pies, cakes, breads, rolls and snack foods. The Company maintains
maximum operating efficiency by producing high volume fresh snack products on
long runs to complement its branded frozen baked products, sales of which are
seasonal in nature. In the past six years, the Company has invested
approximately $150 million to upgrade its frozen baked foods production and
distribution facilities, primarily by adding 13 highly-automated production
lines in nine facilities and to construct its 225,000 square foot
highly-automated frozen distribution facility in Suwanee, Georgia. In addition,
Mrs. Smith's Bakeries is nearing completion of installation of the SAP/R3
operating system, which the Company believes will provide it with competitive
advantages in inventory tracking and distribution. The Company plans to invest
approximately $40 million over fiscal 1998 and 1999 in renovations to improve
efficiencies at several of its frozen food bakeries.
 
     Mrs. Smith's Bakeries' distribution facilities are strategically located
near its production facilities to simplify distribution logistics and shorten
delivery times. The plant in Stilwell, Oklahoma is an efficient facility which
serves as a principal point of distribution for the Company's products
throughout the central, southwestern and western United States. The
state-of-the-art Suwanee distribution facility is located on a major interstate
corridor near four of Mrs. Smith's Bakeries' frozen dessert production
facilities. This facility opened in 1995 and contains such innovations as five
78-foot tall, laser-guided cranes specifically designed for the facility, a six
million cubic foot freezer, and computer-controlled bar-coding and inventorying.
The automation of this facility enables Mrs. Smith's Bakeries to move extremely
large volumes of product without a significant labor component and enables the
facility to operate with extremely cold temperatures that preserve high product
quality. In addition to cost efficiencies, these features allow the Suwanee
facility to better serve customers by processing customer orders much more
quickly than conventional freezer facilities. This facility's frozen storage
capacity will be expanded in 1998 and production capacity is intended to be
added on-site to expand Mrs. Smith's Bakeries' production capacity and to
enhance operating efficiencies by having contiguous production and frozen
storage.
 
     In addition to Mrs. Smith's Bakeries' two strategically-located freezer and
distribution facilities in Suwanee and Stilwell, the Company leases additional
freezer and distribution facilities on the West Coast to facilitate distribution
of its products nationwide. These owned and leased facilities allow the Company
to build and store necessary inventory in seasonal products, and to expedite the
national distribution of both its seasonal and non-seasonal products.
 
     Mrs. Smith's Bakeries distributes its fresh baked snack products from a
centralized distribution facility located near Knoxville, Tennessee. Centralized
distribution allows the Company to achieve both production and distributing
efficiencies. The production facilities are able to operate longer, more
efficient production runs
 
                                        8
<PAGE>   12
 
of a single product, which are then shipped to the centralized distribution
facility. Products coming from different production facilities are then
cross-docked and shipped directly to customer warehouses.
 
  Cookies and Crackers -- Keebler
 
     Keebler attempts to meet the changing demands of its customers by planning
appropriate stock levels and optimal delivery times. To achieve these
objectives, Keebler has developed a network of modern and efficient production
facilities with contiguous or strategically located shipping centers and
distribution warehouses. Keebler owns and operates eleven production facilities
located throughout the United States. Keebler also owns and operates a dairy in
Fremont, Ohio that produces cheese under a proprietary formula which is used as
an ingredient in Cheez-It crackers. Keebler's distribution facilities consist of
eleven shipping centers attached to the production facilities, nine separate
shipping centers (two owned and seven leased) and 67 distribution centers
(twelve owned and 55 leased, 14 of which are idle or subleased) throughout the
United States. Keebler also leases 30 warehouses and 17 depots that are located
throughout the United States and are utilized by the sales force in the
distribution of Keebler's products.
 
     Keebler directly services approximately 30,000 retail customers through its
DSD distribution system, which system employs more than 3,200 persons. Keebler's
DSD distribution system distributes its retail branded cookie and cracker
products directly to the retail location, where these products are then
merchandised by Keebler's own sales force. Members of Keebler's sales force
visit retail outlets an average of 2.8 times per week per store, meeting
directly with and taking orders from store managers and arranging for extra in-
store display space. Keebler's trucks then deliver the orders directly to such
retail outlets, where members of Keebler's sales force, rather than store
employees, stock and arrange its products on the retailers' shelves and build
end-aisle and free standing displays within the stores. While strengthening
relationships with retailers, the frequent store presence of Keebler's sales
force also allows it to oversee and execute Keebler's in-store promotional
programs. In addition, it provides Keebler with the ability to monitor
competitors' in-store product promotions.
 
     Keebler uses its DSD distribution system exclusively to serve supermarkets
and mass merchandisers. In the case of club stores and foodservice distributors,
Keebler uses a dedicated sales force and ships its products directly to the
customers' warehouses. Convenience stores and vending distributors are served
using a network of independent distributors.
 
CUSTOMERS
 
  Fresh Baked Foods -- Flowers Bakeries
 
     The Company's fresh baked foods have a highly diversified customer base,
which includes grocery retailers, restaurants, fast-food chains, food
wholesalers, institutions, and vending companies. Flowers Bakeries also sells
returned and surplus product through a system of independently operated thrift
outlets.
 
     The Company also supplies numerous restaurants, institutions and
foodservice companies with fresh bread products, including buns for fast-food
outlets such as Burger King, Krystal, Arby's, Outback Steakhouse, Olive Garden,
Dairy Queen and Chili's. In May 1995, the Company became a preferred supplier to
Burger King and currently supplies baked products to approximately 1,700 Burger
King restaurants in the Southeast. The Company also sells fresh baked products
to wholesale distributors such as Sysco for ultimate sale to a wide variety of
food outlets. Winn-Dixie is Flowers Bakeries' largest customer for fresh baked
foods.
 
  Frozen Baked Foods -- Mrs. Smith's Bakeries
 
     The Company's frozen baked foods are marketed to traditional retail
outlets, such as grocery stores, as well as non-traditional outlets, ranging
from club stores and mass merchandisers to wholesalers, foodservice distributors
and restaurants. Mrs. Smith's Bakeries' branded frozen baked desserts are sold
primarily through grocery retailers. Its non-branded frozen baked desserts and
specialty breads and rolls are sold to foodservice distributors, such as Sysco,
institutions, retail in-store bakeries and restaurants, including Olive Garden
and Outback Steakhouse. Its fresh baked snack products under the Mrs. Freshley's
brand are sold primarily
 
                                        9
<PAGE>   13
 
through vending outlets. Mrs. Smith's Bakeries is in the second year of a
long-term exclusive contract with a major food wholesaler to supply non-branded
frozen premium pies.
 
     To fully utilize capacity in its facilities, Mrs. Smith's Bakeries produces
fresh baked snack products for its own distribution under the Mrs. Freshley's
brand and for Flowers Bakeries, which markets these products under its BlueBird
brand. The Company, in certain circumstances, enters into co-packing
arrangements with some of its competitors. Through co-packing, the Company
produces and packages baked foods for popular brands such as Weight Watchers,
Stouffer, Lance, Pepperidge Farm and Little Debbie.
 
  Cookies and Crackers -- Keebler
 
     Keebler sells its retail branded cookies and crackers through supermarkets,
mass merchandisers, convenience stores, drug stores and club stores to over
30,000 retail customers and manufactures private label products to be sold by
retailers under their own brands. In addition, Keebler supplies cookies and
crackers and ice cream cones for foodservice markets and produces ice cream
cones for various restaurants and ice cream retailers, such as McDonald's and
TCBY. Keebler also produces a variety of custom-baked products for other
marketers of branded food products, such as Kellogg, Oscar Mayer, Starkist,
Kraft, Gerber and McDonald's. No single customer accounted for more than 5% of
Keebler's net sales.
 
COMPETITION
 
  Fresh Baked Foods -- Flowers Bakeries
 
     The United States fresh baked foods segment is intensely competitive and is
comprised of large food companies, large independent bakeries with national
distribution, and smaller regional and local bakeries. Primary national
competitors include Interstate, Earthgrains, Bestfoods and Pepperidge Farm.
Competition is based on product quality, brand loyalty, price effective
promotions and the ability to target changing consumer preferences. Customer
service, including frequent delivery and well-stocked shelves, is an
increasingly important competitive factor. While the Company experiences price
pressure from time to time, primarily as a result of competitors' promotional
efforts, the Company believes that its status as the low cost producer and
consumer brand loyalty, as well as the Company's diversity within its region in
terms of geographic markets, products, and sales channels, limit the effects of
such competition. Recent consolidation in the baked foods industry has reduced
prior excess capacity and has further enhanced the ability of the larger firms
to compete with small regional bakeries. The Company believes that it enjoys
significant competitive advantages over smaller regional bakeries due to
economies of scale in areas such as purchasing, production, advertising,
marketing and distribution, and its lower production costs.
 
  Frozen Baked Foods -- Mrs. Smith's Bakeries
 
     According to Refrigerated and Frozen Foods, an industry trade publication,
the frozen baked foods industry is led by Pillsbury, Sara Lee, and Mrs. Smith's
Bakeries, which together account for approximately 46% of sales volume in the
broad category. Other significant competitors in the frozen baked dessert
category include Rich Products, Edwards and Pepperidge Farm. According to IRI,
Mrs. Smith's Bakeries had a 53% market share, the number one position, for
retail branded frozen pies in 1997. Competitors for the Mrs. Freshley's brand
products produced by Mrs. Smith's Bakeries include Interstate (Hostess) and
McKee (Little Debbie). Mrs. Freshley's is the country's number three fresh
pastry brand sold through vending machines.
 
     Competition for branded frozen baked products depends primarily on brand
recognition and loyalty, perceived product quality, effective promotions and, to
a lesser extent, price. Based on consumer surveys obtained by the Company, Mrs.
Smith's has an approximate 94% brand awareness in United States households. For
the nonbranded products manufactured by Mrs. Smith's Bakeries, competition is
based upon high-quality products requested by foodservice customers, excellent
service and price.
 
                                       10
<PAGE>   14
 
  Cookies and Crackers -- Keebler
 
     The United States branded cookie and cracker industry is led by Keebler and
Nabisco, which together account for approximately 58% of total sales volume.
Keebler has an approximate 24% share of the retail cookie and cracker market,
while Nabisco, the largest manufacturer in the United States cookie and cracker
industry, has an approximate 34% share. The remaining industry participants
primarily target certain segments of the industry or focus on certain regions of
the United States. Smaller competitors include numerous national, regional and
local manufacturers of both branded and private label products. Competition in
Keebler's markets takes many forms including establishing favorable brand
recognition, developing products sought by consumers, implementing appropriate
pricing, providing strong marketing support and obtaining access to retail
outlets and sufficient shelf space.
 
INTELLECTUAL PROPERTY
 
     The Company owns a number of trademarks and trade names, as well as certain
patents and licenses. Flowers Bakeries' principal brand names include Flowers,
Nature's Own, Whitewheat, Cobblestone Mill, Dandee, Evangeline Maid, Betsy Ross,
ButterKrust, Purity, and BlueBird, among others, and its licensed trademarks
include Sunbeam, Roman Meal, Country Hearth, Bunny and Holsum. Mrs. Smith's
Bakeries' principal brand names are Mrs. Smith's, Mrs. Smith's Restaurant
Classics, Mrs. Smith's Special Recipe, Stilwell, Oregon Farms, European Bakers,
Ltd., Our Special Touch, Mrs. Freshley's, Danish Kitchen and Pour-a-Quiche.
Keebler's principal trademarks and trade names include Keebler, Ernie the
Keebler Elf, the Hollow Tree logo, Cheez-It, Chips Deluxe, Club, Fudge Shoppe,
Graham Selects, Hi-Ho, Hydrox, Sunshine Krispy, Munch'ems, Ready Crust, Pecan
Sandies, Soft Batch, Sunshine, Toasteds, Town House, Vienna Fingers, Wheatables,
and Zesta. Keebler is the exclusive licensee of the Carr's crackers brand name
in the United States. Such trademarks and trade names are considered to be
important to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. Management is
not aware of any fact that would negatively impact the continuing use of any of
its trademarks, trade names, patents or licenses.
 
RAW MATERIALS
 
     The Company's primary baking ingredients are flour, sugar, shortening and
fruit. The Company also uses paper products, such as corrugated cardboard,
aluminum products, such as pie plates, and films and plastics to package its
baked foods. In addition, the Company is also dependent upon natural gas and
propane as a fuel for firing ovens. On average, baking ingredients constitute
approximately 10% to 15%, and packaging represents approximately 1% to 5%, of
the wholesale selling price of the Company's baked foods. The Company maintains
diversified sources for all of its baking ingredients and packaging products.
 
     Commodities, such as the Company's baking ingredients, periodically
experience price fluctuations and, for that reason, the market for these
commodities is continuously monitored. From time to time, the Company enters
into forward purchase agreements and derivative financial instruments to reduce
the impact of volatility in raw materials prices.
 
REGULATION
 
     As a producer and marketer of food items, the Company's operations are
subject to regulation by various federal governmental agencies, including the
Food and Drug Administration, the Department of Agriculture, the Federal Trade
Commission (the "FTC"), the Environmental Protection Agency, and the Department
of Commerce, as well as various state agencies, with respect to production
processes, product quality, packaging, labeling, storage and distribution. Under
various statutes and regulations, such agencies prescribe requirements and
establish standards for quality, purity, and labeling. The finding of a failure
to comply with one or more regulatory requirements can result in a variety of
sanctions, including monetary fines or compulsory withdrawal of products from
store shelves.
 
                                       11
<PAGE>   15
 
     In addition, advertising of the Company's businesses is subject to
regulation by the FTC, and the Company is subject to certain health and safety
regulations, including those issued under the Occupational Safety and Health
Act.
 
     The operations of the Company, like those of similar businesses, are
subject to various Federal, state, and local laws and regulations with respect
to environmental matters, including air and water quality, underground fuel
storage tanks, and other regulations intended to protect public health and the
environment. The operations and the products of the Company's businesses also
are subject to state and local regulation through such measures as licensing of
plants, enforcement by state health agencies of various state standards and
inspection of the facilities. The Company believes that it is currently in
material compliance with applicable laws and regulations.
 
EMPLOYEES
 
     Flowers employs approximately 7,200 persons, approximately 1,000 of whom
are covered by collective bargaining agreements. Keebler employs approximately
9,700 persons, of whom approximately 5,300 are covered by collective bargaining
agreements. The Company believes that it has good relations with its employees.
 
EXECUTIVE OFFICES
 
     The address and telephone number of the principal executive offices of the
Company are 1919 Flowers Circle, Thomasville, Georgia 31757, (912) 226-9110.
 
ITEM 2.  PROPERTIES
 
     Thirty-seven of the Company's production and distribution facilities are
owned, two facilities are leased and three facilities are owned by local
industrial development authorities under terms of Industrial Revenue Bond (IRB)
financing agreements. The leased properties are leased for terms of ten to
fifteen years with certain renewal options. Under the terms of the IRB financing
agreements, title to these properties passes to the Company at maturity for
little or no consideration. The Company's production plant locations are:
 
Montgomery, Alabama
Opelika, Alabama
Tuscaloosa, Alabama
Ft. Smith, Arkansas
Pine Bluff, Arkansas
Texarkana, Arkansas
Bradenton, Florida
Jacksonville, Florida
Miami, Florida
Atlanta, Georgia(2)
Chamblee, Georgia
Forest Park, Georgia
Suwanee, Georgia
Thomasville, Georgia
Tucker, Georgia (Leased)
Villa Rica, Georgia (IRB financed)
London, Kentucky
Baton Rouge, Louisiana
Lafayette, Louisiana
New Orleans, Louisiana
Chaska, Minnesota (IRB financed)
Goldsboro, North Carolina
Jamestown, North Carolina
Kinston, North Carolina
Pembroke, North Carolina
Stilwell, Oklahoma
Pottstown, Pennsylvania (Leased)
Fountain Inn, South Carolina
Spartanburg, South Carolina
  (IRB financed)
Andersonville, Tennessee
Crossville, Tennessee
Morristown, Tennessee
El Paso, Texas
Houston, Texas
San Antonio, Texas
Tyler, Texas
Lynchburg, Virginia
Norfolk, Virginia
Bluefield, West Virginia
Charleston, West Virginia
Parkersburg, West Virginia
 
     Management considers that its properties are well maintained and sufficient
for its present operations.
 
                                       12
<PAGE>   16
 
ITEM 3.  LEGAL PROCEEDINGS
 
     The Company is engaged in various legal proceedings which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to those proceedings will not be material to the
Company's financial position or results of operations.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
period ended December 13, 1997 is incorporated herein by reference.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
<TABLE>
<CAPTION>
                                                             MARKET PRICE                          CASH DIVIDENDS PAID PER
                                         ----------------------------------------------------           COMMON SHARE
                                            TRANSITION                                         -------------------------------
                                           PERIOD 1998         FY 1997           FY 1996
                                         ----------------  ----------------  ----------------  TRANSITION
QUARTER                                   HIGH      LOW     HIGH      LOW     HIGH      LOW    PERIOD 1998   FY 1997   FY 1996
-------                                   ----      ---    -------  -------  -------  -------  -----------   -------   -------
<S>                                      <C> <C>  <C> <C>  <C> <C>  <C> <C>  <C> <C>  <C> <C>  <C>           <C>       <C>
First..................................   20 11/16   16 1/2   13 1/4   10 5/8    9 5/8    8 1/8     .1100     .1000     .0933
Second.................................   21 1/2     16 5/8   15 7/8   12 5/8   10 1/4    8 1/4     .1125     .1017     .0950
Third..................................      --       --      16 1/8   13 1/4   10        8 1/4        --     .1033     .0967
Fourth.................................      --       --      18       15       12        8 1/2        --     .1075     .0983
         Total.........................                                                             .2225     .4125     .3833
</TABLE>
 
                            EQUITY SECURITY HOLDERS
 
<TABLE>
<CAPTION>
                                                              NUMBER OF SHAREHOLDERS OF
TITLE OF CLASS                                                RECORD AT MARCH 23, 1998
--------------                                                -------------------------
<S>                                                           <C>
Common Stock, $.625 par value, together with Preferred Share
  Purchase Rights                                                        8,027
</TABLE>
 
     The preceding table presents the high and low market price and cash
dividend information for each fiscal quarter as it relates to the Company's
common stock, $.625 par value. The Company's common stock is traded on the New
York Stock Exchange (NYSE). Cash dividends have been paid on these shares every
quarter since December 1971.
 
     On March 25, 1998, the last reported sale price of the Common Stock on the
NYSE was $23 1/8 per share.
 
     The declaration of dividends is at the discretion of the Board of Directors
of the Company. While the Company intends to continue to pay quarterly cash
dividends on its Common Stock, the declaration and payment of future dividends
and the amount thereof will be dependent upon the Company's financial condition,
results of operations, cash requirements for its business, future prospects and
other factors deemed relevant by the Board of Directors. In addition, the
existing debt agreements of Keebler contain covenants which limit Keebler's
ability to, among other things, pay dividends.
 
                                       13
<PAGE>   17
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The selected consolidated historical financial data presented below as of
and for the fiscal years 1993, 1994, 1995, 1996 and 1997, and for transition
period 1998, have been derived from the consolidated financial statements of
Flowers which have been audited by Price Waterhouse LLP, independent
accountants. The selected consolidated historical financial data for the 27
weeks ended January 4, 1997 have been derived from the unaudited financial
statements of Flowers. The results of operations presented below are not
necessarily indicative of results to be expected for any future period. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto incorporated by
reference or included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                  52 WEEKS ENDED                              27 WEEKS ENDED
                                            ----------------------------------------------------------   ------------------------
                                            JULY 3,    JULY 2,     JULY 1,      JUNE 29,     JUNE 28,    JANUARY 4,    JANUARY 3,
                                              1993       1994        1995         1996         1997         1997          1998
                                            --------   --------   ----------   ----------   ----------   -----------   ----------
                                                                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>        <C>        <C>          <C>          <C>          <C>           <C>
STATEMENT OF INCOME DATA:
Sales.....................................  $962,132   $989,782   $1,129,203   $1,238,564   $1,437,713    $774,767      $784,097
Other income..............................     4,395      4,690       10,751       12,020       46,784      41,347         2,442
Materials, supplies, labor and other
  production costs........................   493,997    525,731      599,416      674,762      787,799     440,149       418,926
Selling, delivery and administrative
  expenses................................   375,360    383,073      428,833      468,695      537,825     289,152       303,868
Depreciation and amortization.............    33,137     34,110       36,604       40,848       45,970      22,542        26,930
Interest..................................     4,001      4,318        7,086       13,004       25,109      13,936        11,796
Accrual for litigation settlement.........        --         --           --        4,935           --          --            --
Income before income taxes................    60,032     47,240       68,015       48,340       87,794      50,335        25,019
Federal and state income taxes............    20,871     17,744       25,714       18,185       33,191      19,027         9,632
Income (loss) from investment in
  unconsolidated affiliate................        --         --           --          613        7,721        (195)       18,061
Income before cumulative effect of changes
  in accounting principles................    39,161     29,496       42,301       30,768       62,324      31,113        33,448
Cumulative effect of changes in accounting
  principles, net of tax benefit..........        --         --           --           --           --          --        (9,888)
Net income................................    39,161     29,496       42,301       30,768       62,324      31,113        23,560
EARNINGS PER COMMON SHARE -- BASIC:
  Income before cumulative effect of
    changes in accounting principles......  $    .47   $    .35   $      .49   $      .35   $      .71    $    .35      $    .38
  Cumulative effect of changes in
    accounting principles.................        --         --           --           --           --          --          (.11)
  Net income per common share.............       .47        .35          .49          .35          .71         .35           .27
  Weighted average shares outstanding.....    83,222     84,521       86,229       86,933       88,000      87,892        88,368
EARNINGS PER COMMON SHARE -- DILUTED:
  Income before cumulative effect of
    changes in accounting principles......  $    .47   $    .35   $      .49   $      .35   $      .71    $    .35      $    .38
  Cumulative effect of changes in
    accounting principles.................        --         --           --           --           --          --          (.11)
  Net income per common share.............       .47        .35          .49          .35          .71         .35           .27
  Weighted average shares outstanding         83,648     84,784       86,438       87,211       88,401      88,285        88,773
OTHER DATA:
  EBITDA(1)...............................    97,170     85,668      111,705      102,192      158,873      86,813        63,745
  Ratio of earnings to fixed charges(2)...      6.23       5.10         6.08         3.59         3.65        3.50          2.45
  Cash dividends paid per common share....  $   .327   $   .344   $     .362   $     .383   $     .413    $  .2017      $   .223
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                    AS OF
                                             ------------------------------------------------------------------------------------
                                             JULY 3,    JULY 2,     JULY 1,      JUNE 29,     JUNE 28,                 JANUARY 3,
                                               1993       1994        1995         1996         1997                      1998
                                             --------   --------   ----------   ----------   ----------                ----------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                          <C>        <C>        <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Total assets...............................  $490,948   $559,682   $  655,921   $  849,443   $  898,187                 $899,381
Long-term notes payable....................    22,307     77,422       99,251      254,355      259,884                  259,249
Stockholders' equity.......................   280,154    275,731      303,981      305,324      340,012                  348,567
</TABLE>
 
---------------
 
(1) EBITDA is defined as income before interest, taxes, depreciation and
    amortization, income from investment in unconsolidated affiliate and
    cumulative effect of changes in accounting principles. EBITDA is presented
    because the Company believes it to be a useful indicator of a company's
    ability to meet debt service and capital expenditure requirements. It is
    not, however, intended as an alternative measure of operating results or
    cash flow from operations (as determined in accordance with generally
    accepted accounting principles).
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
    consist of income from continuing operations before income taxes and income
    from investment in unconsolidated affiliate plus fixed charges. Fixed
    charges consist of interest expense and interest portion of rent expense.
 
                                       14
<PAGE>   18
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The following discussion should be read in conjunction with "Selected
Financial Data" included herein and the consolidated financial statements and
the related notes thereto of the Company incorporated by reference or included
herein. The following information contains forward-looking statements which
involve certain risks and uncertainties. See "Forward-Looking Statements."
 
OVERVIEW
 
  General
 
     The Company produces and markets fresh baked breads, rolls and snack foods,
frozen baked breads, desserts and snack foods, and cookies and crackers. Sales
are principally affected by pricing, quality, brand recognition, new product
introductions and product line extensions, marketing and service. The Company
manages these factors to achieve a sales mix favoring its higher margin branded
products while using high volume products to control costs and maximize use of
capacity.
 
     The principal elements comprising the Company's production costs are
ingredients, packaging materials, labor and overhead. The major ingredients used
in the production of the Company's products are flour, sugar, shortening and
fruit. The Company also uses paper products, such as corrugated cardboard,
aluminum products, such as pie plates, and plastic to package its products. The
prices of these materials are subject to significant volatility. The Company has
mitigated the effects of such price volatility in the past through its hedging
programs, but may not be successful in protecting itself from fluctuations in
the future. In addition to the foregoing factors, production costs are affected
by the efficiency of production methods and capacity utilization.
 
     The Company's selling, delivery and administrative expenses are comprised
mainly of distribution, logistics and advertising expenses. Distribution and
logistics costs represent the largest component of the Company's cost structure,
other than production costs, and are principally influenced by changes in sales
volume.
 
     Depreciation and amortization expenses for the Company is comprised of
depreciation of property, plant and equipment and amortization of costs in
excess of net tangible assets associated with acquisitions. The Company's
interest expenses are primarily associated with the Company's Revolving Credit
Facility, senior notes outstanding in the aggregate principal amount of $125
million and the Company's commercial paper program. See "-- Liquidity and
Capital Resources."
 
  Matters Affecting Analysis
 
     The Keebler Acquisition closed on February 3, 1998. Accordingly, the
results of operations of Flowers are not consolidated with those of Keebler for
the transition period 1998 or for any prior fiscal year. From January 26, 1996,
the date of the Company's initial investment in Keebler, through February 3,
1998, the Company accounted for its investment in Keebler using the equity
method of accounting. For reporting periods ending after February 3, 1998, the
Company will consolidate Keebler for financial reporting purposes.
 
     As a result of the Company's change in fiscal year end, the Company's
quarterly reporting periods for fiscal year 1998 shall be as follows: first
quarter ending April 25, 1998, second quarter ending July 18, 1998, third
quarter ending October 10, 1998, and fourth quarter and fiscal year ending
January 2, 1999 (the Saturday nearest December 31).
 
                                       15
<PAGE>   19
 
     The Company's results of operations, expressed as a percentage of sales,
for the 27 week transition period ended January 3, 1998, the corresponding 27
week period ended January 4, 1997, and for the 52 week periods ended June 28,
1997, June 29, 1996 and July 1, 1995 are set forth below:
 
<TABLE>
<CAPTION>
                                                   52 WEEKS ENDED               27 WEEKS ENDED
                                            -----------------------------   -----------------------
                                            JULY 1,   JUNE 29,   JUNE 28,   JANUARY 4,   JANUARY 3,
                                             1995       1996       1997        1997         1998
                                            -------   --------   --------   ----------   ----------
<S>                                         <C>       <C>        <C>        <C>          <C>
Sales.....................................  100.00%    100.00%    100.00%     100.00%      100.00%
Other income..............................     .95        .97       3.26        5.34          .31
                                            ------     ------     ------      ------       ------
                                            100.95     100.97     103.26      105.34       100.31
                                            ------     ------     ------      ------       ------
Materials, supplies, labor and other
  production costs........................   53.08      54.48      54.80       56.81        53.43
Selling, delivery and administrative
  expenses................................   37.98      38.24      37.41       37.32        38.75
Depreciation and amortization.............    3.24       3.30       3.20        2.91         3.43
Interest..................................     .63       1.05       1.75        1.80         1.50
                                            ------     ------     ------      ------       ------
Income before income taxes................    6.02       3.90       6.10        6.50         3.20
Federal and state income taxes............    2.28       1.47       2.31        2.46         1.23
Income (loss) from investment in
  unconsolidated affiliate................      --        .05        .54        (.03)        2.30
Income before cumulative effect of changes
  in accounting principles................    3.74       2.48       4.33        4.01         4.27
Cumulative effect of changes in accounting
  principles, net of tax benefit..........      --         --         --          --        (1.26)
                                            ------     ------     ------      ------       ------
Net income................................    3.74%      2.48%      4.33%       4.01%        3.01%
                                            ======     ======     ======      ======       ======
</TABLE>
 
TWENTY-SEVEN WEEKS ENDED JANUARY 3, 1998 COMPARED TO TWENTY-SEVEN WEEKS ENDED
JANUARY 4, 1997
 
     Sales.  For the 27 weeks ended January 3, 1998, sales were $784.1 million,
or 1% higher than sales for the comparable period in the prior year, which were
$774.8 million. Sales from businesses acquired in 1997 contributed most of the
increase, and were offset somewhat by lost sales attributable to businesses
divested by Flowers Bakeries in 1997. The Company's sales for the current period
also were favorably impacted by a change in promotional practices at Mrs.
Smith's Bakeries implemented in 1997.
 
     Other Income.  For the 27 weeks ended January 4, 1997, the Company
recognized approximately $43 million in income attributable to the gain on the
sale of the Company's distributor notes receivable, which occurred in September
1996. The sale of these notes was necessitated by the Company's decision to
settle claims by the United States Internal Revenue Service ("IRS") that the
notes constituted current rather than deferred income. Other income for the
period was offset by approximately $5 million attributable to the write-down of
certain idle facilities.
 
     Materials, Supplies, Labor and Other Production Costs.  The Company's
production costs for the 27 weeks ended January 3, 1998, were $418.9 million, or
5% lower than its costs of $440.1 million for the prior year's period. The
improvement is attributable to decreased ingredient costs, primarily flour, and
continued emphasis on cost controls and operating efficiencies.
 
     Selling, Delivery and Administrative Expenses.  Selling, delivery and
administrative expenses were $303.9 million, or 5% higher for the 27 weeks ended
January 3, 1998, compared to $289.2 million for the same period in the prior
year. For the 27 weeks ended January 3, 1998, the Company experienced higher
advertising and promotional expenses to support new product introductions,
primarily for Mrs. Smith's Bakeries, than in the prior year, as well as
increased logistics expenses at Mrs. Smith's Bakeries to service increased sales
volume. In addition, the Company accrued administrative and other expenses
associated with the change in its fiscal year.
 
     Depreciation and Amortization.  Depreciation and amortization expense was
$26.9 million, or 20% higher for the 27 weeks ended January 3, 1998, than for
the comparable period in the prior year, which was
 
                                       16
<PAGE>   20
 
$22.5 million. The increase was due primarily to the effect of depreciation
attributable to capital improvements implemented in 1997.
 
     Interest.  Interest expense for the 27 weeks ended January 3, 1998 was
$11.8 million, or 15% lower than interest expense of $13.9 million for the same
period in 1997, due primarily to interest of $2.5 million paid pursuant to the
IRS settlement discussed above during the 27 weeks ended January 4, 1997.
 
     Income Before Income Taxes.  Income before income taxes for the 27 weeks
ended January 3, 1998 was $25.0 million. The decrease from the prior year's
corresponding period is primarily attributable to the one-time gain in the prior
period that was generated by the sale of the Company's distributor notes
receivable, discussed above.
 
     Federal and State Income Taxes.  Income taxes for the 27 weeks ended
January 3, 1998 were $9.6 million, a decrease from the corresponding period in
the prior year, due primarily to the difference in pre-tax income for such
periods.
 
     Net Income from Keebler Investment.  In the 27 weeks ended January 3, 1998,
the Company recorded net income from its investment in Keebler of $18.1 million,
compared to a net loss of $.2 million for the comparable period for the prior
year. The increase in net income from Keebler is primarily attributable to sales
volume increases associated with certain of Keebler's branded cookie and cracker
products, the inclusion of the business of Sunshine following its acquisition in
June 1996 by Keebler, improved gross margins and a more efficient fixed cost
structure at Keebler.
 
     Net Income.  Net income of $23.6 million for the 27 weeks ended January 3,
1998 was 24% lower than the $31.1 million net income for the comparable prior
year's period. In addition to the factors described above, the difference in net
earnings was primarily attributable to the effect of one-time charges of $9.9
million for the cumulative effect (net of tax benefit) of changes in accounting
principles taken in the more recent period, expenses accrued by the Company for
administrative and other costs associated with the change in its fiscal year, as
compared to the impact in 1996 of the Company's recognition of the gain on the
sale of its distributor notes receivable.
 
FISCAL YEAR ENDED JUNE 28, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 29, 1996
 
     Sales.  Sales for fiscal year 1997 were $1.438 billion, or 16% higher than
sales of $1.239 billion for fiscal year 1996. The increase in sales was
primarily attributable to sales from businesses acquired during the fourth
quarter of fiscal year 1996 and in fiscal year 1997. The Company also
experienced increased sales volume in the Company's existing businesses,
primarily in Mrs. Smith's Bakeries.
 
     Other Income.  In fiscal year 1997, the Company recognized a gain of
approximately $43.2 million on the sale of the Company's distributor notes, as
discussed above.
 
     Materials, Supplies, Labor and Other Production Costs.  The Company's
production costs for fiscal year 1997 were $787.8 million, or 17% higher than
costs of $674.8 million for fiscal year 1996. The increase in such costs was due
primarily to increased sales volume, and was offset by decreased ingredient and
packaging costs during the fourth quarter of fiscal 1997.
 
     Selling, Delivery and Administrative Expenses.  Selling, delivery and
administrative expenses increased by 15% to $537.8 million for fiscal year 1997
from $468.7 million for fiscal year 1996. The increase was due primarily to
increased sales volume and increased advertising and promotional expenditures,
particularly for Mrs. Smith's Bakeries. Selling, delivery and administrative
expenses as a percentage of sales remained relatively constant with the prior
fiscal year as a result of increased volume and a more efficient cost structure,
particularly in selling and distribution at Flowers Bakeries.
 
     Depreciation and Amortization.  Depreciation and amortization expense
increased by 13% to $46.0 million for fiscal year 1997 from $40.8 million for
fiscal year 1996, due primarily to increased capital spending and the
amortization of the Mrs. Smith's trademarks and costs in excess of net tangible
assets.
 
     Interest.  Interest expense for fiscal year 1997 increased by 93% to $25.1
million from $13.0 million for fiscal year 1996. The increase was attributable
to higher overall borrowings to partially fund fiscal year 1997 capital
spending, to finance frozen inventory at Mrs. Smith's Bakeries, and to finance
the Company's initial
 
                                       17
<PAGE>   21
 
investment in Keebler. Interest expense for fiscal year 1997 also reflects the
payment of $2.5 million on the IRS settlement as described above and a higher
average interest rate as compared to the prior year.
 
     Income Before Income Taxes.  Fiscal year 1997 income before income taxes
increased by 82% to $87.8 million from $48.3 million for fiscal year 1996, due
primarily to the gain on the sale of the Company's distributor notes receivable.
 
     Federal and State Income Taxes.  Federal and state income taxes for fiscal
year 1997 increased to $33.2 million from $18.2 million for fiscal year 1996 due
to increased pre-tax income for fiscal year 1997. The effective income tax rate
for the Company was 37.8% in fiscal year 1997 and 37.6% for fiscal year 1996.
 
     Net Income from Keebler Investment.  For fiscal year 1997, the Company
reported net income from its investment in Keebler of $7.7 million, as compared
to $.6 million for fiscal 1996. The increase was due primarily to the Company's
investment in Keebler extending over the full fiscal year 1997, as opposed to
fiscal year 1996, when the Company made its initial investment in Keebler in the
third fiscal quarter. In addition, Keebler's net income for the time period
covered in the Company's fiscal year 1997 increased substantially due to volume
increases, the inclusion of the Sunshine business and improved cost controls at
Keebler.
 
     Net Income.  For fiscal year 1997, the Company's net income increased by
102% to $62.3 million from $30.8 million for fiscal year 1996. The increase in
net income was due primarily to the inclusion of the Company's after-tax income
from its investment in Keebler, as well as the gain on the sale of the
distributor notes receivable and the other factors described above.
 
FISCAL YEAR ENDED JUNE 29, 1996 COMPARED TO FISCAL YEAR ENDED JULY 1, 1995
 
     Sales.  Sales for fiscal year 1996 were $1.239 billion, or 10% higher than
sales of $1.129 billion for fiscal year 1996. Approximately one-half of the
increase in sales was attributable to sales from businesses acquired during
fiscal year 1995 and early in fiscal year 1996. The Company also experienced
increased sales volume in the Company's existing businesses, as well as
increased selling prices and the addition of 160 new DSD routes at Flowers
Bakeries.
 
     Other Income.  The Company experienced a decrease of 26% in other income
for fiscal year 1996 compared to fiscal year 1995, due to a gain of
approximately $12 million on the sale of certain fixed assets in fiscal year
1995.
 
     Materials, Supplies, Labor and Other Production Costs.  The Company's
production costs for fiscal year 1996 were $674.8 million, or 13% higher than
costs of $599.4 million for fiscal year 1995. The increase in such costs was due
primarily to increased ingredient costs, particularly flour, which was at a 21
year high during the year.
 
     Selling, Delivery and Administrative Expenses.  Selling, delivery and
administrative expenses increased by 9% to $468.7 million for fiscal year 1996
from $428.8 million for fiscal year 1995. The increase was due primarily to
increased sales volume, as well as start-up costs associated with the addition
of 160 new DSD routes at Flowers Bakeries. Additionally, winter weather in the
eastern United States negatively impacted sales and distribution costs.
 
     Depreciation and Amortization.  Depreciation and amortization expense
increased by 12% to $40.8 million for fiscal year 1996 from $36.6 million for
fiscal year 1995, due primarily to increased capital spending.
 
     Interest.  Interest expense for fiscal year 1996 increased by 84% to $13.0
million from $7.1 million for fiscal year 1995. The increase was attributable to
higher overall borrowings to finance the Company's initial investment in
Keebler.
 
     Income Before Income Taxes.  Fiscal year 1996 income before income taxes
decreased by 29% to $48.3 million from $68.0 million for fiscal year 1995, due
primarily to the factors described above, as well as the impact of a reserve of
$4.9 million recorded to reflect the estimated costs of a final settlement of
litigation involving subsidiary operations in Texas. Income was favorably
impacted by the recognition of a gain of $4.1
 
                                       18
<PAGE>   22
 
million on the sale of Keebler stock to certain former shareholders of Sunshine
in connection with Keebler's acquisition of Sunshine.
 
     Federal and State Income Taxes.  Federal and state income taxes for fiscal
year 1996 decreased to $18.2 million from $25.7 million for fiscal year 1995 due
to decreased pre-tax income for fiscal year 1996. The effective income tax rate
for the Company was 37.6% in fiscal year 1996 and 37.8% for fiscal year 1995.
 
     Net Income from Keebler Investment.  For fiscal year 1996, the Company
reported net income from its investment in Keebler of $.6 million. The Company
made its initial investment in Keebler in fiscal year 1996.
 
     Net Income.  For fiscal year 1996, the Company's net income decreased by
27% to $30.8 million from $42.3 million for fiscal year 1995 due to the factors
described above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's primary source of cash to fund its liquidity needs is net
cash provided by operating activities and availability under its revolving
credit facility.
 
     During the transition period 1998, the Company's working capital decreased
$8.8 million to $20.3 million, with cash and cash equivalents decreasing to $3.9
million from $31.1 million at the end of fiscal year 1997. The working capital
decrease and the decrease in cash and cash equivalents in the 27 weeks ended
January 3, 1998 were primarily due to cash expended for capital improvements
throughout the Company.
 
     Cash and cash equivalents increased during fiscal year 1997 from $25.0
million to $31.1 million, and working capital decreased during that fiscal year
from $48.5 million to $29.1 million. The decrease in working capital is
primarily due to the recording of purchase accounting reserves of $35.5 million
relating to acquisitions consummated during fiscal years 1996 and 1997. Cash
flows from operating activities increased in fiscal year 1997 to $79.5 million
from $59.4 million. This increase was the net result of increased profits and
decreased working capital.
 
     During fiscal year 1997 and the 27 weeks ended January 3, 1998, the Company
spent approximately $78 million and $33 million, respectively, for capital
expenditures to expand production facilities and increase efficiencies in both
production and distribution. Since 1992, expenditures have totaled approximately
$377 million with an additional $41 million of expenditures attributable to
acquisitions during that period. Capital expenditures for fiscal year 1998 are
expected to be approximately $40 million for Flowers Bakeries and Mrs. Smith's
Bakeries combined and to be approximately $50 million for Keebler. These
expenditures are targeted to further improve the efficiency of the Company's
production and distribution capabilities.
 
     At January 3, 1998, the Company had borrowed a total of $122 million under
a five year $300 million syndicated loan facility. On January 30, 1998, the
Company entered into a revolving credit facility, which, among other changes,
amended the loan facility to increase available funds to $500 million (the
"Revolving Credit Facility"). In connection with the Keebler Acquisition, the
Company borrowed an additional $309 million and the Company separately repaid
$10 million, so that amounts outstanding under the Revolving Credit Facility as
of March 26, 1998 aggregated $422 million. Also currently outstanding are $125
million of long-term senior notes issued through a private placement completed
during fiscal year 1996. The Company has in place a $75 million commercial paper
program to finance inventory. Borrowings outstanding under this program at
January 3, 1998 were $53.5 million. The Company also has a $50 million ten-year
master lease agreement to finance the automated production lines at certain of
its facilities. At January 3, 1998, $38.7 million had been used under this
agreement. Certain of the Company's credit facilities contain covenants and
restrictions on actions by the Company and its subsidiaries, other than Keebler,
requirements that the Company comply with a minimum cash flow test, a maximum
leverage ratio, a fixed charges coverage ratio and a minimum consolidated net
worth test. As of January 3, 1998, the Company was in compliance with respect to
all covenants under its credit facilities.
 
     Cash dividends have grown at a compound annual rate of 6% since 1992,
increasing from an annual payout of $.309 in calendar 1992 to $.433 in calendar
1997.
 
                                       19
<PAGE>   23
 
     The Company owns a majority of the outstanding stock of Keebler and,
commencing with all reporting periods ending subsequent to February 3, 1998, the
Company will consolidate Keebler for financial reporting purposes. The Company
is limited in its ability to access the cash flows of Keebler to support the
Company's other operations due to the fact that Keebler is not wholly-owned by
the Company and due to restrictions on the payment of dividends in Keebler's
existing credit facilities.
 
     The Company believes that cash flow from operations, and funds available
under the Company's existing credit facilities, will be sufficient to fund its
operating expenses, working capital, capital expenditures and debt service
requirements through fiscal year 1998.
 
     The Company from time to time reviews and will continue to review
acquisition and joint venture opportunities as well as changes in the capital
markets. If the Company were to consummate a significant acquisition or elect to
take advantage of favorable opportunities in the capital markets, the Company
may supplement availability or revise the terms under its credit facilities or
complete public or private offerings of equity or debt securities.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for the
Company's fiscal year 1998. This new statement revises standards for public
companies to report information about segments of their business and also
requires disclosure of selected segment information in quarterly financial
reports. The statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company has not
yet determined the impact this new statement may have on disclosures in the
consolidated financial statements.
 
     The FASB also issued certain other disclosure-related accounting
pronouncements during 1997. While these new statements are effective for future
reporting periods, the Company does not anticipate they will have any
significant impact on the consolidated financial statements.
 
SEASONALITY
 
     The Company's sales, net income and cash flows are affected by the timing
of new product introductions, promotional activities, price increases, and a
seasonal sales bias toward the second half of the calendar year due to events
such as back-to-school, and the Thanksgiving and Christmas holidays. Sales for
Mrs. Smith's Bakeries are highly seasonal since, historically, pie sales have
been concentrated in the year-end holiday season. In January 1998, the Company
commenced a program entitled Operation 365 to promote increased pie consumption
during the remainder of the year.
 
YEAR 2000 CONVERSION
 
     Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists concerning the
potential effects associated with such compliance. The Company is currently
analyzing the Year 2000 computer systems issue and has completed the conversion
of certain of its computerized operations. There can be no assurance that the
Company's software contains or will contain all necessary date code changes. The
Company, its customers and its suppliers may be affected by Year 2000 issues.
The Company has plans to communicate with significant customers, vendors and
other third parties with whom it does significant business to determine their
Year 2000 compliance readiness. However, there can be no guarantee that the
systems of other entities will be timely converted, or that their failure to
convert, or a conversion that is incompatible with the Company's system, will
not have an adverse effect on the Company's business, financial condition and
results of operations.
 
                                       20
<PAGE>   24
 
     On November 20, 1997, the Emerging Issues Task Force ("EITF"), a
subcommittee of FASB, issued EITF 97-13, which requires the cost of business
process reengineering activities that are part of an information systems
development project, including Year 2000 compliance, be expensed as those costs
are incurred. Any unamortized costs that were previously capitalized are
required to be written off as a cumulative adjustment in the quarter that
included November 20, 1997. During the twenty-seven week period ended January 3,
1998, the Company recorded a cumulative after-tax charge of $8.8 million, or
$.10 per share, as a result of its adoption of this pronouncement. These costs
were attributable to a state-of-the-art management information system, which is
being implemented at Mrs. Smith's Bakeries.
 
                           FORWARD-LOOKING STATEMENTS
 
     Certain statements incorporated by reference or made herein under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere herein are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and are subject to the safe harbor provisions of that Act. Such
forward-looking statements include, without limitation, the future availability
and prices of raw materials, the availability of capital on acceptable terms,
the competitive conditions in the baked foods industry, potential regulatory
obligations, the Company's strategies and other statements contained herein that
are not historical facts. Because such forward-looking statements involve risks
and uncertainties, there are important factors that could cause actual results
to differ materially from those expressed or implied by such forward-looking
statements, including, but not limited to, changes in general economic and
business conditions (including in the baked foods markets), the Company's
ability to recover its raw material costs in the pricing of its products, the
availability of capital on acceptable terms, actions of competitors, the extent
to which the Company is able to develop new products and markets for its
products, the time required for such development, the level of demand for such
products, changes in the Company's business strategies and other factors
discussed herein.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     Refer to the Index to Financial Statements and Financial Statement
Schedules for the required information.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       21
<PAGE>   25
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following individuals are the Directors and Executive Officers of the
Company:
 
<TABLE>
<CAPTION>
NAME                                                                  POSITION
----                                                                  --------
<S>                                                    <C>
Amos R. McMullian....................................  Chairman of the Board and Chief
                                                         Executive Officer
Robert P. Crozer.....................................  Vice Chairman of the Board
C. Martin Wood III...................................  Senior Vice President, Chief Financial
                                                         Officer and Director
G. Anthony Campbell..................................  Secretary, General Counsel and
                                                       Director
Edward L. Baker......................................  Director
Joe E. Beverly.......................................  Director
Franklin L. Burke....................................  Director
Langdon S. Flowers...................................  Director
Joseph L. Lanier, Jr.................................  Director
J.V. Shields, Jr.....................................  Director
Heeth Varnedoe III...................................  Director
George E. Deese......................................  President and Chief Operating Officer,
                                                         Flowers Bakeries, Inc.
Gary L. Harrison.....................................  President and Chief Operating Officer,
                                                         Mrs. Smith's Bakeries, Inc.
Jimmy M. Woodward....................................  Treasurer and Chief Accounting Officer
Marta Jones Turner...................................  Vice President of Public Affairs
</TABLE>
 
     Amos R. McMullian, age 60, has served as Chairman of the Board of Directors
of the Company since January 1985, Chairman of the Executive Committee since
January 1984, and Chief Executive Officer of the Company since April 1981. He
served as Vice Chairman of the Board of Directors of the Company from 1984 to
1985 and Co-Chairman of the Executive Committee from 1983 to 1984. Mr. McMullian
served as President and Chief Operating Officer of the Company from 1976 to
1984. Mr. McMullian has been a Director of the Company since 1975. He joined the
Company's predecessor corporation in 1963. Mr. McMullian has served as a
director of Keebler since January 1996.
 
     Robert P. Crozer, age 51, has served as Vice Chairman of the Board of
Directors of the Company since 1989. Mr. Crozer served as Vice
President -- Marketing from 1985 to 1989, as President and Chief Operating
Officer, Convenience Products Group from 1979 to 1989 and as Corporate Director
of Marketing Planning from 1979 to 1985. Mr. Crozer has been a Director of the
Company since 1979. He joined the Company in 1973. Mr. Crozer has served as a
director of Keebler since January 1996 and has served as Chairman of the Board
of Directors of Keebler since February 1998.
 
     C. Martin Wood III, age 54, has served as Senior Vice President and Chief
Financial Officer of the Company since September 1978. Mr. Wood served as Vice
President -- Finance of the Company from 1976 to 1978. Mr. Wood has been a
Director of the Company since 1975. He joined the Company in 1970. Mr. Wood has
served as a director of Keebler since January 1996.
 
     G. Anthony Campbell, age 45, has served as Secretary and General Counsel of
the Company since January 1985. Mr. Campbell served as Assistant General Counsel
of the Company from 1983 to 1985. Mr. Campbell has been a Director of the
Company since 1991. He joined the Company in 1983. Mr. Campbell has served as a
director of Keebler since February 1998.
 
     Edward L. Baker, age 62, is Chairman of the Board of Florida Rock
Industries, Inc. (AMEX), a construction materials company based in Jacksonville,
Florida, which produces and markets sand, gravel, crushed stone, concrete blocks
and other building materials throughout the Southeast. He is also a Director of
American Heritage Life Insurance Company, the principal subsidiary of American
Heritage Life Investment
 
                                       22
<PAGE>   26
 
Corporation (NYSE), Regency Realty Corporation (NYSE), and FRP Properties (OTC).
He has been a Director of the Company since 1992.
 
     Joe E. Beverly, age 56, is Chairman of the Board of Commercial Bank in
Thomasville, Georgia, a wholly-owned subsidiary of Synovus Financial Corp.
(NYSE) and is the former Vice Chairman of the Board of Synovus Financial Corp.
He was President and a Director of Commercial Bank from 1973 to 1989. Mr.
Beverly has been a Director of the Company since 1996.
 
     Franklin L. Burke, age 56, a private investor since 1991, is the former
Senior Executive Vice President and Chief Operating Officer of Bank South Corp.
(OTC), Atlanta, Georgia, and the former Chairman and Chief Executive Officer of
Bank South, N.A., the principal subsidiary of Bank South Corp. From June 1993
through February 1994, Mr. Burke was employed as an advisor by the J. B. Fuqua
Foundation, Inc. He has been a Director of the Company since 1994. Mr. Burke has
served as a director of Keebler since February 1998.
 
     Langdon S. Flowers, age 75, retired as Chairman of the Board of Directors
of the Company in 1985. He has been a Director of the Company since 1968. Mr.
Flowers also is a Director of American Heritage Life Insurance Company, the
principal subsidiary of American Heritage Life Investment Corporation (NYSE).
 
     Joseph L. Lanier, Jr., age 66, has been Chairman of the Board of Directors
and Chief Executive Officer of Dan River Inc. (NYSE), Danville, Virginia, a
textile company, since 1989. He is also a Director of Dimon, Inc. (NYSE),
SunTrust Banks, Inc. (NYSE), Torchmark Corp. (NYSE) and Waddell & Reed
Financial, Inc. (NYSE). Mr. Lanier has been a Director of the Company since
1977.
 
     J.V. Shields, Jr., age 59, is Managing Director and Chairman of the Board
of Directors of Shields & Company, New York, New York, a diversified financial
services company and member of the New York Stock Exchange, Inc. Mr. Shields
also is the Chairman of the Board of Capital Management Associates, Inc., a
registered investment advisor, and the Chairman of the Board of Trustees of The
59 Wall Street Trust, the Brown Brothers Harriman mutual funds group. He has
been a Director of the Company since 1989.
 
     Heeth Varnedoe III, age 60, who joined the Company's predecessor
corporation in 1960, retired from the office of President and Chief Operating
Officer on June 28, 1997. Mr. Varnedoe is currently employed as a consultant by
the Company and serves on the Company's Board of Directors, to which he was
first elected in 1980. Mr. Varnedoe also is a Director of Integrity Music, Inc.
(OTC).
 
     George E. Deese, age 51, has served as President and Chief Operating
Officer of Flowers Bakeries, Inc. since January 1997. Prior to that time, Mr.
Deese served as President and Chief Operating Officer of the Baked Products
Group of the Company from 1983 to January 1997. He served as Regional Vice
President of the Baked Products Group from 1981 to 1983. Mr. Deese was President
of Atlanta Baking Company from 1980 to 1981. He joined the Company in 1964.
 
     Gary L. Harrison, age 60, has served as President and Chief Operating
Officer of Mrs. Smith's Bakeries, Inc., since January 1997. Prior to that time,
Mr. Harrison served as President and Chief Operating Officer of the Specialty
Foods Group of the Company from 1989 to January 1997, served as Executive Vice
President of the Baked Products Group from 1987 to 1989, served as Regional Vice
President of the Baked Products Group from 1977 to 1987, and served as President
of Flowers Baking Company of Thomasville from 1976 to 1977. He joined the
Company in 1954.
 
     Jimmy M. Woodward, age 37, has served as Treasurer and Chief Accounting
Officer of the Company since October 1997. Mr. Woodward served as Assistant
Treasurer of the Company for more than five years prior to that time. Mr.
Woodward has served as a director of Keebler since February 1998.
 
     Marta Jones Turner, age 44, has served as Vice President of Public Affairs
of the Company since September 1997. She served as the Director of Public
Affairs of the Company for more than five years prior to that time.
 
     Heeth Varnedoe III is a nephew of Langdon S. Flowers. Robert P. Crozer,
J.V. Shields, Jr. and C. Martin Wood III are brothers-in-law, and their spouses
are nieces of Langdon S. Flowers.
 
                                       23
<PAGE>   27
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors has established certain standing committees, which
include the Audit, Nominating, and Compensation Committees.
 
     The Board of Directors met three times during the twenty-seven week
transition period ended January 3, 1998. Its Audit Committee met once, and its
Nominating Committee and Compensation Committee did not meet. Each incumbent
Director attended at least 75 percent of the aggregate number of meetings of the
Board of Directors and all committees on which he served during his respective
period of service.
 
     The members of the Audit Committee are Edward L. Baker, Chairman, Joe E.
Beverly and Franklin L. Burke; and the functions of the Audit Committee are: (a)
recommending to the Board of Directors and shareholders the engagement or
discharge of independent auditors; (b) reviewing investigations into matters
relating to audit functions; (c) reviewing with independent auditors the plan
for and results of the audit engagement; (d) reviewing the scope and results of
internal auditing procedures; (e) reviewing the independence of the auditors;
(f) considering the range of audit and non-audit fees; (g) reviewing the
adequacy of the Company's system of internal accounting controls; and (h)
reviewing related party transactions.
 
     The members of the Nominating Committee are Robert P. Crozer, Chairman,
Edward L. Baker, Joseph L. Lanier, Jr. and Amos R. McMullian; and the functions
of the Nominating Committee are: (a) selecting, or recommending to the Board of
Directors nominees for election as Directors; and (b) considering the
performance of incumbent Directors in determining whether to nominate them for
reelection. The Nominating Committee will consider nominations for the next
annual meeting which are submitted by shareholders in writing to the Committee
at the Company's principal office by May 15, 1998.
 
     The members of the Compensation Committee are Joseph L. Lanier, Jr.,
Chairman, Edward L. Baker and Franklin L. Burke. The functions of the
Compensation Committee are: (a) approving, or recommending to the Board of
Directors approval of, compensation plans for officers and Directors; (b)
approving, or recommending to the Board of Directors approval of, remuneration
arrangements for Directors and senior management; and (c) granting benefits
under compensation plans.
 
DIRECTORS' FEES
 
     Each nonemployee member of the Board of Directors receives payments
pursuant to a standard arrangement. For the twenty-seven week transition period
ended January 3, 1998, such Directors received: (i) $1,000 for each meeting of
the Board or committee of the Board attended, with each chairman of a Board
committee receiving an additional $200 per committee meeting; (ii) reimbursement
for travel expenses; and (iii) $1,800 per month. In lieu of the $1,800 per
month, nonemployee members of the Board of Directors may elect under the
Nonemployee Directors' Equity Plan to invest all or a portion of the $1,800 per
month in options to purchase the Company's common stock. The value of such
options is determined by the Black-Scholes option pricing model. During the
transition period 1998 certain nonemployee directors elected to receive said
options under the plan.
 
     During the twenty-seven week transition period ended January 3, 1998, W. H.
Flowers, Chairman Emeritus of the Board of Directors of the Company, and L. S.
Flowers, a Director of the Company and a retired Chairman of the Board, received
payments totaling $93,426 and $30,901, respectively, for consulting services
provided to the Company pursuant to written contracts between the Company and
each individual. The contracts provide that during their term each of Messrs.
Flowers will not compete, directly or indirectly, with the Company.
 
     Heeth Varnedoe III, who retired as President and Chief Operating Officer on
June 28, 1997, is currently employed as a consultant with the Company pursuant
to a consulting agreement dated the date of his retirement. Pursuant to that
agreement, Mr. Varnedoe will be paid compensation at the annual rate of $389,235
through February 7, 1998, and $194,618 through February 10, 1999. The consulting
agreement also provides for Mr. Varnedoe's continued participation in the
Company's employee benefit plans through
 
                                       24
<PAGE>   28
 
February 10, 1999. The agreement provides that, thereafter, in consideration of
a payment of $45,000 per year, Mr. Varnedoe will not compete, directly, or
indirectly, with the Company.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The following table provides summary information concerning compensation of
the Company's Chief Executive Officer and each of the four other most highly
compensated Executive Officers of the Company for the periods indicated.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                ANNUAL COMPENSATION                       LONG TERM COMPENSATION
                                         ----------------------------------   -----------------------------------------------
                                                                              RESTRICTED             LONG TERM       ALL
                                                                  OTHER         STOCK      OPTION    INCENTIVE      OTHER
NAME AND                       FISCAL     SALARY     BONUS     COMPENSATION     AWARDS     AWARDS     PAYOUTS    COMPENSATION
PRINCIPAL POSITION              YEAR        $          $            $             $           #          $            $
------------------             ------    --------   --------   ------------   ----------   -------   ---------   ------------
<S>                            <C>       <C>        <C>        <C>            <C>          <C>       <C>         <C>
Amos R. McMullian............   1998(1)   313,096    187,858         0          498,593          0       0             0
  Chairman of the Board and     1997      505,680    505,680         0                0          0       0             0
  Chief Executive Officer       1996      481,600          0         0          410,737    225,000       0             0
                                1995      436,800    299,295         0                0          0       0             0
Robert P. Crozer.............   1998(1)   211,327    105,663         0          190,698          0       0             0
  Vice Chairman of the Board    1997      389,235    311,388         0                0          0       0             0
                                1996      370,700          0         0          277,239    135,000       0             0
                                1995      324,480    177,867         0                0          0       0             0
George E. Deese..............   1998(1)   162,623     73,180         0          131,215          0       0             0
  President and Chief           1997      268,695    188,087         0                0          0       0             0
  Operating Officer             1996      255,900          0         0          187,297     90,000       0             0
  Flowers Bakeries, Inc.        1995      235,900    113,147         0                0          0       0             0
Gary L. Harrison.............   1998(1)   162,623     73,180         0          131,215          0       0             0
  President and Chief           1997      268,695    263,087         0                0          0       0             0
  Operating Officer             1996      255,900          0         0          187,297     90,000       0             0
  Mrs. Smith's Bakeries, Inc.   1995      235,900    188,147         0                0          0       0             0
C. Martin Wood III...........   1998(1)   125,135     50,054         0           85,024          0       0             0
  Senior Vice President and     1997      210,000    147,000         0                0          0       0             0
  Chief Financial Officer       1996      200,000          0         0          164,281     56,250       0             0
                                1995      187,715     90,036         0                0          0       0             0
</TABLE>
 
---------------
 
(1) Represents the twenty-seven week transition period ended January 3, 1998.
 
     The individuals set forth in the table above held the following Equity
Incentive Award and June 1997 Restricted Stock Award shares granted under the
1989 Executive Stock Incentive Plan, subject to the restrictions of each grant,
and valued at the January 2, 1998 closing market price ($20.4375), less the
price required to be paid by the individual at the time the restrictions lapse:
Messrs. McMullian 110,554 shares, $1,487,102; Crozer 76,034 shares, $1,086,081;
Wood 41,857 shares, $606,193; Deese 51,639 shares, $736,911; Harrison 51,639
shares, $736,911. The shares earn the common stock dividend.
 
                                       25
<PAGE>   29
 
     The following table provides information on option exercises during the
twenty-seven week transition period ended January 3, 1998, by the named
executive officer and the value, at the January 2, 1998 closing price
($20.4375), of unexercised options.
 
       AGGREGATE OPTION EXERCISES IN THE TRANSITION PERIOD AND PERIOD END
                                 OPTION VALUES
 
<TABLE>
<CAPTION>
                                                                                     VALUE OF
                                                                    NUMBER OF       UNEXERCISED
                                                                   UNEXERCISED     IN-THE-MONEY
                                                                   OPTIONS AT       OPTIONS AT
                                                                   PERIOD END       PERIOD END
                                                                  -------------   ---------------
                                     SHARES ACQUIRED    VALUE     EXERCISABLE/     EXERCISABLE/
NAME                                   ON EXERCISE     REALIZED   UNEXERCISABLE    UNEXERCISABLE
----                                 ---------------   --------   -------------   ---------------
<S>                                  <C>               <C>        <C>             <C>
Amos R. McMullian..................         0             $0      225,000/NONE    $2,699,438/NONE
Robert P. Crozer...................         0              0      269,294/NONE    $3,600,479/NONE
George E. Deese....................         0              0       90,000/NONE    $1,079,775/NONE
Gary L. Harrison...................         0              0      145,544/NONE    $1,884,264/NONE
C. Martin Wood III.................         0              0       56,250/NONE    $  674,859/NONE
</TABLE>
 
SEVERANCE POLICY
 
     The Company's Severance Policy (the "Policy") would pay one year's
compensation to any employee who is actually or constructively terminated, other
than for good cause, following a Change in Control, as defined in the Company's
ESIP. The Policy reduces the amount payable to any individual who would be
subject to the "golden parachute" excise tax imposed by the Internal Revenue
Code of 1986, as amended, if, and only to the extent that, the net amount after
taxes received by the individual would be greater than if there had been no
reduction.
 
SEPARATION AGREEMENTS
 
     The Company has authorized separation agreements with all executive
officers and certain other key employees. These agreements serve as memoranda of
the Change in Control provisions which have been authorized by the Company in
its compensation plans, and provide additional benefits, including relocation
benefits and certain welfare benefits in the event of termination of employment
following a Change in Control, except that these benefits are to be reduced to
the extent benefits are received under the Severance Policy described above. The
Compensation Committee may select, in its sole discretion, any additional
executives to be offered such separation agreements.
 
RETIREMENT PLAN
 
     The Flowers Industries, Inc. Retirement Plan No. 1 (the "Retirement Plan")
provides a pension upon retirement on or after age 65 to employees of the
Company and its adopting subsidiaries. The pension is the sum of annual credits
earned during employment. Currently, each annual credit is 1.35 percent of the
first $10,000 of W-2 earnings, subject to certain exclusions, for each year of
service and 2 percent of W-2 earnings, subject to certain exclusions, in excess
of $10,000 each year for each year of service. The table below includes the
estimated amounts which would be payable to the persons indicated upon their
retirement at age 65 under the provisions of the Retirement Plan as supplemented
by the Company's Supplemental Executive Retirement Plan described immediately
below and assuming that payment is made in the form of a 50% joint and survivor
annuity.
 
                                       26
<PAGE>   30
 
                       DISCLOSURE FOR CERTAIN INDIVIDUALS
 
<TABLE>
<CAPTION>
                                                               CREDITED    PROJECTED
                                                                YEARS       ANNUAL
                                                              OF SERVICE    BENEFIT
                                                              ----------   ---------
<S>                                                           <C>          <C>
Amos R. McMullian...........................................      34       $284,883
Robert P. Crozer............................................      24       $242,924
George E. Deese.............................................      33       $162,252
Gary L. Harrison............................................      41       $124,428
C. Martin Wood III..........................................      27       $135,185
</TABLE>
 
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
 
     The Company's 1990 Supplemental Executive Retirement Plan provides a
supplemental retirement income benefit for any executive who is a participant in
the Retirement Plan, if his Retirement Plan benefit is subject to certain
restrictions which apply to tax-qualified plans. The supplemental benefit is
equal to the excess of (i) the benefit he would have received according to the
Retirement Plan formula had he not been subject to limitations on maximum
benefits or pensionable compensation which may be provided by tax-qualified
plans over (ii) the amount he will receive from the Retirement Plan as so
limited. The 1990 Supplemental Executive Retirement Plan is not tax-qualified.
The purpose of the Plan is to ensure that each participating executive's total
retirement income benefits will equal the amounts that would have been payable
to him under the Retirement Plan absent said limitations. Payments pursuant to
this Plan will be calculated in the form of a life only annuity, and the
actuarial equivalent thereof will be paid in the form which the participating
executive has elected for purposes of the Retirement Plan. Payments will be made
from the Company's general assets. Payments will be made at the same time as the
participant's distributions from the Retirement Plan, except in the event of a
Change in Control, in which event the actuarial equivalent of anticipated
payments will be paid immediately in a lump sum. Accruals under this Plan during
the twenty-seven week period ended January 3, 1998 amounted to $321,296 and no
distributions were made from the Plan during the twenty-seven week transition
period ended January 3, 1998.
 
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
 
     The executive compensation program of the Company is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
comprised of three nonemployee Directors. The Committee periodically evaluates
the executive compensation program to assure that it is reasonable, equitable
and competitive. The Committee considers the recommendations of outside,
independent compensation specialists in evaluating compensation levels, plan
design, and administration.
 
  Compensation Philosophy
 
     The Committee administers each aspect of the executive compensation program
in a manner that emphasizes the Company's primary long-term goals, which are the
creation of consistent earnings growth and the enhancement of shareholder value
in the Company's Common Stock. The Committee considers these goals to be
attainable by maintaining continuity within an experienced, professional and
technically proficient executive group. The compensation program is therefore
designed (a) to be competitive with other similarly situated companies, (b) to
be equitable by offering a reasonable level of base compensation and (c) to
align the interests of the executives with those of the shareholders. The
primary compensation arrangements, tailored to fulfill this philosophy and
utilized by the Committee in various combinations, are as follows:
 
  Base Salary
 
     Each year, the Committee reviews the contribution made to the Company's
performance by each senior executive and approves the executive's base salary.
The base salary represents the Company's ongoing compensation commitment and
forms the foundation for the executive compensation program. The Committee
ensures that a competitive base salary is maintained for each executive by
periodically reviewing the results
 
                                       27
<PAGE>   31
 
of independent national survey data for comparable positions in companies with a
dollar sales volume similar to Flowers.
 
  Bonus Plan
 
     The Company's Bonus Plan provides for an annual incentive bonus, which is
expressed as a percentage of base salary, varying by position with the Company.
A bonus is awarded upon the Company's attainment of a specified earnings per
share goal. In addition, the Bonus Plan is designed to provide the executive an
increased award, limited to an amount determined as twice the bonus percentage
established for the executive's position multiplied by the executive's base
salary, if actual earnings per share significantly exceed the goal.
Correspondingly, the Bonus Plan is designed to provide the executive a lesser
award if actual earnings per share fall below the goal, and no award if actual
earnings per share fall below eighty percent of the goal. This mechanism
provides motivation for the executive to continue to strive for improved
earnings per share in any given year, regardless of the fact that the goal may,
or may not, be obtained.
 
  Stock Incentive Plans
 
     In keeping with the Committee's philosophy that the element of stockholder
risk is an essential compensation tool, stock based incentives comprise the
largest portion of the compensation program for the persons listed in the
Summary Compensation Table. The Committee believes that continuation of stock
based incentives is fundamental to the enhancement of shareholder value.
 
     In years prior to fiscal 1993, the Committee granted stock options under
the Company's 1982 Incentive Stock Option Plan (the "1982 Plan"). The 1982 Plan
expired on October 15, 1992, and therefore no additional grants will be made
under the 1982 Plan, although the individuals in the executive group have
available currently exercisable options with expiration dates up to the year
2001.
 
     The 1989 Executive Stock Incentive Plan (the "ESIP") is the Company's
ongoing intermediate and long-term incentive plan. The ESIP provides the
Committee an opportunity to make a variety of stock based awards while selecting
the form that is the most appropriate for the Company and the executive group.
The three types described below contain elements which focus the executive's
attention on one of the Company's primary goals, the enhancement of stockholder
value.
 
     NON-QUALIFIED STOCK OPTIONS:  During fiscal 1996, the Committee granted
non-qualified stock options under the ESIP (the "1996 Options"). The 1996
Options are exercisable at any time, commencing on the first anniversary of the
grant date, until the year 2005. The executives are required to pay the market
value of the shares, determined as of the grant date, which was $8.44 (the
"Option Price"). The executives have no rights as shareholders with respect to
the common shares subject to the 1996 Options until payment of the Option Price.
The 1996 Options are subject to forfeiture in the event of termination of
employment, other than for retirement, disability, death, termination without
cause, or termination for any reason which the Committee determines should not
result in forfeiture.
 
     EQUITY INCENTIVE AWARDS:  During fiscal 1992, the Committee granted an
award under the ESIP referred to as the Equity Incentive Award (the "1992
Award"). The executives were required to pay one half of the market value of the
shares, determined as of the award date, no later than the termination of the
last restrictions on the 1992 Award. The restrictions on the shares under the
1992 Award terminated ratably over the five-year period ended November 15, 1996.
The unvested shares were subject to forfeiture in the event of termination of
employment, other than for retirement, disability, death, termination without
cause, or termination for any reason that the Committee determined should not
result in forfeiture, prior to November 15, 1996. The executives were entitled
to vote the shares and receive the Common Stock dividend during the period in
which the shares were subject to forfeiture. These shares fully vested in fiscal
1997 and all shares were purchased by the executives.
 
     Consistent with the Committee's philosophy of aligning executive
compensation with the shareholders' market appreciation goal, the 1992 Award
provided that in the event the per share market value of the Common Stock
reached or exceeded targeted per share market values of $8.00 and $10.22 prior
to the
 
                                       28
<PAGE>   32
 
expiration of the 1992 Award on November 15, 1996, the recipient would receive
additional shares. During fiscal 1993, the Common Stock targeted market value of
$8.00 per share was attained and additional shares equal to one-half of the 1992
Award were granted, subject to the same terms and conditions as the 1992 Award
but with a three year ratable period during which the restrictions lapsed and at
a purchase price of $4.00 per share. These additional shares fully vested in
fiscal 1996 and all shares were purchased by executives. During fiscal 1996, the
Common Stock targeted market value of $10.22 per share was attained and
additional shares equal to one-half of the 1992 Award were granted, subject to
the same terms and conditions as the 1992 Award but with a three year ratable
period during which the restrictions will lapse and at a purchase price of $5.11
per share.
 
     RESTRICTED STOCK AWARDS:  During the twenty-seven weeks ended January 3,
1998, the Committee granted an award under the ESIP referred to as the June 1997
Restricted Stock Award (the "June 1997 Award"). The executives are required to
pay one half of the market value of the shares, determined as of the grant date.
The restrictions on the shares under the June 1997 Award lapse on June 15, 2001.
The unvested shares are subject to forfeiture in the event of termination of
employment, other than for retirement, disability, death, termination without
cause, or termination for any reason that the Committee determines should not
result in forfeiture, prior to June 15, 2001. The executives are entitled to
vote the shares and receive the Common Stock dividend during the period in which
the shares are subject to forfeiture.
 
  Compensation of Chief Executive Officer
 
     For the twenty-seven week transition period ended January 3, 1998, Mr.
McMullian received a base salary of $313,096, which amount was determined by the
Committee to be appropriate in consideration of the Company's performance, Mr.
McMullian's leadership and contribution to the Company's performance and market
conditions. Mr. McMullian was awarded a bonus of $187,858 for the twenty-seven
week transition period ended January 3, 1998.
 
     During the twenty-seven week transition period ended January 3, 1998, Mr.
McMullian was granted the right to purchase 56,982 shares of the Company's
common stock under the terms of the June 1997 Award.
 
  Deductibility of Compensation Expenses
 
     The Company is not allowed a federal income tax deduction for compensation
paid to certain executive officers in excess of $1 million, except to the extent
such compensation constitutes "performance based compensation" as defined by the
Internal Revenue Code. The Committee believes that the provisions of the Bonus
Plan and the additional grant feature of Restricted Stock Awards made under the
ESIP will result in performance based compensation and the Company will not lose
any federal income tax deduction for compensation paid under these compensation
programs. The Committee will consider this deduction limitation during future
deliberations and will continue to act in the best interests of the Company.
 
  Summary
 
     The Committee believes the base salary and the Bonus Plan provide an
efficient and effective mechanism to reward the executive group for the daily
leadership required to maximize the Company's current performance. Additionally,
the stock-based awards granted under the ESIP serve to align the long term
interests of the executives with those of the shareholders generally so that
decisions are made as owners of the Company.
 
                                          The Compensation Committee
                                          of the Board of Directors
 
                                          Joseph L. Lanier, Jr., Chairman
                                          Edward L. Baker
                                          Franklin L. Burke
 
                                       29
<PAGE>   33
 
                           TOTAL SHAREHOLDER RETURNS
 
<TABLE>
<CAPTION>
        MEASUREMENT PERIOD          FLOWERS INDUSTRIES,
      (FISCAL YEAR COVERED)                INC.            S&P FOODS-500      S&P 500 INDEX
<S>                                 <C>                  <C>                <C>
JUN92                                              100                 100                100
JUN93                                            97.42               99.74             113.63
JUN94                                           112.31               99.87             115.23
JUN95                                           125.65              129.05             145.27
JUN96                                           162.69              151.81             183.04
JUN97                                           262.80              212.28             246.55
3JAN98                                          322.07              250.63             273.92
</TABLE>
 
     Companies in the S&P Foods-500 Index are weighted by market capitalization
indexed to $100 at June 30, 1992. All dividends are deemed reinvested over the
reported period.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information regarding the beneficial
ownership of common stock as of March 23, 1998 by (i) the only persons or groups
known by the Company to own beneficially more than five percent of the Company's
outstanding Common Stock, (ii) each Director of the Company, (iii) the Chief
Executive Officer and each of the other Named Executive Officers, and (iv) all
Directors and Executive Officers as a group. The determination of "beneficial
ownership" is made pursuant to Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "1934 Act"). Such Rule provides that shares shall be
deemed "beneficially owned" where a person or group has, either solely or in
conjunction with others, the power to vote or to direct the voting of shares
and/or the power to dispose, or to direct the disposition of shares; or where a
person or group has the right to acquire any such power within 60 days after the
date such "beneficial ownership" is determined. Each individual has beneficial
ownership of the shares which are subject to any unexercised vested options held
by him; and, except as indicated by footnote, each individual has sole voting
power and sole investment power with respect to the number of shares
beneficially owned by him. Directors and Executive Officers are required to file
reports of their holdings and transactions in the Common Stock of the Company
with the SEC under federal securities laws. Based solely on its review of the
copies of such forms received by it, the Company believes that, for the
twenty-seven weeks ended January 3, 1998, the Section 16(a) filing requirements
were complied with by all Executive Officers and Directors during the period,
except that a Form 4 report for Mr. Edward C. Baker was filed four months late
and the Form 3 report for Mr. Jimmy M. Woodward was filed 16 days late.
 
<TABLE>
<CAPTION>
                                                AMOUNT AND NATURE OF              PERCENT OF
                                                BENEFICIAL OWNERSHIP          OUTSTANDING STOCK
                                              ------------------------    --------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER           VOTING      DISPOSITIVE       VOTING      DISPOSITIVE
------------------------------------          ---------    -----------    ------------   -----------
<S>                                           <C>          <C>            <C>            <C>
Wellington Management Company...............  3,965,506(a)  8,684,735(a)  less than 5%      9.82%
  75 State Street
  Boston, MA 02109
</TABLE>
 
                                       30
<PAGE>   34
 
---------------
 
(a) Shared voting and shared dispositive power only. According to a Schedule 13G
    filed with the SEC on February 10, 1998 by Wellington Management Company
    ("WMC"), as of December 31, 1997, shares of the Company's Common Stock were
    beneficially owned by numerous investment advisory clients of WMC, none of
    which were known to have a beneficial interest with respect to more than 5%
    of the Company's outstanding Common Stock.
 
<TABLE>
<CAPTION>
                                                                 AMOUNT AND NATURE      PERCENT
NAME                                                          OF BENEFICIAL OWNERSHIP   OF CLASS
----                                                          -----------------------   --------
<S>                                                           <C>                       <C>
Edward L. Baker.............................................            49,542(1)            *
Joe E. Beverly..............................................            41,000(2)            *
Franklin L. Burke...........................................             7,404(3)            *
G. Anthony Campbell.........................................           406,803(4)            *
Robert P. Crozer............................................         1,684,796(5)         1.85%
L. S. Flowers...............................................           390,096(6)            *
Joseph L. Lanier, Jr........................................            52,192(7)            *
Amos R. McMullian...........................................         1,105,146(8)         1.21%
J. V. Shields, Jr...........................................            11,250(9)            *
Heeth Varnedoe III..........................................           297,973(10)           *
C. Martin Wood III..........................................           598,323(11)           *
George E. Deese.............................................           307,888(12)           *
Gary L. Harrison............................................           410,947(13)           *
All Directors and Executive Officers as a group (15
  persons)..................................................         5,392,246(14)        5.84%
</TABLE>
 
---------------
 
  *  Less than one percent.
 (1) Includes 16,800 shares owned by a family trust for which Mr. Baker is a
     co-trustee.
 (2) Does not include 45,982 shares owned by the spouse of Mr. Beverly and
     11,164 shares owned by a trust for which his spouse is co-trustee, as to
     which shares Mr. Beverly disclaims any beneficial ownership.
 (3) Includes 3,750 shares owned by the spouse of Mr. Burke, over which shares
     Mr. Burke has investment authority.
 (4) Includes restricted stock awards of 51,574 shares, of which 40,861 shares
     are subject to forfeiture.
 (5) Includes: (i) unexercised stock options for 269,294 shares; (ii) restricted
     stock awards of 97,828 shares, of which 79,748 shares are subject to
     forfeiture; and (iii) 982,780 shares held by limited partnerships in which
     Mr. Crozer and his spouse are the general partners. Does not include the
     following shares as to which Mr. Crozer disclaims any beneficial ownership:
     (i) 7,593 shares held by Mr. Crozer and his spouse as custodians for their
     minor son; (ii) 206,710 shares held by trusts for the benefit of Mr.
     Crozer's minor children; and (iii) 2,006,580 shares owned by the spouse of
     Mr. Crozer.
 (6) Does not include 430,875 shares owned by the spouse of Mr. Flowers, as to
     which Mr. Flowers disclaims any beneficial ownership.
 (7) Does not include 23,890 shares owned by the spouse of Mr. Lanier, as to
     which Mr. Lanier disclaims any beneficial ownership.
 (8) Includes unexercised stock options for 225,000 shares. Also includes
     restricted stock awards of 167,536 shares, all of which are subject to
     forfeiture.
 (9) Does not include 3,241,503 shares owned by the spouse of Mr. Shields, as to
     which Mr. Shields disclaims any beneficial ownership.
(10) Includes unexercised stock options for 150,000 shares. Also includes
     restricted stock awards of 36,160 shares, all of which are subject to
     forfeiture.
(11) Includes: (i) unexercised stock options for 56,250 shares; (ii) restricted
     stock awards of 51,574 shares, of which 40,861 shares are subject to
     forfeiture; and (iii) 51,300 shares held by a trust of which Mr. Wood is
     co-trustee with shared voting and investment power. Does not include the
     following shares, as to which Mr. Wood disclaims any beneficial ownership:
     2,904,009 shares owned by the spouse of Mr. Wood and 25,650 shares held by
     Mr. Wood as custodian for a nephew.
 
                                       31
<PAGE>   35
 
(12) Includes (i) unexercised stock options for 90,000 shares, (ii) restricted
     stock awards of 66,635 shares, of which 54,421 shares are subject to
     forfeiture, and (iii) 628 shares held by Mr. Deese as custodian for his
     minor grandchildren. Does not include 22,708 shares owned by the spouse of
     Mr. Deese, as to which Mr. Deese disclaims any beneficial ownership.
(13) Includes unexercised stock options for 145,544 shares and restricted stock
     awards of 66,635 shares, of which 54,421 shares are subject to forfeiture.
(14) Includes unexercised stock options for 976,964 shares. Also includes
     restricted stock awards of 559,296 shares, of which 474,007 shares are
     subject to forfeiture. Does not include the shares with respect to which
     beneficial ownership is disclaimed as indicated in the preceding footnotes.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Not applicable.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
 
A. LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
 
<TABLE>
<C> <S>      <C>
 1. A.       FINANCIAL STATEMENTS OF THE REGISTRANT
             Report of independent accountants
             Consolidated balance sheet at January 3, 1998, June 28, 1997
             and June 29, 1996
             Consolidated statement of income for the twenty-seven week
             transition period ended January 3, 1998, the fifty-two weeks
             ended June 28, 1997, June 29, 1996 and July 1, 1995
             Consolidated statement of changes in stockholders' equity
             for the twenty-seven week transition period ended January 3,
             1998, the fifty-two weeks ended June 28, 1997, June 29, 1996
             and July 1, 1995
             Consolidated statement of cash flows for the twenty-seven
             week transition period ended January 3, 1998, the fifty-two
             weeks ended June 28, 1997, June 29, 1996 and July 1, 1995
             Notes to consolidated financial statements
 1. B.       FINANCIAL STATEMENTS OF KEEBLER FOODS COMPANY AND UB
             INVESTMENTS US INC. AND SUBSIDIARIES (INCLUDED AS EXHIBIT
             99.1 HERETO)
 
             Report of Independent Accountants
             Consolidated Balance Sheets at January 3, 1998 and December
             28, 1996
             Consolidated Statements of Operations for the year ended
             January 3, 1998, the forty-eight weeks ended December 28,
             1996, the four weeks ended January 26, 1996, and the year
             ended December 30, 1995
             Consolidated Statements of Shareholders' Equity (Deficit)
             for the year ended January 3, 1998, the forty-eight weeks
             ended December 28, 1996, the four weeks ended January 26,
             1996, and the year ended December 30, 1995
             Consolidated Statements of Cash Flows for the year ended
             January 3, 1998, the forty-eight weeks ended December 28,
             1996, the four weeks ended January 26, 1996, and the year
             ended December 30, 1995
             Notes to Consolidated Financial Statements
 2. A.       FINANCIAL STATEMENT SCHEDULES OF THE REGISTRANT
      
             Report of Independent Accountants on Financial Statement
             Schedule
             Schedule II Valuation and Qualifying Accounts -- for the
             fiscal years ended January 3, 1998, June 28, 1997, June 29,
             1996 and July 1, 1995
</TABLE>
 
                                       32
<PAGE>   36
<TABLE>
<C> <S>      <C>
 2. B.       FINANCIAL STATEMENT SCHEDULES OF KEEBLER FOODS COMPANY
             (INCLUDED AS EXHIBIT 99.2 HERETO)
       
 3.          Report of Independent Accountants on Financial Statement
             Schedule
             Schedule II -- Valuation and Qualifying Accounts for the
             year ended January 3, 1998, the forty-eight weeks ended
             December 28, 1996, the four weeks ended January 26, 1996,
             and the year ended December 30, 1995
             EXHIBITS
   
  2          Stock Purchase and Stockholder's Agreement dated as of
             January 28, 1998 by and among Flowers, Bermore, Ltd, Artal
             Luxembourg, S.A. and Keebler (Incorporated by reference to
             the Company's Report on Form 8-K dated February 18, 1998,
             File No. 1-9787)
   
  3 (a)      Second Restated Articles of Incorporation (as amended)
             (Incorporated by reference to the Company's Quarterly Report
             on Form 10-Q for the quarterly period ended December 13,
             1997, File No. 1-9787)
       
  3 (b)      Restated By-Laws, as of October 20, 1989 (Incorporated by
             reference to the Company's Annual Report on Form 10-K for
             the fiscal year ended June 27, 1992, File No. 1-9787)
       
  4 (a)      Rights Agreement dated as of March 17, 1989 between the
             Company and the Rights Agent (Incorporated by reference to
             the Company's Registration Statement on Form 8-A filed March
             21, 1989, as amended, File No. 1-9787)
       
  4 (a)(1)   First Addendum to Rights Agreement dated as of June 6, 1992
             (Incorporated by reference to the Company's Annual Report on
             Form 10-K for the fiscal year ended June 27, 1992, File No.
             1-9787).
          
 10 (a)(1)   Flowers Industries, Inc. Annual Executive Bonus Plan dated
             August 4, 1995 (Incorporated by reference to the Company's
             Annual Report on Form 10-K for the fiscal year ended July 1,
             1995, File No. 1-9787)*
          
 10 (a)(2)   First Amendment to the Flowers Industries, Inc. Annual
             Executive Bonus Plan*++
          
 10 (b)      Flowers Industries, Inc. 401(k) Retirement Savings Plan
             (Incorporated by reference to the Company's Registration
             Statement on Form S-8 filed April 13, 1995, File No.
             33-91198)*
       
 10 (c)      Severance Policy (Incorporated by reference to the Company's
             Annual Report on Form 10-K for the fiscal year ended July 1,
             1989, File No. 1-9787)*
       
 10 (d)      1982 Incentive Stock Option Plan, as amended (Incorporated
             by reference to the Company's Registration Statement on Form
             S-3/S-8 filed May 18, 1990, File No. 33-34855)*
       
 10 (e)      1989 Executive Stock Incentive Plan (Incorporated by
             reference to the Company's Registration Statement on Form
             S-3/S-8 filed May 18, 1990, File No.33-34855)*
       
 10 (e)(1)   Amendment to the 1989 Executive Stock Incentive Plan, dated
             as of August 4, 1995 (Incorporated by reference to the
             Company's Annual Report on Form 10-K for the fiscal year
             ended July 1, 1995, File No. 1-9787)*
          
 10 (e)(2)   Second Amendment to Flowers Industries, Inc. 1989 Executive
             Stock Incentive Plan*++
          
 10 (f)      Flowers Industries, Inc. 1990 Supplemental Executive
             Retirement Plan (Incorporated by reference to the Company's
             Annual Report on Form 10-K for the fiscal year ended June
             30, 1990, File No. 1-9787)*
       
 10 (g)      Flowers Industries, Inc. Nonemployee Directors' Equity
             Plan*++
       
 10 (h)      Stock Purchase Agreement dated as of November 5, 1995,
             between INFLO Holdings Corporation and UB Investments
             (Netherlands) BV, as amended by agreement dated January 26,
             1996 (Incorporated by reference to the Company's Report on
             Form 8-K(A) dated April 10, 1996, File No. 1-9787)
       
 10 (h)      Note Purchase Agreement dated as of December 20, 1995, among
             Flowers and the Purchasers named therein, as amended by
             First Amendment effective as of January 23, 1998, as further
             amended by Second Amendment effective as of March 12, 1998++
       
 10 (i)      Acquisition Agreement dated as of May 1, 1996, among Flowers
             Industries, Inc., Mrs. Smith's Bakeries, a wholly-owned
             subsidiary of Flowers Industries, Inc., The J. M. Smucker
             Company, and Mrs. Smith's, Inc., a wholly-owned subsidiary
             of The J. M. Smucker Company (Incorporated by reference to
             the Company's Report on Form 8-K dated June 13, 1996, File
             No. 1-9787)
</TABLE>
 
                                       33
<PAGE>   37
<TABLE>
<C> <S>      <C>
 10 (i)      $500,000,000 Amended and Restated Credit Agreement dated as
             of January 30, 1998, among Flowers, certain Banks listed
             therein, Wachovia Bank, N.A., as Agent, The Bank of Nova
             Scotia, as Documentation Agent and NationsBank, N.A. as
             Syndicating Agent (Incorporated by reference to the
             Company's Report on Form 8-K dated February 18, 1998, File
             No. 1-9787)
       
 10 (j)      Agreement dated as of May 5, 1997, between the Company and
             Heeth Varnedoe III (Incorporated by reference to the
             Company's Annual Report on Form 10-K for the fiscal year
             ended June 28, 1997, File No. 1-9787.)*
       
 11          Statement re computation of per share earnings++
   
 21          Subsidiaries of the Registrant++
        
 23 (a)      Consent of Price Waterhouse, LLP, Independent Accountants++
        
             Consent of Coopers & Lybrand, L.L.P., Independent
 23 (b)      Accountants++
        
 27          Financial Data Schedule++
        
99.1         Financial Statements of Keebler Foods Company and UB
             Investments US Inc. and Subsidiaries++
    
99.2         Financial Statement Schedules of Keebler Foods Company++
    
99.3         Portions of the Annual Report on Form 10-K for the fiscal
             year ended January 3, 1998 of Keebler Foods Company++
    
</TABLE>
 
---------------
 
* Management contract or compensatory plan or arrangement required to be filed
  as an exhibit hereto pursuant to Item 14(c) of Form 10-K.
 ++ Filed herewith.
 
B. REPORTS ON FORM 8-K
 
     The Company filed a report on Form 8-K on February 18, 1998, as amended by
the Form 8-K/A filed on March 13, 1998 to report the Company's acquisition of a
majority interest in Keebler Foods Company, a Delaware corporation, and the
change in the Company's fiscal year.
 
                                       34
<PAGE>   38
 
     For purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-3/S-8, File No.
33-34855; and on Form S-8, File No. 33-91198 and File No. 333-23351.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
 
                                       35
<PAGE>   39
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Flowers Industries, Inc. has duly caused this Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized as of
March 27, 1998.
 
                            FLOWERS INDUSTRIES, INC.
 
<TABLE>
<S> <C>                            <C>                            <C>
       /s/  AMOS R. MCMULLIAN          /s/  ROBERT P. CROZER         /s/  C. MARTIN WOOD III
    -----------------------------  -----------------------------  -----------------------------
          Amos R. McMullian              Robert P. Crozer              C. Martin Wood III
      Chairman of the Board and     Vice Chairman of the Board      Senior Vice President and
       Chief Executive Officer                                       Chief Financial Officer
</TABLE>
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE                      DATE
                      ---------                                      -----                      ----
<C>                                                      <S>                               <C>
 
                /s/ AMOS R. MCMULLIAN                    Chairman of the Board,            March 24, 1998
-----------------------------------------------------      Chairman of the Executive
                  Amos R. McMullian                        Committee and Chief
                                                           Executive Officer
 
                /s/ ROBERT P. CROZER                     Vice Chairman of the Board and    March 27, 1998
-----------------------------------------------------      a Director
                  Robert P. Crozer
 
               /s/ C. MARTIN WOOD III                    Senior Vice President, Chief      March 27, 1998
-----------------------------------------------------      Financial Officer and a
                 C. Martin Wood III                        Director
 
                 /s/ EDWARD L. BAKER                     Director                          March 24, 1998
-----------------------------------------------------
                   Edward L. Baker
 
                 /s/ JOE E. BEVERLY                      Director                          March 27, 1998
-----------------------------------------------------
                   Joe E. Beverly
 
                /s/ FRANKLIN L. BURKE                    Director                          March 27, 1998
-----------------------------------------------------
                  Franklin L. Burke
 
               /s/ G. ANTHONY CAMPBELL                   General Counsel, Secretary and    March 27, 1998
-----------------------------------------------------      a Director
                 G. Anthony Campbell
 
               /s/ LANGDON S. FLOWERS                    Director                          March 24, 1998
-----------------------------------------------------
                 Langdon S. Flowers
 
              /s/ JOSEPH L. LANIER, JR.                  Director                          March 27, 1998
-----------------------------------------------------
                Joseph L. Lanier, Jr.
 
               /s/ J. V. SHIELDS, JR.                    Director                          March 27, 1998
-----------------------------------------------------
                 J. V. Shields, Jr.
 
               /s/ HEETH VARNEDOE III                    Director                          March 27, 1998
-----------------------------------------------------
                 Heeth Varnedoe III
 
                /s/ JIMMY M. WOODWARD                    Treasurer and Chief               March 27, 1998
-----------------------------------------------------      Accounting Officer
                  Jimmy M. Woodward
</TABLE>
 
                                       36
<PAGE>   40
 
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
 
Report of independent accountants...........................   F-2
Consolidated balance sheet at January 3, 1998, June 28, 1997
  and June 29, 1996.........................................   F-3
Consolidated statement of income for the twenty-seven weeks
  ended January 3, 1998, and the fifty-two weeks ended June
  28, 1997, June 29, 1996 and July 1, 1995..................   F-4
Consolidated statement of changes in stockholders' equity
  for the twenty-seven weeks ended January 3, 1998, and the
  fifty-two weeks ended June 28, 1997, June 29, 1996 and
  July 1, 1995..............................................   F-5
Consolidated statement of cash flows for the twenty-seven
  weeks ended January 3, 1998, and the fifty-two weeks ended
  June 28, 1997, June 29, 1996 and July 1, 1995.............   F-7
Notes to consolidated financial statements..................   F-9
</TABLE>
 
                                       F-1
<PAGE>   41
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of Flowers Industries, Inc.
 
     In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Flowers Industries, Inc. and its subsidiaries at January 3, 1998, June 28, 1997
and June 29, 1996, and the results of their operations and their cash flows for
the twenty-seven week transition period ended January 3, 1998 and for each of
the three fiscal years in the period ended June 28, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
 
     As more fully discussed in Note 1 of the Notes to Consolidated Financial
Statements, during the twenty-seven week transition period ended January 3,
1998, the Company changed its method of accounting for business process
reengineering costs incurred in connection with an information technology
project, pursuant to Emerging Issues Task Force Consensus No. 97-13, "Accounting
for Costs Incurred in Connection with a Consulting Contract or an Internal
Project that Combines Business Process Reengineering and Information Technology
Transformation." In addition, as more fully discussed in Note 1 of the Notes to
Consolidated Financial Statements, during the twenty-seven week transition
period ended January 3, 1998, the Company changed the measurement date used in
its accounting for pensions.
 
/s/ PRICE WATERHOUSE LLP
 
Atlanta, Georgia
March 23, 1998
 
                                       F-2
<PAGE>   42
 
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                              JANUARY 3,    JUNE 28,     JUNE 29,
                                                                 1998         1997         1996
                                                              ----------   ----------   ----------
                                                                 (AMOUNTS IN THOUSANDS, EXCEPT
                                                                          SHARE DATA)
<S>                                                           <C>          <C>          <C>
                                              ASSETS
Current Assets:
  Cash and cash equivalents.................................  $   3,866    $  31,080    $  25,039
  Accounts receivable.......................................    118,147      113,628      120,301
  Inventories...............................................    105,431      104,577       68,576
  Prepaid expenses..........................................      9,421        7,825        5,319
  Deferred income taxes.....................................     16,024       14,421       10,992
                                                              ---------    ---------    ---------
                                                                252,889      271,531      230,227
                                                              ---------    ---------    ---------
Property, Plant and Equipment:
  Land......................................................     20,388       20,692       23,386
  Buildings.................................................    208,179      206,469      183,502
  Machinery and equipment...................................    443,739      446,016      393,319
  Furniture, fixtures and transportation equipment..........     28,095       24,774       21,365
  Construction in progress..................................     46,262       49,062       63,005
                                                              ---------    ---------    ---------
                                                                746,663      747,013      684,577
  Less: accumulated depreciation............................   (308,342)    (299,014)    (264,107)
                                                              ---------    ---------    ---------
                                                                438,321      447,999      420,470
                                                              ---------    ---------    ---------
Other Assets:
  Investment in unconsolidated affiliate....................    100,663       77,071       68,326
  Notes receivable from distributors........................                               61,236
  Other long-term assets....................................     32,620       33,133       24,567
                                                              ---------    ---------    ---------
                                                                133,283      110,204      154,129
                                                              ---------    ---------    ---------
Cost in Excess of Net Tangible Assets.......................     78,368       70,939       45,962
  Less: accumulated amortization............................     (3,480)      (2,486)      (1,345)
                                                              ---------    ---------    ---------
                                                                 74,888       68,453       44,617
                                                              ---------    ---------    ---------
                                                              $ 899,381    $ 898,187    $ 849,443
                                                              =========    =========    =========
 
                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Commercial paper outstanding..............................  $  53,506    $  40,792    $
  Current portion of long-term debt.........................      1,581        6,625        6,593
  Obligations under capital leases..........................      2,651        2,608        1,988
  Accounts payable..........................................     72,311       78,451       98,796
  Accrued taxes other than income taxes.....................      5,230        6,276        5,369
  Income taxes..............................................                     220        1,264
  Other accrued liabilities.................................     97,333      107,497       67,738
                                                              ---------    ---------    ---------
                                                                232,612      242,469      181,748
                                                              ---------    ---------    ---------
Long-Term Notes Payable.....................................    259,249      259,884      254,355
                                                              ---------    ---------    ---------
Obligations Under Capital Leases............................      4,012        2,413        2,573
                                                              ---------    ---------    ---------
Industrial Revenue Bonds....................................     12,950       12,950       17,770
                                                              ---------    ---------    ---------
Deferred Income Taxes.......................................     39,686       38,886       47,270
                                                              ---------    ---------    ---------
Deferred Compensation.......................................      2,305        1,573
                                                              ---------    ---------    ---------
Deferred Income.............................................                               40,403
                                                              ---------    ---------    ---------
Commitments and Contingencies...............................
                                                              ---------    ---------    ---------
Stockholders' Equity:
  Preferred stock -- $100 par value, authorized 10,467
    shares and none issued..................................
  Preferred stock -- $100 par value, authorized 249,533
    shares and none issued..................................
  Common stock -- $.625 par value, authorized 350,000,000
    shares, issued 88,636,089 shares........................     55,398       55,398       55,398
  Capital in excess of par value............................     45,200       43,147       40,317
  Retained earnings.........................................    266,734      260,094      234,069
  Less: Common stock in treasury, 207,670, 563,076 and
    761,010 shares, respectively............................     (2,452)      (6,567)      (6,493)
       Restricted Stock Award and Equity Incentive Award....    (16,313)     (12,060)     (17,967)
                                                              ---------    ---------    ---------
                                                                348,567      340,012      305,324
                                                              ---------    ---------    ---------
                                                              $ 899,381    $ 898,187    $ 849,443
                                                              =========    =========    =========
</TABLE>
 
         (See Accompanying Notes to Consolidated Financial Statements)
 
                                       F-3
<PAGE>   43
 
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
                        CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                   FOR THE 27
                                                     WEEKS
                                                     ENDED             FOR THE 52 WEEKS ENDED
                                                   ----------   ------------------------------------
                                                   JANUARY 3,    JUNE 28,     JUNE 29,     JULY 1,
                                                      1998         1997         1996         1995
                                                   ----------   ----------   ----------   ----------
                                                     (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                <C>          <C>          <C>          <C>
Sales............................................   $784,097    $1,437,713   $1,238,564   $1,129,203
Gain on sale of distributor notes receivable.....                   43,244
Other income.....................................      2,442         3,540        7,909       10,751
Gain on issuance of additional stock of
  unconsolidated affiliate.......................                                 4,111
                                                    --------    ----------   ----------   ----------
                                                     786,539     1,484,497    1,250,584    1,139,954
                                                    --------    ----------   ----------   ----------
Materials, supplies, labor and other production
  costs..........................................    418,926       787,799      674,762      599,416
Selling, delivery and administrative expenses....    303,868       537,825      468,695      428,833
Depreciation and amortization....................     26,930        45,970       40,848       36,604
Interest.........................................     11,796        25,109       13,004        7,086
Accrual for litigation settlement................                                 4,935
                                                    --------    ----------   ----------   ----------
                                                     761,520     1,396,703    1,202,244    1,071,939
                                                    --------    ----------   ----------   ----------
Income before income taxes.......................     25,019        87,794       48,340       68,015
Federal and state income taxes...................      9,632        33,191       18,185       25,714
Income from investment in unconsolidated
  affiliate......................................     18,061         7,721          613
                                                    --------    ----------   ----------   ----------
Income before cumulative effect of changes in
  accounting principles..........................     33,448        62,324       30,768       42,301
Cumulative effect of changes in accounting
  principles, net of tax benefit of $6,146.......     (9,888)
                                                    --------    ----------   ----------   ----------
Net income.......................................   $ 23,560    $   62,324   $   30,768   $   42,301
                                                    ========    ==========   ==========   ==========
Earnings Per Common Share -- Basic
  Income before cumulative effect of changes in
     accounting principles.......................   $    .38    $      .71   $      .35   $      .49
  Cumulative effect of changes in accounting
     principles, net of tax......................       (.11)
                                                    --------    ----------   ----------   ----------
  Net income per common share....................   $    .27    $      .71   $      .35   $      .49
                                                    ========    ==========   ==========   ==========
  Weighted average shares outstanding............     88,368        88,000       86,933       86,229
                                                    ========    ==========   ==========   ==========
Earnings Per Common Share -- Diluted
  Income before cumulative effect of changes in
     accounting principles.......................   $    .38    $      .71   $      .35   $      .49
  Cumulative effect of changes in accounting
     principles, net of tax......................       (.11)
                                                    --------    ----------   ----------   ----------
  Net income per common share....................   $    .27    $      .71   $      .35   $      .49
                                                    ========    ==========   ==========   ==========
  Weighted average shares outstanding............     88,773        88,401       87,211       86,438
                                                    ========    ==========   ==========   ==========
</TABLE>
 
         (See Accompanying Notes to Consolidated Financial Statements)
 
                                       F-4
<PAGE>   44
 
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                              COMMON STOCK                                                           RESTRICTED
                         ----------------------                                TREASURY STOCK        STOCK AWARD
                         NUMBER OF                CAPITAL IN               -----------------------   AND EQUITY
                           SHARES                 EXCESS OF    RETAINED     NUMBER OF                 INCENTIVE
                           ISSUED     PAR VALUE   PAR VALUE    EARNINGS      SHARES        COST         AWARD
                         ----------   ---------   ----------   ---------   -----------   ---------   -----------
                                              (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                      <C>          <C>         <C>          <C>         <C>           <C>         <C>
Balances at July 2,
  1994.................  86,269,670    $53,919    $  21,083    $ 225,601    (1,893,522)  $ (15,200)   $ (9,672)
Stock issued for
  acquisitions.........   2,366,419      1,479       15,872                    198,598       1,594
Exercise of employee
  stock options........                                (178)                   104,449         841
Purchase of treasury
  stock................                                                       (554,745)     (4,426)
Net income for the
  year.................                                           42,301
Exercise of Restricted
  Stock Award..........                                  63                    (74,634)       (572)        708
Amortization of
  Restricted Stock
  Award and Equity
  Incentive Award......                                                                                  1,825
Dividends
  paid -- $.3622 per
  common share.........                                          (31,257)
                         ----------    -------    ---------    ---------   -----------   ---------    --------
Balances at July 1,
  1995.................  88,636,089     55,398       36,840      236,645    (2,219,854)    (17,763)     (7,139)
Stock issued for
  acquisitions.........                                 180                    137,003       1,119
Exercise of employee
  stock options........                                (764)                   285,366       2,337
Purchase of treasury
  stock................                                                       (144,840)     (1,303)
Net income for the
  year.................                                           30,768
Exercise of Restricted
  Stock Award..........                                 769                   (187,596)     (1,650)      1,526
Exercise of Equity
  Incentive Award......                                 301                   (169,931)     (1,830)      1,434
Stock issued into
  escrow in connection
  with Restricted Stock
  Award................                               2,286                  1,180,295       9,640     (11,918)
Stock issued into
  escrow in connection
  with Equity Incentive
  Award................                                 705                    358,547       2,957      (3,662)
Amortization of
  Restricted Stock
  Award and Equity
  Incentive Award......                                                                                  1,792
Dividends
  paid -- $.3833 per
  common share.........                                          (33,344)
                         ----------    -------    ---------    ---------   -----------   ---------    --------
Balances at June 29,
  1996.................  88,636,089     55,398       40,317      234,069      (761,010)     (6,493)    (17,967)
</TABLE>
 
                                       F-5
<PAGE>   45
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
    CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
 
<TABLE>
<CAPTION>
                              COMMON STOCK                                                           RESTRICTED
                         ----------------------                                TREASURY STOCK        STOCK AWARD
                         NUMBER OF                CAPITAL IN               -----------------------   AND EQUITY
                           SHARES                 EXCESS OF    RETAINED     NUMBER OF                 INCENTIVE
                           ISSUED     PAR VALUE   PAR VALUE    EARNINGS      SHARES        COST         AWARD
                         ----------   ---------   ----------   ---------   -----------   ---------   -----------
                                              (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                      <C>          <C>         <C>          <C>         <C>           <C>         <C>
Stock issued for
  acquisition..........                               1,025                    322,233       2,975
Exercise of employee
  stock options........                              (1,017)                   400,853       3,988
Purchase of treasury
  stock................                                                        (19,335)       (289)
Net income for the
  year.................                                           62,324
Exercise of Restricted
  Stock Award..........                               1,072                    (78,106)     (1,362)      1,169
Exercise of Equity
  Incentive Award......                               1,854                   (151,469)     (2,365)      1,738
Restricted Stock Award
  Reversions...........                                (104)                   (56,430)       (456)        557
Amortization of
  Restricted Stock
  Award and Equity
  Incentive Award......                                                                                  2,443
Stock received from
  escrow...............                                                       (219,812)     (2,565)
Dividends
  paid -- $.4125 per
  common share.........                                          (36,299)
                         ----------    -------    ---------    ---------   -----------   ---------    --------
Balances at June 28,
  1997.................  88,636,089     55,398       43,147      260,094      (563,076)     (6,567)    (12,060)
Exercise of employee
  stock options........                                                         45,000         524
Purchase of treasury
  stock................                                                         (6,227)       (117)
Net income for the 27
  weeks ended January
  3, 1998..............                                           23,560
Equity from investment
  in unconsolidated
  affiliate............                                            2,700
Stock issued into
  escrow in connection
  with Restricted Stock
  Award................                               2,118                    347,609       3,965      (6,083)
Restricted Stock Award
  Reversions...........                                 (65)                   (30,976)       (257)        435
Amortization of
  Restricted Stock
  Award and Equity
  Incentive Award......                                                                                  1,395
Dividends
  paid -- $.2225 per
  common share.........                                          (19,620)
                         ----------    -------    ---------    ---------   -----------   ---------    --------
Balances at January 3,
  1998.................  88,636,089    $55,398    $  45,200    $ 266,734       207,670   $  (2,452)   $(16,313)
                         ==========    =======    =========    =========   ===========   =========    ========
</TABLE>
 
         (See Accompanying Notes to Consolidated Financial Statements)
 
                                       F-6
<PAGE>   46
 
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                 FOR THE 27
                                                 WEEKS ENDED          FOR THE 52 WEEKS ENDED
                                                 -----------   ------------------------------------
                                                 JANUARY 3,     JUNE 28,     JUNE 29,     JULY 1,
                                                    1998          1997         1996         1995
                                                 -----------   ----------   ----------   ----------
                                                               (AMOUNTS IN THOUSANDS)
<S>                                              <C>           <C>          <C>          <C>
Cash flows from operating activities:
  Cash received from customers.................   $ 779,029    $1,438,870   $1,232,963   $1,117,262
  Interest received............................         325           824        7,741        7,159
  Sale of distributor notes receivable.........                    65,954
  Other........................................       3,055         6,080        5,416        5,890
                                                  ---------    ----------   ----------   ----------
Cash provided by operating activities..........     782,409     1,511,728    1,246,120    1,130,311
                                                  ---------    ----------   ----------   ----------
  Cash paid to suppliers and employees.........     739,575     1,373,583    1,161,431    1,009,931
  Interest paid................................      11,878        25,955        8,582        6,465
  Income taxes paid............................      10,867        32,729       16,748       20,379
                                                  ---------    ----------   ----------   ----------
Cash disbursed for operating activities........     762,320     1,432,267    1,186,761    1,036,775
                                                  ---------    ----------   ----------   ----------
Net cash provided by operating activities (See
  Schedule 1)..................................      20,089        79,461       59,359       93,536
                                                  ---------    ----------   ----------   ----------
Cash flows from investing activities:
  Purchase of property, plant and equipment....     (32,857)      (77,510)     (75,542)     (73,466)
  Acquisition of businesses....................      (7,931)                   (28,118)     (17,018)
  Divestiture of businesses....................                       200        1,061       22,679
  Decrease in divestiture receivables..........       2,399           417          173
  Investment in unconsolidated affiliate.......                                (61,352)
  Escrow funds.................................                                               4,835
  Other........................................       2,145            63       (6,485)      (1,845)
                                                  ---------    ----------   ----------   ----------
Net cash disbursed for investing activities....     (36,244)      (76,830)    (170,263)     (64,815)
                                                  ---------    ----------   ----------   ----------
Cash flows from financing activities:
  Dividends paid...............................     (19,620)      (36,299)     (33,344)     (31,257)
  Purchase of treasury stock...................        (117)         (289)      (1,303)      (4,426)
  Increase in short-term notes payable.........       7,713        40,792
  Increase in long-term notes payable..........     356,000       524,400      356,625      151,391
  Payments of long-term notes payable..........    (355,035)     (525,194)    (217,871)    (132,351)
                                                  ---------    ----------   ----------   ----------
Net cash (disbursed for) provided by financing
  activities...................................     (11,059)        3,410      104,107      (16,643)
                                                  ---------    ----------   ----------   ----------
Net (decrease) increase in cash and cash
  equivalents..................................   $ (27,214)   $    6,041   $   (6,797)  $   12,078
                                                  =========    ==========   ==========   ==========
</TABLE>
 
                                       F-7
<PAGE>   47
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
              CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                 FOR THE 27
                                                 WEEKS ENDED          FOR THE 52 WEEKS ENDED
                                                 -----------   ------------------------------------
                                                 JANUARY 3,     JUNE 28,     JUNE 29,     JULY 1,
                                                    1998          1997         1996         1995
                                                 -----------   ----------   ----------   ----------
                                                               (AMOUNTS IN THOUSANDS)
<S>                                              <C>           <C>          <C>          <C>
SCHEDULE 1.
Schedule Reconciling Earnings to Net Cash
  Provided by Operating Activities:
     Net income................................   $  23,560    $   62,324   $   30,768   $   42,301
     Noncash expenses, revenues, losses and
       gains included in income:
       Depreciation and amortization...........      26,930        45,970       40,848       36,604
       Gain on sale of distributor notes
          receivable...........................                   (43,244)
       Deferred income taxes...................        (803)        1,506        3,494        2,847
       Cumulative effect of changes in
          accounting principles................       9,888
       Gain on issuance of additional stock of
          unconsolidated affiliate.............                                 (4,111)
       Net income from investment in
          unconsolidated affiliate.............     (18,061)       (7,721)        (613)
     Changes in assets and liabilities, net of
       acquisitions and divestitures:
       (Increase) decrease in accounts
          receivable...........................      (2,282)        7,863      (17,742)      (5,510)
       Increase in inventories.................        (413)      (36,144)     (12,821)      (4,651)
       Increase in prepaid expenses............      (1,495)       (2,242)      (1,650)         (86)
       Decrease in distributor notes
          receivable...........................                    65,954
       (Decrease) increase in accounts
          payable..............................      (6,685)      (21,082)      28,029        5,859
       (Decrease) increase in accrued taxes and
          other liabilities....................     (10,550)        6,277       (6,843)      16,172
                                                  ---------    ----------   ----------   ----------
                                                  $  20,089    $   79,461   $   59,359   $   93,536
                                                  =========    ==========   ==========   ==========
SCHEDULE 2.
Schedule of Noncash Investing and Financing
  Activities:
  Common stock issued in connection with the
     exercise of employee stock options........   $     272    $    2,971   $    1,573   $      663
  Stock issued and held in escrow in connection
     with Restricted Stock Award and Equity
     Incentive Award...........................       6,083                     15,580
  Stock issued for acquisitions................                     4,000        1,299       18,945
  Note payable issued in acquisition of
     business..................................                                 15,000
  Exercise of Restricted Stock Award and Equity
     Incentive Award...........................                     3,727        3,480          572
  Stock released from escrow...................                     2,565
</TABLE>
 
         (See Accompanying Notes to Consolidated Financial Statements)
 
                                       F-8
<PAGE>   48
 
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
CHANGE IN FISCAL YEAR
 
     In January 1998, the Company changed its fiscal year-end from the Saturday
nearest June 30 to the Saturday nearest December 31. As a result, the Company is
reporting a twenty-seven week transition period of June 29, 1997 through January
3, 1998.
 
PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of Flowers
Industries, Inc. and its wholly owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation. The Company's 45% investment
interest in Keebler Foods Company is accounted for under the equity method.
Equity accounting for this investment is discussed in Note 13 to the
consolidated financial statements.
 
REVENUE RECOGNITION
 
     Revenue from sale of products is recognized at the time of shipment. Sales
to a single customer were approximately $84,000,000, or 10.7% of sales during
the twenty-seven weeks transition period ended January 3, 1998, $163,000,000, or
11% of sales during fiscal 1997, $150,000,000, or 12% of sales during fiscal
1996 and $142,000,000, or 13% of sales during fiscal 1995.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers deposits in banks, certificates of deposits and
short-term investments with original maturities of three months or less as cash
and cash equivalents for the purposes of the statement of cash flows.
 
     The major components of cash and cash equivalents are as follows:
 
<TABLE>
<CAPTION>
                                                  JANUARY 3, 1998   JUNE 28, 1997   JUNE 29, 1996
                                                  ---------------   -------------   -------------
                                                              (AMOUNTS IN THOUSANDS)
<S>                                               <C>               <C>             <C>
Cash............................................      $                $11,010         $10,484
Time deposits...................................       3,866            20,070          14,555
                                                      ------           -------         -------
          Total.................................      $3,866           $31,080         $25,039
                                                      ======           =======         =======
</TABLE>
 
ACCOUNTS RECEIVABLE
 
     Accounts receivable consists of trade receivables, current portion of
distributor notes receivable and miscellaneous receivables. As the Company has
historically experienced an insignificant amount of uncollectible accounts, when
a receivable balance is determined to be uncollectible, it is charged directly
to expense.
 
CONCENTRATION OF CREDIT RISK
 
     The Company grants credit to its distributors and customers, who are
primarily in the grocery, foodservice, restaurant and fast-food markets.
 
INVENTORY
 
     Inventories are carried at the lower of cost (primarily first-in,
first-out) or market.
 
HEDGING TRANSACTIONS -- RAW MATERIAL COSTS
 
     The Company's primary raw materials are flour, sugar, shortening and fruit.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. The
                                       F-9
<PAGE>   49
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Company enters into various forward purchase agreements and other derivative
financial instruments to reduce the impact of volatility in ingredients prices.
Amounts payable or receivable under the agreements which qualify as hedges are
recognized as deferred gains or losses and are included in other assets or other
liabilities. These deferred amounts are charged or credited to cost of sales as
the related raw materials costs used in production. Gains and losses on
agreements which do not qualify as hedges are recognized immediately as other
income or expense. At January 3, 1998, the Company had no material commitments
outstanding relating to derivative financial instruments.
 
     During June 1997, the Company entered into an arrangement that allows for
the Company to engage in commodity price agreements based on fixed and floating
prices of an agreed type of commodity. At January 3, 1998, no material amounts
were outstanding under this agreement.
 
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
 
     The Company provides depreciation for financial reporting purposes over the
estimated useful lives of fixed assets using the straight-line method. Upon
retirement or sale of fixed assets, the book value is removed from the accounts
and the difference between such net book value and salvage value received is
recorded in income. Expenditures for maintenance and repairs are charged to
expense; renovations and improvements are capitalized.
 
     The approximate annual rates of depreciation are 3% to 5% for buildings, 8%
for machinery and equipment and 10% to 25% for furniture, fixtures and
transportation equipment. Depreciation expense for the twenty-seven weeks ended
January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $25,936,000,
$44,829,000, $40,559,000 and $35,874,000, respectively.
 
INTERNALLY DEVELOPED SOFTWARE
 
     The Company capitalizes certain costs, primarily hardware, software, and
installation costs, associated with internally developed software projects. Such
amounts are depreciated over periods not to exceed seven years. The Company does
not anticipate that Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed, or Obtained for Internal Use," will have a material
impact on the Company's results of operations or financial condition. As further
discussed below, during the twenty-seven week period ended January 3, 1998, the
Company recorded a cumulative after-tax charge of $8,842,000, to write off
business process reengineering costs that had been incurred as part of an
information systems development project.
 
ADVERTISING AND CONSUMER PROMOTION
 
     Advertising and consumer promotion costs are generally expensed as incurred
or no later than when the advertisement appears or the event is run. Advertising
and consumer promotion expense was approximately $16,998,000 for the
twenty-seven weeks ended January 3, 1998, $19,063,000 for fiscal 1997,
$15,081,000 for fiscal 1996 and $15,875,000 for fiscal 1995. There are no
deferred advertising costs at January 3, 1998, June 28, 1997 or June 29, 1996.
 
NOTES RECEIVABLE AND DEFERRED INCOME
 
     The Company sells its territories to independent distributors. The income
from these sales is recognized as the cash payments are received. The sales of
the territories were previously financed by the Company with ten year notes. In
September 1996, the Company sold these notes, which totaled approximately
$66,000,000, to a financial institution. The proceeds were used to repay debt
outstanding at that time. Of the notes sold, approximately $44,000,000 were
initially without recourse to the Company with approximately $22,000,000 having
limited recourse. Concurrently, approximately $43,000,000 of deferred pre-tax
income was recognized
 
                                      F-10
<PAGE>   50
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
by the Company during fiscal 1997. Subsequent to September 1996, all distributor
purchase arrangements are made directly between the distributor and a financial
institution and, pursuant to an agreement, the Company acts as the servicing
agent for the financial institution and receives a fee for these services. Such
fees aggregated $2,317,000 and $5,029,000 during the twenty-seven weeks ended
January 3, 1998 and fiscal 1997, respectively.
 
AMORTIZATION OF INTANGIBLE ASSETS
 
     Costs in excess of the net tangible assets acquired are, in the opinion of
management, attributable to long-lived intangibles having continuing value.
Excess amounts related to the purchases of businesses are amortized over forty
years from the acquisition date using the straight-line method. Costs of
purchased trademark rights are amortized over the period of expected future
benefit, which is approximately ten to forty years. At each balance sheet date,
the Company assesses whether there has been an impairment of long-lived assets
and the related unamortized goodwill, based on whether certain indicators of
impairment are present. If such indicators are present, the Company evaluates
whether an impairment exists by comparing the gross, undiscounted cash flows to
the carrying value of the related asset. Amortization expense for the
twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal
1995 was $994,000, $1,141,000, $289,000 and $730,000, respectively.
 
TREASURY STOCK
 
     The Company records acquisitions of its common stock for treasury at cost.
Differences between proceeds for reissuances of treasury stock and average cost
are credited to capital in excess of par value or charged to capital in excess
of par value to the extent of prior credits and thereafter to retained earnings.
 
PENSION PLANS
 
     The Company accounts for pensions in accordance with Statement of Financial
Accounting Standards No. 87 -- "Employers' Accounting for Pensions." Pension
accounting information is disclosed in Note 8 to the consolidated financial
statements.
 
INCOME TAXES
 
     The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 -- "Accounting for Income Taxes" (SFAS 109). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates. Income
tax accounting information is disclosed in Note 9 to the consolidated financial
statements.
 
NET INCOME PER COMMON SHARE
 
     The Company computes net income per common share in accordance with
Statement of Financial Accounting Standards No. 128 -- "Earnings Per Share"
(SFAS 128). Basic earnings per share in computed by dividing net income by
weighted average common shares outstanding for the period. Diluted earnings per
share is computed by dividing net income by weighted average common and common
equivalent shares outstanding for the period. Common stock equivalents consist
of the incremental shares associated with the Company's stock option plans, as
determined under the treasury stock method. Earnings per share information for
years prior to the twenty-seven weeks ended January 3, 1998, has been restated
in accordance with SFAS 128.
 
                                      F-11
<PAGE>   51
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
CHANGES IN ACCOUNTING PRINCIPLES
 
     On November 20, 1997, the Emerging Issues Task Force (EITF), a subcommittee
of the Financial Accounting Standards Board, issued EITF 97-13, which requires
the cost of business process reengineering activities that are part of an
information systems development project be expensed as those costs are incurred.
Any unamortized costs that were previously capitalized were required to be
written off as a cumulative adjustment in the quarter that included November 20,
1997. During the twenty-seven week period ended January 3, 1998, the Company
recorded a cumulative after-tax charge of $8,842,000, or $.10 per share, as a
result of its adoption of this pronouncement. These costs were attributable to a
state-of-the-art management information system at the Company's Mrs. Smith's
Bakeries locations.
 
     The Company measures its pension plan assets three months prior to the
beginning of its fiscal year. As a result of the Company's changing its fiscal
year, the measurement date has changed from March 31 to September 30. This
change resulted in a cumulative adjustment, net of tax, of $1,046,000, or $.01
per share, for the twenty-seven week period ended January 3, 1998.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles 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.
 
BUSINESS SEGMENTS
 
     The Company's only business is to provide quality fresh and frozen baked
food products to grocery, foodservice, restaurant and fast-food markets.
 
NOTE 2.  INVENTORIES
 
     The major components of inventories are as follows:
 
<TABLE>
<CAPTION>
                                                          JANUARY 3,   JUNE 28,   JUNE 29,
                                                             1998        1997       1996
                                                          ----------   --------   --------
                                                               (AMOUNTS IN THOUSANDS)
<S>                                                       <C>          <C>        <C>
Ingredients and raw materials...........................   $ 27,310    $ 25,479   $14,951
Packaging materials.....................................     13,149      12,500    10,988
Finished goods..........................................     44,650      47,314    25,527
Supplies................................................     20,322      19,284    17,110
                                                           --------    --------   -------
          Total.........................................   $105,431    $104,577   $68,576
                                                           ========    ========   =======
</TABLE>
 
NOTE 3.  FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Statement of Financial Accounting Standards No. 107 -- "Disclosure about
Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value.
 
     The carrying value of cash and cash equivalents, notes receivable from
distributors, other notes receivable, industrial revenue bonds and long-term
debt payable to financial institutions approximates fair value at January 3,
1998, June 28, 1997 and June 29, 1996.
 
                                      F-12
<PAGE>   52
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 4.  DEBT
 
     In July 1996, the Company entered into a five-year $300,000,000 syndicated
loan facility, of which, $122,000,000 was outstanding at January 3, 1998.
Amounts are borrowed under this facility for periods not to exceed 180 days and
can be reborrowed as necessary during the term of the facility. Interest under
the syndicated loan facility is generally payable monthly and is variable based
on a performance grid using a choice of LIBOR plus .375% or money market rates.
Subsequent to fiscal year-end, on January 30, 1998, this facility was amended to
become a five-year $500,000,000 syndicated loan facility. Interest under the
amended facility is generally payable monthly and is variable based on a
performance grid using a choice of LIBOR plus .475% or money market rates.
Subsequent to period end, the Company borrowed $422 million under the amended
facility. Such proceeds were primarily used to finance the acquisition of a
controlling interest in Keebler.
 
     In October 1997, the Company amended its short-term commercial paper
program to increase the limit from $50,000,000 to $75,000,000 for use in
financing inventory. Borrowings under this program at January 3, 1998 were
$53,506,000.
 
     In January 1996, the Company completed a private placement of $125,000,000
of long-term Senior Notes. These notes are due in three tranches: $100,000,000
due in semi-annual instalments from January 5, 2004 through January 5, 2008
which bears interest at 6.80% per annum; $20,000,000 due January 5, 2011 which
bears interest at 6.99% per annum; and $5,000,000 due January 5, 2016 which
bears interest at 7.08% per annum. Interest on the Senior Notes is payable
semiannually. A portion of the proceeds were used to pay off $114,150,000 of
debt that was outstanding at that time, with the remaining proceeds being used
for working capital and for other general corporate purposes.
 
     The Company also has a $10,000,000 revolving-term loan agreement entered
into in March of 1993, of which no amounts were outstanding at January 3, 1998.
 
     Several loan agreements of the Company contain restrictions which, among
other things, require maintenance of certain financial ratios and restrict
encumbrance of assets and creation of indebtedness. At January 3, 1998, the
Company was in compliance with these financial ratio requirements.
 
                                      F-13
<PAGE>   53
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Total debt consists of:
 
<TABLE>
<CAPTION>
                                                        JANUARY 3,   JUNE 28,   JUNE 29,
                                                           1998        1997       1996
                                                        ----------   --------   --------
                                                             (AMOUNTS IN THOUSANDS)
<S>                                                     <C>          <C>        <C>
Private placement long-term Senior Notes with interest
  from 6.80% to 7.08% payable in instalments from 2004
  through 2016........................................   $125,000    $125,000   $125,000
Borrowings under syndicated loan facility with
  interest from 5.98% to 6.45%........................    122,000     117,000
Commercial paper program with interest from 5.65% to
  6.25%...............................................     53,506      40,792
Borrowings under revolving-term loan agreements.......                           103,375
Various industrial revenue bonds with interest from
  4.20% to 6.00% payable in instalments through 2017
  secured by property.................................     13,170      13,170     18,170
Borrowings scheduled to mature in equal instalments
  over the next two years with interest from 5.64% to
  6.49%...............................................                 10,000     15,000
Various unsecured notes payable with interest of
  approximately 7.5%, payable in instalments through
  2004................................................     13,610      14,289     17,173
                                                         --------    --------   --------
                                                          327,286     320,251    278,718
Due within one year...................................     55,087      47,417      6,593
                                                         --------    --------   --------
Due after one year....................................   $272,199    $272,834   $272,125
                                                         ========    ========   ========
</TABLE>
 
     Annual maturities of long-term debt for each of the six years following
January 3, 1998 are $1,581,000 (excludes $53,506,000 for commercial paper),
$5,819,000, $1,362,000, $1,467,000, $1,579,000 and $1,701,000, respectively.
 
NOTE 5.  COMMITMENTS AND CONTINGENCIES
 
DESCRIPTION OF OPERATING LEASE ARRANGEMENTS
 
     The Company leases certain property and equipment under operating leases
which expire over the next twenty years. Most of these operating leases provide
the Company with the option, after the initial lease term, either to purchase
the property at the then fair value or renew its lease at the then fair rental
value for periods of one month to ten years. Generally, management expects that
leases will be renewed or replaced by other leases in the normal course of
business.
 
     The Company has in place a $50,000,000 ten-year master lease agreement to
finance the automated production lines at certain of its facilities. At January
3, 1998, approximately $38,693,000 had been used under this agreement.
 
                                      F-14
<PAGE>   54
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year are as follows:
 
<TABLE>
<CAPTION>
                                                               (AMOUNTS
                                                                  IN
FISCAL YEAR(S)                                                THOUSANDS)
--------------                                                ----------
<S>                                                           <C>
1998........................................................    $15,979
1999........................................................     13,948
2000........................................................     11,897
2001........................................................      9,326
2002........................................................      8,233
2003 to termination (aggregate).............................     29,730
                                                                -------
          Total minimum lease payments......................    $89,113
                                                                =======
</TABLE>
 
     Total rent expense for all operating leases amounted to $16,225,000 for the
twenty-seven weeks ended January 3, 1998, $24,151,000 for fiscal 1997,
$16,936,000 for fiscal 1996 and $18,897,000 for fiscal 1995.
 
OTHER COMMITMENTS
 
     The Company's various commodity purchase agreements effectively commit the
Company to purchase raw materials in amounts totaling approximately $55,656,000,
at January 3, 1998, which will be used in production in future periods.
 
NOTE 6.  OTHER ACCRUED LIABILITIES
 
     Other accrued liabilities consist of:
 
<TABLE>
<CAPTION>
                                                           JANUARY 3,   JUNE 28,   JUNE 29,
                                                              1998        1997       1996
                                                           ----------   --------   --------
                                                                (AMOUNTS IN THOUSANDS)
<S>                                                        <C>          <C>        <C>
Compensation.............................................   $ 8,344     $ 13,707   $ 7,518
Vacation cost............................................     9,779       10,277    10,030
Pension cost.............................................    12,217       12,438     8,729
Workers' compensation insurance..........................     8,945        9,009    10,881
Other insurance..........................................     4,484        4,799     5,013
Interest.................................................     5,113        5,195     6,041
Purchase accounting reserves.............................    34,953       35,530
Other....................................................    13,498       16,542    19,526
                                                            -------     --------   -------
          Total..........................................   $97,333     $107,497   $67,738
                                                            =======     ========   =======
</TABLE>
 
NOTE 7.  STOCKHOLDERS' EQUITY
 
     The Company's Articles provide that the authorized capital of the Company
consists of 350,000,000 shares of Common Stock of $.625 par value per share,
10,467 shares of preferred stock, par value $100 per share convertible into
Common Stock, and 249,533 shares of preferred stock, par value $100 per share
that, at the discretion of the Board of Directors, may be either convertible or
nonconvertible, of which 100,000 shares has been designated by the Board of
Directors as Series A Junior Participating Preferred Stock ("Series A Preferred
Stock").
 
                                      F-15
<PAGE>   55
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
COMMON STOCK
 
     The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferential rights of any issued and outstanding preferred stock, including the
Series A Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors of
the Company out of funds legally available therefor. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share ratably in all assets of the Company, if any, remaining
after payment of liabilities and the liquidation preferences of any issued and
outstanding preferred stock, including the Series A Preferred Stock. Holders of
Common Stock have no preemptive rights, no cumulative voting rights and no
rights to convert their shares of Common Stock into any other securities of the
Company or any other person. The Common Stock is not subject to redemption or
sinking fund redemption.
 
PREFERRED STOCK
 
     The Board of Directors of the Company has the authority to issue up to
249,533 shares of preferred stock in one or more series and to fix the
designations, relative powers, preferences, rights, qualifications, limitations
and restrictions of all shares of each such series, including without
limitation, dividend rates, conversion rights, voting rights, redemption and
sinking fund provisions, liquidation preferences and the number of shares
constituting each such series, without any further vote or action by the holders
of Common Stock. Pursuant to such authority, the Board of Directors has
designated 100,000 shares of preferred stock as Series A Preferred Stock in
connection with the adoption of the Company's Shareholders' Rights Plan. The
issuance of one or more series of preferred stock will likely decrease the
amount of earnings and assets available for distribution to holders of Common
Stock as dividends or upon liquidation, respectively, and may adversely affect
the rights and powers, including voting rights, of the holders of Common Stock.
The issuance of preferred stock also could have the effect of delaying,
deterring or preventing a change in control of the Company.
 
SHAREHOLDER RIGHTS PLAN
 
     On March 17, 1989, the Company's Board of Directors declared a dividend of
one preferred share purchase right (collectively, the "Rights") for each share
of Common Stock held of record on April 3, 1989. Under certain circumstances, a
Right may be exercised to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock (the "Preferred Stock") at an exercise
price of $33.33.
 
     The Rights become exercisable 10 days after (i) a person or group acquires
10% or more of the Company's outstanding Common Stock, or (ii) an announcement
of a tender offer for 30% or more of the Company's outstanding Common Stock.
 
     If the Rights become exercisable, each Right will entitle the holder
thereof to purchase one-thousandth of a share of the Preferred Stock. If a
person or group acquires 10% or more of the outstanding Common Stock of the
Company, the holder of each Right not owned by the 10% or more shareholder would
be entitled to purchase for $33.33 (the exercise price of the Right) Common
Stock of the Company having market value equal to $66.66. If the Company is a
party to certain mergers or business combination transactions or transfers 50%
or more of its assets or earning power, each Right will entitle its holder to
buy a number of shares of Common Stock of the acquiring or surviving entity (or
of the Company in certain instances) having a market value of twice the exercise
price of the Right, or $66.66. If the Rights are fully exercised, the shares
issued thereby would have a dilutive effect on the shares previously
outstanding.
 
     The Rights expire April 2, 1999, and may be redeemed by the Company for
$.01 per Right at any time prior to the close of business on the tenth day after
a public announcement of an acquisition of 10% or more of the Common Stock of
the Company.
 
                                      F-16
<PAGE>   56
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The principal terms of the Rights are set forth in a registration statement
on Form 8-A filed with the Securities and Exchange Commission and dated as of
March 20, 1989.
 
STOCK INCENTIVE PLANS
 
     The Company has 12,050,000 shares of Common Stock authorized for issuance
to eligible employees under the Executive Stock Incentive Plan (ESIP). The ESIP
authorizes the Compensation Committee of the Board of Directors to grant to
eligible participants of the Company and its subsidiaries, through October 1999,
stock options, stock appreciation rights, restricted or deferred stock awards,
stock purchase rights and other stock-based awards.
 
     During the twenty-seven weeks ended January 3, 1998 and fiscal 1996,
347,609 and 1,180,295 shares, respectively, of the Company's Common Stock were
granted as restricted stock awards (RSA). These shares are held in escrow by the
Company and will be released to the grantee upon the grantee's satisfaction of
continued employment at the same or a higher level during the restriction
periods, which end June 15, 2001, June 15, 1999, May 20, 2000 and June 18, 2000,
and upon payment of the purchase price of $8.75, $4.22, $5.11, and $5.89 per
share, respectively. The purchase price is fifty percent of the mean of the high
and low market value of the Company's Common Stock at the date of grant. The
difference between the market price at the date of grant and the purchase price
to be paid by the grantee is recognized ratably by the Company as compensation
expense over the restriction period. This expense for the twenty-seven weeks
ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995 was $1,066,000,
$1,661,000, $1,299,000 and $901,000, respectively.
 
     With respect to the grant issued during the twenty-seven week period ended
January 3, 1998, if the mean of the high and low market value for the Company's
Common Stock equals or exceeds $25.63 during the restriction period an
additional 347,609 shares at a purchase price of $12.82 per share will be
granted. Subsequent to year end, on February 26, 1998, the stated market value
was attained and the additional shares were granted. The restriction period for
this grant ends February 26, 2000.
 
     During fiscal 1996, 358,547 shares of the Company's Common Stock were
granted as equity incentive awards (EIA). These shares are held in escrow by the
Company and may be released ratably to the grantee upon the grantee's
satisfaction of continued employment at the same or a higher level during the
restriction periods which end May 20, 1999, and upon payment of the purchase
price of $5.11 per share. The purchase price is fifty percent of the mean of the
high and low market value of the Company's Common Stock at the date of grant.
The difference between the market value at the date of grant and the purchase
price to be paid by the grantee is recognized ratably by the Company as
compensation expense over the restriction period. This expense for the
twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal
1995 was $329,000, $782,000, $493,000 and $924,000, respectively.
 
     During fiscal 1996, 843,750 shares of the Company's Common Stock were
granted as non-qualified stock options (NQSO's). The NQSO's are exercisable at
any time, commencing on the first anniversary of the grant date, until the year
2005. The optionees are required to pay the market value of the shares,
determined as of the grant date, which was $8.45. As of fiscal year end January
3, 1998, June 28, 1997, and June 29, 1996, there were 787,500, 787,500 and
843,750, NQSO's outstanding, respectively. In addition to the ESIP, the Company
has 377,778 shares of Common Stock authorized for issuance to key employees
under the Company's Stock Option Plan. Option prices must be 100% of the market
value of the Common Stock at the time of the grant. The Plan expired on October
15, 1992, therefore no additional grants will be made pursuant to this Plan.
 
     The Company has a Nonemployee Directors' Equity Plan (the "Directors'
Plan") pursuant to which an aggregate 300,000 shares of Common Stock, may be
issued and as to which grants or awards of stock options may be made.
 
                                      F-17
<PAGE>   57
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     All individuals who are nonemployee Directors on the first day of the
Company's fiscal year (a "Plan Year") are eligible to participate in the
Directors' Plan. Under the Directors' Plan, the nonemployee Director may
designate the amount of annual compensation payable without regard to the number
of Board or committee meetings attended or committee positions held (the
"Retainer") which can be invested in stock options (an "Option") under the
Directors' Plan. A Director shall be permitted to invest in an Option under the
Directors' Plan only if the total amount invested by that Director is equal to
at least twenty-five percent (25%) of the Retainer. To the extent a Director
elects to invest all or a portion of the Retainer for a Plan Year, an Option
shall be granted on the first day of such Plan Year for that number of shares of
Common Stock ("Shares") equal to 150% of the amount of the Retainer invested
divided by the value of an Option for one Share on the Valuation Date. For this
purpose, value shall be determined by the Black-Scholes option pricing model, as
applied by the Committee.
 
     Subject to the expiration or earlier termination of the Option, 100% of the
Option shall become exercisable on the first anniversary of the date of grant.
An Option shall expire ten years from the date the Option is granted and shall
be subject to earlier termination as hereinafter provided. Once an Option
becomes exercisable, it may thereafter be exercised, wholly or in part, at any
time prior to its expiration or termination. In the event of the Director's
termination from service on the Board, an outstanding Option may be exercised
only to the extent it was exercisable on the date of such termination and shall
expire two years after such termination, or on its stated expiration date,
whichever occurs first. Notwithstanding the above, in the event of a termination
for cause as determined by the Committee, all unexercised Options shall be
forfeited.
 
     The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," (APB 25) and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for options granted under the Company's Stock Option Plan or the
ESIP.
 
     Had compensation expense for the options and restricted stock awards under
the ESIP been determined based on the fair value at the grant dates for the
awards consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123 -- "Accounting for Stock-Based Compensation", the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                         FOR THE 27
                                         WEEKS ENDED                FOR THE 52 WEEKS ENDED
                                       ---------------   --------------------------------------------
                                       JANUARY 3, 1998   JUNE 28, 1997   JUNE 29, 1996   JULY 1, 1995
                                       ---------------   -------------   -------------   ------------
                                                (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                    <C>               <C>             <C>             <C>
As Reported:
  Net income.........................      $23,560          $62,324         $30,768        $42,301
  Net income per common share:
     Basic...........................          .27              .71             .35            .49
     Diluted.........................          .27              .71             .35            .49
Pro forma:
  Net income.........................      $22,735          $61,716         $29,694        $42,301
  Net income per common share:
     Basic...........................          .26              .70             .34            .49
     Diluted.........................          .26              .70             .34            .49
</TABLE>
 
     The fair values of the awards granted were estimated as of the date of
grant using the Black-Scholes option-pricing model based on the following
weighted-average assumptions used for grants during the twenty-seven weeks ended
January 3, 1998: no expected dividend yield; expected volatility of 26.8
percent; risk-free interest rate of 6.31 percent; and expected lives of four
years; and for grants during fiscal 1996: dividend yield of 3.43 percent;
expected volatility of 24.7 percent; risk-free interest rate of 6.23 percent;
and expected lives of five years.
 
                                      F-18
<PAGE>   58
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Stock option activity for the twenty-seven weeks ended January 3, 1998,
fiscal 1997, fiscal 1996 and fiscal 1995 is set forth below:
 
<TABLE>
<CAPTION>
                                 FOR THE 27
                                WEEKS ENDED                          FOR THE 52 WEEKS ENDED
                             ------------------   ------------------------------------------------------------
                              JANUARY 3, 1998       JUNE 28, 1997        JUNE 29, 1996         JULY 1, 1995
                             ------------------   ------------------   ------------------   ------------------
                                       WEIGHTED             WEIGHTED             WEIGHTED             WEIGHTED
                                       AVERAGE              AVERAGE              AVERAGE              AVERAGE
                                       EXERCISE             EXERCISE             EXERCISE             EXERCISE
                             OPTIONS    PRICE     OPTIONS    PRICE     OPTIONS    PRICE     OPTIONS    PRICE
                             -------   --------   -------   --------   -------   --------   -------   --------
                                               (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                          <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>
Outstanding at beginning of
  year.....................   1,211     $7.52      1,664     $7.11      1,114     $5.70      1,222     $5.67
Granted....................                                               844     $8.44
Exercised..................     (46)    $6.06       (453)    $6.03       (294)    $5.59       (108)    $5.40
                              -----                -----               ------                -----
Outstanding at end of
  year.....................   1,165     $7.57      1,211     $7.52      1,664     $7.11      1,114     $5.70
                              =====                =====               ======                =====
Exercisable at end of
  year.....................   1,165                1,211                  820                1,114
                              =====                =====               ======                =====
Weighted average fair value
  of options granted during
  the year.................                                            $ 2.91
                                                                       ======
</TABLE>
 
     All stock options outstanding at January 3, 1998, are exercisable. The
weighted average exercise price is $7.57 and the weighted average remaining
contractual life is 6.39 years.
 
NOTE 8.  PENSION PLANS
 
     The Company has noncontributory defined benefit pension plans covering
certain employees who have completed prescribed service requirements. The
benefits are based on years of service and the employee's career earnings. The
Company also has a supplemental defined benefit pension plan covering certain
Company employees which provides benefits to participants commencing at
retirement calculated according to the formula contained in the Company's
tax-qualified retirement plan, but without regard to statutory limitations on
the maximum amount of compensation which may be taken into account by, nor the
maximum benefits which may be paid from, such plans. Benefits provided by this
supplemental plan are reduced by benefits provided by the defined benefit
pension plans. Pension expense was $2,111,000, $4,860,000, $5,660,000 and
$5,003,000 in the twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal
1996 and fiscal 1995, respectively. Pension plans are funded at amounts
deductible for income tax purposes but not less than the minimum funding
required by the Employee Retirement Income Security Act of 1974. As of January
3, 1998, June 28, 1997 and June 29, 1996, the assets of the plans include
certificates of deposit, marketable equity securities, mutual funds, corporate
and government debt securities and annuity contracts. The marketable equity
securities include 506,250 shares of Common Stock of the Company with a fair
value of approximately $10,346,000, $8,543,000 and $5,442,000 at January 3,
1998, June 28, 1997 and June 29, 1996, respectively.
 
     During the second quarter of fiscal 1995, the Company recognized an
after-tax curtailment gain of $912,000 or $.01 per share, in accordance with
Statement of Financial Accounting Standards No. 88 -- "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." The gain arose from the sale of a portion of the
Company's territories to independent distributors and the termination of
participation in the Flowers Industries, Inc. Retirement Plans of certain
employees.
 
                                      F-19
<PAGE>   59
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Net periodic pension costs of these plans for each of the respective
periods includes the following components:
 
<TABLE>
<CAPTION>
                                                FOR THE 27
                                                WEEKS ENDED      FOR THE 52 WEEKS ENDED
                                                -----------   -----------------------------
                                                JANUARY 3,    JUNE 29,   JUNE 29,   JULY 1,
                                                   1998         1997       1996      1995
                                                -----------   --------   --------   -------
                                                          (AMOUNTS IN THOUSANDS)
<S>                                             <C>           <C>        <C>        <C>
Service cost-benefit earned during the
  period......................................   $  2,846     $  5,603   $ 5,765    $ 5,538
Interest cost on projected benefit
  obligation..................................      5,207       10,311     9,341      8,261
Reduction of pension costs due to actual
  return on plan assets.......................    (26,113)     (10,415)   (9,073)    (8,593)
Net amortization and deferral.................     20,171         (639)     (373)      (203)
                                                 --------     --------   -------    -------
                                                 $  2,111     $  4,860   $ 5,660    $ 5,003
                                                 ========     ========   =======    =======
</TABLE>
 
     Assumptions used to determine net periodic pension cost for these plans at
each of the respective period ends are as follows:
 
<TABLE>
<CAPTION>
                                                      JANUARY 3,   JUNE 28,   JUNE 29,   JULY 1,
                                                         1998        1997       1996      1995
                                                      ----------   --------   --------   -------
<S>                                                   <C>          <C>        <C>        <C>
Discount rate.......................................     8.00%       8.00%      7.75%     8.25%
Rate of increase in compensation levels.............     5.50        5.50       5.25      5.75
Expected long-term rate of return on assets.........     9.00        9.00       9.00      9.00
</TABLE>
 
     Flowers Industries, Inc. Retirement Plans No. 01 and 02 have assets that
exceed the accumulated benefit obligation. There are certain plans, however,
with accumulated benefit obligations which exceed plan assets. The following
table summarizes the funded status of the Company's pension plans and the
related amounts that are recognized in the Company's balance sheet at January 3,
1998, June 28, 1997 and June 29, 1996:
<TABLE>
<CAPTION>
                                  PLANS FOR         PLANS FOR         PLANS FOR         PLANS FOR
                                    WHICH             WHICH             WHICH             WHICH
                                ASSETS EXCEED      ACCUMULATED      ASSETS EXCEED      ACCUMULATED
                                 ACCUMULATED     BENEFITS EXCEED     ACCUMULATED     BENEFITS EXCEED
                                  BENEFITS           ASSETS           BENEFITS           ASSETS
                               ---------------   ---------------   ---------------   ---------------
                               JANUARY 3, 1998   JANUARY 3, 1998    JUNE 28, 1997     JUNE 28, 1997
                               ---------------   ---------------   ---------------   ---------------
                                                      (AMOUNTS IN THOUSANDS)
<S>                            <C>               <C>               <C>               <C>
Actuarial present value of
  benefit obligations:
  Accumulated benefit
    obligations:
    Vested...................     $(118,783)         $(4,810)         $(112,419)         $(4,696)
    Nonvested................        (2,604)            (143)            (2,387)            (137)
                                  ---------          -------          ---------          -------
                                  $(121,387)         $(4,953)         $(114,806)         $(4,833)
                                  =========          =======          =========          =======
Plan assets at fair value....     $ 152,748          $ 2,080          $ 135,810          $ 2,009
Projected benefit
  obligations................      (139,244)          (7,693)          (132,122)          (7,473)
                                  ---------          -------          ---------          -------
Plan assets in excess of
  (less than) projected
  benefit obligations........        13,504           (5,613)             3,688           (5,464)
Items not yet recognized in
  earnings:
  Unrecognized net asset at
    transition...............        (4,154)                             (4,366)
  Unrecognized prior service
    cost.....................           528               88                562               33
  Unrecognized net (gain)
    loss.....................       (18,847)           2,277             (9,308)           2,417
                                  ---------          -------          ---------          -------
Contribution payable.........     $  (8,969)         $(3,248)         $  (9,424)         $(3,014)
                                  =========          =======          =========          =======
 
<CAPTION>
                                  PLANS FOR         PLANS FOR
                                    WHICH             WHICH
                                 ACCUMULATED       ACCUMULATED
                               BENEFITS EXCEED   BENEFITS EXCEED
                                   ASSETS            ASSETS
                               ---------------   ---------------
                                JUNE 29, 1996     JUNE 29, 1996
                               ---------------   ---------------
                                    (AMOUNTS IN THOUSANDS)
<S>                            <C>               <C>
Actuarial present value of
  benefit obligations:
  Accumulated benefit
    obligations:
    Vested...................     $ (98,543)         $(4,615)
    Nonvested................        (1,937)            (136)
                                  ---------          -------
                                  $(100,480)         $(4,751)
                                  =========          =======
Plan assets at fair value....     $ 114,508          $ 2,047
Projected benefit
  obligations................      (117,730)          (6,932)
                                  ---------          -------
Plan assets in excess of
  (less than) projected
  benefit obligations........        (3,222)          (4,885)
Items not yet recognized in
  earnings:
  Unrecognized net asset at
    transition...............        (5,207)
  Unrecognized prior service
    cost.....................          (110)             348
  Unrecognized net (gain)
    loss.....................         2,929            1,417
                                  ---------          -------
Contribution payable.........     $  (5,610)         $(3,120)
                                  =========          =======
</TABLE>
 
                                      F-20
<PAGE>   60
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company made contributions of approximately $526,000 in the
twenty-seven weeks ended January 3, 1998, $371,000 in fiscal 1997, $271,000 in
fiscal 1996 and $441,000 in fiscal 1995 to collectively bargained, multiemployer
pension plans based on specific rates per hour worked by participating
employees.
 
NOTE 9.  INCOME TAXES
 
     The provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                 FOR THE 27
                                                 WEEKS ENDED      FOR THE 52 WEEKS ENDED
                                                 -----------   -----------------------------
                                                 JANUARY 3,    JUNE 28,   JUNE 29,   JULY 1,
                                                    1998         1997       1996      1995
                                                 -----------   --------   --------   -------
                                                           (AMOUNTS IN THOUSANDS)
<S>                                              <C>           <C>        <C>        <C>
Current taxes:
  Federal......................................    $5,686      $26,910    $13,915    $21,886
  State........................................     2,395        5,557      2,621      2,723
                                                   ------      -------    -------    -------
                                                    8,081       32,467     16,536     24,609
                                                   ------      -------    -------    -------
Deferred taxes:
  Federal......................................     2,395        1,587      1,636      1,358
  State........................................      (319)         347        347        854
                                                   ------      -------    -------    -------
                                                    2,076        1,934      1,983      2,212
                                                   ------      -------    -------    -------
Benefit of operating loss carryforwards........      (525)      (1,210)      (334)    (1,107)
                                                   ------      -------    -------    -------
Provision for income taxes.....................    $9,632      $33,191    $18,185    $25,714
                                                   ======      =======    =======    =======
</TABLE>
 
     Deferred tax liabilities (assets) are comprised of the following:
 
<TABLE>
<CAPTION>
                                                       FOR THE 27     FOR THE 52 WEEKS
                                                       WEEKS ENDED          ENDED
                                                       -----------   -------------------
                                                       JANUARY 3,    JUNE 28,   JUNE 29,
                                                          1998         1997       1996
                                                       -----------   --------   --------
                                                            (AMOUNTS IN THOUSANDS)
<S>                                                    <C>           <C>        <C>
Depreciation.........................................   $ 52,936     $ 51,275   $ 47,999
Other................................................     13,871        8,673      7,902
                                                        --------     --------   --------
  Gross deferred tax liabilities.....................     66,807       59,948     55,901
                                                        --------     --------   --------
Self-insurance accrual...............................     (5,228)      (5,274)    (5,926)
Vacation accrual.....................................     (2,080)      (2,275)    (2,554)
Pension accrual......................................     (3,246)      (2,481)    (2,547)
Purchase accounting reserves.........................    (13,921)     (14,483)        --
Loss carryforwards...................................     (4,739)      (4,117)    (3,805)
Other................................................    (16,050)      (9,093)    (7,565)
                                                        --------     --------   --------
  Gross deferred tax assets..........................    (45,264)     (37,723)   (22,397)
Deferred tax assets valuation allowance..............      2,119        2,240      2,774
                                                        --------     --------   --------
                                                        $ 23,662     $ 24,465   $ 36,278
                                                        ========     ========   ========
</TABLE>
 
     The net change in the valuation allowance for deferred tax assets was a
decrease of $121,000, related to operating loss carryforwards.
 
                                      F-21
<PAGE>   61
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The provision for income taxes on income differs from the amount computed
by applying the U.S. federal income tax rate (35%) because of the effect of the
following items:
 
<TABLE>
<CAPTION>
                                                 FOR THE 27
                                                 WEEKS ENDED      FOR THE 52 WEEKS ENDED
                                                 -----------   -----------------------------
                                                 JANUARY 3,    JUNE 28,   JUNE 29,   JULY 1,
                                                    1998         1997       1996      1995
                                                 -----------   --------   --------   -------
                                                           (AMOUNTS IN THOUSANDS)
<S>                                              <C>           <C>        <C>        <C>
Tax at U.S. federal income tax rate............    $8,757      $30,728    $16,919    $23,805
State income taxes, net of U.S. federal income
  tax benefit..................................     1,390        3,837      1,929      2,325
Benefit of operating loss carryforwards........      (525)      (1,210)      (334)    (1,107)
Other..........................................        10         (164)      (329)       691
                                                   ------      -------    -------    -------
  Provision for income taxes...................    $9,632      $33,191    $18,185    $25,714
                                                   ======      =======    =======    =======
</TABLE>
 
     The amount of federal operating loss carryforwards generated by certain
subsidiaries prior to their acquisition is $2,825,000 with expiration dates
through the fiscal year 2009. The use of pre-acquisition operating losses and
tax credit carryforwards is subject to limitations imposed by the Internal
Revenue Code. The Company does not anticipate that these limitations will affect
utilization of the carryforwards prior to their expiration. Various subsidiaries
have state operating loss carryforwards of $63,579,000 with expiration dates
through the fiscal year 2013.
 
     During fiscal 1997, the Internal Revenue Service ("IRS") completed an
examination of the Company's federal income tax returns for fiscal years 1993
through 1995. During the examination, the IRS asserted that the Company's
independent distributor program generated ordinary income upon the initial sale
of the territories. As a result, the Company paid for certain claims by the IRS
relating primarily to the Company's independent distributor program.
 
NOTE 10.  OTHER EMPLOYEE BENEFIT PLANS
 
     Under the Company's Bonus Plan, approved annually by the Compensation
Committee, certain key employees may receive bonus compensation based on
attainment of specified income goals. Total compensation under the Bonus Plan
was approximately $3,405,000, $6,969,000, $877,000 and $6,157,000 for the
twenty-seven weeks ended January 3, 1998, fiscal 1997, fiscal 1996 and fiscal
1995, respectively.
 
     The Flowers Industries, Inc. 401(k) Retirement Savings Plan covers
substantially all employees who have completed certain service requirements.
Generally the cost and contributions for employees who participate in the
defined benefit pension plan is 25% of the first $400 contributed by the
employee. The costs and contributions for employees who do not participate in
the defined benefit pension plan is 2% of compensation and 25% of the employees
contributions up to 6% of compensation. During the twenty-seven weeks ended
January 3, 1998, fiscal 1997, fiscal 1996 and fiscal 1995, the total cost and
contributions was $646,000, $1,367,000, $1,268,000 and $265,000, respectively.
 
NOTE 11.  LEGAL MATTERS AND CONTINGENCIES
 
     The Company is engaged in various legal proceedings which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to those proceedings will not be material to the
Company's financial position or results of operations. A reserve of $4,935,000
was recorded during fiscal 1996 and paid during fiscal 1997 representing final
settlement of certain litigation involving subsidiary operations in Texas.
 
                                      F-22
<PAGE>   62
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 12.  ACQUISITIONS
 
     On May 31, 1996, the Company acquired certain assets of Mrs. Smith's, Inc.,
a manufacturer and marketer of frozen pies, including its brand name and
trademarks from the J. M. Smucker Company. Under the terms of the acquisition
agreement, Flowers paid $30,000,000, consisting of $15,000,000 in cash at
closing and a $15,000,000 note payable. In addition, the Company entered into
ten-year leases for the property, plant and equipment used in the business. The
acquisition has been accounted for as a purchase, and, accordingly, the results
of operations of the acquired business are included in the consolidated
statement of income from the date of acquisition.
 
     The following unaudited condensed combined pro forma results of operations
assume the acquisition occurred as of the beginning of each fiscal year:
 
<TABLE>
<CAPTION>
                                                                   FOR THE YEAR ENDED
                                                              ----------------------------
                                                              JUNE 29, 1996   JULY 1, 1995
                                                              -------------   ------------
                                                                 (AMOUNTS IN THOUSANDS
                                                                 EXCEPT PER SHARE DATA)
<S>                                                           <C>             <C>
Sales.......................................................   $1,351,769      $1,249,461
Net income..................................................       33,056          45,057
Earnings per share -- basic.................................          .38             .52
Earnings per share -- diluted...............................          .38             .52
</TABLE>
 
     The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of the beginning of the fiscal year, nor are they necessarily indicative of
future operating results.
 
     In addition, the Company acquired certain other businesses during fiscal
1996, fiscal 1997 and the twenty-seven weeks ended January 3, 1998 which have
been accounted for as purchases. These acquisitions are immaterial to the
results of operations and financial condition of the Company.
 
     During fiscal 1997, the Company recorded $22,653,000, net of tax of
$14,483,000, in additional goodwill related to liabilities anticipated to be
incurred for planned activities for certain acquisitions made during fiscal 1996
and fiscal 1997. A reserve of $34,953,000 and $35,530,000 relating to these
transactions is included in other accrued liabilities at January 3, 1998 and
June 28, 1997, respectively.
 
NOTE 13.  INVESTMENT IN UNCONSOLIDATED AFFILIATE
 
     In January 1996, the Company acquired, for $62,500,000, a 49.6% interest in
INFLO Holdings Corporation (INFLO), a newly formed corporation jointly owned by
the Company and Artal Luxembourg S.A. On January 26, 1996, INFLO acquired 100%
of Keebler Corporation for an aggregate consideration of $454,900,000 from
United Biscuits (Holdings) plc. Keebler is the second largest cookie and cracker
manufacturer in the United States. The acquisition of Keebler Corporation was
financed through the equity of INFLO and bank borrowings. The Company accounts
for its investment in INFLO using the equity method of accounting.
 
     On June 4, 1996, Keebler Corporation acquired 100% of Sunshine Biscuits
from G. F. Industries, Inc. (GFI) for an aggregate purchase price of
$171,600,000. The acquisition was funded by Keebler Corporation's working
capital, bank financing and the issuance to GFI of $23,600,000 of INFLO common
stock and warrants. In fiscal 1996, the Company recognized a pre-tax gain on the
shares issued to GFI of $4,111,000. As a result of this transaction, the
Company's interest in INFLO was reduced to 45.2%.
 
                                      F-23
<PAGE>   63
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Condensed financial information of INFLO is as follows:
 
<TABLE>
<CAPTION>
                                                              APRIL 19, 1997   APRIL 20, 1996
                                                              --------------   --------------
                                                                  (AMOUNTS IN THOUSANDS)
<S>                                                           <C>              <C>
Current assets..............................................    $  332,782        $252,791
Total assets................................................     1,081,984         867,429
Current liabilities.........................................       347,647         384,635
Total liabilities...........................................       911,997         741,174
Common stockholders' equity.................................       169,987         126,255
Total liabilities and common stockholders' equity...........     1,081,984         867,429
</TABLE>
 
<TABLE>
<CAPTION>
                                 APRIL 21, 1996 -- APRIL 19, 1997   JANUARY 26, 1996 -- APRIL 20, 1996
                                 --------------------------------   ----------------------------------
                                                        (AMOUNTS IN THOUSANDS)
<S>                              <C>                                <C>
Sales..........................             $1,907,307                           $345,600
Gross profit...................              1,030,539                            177,900
Net income.....................                 19,411                              1,255
</TABLE>
 
     On November 20, 1997, INFLO was merged into Keebler Corporation and
subsequently changed its name to Keebler Foods Company ("Keebler"). Condensed
financial information of Keebler for the period included in the Company's
results for the twenty-seven weeks ended January 3, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                                 JANUARY 3, 1998
                                                              ----------------------
                                                              (AMOUNTS IN THOUSANDS)
<S>                                                           <C>
Current assets..............................................        $  301,646
Total assets................................................         1,042,851
Current liabilities.........................................           368,185
Total liabilities...........................................           820,800
Common stockholders' equity.................................           222,051
Total liabilities and common stockholders' equity...........         1,042,851
</TABLE>
 
<TABLE>
<CAPTION>
                                                        JUNE 29, 1997 - JANUARY 3, 1998
                                                        -------------------------------
                                                             (AMOUNTS IN THOUSANDS)
<S>                                                     <C>
Sales.................................................             $1,164,224
Gross profit..........................................                668,529
Net income............................................                 45,372
</TABLE>
 
     As presented above, the Company's net income from its investment in Keebler
for the twenty-seven weeks ended January 3, 1998, includes twenty-seven weeks of
Keebler's operating results. The increase in retained earnings reflected as
equity from investment in unconsolidated affiliate of $2,700,000 was
necessitated by the Company's change in fiscal year end and represents the
elimination of the lag of approximately two months in its recognition of
Keebler's results.
 
     Currently, Keebler's existing credit agreement places certain restrictions
on its ability to pay dividends. As of January 3, 1998, the Company had
recognized aggregate equity of $29 million from its investment in Keebler.
 
                                      F-24
<PAGE>   64
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 14.  UNAUDITED QUARTERLY FINANCIAL INFORMATION
 
     Results of operations for each of the two quarters of the twenty
seven-weeks ended January 3, 1998 and for each of the four quarters of the
fiscal years ended June 28, 1997 and June 29, 1996 follow (each quarter
represents a period of twelve weeks except the fourth quarter, which includes
sixteen weeks and the second quarter of 1998, which includes fifteen weeks):
 
<TABLE>
<CAPTION>
                  QUARTER                      FIRST      SECOND       THIRD      FOURTH
                  -------                    ---------   ---------   ---------   ---------
                                               1998        1998
                                               1997        1997        1997        1997
                                               1996        1996        1996        1996
                                             ---------   ---------   ---------   ---------
                                             (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                          <C>         <C>         <C>         <C>
Sales......................................  $308,387    $475,710(1) $     --    $     --
                                              322,710     381,290     301,392     432,321
                                              269,674     290,538     275,013     403,339
Gross Profit...............................   142,911     222,260(1)       --          --
                                              140,438     164,756     142,278     202,442
                                              125,893     130,676     125,398     181,835
Income before income taxes.................    15,364       9,655(1)       --          --
                                               32,925      19,175       9,912      25,782
                                               12,696      12,749       9,135      13,760
Net (loss) income from investment in
  unconsolidated affiliate.................     5,157      12,904(1)       --          --
                                                 (531)        336       6,005       1,911
                                                   --          --          --         613
Net income.................................    14,529       9,031(1)       --          --
                                               19,948      12,263      12,170      17,943
                                                7,897       7,930       5,682       9,259
Basic net income per common share..........       .16         .10(1)       --          --
                                                  .23         .14         .14         .20
                                                  .09         .09         .07         .11
Diluted net income per common share........       .16         .10(1)       --          --
                                                  .23         .14         .14         .20
                                                  .09         .09         .07         .11
</TABLE>
 
---------------
 
(1) Amounts relate to a fifteen week period ended January 3, 1998 and, as such,
    do not correspond to the amounts reported in the Company's Second Quarter
    Form 10-Q for the twelve week period ended December 13, 1997.
 
                                      F-25
<PAGE>   65
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 15.  NET INCOME PER SHARE
 
     Earnings per share is calculated using the weighted average number of
common and common equivalent shares outstanding during each period. The common
stock equivalents consist of the incremental shares associated with the
Company's stock option plans, as determined under the treasury stock method.
 
     The following table sets forth the computation of basic and diluted net
income per shares:
 
<TABLE>
<CAPTION>
                                                 27 WEEKS                      52 WEEKS ENDED
                                                   ENDED        --------------------------------------------
                                              JANUARY 3, 1998   JUNE 28, 1997   JUNE 29, 1996   JULY 1, 1995
                                              ---------------   -------------   -------------   ------------
                                                                  (AMOUNTS IN THOUSANDS)
<S>                                           <C>               <C>             <C>             <C>
Numerator:
  Income before cumulative effect of changes
     in accounting principles, net of tax...      $33,448          $62,324         $30,768        $42,301
  Cumulative effect of changes in accounting
     principles, net of tax.................       (9,888)
                                                  -------          -------         -------        -------
  Net income................................      $23,560          $62,324         $30,768        $42,301
                                                  =======          =======         =======        =======
Denominator:
  Basic weighted average shares.............       88,368           88,000          86,933         86,229
  Effect of dilutive securities:
     Stock options..........................          405              401             278            209
                                                  -------          -------         -------        -------
  Diluted weighted average shares...........       88,773           88,401          87,211         86,438
                                                  =======          =======         =======        =======
</TABLE>
 
NOTE 16.  UNAUDITED OPERATING RESULTS FOR THE TWENTY-SEVEN WEEKS ENDED JANUARY
          4, 1997
 
     The unaudited condensed results of operations for the twenty-seven weeks
ended January 4, 1997 are presented below. In the opinion of the Company, the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
results of operations.
 
<TABLE>
<CAPTION>
                                                              (AMOUNTS IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
                                                              -----------------------
<S>                                                           <C>
Sales.......................................................         $774,767
Income before income taxes..................................           50,335
Income taxes................................................           19,027
Net loss from investment in unconsolidated affiliate........             (195)
Net income..................................................           31,113
Earnings per share -- basic.................................              .35
Earnings per share -- diluted...............................              .35
</TABLE>
 
                                      F-26
<PAGE>   66
 
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 17.  SUBSEQUENT EVENT
 
     On February 3, 1998, the Company acquired an additional 11.5% of the common
stock of Keebler, giving the Company a controlling ownership position in Keebler
of approximately 55%. Under the terms of the acquisition agreement, the Company
paid $308,624,000 in cash at closing. The acquisition was financed through
borrowings under the $500,000,000 syndicated loan facility.
 
     The following unaudited condensed combined pro forma results of operations
assume the acquisition occurred as of the beginning of each period:
 
<TABLE>
<CAPTION>
                                                                   FOR THE             FOR THE
                                                              TWENTY-SEVEN WEEKS   FIFTY-TWO WEEKS
                                                                    ENDED               ENDED
                                                               JANUARY 3, 1998      JUNE 28, 1997
                                                              ------------------   ---------------
                                                                (AMOUNTS IN THOUSANDS EXCEPT PER
                                                                          SHARE DATA)
<S>                                                           <C>                  <C>
Sales.......................................................      $1,792,419         $3,421,082
Net income..................................................          27,915             56,765
Earnings per share -- basic.................................             .32                .65
Earnings per share -- diluted...............................             .31                .64
</TABLE>
 
     The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of the beginning of the period, nor are they necessarily indicative of future
operating results.
 
                                      F-27
<PAGE>   67
 
                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE
 
To the Board of Directors
of Flowers Industries, Inc.
 
     Our audits of the consolidated financial statements referred to in our
report dated March 23, 1998 of this Transition Report on Form 10-K also included
an audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
 
/s/ PRICE WATERHOUSE LLP
 
Atlanta, Georgia
March 23, 1998
<PAGE>   68
 
                VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II)
 
<TABLE>
<CAPTION>
                                                           BALANCE
                                                             AT                                 BALANCE
                                                          BEGINNING   ADDITIONS                 AT END
CLASSIFICATION                                            OF PERIOD    AT COST    DEDUCTIONS   OF PERIOD
--------------                                            ---------   ---------   ----------   ---------
                                                                      (AMOUNTS IN THOUSANDS)
<S>                                                       <C>         <C>         <C>          <C>
Twenty-seven Weeks Ended January 3, 1998
  Cost in Excess of Net Tangible Assets.................   $68,453     $ 7,429     $  (994)     $74,888
                                                           =======     =======     =======      =======
Year Ended June 28, 1997
  Cost in Excess of Net Tangible Assets.................   $44,617     $24,977     $(1,141)     $68,453
                                                           =======     =======     =======      =======
Year Ended June 29, 1996
  Cost in Excess of Net Tangible Assets.................   $ 9,281     $35,625     $  (289)     $44,617
                                                           =======     =======     =======      =======
Year Ended July 1, 1995
  Cost in Excess of Net Tangible Assets.................   $ 9,618     $   393     $  (730)     $ 9,281
                                                           =======     =======     =======      =======
</TABLE>
 
See Note 1 of Notes to Consolidated Financial Statements for accounting policy
for capitalization and amortization of intangible assets.