<PAGE>   1

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                  FORM 10-K/A
                                AMENDMENT NO. 1

<TABLE>
<C>               <S>
   (MARK ONE)
      [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
                                               OR
      [  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>

                           COMMISSION FILE NO. 1-9787

                            FLOWERS INDUSTRIES, INC.
             (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                                              <C>
                    GEORGIA                                         58-0244940
        (State or other jurisdiction of                          (I.R.S. Employer
         incorporation or organization)                        Identification No.)

              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:

<TABLE>
<CAPTION>
                                                          NAME OF EACH EXCHANGE ON WHICH
              TITLE OF EACH CLASS                                   REGISTERED
              -------------------                         ------------------------------
<S>                                              <C>
  COMMON STOCK, $.625 PAR VALUE, TOGETHER WITH               NEW YORK STOCK EXCHANGE
         PREFERRED SHARE PURCHASE RIGHTS

           7.15% DEBENTURES DUE 2028                         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 26, 1999: $2,343,363,083

     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 26, 1999
              -------------------                         -----------------------------
<S>                                              <C>
         COMMON STOCK, $.625 PAR VALUE                             100,001,659
</TABLE>

     DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 OF KEEBLER FOODS COMPANY, A
DELAWARE CORPORATION, AND PORTIONS OF THE COMPANY'S DEFINITIVE PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS ON MAY 28, 1999 IN PART III.

     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 [ ].
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                               FORM 10-K/A REPORT

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              ----
<C>       <C>   <S>                                                           <C>
                                     PART II

ITEM NO.   6.   SELECTED FINANCIAL DATA.....................................    1
           7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
                OPERATIONS AND FINANCIAL CONDITION..........................    2
          7a.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK........................................................   11
           8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   12

                                     PART IV

ITEM NO.  14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM
                8-K.........................................................   12
</TABLE>

                                        i
<PAGE>   3

     Explanatory Note: This Amendment No. 1 on Form 10-K/A to the Annual Report
on Form 10-K ("Form 10-K") of Flowers Industries, Inc. (the "Company") for the
fiscal year ended January 2, 1999, includes additional disclosure items added to
Items 6, 7, and 8. Specifically, additional disclosure was added in the
"Information on Restructurings and Acquisitions," "Liquidity and Capital
Resources" and "Matters Affecting Analysis" sections of Item 7 and Notes 1, 2, 7
and 12 of the Notes to Consolidated Financial Statements. These additional
disclosure items have been added as a result of suggested additional disclosures
received from the United States Securities and Exchange Commission in connection
with a review of the Company's Form 10-K. In addition, the Company is filing new
consents of PricewaterhouseCoopers LLP, an amended Schedule II Valuation and
Qualifying Accounts, and financial statements of Keebler Foods Company for the
fiscal year ended January 2, 1999.

               INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

     The Registrant incorporates by reference into this Annual Report on Form
10-K/A for the fiscal year ended January 2, 1999, certain portions of the Annual
Report on Form 10-K of Keebler Foods Company for its fiscal year ended January
2, 1999, filed with the Securities and Exchange Commission on March 22, 1999
(File No. 001-13705) (the "Keebler Form 10-K"), as follows:

<TABLE>
<CAPTION>
                                                              ITEM OF FLOWERS ANNUAL
         ITEM OF KEEBLER ANNUAL REPORT                      REPORT ON FORM 10-K/A INTO
              ON FORM 10-K BEING                            WHICH INFORMATION IS BEING
           INCORPORATED BY REFERENCE                         INCORPORATED BY REFERENCE
         -----------------------------                      --------------------------
<S>       <C>                              <C>    <C>       <C>                              <C>
                    PART II                                           PART II

Item 6.   Selected Financial Data........         Item 6.   Selected Financial Data
Item 7.   Management's Discussion and             Item 7.   Management's Discussion and
          Analysis of Financial Condition                   Analysis of Results of
          and Results of Operations......                   Operations and Financial
                                                            Condition
Item 7a.  Quantitative and Qualitative            Item 7a.  Quantitative and Qualitative
          Disclosures About Market                          Disclosures About Market Risk
          Risk...........................
</TABLE>

                                       ii
<PAGE>   4

ITEM 6.  SELECTED FINANCIAL DATA

     The selected consolidated historical financial data presented below as of
and for the fiscal years 1998, transition period 1998, 1997, 1996, 1995 and
1994, have been derived from the consolidated financial statements of the
Company which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The results of operations presented below are not necessarily
indicative of results to be expected for any future period and should be read in
conjunction with "Matters Affecting Analysis" included in Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition, of
this Form 10-K/A.

<TABLE>
<CAPTION>
                                                       FOR THE 27
                                     FOR THE 52       WEEKS ENDED                       FOR THE 52 WEEKS ENDED
                                     WEEKS ENDED       JANUARY 3,     -----------------------------------------------------------
                                   JANUARY 2, 1999        1998        JUNE 28, 1997   JUNE 29, 1996   JULY 1, 1995   JULY 2, 1994
                                   ---------------   --------------   -------------   -------------   ------------   ------------
                                                           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                <C>               <C>              <C>             <C>             <C>            <C>
STATEMENT OF INCOME DATA:
Sales............................    $3,776,461         $786,539       $1,441,253      $1,250,584      $1,139,954      $994,472
Materials, supplies, labor and
  other production costs.........     1,702,581          418,926          787,799         674,762         599,416       525,731
Selling, marketing and
  administrative expenses........     1,644,413          303,868          537,825         473,630         428,833       383,073
Depreciation and amortization....       128,765           26,930           45,970          40,848          36,604        34,110
Non-recurring charge.............        68,313               --               --              --              --            --
Interest expense, net............        68,725           11,796           25,109          13,004           7,086         4,318
Gain on sale of distributor notes
  receivable                                                               43,244
Income before income taxes,
  investment in unconsolidated
  affiliate, minority interest,
  extraordinary loss and
  cumulative effect of changes in
  accounting principles..........       163,664           25,019           87,794          48,340          68,015        47,240
Income taxes.....................        74,391            9,632           33,191          18,185          25,714        17,744
Income from investment in
  unconsolidated affiliate.......            --           18,061            7,721             613              --            --
Income before minority interest,
  extraordinary loss and
  cumulative effect of changes in
  accounting principles..........        89,273           33,448           62,324          30,768          42,301        29,496
Minority interest................       (43,305)              --               --              --              --            --
Income before extraordinary loss
  and cumulative effect of
  changes in accounting
  principles.....................        45,968           33,448           62,324          30,768          42,301        29,496
Extraordinary loss due to early
  extinguishment of debt, net of
  tax benefit and minority
  interest.......................          (938)              --               --              --              --            --
Cumulative effect of changes in
  accounting principles, net of
  tax benefit....................        (3,131)          (9,888)              --              --              --            --
Net income.......................    $   41,899         $ 23,560       $   62,324      $   30,768      $   42,301      $ 29,496
NET INCOME PER COMMON SHARE:
Basic:
  Income before extraordinary
    loss and cumulative effect of
    changes in accounting
    principles...................    $      .47         $    .38       $      .71      $      .35      $      .49      $    .35
  Extraordinary loss due to early
    extinguishment of debt, net
    of tax benefit and minority
    interest.....................          (.01)              --               --              --              --            --
  Cumulative effect of changes in
    accounting principles, net of
    tax benefit..................          (.03)            (.11)              --              --              --            --
  Net income per common share....    $      .43         $    .27       $      .71      $      .35      $      .49      $    .35
  Weighted average shares
    outstanding..................        96,393           88,368           88,000          86,933          86,229        84,521
Diluted:
  Income before extraordinary
    loss and cumulative effect of
    changes in accounting
    principles...................    $      .47         $    .38       $      .71      $      .35      $      .49      $    .35
  Extraordinary loss due to early
    extinguishment of debt, net
    of tax benefit and minority
    interest.....................          (.01)              --               --              --              --            --
  Cumulative effect of changes in
    accounting principles, net of
    tax benefit..................          (.03)            (.11)              --              --              --            --
  Net income per common share....    $      .43         $    .27       $      .71      $      .35      $      .49      $    .35
  Weighted average shares
    outstanding..................        96,801           88,773           88,401          87,211          86,438        84,784
BALANCE SHEET DATA:
  Total assets...................    $2,860,900         $898,880       $  898,187      $  849,443      $  655,921      $559,682
  Long-term debt.................     1,038,998          276,211          275,247         274,698         120,944        92,886
  Stockholders' equity...........       572,961          348,567          340,012         305,324         303,981       275,731
</TABLE>

                                        1
<PAGE>   5

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

     The following discussion should be read in conjunction with "Selected
Consolidated Historical Financial Data" included herein and the consolidated
financial statements and the related notes thereto of the Company incorporated
by reference or included elsewhere. 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, fruits
and dairy products. 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, marketing 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 are 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 expense related to its outstanding debt is discussed in Note 4 of Notes
to Consolidated Financial Statements.

  Matters Affecting Analysis

     As used herein, unless the context otherwise indicates, (i) "FII" means
Flowers Industries, Inc., the publicly traded holding company, which owns all
the outstanding common stock of Flowers Bakeries, Inc. ("Flowers Bakeries") and
Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a majority of
the outstanding common stock of Keebler Foods Company; (ii) "Keebler" means
Keebler Foods Company and its consolidated subsidiaries; (iii) "Flowers" means
FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs. Smith's
Bakeries, and their respective subsidiaries, excluding Keebler, and (iv) the
"Company" means Flowers and its consolidated, majority-owned subsidiary,
Keebler, collectively.

     On February 3, 1998, FII completed its purchase of additional shares of
Keebler to increase its ownership from approximately 45% to 55% ("Keebler
Acquisition"). Accordingly, the results of operations of Keebler are
consolidated with those of Flowers for the fiscal year ended January 2, 1999.
From January 26, 1996, the date of FII's initial investment in Keebler, through
February 3, 1998, FII accounted for its investment in Keebler using the equity
method of accounting.

     As a result of Flowers' change in fiscal year end, the Company's quarterly
reporting periods for fiscal 1998 were as follows: first quarter ended April 25,
1998, second quarter ended July 18, 1998, third quarter ended October 10, 1998,
and fourth quarter and fiscal year ended January 2, 1999 (the Saturday nearest
December 31). Unless stated otherwise, all references to (i) "fiscal 1996" shall
mean Flowers' full fiscal year ended June 29, 1996; (ii) "fiscal 1997" shall
mean Flowers' full fiscal year ended June 28, 1997; (iii) "twenty-

                                        2
<PAGE>   6

seven week transition period ended January 3, 1998" shall mean Flowers'
twenty-seven week transition period from June 29, 1997 through January 3, 1998;
and (iv) "fiscal 1998" shall mean Flowers' full fiscal year ended January 2,
1999. For purposes of this analysis and in light of the change in fiscal year
end discussed above, the Company has compared fiscal 1998 with the corresponding
financial information for the fifty-two weeks ended January 3, 1998 which has
been developed solely for comparative purposes, and has compared fiscal 1997
with fiscal 1996.

     Prior to September 1996, Flowers Bakeries sold its territories to
independent distributors and financed such sales with ten year notes. In
September 1996, Flowers Bakeries sold these notes, which totaled approximately
$66.0 million, to a financial institution. Approximately $43.2 million of
deferred pre-tax income was recognized. Subsequent to September 1996, all
distributor loans have been made directly between the distributor and a
financial institution. Pursuant to an agreement, Flowers Bakeries acts as the
servicing agent for the financial institution and receives a fee for these
services.

Information on Restructurings and Acquisitions

     The Company has undertaken a number of rationalizations and reorganizations
of its operations, all of which are expected to be completed by the end of
fiscal 1999. As a result of this reorganization and the resulting plant
closures, production capability has been eliminated or transferred to other
facilities. The purpose of the various reorganization plans was to realize
long-term improved overall efficiencies and to reduce costs. However, management
expects that there may be short-term inefficiencies as the rationalizations and
reorganizations are completed.

     During the fourth quarter of fiscal 1998, the Board of Directors of the
Company approved a plan to realign production and distribution at Flowers
Bakeries and Mrs. Smith's Bakeries in order to enhance efficiency. The Company
recorded a pre-tax non-recurring charge of $68.3 million ($32.2 million, $32.3
million and $3.8 million for Flowers Bakeries, Mrs. Smith's Bakeries and
Keebler, respectively), or $.45 per share after-tax. The charge includes $57.5
million of noncash asset impairments, $4.7 million of severance costs and $6.1
million of other related exit costs. The plan involves closing six less
efficient facilities of Flowers Bakeries and Mrs. Smith's Bakeries and shifting
their production and distribution to highly automated facilities. As a direct
result of management's decision to implement production line rationalizations,
asset impairments were recorded to write-down the closed facilities to net
realizable value, less cost to sell, based on management's estimate of fair
value, and the related cost in excess of net tangible assets. Also, as part of
this plan, asset impairments were recorded to write-off certain duplicate
machinery and equipment designated for disposal. The plan included severance
costs for 695 employees, and, as of January 2, 1999, 405 employees had been
terminated. The remaining exit costs include ongoing costs, such as guard
service, utilities and property taxes of the closed facilities until time of
disposal. Management anticipates that all significant actions related to the
plan will be completed as of the end of fiscal 1999. Additionally, the Company
recorded an extraordinary loss of $.9 million, net of tax benefit and minority
interest, related to the early extinguishment of debt, and $3.1 million, net of
tax benefit, for a cumulative effect of a change in accounting principle related
to the early adoption of Statement of Position 98-5 -- "Reporting on the Costs
of Start-Up Activities" ("SOP 98-5"). The effect of the above charges on fiscal
1998 net income was $.49 per share. Excluding the unusual charges, net income
for fiscal 1998 was $.92 per share. Management anticipates the charges will
result in operating savings of approximately $40.0 million over the next five
years, principally from reduced depreciation of approximately $13.0 million and
increased efficiencies and reduced employee expense of approximately $27.0
million.

     As part of accounting for the acquisition of President, Keebler recognized
costs pursuant to a plan to exit certain activities and operations of President
in order to rationalize productivity and reduce costs and inefficiencies. These
exit costs, for which there is no anticipated future economic benefit, were
provided for in the allocation of the purchase price and totaled $12.8 million.
Company-wide staff reductions of approximately 360 employees were estimated at
$6.7 million, with the balance of the reserves allocated to costs associated
with the closing of seven production, sales or distribution facilities, which
principally include noncancelable lease obligations and building maintenance
costs of $5.7 million. Spending against the reserves established for the
President acquisition for fiscal 1999 totaled $.1 million. Management's plan is
expected to
                                        3
<PAGE>   7

be substantially complete before the end of fiscal 1999, except for
noncancelable lease obligations and building maintenance costs, which will
conclude in fiscal 2006.

     As part of the acquisition of Mrs. Smith's Inc., Flowers recorded a
purchase accounting reserve of $37.1 million as an increase to cost in excess of
net tangible assets, in order to realign production and distribution at Mrs.
Smith's Bakeries to reduce inefficiencies. The realignment involved the shutdown
of a leased production facility. The reserve includes $27.6 million of
noncancelable lease obligations and building maintenance costs, $2.1 million of
severance costs, and $7.4 million of other exit costs, including health
insurance, incremental workers' compensation costs and the costs associated with
dismantling and disposing of equipment, at the closed facility. Under the plan,
approximately 300 employees were to be and have been terminated. With the
exception of noncancelable lease obligations and building maintenance costs that
continue through fiscal 2006, this plan was substantially complete as of the end
of fiscal 1998. Spending against the reserve totaled $4.1 million, $.6 million
and $1.6 million in fiscal 1998, the twenty-seven week transition period ended
January 3, 1998 and fiscal 1997, respectively.

     As part of INFLO's acquisition of Keebler and Keebler's subsequent
acquisition of Sunshine, Keebler's management team adopted and began executing a
plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4
million were provided for in the allocation of the purchase price of both the
Keebler and Sunshine acquisitions. Management's plan included company-wide staff
reductions, the closure of production, distribution and sales force facilities
and information system exit costs. Severance costs were estimated at $39.4
million for the approximate 1,400 employees anticipated to be terminated. As of
the end of fiscal 1998, all had been terminated. The plan included the closure
of its Atlanta, Georgia and Santa Fe Springs, California, production facilities,
as well as 39 sales force and distribution facilities. Costs incurred related to
the closing of production, distribution and sales force facilities, other than
severance costs, included primarily noncancelable lease obligations and building
maintenance costs of $31.2 million. An additional $6.8 million was anticipated
for lease costs related to exiting legacy information systems. As of January 4,
1998, the date FII began consolidating Keebler for financial reporting purposes,
the remaining liability was $22.5 million, of which $20.2 million related to
noncancelable lease obligations and building maintenance costs, $.3 million
related to severance costs and $2.0 million related to other exit costs. All
activity prior to that date occurred while FII accounted for its investment in
Keebler in accordance with the equity method of accounting. Spending against the
remaining reserves of $22.5 million totaled $7.7 million for fiscal 1998. In
addition, during fiscal 1998, Keebler expensed an additional $2.8 million,
principally for costs related to the closure of two distribution facilities not
included in the original plan. Also during fiscal 1998, Keebler adjusted
accruals previously established in the accounting for prior acquisitions by
reducing goodwill and other intangibles by $3.7 million to recognize exit costs
that are now expected to be less than initially anticipated. The exit plan is
expected to be complete as of the end of fiscal 1999, with the exception of
noncancelable lease obligations that continue through fiscal 2006.

                                        4
<PAGE>   8

     The Company's results of operations, expressed as a percentage of sales,
are set forth below:

<TABLE>
<CAPTION>
                                                           FOR THE 52 WEEKS ENDED
                                               ----------------------------------------------
                                               JANUARY 2,   JANUARY 3,    JUNE 28,   JUNE 29,
                                                  1999         1998         1997       1996
                                               ----------   -----------   --------   --------
                                                            (UNAUDITED)
<S>                                            <C>          <C>           <C>        <C>
Sales........................................    100.00%      100.00%      100.00%    100.00%
Gross margin.................................     54.92        47.61        45.34      46.04
Selling, marketing and administrative
  expenses...................................     43.54        38.26        37.31      37.48
Depreciation and amortization................      3.41         3.42         3.19       3.27
Non-recurring charge.........................      1.81
Interest expense, net........................      1.82         1.60         1.74       1.04
Income before income taxes, investment in
  unconsolidated affiliate, minority
  interest, extraordinary loss and cumulative
  effect of changes in accounting
  principles.................................      4.34         4.34         6.09       3.86
Income taxes.................................      1.97         1.65         2.30       1.45
Net income...................................      1.12%        3.72%        4.32%      2.46%
</TABLE>

FIFTY-TWO WEEKS ENDED JANUARY 2, 1999 COMPARED TO FIFTY-TWO WEEKS ENDED JANUARY
3, 1998

     Sales.  For fiscal 1998, sales were $3,776.5 million or 162% higher than
sales for the comparable period in the prior year, which were $1,440.1 million.
A majority of the increase was due to the consolidation of Keebler's sales,
following the Keebler Acquisition, in the amount of $2,226.5 million. Sales at
Flowers Bakeries and Mrs. Smith's Bakeries increased $46.6 million, or 5%, and
$63.1 million, or 12%, respectively, for the comparable period in the prior
year. Of the increase at Flowers Bakeries, 3%, 1% and 1% were due to an
acquisition, increased volume, and pricing and product mix, respectively. Of the
increase at Mrs. Smith's Bakeries, 8%, 3% and 1% were due to the acquisition of
two businesses, increased volume, and pricing and product mix, respectively.

     Gross Margin.  Gross margin for fiscal 1998 was $2,073.9 million, or 202%
higher than the gross margin for the comparable period in the prior year, which
was $685.6 million. The Company's gross margin for fiscal 1998 includes gross
margin of $1,319.0 million attributable to Keebler, a factor not present in the
prior year. Flowers Bakeries' gross margin improved to 54% of sales in fiscal
1998 as compared to 52% of sales for the comparable period in the prior year.
Improved volume, production efficiencies and lower ingredient costs led to the
increase. Mrs. Smith's Bakeries' gross margin improved to 41% of sales in fiscal
1998 as compared to 37% of sales for the comparable period in the prior year.
This increase was due primarily to increased volume, cost control and greater
plant efficiencies.

     Selling, Marketing and Administrative Expenses.  For fiscal 1998, selling,
marketing and administrative expenses were $1,644.4 million, or 198% higher than
its expenses of $551.0 million for the comparable period in the prior year. The
increase is due primarily to the inclusion of $1,053.8 million of such expenses
attributable to Keebler. Selling, marketing and administrative expenses
increased at Flowers Bakeries primarily due to increased sales volume and
expenses related to a project to improve its information systems. Mrs. Smith's
Bakeries' selling, marketing and administrative expenses increased primarily due
to increased sales volume and logistics costs related to the closing of its
production facility in Pottstown, Pennsylvania and the shifting of its
production to other Mrs. Smith's Bakeries' facilities.

     Depreciation and Amortization.  Depreciation and amortization expense was
$128.8 million for fiscal 1998, an increase of 162% over the corresponding
period in the prior year, which was $49.2 million. The increase was primarily a
result of the consolidation of Keebler, increased goodwill amortization relating
to the Keebler Acquisition and increased depreciation associated with capital
improvements.

     Non-Recurring Charge.  See discussion under the heading "Matters Affecting
Analysis" above.

     Interest Expense.  For fiscal 1998, interest expense was $68.7 million, an
increase of 199% over the corresponding period in the prior year, which was
$23.0 million. Approximately $26.5 million in interest

                                        5
<PAGE>   9

expense was attributable to the consolidation of Keebler, with the remaining
increase due to borrowings used to fund the Keebler Acquisition.

     Income Before Income Taxes.  Income before income taxes was $163.7 million
for fiscal 1998, an increase of 162% over the $62.5 million reported for the
comparable period in the prior year. Approximately $169.5 million of the
increase was the result of the consolidation of Keebler, which was partially
offset by the $68.3 million non-recurring charge, increased goodwill and
interest expense, all of which are discussed above.

     Income Taxes.  Income taxes for fiscal 1998 were $74.4 million, an increase
of 213% over the comparable period in the prior year, which were $23.8 million.
This increase is due primarily to the inclusion of $73.0 million of income taxes
attributable to the consolidation of Keebler, partially offset by a reduction of
income tax expense related to the non-recurring charge. Additionally, the
effective tax rate increased to 45% from 38% due primarily to increased
nondeductible goodwill amortization.

     Net Income.  Net income for fiscal 1998 was $41.9 million, a decrease of
22%, as compared to $53.6 million reported in the prior year. The decrease was
attributable to the non-recurring charge, an extraordinary loss due to early
extinguishment of debt and a cumulative effect of a change in accounting
principle relating to the Company's adoption of SOP 98-5. These decreases were
partially offset by the consolidation of Keebler, which contributed $52.4
million, net of minority interest.

FIFTY-TWO WEEKS ENDED JUNE 28, 1997 COMPARED TO FIFTY-TWO WEEKS ENDED JUNE 29,
1996

     Sales.  Sales for fiscal 1997 were $1,441.3 million, or 15% higher than
sales of $1,250.6 million for fiscal 1996. Sales at Flowers Bakeries increased
8% to $904.6 million from $841.2 million, primarily as a result of an
acquisition during the second quarter of fiscal 1997 and increased volume. Sales
at Mrs. Smith's Bakeries increased 32% to $536.7 million from $405.3 million as
a result of the acquisition of Mrs. Smith's Inc. in Pottstown, Pennsylvania
during the fourth quarter of fiscal 1996 and increased volume at its existing
production facilities.

     Gross Margin.  Gross margin for fiscal 1997 was $653.5 million, an increase
of 13% over $575.8 million reported during fiscal 1996. This increase was
primarily due to increased sales as discussed above and decreased ingredient and
packaging costs during the fourth quarter of fiscal 1997.

     Selling, Marketing and Administrative Expenses.  Selling, marketing and
administrative expenses increased by 15% to $537.8 million for fiscal 1997 from
$468.7 million for fiscal 1996. The increase was due primarily to increased
sales volume and increased advertising and promotional expenditures,
particularly at Mrs. Smith's Bakeries. Expenses as a percentage of sales
remained relatively constant with the prior 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 1997 from $40.8 million for fiscal
1996. This increase is primarily due to increased capital spending at both
Flowers Bakeries and Mrs. Smith's Bakeries and the amortization of trademarks
and goodwill at Mrs. Smith's Bakeries.

     Interest Expense.  Interest expense for fiscal 1997 increased by 93% to
$25.1 million from $13.0 million in fiscal 1996. The increase was attributable
to higher overall borrowings to partially fund capital spending, to finance
frozen inventory at Mrs. Smith's Bakeries and to finance FII's initial
investment in Keebler. Interest expense for fiscal 1997 also reflects the
payment of $2.5 million for an Internal Revenue Service settlement and a higher
average interest rate as compared to the prior year.

     Income Before Income Taxes.  Fiscal 1997 income before income taxes and
investment in unconsolidated affiliate increased by 82% to $87.8 million from
$48.3 million for fiscal 1996. This increase was due primarily to a gain of
$43.2 million on the sale of Flowers Bakeries' distributor notes receivable,
which occurred during the first quarter of fiscal 1997.

                                        6
<PAGE>   10

     Income Taxes.  Income taxes for fiscal 1997 increased to $33.2 million from
$18.2 million for fiscal 1996 due to increased pre-tax income in fiscal 1997.
The effective tax rate was 37.8% in fiscal 1997 as compared to 37.6% in fiscal
1996.

     Net Income.  For fiscal 1997, net income increased by 102% to $62.3 million
from $30.8 million for fiscal 1996. This increase was due primarily to the
inclusion of the after-tax income from FII's initial investment in Keebler of
$7.7 million in fiscal 1997 as compared to $.6 million in fiscal 1996, as well
as the gain on the sale of Flowers Bakeries' distributor notes receivable and
the other factors described above.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities for fiscal 1998 was $200.6
million. Positive net cash flow of $84.4 million was provided from net income
for the year. Net cash flows provided by operations were negatively impacted by
the build-up of inventory at Mrs. Smith's Bakeries as a result of the production
transition from its Pottstown, Pennsylvania facility, which was closed during
the fourth quarter of fiscal 1998, to other Mrs. Smith's Bakeries' facilities.
An increase in trade accounts receivable due to the just-completed high-selling
holiday period, also had a negative impact. The timing of payments of other
liabilities had a positive impact on cash flows.

     Net cash disbursed for investing activities for fiscal 1998 of $897.9
million primarily consisted of $285.2 million for the Keebler Acquisition,
$444.8 million for the acquisition of President by Keebler and capital
expenditures of $140.3 million. The capital expenditures, primarily consisting
of $38.6 million at Flowers Bakeries, $34.7 million at Mrs. Smith's Bakeries and
$66.8 million at Keebler, were made principally to update and enhance production
and distribution facilities.

     For fiscal 1998, net cash provided by financing activities of $750.5
million resulted from FII's issuance of $200.0 million of 7.15% debentures due
April 15, 2028 and the issuance of 9,000,000 shares of common stock in a public
offering at $22 per share. These transactions were consummated on April 27,
1998. Debt incurred by Keebler to finance the acquisition of President and the
exercise of Keebler warrants by a former shareholder, concurrent with Keebler's
initial public offering on February 3, 1998, also contributed to net cash
provided by financing activities. Dividends paid of $46.1 million partially
offset these cash inflows.

     At January 2, 1999, cash and cash equivalents were $57.0 million. As
described in Note 4 of Notes to Consolidated Financial Statements, long-term
debt was $1,039.0 million and current maturities of long-term debt were $195.3
million at January 2, 1999. In connection with the consolidation of Keebler, the
Company has recorded Keebler's indebtedness of $654.5 million as of January 2,
1999; however, Flowers has not guaranteed such indebtedness and it is to be
repaid solely from the cash flows of Keebler. The Company believes that, in
light of its current cash position, its cash flow from operating activities and
its credit arrangements, it can adequately meet presently foreseeable financing
requirements.

     Cash dividends have grown at a compounded annual rate of 6% since 1993,
increasing from an annual payout of $.3356 in calendar 1993 to $.4750 in
calendar 1998.

     Spending for facility closing and severance costs related to exit plans
established in the Keebler, Sunshine, Mrs. Smith's Inc. and President
acquisitions and the non-recurring charge is expected to be substantially
complete as of the end of fiscal 1999, except for noncancelable lease payments
and building maintenance costs that will continue through fiscal 2006.
Management anticipates these cash requirements will be funded through operating
cash flow.

     FII owns a majority of the outstanding stock of Keebler, and therefore is
consolidating Keebler for financial reporting purposes. FII is limited in its
ability to access the cash flows of Keebler to support its other operations due
to the fact that Keebler is not wholly owned by FII and due to restrictions on
the payment of dividends in Keebler's existing credit facilities.

                                        7
<PAGE>   11

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 -- "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new rules for
accounting for derivative instruments and hedging activities. The statement
requires that all derivatives be recognized as either assets or liabilities in
the balance sheet and that the instruments be measured at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. This standard is effective
for the Company's fiscal year 2000. The Company is currently assessing the
effects SFAS 133 will have on its financial position and results of operations.

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 first quarter and second half of the calendar
year. The sales bias towards the first quarter is due primarily to Keebler being
the leading supplier of Girl Scout cookies and the sales bias toward the second
half of the year is primarily 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 1998, Mrs. Smith's Bakeries commenced a program entitled
"Operation 365" to promote increased pie consumption during the remainder of the
year.

YEAR 2000 CONVERSION

     The Company utilizes a number of computer software programs and operating
systems throughout its organization, including applications used in order
processing, shipping and receiving, accounts payable and receivable processing,
financial reporting and in various other administrative functions. The Company
recognizes the need to make every effort to ensure that its operations will not
be adversely impacted by applications and processing issues related to the
upcoming calendar year 2000 (the "Year 2000 Issue"). The Year 2000 Issue is the
result of computer programs that have been written to recognize two-digit,
rather than four-digit, date codes to define the applicable year. To the extent
that the Company's software applications contain source codes that are unable to
appropriately interpret a code using "00" as the upcoming year 2000 rather than
1900, the Company could experience system failures or miscalculations that could
disrupt operations and cause a temporary inability to process transactions, send
and process invoices or engage in similar normal business activities.

     Based on its ongoing assessment of its systems, the Company has determined
that it will be required to modify or replace significant portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company presently believes that with
modifications to its existing software and certain conversions to new software,
the Year 2000 Issue will not present significant operational problems for its
computer systems. In addition, the Company's systems and operations are
dependent, in part, on interaction with systems operated or provided by vendors,
customers or other third parties, and the Company is currently surveying those
parties about their progress in identifying and addressing problems that their
computer systems may face in connection with the Year 2000 Issue. The Company
believes that it has little or no exposure for contingencies related to the Year
2000 Issue for the products it has sold.

     The Company's plan to resolve the Year 2000 Issue (the "Plan") identifies
exposure with respect to the Company's three operating segments, Flowers
Bakeries, Mrs. Smith's Bakeries and Keebler, in three different areas:
information technology, operating equipment with embedded chips or software and
third-party vendors. In addition, the Plan involves the following four phases
for each of the potential exposure items: assessment, remediation, testing and
implementation. The discussion set forth below will present a current assessment
of these areas for each of the Company's operating segments.

                                        8
<PAGE>   12

  Flowers Bakeries

     With respect to information technology, Flowers Bakeries has completed its
assessment of this risk area. This assessment indicated that most of Flowers
Bakeries' significant information technology systems could be affected,
particularly the general ledger, billing, payables, inventory and ordering
systems. As of February 1999, Flowers Bakeries is 100% complete on the
remediation phase of its critical systems. Flowers Bakeries has begun the
testing and implementation phases. These phases run concurrently for different
systems. As of February 1999, Flowers Bakeries has completed 50% of its testing.
Completion of the testing phase for all significant systems is expected by June
1999, with all remediation and implementation of systems expected to be fully
tested and operational by August 1999.

     Flowers Bakeries has also engaged a consultant (the "Consultant") to
inventory and assess all of its critical computer hardware. The inventory is
expected to be completed by April 1999 and non-compliant systems will either be
remediated or replaced. The assessment of the operating equipment with embedded
chips or software is 75% complete as of February 1999. Flowers Bakeries has
contracted with the Consultant for the purposes of conducting the inventory and
providing assistance with the remediation effort. The expected completion date
of remediation is June 1999. Testing of this equipment is more difficult than
the testing of information technology systems; as a result, Flowers Bakeries has
completed approximately 2% of the testing of remediation of its operating
equipment. Once testing is complete, the operating equipment should be
compliant. Testing and implementation of affected equipment is expected to be
complete by August 1999.

     The assessment of third-party vendors or customers and their exposure to
the Year 2000 Issue is 50% complete for systems that directly interface with
Flowers Bakeries as of February 1999. Flowers Bakeries expects to complete
surveying all third parties by August 1999. Flowers Bakeries expects to complete
the testing phase for systems interface work by August 1999. Flowers Bakeries
has queried its significant suppliers that do not share information systems with
Flowers Bakeries (external agents). To date, Flowers Bakeries is not aware of
any external agent with a Year 2000 Issue that would materially impact its
results of operations, liquidity or capital resources. However, Flowers Bakeries
has no means of ensuring that external agents will be Year 2000 compliant. The
inability of external agents to complete their Year 2000 resolution processing
in a timely fashion could materially impact Flowers Bakeries. The effect of
noncompliance by external agents is not determinable by Flowers Bakeries.
Detailed contingency plans are being put in place in an effort to ensure Flowers
Bakeries is prepared to handle any possible interruptions to production
processing.

     In addition to the assessments discussed above, a different consulting firm
is reviewing the adequacy, completeness and feasibility of Flowers Bakeries'
programs to address the Year 2000 Issue. The consulting firm continues to
provide recommendations that Flowers Bakeries is constantly assessing regarding
improvements to its program and monitors Flowers Bakeries' execution of
remediation efforts.

  Mrs. Smith's Bakeries

     With respect to information technology, Mrs. Smith's Bakeries has completed
its assessment of this risk area. This assessment indicated that most of Mrs.
Smith's Bakeries' significant information technology systems would not be
affected. Mrs. Smith's Bakeries has recently completed a four-year project of
installing a new enterprise-wide information technology system. This system is
Year 2000 compliant and is responsible for running over 90% of the company's
business processes.

     The assessment and remediation of the operating equipment with embedded
chips or software is 90% complete. The expected completion date of remediation
is April 1999. Mrs. Smith's Bakeries has completed approximately 75% of the
testing of remediation of its operating equipment. Once testing is complete, the
operating equipment should be compliant. Testing and implementation of affected
equipment is expected to be complete by April 1999.

     The assessment of third-party vendors or customers and their exposure to
the Year 2000 Issue is 50% complete for systems that directly interface with
Mrs. Smith's Bakeries and 80% complete for all other material exposure. Mrs.
Smith's Bakeries completed surveying all third parties in January 1999. Mrs.
Smith's

                                        9
<PAGE>   13

Bakeries has completed remediation efforts on the systems and is 50% complete
with the testing and implementation phases. Mrs. Smith's Bakeries expects to
complete the testing phase for systems interface work by March 1999. Mrs.
Smith's Bakeries has queried its significant suppliers that do not share
information systems with Mrs. Smith's Bakeries (external agents). To date, Mrs.
Smith's Bakeries is not aware of any external agent with a Year 2000 Issue that
would materially impact its results of operations, liquidity or capital
resources. However, Mrs. Smith's Bakeries has no means of ensuring that external
agents will be Year 2000 compliant. The inability of external agents to complete
their Year 2000 resolution processing in a timely fashion could materially
impact Mrs. Smith's Bakeries. The effect of noncompliance by external agents is
not determinable by Mrs. Smith's Bakeries.

  Keebler

     Keebler has completed a comprehensive review of its computer systems and
non-information technology systems to identify potential Year 2000 issues. As
Keebler has implemented the SAP R/3 management information system and
Manugistics software, both of which were developed/purchased as Year 2000
compliant, management does not anticipate that the impact of Year 2000 issues on
its business will be material. Additionally, secondary information systems,
which are not material to Keebler's ability to forecast, manufacture or deliver
product, have been reviewed and Year 2000 issues identified. Currently, Keebler
is in the process of correcting or upgrading these systems and intends to be
Year 2000 compliant on all critical systems by mid-1999.

     Keebler has submitted a comprehensive questionnaire to its material vendors
and suppliers in an effort to verify that they will be Year 2000 compliant and
to identify any problem areas with these groups. Although the results of the
questionnaire indicated that material vendors and suppliers intend to be Year
2000 compliant before the end of 1999, they were not able to provide any
assurances. Currently, Keebler is in the process of developing a contingency
plan to address any potential Year 2000 failures caused by a third party. While
there is no assurance that third parties will convert their systems in a timely
manner and that they will be compatible with Keebler's systems, management
believes these risks will be minimized due to the procedures related to third
parties discussed above and the development of a contingency plan.

     Keebler completed a comprehensive review of President's computer systems
and non-information technology systems to identify potential Year 2000 issues
for this subsidiary. Many of the Year 2000 risks at President will be mitigated
through the implementation of the SAP R/3 management information system,
Manugistics software and Keebler's warehouse management system at the President
facilities. Management expects this implementation to be completed during fiscal
1999.

     Based on the progress made to date in assessing its Year 2000 issues and
its compliance with Year 2000 issues related to primary business information
systems, Keebler does not foresee significant risks associated with its Year
2000 compliance at this time. As the plan is to address any significant risks
associated with Year 2000 issues prior to being affected by them, a
comprehensive contingency plan has not been developed, however, if a significant
risk related to Year 2000 compliance or a delay in the anticipated timeline for
compliance occurs, one will be developed as deemed necessary at that time.

     The information presented above sets forth the steps Keebler has taken to
address Year 2000 issues. Keebler does not expect compliance with Year 2000
issues or the most reasonable likely worst case scenario and related contingency
plan to have a material impact on its business, results of operations or
financial condition.

  Summary

     The Company is utilizing both internal and external resources to reprogram,
or replace, and test its software for Year 2000 modifications. The total cost of
the Plan is estimated at $6 to $7 million and is being funded through operating
cash flow and expensed as incurred. To date, the Company has incurred
approximately $2.3 million in expenses related to the assessment of, and
preliminary efforts on, its Year 2000 modification projects, the development of
the plan for the purchase of new systems and system modifications.

                                       10
<PAGE>   14

     The costs of the Plan and the time frame in which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. Specific factors that might result in
additional costs or time delays include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties. Based upon
the Company's current estimates, the Company does not anticipate that the cost
of compliance with the Year 2000 Issue will be material to its business,
financial condition or results of operations; however, there can be no assurance
that the Company's systems, or those of its vendors, customers or other third
parties, will be made Year 2000 compliant in a timely manner or that the impact
of the failure to achieve such compliance will not have a material adverse
effect on the Company's business, financial condition or results of operations.

     Based on the progress the Company has made in addressing its Year 2000
issues and the Company's compliance with the Year 2000 Issue on its primary
business information systems, the Company does not foresee significant risks
associated with its Year 2000 compliance at this time. As the Company plans to
address any significant Year 2000 issues prior to being affected by them, a
comprehensive contingency plan has not been developed. However, if a significant
risk related to Year 2000 compliance or a delay in the anticipated schedule for
compliance occurs, the Company will develop contingency plans as deemed
necessary at that time.

     The discussion of the Company's efforts and management's expectations
relating to Year 2000 compliance are forward-looking statements. Readers are
cautioned that forward-looking statements contained herein should be read in
conjunction with the Company's disclosures under the heading "Forward-Looking
Statements" set forth elsewhere herein.

FORWARD-LOOKING STATEMENTS

     Certain statements incorporated by reference or made herein under the
captions "Business" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition," 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 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the normal course of business, the Company is exposed to commodity price
and interest rate risks, primarily related to the purchase of raw materials and
packaging supplies and changes in interest rates. The Company manages its
exposure to these risks through the use of various financial instruments, none
of which are entered into for trading purposes. The Company has established
policies and procedures governing the use of financial instruments, specifically
as it relates to the type and volume of financial instruments entered into.
Financial instruments can only be used to hedge an economic exposure, and
speculation is prohibited. The Company's accounting policy related to financial
instruments is further described in Note 1 of Notes to Consolidated Financial
Statements.

                                       11
<PAGE>   15

  Commodity Price Risk

     The Company enters into commodity future and option contracts and swap
agreements for wheat and, to a lesser extent, other commodities in order to
provide a predictable and consistent commodity price, reducing the impact of
volatility in its raw material and packaging prices. A sensitivity analysis has
been prepared to estimate the Company's exposure to commodity price risk. Based
on the Company's derivative portfolio as of January 2, 1999, a hypothetical ten
percent adverse change in commodity prices under normal market conditions could
potentially have a $11.6 million effect on the fair value of the derivative
portfolio. The analysis disregards changes in the exposures inherent in the
underlying hedged item; however, the Company expects that any loss in fair value
of the portfolio would be substantially offset by increases in the fair value of
those hedged items.

  Interest Rate Risk

     The Company manages its exposure to interest rate risk primarily through
the use of a combination of fixed to floating rate debt, as well as interest
rate swap agreements, in order to reduce overall interest costs. Keebler has
entered into interest rate swap agreements on both its fixed and floating rate
debt. A sensitivity analysis has been prepared to estimate the Company's
exposure to interest rate risk. Based on the Company's outstanding debt and
related interest rate swap agreements as of January 2, 1999, a hypothetical ten
percent adverse change in interest rates under normal market conditions could
potentially result in a reduction of $7.6 million in the fair value. The
analysis disregards changes in the exposures inherent in the underlying hedged
item; however, the Company expects that any loss in fair value of the interest
rate swap agreements would be substantially offset by increases in the value of
those hedged items.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Refer to the Index to Financial Statements and Financial Statement
Schedules for the required information.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K

a. List of documents filed as part of this report

     1. Financial Statements of the Registrant
         Report of independent accountants
        Consolidated statement of income for the fifty-two weeks ended January
         2, 1999, the twenty-seven weeks ended January 3, 1998 and the
         fifty-two weeks ended June 28, 1997 and June 29, 1996
        Consolidated balance sheet at January 2, 1999, January 3, 1998 and June
         28, 1997
        Consolidated statement of changes in stockholders' equity for the
         fifty-two weeks ended January 2, 1999, the twenty-seven weeks ended
         January 3, 1998, and the fifty-two weeks ended June 28, 1997 and June
         29, 1996
        Consolidated statement of cash flows for the fifty-two weeks ended
         January 2, 1999, the twenty-seven weeks ended January 3, 1998, and the
         fifty-two weeks ended June 28, 1997 and June 29, 1996
        Notes to consolidated financial statements

     2. Financial Statement Schedules of the Registrant

        Report of independent accountants on financial statement schedule
        Schedule II Valuation and Qualifying Accounts -- for the fiscal year
         ended January 2, 1999, the twenty-seven weeks ended January 3, 1998,
         and fiscal years ended June 28, 1997 and June 29, 1996

                                       12
<PAGE>   16

     3. Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   EXHIBIT
-------                                  -------
<C>       <C>  <S>
 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)
 3.1      --   Third Restated Articles of Incorporation (Incorporated by
               reference to the Company's Annual Report on Form 10-K for
               the fiscal year ended January 2, 1999, File No. 1-9787)
 3.2      --   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)
 4.1      --   Rights Agreement dated as of April 2, 1999 between Flowers
               Industries, Inc. and First Union National Bank, as Rights
               Agent (Incorporated by reference to the Company's
               Registration Statement on Form 8-A filed April 2, 1999, File
               No. 1-9787)
10.1      --   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)*
10.2      --   First Amendment to the Flowers Industries, Inc. Annual
               Executive Bonus Plan (Incorporated by reference to the
               Company's Transition Report on Form 10-K for the fiscal year
               ended January 3, 1998, File No. 1-9787)*
10.3      --   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)*
10.4      --   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)*
10.5      --   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)*
10.6      --   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)*
10.7      --   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)*
10.8      --   Second Amendment to Flowers Industries, Inc. 1989 Executive
               Stock Incentive Plan (Incorporated by reference to the
               Company's Transition Report on Form 10-K for the fiscal year
               ended January 3, 1998, File No. 1-9787)*
10.9      --   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)*
10.10     --   Flowers Industries, Inc. Nonemployee Directors' Equity Plan
               (Incorporated by reference to the Company's Transition
               Report on Form 10-K for the fiscal year ended January 3,
               1998, File
               No. 1-9787)*
10.11     --   Form of Separation Agreement between the Company and certain
               members of management of the Company* (Incorporated by
               reference to the Company's Annual Report on Form 10-K for
               the fiscal year ended January 2, 1999, File No. 1-9787)
10.12     --   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)
</TABLE>

                                       13
<PAGE>   17

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                   EXHIBIT
-------                                  -------
<C>       <C>  <S>
10.13     --   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
               (Incorporated by reference to the Company's Transition
               Report on Form 10-K for the fiscal year ended January 3,
               1998, File
               No. 1-9787)
10.14     --   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)
10.15     --   $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)
10.16     --   Indenture between Flowers Industries, Inc. and SunTrust
               Bank, Atlanta, as Trustee (Incorporated by reference to the
               Company's Annual Report on Form 10-K for the fiscal year
               ended January 2, 1999, File No. 1-9787)
10.17     --   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++
23.1      --   Consent of PricewaterhouseCoopers LLP, Independent
               Accountants++
23.2      --   Consent of PricewaterhouseCoopers LLP, Independent
               Accountants++
27        --   Financial Data Schedule++
99.1      --   Portions of the Annual Report on Form 10-K for the fiscal
               year ended January 2, 1999 of Keebler Foods Company
               (Incorporated by reference to the Company's Annual Report on
               Form 10-K for the fiscal year January 2, 1999, File No.
               1-9787)
99.2      --   Financial Statements of Keebler Foods Company for the fiscal
               year ended January 2, 1999++
</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 April 2, 1999, to report the
declaration of a dividend of one right per share of Common Stock to the
shareholders of record on April 2, 1999.

                                       14
<PAGE>   18

     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.

                                       15
<PAGE>   19

                                   SIGNATURES

     Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, Flowers Industries, Inc. has duly caused this Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized on this
7th day of October, 1999.

                                          FLOWERS INDUSTRIES, INC.

                                                 /s/ JIMMY M. WOODWARD

                                          --------------------------------------
                                                    Jimmy M. Woodward
                                                 Vice-President and Chief
                                                  Administrative Officer
                                                 Chief Accounting Officer

                                       16
<PAGE>   20

                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of independent accountants...........................  F-2
Consolidated statement of income for the fifty-two weeks
  ended January 2, 1999, the twenty-seven weeks ended
  January 3, 1998, and the fifty-two weeks ended June 28,
  1997 and June 29, 1996....................................  F-3
Consolidated balance sheet at January 2, 1999, January 3,
  1998 and June 28, 1997....................................  F-4
Consolidated statement of changes in stockholders' equity
  for the fifty-two weeks ended January 2, 1999, the
  twenty-seven weeks ended January 3, 1998, and the
  fifty-two weeks ended June 28, 1997 and June 29, 1996.....  F-5
Consolidated statement of cash flows for the fifty-two weeks
  ended January 2, 1999, the twenty-seven weeks ended
  January 3, 1998, and the fifty-two weeks ended June 28,
  1997 and June 29, 1996....................................  F-6
Notes to consolidated financial statements..................  F-8
</TABLE>

                                       F-1
<PAGE>   21

                       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 (the "Company") at January 2,
1999, January 3, 1998, and June 28, 1997, and the results of their operations
and their cash flows for the year ended January 2, 1999, for the twenty-seven
week period ended January 3, 1998, and for each of the two 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 discussed in Note 1 of the Notes to Consolidated Financial Statements,
during the year ended January 2, 1999, the Company changed its method of
accounting for start-up costs and organizational costs. In addition, during the
twenty-seven week period ended January 3, 1998, the Company changed its method
of accounting for business process reengineering costs and the measurement date
used in its accounting for pensions.

/s/  PRICEWATERHOUSECOOPERS LLP

Atlanta, Georgia
February 2, 1999

                                       F-2
<PAGE>   22

                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                         FOR THE 52    FOR THE 27    FOR THE 52 WEEKS ENDED
                                                         WEEKS ENDED   WEEKS ENDED   -----------------------
                                                         JANUARY 2,    JANUARY 3,     JUNE 28,     JUNE 29,
                                                            1999          1998          1997         1996
                                                         -----------   -----------   ----------   ----------
                                                            (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>           <C>           <C>          <C>
Sales..................................................  $3,776,461     $786,539     $1,441,253   $1,250,584
                                                         ----------     --------     ----------   ----------
Materials, supplies, labor and other production
  costs................................................   1,702,581      418,926        787,799      674,762
Selling, marketing and administrative expenses.........   1,644,413      303,868        537,825      468,695
Depreciation and amortization..........................     128,765       26,930         45,970       40,848
Non-recurring charge...................................      68,313
                                                         ----------     --------     ----------   ----------
Income from operations.................................     232,389       36,815         69,659       66,279
  Interest expense.....................................      72,840       12,144         25,691       13,671
  Interest (income)....................................      (4,115)        (348)          (582)        (667)
                                                         ----------     --------     ----------   ----------
Interest expense, net..................................      68,725       11,796         25,109       13,004
                                                         ----------     --------     ----------   ----------
Gain on sale of distributor notes receivable...........                                  43,244
Accrual for litigation settlement......................                                                4,935
                                                         ----------     --------     ----------   ----------
Income before income taxes, income from investment in
  unconsolidated affiliate, minority interest,
  extraordinary loss and cumulative effect of changes
  in accounting principles.............................     163,664       25,019         87,794       48,340
Income taxes...........................................      74,391        9,632         33,191       18,185
Income from investment in unconsolidated affiliate.....                   18,061          7,721          613
                                                         ----------     --------     ----------   ----------
Income before minority interest, extraordinary loss and
  cumulative effect of changes in accounting
  principles...........................................      89,273       33,448         62,324       30,768
Minority interest......................................     (43,305)
                                                         ----------     --------     ----------   ----------
Income before extraordinary loss and cumulative effect
  of changes in accounting principles..................      45,968       33,448         62,324       30,768
Extraordinary loss due to early extinguishment of debt,
  net of tax benefit and minority interest.............        (938)
Cumulative effect of changes in accounting principles,
  net of tax benefit...................................      (3,131)      (9,888)
                                                         ----------     --------     ----------   ----------
         Net income....................................  $   41,899     $ 23,560     $   62,324   $   30,768
                                                         ==========     ========     ==========   ==========
Net Income Per Common Share:
  Basic --
    Income before extraordinary loss and cumulative
      effect of changes in accounting principles.......  $      .47     $    .38     $      .71   $      .35
    Extraordinary loss due to early extinguishment of
      debt, net of tax benefit and minority interest...        (.01)
    Cumulative effect of changes in accounting
      principles, net of tax benefit...................        (.03)        (.11)
                                                         ----------     --------     ----------   ----------
    Net income per common share........................  $      .43     $    .27     $      .71   $      .35
                                                         ==========     ========     ==========   ==========
    Weighted average shares outstanding................      96,393       88,368         88,000       86,933
                                                         ==========     ========     ==========   ==========
  Diluted --
    Income before extraordinary loss and cumulative
      effect of changes in accounting principles.......  $      .47     $    .38     $      .71   $      .35
    Extraordinary loss due to early extinguishment of
      debt, net of tax benefit and minority interest...        (.01)
    Cumulative effect of changes in accounting
      principles, net of tax benefit...................        (.03)        (.11)
                                                         ----------     --------     ----------   ----------
    Net income per common share........................  $      .43     $    .27     $      .71   $      .35
                                                         ==========     ========     ==========   ==========
    Weighted average shares outstanding................      96,801       88,773         88,401       87,211
                                                         ==========     ========     ==========   ==========
</TABLE>

         (See Accompanying Notes to Consolidated Financial Statements)

                                       F-3
<PAGE>   23

                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                               JANUARY 2, 1999   JANUARY 3, 1998   JUNE 28, 1997
                                                               ---------------   ---------------   -------------
                                                                   (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                            <C>               <C>               <C>
                                                     ASSETS
Current Assets:
 Cash and cash equivalents..................................     $   56,965         $   3,866        $  31,080
 Accounts and notes receivable, net.........................        268,084           118,147          113,628
 Inventories, net:
   Raw materials............................................         54,739            27,310           25,479
   Packaging materials......................................         27,056            12,648           12,500
   Finished goods...........................................        207,620            44,650           47,314
   Other....................................................          8,178             4,731            3,310
                                                                 ----------         ---------        ---------
                                                                    297,593            89,339           88,603
                                                                 ----------         ---------        ---------
 Deferred income taxes......................................         76,327            16,024           14,421
 Other......................................................         84,276            37,886           35,123
                                                                 ----------         ---------        ---------
                                                                    783,245           265,262          282,855
                                                                 ----------         ---------        ---------
Property, Plant and Equipment:
 Land.......................................................         39,149            20,388           20,692
 Buildings..................................................        350,067           208,179          206,469
 Machinery and equipment....................................        816,495           443,739          446,016
 Furniture, fixtures and transportation equipment...........        116,219            28,095           24,774
 Construction in progress...................................         96,288            46,262           49,062
                                                                 ----------         ---------        ---------
                                                                  1,418,218           746,663          747,013
 Less: accumulated depreciation.............................       (430,516)         (308,342)        (299,014)
                                                                 ----------         ---------        ---------
                                                                    987,702           438,321          447,999
                                                                 ----------         ---------        ---------
Other Assets:
 Investment in unconsolidated affiliate.....................                          100,663           77,071
 Other......................................................         86,510            17,917           21,809
                                                                 ----------         ---------        ---------
                                                                     86,510           118,580           98,880
                                                                 ----------         ---------        ---------
Cost in Excess of Net Tangible Assets:
 Cost in excess of net tangible assets......................      1,033,632            80,586           70,939
 Less: accumulated amortization.............................        (30,189)           (3,869)          (2,486)
                                                                 ----------         ---------        ---------
                                                                  1,003,443            76,717           68,453
                                                                 ----------         ---------        ---------
                                                                 $2,860,900         $ 898,880        $ 898,187
                                                                 ==========         =========        =========
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 Commercial paper...........................................     $   74,870         $  53,506        $  40,792
 Current maturities of long-term debt.......................        120,479             4,232            9,233
 Accounts payable...........................................        227,749            72,311           78,451
 Income taxes...............................................                                               220
 Facility closing costs and severance.......................         23,670             4,812              577
 Other accrued liabilities..................................        314,270            67,109           78,243
                                                                 ----------         ---------        ---------
                                                                    761,038           201,970          207,516
                                                                 ----------         ---------        ---------
Long-Term Debt..............................................      1,038,998           276,211          275,247
                                                                 ----------         ---------        ---------
Other Liabilities:
 Deferred income taxes......................................        182,244            39,686           38,886
 Postretirement/postemployment obligations..................         63,754
 Facility closing costs and severance.......................         41,331            30,141           34,953
 Other......................................................         52,915             2,305            1,573
                                                                 ----------         ---------        ---------
                                                                    340,244            72,132           75,412
                                                                 ----------         ---------        ---------
Commitments and Contingencies...............................
                                                                 ----------         ---------        ---------
Minority Interest...........................................        147,659
                                                                 ----------         ---------        ---------
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 100,202,414, 88,636,089 and 88,636,089
   shares, respectively.....................................         62,627            55,398           55,398
 Capital in excess of par value.............................        274,255            45,200           43,147
 Retained earnings..........................................        262,531           266,734          260,094
 Common stock in treasury, 381,366, 207,670 and 563,076
   shares, respectively.....................................         (6,762)           (2,452)          (6,567)
 Stock compensation related adjustments.....................        (19,690)          (16,313)         (12,060)
                                                                 ----------         ---------        ---------
                                                                    572,961           348,567          340,012
                                                                 ----------         ---------        ---------
                                                                 $2,860,900         $ 898,880        $ 898,187
                                                                 ==========         =========        =========
</TABLE>

         (See Accompanying Notes to Consolidated Financial Statements)

                                       F-4
<PAGE>   24

                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             COMMON STOCK
                                        -----------------------                               TREASURY STOCK          STOCK
                                         NUMBER OF                CAPITAL IN              ----------------------   COMPENSATION
                                          SHARES                  EXCESS OF    RETAINED    NUMBER OF                 RELATED
                                          ISSUED      PAR VALUE   PAR VALUE    EARNINGS     SHARES        COST     ADJUSTMENTS
                                        -----------   ---------   ----------   --------   -----------   --------   ------------
                                                        (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                     <C>           <C>         <C>          <C>        <C>           <C>        <C>
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)
Stock issued for acquisitions.........                                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 year...............                                           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)
Common stock offering.................    9,000,000      5,625      182,305
Stock issued for acquisition..........    2,000,000      1,250       38,750
Exercise of employee stock options....      225,000        141        2,797                   (61,424)    (2,419)
Exercise of Equity Incentive Award....                                  452                   (44,263)      (982)         524
Purchase of treasury stock............                                                        (24,414)      (532)
Net income for the year...............                                           41,899
Adjustment for Keebler treasury stock
  transactions........................                               (3,677)
Stock issued into escrow in connection
  with Restricted Stock Award.........      345,973        216        8,653                                            (8,869)
Restricted Stock Award Reversions.....       (4,648)        (3)        (225)                  (43,595)      (377)         513
Amortization of Restricted Stock Award
  and Equity Incentive Award..........                                                                                  4,455
Dividends paid -- $.4750 per common
  share...............................                                          (46,102)
                                        -----------    -------     --------    --------   -----------   --------     --------
Balances at January 2, 1999...........  100,202,414    $62,627     $274,255    $262,531      (381,366)  $ (6,762)    $(19,690)
                                        ===========    =======     ========    ========   ===========   ========     ========
</TABLE>

         (See Accompanying Notes to Consolidated Financial Statements)

                                       F-5
<PAGE>   25

                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                   FOR THE 52    FOR THE 27    FOR THE 52 WEEKS ENDED
                                                   WEEKS ENDED   WEEKS ENDED   ----------------------
                                                   JANUARY 2,    JANUARY 3,    JUNE 28,     JUNE 29,
                                                      1999          1998         1997         1996
                                                   -----------   -----------   ---------   ----------
                                                                 (AMOUNTS IN THOUSANDS)
<S>                                                <C>           <C>           <C>         <C>
Cash flows provided by operating activities:
Net income.......................................   $  41,899     $ 23,560     $ 62,324    $  30,768
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Minority interest..............................      42,537
  Income from investment in unconsolidated
     affiliate...................................                  (18,061)      (7,721)        (613)
  Depreciation and amortization..................     128,765       26,930       45,970       40,848
  Deferred income taxes..........................      (1,504)        (803)       1,506        3,494
  Gain on sale of distributor notes receivable...                               (43,244)
  Non-recurring charge...........................      68,313
  Loss due to early extinguishment of debt.......       1,706
  Cumulative effect of changes in accounting
     principles..................................       3,131        9,888
  Other..........................................      (1,486)                                (4,111)
Changes in assets and liabilities, net of
  acquisitions:
  Accounts and notes receivable, net.............     (10,773)      (2,282)       7,863      (17,742)
  Inventories, net...............................     (35,828)        (413)     (36,144)     (12,821)
  Other assets...................................     (53,486)      (1,495)      (2,242)      (1,650)
  Accounts payable and other accrued
     liabilities.................................      27,076      (16,658)     (13,199)      21,186
  Facility closing costs and severance...........      (9,798)        (577)      (1,606)
                                                    ---------     --------     --------    ---------
Net cash provided by operating activities........     200,552       20,089       13,507       59,359
                                                    ---------     --------     --------    ---------
Cash flows from investing activities:
  Purchase of property, plant and equipment......    (140,275)     (32,857)     (77,510)     (75,542)
  Investment in unconsolidated affiliate.........                                            (61,352)
  Acquisition of majority interest in Keebler....    (285,203)
  Acquisition of President by Keebler............    (444,818)
  Acquisition of other businesses, net of
     divestitures................................     (28,992)      (5,532)         617      (26,884)
  Other..........................................       1,378        2,145           63       (6,485)
                                                    ---------     --------     --------    ---------
Net cash disbursed for investing activities......    (897,910)     (36,244)     (76,830)    (170,263)
                                                    ---------     --------     --------    ---------
Cash flows from financing activities:
  Common stock offering proceeds, net of
     underwriters discount and offering costs....     187,930
  Dividends paid.................................     (46,102)     (19,620)     (36,299)     (33,344)
  Treasury stock purchases.......................      (8,059)        (117)        (289)      (1,303)
  Stock compensation and warrants exercised......      20,744
  Debentures proceeds............................     199,417
  Debentures issuance costs......................      (1,750)
  Increase in commercial paper...................      21,364        7,713       40,792
  Increase in long-term debt.....................     376,913          965         (794)     138,754
  Distributor notes receivable proceeds..........                                65,954
                                                    ---------     --------     --------    ---------
Net cash provided by (disbursed for) financing
  activities.....................................     750,457      (11,059)      69,364      104,107
                                                    ---------     --------     --------    ---------
Net increase (decrease) in cash and cash
  equivalents....................................      53,099      (27,214)       6,041       (6,797)
Cash and cash equivalents at beginning of
  period.........................................       3,866       31,080       25,039       31,836
                                                    ---------     --------     --------    ---------
Cash and cash equivalents at end of period.......   $  56,965     $  3,866     $ 31,080    $  25,039
                                                    =========     ========     ========    =========
</TABLE>

         (See Accompanying Notes to Consolidated Financial Statements)

                                       F-6
<PAGE>   26

                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                    FOR THE 52    FOR THE 27    FOR THE 52 WEEKS ENDED
                                                    WEEKS ENDED   WEEKS ENDED   ----------------------
                                                    JANUARY 2,    JANUARY 3,    JUNE 28,     JUNE 29,
                                                       1999          1998         1997         1996
                                                    -----------   -----------   ---------    ---------
                                                                  (AMOUNTS IN THOUSANDS)
<S>                                                 <C>           <C>           <C>          <C>
Schedule of noncash investing and financing
  activities:
  Stock compensation transactions.................    $20,431       $ 6,355      $ 9,263      $20,633
  Stock issued for acquisition....................     40,000                      4,000        1,299
  Note payable issued in acquisition of
     business.....................................                                             15,000

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
     Interest, net of amounts capitalized.........    $62,982       $11,878      $25,955      $ 8,582
     Income taxes.................................     87,063        10,867       32,729       16,748
</TABLE>

         (See Accompanying Notes to Consolidated Financial Statements)

                                       F-7
<PAGE>   27

                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DEFINITIONS

     As used in this filing, unless the context otherwise indicates, (i) "FII"
means Flowers Industries, Inc., the publicly traded holding company, which owns
all of the outstanding common stock of Flowers Bakeries, Inc. ("Flowers
Bakeries") and Mrs. Smith's Bakeries, Inc. ("Mrs. Smith's Bakeries"), and owns a
majority of the outstanding common stock of Keebler Foods Company; (ii)
"Keebler" means Keebler Foods Company and its consolidated subsidiaries; (iii)
"Flowers" means FII and its wholly owned subsidiaries, Flowers Bakeries and Mrs.
Smith's Bakeries, and their respective subsidiaries, excluding Keebler, and (iv)
the "Company" means Flowers and its consolidated, majority-owned subsidiary,
Keebler, collectively.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company.
As further described in Note 2, FII purchased an additional 11.5% of the common
stock of Keebler on February 3, 1998 giving FII a majority ownership position in
Keebler of approximately 55%. As a result, all amounts included herein as of
January 2, 1999 and for the fifty-two weeks then ended, present Keebler with
Flowers on a consolidated basis. All amounts included herein related to prior
periods present FII's investment in Keebler under the equity method.
Intercompany accounts and transactions are eliminated in consolidation.

CHANGE IN FISCAL YEAR END

     In January 1998, Flowers 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 1996" shall mean Flowers' full fiscal year ended
June 29, 1996; (ii) "fiscal 1997" shall mean Flowers' full fiscal year ended
June 28, 1997; (iii) "twenty-seven week transition period ended January 3, 1998"
shall mean Flowers' twenty-seven week transition period from June 29, 1997
through January 3, 1998, and (iv) "fiscal 1998" shall mean the Company's full
fiscal year ended January 2, 1999. As a result, the Company has presented its
financial position as of January 2, 1999, January 3, 1998 and June 28, 1997 and
has presented its results of operations, cash flow and changes in stockholders'
equity for fiscal 1998, the twenty-seven week transition period ended January 3,
1998, fiscal 1997 and fiscal 1996. For comparative purposes the Company has
included unaudited condensed consolidated financial information of Flowers in
Note 15 for the fifty-two weeks ended January 3, 1998 and the twenty-seven weeks
ended January 4, 1997.

RECLASSIFICATIONS

     During fiscal 1998, the Company changed its method of presenting the
statement of cash flows from the direct method to the indirect method. This and
certain other reclassifications of prior year information have been made to
conform with the current year presentation.

REVENUE RECOGNITION

     Revenue from sale of product at Flowers Bakeries is recognized at the time
of shipment to its independent distributors, with a discount given the
distributor recorded as an expense in selling, marketing and administrative
expenses. Revenue from sale of product at Mrs. Smith's Bakeries is recognized at
the time of shipment to the customer, recorded net of customer discounts.
Revenue from sale of product at Keebler is recognized at the time of shipment to
the customer or independent distributor, recorded net of customer and
distributor discounts. Information regarding sales to significant customers is
described in Note 12.

                                       F-8
<PAGE>   28
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

ACCOUNTS RECEIVABLE

     Accounts receivable consists of trade receivables, current portion of notes
receivable and miscellaneous receivables. At January 2, 1999, allowances of $7.8
million were recorded.

CONCENTRATION OF CREDIT RISK

     The Company grants credit to its customers and independent distributors,
who are primarily in the grocery and foodservice markets.

INVENTORIES

     Inventories are carried at the lower of cost or market. Approximately 47%,
100% and 100% of inventories at January 2, 1999, January 3, 1998 and June 28,
1997, respectively, are valued using the first-in-first-out method, with
Keebler's finished goods inventory valued primarily under the last-in-first-out
("LIFO") method. There was no reserve required at January 2, 1999 to state the
inventory on a LIFO basis. At January 2, 1999, inventories are shown net of
allowances for slow-moving and aged inventory of $9.6 million.

DERIVATIVE FINANCIAL INSTRUMENTS

     The Company enters into forward purchase commitments and derivative
financial instruments in order to manage its exposure to commodity price and
interest rate risk, and does not use them for trading purposes. As of January 2,
1999, the Company had entered into various arrangements that allow the Company
to engage in commodity price and interest rate agreements based on fixed and
floating commodity prices and interest rates, respectively.

     The Company's primary raw materials are flour, sugar, shortening, fruits
and dairy products. Amounts payable or receivable under the commodity agreements
which qualify as hedges are recognized as deferred gains or losses when the
positions are closed, and are charged or credited to cost of sales as the
related raw materials are used in production. For fiscal 1998, the twenty-seven
week transition period ended January 3, 1998 and fiscal 1997, losses of $7.9
million, $.6 million and $1.9 million, respectively, were recorded. For fiscal
1996, a gain of $10.2 million was recorded. Gains and losses described above
were substantially offset by opposite movements in the cost of the underlying
hedged items. Gains and losses on agreements which do not qualify as hedges are
marked to market and recognized immediately as other income or expense. For
fiscal 1998, a gain of $1.1 million was recorded and for the twenty-seven week
transition period ended January 3, 1998, a loss of $.8 million was recorded. As
of January 2, 1999, deferred losses on closed contracts accounted for as hedges
were $3.8 million. At January 2, 1999, the Company had approximately $116.6
million of commitments outstanding related to commodity derivative financial
instruments.

     Keebler uses interest rate swap agreements to effectively convert certain
fixed rate debt to a floating rate instrument and certain floating rate debt to
a fixed rate instrument. Amounts payable or receivable under the interest rate
swap agreements, calculated as the difference between the fixed and floating
rates multiplied by the notional amount, is recorded as an adjustment to
interest expense, in accordance with hedge accounting. Keebler's interest rate
swap agreements are further discussed in Note 4.

                                       F-9
<PAGE>   29
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     Buildings are depreciated over ten to forty years, machinery and equipment
over three to twenty-five years, and furniture, fixtures and transportation
equipment over three to fifteen years. Depreciation expense for fiscal 1998, for
the twenty-seven week transition period ended January 3, 1998, fiscal 1997 and
fiscal 1996 was $108.5 million, $25.9 million, $44.8 million and $40.6 million,
respectively.

RESEARCH AND DEVELOPMENT

     Activities related to new product development and major improvements to
existing products and processes are expensed as incurred. Amounts were $11.4
million for fiscal 1998, $.7 million for the twenty-seven week transition period
ended January 3, 1998, $1.0 million for fiscal 1997 and $.8 million for fiscal
1996.

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 $108.4 million for fiscal 1998,
$17.0 million for the twenty-seven week transition period ended January 3, 1998,
$19.1 million for fiscal 1997 and $15.1 million for fiscal 1996. There were no
deferred advertising costs at January 2, 1999, January 3, 1998 or June 28, 1997.

NOTES RECEIVABLE AND DEFERRED INCOME

     Prior to September 1996, Flowers Bakeries sold its territories to
independent distributors and financed such sales with ten year notes. In
September 1996, Flowers Bakeries sold these notes, which totaled approximately
$66.0 million, to a financial institution. The proceeds were used to repay debt
outstanding at that time. Concurrently, approximately $43.2 million of deferred
pre-tax income was recognized by Flowers Bakeries during fiscal 1997. Subsequent
to September 1996, all distributor arrangements are made directly between the
distributor and a financial institution and, pursuant to an agreement, Flowers
Bakeries acts as the servicing agent for the financial institution and receives
a fee for these services.

COST IN EXCESS OF NET TANGIBLE ASSETS

<TABLE>
<CAPTION>
                                                        JANUARY 2, 1999   JANUARY 3, 1998   JUNE 28, 1997
                                                        ---------------   ---------------   -------------
                                                                     (AMOUNTS IN THOUSANDS)
<S>                                                     <C>               <C>               <C>
Goodwill, net.........................................    $  748,456          $46,100          $39,261
Trademarks and trade names, net.......................       254,987           30,617           29,192
                                                          ----------          -------          -------
                                                          $1,003,443          $76,717          $68,453
                                                          ==========          =======          =======
</TABLE>

     Costs in excess of the net tangible assets acquired are, in the opinion of
management, attributable to long-lived intangibles having continuing value.
Goodwill related to the purchases of businesses are amortized over forty years
from the acquisition date using the straight-line method. Costs of purchased
trademark and trade name rights are amortized over the period of expected future
benefit, which is approximately ten to forty years. Amortization expense for
fiscal 1998, the twenty-seven week transition period ended January 3, 1998,
fiscal 1997 and fiscal 1996 was $19.6 million, $1.0 million, $1.1 million and
$.3 million, respectively.

                                      F-10
<PAGE>   30
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TREASURY STOCK

     FII records acquisitions of its common stock for treasury at cost.
Differences between proceeds for reissuances of treasury stock and average cost
are credited or charged to capital in excess of par value to the extent of prior
credits and thereafter to retained earnings.

STOCK-BASED COMPENSATION

     The Company applies Accounting Principles Board Opinion No.
25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its plans. 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 vesting period.

NET INCOME PER COMMON SHARE

     The Company computes net income per common share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128 -- "Earnings Per
Share." Basic net income per share is computed by dividing net income by
weighted average common shares outstanding for the period. Diluted net income
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.

CHANGES IN ACCOUNTING PRINCIPLES

     On April 3, 1998, the Accounting Standards Executive Committee, a
subcommittee of the American Institute of Certified Public Accountants, issued
Statement of Position 98-5 -- "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organizational
costs to be expensed as incurred. As a result of adopting SOP 98-5, the Company
recorded a cumulative after-tax charge of $3.1 million, or $.03 per share.

     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 transition period ended
January 3, 1998, Flowers recorded a cumulative after-tax charge of $8.8 million,
or $.10 per share, as a result of its adoption of this pronouncement.

     The Company measures its pension plan assets three months prior to the
beginning of its fiscal year. As a result of Flowers changing its fiscal year,
the measurement date has changed from March 31 to September 30 for
Flowers-sponsored defined benefit plans. This change resulted in a cumulative
adjustment, net of tax, of $1.0 million, or $.01 per share, for the twenty-seven
week transition period ended January 3, 1998.

COMPREHENSIVE INCOME

     As of January 4, 1998, the Company adopted SFAS No. 130 -- "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
statement had no impact on the Company's net earnings or stockholders' equity.
During fiscal 1998 and the prior periods presented, total comprehensive income
substantially equaled net income.

                                      F-11
<PAGE>   31
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS

     In accordance with SFAS No. 121 -- "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
determines whether there has been an impairment of long-lived assets and the
related unamortized goodwill, based on whether certain indicators of impairment
are present. In the event that facts and circumstances indicate that the cost of
any long-lived assets and the related unamortized goodwill may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future gross, undiscounted cash flows associated with the asset
would be compared to the asset's carrying amount to determine if a write-down is
required.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 -- "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new rules for
accounting for derivative instruments and hedging activities. The statement
requires that all derivatives be recognized either as assets or liabilities on
the balance sheet and that the instruments be measured at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. The standard will be
effective for the Company's fiscal year 2001. The Company is currently assessing
the effects SFAS 133 will have on its financial position and results of
operations.

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.

NOTE 2.  ACQUISITIONS

ACQUISITION OF KEEBLER

     On January 26, 1996, FII acquired, for $62.5 million, a 49.6% interest in
INFLO Holdings Corporation ("INFLO"), a newly formed corporation jointly owned
by FII and Artal Luxembourg Corporation S.A. On January 26, 1996, INFLO acquired
100% of Keebler Corporation for an aggregate consideration of $454.9 million
from United Biscuits (Holdings) plc. The acquisition of Keebler Corporation was
financed through the equity of INFLO and bank borrowings. FII accounted for its
investment in INFLO using the equity method of accounting from January 26, 1996
up until the time of the control purchase as further described below.

     On June 4, 1996, Keebler Corporation acquired 100% of Sunshine Biscuits,
Inc. ("Sunshine") from G.F. Industries, Inc. ("GFI") for an aggregate purchase
price of $171.6 million. The acquisition was funded by Keebler Corporation's
working capital, bank financing and the issuance to GFI of $23.6 million of
INFLO common stock and warrants. As a result of this transaction, FII's interest
in INFLO was reduced to 45.2%.

     On November 20, 1997, INFLO was merged into Keebler Corporation and
subsequently changed its name to Keebler Foods Company.

     On February 3, 1998, FII acquired an additional 11.5% of the common stock
of Keebler, concurrent with Keebler's initial public offering, giving FII a
majority ownership position in Keebler of approximately 55% (the "Keebler
Acquisition"). The aggregate purchase price of the additional interest in
Keebler was approximately $312.4 million, including transaction expenses. The
Keebler Acquisition was initially financed

                                      F-12
<PAGE>   32
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

through borrowings under FII's $500.0 million Syndicated Loan Facility. The
acquisition of the additional interest in Keebler was accounted for using the
purchase method of accounting, and accordingly, Keebler's assets and liabilities
are included in the consolidated balance sheet as of January 2, 1999. The
acquisition of the majority interest resulted in FII consolidating Keebler's
operating results effective January 4, 1998. Keebler's operating results for the
period January 4, 1998 through February 3, 1998, the date FII acquired the
majority interest, were not materially different had the investment in Keebler
been accounted for under the equity method, the method by which FII previously
accounted for its investment in Keebler. The excess of the purchase price over
the fair value of the net assets underlying the additional interest acquired,
approximately $264.2 million, has been recorded as goodwill and is being
amortized over forty years.

     The purchase price has been allocated to the assets acquired and
liabilities assumed based on the respective fair values at the date of purchase,
as summarized below (amounts in thousands):

<TABLE>
<S>                                                           <C>
Cash........................................................  $ 46,989
Accounts receivable.........................................    98,963
Inventory...................................................   112,462
Other current assets........................................    63,033
Property, plant and equipment...............................   478,121
Cost in excess of net tangible assets.......................   201,205
Other assets................................................    61,879
Current liabilities.........................................   368,185
Long-term debt..............................................   272,390
Deferred income taxes.......................................    69,417
Postretirement/postemployment obligations...................    60,605
Other noncurrent liabilities................................    50,203
Minority interest...........................................   108,833
</TABLE>

     The following unaudited condensed combined pro forma results of operations
assume the Keebler Acquisition occurred as of the beginning of the period.
Additionally, the pro forma results for the year ended January 3, 1998 give
effect to (i) FII selling 9,000,000 shares of its common stock in a public
offering at $22 per share on April 27, 1998 and (ii) FII selling $200.0 million
of 7.15% debentures on April 27, 1998, due April 15, 2028, as if such
transactions had occurred at the beginning of the period (amounts in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                              FOR THE 53 WEEKS ENDED
                                                                 JANUARY 3, 1998
                                                              ----------------------
<S>                                                           <C>
Sales.......................................................        $3,505,263
Income before extraordinary loss and cumulative effect of
  changes in accounting principles..........................            61,777
Net income..................................................            48,255
Diluted Net Income Per Common Share:
  Income before extraordinary loss and cumulative effect of
     changes in accounting principles.......................               .63
  Net income................................................               .49
</TABLE>

     The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the transactions been consummated
as of the beginning of the period, nor are they necessarily indicative of future
operating results.

                                      F-13
<PAGE>   33
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACQUISITION OF MRS. SMITH'S INC.

     On May 31, 1996, Flowers acquired the trademark of Mrs. Smith's Inc., a
producer and marketer of frozen pies, from the J.M. Smucker Company. Under the
terms of the acquisition agreement, Flowers paid $30.0 million, which consisted
of $15.0 million in cash at closing and a $15.0 million note payable. In
addition, Flowers 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
have been included in the consolidated statement of income from the date of
acquisition. As discussed in Note 7, during fiscal 1997, Flowers recorded a
purchase accounting reserve of $37.1 million. Of this amount, $22.7 million was
allocated to cost in excess of net tangible assets and $14.4 million was
allocated to deferred tax assets.

ACQUISITION OF PRESIDENT INTERNATIONAL, INC.

     On September 28, 1998, Keebler acquired President International, Inc.
("President") from President International Trade and Investment Corporation for
an aggregate purchase price of $450.6 million, including transaction expenses
paid at closing. The President acquisition was funded by Keebler, with
approximately $75.0 million from existing resources and the remainder from
borrowings under the $700.0 million Senior Credit Facility Agreement ("Credit
Facility") and a $125.0 million Bridge Facility, both dated as of September 28,
1998.

     The acquisition of President has been accounted for as a purchase. The
purchase price has been allocated to the net tangible and intangible assets of
President based on a preliminary assessment of fair values. The excess of the
purchase price over the fair value of net assets acquired is approximately
$329.2 million, of which $12.8 million represents costs pursuant to a plan to
exit certain activities and operations of President, as further discussed in
Note 7. The unallocated excess purchase price is being amortized straight-line
over forty years.

     Results of operations for President from the date of acquisition have been
included in the consolidated statement of income. The following unaudited
condensed combined pro forma results of operations of the Company assume the
President acquisition, the Keebler Acquisition and FII's equity and debt
offerings discussed above occurred as of the beginning of each period presented
(amounts in thousands, except per share data):

<TABLE>
<CAPTION>
                                               FOR THE 52 WEEKS ENDED   FOR THE 53 WEEKS ENDED
                                                  JANUARY 2, 1999          JANUARY 3, 1998
                                               ----------------------   ----------------------
<S>                                            <C>                      <C>
Sales........................................        $4,133,481               $3,952,547
Income before extraordinary loss and
  cumulative effect of changes in accounting
  principles.................................            50,449                   56,793
Net income...................................            46,380                   42,835
Diluted Net Income Per Common Share:
  Income before extraordinary loss and
     cumulative effect of changes in
     accounting principles...................               .52                      .58
  Net income.................................               .48                      .44
</TABLE>

     The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the transactions been consummated
as of the beginning of each period presented, nor are they necessarily
indicative of future operating results.

OTHER ACQUISITIONS

     On January 30, 1998, Flowers Bakeries acquired the outstanding common stock
of Franklin Baking Company ("Franklin") in Goldsboro, North Carolina. Franklin
is a producer and marketer of fresh bakery

                                      F-14
<PAGE>   34
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

products primarily to supermarkets. On May 1, 1998, Mrs. Smith's Bakeries
acquired the Pet-Ritz and Oronoque Orchard frozen dessert brands from Van de
Kamp's, Inc. Both transactions have been accounted for as purchases, and
accordingly, the results of operations are included in the consolidated
statement of income from the date of acquisition. The Company does not consider
the effects of either of the acquisitions significant for pro forma disclosure
purposes. Additionally, Flowers acquired certain other businesses during fiscal
1996, fiscal 1997, the twenty-seven week transition period ended January 3, 1998
and fiscal 1998 which have been accounted for as purchases. These acquisitions
are immaterial to the results of operations and financial condition of the
Company.

NOTE 3.  OTHER ACCRUED LIABILITIES

     Other accrued liabilities consist of:

<TABLE>
<CAPTION>
                                                           JANUARY 2,   JANUARY 3,   JUNE 28,
                                                              1999         1998        1997
                                                           ----------   ----------   --------
                                                                 (AMOUNTS IN THOUSANDS)
<S>                                                        <C>          <C>          <C>
Employee compensation....................................   $ 93,942     $18,123     $23,984
Pension..................................................     19,511      12,217      12,438
Insurance................................................     63,551      13,429      13,808
Marketing and consumer promotions........................     65,075      12,592       7,119
Other....................................................     72,191      10,748      20,894
                                                            --------     -------     -------
          Total..........................................   $314,270     $67,109     $78,243
                                                            ========     =======     =======
</TABLE>

     FII does not guarantee Keebler's other accrued liabilities of $232.1
million, which are included in the consolidated amount at January 2, 1999.

NOTE 4.  DEBT

     Total debt consists of the following:

<TABLE>
<CAPTION>
                                 INTEREST      FINAL    JANUARY 2,   JANUARY 3,   JUNE 28,
                                   RATE      MATURITY      1999         1998        1997
                                -----------  ---------  ----------   ----------   --------
                                                              (AMOUNTS IN THOUSANDS)
<S>                             <C>          <C>        <C>          <C>          <C>
Flowers:
  Syndicated Loan Facility....     6.11%       2003     $  150,000    $122,000    $117,000
  Senior Notes................  6.80%-7.08%    2016        125,000     125,000     125,000
  Debentures..................     7.15%       2028        200,000
  Commercial Paper............     5.87%      Various       74,870      53,506      40,792
  Other.......................    Various    2004-2017      29,982      33,443      42,480
                                                        ----------    --------    --------
                                                           579,852     333,949     325,272
                                                        ----------    --------    --------
Keebler:
  Bridge Facility.............     6.26%       1999         75,000
  Revolving Facility..........     6.07%       2004         85,000
  Term Facility...............     5.94%       2004        350,000
  Senior Subordinated Notes...    10.75%       2006        124,400
  Other.......................    Various    2001-2042      20,095
                                                        ----------    --------    --------
                                                           654,495
                                                        ----------    --------    --------
Consolidated Debt.............                           1,234,347     333,949     325,272
  Due within one year.........                             195,349      57,738      50,025
                                                        ----------    --------    --------
  Due after one year..........                          $1,038,998    $276,211    $275,247
                                                        ==========    ========    ========
</TABLE>

                                      F-15
<PAGE>   35
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FLOWERS

     On July 10, 1996, FII entered into a five year $300.0 million Syndicated
Loan Facility. The facility was amended in January 1998, increasing the limit to
$500.0 million, and extending the term to January 30, 2003. The facility was
amended primarily to provide financing for the purchase of the majority interest
in Keebler on February 3, 1998. At January 2, 1999, $150.0 million was
outstanding. 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 facility is generally payable monthly and is variable based
on a performance grid using a choice of LIBOR plus .38% or money market rates.

     On January 5, 1996, FII completed a private placement of $125.0 million of
Senior Notes. These notes are due in three tranches: $100.0 million due in
semiannual installments from January 5, 2004 through January 5, 2008 which bears
interest at 6.80% per annum; $20.0 million due January 5, 2011 which bears
interest at 6.99% per annum; and $5.0 million due January 5, 2016 which bears
interest at 7.08% per annum. Interest is payable semiannually.

     On April 27, 1998, FII sold $200.0 million of 7.15% debentures due April
15, 2028, priced at 99.47%. Interest on the debentures is payable semiannually.
Net proceeds from the offering were used to reduce borrowings under the $500.0
million Syndicated Loan Facility.

     On July 28, 1998, FII amended its short-term Commercial Paper Agreement to
increase the limit from $75.0 million to $100.0 million. Borrowings under this
Agreement are used to finance inventory at Mrs. Smith's Bakeries, and at January
2, 1999 were $74.9 million.

     FII also has a $10.0 million revolving-term loan agreement entered into in
March 1993, of which no amounts were outstanding at January 2, 1999.

KEEBLER

     At January 2, 1999, Keebler's primary credit financing was provided by a
$700.0 million Credit Facility and a $125.0 million Bridge Facility. Keebler
entered into new debt facilities in order to finance the acquisition of
President on September 28, 1998. The new debt structure provides for borrowings
of $825.0 million, consisting of $350.0 million under the Revolving Facility,
$350.0 million under the Term Facility and an additional $125.0 million under
the Bridge Facility.

     The current outstanding balance on the Term Facility was $350.0 million
with quarterly scheduled principal payments through the final maturity of
September 4, 2004. The Revolving Facility, with a current outstanding balance of
$85.0 million and available balance of $265.0 million at January 2, 1999, has a
final maturity of September 2004 with no scheduled principal payments. Certain
letters of credit totaling $42.2 million reduce the available balance on the
Revolving Facility. Any unused borrowings under the Revolving Facility are
subject to a commitment fee. The current commitment fee will vary from .1250%
-.30% based on the relationship of debt to adjusted earnings with a minimum
commitment fee of .20% required through March 28, 1999. The Bridge Facility,
which is anticipated to be refinanced with a receivable facility, has a final
maturity of September 1999 with no scheduled principal payments. The current
outstanding balance on the Bridge Facility was $75.0 million with an additional
$50.0 million in available borrowings.

     Interest on the Credit Facility is calculated based on base rate plus
applicable margin. The base rate can, at Keebler's option, be: (i) the higher of
the base domestic lending rate as established by the administrative agent for
the lender of the Credit Facility, or the Federal Funds Rate plus one-half of
one percent; or (ii) a reserve percentage adjusted LIBOR as offered by the
administrative agent. The Credit Facility requires Keebler to meet certain
financial covenants including debt to earnings before interest, taxes,
depreciation and amortization ratio and cash flow coverage ratios. Interest on
the Bridge Facility is calculated using the same components as the Credit
Facility and also is restricted by the same financial covenants.

     In conjunction with the President acquisition on September 28, 1998, a term
loan was extinguished by using $145.0 million of borrowings under the new Credit
Facility. Keebler recorded a pre-tax extraordinary

                                      F-16
<PAGE>   36
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

charge of $2.8 million related primarily to expensing certain bank fees which
were being amortized and which were incurred at the time the term loan was
issued. The related after-tax charge, net of tax benefit and minority interest,
was $.9 million.

     On October 23, 1996, pursuant to an exchange and registration rights
agreement, Keebler registered its 10.75% Senior Subordinated Notes due 2006 (the
"Notes") under the Securities Act of 1933 in exchange for previously held
Increasing Rate Notes. The Notes were issued under an indenture dated June 15,
1996 between Keebler, Keebler's Restricted Subsidiaries (as defined in the
indenture) and the U.S. Trust Company of New York, as trustee. The Notes are
unsecured, senior subordinated obligations of Keebler guaranteed by the
Restricted Subsidiaries. Interest on the Notes is paid semiannually on January 1
and July 1 of each year, commencing January 1, 1997. At Keebler's option, up to
35.0% of the aggregate original principal of the Notes can be redeemed at a
redemption price of 110.0% on or prior to July 1, 1999 following a public equity
offering. In addition, Keebler's ability to pay dividends or make other
distributions on its common stock is limited by the terms of the indenture
governing the Notes.

     At January 2, 1999, Keebler had interest rate swap agreements with a
notional amount of $403.3 million, with expiration dates from 2001 through 2004,
used to hedge its floating rate debt and had a swap agreement with a notional
amount of $124.0 million, expiring in 2001, used to hedge its fixed rate debt.
These interest rate swap agreements are with the Bank of Nova Scotia.

     In connection with the consolidation of Keebler, FII has recorded Keebler's
indebtedness of $654.5 million as of January 2, 1999, however, FII has not
guaranteed such indebtedness and it is to be repaid solely from the cash flows
of Keebler.

     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 2, 1999, the
Company was in compliance with these financial ratio requirements.

     Annual maturities of long-term debt for each of the five years following
January 2, 1999 and thereafter are as follows:

<TABLE>
<CAPTION>
                                                        FLOWERS    KEEBLER    CONSOLIDATED
                                                        --------   --------   ------------
                                                              (AMOUNTS IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
1999..................................................  $ 82,619   $112,730    $  195,349
2000..................................................     4,214     27,814        32,028
2001..................................................     1,467     51,151        52,618
2002..................................................     1,579     68,871        70,450
2003..................................................     1,701    105,929       107,630
Thereafter............................................   488,272    288,000       776,272
                                                        --------   --------    ----------
          Total.......................................  $579,852   $654,495    $1,234,347
                                                        ========   ========    ==========
</TABLE>

     The total amount due for FII during fiscal 1999 includes $74.9 million of
short-term commercial paper, which FII intends to refinance under its Commercial
Paper Agreement.

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-six 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.

                                      F-17
<PAGE>   37
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company has entered into certain operating lease obligations requiring
the Company to purchase or guarantee the residual value to the lessor of
approximately $29.0 million at the termination of the lease.

     Minimum payments for the Company's operating leases, exclusive of the
amount discussed above, having initial or remaining noncancelable terms in
excess of one year, are as follows (amounts in thousands):

<TABLE>
<S>                                                           <C>
1999........................................................  $ 47,132
2000........................................................    42,058
2001........................................................    36,725
2002........................................................    32,045
2003........................................................    30,414
Thereafter..................................................    59,854
                                                              --------
          Total.............................................  $248,228
                                                              ========
</TABLE>

     Rent expense for all operating leases amounted to $61.3 million for fiscal
1998, $16.2 million for the twenty-seven week transition period ended January 3,
1998, $24.2 million for fiscal 1997 and $16.9 million for fiscal 1996. FII does
not guarantee Keebler's lease obligations of $135.7 million which are included
in the consolidated amount above.

OTHER COMMITMENTS

     The Company's various commodity purchase agreements effectively commit the
Company to purchase raw materials in amounts approximating $150.0 million at
January 2, 1999, which will be used in production in future periods.

NOTE 6.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying value of cash and cash equivalents, notes receivable and
long-term debt approximates fair value at January 2, 1999, January 3, 1998 and
June 28, 1997. The fair value of the Company's outstanding commodity derivative
financial instruments, based on the stated market value as of January 2, 1999,
was $113.8 million. The fair value of Keebler's interest rate swap agreements, a
net receivable of $1.1 million, was obtained from the Bank of Nova Scotia and
was estimated based on market prices as of January 2, 1999.

NOTE 7.  FACILITY CLOSING COSTS AND SEVERANCE

NON-RECURRING CHARGE

     During the fourth quarter of fiscal 1998, the Board of Directors of the
Company approved a plan to realign production and distribution at Flowers
Bakeries and Mrs. Smith's Bakeries in order to enhance efficiency. The Company
recorded a pre-tax non-recurring charge of $68.3 million ($32.2 million, $32.3
million and $3.8 million for Flowers Bakeries, Mrs. Smith's Bakeries and
Keebler, respectively), or $.45 per share after-tax. The charge includes $57.5
million of noncash asset impairments, $4.7 million of severance costs and $6.1
million of other related exit costs. The plan involves closing six less
efficient facilities of Flowers Bakeries and Mrs. Smith's Bakeries and shifting
their production and distribution to highly automated facilities.

     As a direct result of management's decision to implement production line
rationalizations, asset impairments were recorded to write-down the closed
facilities to net realizable value, less cost to sell, based on management's
estimate of fair value, and the related cost in excess of net tangible assets.
Also, as part of this plan, asset impairments were recorded to write-off certain
duplicate machinery and equipment to be disposed of. Severance costs provide for
the reduction of 695 employees, and, as of January 2, 1999, 405 employees had
been severed. Ongoing costs, including, but not limited to, guard service,
utilities and property taxes, of the

                                      F-18
<PAGE>   38
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

closed facilities until time of disposal primarily represent the other exit
costs. Management anticipates that all significant actions related to the plan
will be completed as of the end of fiscal 1999.

PURCHASE ACCOUNTING RESERVES

     As part of accounting for the acquisition of President, Keebler recognized
costs pursuant to a plan to exit certain activities and operations of President
in order to rationalize productivity and reduce costs and inefficiencies. These
exit costs, for which there is no anticipated future economic benefit, were
provided for in the allocation of the purchase price and totaled $12.8 million.
Company-wide staff reductions of approximately 360 employees were estimated at
$6.7 million, with the balance of the reserves allocated to costs associated
with the closing of seven production, sales or distribution facilities, which
principally include noncancelable lease obligations and building maintenance
costs of $5.7 million. Spending against the reserves established for the
President acquisition for fiscal 1999 totaled $.1 million. Management's plan is
expected to be substantially complete before the end of fiscal 1999, except for
noncancelable lease obligations and building maintenance costs, which will
conclude in fiscal 2006.

     As part of the acquisition of Mrs. Smith's Inc., Flowers recorded a
purchase accounting reserve of $37.1 million as an increase to cost in excess of
net tangible assets, in order to realign production and distribution at Mrs.
Smith's Bakeries to reduce inefficiencies. The realignment involved the shutdown
of a leased production facility. The reserve includes $27.6 million of
noncancelable lease obligations and building maintenance costs, $2.1 million of
severance costs and $7.4 million of other exit costs, including health
insurance, incremental workers' compensation costs and the costs associated with
dismantling and disposing of equipment, at the closed facility. Under the plan,
approximately 300 employees were to be and have been terminated. With the
exception of noncancelable lease obligations and building maintenance costs that
continue through fiscal 2006, this plan was substantially complete as of the end
of fiscal 1998. Spending against the reserve totaled $4.1 million, $.6 million
and $1.6 million in fiscal 1998, the twenty-seven week transition period ended
January 3, 1998 and fiscal 1997, respectively.

     As part of INFLO's acquisition of Keebler and Keebler's subsequent
acquisition of Sunshine, Keebler's management team adopted and began executing a
plan to reduce costs and inefficiencies. Certain exit costs totaling $77.4
million were provided for in the allocation of the purchase price of both the
Keebler and Sunshine acquisitions. Management's plan included company-wide staff
reductions, the closure of production, distribution and sales force facilities
and information system exit costs. Severance costs were estimated at $39.4
million for the approximate 1,400 employees anticipated to be terminated. As of
the end of fiscal 1998, all had been terminated. The plan included the closure
of its Atlanta, Georgia and Santa Fe Springs, California, production facilities,
as well as 39 sales force and distribution facilities. Costs incurred related to
the closing of production, distribution and sales force facilities, other than
severance costs, included primarily noncancelable lease obligations and building
maintenance costs of $31.2 million. An additional $6.8 million was anticipated
for lease costs related to exiting legacy information systems. As of January 4,
1998, the date FII began consolidating Keebler for financial reporting purposes,
the remaining liability was $22.5 million, of which $20.2 million related to
noncancelable lease obligations and building maintenance costs, $.3 million
related to severance costs and $2.0 million related to other exit costs. All
activity prior to that date occurred while FII accounted for its investment in
Keebler in accordance with the equity method of accounting. Spending against the
remaining reserves of $22.5 million totaled $7.7 million for fiscal 1998. In
addition, during fiscal 1998, Keebler expensed an additional $2.8 million,
principally for costs related to the closure of two distribution facilities not
included in the original plan. Also during fiscal 1998, Keebler adjusted
accruals previously established in the accounting for prior acquisitions by
reducing goodwill and other intangibles by $3.7 million to recognize exit costs
that are now expected to be less than initially anticipated. The exit plan is
expected to be complete as of the end of fiscal 1999, with the exception of
noncancelable lease obligations that continue through fiscal 2006.

                                      F-19
<PAGE>   39
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Activity with respect to the non-recurring charge and purchase accounting
reserves was as follows (amounts in thousands):

  Non-Recurring Charge:

<TABLE>
<S>                                                           <C>
Provision, fiscal 1998......................................  $68,313
Noncash asset impairments...................................  (57,489)
Severance costs.............................................   (3,217)
Other exit costs............................................      (94)
                                                              -------
          Balance at January 2, 1999........................  $ 7,513
                                                              =======
</TABLE>

  Purchase Accounting Reserves:

<TABLE>
<S>                                                           <C>
Provision, fiscal 1997......................................  $37,136
Severance costs.............................................      (67)
Other exit costs............................................   (1,539)
                                                              -------
          Balance at June 28, 1997..........................   35,530
Severance costs.............................................     (316)
Other exit costs............................................     (261)
                                                              -------
          Balance at January 3, 1998........................   34,953
Keebler Acquisition.........................................   22,478
Provision, fiscal 1998......................................   12,770
Severance costs.............................................     (766)
Other exit costs............................................  (11,000)
Net reserve adjustments.....................................     (947)
                                                              -------
          Balance at January 2, 1999........................  $57,488
                                                              =======
</TABLE>

     At January 2, 1999, January 3, 1998 and June 28, 1997, the facility closing
costs and severance liability, which includes the non-recurring charge and
purchase accounting reserves, totaled $65.0 million, $35.0 million and $35.5
million, respectively.

NOTE 8.  STOCKHOLDERS' EQUITY

FII

     FII's Articles of Incorporation provide that the authorized capital of FII
consists of 350,000,000 shares of common stock of $.625 par value per share (the
"Common Stock"), 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 non-convertible, of which 100,000 shares has been designated by
the Board of Directors as Series A Junior Participating Preferred Stock ("Series
A Preferred Stock").

  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
FII out of funds legally available therefor. In the event of a liquidation,
dissolution or winding-up of FII, holders of Common Stock are entitled to share
ratably in all assets of FII, if any, remaining after payment of liabilities and
the liquidation preferences of any

                                      F-20
<PAGE>   40
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 FII or any other person. The Common Stock is not subject to redemption or
sinking fund redemption.

     On April 27, 1998, FII sold 9,000,000 shares of its Common Stock in a
public offering at $22 per share. Net proceeds from the offering were used to
reduce borrowings under the $500.0 million Syndicated Loan Facility which were
primarily incurred to purchase the majority interest in Keebler.

  Preferred Stock

     The Board of Directors of FII 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 FII's Shareholder's 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 FII.

  Treasury Stock

     In October 1990, FII's board of directors approved a program authorizing
FII to repurchase up to 15% of the total shares of its outstanding Common Stock.
The stock will be repurchased at times when securities are available at prices
FII considers attractive.

KEEBLER

  Common Stock

     On January 29, 1998, Keebler made an initial public offering of 13,386,661
shares of common stock. All the shares in the offering were sold by certain
existing shareholders, with no proceeds from the offering going to Keebler.
Concurrent with this public offering, FII acquired an additional 11.5% interest
in Keebler increasing its ownership position to approximately 55%. Keebler
declared no cash dividends for the year ended January 2, 1999. Keebler's ability
to pay cash dividends is limited by the Credit Agreement and the Senior
Subordinated Notes. The most limiting dividend restriction exists under the
Senior Subordinated Notes, which limits dividend payments to the sum of: (i) 50%
of consolidated cumulative net income; (ii) net cash proceeds received from the
issuance of capital stock; (iii) net cash proceeds received from the exercise of
stock options and warrants; (iv) net cash received from the conversion of
indebtedness into capital stock; and (v) the net reduction in investments made
by Keebler.

  Treasury Stock

     In March 1998, Keebler's board of directors authorized the repurchase, at
management's discretion, of up to $30.0 million of Keebler's common stock. Such
repurchases are to offset dilution from the issuance of shares related to
employee stock option exercises.

     Keebler's equity is eliminated in consolidation and the approximate 45%
minority interest that results represents shares owned other than by FII.

                                      F-21
<PAGE>   41
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FII SHAREHOLDER'S RIGHTS PLAN

     Subsequent to year end, on March 19, 1999, the Company's board of directors
declared a dividend of one preferred share purchase right ( a "Right" or
collectively, the "Rights") for each share of Common Stock held of record on the
close of business on April 2, 1999. Under certain circumstances, a Right may be
exercised to purchase one ten-thousandth of a share of Series A Junior
Participating Preferred Stock (the "Preferred Stock") at an exercise price of
$90.00.

     The Rights become exercisable upon the earlier to occur of: (i) the tenth
calendar day after a person or group acquires 15% or more of the Company's
outstanding Common Stock or (ii) the tenth business day after the commencement
of a tender offer for 15% or more of the Company's outstanding Common Stock. If
the Rights become exercisable, each Right will entitle the holder thereof to
purchase one ten-thousandth of a share of Preferred Stock. If a person or group
acquires 15% or more of the outstanding Common Stock of the Company, the holder
of each Right not owned by the 15% or more shareholder would be entitled to
purchase for $90.00 (the exercise price of the Right) Common Stock of the
Company having market value equal to $180.00. If the Company is a party to
certain mergers or business combination transactions or transfers 50% or more of
its assets or earning power to another party, each Right will entitle its holder
to buy a number of shares of Common Stock of the acquiring or surviving company
having a market value of twice the exercise price of the Rights, or $180.00. If
the Rights are fully exercised, the shares issued thereby would cause a
substantial dilution to the shareholders of the acquiring or surviving company.
The Company may also, under certain circumstances, exchange the Rights not owned
by the 15% or more shareholder at an exchange ratio of one share of Common Stock
per Right.

     The Rights expire April 2, 2009, and may be redeemed by the Company for
$.01 per Right at any time prior to the close of business on the later of: (i)
the tenth calendar day after a person or group acquires 15% or more of the
Company's outstanding Common Stock or (ii) the tenth business day after the
commencement of a tender offer for 15% or more of the Company's outstanding
Common Stock.

FII STOCK INCENTIVE PLANS

     FII has two stock incentive plans that authorize the Compensation Committee
of the Board of Directors to grant to eligible employees stock options, stock
appreciation rights, restricted or deferred stock awards, stock purchase rights
and other stock-based awards. The Executive Stock Incentive Plan ("ESIP"), the
only plan with shares available for grant, is authorized to grant to eligible
employees up to 12,050,000 shares of Common Stock, through October 17, 2007. The
FII Stock Option Plan expired on October 15, 1992, therefore no additional
grants will be made pursuant to this Plan.

     During fiscal 1998, the twenty-seven week transition period ended January
3, 1998 and fiscal 1996, 345,972, 347,609 and 1,180,295 shares, respectively, of
FII's Common Stock were issued as Restricted Stock Awards ("RSA"). These shares
are held in escrow by FII 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 and payment of the purchase price. The restriction periods
end at various dates through June 2001. The purchase price is 50% of the mean of
the high and low market value of FII's Common Stock at the date of grant. The
purchase price of the shares issued ranges from $4.22 to $12.82 per share.
Compensation expense for fiscal 1998, the twenty-seven week transition period
ended January 3, 1998, fiscal 1997 and fiscal 1996 was $3.8 million, $1.1
million, $1.7 million and $1.3 million, respectively.

     During fiscal 1996, 358,547 shares of FII's Common Stock were issued as
Equity Incentive Awards ("EIA"). These shares are held in escrow by FII 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 period which
ends May 20, 1999, and upon payment of the purchase price of $5.11 per share.
The purchase price is 50% of the mean of the high and low market value of FII's
Common Stock on the date of grant.

                                      F-22
<PAGE>   42
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Compensation expense for fiscal 1998, the twenty-seven week transition period
ended January 3, 1998, fiscal 1997 and fiscal 1996 was $.7 million, $.3 million,
$.8 million and $.5 million, respectively.

     During fiscal 1998 and fiscal 1996, 1,128,600 and 843,750 shares,
respectively, of FII's Common Stock were granted as non-qualified stock options
("NQSOs"). The NQSOs vest over a one or four year period and expire ten years
after the date of grant. The optionees are required to pay the market value of
the shares, determined as of the grant date, which was $21.00 during fiscal 1998
and $8.45 during fiscal 1996. As of January 2, 1999, January 3, 1998 and June
28, 1997, there were 1,926,000, 1,165,000 and 1,211,000 NQSOs outstanding,
respectively.

     Stock option activity for FII's stock incentive plans for fiscal 1998, the
twenty-seven week transition period ended January 3, 1998, fiscal 1997 and
fiscal 1996 is set forth below:

<TABLE>
<CAPTION>
                                  FOR THE 52           FOR THE 27               FOR THE 52 WEEKS ENDED
                                 WEEKS ENDED          WEEKS ENDED       ---------------------------------------
                               JANUARY 2, 1999      JANUARY 3, 1998       JUNE 28, 1997        JUNE 29, 1996
                              ------------------   ------------------   ------------------   ------------------
                                        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......................   1,165     $ 7.57     1,211     $7.52      1,664     $7.11      1,114     $5.70
Granted.....................   1,129     $21.00                                                 844     $8.44
Exercised...................    (368)    $ 8.10       (46)    $6.06       (453)    $6.03       (294)    $5.59
                              ------               ------               ------               ------
Outstanding at end of
  year......................   1,926     $15.34     1,165     $7.57      1,211     $7.52      1,664     $7.11
                              ======               ======               ======               ======
Exercisable at end of
  year......................     798                1,165                1,211                  820
                              ======               ======               ======               ======
Weighted average fair value
  of options granted during
  the year..................  $ 4.37                                                         $ 2.91
                              ======                                                         ======
</TABLE>

     At January 2, 1999, 798,000 of the options are exercisable with a weighted
average price of $7.33. The weighted average remaining contractual life of FII's
options outstanding at January 2, 1999 is approximately 7.6 years.

     Keebler's 1996 Stock Option Plan has 9,673,594 shares of Keebler's common
stock authorized for future grant. All options granted have ten year terms and,
due to acceleration resulting from the achievement of certain performance
measures, vest by 2001. Under this plan, at January 2, 1999, options for
6,456,280 shares were outstanding, of which 4,433,774 are exercisable. Keebler's
1998 Omnibus Stock Incentive Plan has 2,850,200 shares of Keebler's common stock
authorized for future grant. All options granted generally have ten year terms
and vest at the end of five years. Vesting can be accelerated if certain stock
price performance measures are met. Under this plan, at January 2, 1999, options
for 2,715,636 shares were outstanding, of which none are exercisable.

     As the Company applies APB 25 in accounting for its plans, and the option
price is the market price at date of grant, no compensation expense has been
recognized for options granted under the Company's plans.

                                      F-23
<PAGE>   43
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Had compensation expense for the options and Restricted Stock Awards under
the Company's plans, inclusive of Keebler's options, been determined based on
the fair value at the grant dates for the awards consistent with the methodology
prescribed under SFAS 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 52        FOR THE 27         FOR THE 52 WEEKS ENDED
                                       WEEKS ENDED       WEEKS ENDED     -----------------------------
                                     JANUARY 2, 1999   JANUARY 3, 1998   JUNE 28, 1997   JUNE 29, 1996
                                     ---------------   ---------------   -------------   -------------
                                               (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                  <C>               <C>               <C>             <C>
As Reported:
  Net income.......................      $41,899           $23,560          $62,324         $30,768
  Net Income Per Common Share:
     Basic.........................          .43               .27              .71             .35
     Diluted.......................          .43               .27              .71             .35
Pro Forma:
  Net income.......................      $38,989           $22,735          $61,716         $29,694
  Net Income Per Common Share:
     Basic.........................          .40               .26              .70             .34
     Diluted.......................          .40               .26              .70             .34
</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 fiscal 1998: expected
dividend yield of 3.64%, expected volatility of 23.9%, risk-free interest rate
of 5.60% and expected lives of five years; during the twenty-seven week
transition period ended January 3, 1998: no expected dividend yield, expected
volatility of 26.8%, risk-free interest rate of 6.31% and expected lives of four
years; and for grants during fiscal 1996: dividend yield of 3.43%, expected
volatility of 24.7%, risk-free interest rate of 6.23% and expected lives of five
years. The weighted average assumptions used for Keebler's grants during fiscal
1998 were as follows: no expected dividend yield, expected volatility of 27.2%,
risk-free interest rate of 5.04% and expected lives of five years.

NOTE 9.  RETIREMENT PLANS

DEFINED BENEFIT PLANS

  Flowers

     Flowers has noncontributory defined benefit pension plans covering certain
employees. The benefits are based on years of service and the employee's career
earnings. Flowers also has a supplemental defined benefit pension plan covering
certain Flowers' 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. The 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 ("ERISA"). As of January 2, 1999, January
3, 1998 and June 28, 1997, 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 FII's Common Stock with a fair value of approximately $12.1
million, $10.3 million and $8.5 million at January 2, 1999, January 3, 1998 and
June 28, 1997, respectively.

                                      F-24
<PAGE>   44
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Keebler

     Keebler has a trusteed, noncontributory defined benefit pension plan
covering certain employees. Benefits provided under the plan are primarily based
on years of service and the employee's final level of compensation. Keebler
contributes annually not less than the ERISA minimum funding requirements. As of
January 2, 1999, assets held by the plan consist primarily of common stocks,
government securities, bonds and a real estate investment of $3.1 million in a
distribution center which is under an operating lease to Keebler.

     In addition to the pension plan, Keebler also maintains an unfunded
supplemental retirement plan for certain highly compensated former executives.
Benefits provided are based on years of service. Vesting is graduated depending
on termination after age 55.

     The net periodic pension cost for the Company's plans that are not fully
funded includes the following components:

<TABLE>
<CAPTION>
                                                                          FOR THE 52 WEEKS
                                             FOR THE 52    FOR THE 27           ENDED
                                             WEEKS ENDED   WEEKS ENDED   -------------------
                                             JANUARY 2,    JANUARY 3,    JUNE 28,   JUNE 29,
                                                1999          1998         1997       1996
                                             -----------   -----------   --------   --------
                                                         (AMOUNTS IN THOUSANDS)
<S>                                          <C>           <C>           <C>        <C>
Service cost...............................   $  6,268       $ 2,846     $  5,603   $ 5,887
Interest cost..............................     11,904         5,207       10,311     9,368
Expected return on plan assets.............    (13,635)       (5,585)     (10,415)   (9,104)
Amortization of transition asset...........       (841)         (422)        (841)     (841)
Prior service cost.........................         59            30           84        72
Recognized net actuarial (gain) loss.......       (177)           35          118       396
Purchase accounting adjustment.............                                            (118)
                                              --------       -------     --------   -------
Net periodic pension cost..................   $  3,578       $ 2,111     $  4,860   $ 5,660
                                              ========       =======     ========   =======
</TABLE>

                                      F-25
<PAGE>   45
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The funding status and the amounts recognized in the consolidated balance
sheet for the Company's plans that are not fully funded are as follows:

<TABLE>
<CAPTION>
                                                   FOR THE 52    FOR THE 27    FOR THE 52
                                                   WEEKS ENDED   WEEKS ENDED   WEEKS ENDED
                                                   JANUARY 2,    JANUARY 3,     JUNE 28,
                                                      1999          1998          1997
                                                   -----------   -----------   -----------
                                                           (AMOUNTS IN THOUSANDS)
<S>                                                <C>           <C>           <C>
Change in benefit obligation:
  Benefit obligation at beginning of year........   $(146,937)    $(139,594)    $(124,662)
  Acquisitions...................................     (10,303)                     (1,389)
  Service cost...................................      (6,268)       (2,846)       (5,603)
  Interest cost..................................     (11,904)       (5,207)      (10,311)
  Amendments.....................................                                      29
  Actuarial loss.................................     (23,964)       (9,744)       (3,564)
  Adjustment for change in measurement date......                     7,266
  Benefits paid..................................       7,727         3,188         5,906
                                                    ---------     ---------     ---------
  Benefit obligation at end of year..............    (191,649)     (146,937)     (139,594)
                                                    ---------     ---------     ---------
Change in plan assets:
  Fair value of plan assets at beginning of
     year........................................     154,828       137,819       116,556
  Actual return on plan assets...................      (2,199)       26,113        25,008
  Employer contribution..........................       1,141         3,333           788
  Acquisitions...................................   $             $             $   1,373
  Adjustment for change in measurement date......                    (9,249)
  Benefits paid..................................      (6,977)       (3,188)       (5,906)
                                                    ---------     ---------     ---------
  Fair value of plan assets at end of year.......     146,793       154,828       137,819
                                                    ---------     ---------     ---------
  Funded status..................................     (44,856)        7,891        (1,775)
  Unrecognized net actuarial (gain) loss.........      22,749       (16,900)       (6,891)
  Contribution between measurement date and
     fiscal year end.............................         185           330
  Unrecognized prior service cost................         557           616           596
  Unrecognized net transition asset..............      (3,313)       (4,154)       (4,368)
                                                    ---------     ---------     ---------
  Net amount recognized at end of year...........   $ (24,678)    $ (12,217)    $ (12,438)
                                                    =========     =========     =========
</TABLE>

     The net amount recognized at the end of the year includes $19.5 million
which is recorded in other accrued liabilities (see Note 3) and the remainder is
included in other long-term liabilities.

                                      F-26
<PAGE>   46
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Assumptions used in accounting for the Company's plans that are not fully
funded at each of the respective period-ends are as follows:

<TABLE>
<CAPTION>
                                               JANUARY 2,   JANUARY 3,   JUNE 28,   JUNE 29,
                                                  1999         1998        1997       1996
                                               ----------   ----------   --------   --------
<S>                                            <C>          <C>          <C>        <C>
Weighted average assumptions:
  Measurement date...........................     9/30/98    9/30/97     3/31/97    3/31/96
  Discount rate..............................  6.50%-7.50%      8.00%       8.00%      7.75%
  Expected return on plan assets.............        9.00%      9.00%       9.00%      9.00%
  Rate of compensation increase..............  4.00%-5.00%      5.50%       5.50%      5.25%
</TABLE>

     The net periodic pension cost for the Company's fully funded plan includes
the following components:

<TABLE>
<CAPTION>
                                                                    FOR THE 52
                                                                   WEEKS ENDED
                                                                 JANUARY 2, 1999
                                                              ----------------------
                                                              (AMOUNTS IN THOUSANDS)
<S>                                                           <C>
Service cost................................................         $  9,040
Interest cost...............................................           31,080
Expected return on plan assets..............................          (39,352)
Prior service cost..........................................              689
                                                                     --------
Net periodic pension cost...................................         $  1,457
                                                                     ========
</TABLE>

                                      F-27
<PAGE>   47
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The funded status and the amounts recognized in the consolidated balance
sheet for the Company's fully funded plan is as follows:

<TABLE>
<CAPTION>
                                                                FOR THE 52
                                                                WEEKS ENDED
                                                              JANUARY 2, 1999
                                                              ---------------
                                                                (AMOUNTS IN
                                                                THOUSANDS)
<S>                                                           <C>
Change in benefit obligation:
  Benefit obligation at beginning of year...................     $      --
  Acquisitions..............................................      (460,139)
  Service cost..............................................        (9,040)
  Interest cost.............................................       (31,080)
  Amendments................................................        (4,874)
  Actuarial loss............................................       (45,871)
  Benefits paid.............................................        30,692
                                                                 ---------
  Benefit obligation at end of year.........................      (520,312)
                                                                 ---------
Change in plan assets:
  Fair value of plan assets at beginning of year............            --
  Acquisitions..............................................       515,290
  Actual return on plan assets..............................        77,731
  Employer contribution.....................................        19,292
  Benefits paid.............................................       (30,692)
                                                                 ---------
  Fair value of plan assets at end of year..................       581,621
                                                                 ---------
  Funded status.............................................        61,309
  Unrecognized net actuarial gain...........................       (16,538)
  Contribution between measurement date and fiscal year
     end....................................................           115
  Unrecognized prior service cost...........................         9,230
                                                                 ---------
  Net amount recognized at end of year......................     $  54,116
                                                                 =========
</TABLE>

     Assumptions used in accounting for the Company's fully funded plan for
fiscal 1998 are as follows:

<TABLE>
<CAPTION>
                                                              JANUARY 2, 1999
                                                              ---------------
<S>                                                           <C>
Weighted average assumptions:
  Measurement date..........................................      9/30/98
  Discount rate.............................................         6.50%
  Expected return on plan assets............................         9.00%
  Rate of compensation increase.............................         4.00%
</TABLE>

                                      F-28
<PAGE>   48
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER PLANS

  Flowers

     Flowers contributes to various multiemployer, union-administered defined
benefit and defined contribution pension plans. Benefits provided under the
multiemployer pension plans are generally based on years of service and employee
age. Expense under these plans was $.3 million for fiscal 1998, $.5 million for
the twenty-seven week transition period ended January 3, 1998, $.4 million for
fiscal 1997 and $.3 million for fiscal 1996, respectively.

     The Flowers Industries, Inc. 401(k) Retirement Savings Plan covers
substantially all Flowers 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 fiscal
1998, the twenty-seven week transition period ended January 3, 1998, fiscal 1997
and fiscal 1996, the total cost and contributions were $1.3 million, $.6
million, $1.4 million and $1.3 million, respectively.

  Keebler

     Contributions are also made by Keebler to a retirement program for Grand
Rapids union employees. Benefits provided under the plan are based on a flat
monthly amount for each year of service and are unrelated to compensation.
Contributions are made based on a negotiated hourly rate. For fiscal 1998,
Keebler expensed contributions of $2.3 million.

     Keebler contributes to various multiemployer, union-administered defined
benefit and defined contribution pension plans. Benefits provided under the
multiemployer pension plans are generally based on years of service and employee
age. Expense under these plans was $8.9 million for fiscal 1998.

NOTE 10.  POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

     Keebler provides certain medical and life insurance benefits for eligible
retired employees of Keebler. The medical plan, which covers nonunion employees
with ten or more years of service, is a comprehensive indemnity-type plan. The
plan incorporates an up-front deductible, coinsurance payments and employee
contributions which are based on length of service. The life insurance plan
offers a small amount of coverage versus the amount the employees had while
employed. Keebler does not fund the plan.

     The net periodic postretirement benefit expense includes the following
components:

<TABLE>
<CAPTION>
                                                                FOR THE 52
                                                                WEEKS ENDED
                                                              JANUARY 2, 1999
                                                              ---------------
                                                                (AMOUNTS IN
                                                                THOUSANDS)
<S>                                                           <C>
Service cost................................................      $2,045
Interest cost...............................................       3,961
Amortization of prior service cost..........................        (115)
                                                                  ------
Net periodic postretirement benefit cost....................      $5,891
                                                                  ======
</TABLE>

                                      F-29
<PAGE>   49
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The unfunded status and the amounts recognized in the consolidated balance
sheet for Keebler's postretirement obligation are as follows:

<TABLE>
<CAPTION>
                                                                FOR THE 52
                                                                WEEKS ENDED
                                                              JANUARY 2, 1999
                                                              ---------------
                                                                (AMOUNTS IN
                                                                THOUSANDS)
<S>                                                           <C>
Change in benefit obligation:
  Benefit obligation at beginning of year...................     $     --
  Acquisitions..............................................      (58,288)
  Service cost..............................................       (2,045)
  Interest cost.............................................       (3,961)
  Actuarial gain............................................        3,641
  Benefits paid.............................................        4,384
                                                                 --------
     Benefit obligation at end of year......................     $(56,269)
     Unrecognized actuarial gain............................       (7,856)
     Unrecognized prior service cost........................         (574)
     Benefit payments subsequent to measurement date........          978
                                                                 --------
     Accrued benefit obligation.............................     $(63,721)
                                                                 ========
</TABLE>

     The accumulated postretirement benefit obligation was determined using a
weighted average discount rate of 6.5% for fiscal 1998. The weighted average
annual assumed rate of increase in the cost of covered benefits is 6.0% for
fiscal 1998, declining gradually to an ultimate trend rate of 5.0% for fiscal
1999. A one percent increase in the trend rate for health care costs would have
increased the accumulated benefit obligation as of January 2, 1999 by $2.6
million and the net periodic benefit cost by $.3 million. A one percent decrease
in the trend rate for health care costs would have decreased the accumulated
benefit obligation and net periodic benefit cost by $2.7 million and $.3
million, respectively, as of January 2, 1999.

     Additionally, Keebler provides post employment medical benefits to
employees on long-term disability. The plan is a comprehensive indemnity-type
plan which covers nonunion employees on long-term disability. There is no length
of service requirement. The plan incorporates coinsurance payments and
deductibles. Keebler does not fund the plan. The postemployment obligation
included in the consolidated balance sheet at January 2, 1999 was $4.7 million.

                                      F-30
<PAGE>   50
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11.  INCOME TAXES

     The Company's provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                              FOR THE 52
                                              FOR THE 52    FOR THE 27        WEEKS ENDED
                                              WEEKS ENDED   WEEKS ENDED   -------------------
                                              JANUARY 2,    JANUARY 3,    JUNE 28,   JUNE 29,
                                                 1999          1998         1997       1996
                                              -----------   -----------   --------   --------
                                                          (AMOUNTS IN THOUSANDS)
<S>                                           <C>           <C>           <C>        <C>
Current Taxes:
  Federal...................................    $72,121       $5,686      $26,910    $13,915
  State.....................................      6,010        2,395        5,557      2,621
                                                -------       ------      -------    -------
                                                 78,131        8,081       32,467     16,536
                                                -------       ------      -------    -------
Deferred Taxes:
  Federal...................................     (3,346)       2,395        1,587      1,636
  State.....................................       (394)        (319)         347        347
                                                -------       ------      -------    -------
                                                 (3,740)       2,076        1,934      1,983
                                                -------       ------      -------    -------
Benefit of operating loss carryforwards.....                    (525)      (1,210)      (334)
                                                -------       ------      -------    -------
Provision for income taxes..................    $74,391       $9,632      $33,191    $18,185
                                                =======       ======      =======    =======
</TABLE>

     Deferred tax liabilities (assets) are comprised of the following:

<TABLE>
<CAPTION>
                                                   FOR THE 52    FOR THE 27    FOR THE 52
                                                   WEEKS ENDED   WEEKS ENDED   WEEKS ENDED
                                                   JANUARY 2,    JANUARY 3,     JUNE 28,
                                                      1999          1998          1997
                                                   -----------   -----------   -----------
                                                           (AMOUNTS IN THOUSANDS)
<S>                                                <C>           <C>           <C>
Depreciation.....................................   $ 173,610     $ 52,936      $ 51,275
Trademarks, trade names and intangibles..........      49,348
Prepaid pension..................................      14,283
Inventory valuation..............................       6,779
Other............................................      13,816       13,871         8,673
                                                    ---------     --------      --------
          Gross deferred tax liabilities.........     257,836       66,807        59,948
                                                    ---------     --------      --------
Workers compensation.............................     (19,891)      (5,228)       (5,274)
Postretirement/postemployment benefits...........     (26,171)
Employee benefits................................     (33,806)      (5,326)       (4,756)
Facility closing costs and severance.............     (56,805)     (13,921)      (14,483)
Loss carryforwards...............................     (84,447)      (4,739)       (4,117)
Other............................................     (17,109)     (16,050)       (9,093)
                                                    ---------     --------      --------
          Gross deferred tax assets..............    (238,229)     (45,264)      (37,723)
Deferred tax assets valuation allowance..........      86,310        2,119         2,240
                                                    ---------     --------      --------
                                                    $ 105,917     $ 23,662      $ 24,465
                                                    =========     ========      ========
</TABLE>

     The net change in the valuation allowance for deferred tax assets was an
increase of $84.1 million, related to operating loss carryforwards. The increase
was primarily attributable to the consolidation of Keebler.

                                      F-31
<PAGE>   51
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The provision for income taxes 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 52    FOR THE 27    FOR THE 52 WEEKS ENDED
                                           WEEKS ENDED   WEEKS ENDED   ----------------------
                                           JANUARY 2,    JANUARY 3,     JUNE 28,     JUNE 29,
                                              1999          1998          1997         1996
                                           -----------   -----------   -----------   --------
                                                         (AMOUNTS IN THOUSANDS)
<S>                                        <C>           <C>           <C>           <C>
Tax at U.S. federal income tax rate......    $57,283       $8,757        $30,728     $16,919
State income taxes, net of U.S. federal
  income tax benefit.....................      5,298        1,390          3,837       1,929
Benefit of operating loss
  carryforwards..........................                    (525)        (1,210)       (334)
Intangible amortization..................      6,910          174            122          77
Other....................................      4,900         (164)          (286)       (406)
                                             -------       ------        -------     -------
          Provision for income taxes.....    $74,391       $9,632        $33,191     $18,185
                                             =======       ======        =======     =======
</TABLE>

     The amount of federal operating loss carryforwards generated by certain
subsidiaries of FII prior to their acquisition is $2.8 million 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. FII does not anticipate that these limitations will affect
utilization of the carryforwards prior to their expiration. Various subsidiaries
have state operating loss carryforwards of $56.1 million with expiration dates
through fiscal 2013.

     Keebler has net operating loss carryforwards totaling approximately $203.2
million through 1998 and expiring in 2008 through 2011. Pursuant to the terms of
INFLO's purchase of Keebler, the predecessor company retained the right to use
the net operating losses for potential carrybacks. Any unused operating losses
are then available to Keebler, but are significantly restricted under current
tax law. Therefore, all net operating loss carryforwards have been fully
reserved due to the uncertainty of their realization. In the event the net
operating loss carryforwards become realizable, the valuation allowance would be
reversed against trademarks, trade names and other intangibles.

     During fiscal 1997, the Internal Revenue Service ("IRS") completed an
examination of Flowers' federal income tax returns for fiscal years 1993 through
1995. During the examination, the IRS asserted that Flowers' independent
distributor program generated ordinary income upon the initial sale of the
territories. As a result, Flowers paid for certain claims by the IRS relating
primarily to Flowers' independent distributor program. Currently, Flowers is
under audit by the IRS for fiscal 1997 and fiscal 1996.

NOTE 12.  SEGMENT REPORTING

     In fiscal 1998, the Company adopted SFAS No. 131 -- "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes new standards for the manner in which companies report operating
segment information, as well as disclosures about products and services and
major customers. As required by SFAS 131, the Company has restated prior years
for comparability.

     The Company has three reportable segments: Flowers Bakeries, Mrs. Smith's
Bakeries and Keebler. Flowers Bakeries produces fresh breads and rolls, Mrs.
Smith's Bakeries produces fresh and frozen baked desserts, snacks, breads and
rolls, and Keebler produces a full line of cookies and crackers. The segments
are managed as strategic business units due to their distinct production
processes and marketing strategies.

                                      F-32
<PAGE>   52
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The accounting policies of the segments are substantially the same as those
described in Note 1. The Company evaluates each segment's performance based on
income or loss before interest and income taxes, excluding corporate and other
unallocated expenses and non-recurring charges. Information regarding the
operations in these reportable segments is as follows:

<TABLE>
<CAPTION>
                                         FOR THE 52    FOR THE 27    FOR THE 52 WEEKS ENDED
                                         WEEKS ENDED   WEEKS ENDED   -----------------------
                                         JANUARY 2,    JANUARY 3,     JUNE 28,     JUNE 29,
                                            1999          1998          1997         1996
                                         -----------   -----------   ----------   ----------
                                                       (AMOUNTS IN THOUSANDS)
<S>                                      <C>           <C>           <C>          <C>
Sales:
  Flowers Bakeries.....................  $  949,870     $460,245     $  904,585   $  841,181
  Mrs. Smith's Bakeries................     672,821      369,262        615,637      474,932
  Keebler..............................   2,226,480
  Eliminations and Other (1)...........     (72,710)     (42,968)       (78,969)     (65,529)
                                         ----------     --------     ----------   ----------
                                         $3,776,461     $786,539     $1,441,253   $1,250,584
                                         ==========     ========     ==========   ==========
Depreciation and Amortization:
  Flowers Bakeries.....................  $   33,487     $ 16,505     $   28,533   $   25,601
  Mrs. Smith's Bakeries................      18,676        9,427         15,830       13,877
  Keebler..............................      69,125
  Other................................       7,477          998          1,607        1,370
                                         ----------     --------     ----------   ----------
                                         $  128,765     $ 26,930     $   45,970   $   40,848
                                         ==========     ========     ==========   ==========
Income Before Interest and Taxes:
  Flowers Bakeries.....................  $   75,779     $ 31,388     $   46,189   $   47,045
  Mrs. Smith's Bakeries................      45,855       20,153         40,186       21,603
  Keebler..............................     199,891
  Unallocated General Expenses.........     (20,823)     (14,726)       (16,716)      (2,369)
  Non-Recurring Charge.................     (68,313)
                                         ----------     --------     ----------   ----------
                                         $  232,389     $ 36,815     $   69,659   $   66,279
                                         ==========     ========     ==========   ==========
Non-Recurring Charge:
  Flowers Bakeries.....................  $   32,161
  Mrs. Smith's Bakeries................      32,300
  Keebler..............................       3,852
                                         ----------     --------     ----------   ----------
                                         $   68,313
                                         ==========     ========     ==========   ==========
Interest Expense, Net..................  $   68,725     $ 11,796     $   25,109   $   13,004
                                         ==========     ========     ==========   ==========
</TABLE>

                                      F-33
<PAGE>   53
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                         FOR THE 52    FOR THE 27    FOR THE 52 WEEKS ENDED
                                         WEEKS ENDED   WEEKS ENDED   -----------------------
                                         JANUARY 2,    JANUARY 3,     JUNE 28,     JUNE 29,
                                            1999          1998          1997         1996
                                         -----------   -----------   ----------   ----------
                                                       (AMOUNTS IN THOUSANDS)
<S>                                      <C>           <C>           <C>          <C>
Income Before Income Taxes, Investment
  in Unconsolidated Affiliate, Minority
  Interest, Extraordinary Loss and
  Cumulative Effect of Changes in
  Accounting Principles................  $  163,664     $ 25,019     $   87,794   $   48,340
                                         ==========     ========     ==========   ==========
Capital Expenditures:
  Flowers Bakeries.....................  $   38,573     $ 22,710     $   48,334   $   55,730
  Mrs. Smith's Bakeries................      34,711        9,817         28,577       18,919
  Keebler..............................      66,798
  Other................................         193          330            599          893
                                         ----------     --------     ----------   ----------
                                         $  140,275     $ 32,857     $   77,510   $   75,542
                                         ==========     ========     ==========   ==========
Assets:
  Flowers Bakeries.....................  $  458,966     $401,787     $  408,815   $  441,856
  Mrs. Smith's Bakeries................     459,652      366,602        361,575      281,610
  Keebler..............................   1,655,780
  Other................................     286,502      130,491        127,797      125,977
                                         ----------     --------     ----------   ----------
                                         $2,860,900     $898,880     $  898,187   $  849,443
                                         ==========     ========     ==========   ==========
</TABLE>

---------------

(1) Primarily represents elimination of intersegment sales from Mrs. Smith's
    Bakeries to Flowers Bakeries which are transferred at standard costs.

     Sales to a single customer were approximately $84.0 million, or 11% of
sales during the twenty-seven week transition period ended January 3, 1998,
$163.0 million, or 11% of sales during fiscal 1997, and $150.0 million, or 12%
of sales during fiscal 1996. During fiscal 1998, no sales to a single customer
accounted for more than 10% of sales.

NOTE 13.  NET INCOME PER SHARE

     Net income 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 FII'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 share:

<TABLE>
<CAPTION>
                                                   FOR THE 52        FOR THE 27         FOR THE 52 WEEKS ENDED
                                                   WEEKS ENDED       WEEKS ENDED     -----------------------------
                                                 JANUARY 2, 1999   JANUARY 3, 1998   JUNE 28, 1997   JUNE 29, 1996
                                                 ---------------   ---------------   -------------   -------------
                                                           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>               <C>               <C>             <C>
Numerator:
  Income before extraordinary loss and
     cumulative effect of changes in accounting
     principles................................      $45,968           $33,448          $62,324         $30,768
  Extraordinary loss due to early
     extinguishment of debt, net of tax benefit
     and minority interest.....................         (938)
  Cumulative effect of changes in accounting
     principles, net of tax benefit............       (3,131)           (9,888)
                                                     -------           -------          -------         -------
  Net income...................................      $41,899           $23,560          $62,324         $30,768
                                                     =======           =======          =======         =======
</TABLE>

                                      F-34
<PAGE>   54
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                   FOR THE 52        FOR THE 27         FOR THE 52 WEEKS ENDED
                                                   WEEKS ENDED       WEEKS ENDED     -----------------------------
                                                 JANUARY 2, 1999   JANUARY 3, 1998   JUNE 28, 1997   JUNE 29, 1996
                                                 ---------------   ---------------   -------------   -------------
                                                           (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                              <C>               <C>               <C>             <C>
Denominator:
  Basic weighted average shares................       96,393            88,368           88,000          86,933
  Effect of dilutive securities:
     Stock options.............................          408               405              401             278
                                                     -------           -------          -------         -------
  Diluted weighted average shares..............       96,801            88,773           88,401          87,211
                                                     =======           =======          =======         =======
Net Income Per Common Share:
  Basic --
     Income before extraordinary loss and
       cumulative effect of changes in
       accounting principles...................      $   .47           $   .38          $   .71         $   .35
     Extraordinary loss due to early
       extinguishment of debt, net of tax
       benefit and minority interest...........         (.01)
     Cumulative effect of changes in accounting
       principles, net of tax benefit..........         (.03)             (.11)
                                                     -------           -------          -------         -------
     Net income per common share...............      $   .43           $   .27          $   .71         $   .35
                                                     =======           =======          =======         =======
  Diluted --
     Income before extraordinary loss and
       cumulative effect of changes in
       accounting principles...................      $   .47           $   .38          $   .71         $   .35
     Extraordinary loss due to early
       extinguishment of debt, net of tax
       benefit and minority interest...........         (.01)
     Cumulative effect of changes in accounting
       principles, net of tax benefit..........         (.03)             (.11)
                                                     -------           -------          -------         -------
     Net income per common share...............      $   .43           $   .27          $   .71         $   .35
                                                     =======           =======          =======         =======
</TABLE>

NOTE 14.  UNAUDITED QUARTERLY FINANCIAL INFORMATION

     Results of operations for each of the four quarters in the respective
fiscal years is as follows (each quarter represents a period of twelve weeks,
except the first quarter of fiscal 1998 and the fourth quarter of fiscal 1997,
both of which include sixteen weeks):

<TABLE>
<CAPTION>
QUARTER                             FIRST          SECOND         THIRD        FOURTH
-------                             ----------     ----------     ----------   ----------
                                    1998           1998           1998         1998
                                    1998(T)        1998(T)        1998(T)      1998(T)
                                    1997           1997           1997         1997
                                    ----------     ----------     ----------   ----------
                                        (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>            <C>            <C>          <C>
Sales.............................  $1,077,034     $  836,424     $  862,784   $1,000,219
                                       310,063        476,476(1)          --           --
                                       318,957        383,146        303,950      435,200
Gross margin......................     590,744        461,372        480,578      541,186
                                       144,587        223,026(1)          --           --
                                       179,929        166,612        144,836      205,321
Income (loss) before extraordinary
  loss and cumulative effect of
  changes in accounting
  principles......................      15,028         18,467         25,555      (13,082)
                                        14,529         18,919(1)          --           --
                                        19,948         12,263         12,170       17,943
</TABLE>

                                      F-35
<PAGE>   55
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
QUARTER                             FIRST          SECOND         THIRD        FOURTH
-------                             ----------     ----------     ----------   ----------
                                    1998           1998           1998         1998
                                    1998(T)        1998(T)        1998(T)      1998(T)
                                    1997           1997           1997         1997
                                    ----------     ----------     ----------   ----------
                                        (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>            <C>            <C>          <C>
Extraordinary loss due to early
  extinguishment of debt, net of
  tax benefit and minority
  interest........................          --             --           (938)          --
                                            --             --             --           --
                                            --             --             --           --
Cumulative effect of changes in
  accounting principles, net of
  tax benefit.....................      (3,131)(2)         --             --           --
                                            --         (9,888)(1)         --           --
                                            --             --             --           --
Net income (loss).................      11,897         18,467         24,617      (13,082)
                                        14,529          9,031(1)          --           --
                                        19,948         12,263         12,170       17,943
Basic net income (loss) per common
  share...........................         .13            .19            .25         (.13)
                                           .16            .10(1)          --           --
                                           .23            .14            .14          .20
Diluted net income (loss) per
  common share....................         .13            .19            .25         (.13)
                                           .16            .10(1)          --           --
                                           .23            .14            .14          .20
</TABLE>

---------------

(T) Twenty-seven week transition period ended January 3, 1998.
(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.
(2) During the fourth quarter of fiscal 1998, the Company adopted SOP 98-5. The
    cumulative effect of this change in accounting was retroactive to the first
    quarter of fiscal 1998 and does not correspond with the amounts reported in
    the Company's first quarter Form 10-Q for the sixteen weeks ended April 25,
    1998.

                                      F-36
<PAGE>   56
                   FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15.  UNAUDITED OPERATING RESULTS

     The unaudited condensed consolidated results of operations of Flowers for
the fifty-two weeks ended January 3, 1998 and the twenty-seven weeks ended
January 4, 1997 are presented below. In the opinion of management, the
accompanying unaudited condensed consolidated results of operations contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the results of operations:

<TABLE>
<CAPTION>
                                                              FOR THE 52        FOR THE 27
                                                              WEEKS ENDED       WEEKS ENDED
                                                            JANUARY 3, 1998   JANUARY 4, 1997
                                                            ---------------   ---------------
                                                              (AMOUNTS IN THOUSANDS, EXCEPT
                                                                     PER SHARE DATA)
<S>                                                         <C>               <C>
Sales.....................................................    $1,440,079         $774,767
Income before income taxes and cumulative effect of
  changes in accounting principles........................        62,478           50,335
Income taxes..............................................        23,796           19,027
Income (loss) from investment in unconsolidated
  affiliate...............................................        24,813             (195)
Income before cumulative effect of changes in accounting
  principles..............................................        63,495           31,113
Cumulative effect of changes in accounting principles.....        (9,888)
Net income................................................        53,607           31,113
Net Income Per Common Share:
  Income per share before cumulative effect -- basic......           .72              .35
  Income per share before cumulative effect -- diluted....           .72              .35
  Net income per share -- basic...........................           .61              .35
  Net income per share -- diluted.........................           .61              .35
</TABLE>

NOTE 16.  SUBSEQUENT EVENTS

     On January 29, 1999, Keebler entered into a Receivable Purchase Agreement
("Agreement") to replace the Bridge Facility existing at January 2, 1999. This
Agreement allows funds to be borrowed at a lower cost to Keebler and is
collateralized by the accounts receivable of Keebler.

     On January 21, 1999, certain stockholders of Keebler sold 16,200,000 shares
of Keebler's common stock in a secondary public offering, reducing their
ownership percentage to 7%, collectively. Keebler received no proceeds from the
sale, and the ownership percentages of FII and the management of Keebler
remained at approximately 55% and 2%, respectively.

     On March 19, 1999, the Board of Directors of the Company declared a
dividend of one right per share of common stock outstanding on April 2, 1999,
pursuant to the terms of the Rights Agreement effective as of April 2, 1999,
between the Company and First Union National Bank, as Rights Agent.

                                      F-37
<PAGE>   57

                      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 February 2, 1999 of this Report on Form 10-K/A also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K/A. 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/ PRICEWATERHOUSECOOPERS LLP

Atlanta, Georgia
February 2, 1999
<PAGE>   58

                                                                     SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

     Those valuation and qualifying accounts which are deducted in the balance
sheet from the assets to which they apply:

<TABLE>
<CAPTION>
                                                           ADDITIONS    ADDITIONS
                                             BALANCE AT    CHARGED TO   CHARGED TO                    BALANCE
                                             BEGINNING     COSTS AND      OTHER                       AT END
CLASSIFICATION                               OF PERIOD      EXPENSES     ACCOUNTS     DEDUCTIONS     OF PERIOD
--------------                              ------------   ----------   ----------    ----------     ---------
<S>                                         <C>            <C>          <C>           <C>            <C>
Year Ended January 2, 1999
  Discounts and doubtful accounts.........     $   --       $20,148      $ 7,844(1)    $(20,210)(2)   $ 7,782
                                               ======       =======      =======       ========       =======
  Deferred taxes..........................     $2,119       $    --      $84,350(3)    $   (159)      $86,310
                                               ======       =======      =======       ========       =======
  Inventory reserves......................     $  501       $ 7,484      $ 8,589(4)    $ (6,960)(5)   $ 9,614
                                               ======       =======      =======       ========       =======
Twenty-Seven Weeks Ended January 3, 1998
  Deferred taxes..........................     $2,240       $    --      $    --       $   (121)      $ 2,119
                                               ======       =======      =======       ========       =======
  Inventory reserves......................     $   --       $   501      $    --       $     --       $   501
                                               ======       =======      =======       ========       =======
Year Ended June 28, 1997
  Deferred taxes..........................     $2,774       $    --      $    --       $   (534)      $ 2,240
                                               ======       =======      =======       ========       =======
Year Ended June 29, 1996
  Deferred taxes..........................     $1,659       $    --      $ 1,115(6)    $     --       $ 2,774
                                               ======       =======      =======       ========       =======
</TABLE>

---------------

(1) $4,965 and $2,879 acquired in the Keebler Acquisition and President
    International, Inc. acquisition by Keebler, respectively.
(2) Primarily charges against reserves, net of recoveries.
(3) Amount acquired in the Keebler Acquisition.
(4) $6,782 and $1,807 acquired in the Keebler Acquisition and President
    International, Inc. acquisition by Keebler, respectively.
(5) Inventory write-offs, net.
(6) Operating loss carryforwards

                                       S-1