EXHIBIT 99.1

Portions of the Annual Report on Form 10-K for the fifty-two weeks ended January 1, 2000 of Flowers Industries, Inc. filed with the SEC on March 31, 2000.

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

The following discussion should be read in conjunction with "Selected Financial Data" included herein and the consolidated financial statements and the related notes thereto of the Company incorporated by reference or included 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.

Mrs. Smith's Bakeries experienced significant cost overruns in fiscal 1999 due primarily to the delay in completion of a major capital project involving 25 new or relocated and upgraded production lines at seven of its 10 operating facilities. Additionally, after the end of the second quarter of fiscal 1999, a review of Mrs. Smith's Bakeries business unit operations resulted in the recognition of higher reserves related to accounts receivable and inventory. These items are more fully addressed in the discussion of operating results by business segment below.

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 years ended January 1, 2000 and 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.

In January 1998, Flowers changed its fiscal year from the Saturday nearest June 30 to the Saturday nearest December 31. Unless stated otherwise, all references to: (i) "fiscal 1997" shall mean Flowers' full fiscal year ended June 28, 1997; (ii) the "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; (iii) "fiscal 1998" shall mean Flowers' full fiscal year ended January 2, 1999; and (iv) "fiscal 1999" shall mean Flowers' full fiscal year ended January 1, 2000. 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. The Company's quarterly reporting periods for fiscal 1999 were as follows, first quarter ended April 24, 1999, second quarter ended July 17, 1999, third quarter ended October 9, 1999, and fourth quarter and fiscal year ended January 1, 2000 (the Saturday nearest December 31).

Prior to September 1996, Flowers Bakeries sold certain of 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.

The Company enters into commodity future and option contracts and swap agreements for wheat and, to a lesser extent, other commodities, in an effort to provide a predictable and consistent commodity price, and thereby reduce the impact and volatility in its raw material and packaging prices. In fiscal 1999, the Company recorded a negative mark-to-market adjustment of $3.5 million related to these activities. In fiscal 1998, a gain of $1.1 million was recorded, and for the transition period ended January 3, 1998 and the fiscal year ended June 28, 1997 losses of $0.8 million and $0 were recorded, respectively. The charges are recorded as an FII expense and do not affect the results of operations on a segment basis at Flowers Bakeries, Mrs. Smith's Bakeries or Keebler.

Information on Restructurings and Acquisitions

The Company has undertaken a number of rationalizations and reorganizations of its operations during fiscal 1999 and fiscal 1998. As a result of these reorganizations 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 continue to be short-term inefficiencies as the rationalizations and reorganizations are completed.

During fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey production facility due to excess capacity within Keebler's 14-plant manufacturing network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million. The charge included $46.1 million of non-cash asset impairments and $23.1 million of severance and other exit costs related to the Sayreville facility. As a direct result of this plan, asset impairments were recorded to write-down the closed

facility to net realizable value, less cost to sell, based on management's estimate of fair value. Also, as part of this plan, asset impairments were recorded to write-off certain other machinery and equipment currently held by Keebler and to reduce goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996, neither of which provides any future economic benefit. Severance costs provided for the reduction of approximately 650 employees, of which 600 were represented by unions, and, as of January 1, 2000, approximately 640 employees, of which 595 were represented by unions, had been severed. This plan is substantially complete as of January 1, 2000. Accordingly, during the fourth quarter of fiscal 1999, an adjustment of $2.9 million was recorded against the original $69.2 million. The adjustment was due to lower than expected severance costs and an earlier than expected disposal of the facility as current real estate conditions resulted in a twelve month reduction in the estimated disposal period. The adjusted net charge in fiscal 1999 related to this plant closure was $66.3 million. Ongoing costs, including, but not limited to, guard service, utilities, property taxes and preparing the facility for sale, will continue for eighteen months or until the facility is disposed of, whichever occurs earlier. The amount of suspended depreciation and amortization that would have been recognized for year ended January 1, 2000 if prior period impairment had not been recognized was approximately $3.7 million, with $5.6 million of annualized savings anticipated in 2000.

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). The charge included $57.5 million of noncash asset impairments, $4.8 million of severance costs and $6.1 million of other related exit costs. The plan involved 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 1, 2000, all such employees had been terminated. During fiscal 1999, Flowers Bakeries and Mrs. Smith's Bakeries recorded adjustments to the fiscal 1998 restructuring reserve of $1.1 million and $4.9 million, respectively. These adjustments are the result of reduced carrying costs of plants held for sale, an adjustment to the value of these assets due to the identification of a buyer and changes in estimates of severance and other employee termination costs. As of January 1, 2000, all significant actions related to the plans have been completed. The remaining exit costs include ongoing costs such as guard service, utilities and property taxes of closed facilities until the time of disposal. 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.

During fiscal 1998, 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 were initially estimated at 410 employees and $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. At January 1, 2000, approximately 40 employees not under union contract had been terminated. In addition, during the year management reviewed its exit plan and made a determination that approximately 110 employees not under union contract, would not be terminated. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the President acquisition by reducing goodwill and other intangibles by $4.5 million to recognize exit costs that are now expected to be less than initially anticipated. The remainder of management's exit plan is expected to be substantially complete before the end of fiscal 2000 with only noncancelable lease obligations to be paid over the next six years, concluding in fiscal 2006.

As part of the acquisition of Mrs. Smith's Inc., Flowers recorded a purchase accounting reserve of $37.1 million 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 $6.8 million, $4.0 million, $.6 million and $1.6 million in fiscal 1999, 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 approximately 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 totaled $3.0 million for fiscal 1999 and $7.7 million for fiscal 1998. In addition, during fiscal 1999 and fiscal 1998, Keebler expensed $0.8 million and $2.8 million, respectively, principally for costs related to the closure of two distribution facilities not included in the original plan. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the Keebler acquisition by reducing goodwill and other intangibles by $0.5 million and reversing $1.3 million into income from operations to recognize exit costs that are now expected to be less than initially anticipated. The $1.3 million was credited to operating income as it had originally been charged to income from operations in fiscal 1999 and fiscal 1998. During fiscal 1998, Keebler also adjusted accruals previously established in the accounting for the Keebler and Sunshine 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 was substantially complete at January 1, 2000 with only noncancelable lease obligations continuing through 2006.

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

                                                                   FOR THE 52 WEEKS ENDED
                                                     ------------------------------------------------
                                                     JANUARY 1,   JANUARY 2,   JANUARY 3,    JUNE 28,
                                                        2000         1999         1998         1997
                                                     ----------   ----------   ----------    --------
                                                                        (UNAUDITED)
Sales ........................................         100.00%      100.00%      100.00%      100.00%
Gross margin .................................          52.74        54.78        47.32        45.20
Selling, marketing and administrative
  expenses ...................................          43.56        43.38        37.92        37.16
Depreciation and amortization ................           3.41         3.42         3.44         3.20
Non-recurring charge .........................           1.42         1.81
Interest expense, net ........................           1.91         1.83         1.61         1.75
Income before income taxes, investment in
  unconsolidated affiliate, minority interest,
  extraordinary loss and cumulative effect of
  changes in accounting principles ...........           2.43         4.35         4.36         6.11
Income taxes .................................           1.33         1.98         1.66         2.31
Net income ...................................            .17%        1.11%        3.74%        4.33%

FIFTY-TWO WEEKS ENDED JANUARY 1, 2000 COMPARED TO FIFTY-TWO WEEKS ENDED JANUARY
2, 1999

Consolidated Results

Sales. For the fiscal year ended January 1, 2000, sales were $4,236.0 million, or 12.5%, higher than sales for the prior year of $3,765.4 million. The effect on reported sales of businesses acquired, net of businesses sold subsequent to the start of 1999 was 8.8%. The overall sales increase, excluding acquisitions, is the result of a 5.3% increase at Keebler, a 2.4% increase at Flowers Bakeries and a 1.1% increase at Mrs. Smith's Bakeries.

Gross Margin. Gross profit margin was 52.7% in fiscal 1999 as compared to 54.8% in fiscal 1998. Production difficulties and inefficiencies due to the plant realignment project at Mrs. Smith's Bakeries offset improved efficiencies and cost reduction programs at Flowers Bakeries and Keebler.

Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses increased $211.8 million or 13.0% over fiscal 1998. These expenses were 43.6% of sales in fiscal 1999 as compared to 43.4% in fiscal 1998.

Depreciation and Amortization Expense. Depreciation and amortization expense was $144.6 million for fiscal 1999, an increase of 12.3% over $128.8 million for fiscal 1998. This is primarily due to increased capital spending and a full year of amortization related to Keebler's purchase of President.

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

Interest Expense. For fiscal 1999, net interest expense was $80.9 million, an increase of 17.8% over fiscal 1998 interest expense of $68.7 million. Interest expense at Keebler was $36.2 million in fiscal 1999 and $26.5 million in fiscal 1998. The increase was primarily due to the overall higher average debt balance outstanding as a result of the President acquisition in fiscal 1998. Interest expense at Flowers was $44.7 million in fiscal 1999 and $42.2 million in fiscal 1998. The increase was due to higher borrowings required to fund capital expenditures at Flowers Bakeries and Mrs. Smith's Bakeries.

Income Before Income Taxes. Income before income taxes was $103.1 million for fiscal 1999, a decrease of 37.0% compared to income of $163.7 million reported in fiscal 1998. This decrease is primarily a result of losses in fiscal 1999 at Mrs. Smith's Bakeries due to costs related to a major production realignment as discussed below. Before considering non-recurring charges and credits, Mrs. Smith's Bakeries incurred an operating loss in fiscal 1999 of $53.3 million compared to operating income in fiscal 1998 of $45.9 million. Flowers Bakeries operating income, before non recurring credits, decreased $8.8 million in fiscal 1999 and unallocated expenses were higher by $12.5 million. These decreases are somewhat offset by increases in operating income of $64.0 million at Keebler. See below for further discussion of the results of operations by business segment.

Income Taxes. Income taxes were provided at an effective rate of 54.6% in fiscal 1999 and 45.5% in fiscal 1998. The consolidated effective rate in fiscal 1999 is based on the interaction of the effective rate on Keebler's profits of 45.3% and the effective rate of the tax benefit on Flowers loss (excluding Keebler) of 29.0%. In each year the effective rate exceeded the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, other intangibles and goodwill. During fiscal 1999, nondeductible items increased at Keebler due to inclusion of a full year of amortization for President intangibles and goodwill impairment related to the closure of the Sayreville, New Jersey facility. The effective rate on the loss at Flowers is indicative of the nondeductible charges included in the calculation of the loss.

Net Income. For fiscal 1999, net income was $7.3 million, a decrease of 82.6% as compared to $41.9 million net income reported in fiscal 1998. Fiscal 1999 included a net non-recurring charge of $60.4 million and fiscal 1998 included a non-recurring charge of $68.3 million. Excluding the effect of these charges in fiscal 1999 and fiscal 1998, net income was $27.7 million in fiscal 1999 and $89.5 million in fiscal 1998. The decrease of $61.8 million is primarily attributable to production difficulties and inefficiencies at Mrs. Smith's Bakeries offset by increases at Keebler. These items are discussed in detail below.

Operating Results by Business Segment

Flowers Bakeries

Sales at Flowers Bakeries for fiscal 1999 were $961.7 million, an increase of $22.6 million and 2.4% over sales of $939.1 million reported a year ago. Acquisitions, net of divestitures, accounted for 0.5% of the increase. The total sales increase was attributable to increases of 2.2% and 8.7% in branded retail and foodservice sales, respectively, slightly offset by a decrease of 7.0% in private label sales. Exclusive of the effect of acquisitions, the overall sales increase was a result of an increase of 4.5% in overall pricing offset by a decrease in volume of 2.2%.

Gross margins increased to $515.1 million and 53.6% of sales for fiscal 1999 compared to $498.3 million and 53.1% of sales in fiscal 1998. This represents a combination of increased pricing offset by increased operating costs. While the cost of ingredients decreased during the year, the shift to sponge and dough production methods and the accompanying change in product formulation somewhat offset these savings. Flowers Bakeries believes that the sponge and dough process produces a better tasting product that will be valued in the market. Additional incremental costs were incurred due to the production disruption at the Goldsboro facility during construction of a new bun line.

Selling, marketing and administrative expenses increased 6.7% and $26.2 million to $415.3 million and 43.2% of sales in fiscal 1999 from $389.1 million and 41.4% of sales in fiscal 1998. Distribution costs in fiscal 1999 were higher

due to rising fuel costs, additional miles incurred throughout the route system and incremental distribution cost due to severe hurricanes and flooding in Florida and North Carolina. Administrative costs increased as a result of incremental costs associated with realigning the northern region to consolidate the Goldsboro, North Carolina facility (acquired in 1998) and incremental costs associated with the consolidation of the accounts receivable and accounts payable functions to a central Shared Services Center. Y2K costs during fiscal 1999 were $0.6 million.

Depreciation and amortization expense was $32.9 million for fiscal 1999, a decrease of 1.8% from $33.5 million for fiscal 1998. The decrease is a result of the asset impairments recorded as a part of the non-recurring charge and write-off of start-up costs recorded in the prior year, partially offset by increased depreciation associated with capital improvements.

Operating income was $67.0 million in fiscal 1999, a decrease of $8.8 million and 11.6% from fiscal 1998 operating income of $75.8 million. Despite these disappointing results in fiscal 1999, management expects operations at Flowers Bakeries to return to historic growth rates in 2000.

Mrs. Smith's Bakeries

Sales at Mrs. Smith's Bakeries for fiscal 1999, after excluding inter-segment sales, increased 1.1% to $606.5 million from $599.8 million reported a year ago. This increase was primarily driven by increases of 6.7%, 8.5% and 1.2% in foodservice, in-store bakery and branded retail sales, respectively, partially offset by a reduction of 7.8% in non-branded retail and co-pack fresh snack products. The disappointing sales increase is attributable to production difficulties, as discussed below, resulting in product shortages.

Gross margin for fiscal 1999 was $172.0 million and 28.4% of sales compared to $246.4 million and 41.1% reported a year ago. This decrease is primarily the result of costs associated with a massive production realignment project that included the installation and start-up of 25 new or relocated and upgraded production lines. Mrs. Smith's Bakeries experienced start-up costs, product damage, spoilage and unabsorbed overhead at seven of its 10 production facilities primarily in the third and fourth quarter of fiscal 1999. This project fell behind due to the delay in the receipt and installation of production equipment, and in the programming of production control software and the hiring and training of additional production employees. Traditionally, the third and fourth quarters are Mrs. Smith's Bakeries highest volume quarters. However, product shortages in these quarters hurt overall sales especially in the higher margin retail segment.

Selling, marketing and administrative expenses were $205.1 million and 33.8% of sales in fiscal 1999 as compared to $181.8 million and 30.3% of sales in fiscal 1998. These costs increased primarily due to increased administrative and distribution costs associated with Mrs. Smith's Bakeries' production realignment and increased promotional expenses which were committed to the retail market based on higher expected sales. As a result of lower production, sales volume was lower than anticipated during the seasonally high sales period of the third and fourth quarters. Also, following a review of Mrs. Smith's Bakeries' business operations after the end of the second quarter of fiscal 1999, the Company determined to recognize higher reserves for customer deductions, previously believed to be collectible, and trade promotions. At the same time, the Company also revised estimates of the recoverable amount of certain out of code, damaged or discontinued inventory. The conclusions reached by the Company relative to the ultimate realization of certain accounts receivable were based upon recent trends associated with Mrs. Smith's Bakeries' promotional and discount programs. The reserves at January 1, 2000 are considered adequate, and the promotional programs have been simplified. Y2K costs during fiscal 1999 were $.4 million.

Depreciation and amortization expense was $20.1 million for fiscal 1999, an increase of 7.5% over $18.7 million for fiscal 1998.

This increase is related to capital spending during the period offset by decreases in depreciation and amortization that resulted from the asset impairments recorded as a part of the non-recurring charge recorded in fiscal 1998. Depreciation and amortization expense will increase in fiscal 2000 as depreciation on the capital projects associated with the production realignment is reflected for a full year.

The operating loss, excluding non-recurring charge credits, was $53.3 million in fiscal 1999, a decrease of $99.2 million from operating income, excluding non-recurring charges, of $45.9 million in fiscal 1998. As discussed above, the primary cause of this decrease was the costs associated with the production realignment and the related effect on sales. Fiscal 1999 was a year of tremendous challenges at Mrs. Smiths Bakeries. Management continues to address these production issues and expects them to be fully resolved during fiscal 2000. With the resolution of the production issues, elimination of the unusual costs that were incurred in fiscal 1999 and increased sales volume, Mrs. Smith's Bakeries is expected to have improved operating results in 2000.

Keebler

Sales at Keebler for fiscal 1999 increased 19.8% to $2,667.8 million from $2,226.5 million in fiscal 1998. This increase is primarily due to an increase in Keebler sales of branded products of 16.7% and an increase in the sales of specialty products of 32.8%. The acquisition of President accounted for sales of $423.3 million in fiscal 1999 as compared to sales of $95.3 million in fiscal 1998. Excluding the effects of President, sales increased 5.3% overall. Volume gains in core Keebler branded business and specialty business of 6.0% and 2.3%, respectively, accounted for this gain.

Gross margins at Keebler declined slightly to 58.1% of sales during fiscal 1999 from 59.2% during the same period a year ago. This is attributable to a decrease in margins on specialty products, that was caused by a change in sales mix toward the high cost, custom-baked products. This decrease was partially offset by an increase in margins of branded products due to improved product mix and higher volume due to the inclusion of President for a full year. Excluding the impact of President, gross margins would have been 60.0% in fiscal 1999 and 58.8% in fiscal 1998. The improvement in year-over-year comparisons resulted from the benefits received on productivity and cost savings programs designed to improve efficiency at Keebler's production facilities, as well as from other cost reduction initiatives.

Selling, marketing and administrative expenses increased $151.7 million in fiscal 1999, but improved 2.1% as a percent of sales. In addition to the inclusion of President expenses for a full year in fiscal 1999, as compared to only fourteen weeks in fiscal 1998, higher selling, marketing and administrative expenses were also experienced as a result of core Keebler volume growth. After removing the expenses contributed by President, selling, marketing and administrative expenses, as a percent of sales, were essentially flat year-over- year. Total marketing expenses increased as Keebler continued its focus on building brand equity and incremental trade promotion programs were instituted in support of the national distribution of Famous Amos and Murray Sugar Free cookies. Despite higher sales levels in fiscal 1999, more efficient marketing processes resulted in a lower rate of marketing expenses as a percent of sales. In addition, increased administrative expenses were incurred in fiscal 1999, due principally to higher compensation costs resulting from growth in the core Keebler business. Increases in selling and distribution expenses resulted mainly from the volume gains, as savings were achieved through a more efficient selling and distribution network. Keebler spent $2.9 million in fiscal 1999 preparing for Y2K.

Depreciation and amortization expense was $84.1 million for fiscal 1999, an increase of 21.7% over $69.1 million for fiscal 1998. This increase is due primarily to increased goodwill amortization and depreciation relating to the purchase of President and increased depreciation associated with capital improvements.

Operating income for fiscal 1999 was $197.6 million, an increase of $1.6 million and 0.8% over fiscal 1998 operating income of $196.0 million.

Excluding the non-recurring charge in fiscal 1999, operating income was $263.9 million, an increase of $64.0 million and 32.0% over the prior year. As previously discussed, the increase in operating income before considering the non-recurring charge reflects growth due to the inclusion of the President business for a full year, growth in the Keebler core business and the benefits of productivity and cost savings programs.

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

Consolidated Results

Sales. For fiscal 1998, sales were $3,765.4 million or 163% higher than sales in the prior year, which were $1,432.2 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. Excluding the Keebler Acquisition, the overall sales increase is the result of a 5% increase at Flowers Bakeries and a 12% increase at Mrs. Smith's Bakeries.

Gross Margin. Gross margin for fiscal 1998 was $2,062.8 million, or 204% higher than the gross margin for the prior year, for which gross margin was $677.7 million. The Company's gross margin for fiscal 1998 includes $1,319.0 million attributable to Keebler, a factor not present in the prior year. Flowers Bakeries' gross margin improved to 53% as compared to 51% of sales for fiscal 1997. Mrs. Smith's Bakeries' gross margin improved to 41% in fiscal 1998 from 37% in the prior year.

Selling, Marketing and Administrative Expense. For fiscal 1998, selling, marketing and administrative expenses were $1,633.3 million, or 201% higher than expense of $543.1 million for the prior year. The increase is due primarily to the inclusion of such expenses attributable to Keebler.

Depreciation and Amortization. Depreciation and amortization expense was $128.8 million for fiscal 1998, an increase of 162% over the prior year, in which it 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 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 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, and increased goodwill and interest expense, all of which are discussed above and in the following business segment section.

Income Taxes. Income taxes for fiscal 1998 were $74.4 million, an increase of 213% over the comparable period in the prior year, in which income taxes 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.

Operating Results by Business Segment

Flowers Bakeries

Fiscal 1998 sales at Flowers Bakeries increased $43.5 million, or 5% from the prior year. Of the increase, 3% was due to an acquisition, 1% due to increased volume and 1% due to pricing and product mix. Gross margin improved to 53% of sales in fiscal 1998 as compared to 51% in the prior year. Improved volume, production efficiencies and lower ingredient costs contributed to the increase in gross margin. Selling, marketing and administrative expenses increased, primarily due to increased sales volume and expenses related to a project to improve Flowers Bakeries' information systems.

Mrs. Smith's Bakeries

Sales at Mrs. Smith's Bakeries increased $63.1 million, or 12%, in fiscal 1998 from the prior year. Of the increase, 8% was due to the acquisition of two businesses, 3% due to increased volume, and 1% due to pricing and product
mix. Gross margin improved to 41% of sales in fiscal 1998 from 37% for the prior year. This increase was due primarily to increased volume, cost control and greater plant efficiencies. 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.

Keebler

As discussed in matters affecting analysis, on February 3, 1998 FII increased its ownership in Keebler to 55% from 45%, Prior to that date FII accounted for its investment in Keebler under the equity method. During fiscal 1998, the first year the results of Keebler operations were consolidated, sales and gross margin were $2,226.5 million, and $1,319.0 million, respectively. Selling, marketing and administrative expenses were $1,053.8 million in fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

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. As a result of the consolidation of Keebler, the Company's balance sheet reflects Keebler's indebtedness of $456.4 million as of January 1, 2000; however, Flowers has not guaranteed such indebtedness and it is to be repaid solely from the cash flows of Keebler.

Net cash provided by operating activities for fiscal 1999 was $243.1 million. Operating cash flows were positively affected by decreases in inventory and the timing of payments for vendor accounts. Operating cash flows were negatively affected by increases in receivables, including income tax benefits, and payments against facility closing cost reserves.

Net cash disbursed for investing activities for fiscal 1999 was $273.7

million. This amount primarily consisted of $10.8 million for acquisitions and $266.6 million for capital expenditures. Capital expenditures of $73.6 million at Flowers Bakeries, $127.3 million at Mrs. Smith's Bakeries, including non-cash capital leases of $47.4 million, and $100.7 million at Keebler were made primarily to update and enhance production and distribution facilities. The remaining capital expenditures were $12.4 million at the FII corporate level.

In fiscal 2000, the Company expects capital spending at Flowers Bakeries and Mrs. Smith's Bakeries to be approximately $35 million, a substantial reduction from fiscal 1999, since the production enhancement program is largely complete. Capital expenditures in fiscal 2000 will be used to finish projects that carried over from fiscal 1999 and to perform normal repair and maintenance items at existing facilities. Spending for facility closing and severance costs related to exit plans established in the acquisitions effected by Flowers and Keebler and the non-recurring charges are 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.

In fiscal 1999, net cash provided by financing activities was $15.4 million. Gross cash proceeds resulted from a receivable securitization at Keebler of $103.0 million, a net decrease in debt of $30.6 million and receipts from the exercise of stock compensation awards of $15.3 million. Keebler's debt decreased $198.1 million and Flowers' debt increased $214.9 million (including non cash capitalized leases of $47.4 million). Flowers' $100 million commercial paper agreement terminated on January 14, 2000 and the outstanding balance of $25.0 million was paid with available funds under Flowers' $500 million revolving syndicated loan facility (the "Loan Facility").

For fiscal 1999, dividends paid per FII share increased 8.4% to $.515 from $.475 paid in the prior year. Dividends are declared at the discretion of the Board of Directors based on an assessment of the Company's financial position and other considerations. FII's ability to pay dividends is limited by the terms of its Loan Facility, as discussed below.

Keebler declared no cash dividends during fiscal 1999 or prior thereto. Keebler's ability to pay cash dividends is limited by terms of its credit facilities. The most restrictive provision limits dividend payments by Keebler 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 proceeds received from the conversion of indebtedness into capital stock and (v) the net reduction in investments made by Keebler. Keebler is in compliance with these dividend restrictions and, accordingly, Keebler's Board declared a dividend subsequent to year end of $0.1125 per share that was paid on March 22, 2000. As a result of its 55% ownership in Keebler, FII received approximately $5.2 million from this dividend.

The Company's credit facilities consist of the $500 million Loan Facility, $125 million of senior notes, a $100 million synthetic lease facility and $200 million of 7.15% debentures due 2028.

Since September 1996, the Company has been a party to an $80 million loan facility agreement relating to its distributor note program (the "Distributor Facility") which is subject to the same financial covenants as the Loan Facility. This agreement provides third party credit facilities for the independent distributors serving Flowers Bakeries. The Company receives payments from the independent distributors and remits such amounts, net of certain loan servicing fees, to the financial institution. Additionally, the agreement requires amounts to be placed in escrow by the Company upon the occurrence of certain events as defined in the agreement. No events have occurred as of January 1, 2000 that would require such funding by the Company.

During fiscal 1999 and subsequent to year-end, FII amended the Loan Facility and the Distributor Facility. The amendments provided for increased loan borrowing margins and facility fees and added and amended certain financial covenants. The covenants currently in effect include, among others, (i) a maximum leverage ratio of 0.65 to 1, (ii) an adjusted fixed charges coverage ratio of 1.10 to 1 for the second quarter of fiscal 2000, with increased levels for all quarters thereafter; (iii) minimum adjusted consolidated EBITDA at specified levels for each fiscal quarter, (iv) a borrowing base covenant requiring that FII's total indebtedness, measured quarterly, not exceed specified percentages of the book value of accounts receivable, inventory, property, plant and equipment and the fair market value of FII's interest in Keebler, (v) a prohibition on acquisitions, (vi) a negative pledge on all assets of the Company, (vii) a limit on Flowers capital expenditures, and (viii) limits on cash dividends unless the Company would have, following payment thereof, at least $15 million availability under the unused commitments and borrowing base tests of the Loan Facility. The amount of retained earnings available for payment of dividends at January 1, 2000 under the amendment was $125.0 million.

The Company was in compliance with all covenants under its Loan Facility as in effect on January 1, 2000 and believes that, in light of its current cash position, its cash flow from operating activities and its amended credit facilities, it can comply with the current terms of its Loan Facility, Distributor Facility and other credit facilities and can meet presently foreseeable financial requirements.

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 depend on the intended use of the derivative and the resulting designation. The effective date for this standard has been extended to 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.

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.

YEAR 2000 ISSUE

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 recognized the need to make every effort to ensure that its operations were not adversely impacted by applications and processing issues related to the 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 have experienced system failures or miscalculations that could have disrupted operations and caused a temporary inability to process transactions, send and process invoices or engage in similar normal business activities.

The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of the Year 2000 Issue. However, it is possible that the full impact of the date change has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly, or year end. The Company believes that any such problems are likely to be minor and correctable. In addition, the Company could still be negatively affected if its customers or suppliers are adversely affected by the Year 2000 or similar issues. The Company currently is not aware of any significant Year 2000 or similar problems that have arisen for its customers and suppliers. Although a contingency plan does not exist regarding these potential problems, if significant risk is identified, the Company will develop contingency plans as deemed necessary at that time.

The Company expended $6.2 million on Year 2000 readiness efforts from 1997 to 1999. These efforts included replacing some outdated, non-compliant hardware and non-compliant software as well as identifying and remediating Year 2000 problems.

FORWARD-LOOKING STATEMENTS

Certain statements incorporated by reference or made in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These statements are subject to the safe harbor provisions of the Reform Act. Such forward-looking statements include, without limitation, statements about:

- the competitiveness of the baking industry;

- the future availability and prices of raw and packaging materials;

- potential regulatory obligations;

- our strategies;

- other statements that are not historical facts; and

- Year 2000 issues.

When used in this discussion, the words "anticipate," "believe," "estimate" and similar expressions are generally intended to identify forward-looking statements. 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 or business conditions (including in the baking industry);

- actions of competitors;

- our ability to retain capital on terms acceptable to us;

- our ability to recover material costs in the pricing of our products;

- the extent to which we are able to develop new products and markets for our products;

- the time required for such development;

- the level of demand for such products; and

- changes in our business strategies.

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.

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 an effort to provide a predictable and consistent commodity price and thereby reduce 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 1, 2000, a hypothetical ten percent adverse change in commodity prices under normal market conditions could potentially have a $19.5 million effect on the fair value of the derivative portfolio. 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 reductions in raw material and packaging prices.

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 Flowers' mix of fixed and floating rate debt at January 1, 2000, assuming a ten percent increase in interest rates, Flowers' interest cost would increase $3.3 million, while the impact of a ten percent decrease in interest rates would reduce interest expense $3.3 million. Based on Flowers' mix of fixed and floating rate debt at January 2, 1999, assuming a ten percent increase in interest rates, Flowers' interest cost would increase $1.5 million, while the impact of a ten percent decrease in interest rates would reduce interest expense $1.5 million. Assuming a ten percent increase in market price, the fair value of Keebler's interest rate swap agreements at January 1, 2000, with a notional amount of $334.0 million, would increase the net receivable to $9.7 million, while the impact of a ten percent decrease in market price would reduce the net receivable to $6.0 million. The fair value of Keebler's interest rate swap agreements at January 2, 1999, with an assumed ten percent increase in market price and the notional amount of $527.3 million, would increase the net receivable to $3.1 million, while the impact of a ten percent decrease in market price would result in a net payable

of $4.4 million. 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. During 1999, an interest swap that no longer served as a hedge, with a notional amount of $170.0 million, was recognized in income from operations with a marked to market fair value of $2.8 million.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Flowers Industries, Inc.

In our opinion, the accompanying consolidated balance sheets 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 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for the years ended January 1, 2000 and January 2, 1999, for the twenty-seven week period ended January 3, 1998, and for the year ended June 28, 1997, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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.

/s/  PRICEWATERHOUSECOOPERS LLP

Atlanta, Georgia
February 3, 2000
except for Note 15 which
is as of March 30, 2000

                                                                 FOR THE 52 WEEKS ENDED         FOR THE 27       FOR THE 52
                                                             -----------------------------      WEEKS ENDED      WEEKS ENDED
                                                              JANUARY 1,        JANUARY 2,       JANUARY 3,        JUNE 28,
                                                                 2000              1999             1998             1997
                                                             -----------       -----------      -----------      -----------
                                                             (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales .................................................      $ 4,236,010       $ 3,765,367       $ 784,097       $ 1,437,713
                                                             -----------       -----------       ---------       -----------
Materials, supplies, labor and other production
  costs ...............................................        2,001,956         1,702,581         418,926           787,799
Selling, marketing and administrative expenses ........        1,845,101         1,633,319         301,426           534,285
Depreciation and amortization .........................          144,619           128,765          26,930            45,970
Non-recurring charge ..................................           60,355            68,313
                                                             -----------       -----------       ---------       -----------
Income from operations ................................          183,979           232,389          36,815            69,659
  Interest expense ....................................           82,565            72,840          12,144            25,691
  Interest (income) ...................................           (1,700)           (4,115)           (348)             (582)
                                                             -----------       -----------       ---------       -----------
Interest expense, net .................................           80,865            68,725          11,796            25,109
                                                             -----------       -----------       ---------       -----------
Gain on sale of distributor notes receivable ..........                                                               43,244
                                                             -----------       -----------       ---------       -----------
Income before income taxes, income from investment in
  unconsolidated affiliate, minority interest,
  extraordinary loss and cumulative effect of changes
  in accounting principles ............................          103,114           163,664          25,019            87,794
Income taxes ..........................................           56,260            74,391           9,632            33,191
Income from investment in unconsolidated affiliate ....                                             18,061             7,721
                                                             -----------       -----------       ---------       -----------
Income before minority interest, extraordinary loss and
  cumulative effect of changes in accounting
  principles ..........................................           46,854            89,273          33,448            62,324
Minority interest .....................................          (39,560)          (43,305)
                                                             -----------       -----------       ---------       -----------
Income before extraordinary loss and cumulative effect
  of changes in accounting principles .................            7,294            45,968          33,448            62,324
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 ...................................      $     7,294       $    41,899       $  23,560       $    62,324
                                                             ===========       ===========       =========       ===========
Net Income Per Common Share:
  Basic --
    Income before extraordinary loss and cumulative
      effect of changes in accounting principles ......      $       .07       $       .47       $     .38       $       .71
    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 .......................      $       .07       $       .43       $     .27       $       .71
                                                             ===========       ===========       =========       ===========
    Weighted average shares outstanding ...............          100,112            96,393          88,368            88,000
                                                             ===========       ===========       =========       ===========
  Diluted --
    Income before extraordinary loss and cumulative
      effect of changes in accounting principles ......      $       .07       $       .47       $     .38       $       .71
    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 .......................      $       .07       $       .43       $     .27       $       .71
                                                             ===========       ===========       =========       ===========
    Weighted average shares outstanding ...............          100,420            96,801          88,773            88,401
                                                             ===========       ===========       =========       ===========

(See Accompanying Notes to Consolidated Financial Statements)

                                                                            JANUARY 1, 2000    JANUARY 2, 1999
                                                                            ---------------    ---------------
                                                                                   (AMOUNTS IN THOUSANDS)
                                     ASSETS
Current Assets:
  Cash and cash equivalents ............................................      $    39,382       $    54,542
  Accounts and notes receivable, net ...................................          185,939           270,507
  Inventories, net:
    Raw materials ......................................................           68,110            54,739
    Packaging materials ................................................           29,855            27,056
    Finished goods .....................................................          175,281           207,620
    Other ..............................................................            7,679             8,178
                                                                              -----------       -----------
                                                                                  280,925           297,593
  Deferred income taxes ................................................           71,498            76,327
  Other ................................................................          112,794            84,276
                                                                              -----------       -----------
                                                                                  690,538           783,245
                                                                              -----------       -----------
Property, Plant and Equipment:
  Land .................................................................           49,612            39,149
  Buildings ............................................................          386,197           350,067
  Machinery and equipment ..............................................          958,176           816,495
  Furniture, fixtures and transportation equipment .....................          148,565           116,219
  Construction in progress .............................................          127,545            96,288
                                                                              -----------       -----------
                                                                                1,670,095         1,418,218
  Less: accumulated depreciation .......................................         (520,456)         (430,516)
                                                                              -----------       -----------
                                                                                1,149,639           987,702
                                                                              -----------       -----------
Other Assets ...........................................................           88,715            86,510
                                                                              -----------       -----------
  Cost in Excess of Net Tangible Assets:
  Cost in excess of net tangible assets ................................        1,033,272         1,033,632
  Less: accumulated amortization .......................................          (61,686)          (30,189)
                                                                              -----------       -----------
                                                                                  971,586         1,003,443
                                                                              -----------       -----------
                                                                              $ 2,900,478       $ 2,860,900
                                                                              ===========       ===========
                      LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
  Commercial paper .....................................................      $        --       $    74,870
  Current maturities of long-term debt and capital leases ..............           47,566           120,479
  Accounts payable .....................................................          248,153           227,749
  Income taxes .........................................................           23,603                --
  Facility closing costs and severance .................................           16,836            23,670
  Other accrued liabilities ............................................          319,639           314,270
                                                                              -----------       -----------
                                                                                  655,797           761,038
                                                                              -----------       -----------
Long-term debt and capital leases ......................................        1,208,630         1,038,998
                                                                              -----------       -----------
Other liabilities:
  Deferred income taxes ................................................          162,470           182,244
  Postretirement/postemployment obligations ............................           64,772            63,754
  Facility closing costs and severance .................................           30,188            41,331
  Other ................................................................           56,289            52,915
                                                                              -----------       -----------
                                                                                  313,719           340,244
                                                                              -----------       -----------
Minority interest ......................................................          183,578           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
    100,863,848 and 100,202,414 shares,
    respectively .......................................................           63,040            62,627
  Capital in excess of par value .......................................          291,377           274,255
  Retained earnings ....................................................          219,279           262,531
  Common stock in treasury, 567,160 and 381,366 shares,
    respectively .......................................................          (10,594)           (6,762)
  Stock compensation related adjustments ...............................          (24,348)          (19,690)
                                                                              -----------       -----------
                                                                                  538,754           572,961
                                                                              -----------       -----------
                                                                              $ 2,900,478       $ 2,860,900
                                                                              ===========       ===========

(See Accompanying Notes to Consolidated Financial Statements)

                                                   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)

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 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)
  Net income for the year ................                                               7,294
  Adjustment for Keebler stock
    transactions .........................                                  2,907
  Exercise of employee stock options .....                                   (750)                  78,044       1,494
  Exercise of Equity Incentive Award .....                                  1,043                  (91,547)     (2,161)       1,025
  Exercise of Restricted Stock Award .....                                  1,917                 (121,078)     (2,497)       1,666
  Purchase of treasury stock .............                                                         (15,053)       (335)
  Stock issued into escrow in connection
    with Restricted Stock Award ..........       673,800         420       12,376                                           (12,796)
  Restricted Stock Award reversions ......       (12,366)         (7)        (371)                 (36,160)       (333)         450
  Amortization of Restricted Stock Award
    and Equity Incentive Award ...........                                                                                    4,997
  Dividends paid -- $.515 per common
    share ................................                                             (50,546)
                                             -----------   ---------    ---------    ---------    --------    --------     --------
Balances at January 1, 2000 ..............   100,863,848   $  63,040    $ 291,377    $ 219,279    (567,160)   $(10,594)    $(24,348)
                                             ===========   =========    =========    =========    ========    ========     ========

(See Accompanying Notes to Consolidated Financial Statements)

                                                             FOR THE 52 WEEKS
                                                                   ENDED            FOR THE 27    FOR THE 52
                                                          -----------------------   WEEKS ENDED   WEEKS ENDED
                                                          JANUARY 1,   JANUARY 2,   JANUARY 3,     JUNE 28,
                                                             2000         1999         1998          1997
                                                          ----------   ----------   -----------   -----------
                                                                        (AMOUNTS IN THOUSANDS)

Cash flows provided by operating activities:
Net income..............................................  $   7,294    $  41,899     $ 23,560      $ 62,324
Adjustments to reconcile net income to net cash provided
  by operating activities:
  Minority interest.....................................     39,560       42,537
  Income from investment in unconsolidated affiliate....                              (18,061)       (7,721)
  Depreciation and amortization.........................    144,619      128,765       26,930        45,970
  Deferred income taxes.................................    (16,782)      (1,504)        (803)        1,506
  Gain on sale of distributor notes receivable..........                                            (43,244)
  Non-recurring charge..................................     46,071       68,313
  Loss due to early extinguishment of debt..............                   1,706
  Cumulative effect of changes in accounting
    principles..........................................                   3,131        9,888
  Other.................................................      6,946       (1,486)
Changes in assets and liabilities, net of acquisitions:
  Accounts and notes receivable, net....................    (29,803)     (11,330)      (3,281)        2,343
  Inventories, net......................................     16,811      (35,828)        (413)      (36,144)
  Other assets..........................................    (13,425)     (53,486)      (1,495)       (2,242)
  Accounts payable and other accrued liabilities........     60,191       27,076      (16,658)      (13,199)
  Facility closing costs and severance..................    (18,389)      (9,798)        (577)       (1,606)
                                                          ---------    ---------     --------      --------
Net cash provided by operating activities...............    243,093      199,995       19,090        17,987
                                                          ---------    ---------     --------      --------
Cash flows from investing activities:
  Purchase of property, plant and equipment.............   (266,607)    (140,275)     (32,857)      (77,510)
  Acquisition of majority interest in Keebler (net of
    cash acquired)......................................                (285,203)
  Acquisition of President by Keebler (net of cash
    acquired)...........................................                (444,818)
  Acquisition of other businesses, net of divestitures
    (net of cash acquired)..............................    (10,772)     (28,992)      (5,532)          617
  Other.................................................      3,696        1,378        2,145            63
                                                          ---------    ---------     --------      --------
Net cash disbursed for investing activities.............   (273,683)    (897,910)     (36,244)      (76,830)
                                                          ---------    ---------     --------      --------
Cash flows from financing activities:
  Common stock offering proceeds, net of underwriters'
    discount and offering costs.........................                 187,930
  Dividends paid........................................    (50,546)     (46,102)     (19,620)      (36,299)
  Treasury stock purchases..............................    (21,688)      (8,059)        (117)         (289)
  Proceeds from receivables securitization..............    103,000
  Stock compensation and warrants exercised.............     15,306       20,744
  Debentures proceeds...................................                 199,417
  Debentures issuance costs.............................                  (1,750)
  Increase (decrease) in commercial paper...............    (74,870)      21,364        7,713        40,792
  Increase (decrease) in debt and capital lease
    obligations.........................................     44,228      376,913          965          (794)
  Distributor notes receivable proceeds.................                                             65,954
                                                          ---------    ---------     --------      --------
Net cash provided by (disbursed for) financing
  activities............................................     15,430      750,457      (11,059)       69,364
                                                          ---------    ---------     --------      --------
Net increase (decrease) in cash and cash equivalents....    (15,160)      52,542      (28,213)       10,521
Cash and cash equivalents at beginning of period........     54,542        2,000       30,213        19,692
                                                          ---------    ---------     --------      --------
Cash and cash equivalents at end of period..............  $  39,382    $  54,542     $  2,000      $ 30,213
                                                          =========    =========     ========      ========
Schedule of noncash investing and financing activities:
  Stock compensation transactions.......................  $   4,658    $  20,431     $  6,355      $  9,263
  Stock issued for acquisition..........................                  40,000                      4,000
  Capital lease obligations.............................     47,406
Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Interest, net of amounts capitalized................  $  86,054    $  62,982     $ 11,878      $ 25,955
    Income taxes........................................     38,281       87,063       10,867        32,729

(See Accompanying Notes to Consolidated Financial Statements)

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, for the fifty-two weeks then ended and forward, 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 1997" shall mean Flowers' full fiscal year ended June 28, 1997; (ii) "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; (iii) "fiscal 1998" shall mean the Company's full fiscal year ended January 2, 1999; and (iv) "fiscal 1999" shall mean the Company's full fiscal year ended January 1, 2000. As a result, the Company has presented its financial position as of January 1, 2000 and January 2, 1999 and has presented its results of operations, cash flow and changes in stockholders' equity for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997. For comparative purposes the Company has included unaudited, condensed, consolidated financial information of Flowers in Note 14 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 were made to conform with the current 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. 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, and $163.0 million, or 11% of sales during fiscal 1997. During fiscal 1999 and fiscal 1998, no sales to a single customer accounted for more than 10% of sales.

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. Allowances of $22.0 million and $7.8 million were recorded at January 1, 2000 and January 2, 1999, respectively.

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 41% and 47% of inventories at January 1, 2000 and January 2, 1999, respectively, are valued using the first-in-first-out method ("FIFO"), with Keebler's finished goods inventory valued primarily under the last-in-first-out ("LIFO") method. Inventory valued under LIFO approximates FIFO at January 1, 2000 and January 2, 1999.

At January 1, 2000 and January 2, 1999, inventories are shown net of allowances for slow-moving and aged inventory of $13.0 million and $9.6 million, respectively.

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION

Property, plant and equipment is stated at cost. Depreciation expense is computed using the straight-line method based on the estimated useful lives of the depreciable assets. Certain facilities and equipment held under capital leases are classified as property, plant and equipment and amortized using the straight-line method over the lease terms and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense.

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. Property under capital leases is amortized over the lease term. Depreciation expense for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998, and fiscal 1997 was $113.1 million, $108.5 million, $25.9 million and $44.8 million, respectively.

NOTES RECEIVABLE AND DEFERRED INCOME

Prior to September 1996, Flowers Bakeries sold certain of 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. The agreement requires amounts to be placed in escrow by the Company upon the occurrence of certain events as defined in the agreement. No events have occurred as of January 1, 2000 that would require such funding by the Company.

                                              JANUARY 1, 2000   JANUARY 2, 1999
                                              ---------------   ---------------
                                                   (AMOUNTS IN THOUSANDS)

Goodwill, net...............................     $731,804         $  748,456
Trademarks and trade names, net.............      239,782            254,987
                                                 $971,586         $1,003,443
                                                 ========         ==========

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 twenty to 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, ranging from ten to forty years. Amortization expense for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997 was $31.5 million, $19.6 million, $1.0 million and $1.1 million, respectively. During fiscal 1999, the Company recorded $9.8 million of goodwill and trademark adjustments related to purchase accounting and non-recurring charge reserves (Note 7).

DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments as part of an overall strategy to manage market risk. The Company uses forward commodity futures and options contracts to hedge existing or future exposure to changes in commodity prices. The Company does not enter into these derivative financial instruments for trading or speculative purposes.

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.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The new statement establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities in the statement of financial position 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 Company is currently assessing the effects SFAS133 will have on its financial position and results of operations.

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.

RESEARCH AND DEVELOPMENT

Activities related to new product development and major improvements to existing products and processes are expensed as incurred. Amounts were $13.1 million for fiscal 1999, $11.4 million for fiscal 1998, $.7 million for the twenty-seven week transition period ended January 3, 1998 and $1.0 million for fiscal 1997.

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 $111.2 million for fiscal 1999, $108.4 million for fiscal 1998, $17.0 million for the twenty-seven week transition period ended January 3, 1998 and $19.1 million for fiscal 1997.

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 excess of the market price at the date of grant over the purchase price to be paid by the grantee, if any, is recognized ratably by the Company, as compensation expense, over the vesting period.

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 to market value or discounted cash flow value is required.

SOFTWARE DEVELOPMENT COSTS

The Company accounts for software development costs in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 98-1, "Accounting for Cost of Computer Software Developed or Obtained for Internal Use". In accordance with SOP 98-1, the Company expenses costs incurred in the preliminary project stage, and thereafter, capitalizes costs incurred in developing or obtaining internally used software. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized over a period of not more than five years and are subject to impairment evaluation in accordance with the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." The Company capitalized software development costs of $14.7 million and $5.6 million in fiscal 1999 and fiscal 1998, respectively.

NET INCOME PER COMMON SHARE

The Company computes net income per common share in accordance with 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 November 20, 1997, the Emerging Issues Task Force ("EITF"), a subcommittee of the FASB, 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.

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

On April 3, 1998, the Accounting Standards Executive Committee, a subcommittee of the American Institute of Certified Public Accountants, issued SOP 98-5 -- "Reporting on the Costs of Start-Up Activities". 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 in fiscal 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 1999 and the prior periods presented, total comprehensive income equaled net income.

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 a 49.6% interest in INFLO Holdings Corporation ("INFLO"), a newly formed corporation jointly owned by FII and Artal Luxembourg Corporation S.A. for $62.5 million. 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 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,

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accordingly, Keebler's assets and liabilities are included in the consolidated balance sheet as of January 2, 1999 and January 1, 2000. 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 purchase price has been allocated to the net tangible and intangible assets acquired and liabilities assumed of Keebler's based on their respective fair values. 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.

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 their respective 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. The unallocated excess purchase price is being amortized straight-line over forty years.

Results of operations for President from September 28, 1998 to January 2, 1999 have been included in the consolidated statement of income for fiscal 1998. The following unaudited, condensed, combined pro forma results of operations of the Company assume the President acquisition and the Keebler Acquisition occurred as of the beginning of each period presented. 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:

                                               FOR THE 52 WEEKS ENDED        FOR THE 53 WEEKS ENDED
                                                  JANUARY 2, 1999                     JANUARY 3, 1998
                                               ----------------------         ----------------------
                                                     (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

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

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.

                                                              JANUARY 1,   JANUARY 2,
                                                                 2000         1999
                                                              ----------   ----------
                                                              (AMOUNTS IN THOUSANDS)

Employee compensation.......................................   $ 89,093     $ 93,942
Pension.....................................................     21,521       19,511
Insurance...................................................     61,268       63,551
Marketing and consumer promotions...........................     61,869       65,075
Other.......................................................     85,888       72,191
                                                               --------     --------
          Total.............................................   $319,639     $314,270
                                                               ========     ========

FII does not guarantee Keebler's other accrued liabilities of $237.4 million, which are included in the consolidated amount at January 1, 2000.

                                             INTEREST      FINAL      JANUARY 1,   JANUARY 2,
                                               RATE       MATURITY        2000         1999
                                             --------     ---------   ----------   ----------
                                                                      (AMOUNTS IN THOUSANDS)

Flowers:
  Syndicated Loan Facility.................   7.56%         2003      $  350,000    $  150,000
  Senior Notes.............................   6.84%         2016         125,000       125,000
  Debentures...............................   7.15%         2028         200,000       200,000
  Commercial Paper.........................   5.55%         2000          25,027        74,870
  Capital Lease Obligations................   7.75%        Various        51,317         2,853
  Other....................................  Various      2004-2017       48,409        27,129
                                                                      ----------    ----------
                                                                         799,753       579,852
                                                                      ----------    ----------
Keebler:
  Bridge Facility..........................   6.26%         1999                        75,000
  Revolving Facility.......................   5.84%         2004                        85,000
  Term Facility............................   5.81%         2004         314,000       350,000
  Senior Subordinated Notes................   10.75%        2006         124,400       124,400
  Capital Lease Obligations................  Various      2002-2042        7,588         8,290
  Other Senior Debt........................  Various      2001-2005       10,455        11,805
                                                                      ----------    ----------
                                                                         456,443       654,495
                                                                      ----------    ----------
Consolidated Debt:.........................                            1,256,196     1,234,347
  Due within one year......................                               47,566       195,349
                                                                      ----------    ----------
  Due after one year.......................                           $1,208,630    $1,038,998
                                                                      ==========    ==========

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 1, 2000 and January 2, 1999, $350.0 million and $150.0 million, respectively 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

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

grid using a choice of LIBOR plus 1.375% or money market rates. At January 1, 2000, the commitment fee was 0.375%.

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 were used to finance inventory at Mrs. Smith's Bakeries. On January 14, 2000, this facility was terminated and repaid with borrowings from the Syndicated Loan Facility. In accordance with FASB Statement No. 6, "Classification of Short-Term Obligations Expected to be Refinanced", the outstanding balance of $25.0 million was classified as long-term debt on January 1, 2000.

FII also has a $10.0 million revolving-term loan agreement with no amounts outstanding at January 1, 2000 or January 2, 1999.

Several loan agreements of FII contain restrictions which, among other things, require maintenance of certain financial ratios and restrict encumbrance of assets and creation of indebtedness. At January 1, 2000, FII was in compliance with these requirements.

KEEBLER

At January 1, 2000, and January 2, 1999, Keebler's primary credit financing was provided by a $700.0 million Credit Facility consisting of $350.0 million under the Revolving Facility and $350.0 million under the Term Facility. At January 2, 1999, financing was also provided under a $125.0 million Bridge Facility.

Outstanding balances under the Term Facility were $314.0 million and $350.0 million at January 1, 2000 and January 2, 1999, respectively. Quarterly principal payments are scheduled through the final maturity at September 2004. The Revolving Facility had outstanding balances of zero and $85.0 million and available balances of $350.0 million and $265.0 million at January 1, 2000 and January 2, 1999, respectively. The Revolving Facility has no scheduled principal payment until maturity at September 2004. Any unused borrowings under the Revolving Facility are subject to a commitment fee that will vary from 0.125% - 0.30% based on the relationship of debt to adjusted earnings. At January 1, 2000, the commitment fee was 0.125%.

The $75.0 million Bridge Facility outstanding at January 2, 1999, that had a final maturity of September 1999, with no scheduled principal payments, was refinanced on January 29, 1999. Keebler entered into a Receivables Purchase Agreement ("the Agreement") to replace the $75.0 million of debt held under the Bridge Facility, allowing funds to be borrowed at a lower cost to Keebler. The accounting for this Agreement is governed by SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Under the guidelines of SFAS No. 125, a special purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler Foods Company. All transactions under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. At January 1, 2000, a net of $103.0 million of accounts receivable had been sold at fair value, which is below the maximum amount currently available under the Agreement.

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Interest on the Bridge Facility is calculated using the same components as the Credit Facility.

In conjunction with the President acquisition on September 28, 1998, Term Loan A was extinguished by using $145.0 million of borrowings under the new Credit Facility. Keebler recorded a pre-tax extraordinary charge of $2.8 million related primarily to expensing certain bank fees which were being amortized and which were incurred at the time Term Loan A was issued. The related after-tax charge, net of minority interest, was $.9 million.

On July 1, 1998, Keebler entered into a swap transaction which matures on July 1, 2001. The swap transaction had the effect of converting the fixed rate of 10.75% on $124.0 million of the Notes to a rate of 11.33% through July 3, 2000. In addition, on September 30, 1998 and October 5, 1998, Keebler entered into two swap transactions both maturing on September 30, 2004, each of which converts the base rate on $105.0 million of Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively.

Keebler also maintains an interest rate swap that does not qualify for hedge accounting, which has a notional amount of $170.0 million and a fixed rate obligation of 5.0185% through February 1, 2001. During fiscal 1999, $2.8 million was recognized in income from operations in order to mark-to-market the interest rate swap. The resulting receivable related to this transaction was recorded as a current receivable as part of other current assets for $0.5 million and a long-term receivable as part of other assets for $2.3 million in the statement of financial position.

Several loan agreements of Keebler contain restrictions which, among other things, require maintenance of certain financial ratios and restrict encumbrance of assets and creation of indebtedness. At January 1, 2000, Keebler was in compliance with these requirements.

Annual maturities of long-term debt and capital leases for each of the five years following January 1, 2000 and thereafter are as follows:

                                                        FLOWERS      KEEBLER    CONSOLIDATED
                                                        -------      -------    ------------
                                                               (AMOUNTS IN THOUSANDS)

2000..................................................  $ 35,310     $ 37,283    $   72,593
2001..................................................     7,138       42,162        49,300
2002..................................................     7,257       68,647        75,904
2003..................................................     7,404      105,596       113,000
2004..................................................    32,797       75,769       108,566
2005 and thereafter...................................   709,847      126,986       836,833
                                                        --------     --------    ----------
          Total.......................................  $799,753     $456,443    $1,256,196
                                                        ========     ========    ==========

FII has not guaranteed any of the Keebler indebtedness and it is to be repaid solely from the cash flows of Keebler.

LEASES

The Company leases certain property and equipment under various operating and capital lease arrangements that expire over the next 25 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 value for periods from one month to ten years. Flowers has entered into certain capital lease obligations requiring the Company to guarantee the residual value to the lessor of approximately $29.0 million

                                                            JANUARY 1, 2000    JANUARY 2, 1999
                                                            ---------------    ---------------
                                                                 (AMOUNTS IN THOUSANDS)

Land......................................................      $   980           $  980
Buildings.................................................        2,894            2,894
Machinery and Equipment...................................       54,159            4,811
Other Leased Assets.......................................            1                1
                                                                -------           ------
                                                                 58,034            8,686
Accumulated Depreciation..................................       (2,172)            (242)
                                                                -------           ------
                                                                $55,862           $8,444
                                                                =======           ======

Future minimum lease payments under scheduled capital and operating leases that have initial or remaining noncancelable terms in excess of one year are as follows:

                                                            CAPITAL LEASES   OPERATING LEASES
                                                            --------------   ----------------
                                                                 (AMOUNTS IN THOUSANDS)

2000......................................................     $10,388           $ 50,655
2001......................................................       9,452             42,664
2002......................................................       8,462             35,324
2003......................................................       7,187             31,919
2004......................................................      11,230             23,266
2005 and thereafter.......................................      31,998            113,266
                                                               -------           --------
          Total minimum payments..........................     $78,717           $297,094
Amount representing interest..............................     (19,812)
                                                               -------
Obligations under capital leases..........................      58,905
Obligations due within one year...........................      (7,666)
                                                               =======
Long-term obligations under capital leases................     $51,239
                                                               =======

Rent expense for all operating leases amounted to $96.2 million for fiscal 1999, $61.3 million for fiscal 1998, $16.2 million for the twenty-seven week transition period ended January 3, 1998 and $24.2 million for fiscal 1997. FII does not guarantee Keebler's lease obligations of $7.6 million, which are included in the consolidated amount above.

NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair market value of short and long-term borrowing was estimated using discounted cash flow analysis based on current interest rates which would be obtained for similar financial instruments. The carrying value of cash and cash equivalents and short-term debt approximates fair value at January 1, 2000 and January 2, 1999, because of the short-term maturity of the instruments. The fair value of Flowers long-term debt was $712.5 million at January 1, 2000 and approximately equaled carrying value at January 2, 1999. The fair value of Keebler's long-term debt was $417.2 million and $536.6 million at January 1, 2000 and January 2, 1999, respectively. The fair value of the Company's outstanding commodity derivative financial instruments, based on the stated market value as of January 1, 2000 and January 2, 1999, was $92.0 million and $113.8 million, respectively. The fair value of Keebler's interest rate swap agreements, a net receivable of $7.9 million, was estimated based on market prices as of January 1, 2000.

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. COMMODITY PURCHASE AGREEMENTS

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. To qualify as a hedge, a commodity agreement must reduce the exposure of the Company to price risk and must show high correlation of changes in value with the value of the hedged item. For fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997, losses of $6.5 million, $7.9 million, $.6 million and $1.9 million, respectively, were recorded. As of January 1, 2000 and January 2, 1999, deferred losses on closed contracts accounted for as hedges were $5.8 million and $3.8 million, respectively. Gains and losses on agreements which do not qualify as hedges are marked to market and recorded immediately as other income or expense. For fiscal 1999, a loss of $3.5 million was recorded. 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. There was no gain or loss in fiscal 1997.

The Company's various commodity purchase agreements effectively commit the Company to purchase raw materials in amounts approximating $113.0 million at January 1, 2000, which will be used in production in future periods.

NOTE 7. FACILITY CLOSING COSTS AND SEVERANCE

NON-RECURRING CHARGES

During fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey production facility due to excess capacity within Keebler's 14-plant manufacturing network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million. The charge included $46.1 million of non-cash asset impairments and $23.1 million of severance and other exit costs related to the Sayreville facility. As a direct result of this plan, asset impairments were recorded to write-down the closed facility to net realizable value, less cost to sell, based on management's estimate of fair value. Also, as part of this plan, asset impairments were recorded to write-off certain other machinery and equipment currently held by Keebler and to reduce goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996, neither of which provides any future economic benefit. Severance costs provided for the reduction of approximately 650 employees, of which 600 were represented by unions. As of January 1, 2000, approximately 640 employees, of which 595 were represented by unions, had been severed. This plan is substantially complete as of January 1, 2000. Accordingly, during the fourth quarter of fiscal 1999, an adjustment of $2.9 million was recorded against the original $69.2 million. The adjustment was due to lower than expected severance costs and an earlier than expected disposal of the facility as current real estate conditions resulted in a twelve month reduction in the estimated disposal period. The adjusted net charge in fiscal 1999 related to this plant closure was $66.3 million. Ongoing costs, including but not limited to, guard service, utilities, property taxes and preparing the facility for sale, will continue for eighteen months or until the facility is disposed of, whichever occurs earlier. The amount of suspended depreciation and amortization that would have been recognized for the year ended January 1, 2000, if prior period impairment had not been recognized was approximately $3.7 million, with $5.6 million of annualized savings anticipated in 2000.

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). The charge included $57.5 million of noncash asset impairments, $4.8 million of severance costs and $6.1 million of other related exit costs. The plan involved 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

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 1, 2000, all such employees had been terminated. During fiscal 1999, Flowers Bakeries and Mrs. Smith's Bakeries recorded adjustments to the fiscal 1998 restructuring reserve of $1.1 million and $4.9 million, respectively. These adjustments are the result of reduced carrying costs of plants held for sale, an adjustment to the value of these assets due to the identification of a buyer and changes in estimates of severance and other employee termination costs. As of January 1, 2000, all significant actions related to these plans have been completed. The remaining exit costs include ongoing costs such as guard service, utilities and property taxes of closed facilities until the time of disposal. 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.

PURCHASE ACCOUNTING RESERVES

During fiscal 1998, 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 were initially estimated at 410 employees and $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. At January 1, 2000, approximately 40 employees not under union contract had been terminated. In addition, during the year management reviewed its exit plan and made a determination that approximately 110 employees not under union contract, would not be terminated. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the President acquisition by reducing goodwill and other intangibles by $4.5 million to recognize exit costs that are now expected to be less than initially anticipated. The remainder of management's exit plan is expected to be substantially complete before the end of fiscal 2000 with only noncancelable lease obligations to be paid over the next six years, concluding in fiscal 2006.

As part of the acquisition of Mrs. Smith's Inc. in fiscal 1996, Flowers recorded a purchase accounting reserve of $37.1 million 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 $6.8 million, $4.0 million, $.6 million and $1.6 million in fiscal 1999, 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 approximately 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

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 totaled $3.0 million for fiscal 1999 and $7.7 million for fiscal 1998. In addition, during fiscal 1999 and fiscal 1998, Keebler expensed $0.8 million and $2.8 million, respectively, principally for costs related to the closure of two distribution facilities not included in the original plan. During fiscal 1999, Keebler adjusted accruals previously established in the accounting for the Keebler acquisition by reducing goodwill and other intangibles by $0.5 million and reversing $1.3 million into income from operations to recognize exit costs that are now expected to be less than initially anticipated. The $1.3 million was credited to operating income as it had originally been charged to income from operations in fiscal 1999 and fiscal 1998. During fiscal 1998, Keebler also adjusted accruals previously established in the accounting for the Keebler and Sunshine 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 was substantially complete at January 1, 2000 with only noncancelable lease obligations continuing through 2006.

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

                                     BALANCE AT                                         BALANCE AT
                                      JANUARY 3,   PROVISION/    NONCASH                 JANUARY 2,
                                         1998      ADJUSTMENTS   REDUCTIONS   SPENDING      1999
                                      ----------   -----------   ----------   --------   ----------

Noncash impairments.................    $   --       $57,489      $(57,489)   $     --     $   --
Severance...........................        --         4,755            --      (3,217)     1,538
Noncancelable lease obligations and
  facility closure costs............        --         3,995            --          --      3,995
Other...............................        --         2,074            --         (94)     1,980
                                        ------       -------      --------    --------     ------
          Total.....................    $   --       $68,313      $(57,489)   $ (3,311)    $7,513
                                        ======       =======      ========    ========     ======

                                      BALANCE AT                                          BALANCE AT
                                      JANUARY 2,   PROVISION/     NONCASH                 JANUARY 1,
                                         1999      ADJUSTMENTS   REDUCTIONS   SPENDING       2000
                                      ----------   -----------   ----------   --------    ----------

Noncash impairments.................    $   --       $42,049      $(42,049)   $     --     $   --
Severance...........................     1,538        14,377            --     (13,878)     2,037
Noncancelable lease obligations and
  facility closure costs............     3,995         1,358            --      (2,522)     2,831
Other...............................     1,980         2,571            --      (2,089)     2,462
                                        ------       -------      --------    --------     ------
          Total.....................    $7,513       $60,355      $(42,049)   $(18,489)    $7,330
                                        ======       =======      ========    ========     ======

                                               BALANCE AT                            BALANCE AT
                                               JANUARY 3,   PROVISION/               JANUARY 2,
                                                  1998      ADJUSTMENTS   SPENDING     1999
                                               ----------   -----------   --------   ----------

Mrs. Smith's Bakeries
Severance....................................   $ 1,735       $    --     $   (388)   $ 1,347
Non cancelable lease obligations and other
  facility closure costs.....................    27,149            --       (1,350)    25,799
Other........................................     6,069            --       (2,308)     3,761
                                                -------       -------     --------    -------
          Total..............................   $34,953       $    --     $ (4,046)   $30,907
                                                -------       -------     --------    -------
Keebler Foods Company
Severance....................................   $   231       $   111     $   (293)   $    49
Non cancelable lease obligations and other
  facility closure costs.....................    12,505         2,244       (3,265)    11,484
Other........................................     1,895          (182)      (1,689)        24
                                                -------       -------     --------    -------
          Total..............................   $14,631       $ 2,173     $ (5,247)   $11,557
                                                -------       -------     --------    -------
Sunshine Biscuits, Inc.
Severance....................................   $   112       $    --     $    (26)   $    86
Non cancelable lease obligations and other
  facility closure costs.....................     7,735        (3,120)      (2,388)     2,227
                                                -------       -------     --------    -------
          Total..............................   $ 7,847       $(3,120)    $ (2,414)   $ 2,313
                                                -------       -------     --------    -------
President International, Inc.
Severance....................................   $    --       $ 6,653     $    (59)   $ 6,594
Non cancelable lease obligations and other
  facility closure costs.....................        --         5,670           --      5,670
Other........................................        --           447           --        447
                                                -------       -------     --------    -------
          Total..............................   $    --       $12,770     $    (59)   $12,711
                                                -------       -------     --------    -------
          GRAND TOTAL........................   $57,431       $11,823     $(11,766)   $57,488
                                                =======       =======     ========    =======

                                               BALANCE AT                            BALANCE AT
                                               JANUARY 2,   PROVISION/               JANUARY 1,
                                                  1999      ADJUSTMENTS   SPENDING      2000
                                               ----------   -----------   --------   ----------

Mrs. Smith's Bakeries
Severance....................................   $ 1,347       $    --     $ (1,347)   $    --
Non cancelable lease obligations and other
  facility closure costs.....................    25,799        (1,405)      (4,208)    20,186
Other........................................     3,761            --       (1,285)     2,476
                                                -------       -------     --------    -------
          Total..............................   $30,907       $(1,405)    $ (6,840)   $22,662
                                                -------       -------     --------    -------
Keebler Foods Company
Severance....................................   $    49       $    25     $    (50)   $    24
Non cancelable lease obligations and other
  facility closure costs.....................    11,484        (1,009)      (2,646)     7,829
Other........................................        24           (10)         (14)        --
                                                -------       -------     --------    -------
          Total..............................   $11,557       $  (994)    $ (2,710)   $ 7,853
                                                -------       -------     --------    -------

                                                     BALANCE AT                                BALANCE AT
                                                     JANUARY 2,   PROVISION/                   JANUARY 1,
                                                        1999      ADJUSTMENTS     SPENDING        2000
                                                     ----------   -----------     --------     ----------

Sunshine Biscuits, Inc.
Severance ......................................      $     86      $     --      $    (23)     $     63
Non cancelable lease obligations and other
  facility closure costs .......................         2,227            --          (265)        1,962
                                                      --------      --------      --------      --------
          Total ................................      $  2,313      $     --      $   (288)     $  2,025
                                                      --------      --------      --------      --------
President International, Inc. ..................
Severance ......................................      $  6,594      $ (3,189)     $   (576)     $  2,829
Non cancelable lease obligations and other
  facility closure costs .......................         5,670          (991)          (83)        4,596
Other ..........................................           447          (319)         (118)           10
                                                      --------      --------      --------      --------
          Total ................................      $ 12,711      $ (4,499)     $   (777)     $  7,435
                                                      --------      --------      --------      --------
          GRAND TOTAL ..........................      $ 57,488      $ (6,898)     $(10,615)     $ 39,975
                                                      ========      ========      ========      ========

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. 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 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

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

FII SHAREHOLDER'S RIGHTS PLAN

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.

STOCK INCENTIVE PLANS

Flowers

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. Additionally, FII has a Non-Employee Directors' Equity Plan (the "Directors' Plan") pursuant to which an aggregate of 300,000 shares of Common Stock may be issued and awarded as stock options to non-employee directors. All options granted under this plan have ten year terms and vest one year from the date of grant.

During fiscal 1999, fiscal 1998 and the twenty-seven week transition period ended January 3, 1998, 673,800 shares, 345,972 shares and 347,609 shares respectively, of FII's Common Stock were issued as Restricted Stock Awards ("RSAs"). Pursuant to the ESIP, 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. During fiscal 1999, special grants were made to

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

key executives that include the attainment of specific financial goals as a condition of vesting. The restriction periods end at various dates through June 2003. 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 described above and shares still outstanding granted prior to fiscal 1997 ranges from $5.11 to $12.82 per share. Compensation expense for fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997 was $4.8 million, $3.8 million, $1.1 million and $1.7 million, respectively.

During fiscal 1996, 358,547 shares of FII's Common Stock were issued as Equity Incentive Awards ("EIA"). Pursuant to the ESIP, 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. Compensation expense for fiscal 1999, fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997 was $.2 million, $.7 million, $.3 million and $.8 million, respectively. The awards were fully exercised in fiscal 1999.

During fiscal 1998, 1,128,600 shares of FII's Common Stock were granted as non-qualified stock options ("NQSOs"). Pursuant to the ESIP, the NQSOs vest at the end of four years 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. As of January 1, 2000 and January 2, 1999, there were 1,854,000 and 1,926,000 NQSOs outstanding, respectively.

During fiscal 1999 and fiscal 1998, the twenty-seven week transition period ended January 3, 1998 and fiscal 1997, the stock option activity pursuant to the ESIP is set forth below:

                                                   FOR THE 52            FOR THE 52            FOR THE 27            FOR THE 52
                                                  WEEKS ENDED           WEEKS ENDED           WEEKS ENDED           WEEKS ENDED
                                                JANUARY 1, 2000       JANUARY 2, 1999       JANUARY 3, 1998        JUNE 29, 1997
                                               ------------------    ------------------    ------------------    ------------------
                                                         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)

Outstanding at beginning of year .........      1,926     $15.34      1,165     $ 7.57      1,211     $ 7.52      1,664     $ 7.11
Granted ..................................                            1,129      21.00
Exercised ................................        (63)      5.50       (368)      8.10        (46)    $ 6.06       (453)    $ 6.03
Forfeitures ..............................         (9)
                                               ------     ------     ------     ------     ------     ------     ------     ------
Outstanding at end of year ...............      1,854     $15.65      1,926     $15.34      1,165     $ 7.57      1,211     $ 7.52
                                               ======                ======                ======                ======
Exercisable at end of year ...............        735                   798                 1,165                 1,211
                                               ======                ======                ======                ======
Weighted average fair value of options
  granted during the year ................        N/A                $ 4.37                   N/A                   N/A
                                               ======                ======                ======                ======

                                                               WEIGHTED         WEIGHTED AVERAGE
                                                           AVERAGE EXERCISE   REMAINING CONTRACTUAL
RANGE OF EXERCISE PRICES PER SHARE            SHARES       PRICE PER SHARE        LIFE IN YEARS
----------------------------------           ---------     ----------------   ---------------------

Outstanding:
  $ 5.50 - $ 6.06 .................            262,234          $ 5.79                1.5
  $ 8.45 ..........................            472,500            8.45                5.5
  $21.00 ..........................          1,119,400          $21.00                8.5
                                             ---------          ------                ---
  $ 5.50 - $21.00 .................          1,854,134          $15.65                6.7
                                             =========          ======                ===
Exercisable:
  $ 5.50 - $ 6.06 .................            262,234          $ 5.79
  $ 8.45 ..........................            472,500            8.45
                                             ---------          ------
  $ 5.50 - $ 8.45 .................            734,734          $ 7.50
                                             =========          ======

During fiscal 1999 and fiscal 1998, and the twenty-seven week transition period ended January 3, 1998 stock option activity pursuant to the Directors' Plan is set forth below:

                                                       FOR THE 52              FOR THE 52              FOR THE 27
                                                       WEEKS ENDED             WEEKS ENDED             WEEKS ENDED
                                                     JANUARY 1, 2000         JANUARY 2, 1999         JANUARY 3, 1998
                                                   -------------------     -------------------     -------------------
                                                              WEIGHTED                WEIGHTED                WEIGHTED
                                                              AVERAGE                 AVERAGE                 AVERAGE
                                                              EXERCISE                EXERCISE                EXERCISE
                                                   OPTIONS     PRICE       OPTIONS     PRICE       OPTIONS     PRICE
                                                   -------    --------     -------    --------     -------    --------
                                                              (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Outstanding at beginning of year ............          57      $18.51          41      $17.50
Granted .....................................          28       24.12          16       21.00          41      $17.50
Exercised ...................................
Forfeitures .................................
                                                   ------                  ------                  ------
Outstanding at end of year ..................          85      $20.35          57      $18.51          41      $17.50
                                                   ======                  ======                  ======
Exercisable at end of year ..................          57                      41                       0
                                                   ======                  ======                  ======
Weighted average fair value of options
  granted during the year ...................      $ 7.60                  $ 4.37                  $ 4.36
                                                   ======                  ======                  ======

As of January 1, 2000, 57,376 of the options, under the Directors' Plan are exercisable with a weighted average price of $18.51. The weighted average remaining contractual life of options outstanding is approximately eight and one half years. The exercise price of the options range from $17.50 to $24.12.

Keebler

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 1, 2000, options for 5,919,629 shares were outstanding, of which 4,493,801 are exercisable with a weighted average price of $1.96. Keebler's 1998 Omnibus Stock Incentive Plan has 6,500,000 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 1, 2000, options for 2,817,602 shares were outstanding, of which 899,699 are exercisable with a weighted average exercise price of $25.74. Exercise prices as of January 1, 2000, for options outstanding under the 1996 Stock Option Plan range from $1.74 to $5.23. The weighted average remaining contractual life of these options is approximately six and one-half years. Exercise prices as of January 1, 2000, for options outstanding under the 1998 Omnibus Stock Incentive Plan range from $24.00 to $39.25. The weighted average remaining contractual life of these options is approximately five years.

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Keebler's Non-Employee Director Stock Plan has 300,000 shares of Keebler's Common Stock authorized for future grant. All options granted have ten year terms and vest automatically upon grant. Under this plan, at January 1, 2000, options for 30,000 shares were outstanding and exercisable. The exercise price of these options range from $27.44 to $30.75. The weighted average remaining contractual life of these options is approximately eight and one half years.

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.

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:

                                                FOR THE 52        FOR THE 52        FOR THE 27       FOR THE 52
                                                WEEKS ENDED       WEEKS ENDED       WEEKS ENDED      WEEKS ENDED
                                              JANUARY 1, 2000   JANUARY 2, 1999   JANUARY 3, 1998   JUNE 28, 1997
                                              ---------------   ---------------   ---------------   -------------
                                                          (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

As Reported:
  Net Income .............................        $ 7,294           $41,899           $23,560          $62,324
  Net Income Per Common Share:
     Basic ...............................            .07               .43               .27              .71
     Diluted .............................            .07               .43               .27              .71
Pro Forma:
  Net Income .............................        $ 5,676           $38,989           $22,735          $61,716
  Net Income Per Common Share:
     Basic ...............................            .06               .40               .26              .70
     Diluted .............................            .06               .40               .26              .70

For awards granted the following weighted average assumptions were used to determine fair value using the Black-Scholes option-pricing model:

                                                 FOR THE 52 WEEKS    FOR THE 52 WEEKS    FOR THE 27
                                                      ENDED               ENDED          WEEKS ENDED
                                                 JANUARY 1, 2000     JANUARY 2, 1999     JANUARY 3,
                                                 ----------------    ----------------       1998
                                                  FII     KEEBLER     FII     KEEBLER        FII
                                                 -----    -------    -----    -------    -----------

Dividend Yield...............................     0.00%     0.00%     3.64%     0.00%        0.00%
Expected Volatility..........................    23.70%    24.80%    23.90%    27.20%       26.80%
Risk-free Interest Rate......................     5.80%     5.76%     5.60%     5.04%        6.31%
Expected Option Life (Years).................        4         5         5         5            4

NOTE 9. RETIREMENT PLANS

DEFINED BENEFIT PLANS

Flowers

Flowers has a trusteed, noncontributory defined benefit pension plan covering certain employees. The benefits are based on years of service and the employee's career earnings. The plan is 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 1, 2000 and January 2, 1999, the assets of the plan include certificates of deposit, marketable equity securities, mutual funds, corporate and government debt securities and annuity contracts. The marketable equity securities include

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

916,250 and 506,250 shares of FII's Common Stock, respectively, with a fair value of approximately $14.6 million and $12.1 million at January 1, 2000 and January 2, 1999, respectively. In addition to the pension plan, Flowers also has an unfunded supplemental retirement plan for certain highly compensated employees. Benefits provided by this supplemental plan are reduced by benefits provided under the defined benefit pension plan.

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. Assets held by the pension 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. Keebler contributes annually not less than the ERISA minimum funding requirements. Effective December 31, 1998, the pension plans of President were merged with Keebler's pension plan. In addition to the pension plan, Keebler also maintains an unfunded supplemental retirement plan for certain highly compensated former executives and an unfunded plan for certain highly compensated current and former executives ("the excess retirement plan"). Benefits provided are based on years of service.

The net periodic pension cost for the Flowers plans that are not fully funded and Keebler's unfunded supplemental retirement plan include the following components:

                                        FOR THE 52    FOR THE 52    FOR THE 27    FOR THE 52
                                        WEEKS ENDED   WEEKS ENDED   WEEKS ENDED   WEEKS ENDED
                                        JANUARY 1,    JANUARY 2,    JANUARY 1,     JUNE 28,
                                           2000          1999          1998          1997
                                        -----------   -----------   -----------   -----------
                                                       (AMOUNTS IN THOUSANDS)

Service cost..........................   $  8,005      $  6,268       $ 2,846      $  5,603
Interest cost.........................     13,166        11,904         5,207        10,311
Expected return on plan assets........    (13,844)      (13,635)       (5,585)      (10,415)
Amortization of transition assets.....       (841)         (841)         (422)         (841)
Prior service cost....................         59            59            30            84
Recognized net actuarial (gain)
  loss................................        448          (177)           35           118
                                         --------      --------       -------      --------
Net periodic pension cost.............   $  6,993      $  3,578       $ 2,111      $  4,860
                                         ========      ========       =======      ========

                                                                JANUARY 1, 2000   JANUARY 2, 1999
                                                                ---------------   ---------------
                                                                     (AMOUNTS IN THOUSANDS)

Change in benefit obligation:
  Benefit obligation at beginning of year ..................      $ (191,649)       $ (146,937)
  Acquisitions .............................................                           (10,303)
  Service cost .............................................          (8,005)           (6,268)
  Interest cost ............................................         (13,166)          (11,904)
  Actuarial gain (loss) ....................................          24,650           (23,964)
  Benefits paid ............................................           8,040             7,727
                                                                  ----------        ----------
  Benefit obligation at end of year ........................        (180,130)         (191,649)
                                                                  ----------        ----------
Change in plan assets:
  Fair value of plan assets at beginning of year ...........         146,793           154,828
  Actual return on plan assets .............................          14,294            (2,199)
  Employer contribution ....................................             252             1,141
  Benefits paid ............................................          (7,400)           (6,977)
                                                                  ----------        ----------
  Fair value of plan assets at end of year .................         153,939           146,793
                                                                  ----------        ----------
  Funded status ............................................         (26,191)          (44,856)
  Unrecognized net actuarial (gain) loss ...................          (2,934)           22,749
  Contribution between measurement date and fiscal year
     end ...................................................             183               185
  Unrecognized prior service cost ..........................             498               557
  Unrecognized net transition asset ........................          (2,472)           (3,313)
                                                                  ----------        ----------
  Net amount recognized at end of year .....................      $  (30,916)       $  (24,678)
                                                                  ==========        ==========

The net periodic pension cost for Keebler's unfunded excess retirement plan includes the following components:

                                                                      FOR THE 52
                                                                      WEEKS ENDED
                                                                -----------------------
                                                                JANUARY 1,   JANUARY 2,
                                                                   2000         1999
                                                                ----------   ----------
                                                                      (AMOUNTS IN
                                                                       THOUSANDS)

Service cost ................................................      $431         $173
Interest cost ...............................................       155           78
Recognized net actuarial (gain) loss ........................         8          (47)
                                                                   ----         ----
Net periodic pension cost ...................................      $594         $204
                                                                   ====         ====

                                                      JANUARY 1, 2000  JANUARY 2, 1999
                                                      ---------------  ---------------
                                                           (AMOUNTS IN THOUSANDS)

Change in benefit obligation:
  Benefit obligation at beginning of year ........        $ (2,395)       $ (1,085)
  Service cost ...................................            (431)           (173)
  Interest cost ..................................            (155)            (78)
  Actuarial (loss) ...............................            (158)         (1,076)
  Benefits and expenses paid .....................              31              17
                                                          --------        --------
  Benefit obligation at end of year ..............          (3,108)         (2,395)
  Fair value of plan assets
                                                          --------        --------
  Funded status ..................................          (3,108)         (2,395)
  Unrecognized net actuarial loss ................             501             351
  Benefit paid subsequent to measurement date ....              17
                                                          --------        --------
  Net amount recognized at end of year ...........        $ (2,590)       $ (2,044)
                                                          ========        ========

The net amount recognized at the end of the year includes $21.5 million which is recorded in other accrued liabilities (Note 3) and the remainder is included in other long-term liabilities.

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

                                         JANUARY 1,    JANUARY 2,    JANUARY 3,    JUNE 28,
                                            2000          1999          1998         1997
                                         ----------    ----------    ----------    --------

Weighted average assumptions:
  Measurement date...................       9/30/99       9/30/98     9/30/97      3/31/97
  Discount rate......................    7.50%-7.75%   6.50%-7.50%       8.00%        8.00%
  Expected return on plan assets.....          9.00%         9.00%       9.00%        9.00%
  Rate of compensation increase......    4.50%-5.25%   4.00%-5.00%       5.50%        5.50%

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

                                                   FOR THE 52 WEEKS ENDED
                                             ---------------------------------
                                             JANUARY 1, 2000   JANUARY 2, 1999
                                             ---------------   ---------------
                                                  (AMOUNTS IN THOUSANDS)

Service cost ...........................        $ 13,364          $  9,040
Interest cost ..........................          32,841            31,080
Expected return on plan assets .........         (41,887)          (39,352)
Recognized net actuarial loss ..........              43
Prior service cost .....................             689               689
                                                --------          --------
Net periodic pension cost ..............        $  5,050          $  1,457
                                                ========          ========

                                                                    JANUARY 1, 2000    JANUARY 2, 2000
                                                                    ---------------    ---------------
                                                                          (AMOUNTS IN THOUSANDS)

Benefit obligation at beginning of year ....................          $ (520,312)         $        0
  Acquisitions .............................................                                (460,139)
  Service cost .............................................             (13,364)             (9,040)
  Interest cost ............................................             (32,841)            (31,080)
  Amendments ...............................................                   0              (4,874)
  Actuarial gain (loss) ....................................              60,261             (45,871)
  Curtailment gain .........................................                 897
  Benefits paid ............................................              30,009              30,692
                                                                      ----------          ----------
  Benefit obligation at end of year ........................            (475,350)           (520,312)
                                                                      ----------          ----------
Change in plan assets:
  Fair value of plan assets at beginning of year ...........             581,621
  Acquisitions .............................................                                 515,290
  Actual return on plan assets .............................               2,253              77,731
  Employer contribution ....................................                 115              19,292
  Benefits paid ............................................             (30,009)            (30,692)
                                                                      ----------          ----------
  Fair value of plan assets at end of year .................             553,980             581,621
                                                                      ----------          ----------
  Funded status ............................................              78,630              61,309
  Unrecognized net actuarial gain ..........................             (37,209)            (16,538)
  Contribution between measurement date and fiscal year
     end ...................................................                                     115
  Unrecognized prior service cost ..........................               7,730               9,230
                                                                      ----------          ----------
  Net amount recognized at end of year .....................          $   49,151          $   54,116
                                                                      ==========          ==========

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

                                                        JANUARY 1, 2000   JANUARY 2, 1999
                                                        ---------------   ---------------

Weighted average assumptions:
  Measurement date....................................      9/30/99           9/30/98
  Discount rate.......................................         7.50%             6.50%
  Expected return on plan assets......................         8.70%             9.00%
  Rate of compensation increase.......................         4.50%             4.00%

FII is not obligated to satisfy the pension obligations of Keebler.

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 $.5 million for fiscal 1999, $.3 million for fiscal 1998, $.5 million for the twenty-seven week transition period ended January 3, 1998 and $.4 million for fiscal 1997.

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 1999 and fiscal 1998, the twenty-seven week transition period ended January 3,

FLOWERS INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1998 and fiscal 1997, the total cost and contributions were $1.9 million, $1.3 million, $.6 million and $1.4 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 1999 and fiscal 1998, Keebler expensed contributions of $2.5 million and $2.3 million, respectively.

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 $6.8 million and $8.9 million for fiscal 1999 and fiscal 1998, respectively.

NOTE 10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

Flowers

FII provides certain medical and life insurance benefits for eligible retired employees. The medical plan covers eligible retirees under the active medical and dental plans. The plan incorporates an up front deductible, coinsurance payments and employee contributions at COBRA premium levels. Eligibility and maximum period of coverage is based on age and length of service. The life insurance plan offers coverage to a closed group of retirees.

Keebler

Keebler provides certain medical and life insurance benefits for eligible retired employees of Keebler. The medical plan, which covers nonunion and certain union 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.

Additionally, Keebler provides postemployment 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 pre-fund the plan. The postemployment obligation included in the consolidated balance sheet at January 1, 2000 and January 2, 1999 was $5.5 million and $4.7 million, respectively. The plan was amended in fiscal 1999 for a change in the calculation of retiree contribution rates that resulted in an $8.5 million reduction to the benefit obligation and a corresponding decrease in unrecognized prior service cost.

The net periodic postretirement benefit expense for the Company includes the following components:

                                                                 52 WEEKS ENDED
                                                      -----------------------------------
                                                      JANUARY 1, 2000     JANUARY 2, 1999
                                                      ---------------     ---------------
                                                            (AMOUNTS IN THOUSANDS)

Service cost .....................................        $  2,348            $  2,045
Interest cost ....................................           3,722               3,961
Amortization of prior service cost ...............            (115)               (115)
Prior service cost ...............................             389
Amortization of net gain .........................            (375)
                                                          --------            --------
Net periodic postretirement benefit cost .........        $  5,969            $  5,891
                                                          ========            ========

                                                       JANUARY 1, 2000    JANUARY 2, 1999
                                                       ---------------    ---------------
                                                                 (AMOUNTS IN THOUSANDS)
Change in benefit obligation:
  Benefit obligation at beginning of year ..........      $(60,738)
  Acquisitions .....................................                         $(58,288)
  Service cost .....................................        (2,348)            (2,045)
  Interest cost ....................................        (3,722)            (3,961)
  Amendments .......................................         8,531
  Participant contributions ........................            38
  Actuarial gain ...................................           (21)              (828)
  Curtailment ......................................           108
  Benefits paid ....................................         5,558              4,384
                                                          --------           --------
  Benefit obligation at end of year ................      $(52,594)          $(60,738)
     Unrecognized actuarial gain ...................        (8,166)            (7,856)
     Unrecognized prior service cost ...............        (4,817)             3,895
     Benefit payments subsequent to measurement date           880                978
                                                          --------           --------
     Accrued benefit obligation ....................      $(64,697)          $(63,721)
                                                          ========           ========

Assumptions used in accounting for the Company's postretirement benefit plans at each of the respective period ends are as follows:

                                                         JANUARY 1, 2000    JANUARY 2, 1999
                                                         ---------------    ---------------
Weighted average assumptions:
  Measurement date.....................................        9/30/99          9/30/98
  Discount rate........................................     6.75%-7.50%            6.50%
  Rate of increase.....................................     5.50%-8.00%            6.00%

A one percent increase in the trend rate for health care costs would have increased the accumulated benefit obligation as of January 1, 2000 by $2.3 million and the net periodic benefit cost by $0.4 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 $2.1 million and $0.3, as of January 1, 2000 and January 2, 1999, respectively.

FII is not obligated to satisfy the postretirement and postemployment benefits of Keebler.

                                       FOR THE 52
                                       WEEKS ENDED           FOR THE 27     FOR THE 52
                               -------------------------     WEEKS ENDED    WEEKS ENDED
                               JANUARY 1,     JANUARY 2,     JANUARY 3,       JUNE 28,
                                  2000           1999           1998            1997
                               ----------     ----------     -----------    -----------
                                                (AMOUNTS IN THOUSANDS)
Current Taxes:
  Federal ................      $ 60,139       $ 72,121       $  5,686       $ 26,910
  State ..................         9,203          6,010          2,395          5,557
                                --------       --------       --------       --------
                                  69,342         78,131          8,081         32,467
                                --------       --------       --------       --------
Deferred Taxes:
  Federal ................       (11,228)        (3,346)         2,395          1,587
  State ..................        (1,854)          (394)          (844)          (863)
                                --------       --------       --------       --------
                                 (13,082)        (3,740)         1,551            724
                                --------       --------       --------       --------
Provision for income taxes      $ 56,260       $ 74,391       $  9,632       $ 33,191
                                ========       ========       ========       ========

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

                                                  JANUARY 1,          JANUARY 2,
                                                     2000                1999
                                                  ----------          ----------
                                                      (AMOUNTS IN THOUSANDS)

Depreciation ................................     $ 132,792           $ 173,610
Trademarks, trade names and intangibles .....        64,887              49,348
Prepaid pension .............................        13,327              14,283
Inventory valuation .........................           559               6,779
Other .......................................        26,053              13,816
                                                  ---------           ---------
          Gross deferred tax liabilities ....       237,618             257,836
                                                  ---------           ---------
Workers compensation ........................        (9,070)            (19,891)
Postretirement/postemployment benefits ......       (26,778)            (26,171)
Employee benefits ...........................       (34,667)            (33,806)
Facility closing costs and severance ........       (37,342)            (56,805)
Loss carryforwards ..........................       (21,910)            (84,447)
Other .......................................       (19,891)            (17,109)
                                                  ---------           ---------
          Gross deferred tax assets .........      (149,658)           (238,229)
Deferred tax assets valuation allowance .....         3,012              86,310
                                                  ---------           ---------
                                                  $  90,972           $ 105,917
                                                  =========           =========

The net change in the valuation allowance for deferred tax assets was a decrease of $83.3 million, related to net operating loss carryforwards. The decrease was primarily attributable to the utilization of the Keebler pre-acquisition net operating loss carryforwards as a result of the resolution of the uncertainty regarding the availability of these losses.

                                                   FOR THE 52
                                                   WEEKS ENDED                 FOR THE 27       FOR THE 52
                                              ---------------------------      WEEKS ENDED      WEEKS ENDED
                                              JANUARY 1,       JANUARY 2,       JANUARY 3,        JUNE 28,
                                                 2000             1999             1998             1997
                                              ----------       ----------      -----------      -----------
                                                                  (AMOUNTS IN THOUSANDS)
Tax at U.S. federal income tax rate ......     $ 36,090         $ 57,283         $ 8,757         $ 30,728
State income taxes, net of U.S. federal
  income tax benefit .....................        6,923            5,298           1,390            3,837
Benefit of operating loss carryforwards ..         (522)                            (525)          (1,210)
Intangible amortization ..................        9,150            6,910             174              122
Other ....................................        4,619            4,900            (164)            (286)
                                               --------         --------         -------         --------
          Provision for income taxes .....     $ 56,260         $ 74,391         $ 9,632         $ 33,191
                                               ========         ========         =======         ========

The amount of federal net 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 net operating losses 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 net operating loss carryforwards of $156.0 million with expiration dates through fiscal 2014.

In fiscal 1998, Keebler's net operating loss carryforwards were approximately $207.1 million. All net operating loss carryforwards were used in fiscal 1999 to offset gains incurred through the Section 338 income tax election, which adjusted the tax basis of all assets and liabilities that resulted from INFLO's acquisition of Keebler. Keebler's intangible asset resulting from this transaction was reduced by a corresponding $11.8 million as a result of resolving the pre-acquisition tax basis of acquired assets and liabilities.

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.

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.

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.

                                                           FOR THE 52 WEEKS ENDED             FOR THE 27          FOR THE 52
                                                      -------------------------------         WEEKS ENDED         WEEKS ENDED
                                                       JANUARY 1,          JANUARY 2,          JANUARY 3,           JUNE 28,
                                                         2000                 1999                1998                1997
                                                      -----------         -----------         -----------         -----------
                                                                                (AMOUNTS IN THOUSANDS)
Sales:
  Flowers Bakeries ...........................        $   961,699         $   939,119         $   457,803         $   901,045
  Mrs. Smith's Bakeries ......................            673,133             672,821             369,262             615,637
  Keebler ....................................          2,667,771           2,226,480
  Eliminations (1) ...........................            (66,593)            (73,053)            (42,968)            (78,969)
                                                      -----------         -----------         -----------         -----------
                                                      $ 4,236,010         $ 3,765,367         $   784,097         $ 1,437,713
                                                      ===========         ===========         ===========         ===========
Depreciation and Amortization:
  Flowers Bakeries ...........................        $    32,865         $    33,487         $    16,505         $    28,533
  Mrs. Smith's Bakeries ......................             20,127              18,676               9,427              15,830
  Keebler ....................................             84,125              69,125
  Other ......................................              7,502               7,477                 998               1,607
                                                      -----------         -----------         -----------         -----------
                                                      $   144,619         $   128,765         $    26,930         $    45,970
                                                      ===========         ===========         ===========         ===========
Non-Recurring Charge:
  Flowers Bakeries ...........................        $    (1,120)        $    32,161
  Mrs. Smith's Bakeries ......................             (4,874)             32,300
  Keebler ....................................             66,349               3,852
                                                      -----------         -----------
                                                      $    60,355         $    68,313
                                                      ===========         ===========
Income (Loss) Before Interest and Taxes:
  Flowers Bakeries ...........................        $    66,995         $    75,779         $    31,388         $    46,189
  Mrs. Smith's Bakeries ......................            (53,256)             45,855              20,153              40,186
  Keebler ....................................            263,903             199,891
  Unallocated General Expenses ...............            (33,308)            (20,823)            (14,726)            (16,716)
  Non-Recurring Charge .......................            (60,355)            (68,313)
                                                      -----------         -----------         -----------         -----------
                                                      $   183,979         $   232,389         $    36,815         $    69,659
                                                      ===========         ===========         ===========         ===========
Interest Expense, Net ........................        $    80,865         $    68,725         $    11,796         $    25,109
                                                      ===========         ===========         ===========         ===========
Income Before Income Taxes, Investment in
  Unconsolidated Affiliate, Minority Interest,
  Extraordinary Loss and Cumulative Effect of
  Changes in Accounting Principles ...........        $   103,114         $   163,664         $    25,019         $    87,794
                                                      ===========         ===========         ===========         ===========
Capital Expenditures:
  Flowers Bakeries ...........................        $    73,553         $    38,573         $    22,710         $    48,334
  Mrs. Smith's Bakeries (2) ..................            127,340              34,711               9,817              28,577
  Keebler ....................................            100,685              66,798
  Other ......................................             12,435                 193                 330                 599
                                                      -----------         -----------         -----------         -----------
                                                      $   314,013         $   140,275         $    32,857         $    77,510
                                                      ===========         ===========         ===========         ===========

                                                  FOR THE 52 WEEKS ENDED      FOR THE 27     FOR THE 52
                                              ----------------------------    WEEKS ENDED    WEEKS ENDED
                                               JANUARY 1,       JANUARY 2,     JANUARY 3,      JUNE 28,
                                                  2000             1999           1998           1997
                                              -----------      -----------    -----------    -----------
                                                                (AMOUNTS IN THOUSANDS)
Assets:
  Flowers Bakeries .................          $  491,396       $  458,966      $401,787       $408,815
  Mrs. Smith's Bakeries ............             506,586          459,652       366,602        361,575
  Keebler ..........................           1,528,183        1,655,780
  Other ............................             374,313          286,502       130,491        127,797
                                              ----------       ----------      --------       --------
                                              $2,900,478       $2,860,900      $898,880       $898,187
                                              ==========       ==========      ========       ========

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

(2) Includes noncash capital leases of $47.4 million.

QUARTER                                            FIRST QUARTER   SECOND QUARTER   THIRD QUARTER   FOURTH QUARTER
                                                   -------------   --------------   -------------   --------------
                                                            (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Sales ..............................      1999      $1,301,695       $ 940,334        $ 983,223       $1,010,759
                                          1998       1,075,037         833,059          859,517          997,754
Gross margin .......................      1999         693,750         496,406          493,900          549,998
                                          1998         588,747         458,007          477,311          538,721
Income (loss) before extraordinary
  loss and cumulative effect of
  changes in accounting
  principles .......................      1999          24,836         (27,735)          (9,103)          19,296
                                          1998          15,028          18,467           25,555          (13,082)
Extraordinary loss due to early
  extinguishment of debt, net of tax
  benefit and minority interest ....      1999              --              --               --               --
                                          1998              --              --             (938)              --
Cumulative effect of changes in
  accounting principles, net of tax
  benefit ..........................      1999              --              --               --               --
                                          1998          (3,131)(1)          --               --               --
Net income (loss) ..................      1999          24,836         (27,735)          (9,103)          19,296
                                          1998          11,897          18,467           24,617          (13,082)
Basic net income (loss) per common
  share ............................      1999             .25            (.28)            (.09)             .19
                                          1998             .13             .19              .25             (.13)
Diluted net income (loss) per common
  share ............................      1999             .25            (.28)            (.09)             .19
                                          1998             .13             .19              .25             (.13)

(1) During the fourth quarter of fiscal 1998, the Company adopted SOP 98-5. The cumulative effect of this change in accounting principles 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.

                                                               FOR THE 52          FOR THE 27
                                                              WEEKS ENDED         WEEKS ENDED
                                                            JANUARY 3, 1998     JANUARY 4, 1997
                                                            ---------------     ---------------
                                                                   (AMOUNTS IN THOUSANDS,
                                                                   EXCEPT PER SHARE DATA)
Sales .............................................          $ 1,432,200           $ 774,767
Income before income taxes and cumulative effect of
  changes in accounting principles ................               62,478              50,335
Income tax expense ................................               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:
  Net income per share before cumulative effect --
     basic ........................................                  .72                 .35
  Net income per share before cumulative effect --
     diluted ......................................                  .72                 .35
  Net income per share -- basic ...................                  .61                 .35
  Net income per share -- diluted .................                  .61                 .35

NOTE 15. SUBSEQUENT EVENTS

In January 2000, Flowers Bakeries acquired The Kroger Co.'s bakery in Memphis, Tennessee ("Kroger"). The transaction was accounted for as a purchase. The Memphis Bakery has two production lines, which produce breads, buns and rolls for Kroger stores in Tennessee, northern Arkansas and southern Missouri.

On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin") in a business combination that was accounted for as a purchase. Austin is a leading producer and marketer of single serve baked snacks, including cracker sandwiches and bite-sized crackers and cookies.

The Austin and Kroger transactions, valued collectively at approximately $275 million, were financed with borrowings under the existing credit facilities of Keebler and Flowers, respectively.

On March 30, 2000 FII amended the $500 million Syndicated Loan Facility. The amendment adjusted the applicable interest margin to 2.0 % and the commitment fee to .05%. In addition, certain financial covenants were amended while others were added. The covenants in effect currently include, among others, (1) a maximum leverage ratio, (2) a minimum fixed charge coverage ratio,
(3) minimum adjusted EBITDA, as defined, (4) a borrowing base covenant requiring that FII's total indebtedness not exceed specified percentages of the book value of accounts receivable, inventory, property, plant and equipment and the fair value of FII's interest in Keebler, (5) a prohibition on acquisitions, (6) a negative pledge on all assets of the Company, (7) a limit on Flowers capital expenditures, and (8) limits on cash dividends unless the Company would have, following payment thereof, at least $15 million availability under the unused commitments and borrowing base tests of the facility. As of January 1, 2000 and the date of the amendment the Company was in compliance with all covenants. Further, the amount of retained earnings available for payment of dividends at January 1, 2000 under the amendment was $125.0 million.

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 3, 2000 and March 30, 2000 of this Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

                                          /s/ PRICEWATERHOUSECOOPERS LLP

Atlanta, Georgia
March 30, 2000

                                                                                        October 7, 2000       January 1, 2000
                                                                                        ---------------       ---------------
                                                                                         (Unaudited)
ASSETS
Current Assets:
     Cash and cash equivalents                                                            $     23,766          $     39,382
     Accounts and notes receivable, net                                                        191,140               185,939
     Inventories, net:
          Raw materials                                                                         52,277                68,110
          Packaging materials                                                                   31,354                29,855
          Finished goods                                                                       214,210               175,281
          Other                                                                                  4,560                 7,679
                                                                                          ------------          ------------
                                                                                               302,401               280,925
     Deferred income taxes                                                                      69,289                71,498
     Other                                                                                      99,765               112,794
                                                                                          ------------          ------------
                                                                                               686,361               690,538
                                                                                          ------------          ------------

Property, Plant and Equipment:
     Land                                                                                       52,717                49,612
     Buildings                                                                                 427,566               386,197
     Machinery and equipment                                                                 1,067,652               958,176
     Furniture, fixtures and transportation equipment                                          165,154               148,565
     Construction in progress                                                                   96,147               127,545
                                                                                          ------------          ------------
                                                                                             1,809,236             1,670,095
     Less:  accumulated depreciation                                                          (614,229)             (520,456)
                                                                                          ------------          ------------
                                                                                             1,195,007             1,149,639
                                                                                          ------------          ------------
Other Assets                                                                                    84,988                88,715
                                                                                          ------------          ------------
Cost in Excess of Net Tangible Assets:
     Cost in excess of net tangible assets                                                   1,259,346             1,033,272
     Less:  accumulated amortization                                                           (91,080)              (61,686)
                                                                                          ------------          ------------
                                                                                             1,168,266               971,586
                                                                                          ------------          ------------
                                                                                          $  3,134,622          $  2,900,478
                                                                                          ============          ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Current maturities of long-term debt                                                  $     58,309          $     47,566
    Accounts payable                                                                           252,352               248,153
    Facility closing costs and severance                                                        17,539                16,836
    Other accrued liabilities                                                                  345,294               343,242
                                                                                          ------------          ------------
                                                                                               673,494               655,797
                                                                                          ------------          ------------

Long-Term Debt and Capital Leases                                                            1,374,105             1,208,630
                                                                                          ------------          ------------
Other Liabilities:
    Deferred income taxes                                                                      158,456               162,470
    Postretirement/postemployment obligations                                                   64,038                64,772
    Facility closing costs and severance                                                        22,204                30,188
    Other                                                                                       60,772                56,289
                                                                                          ------------          ------------
                                                                                               305,470               313,719
                                                                                          ------------          ------------

Minority Interest                                                                              236,483               183,578
                                                                                          ------------          ------------

Stockholders' Equity:
     Preferred stock-$100 par value, 10,467 authorized and none issued Preferred
     stock-$100 par value, 249,533 authorized and none issued Common stock-$.625
     par value, 350,000,000 authorized and
          100,527,893 and 100,863,848 shares issued, respectively                               62,830                63,040
     Capital in excess of par value                                                            289,127               291,377
     Retained earnings                                                                         215,285               219,279
     Common stock in treasury, 452,995 and
          567,160 shares, respectively                                                          (8,272)              (10,594)
     Stock compensation related adjustments                                                    (13,900)              (24,348)
                                                                                          ------------          ------------
                                                                                               545,070               538,754
                                                                                          ------------          ------------
                                                                                          $  3,134,622          $  2,900,478
                                                                                          ============          ============

                                                              For the Twelve Weeks Ended             For the Forty Weeks Ended
                                                          ----------------------------------    -----------------------------------
                                                          October 7, 2000    October 9, 1999    October 7, 2000     October 9, 1999
                                                          ---------------    ---------------    ---------------     ---------------
Sales                                                       $ 1,022,967         $  982,664        $ 3,317,466         $ 3,222,157
Materials, supplies, labor and other production costs           460,383            491,204          1,505,245           1,548,311
Selling, marketing and administrative expenses                  446,377            425,839          1,445,318           1,408,420
Depreciation and amortization                                    40,860             33,981            129,145             107,240
Insurance proceeds                                               (3,105)                 0             (4,774)                  0
Non-recurring (credit) charge                                    (1,428)                 0             (2,424)             69,208
                                                            -----------         ----------        -----------         -----------
Income from operations                                           79,880             31,640            244,956              88,978

Interest (income)                                                (1,517)              (249)            (3,002)             (1,190)
Interest expense                                                 28,148             18,599             89,239              63,595
                                                            -----------         ----------        -----------         -----------
Interest expense, net                                            26,631             18,350             86,237              62,405
                                                            -----------         ----------        -----------         -----------

Income before income taxes and minority interest                 53,249             13,290            158,719              26,573
Income taxes                                                     21,462              7,990             68,115              19,102
                                                            -----------         ----------        -----------         -----------
Income before minority interest                                  31,787              5,300             90,604               7,471
Minority interest                                               (18,829)           (14,403)           (55,359)            (19,473)
                                                            -----------         ----------        -----------         -----------
Net income (loss)                                           $    12,958         $   (9,103)       $    35,245         $   (12,002)
                                                            ===========         ==========        ===========         ===========
Net Income (Loss) Per Common Share:
Basic:
  Net income (loss) per share                               $      0.13         $    (0.09)       $      0.35         $     (0.12)
  Weighted average shares outstanding                           100,089            100,274            100,128             100,060

Diluted:
  Net income (loss)per share                                $      0.13         $    (0.09)       $      0.35         $     (0.12)
  Weighted average shares outstanding                           100,368            100,522            100,372             100,388

Cash Dividends Paid Per Common Share                        $    0.1325         $   0.1300        $    0.3975         $    0.3825

(See Accompanying Notes to Consolidated Financial Statements)

                                                                             For the Forty Weeks Ended
                                                                        -----------------------------------
                                                                        October 7, 2000     October 9, 1999
                                                                        ---------------     ---------------
  Cash flows provided by operating activities:
  Net income (loss)                                                        $  35,245           $ (12,002)
  Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:
       Minority interest                                                      55,359              19,473
       Depreciation and amortization                                         129,145             107,240
       Non-recurring (credit) charge                                          (2,043)             46,071
       Deferred income taxes                                                   5,338             (21,274)
       Income tax benefit related to stock options exercised                  21,457              10,754
       Gain on sale of property, plant and equipment                          (2,208)                  0
       Gain on sale of  business                                              (5,700)                  0
  Changes in assets and liabilities, net of acquisitions:
       Accounts and notes receivable, net                                    (10,639)            (68,561)
       Inventories, net                                                      (12,904)              2,745
       Other assets                                                            9,717             (33,471)
       Accounts payable and other accrued liabilities                          7,310              45,542
       Income taxes payable                                                  (21,329)                  0
       Facility closing costs and severance                                  (21,129)              3,116
       Other                                                                     831               8,941
                                                                           ---------           ---------
  Net cash provided by operating activities                                  188,450             108,574
                                                                           ---------           ---------
  Cash flows from investing activities:
       Purchase of property, plant and equipment                             (91,624)           (195,608)
       Acquisition of businesses, net of divestitures                       (258,867)             (7,939)
       Sesame Street Trademark license agreement                             (10,000)                  0
       Proceeds from property sales                                           23,377                   0
       Other                                                                     106                   0
                                                                           ---------           ---------
  Net cash disbursed for investing activities                               (337,008)           (203,547)
                                                                           ---------           ---------
  Cash flows from financing activities:
       Dividends paid, net of dividends received                             (52,139)            (38,278)
       Treasury stock purchases                                              (10,023)            (21,683)
       Stock compensation and warrants exercised                              10,405               4,888
       Proceeds from receivables securitization                               13,000             125,000
       Decrease in commercial paper                                                0             (10,209)
       Increase (decrease) in debt and capital leases                        171,699              (4,215)
                                                                           ---------           ---------
  Net cash provided by financing activities                                  132,942              55,503
                                                                           ---------           ---------
  Net (decrease) in cash and cash equivalents                                (15,616)            (39,470)
  Cash and cash equivalents at beginning of period                            39,382              54,542
                                                                           ---------           ---------
  Cash and cash equivalents at end of period                               $  23,766           $  15,072
                                                                           =========           =========
Schedule of noncash investing and financing activities:
  Stock compensation transactions                                          $   2,505           $       0
                                                                           =========           =========

(See Accompanying Notes to Consolidated Financial Statements)

FLOWERS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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.

Interim Financial Statements - The accompanying unaudited condensed consolidated financial statements of the Company have been prepared by the Company's management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. The unaudited consolidated financial statements included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of October 7, 2000 and January 1, 2000, the results of operations for the twelve and forty week periods ended October 7, 2000 and October 9, 1999 and statement of cash flows for the forty weeks ended October 7, 2000 and October 9, 1999. The results of operations for the twelve and forty week periods ended October 7, 2000 and October 9, 1999, are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2000.

Reporting Periods - The Company's quarterly reporting periods for fiscal 2000 are as follows: first quarter ended April 22, 2000 (sixteen weeks), second quarter ended July 15, 2000 (twelve weeks), third quarter ended October 7, 2000 (twelve weeks) and fourth quarter ending December 30, 2000 (twelve weeks).

Reclassifications - Certain reclassifications of prior period data have been made to conform with the current period reporting.

2. BUSINESS ACQUISITIONS

On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin"), for an aggregate purchase price of $253.7 million, excluding related fees and expenses paid of approximately $3.0 million. The acquisition of Austin was a cash transaction funded with approximately $235.0 million from borrowings under Keebler's $700.0 million Senior Credit Facility Agreement and the remainder from cash received on additional sales of accounts receivable under Keebler's $125.0 million Receivables Purchase Agreement.

The acquisition of Austin by Keebler has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of Austin based on respective fair values. The acquisition has resulted in an estimated unallocated excess purchase price over fair value of net assets acquired of $168.5 million, which is being amortized on a straight-line basis over a forty year period.

Results of operations for Austin from March 6, 2000, have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place on the first day of the year reported. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase and amortization of the trademarks, trade names, other intangibles and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been reported had the Austin acquisition been effected on the first day of the year reported.

                                                                           Unaudited
    (Amounts In Thousands Except Per Share Data)                    For the Forty Weeks Ended
                                                                ---------------------------------
                                                                October 7, 2000   October 9, 1999
                                                                ---------------   ---------------
Net sales ..................................................    $ 3,344,961         $ 3,384,350
Net income (loss) ..........................................    $    33,303         $   (12,776)
Diluted net income (loss) per share ........................    $       .33         $      (.13)

On January 26, 2000, Flowers completed the purchase of The Kroger Company's Memphis, Tennessee bakery. The results of operations of this bakery from January 26, 2000 are included in the consolidated statements of operations and are not significantly different from the results that would have been reported had the operations been included from January 2, 2000.

3. PURCHASE COMMITMENTS AND 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.

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. To qualify as a hedge, a commodity agreement must reduce the exposure of the Company to price risk and must show a high correlation of changes in value with the value of the hedged item. Assuming a ten percent decrease in market price, the fair value of open contracts with a notional amount of $85.0 million at October 7, 2000 would be impacted by $(6.3) million.

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 agreements, calculated as the difference between the fixed and floating rates multiplied by the notional amount, are recorded as adjustments to interest expense, in accordance with hedge accounting. The fair value of the interest rate swap agreements at October 7, 2000, with a notional amount of $316.5 million, remains comparable to year-end. Additionally, interest rates have not fluctuated materially from year end and therefore the sensitivity analysis performed as of January 1, 2000 for interest rate swap agreements remains a valid estimate.

    FLOWERS:                                   Interest Rate     Maturity       October 7, 2000     January 1, 2000
                                              --------------    ----------      ---------------     ---------------
                                                                                   (Amounts in Thousands)
Syndicated Loan Facility .....                      8.13%        1/29/2003         $  440,000          $  350,000
Senior Notes .................                      6.84%         1/5/2016            125,000             125,000
Debentures ...................                      7.15%        4/15/2028            200,000             200,000
Capital Lease Obligations ....                      8.07%        2000-2007             50,636              51,317
Other ........................                   Various         2000-2014             20,014              73,436
                                                                                   ----------          ----------
                                                                                      835,650             799,753
                                                                                   ----------          ----------

KEEBLER:

Revolving Facility ...........                      6.85%        9/28/2004         $  170,000          $       --
Term Facility ................                      6.83%        9/28/2004            287,000             314,000
Senior Subordinated Notes ....                     10.75%         7/1/2006            124,400             124,400
Other Senior Debt ............                   Various         2001-2005              8,840              10,455
Capital Lease Obligations ....                   Various         2002-2042              6,524               7,588
                                                                                   ----------          ----------
                                                                                      596,764             456,443
                                                                                   ----------          ----------

Consolidated Debt: ...........                                                      1,432,414           1,256,196
   Less current maturities ...                                                         58,309              47,566
                                                                                   ----------          ----------
   Total long term debt ......                                                     $1,374,105          $1,208,630
                                                                                   ==========          ==========

On March 6, 2000, Keebler utilized existing credit facilities in order to finance the acquisition of Austin. The additional borrowings were under the Revolving Facility, which was originally entered into on September 28, 1998. At October 7, 2000, the outstanding balance on the Revolving Facility was $170.0 million, with an available balance of $180.0 million.

On March 30, 2000, FII amended its $500 million Syndicated Loan Facility and the $80.0 million loan facility agreement relating to its distributor program (the "Distributor Facility"). The amendments provided for increased loan borrowing margins and facility fees and added and amended certain financial covenants. The covenants currently in effect include, among others: (i) a maximum leverage ratio of .65 to 1; (ii) an adjusted fixed charges coverage ratio; (iii) minimum adjusted consolidated EBITDA at specified levels for each fiscal quarter; (iv) a borrowing base covenant requiring that FII's total indebtedness, measured quarterly, not exceed specified percentages of the book value of accounts receivable, inventory, property, plant and equipment and the fair market value of FII's interest in Keebler; (v) a prohibition on acquisitions; (vi) a negative pledge on all assets of the Company; (vii) a limit on capital expenditures of $40 million for fiscal 2000 and $37.5 million per fiscal year thereafter; and (viii) limits on cash dividends unless the Company would have, following payment thereof, at least $15 million availability under the unused commitments and borrowing base tests of the Loan Facility. The Company was in compliance with all covenants under its Loan Facility as in effect on October 7, 2000.

5. FACILITY CLOSING COSTS AND SEVERANCE

NON-RECURRING CHARGES

In May of 1999, Keebler closed its manufacturing facility in Sayreville, New Jersey, which resulted in a pre-tax restructuring and impairment charge of $69.2 million which was subsequently reduced by $2.9 million in the fourth quarter of 1999. The reduction was due to lower than expected severance costs and earlier than expected disposal of the facility. In the second quarter of fiscal 2000, the charge was reduced by an adjustment of $1.0 million. The additional adjustment resulted from lower-than expected severance costs and the earlier-than-expected sale of the facility. Only costs related to the settlement of workers compensation claims and health and welfare payments are expected to extend beyond the year ending December 30, 2000.

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). In the 12 weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of an additional $1.4 million. This adjustment relates to Flowers Bakeries decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of its growing foodservice business. This bakery will be opened in early 2001. The remaining exit costs include ongoing costs such as guard service, utilities and property taxes of

closed facilities. Activity with respect to the reserve for non- recurring charges was as follows (amounts in thousands):

                                          01/01/2000  Prov/Adj     Spending   10/07/2000
                                          ----------------------------------------------
Noncancelable lease obligations
    and other facility closing costs      $2,831      $(1,577)      $  (958)      $  296
Severance                                  2,037         (140)       (1,196)         701
Other                                      2,462          700           (55)       3,107
                                          ------      -------       -------       ------
                Total                     $7,330      $(1,017)      $(2,209)      $4,104
                                          ======      =======       =======       ======

PURCHASE ACCOUNTING RESERVES

As part of accounting for the acquisition of Austin in the first quarter of 2000, Keebler recognized estimated costs pursuant to a plan to exit certain activities of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the allocation of the purchase price and totaled $14.5 million. At October 7, 2000, approximately 75 non-union employees had been terminated, with the remaining terminations scheduled to occur by February 2001. Spending on exit costs is expected to be substantially complete before the end of 2001, with primarily health and welfare payments extending beyond that time frame.

During fiscal 1998, as part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of President. Exit costs related to the plan, totaling $12.8 million, were provided for in the allocation of the purchase price. Management's exit plan is expected to be substantially complete before the end of fiscal 2000 with only noncancelable lease obligations to be paid over the next six years, concluding in fiscal 2006.

As part of the acquisition of Mrs. Smith's Inc. in fiscal 1996, Flowers recorded a purchase accounting reserve of $37.1 million in order to realign production and distribution at Mrs. Smith's Bakeries. 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.

As part of INFLO's acquisition of Keebler and Keebler's subsequent acquisition of Sunshine in 1996, 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. During the quarter ended July 15, 2000, Keebler adjusted accruals previously established by reducing goodwill and other intangibles by $0.5 million and $1.1 million, respectively, to recognize exit costs that are now expected to be less than initially anticipated. The exit plan was substantially complete at January 2, 2000 with only noncancelable lease

obligations continuing through 2006. Activity with respect to the purchase accounting reserves was as follows (amounts in thousands):

MRS SMITH'S BAKERIES                          01/01/2000      Prov/Adj       Spending     10/07/2000
                                              ------------------------------------------------------
Noncancelable lease obligations
    and other facility closing costs             $20,186                     $ (2,776)      $17,410
Other                                              2,476                         (542)        1,934
                                              -----------------------------------------------------
                Total                             22,662             0         (3,318)       19,344
                                              -----------------------------------------------------
KEEBLER FOODS COMPANY
                                              -----------------------------------------------------
Noncancelable lease obligations
    and other facility closing costs             $ 7,829      $   (500)      $ (1,430)      $ 5,899
Severance                                             24                                         24
                                              -----------------------------------------------------
                Total                              7,853          (500)        (1,430)        5,923
                                              -----------------------------------------------------
SUNSHINE BISCUITS, INC.
                                              -----------------------------------------------------
Noncancelable lease obligations
    and other facility closing costs             $ 1,962      $ (1,116)      $   (689)      $   157
Severance                                             63                          (17)           46
                                              -----------------------------------------------------
                Total                              2,025        (1,116)          (706)          203
                                              -----------------------------------------------------
PRESIDENT INTERNATIONAL, INC.
                                              -----------------------------------------------------
Noncancelable lease obligations
    and other facility closing costs             $ 4,596                     $   (569)      $ 4,027
Severance                                          2,829                       (2,235)          594
Other                                                 10                          (10)            0
                                              -----------------------------------------------------
                Total                              7,435             0         (2,814)        4,621
                                              -----------------------------------------------------
AUSTIN QUALITY FOODS
                                              -----------------------------------------------------
Noncancelable lease obligations
    and other facility closing costs                          $    479       $   (408)      $    71
Severance                                                       13,979         (8,398)        5,581
Other                                                               28             (5)           23
                                              -----------------------------------------------------
                Total                                  0        14,486         (8,811)        5,675
                                              -----------------------------------------------------
                GRAND TOTAL                      $39,975      $ 12,870       $(17,079)      $35,766
                                              =====================================================

6. SEGMENT REPORTING

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.

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 (amounts in thousands):

                                               For the Twelve Weeks Ended                        For the Forty Weeks Ended
                                       ------------------------------------------        ------------------------------------------
                                       October 7, 2000            October 9, 1999        October 7, 2000            October 9, 1999
                                       ---------------            ---------------        ---------------            ---------------
                                                       (Unaudited)                                       (Unaudited)
SALES:
  Flowers Bakeries                       $   233,571                $   223,459            $   782,257                $   743,080
  Mrs. Smith's Bakeries                      161,740                    157,892                472,032                    476,900
  Keebler                                    642,203                    615,844              2,111,635                  2,055,724
  Elimination (1)                            (14,547)                   (14,531)               (48,458)                   (53,547)
                                         -----------                -----------            -----------                -----------
                                         $ 1,022,967                $   982,664            $ 3,317,466                $ 3,222,157
                                         ===========                ===========            ===========                ===========

DEPRECIATION AND AMORTIZATION:
  Flowers Bakeries                       $     9,238                $     7,726            $    28,884                $    24,866
  Mrs. Smith's Bakeries                        6,699                      4,908                 21,650                     14,129
  Keebler                                     23,114                     19,480                 72,547                     62,651
  FII (2)                                      1,809                      1,867                  6,064                      5,594
                                         -----------                -----------            -----------                -----------
                                         $    40,860                $    33,981            $   129,145                $   107,240
                                         ===========                ===========            ===========                ===========

INCOME (LOSS) FROM OPERATIONS:
  Flowers Bakeries                       $    10,905                $    13,958            $    55,598                $    53,237
  Mrs. Smith's Bakeries                       (5,014)                   (33,558)               (30,489)                   (50,706)
  Keebler                                     75,645                     62,960                235,872                    182,337
  FII (2)                                     (6,189)                   (11,720)               (23,223)                   (26,682)
  Insurance proceeds                           3,105                          0                  4,774                          0
  Non-recurring (credit) charge                1,428                          0                  2,424                    (69,208)
                                         -----------                -----------            -----------                -----------
                                         $    79,880                $    31,640            $   244,956                $    88,978
                                         ===========                ===========            ===========                ===========

(1) Represents elimination of intersegment sales from Mrs. Smith's Bakeries to Flowers Bakeries which are transferred at cost

(2) Unallocated corporate expenses

7. NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 established 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 on December 31, 2000, the first day of fiscal year 2001. In accordance with the transition provisions of SFAS 133, upon adoption, the Company will record a cumulative effect-type adjustment to accumulated comprehensive income to recognize at fair value all derivatives, and related losses deferred on the balance sheet, designated as cash flow hedging instruments. The Company does not believe the adoption of SFAS 133 will have a material impact on the results of operations. At October 7, 2000, the fair value of all derivative instruments designated as cash flow hedging instruments was $(2.0) million, which would have resulted in a net liability. Related losses deferred on the balance sheet at October 7, 2000 were $6.2 million. The fair value of the derivative instruments and the related deferred losses could be materially different at the adoption date, December 31, 2000.

On May 18, 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached consensus on Issue No. 00-14 "Accounting for Certain Sales Incentives." This issue addresses the recognition, measurement, and income statement classification of sales incentives offered by vendors (including manufacturers) that have the effect of reducing the price of a product or service to a customer at the point of sale. For cash sales incentives within the scope of this issue, costs are generally recognized at the date on which the related revenue is recorded by the vendor and are to be classified as a reduction of revenue. For non-cash sales incentives, such as package inserts, costs are to be classified within cost of sales. This issue is effective for the second quarter of fiscal 2001. Management has assessed the impact of this guidance and determined that adoption will not result in a material reclassification between net sales and selling, general, and administrative expense. Net earnings would not be affected.

In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is required to apply the accounting and disclosures described in this bulletin in the fourth quarter of fiscal 2000. Management has assessed the impact of SAB 101 and determined that issuance will have no material impact on the Company's sales or net earnings.

8. SUBSEQUENT EVENTS

On October 26, 2000, FII and Keebler announced that an agreement was reached for a series of transactions that will result in the sale of Keebler Foods Company to Kellogg Company and the spin-off to FII shareholders of a new company, Flowers Foods, Inc. FII agreed to sell its controlling stake in Keebler to Kellogg for $42.00 per share. Simultaneously with the sale of the Keebler controlling stake, FII will spin-off to its shareholders the new company, Flowers Foods, Inc., which is anticipated to trade on the New York Stock Exchange under the original symbol FLO. Flowers Foods, Inc. will include the Flowers Bakeries and Mrs. Smith's Bakeries businesses and approximately $250 million in debt. After deducting certain liabilities at FII, the proceeds from the transaction will be paid to FII's shareholders in cash. In addition to these proceeds, each FII shareholder will receive shares representing a proportionate interest in Flowers Foods. The new company will be headquartered in Thomasville, Georgia and will be led by the current FII management team.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Matters Affecting Analysis:

The following discussion of the financial condition and results of operations for the twelve and forty weeks ended October 7, 2000 should be read in conjunction with FII's annual report on Form 10-K for the fiscal year ended January 1, 2000, filed with the Securities and Exchange Commission on March 30, 2000.

The Company maintains insurance for property damage, mechanical breakdown, product liability, product contamination and business interruption applicable to its production facilities. During fiscal 1999, Mrs. Smith's Bakeries incurred substantial costs related to mechanical breakdown and product contamination at certain plants. Mrs. Smith's Bakeries filed claims under the Company's insurance policies for a portion of these costs that it believes to be insured. During the quarter ended July 15, 2000, Mrs. Smith's Bakeries recovered insurance proceeds of $1.7 million related to product contamination claims. In the quarter ended October 7, 2000, Mrs. Smith's Bakeries recovered additional insurance proceeds of $3.1 million related to mechanical breakdown, product contamination and payments under business interruption coverage. Mrs. Smith's Bakeries continues to pursue recovery under various insurance policies for covered losses. The claims process is lengthy and its outcome cannot be predicted with certainty. If future insurance proceeds are recovered, they will be reported as a separate line item, net of claims preparation expenses.

During the fourth quarter of fiscal 1998, Flowers Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million, of which $32.2 million was related to the operations of Flowers Bakeries. In the twelve weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of $1.4 million. This adjustment relates to Flowers Bakeries decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of our growing foodservice business. This bakery will be operational in early 2001.

During the first quarter of fiscal 2000, Flowers completed its acquisition of The Kroger Company's bakery in Memphis, Tennessee (the "Kroger acquisition") and Keebler completed its acquisition of Austin Specialty Foods, Inc (the "Austin acquisition"). On January 4, 2000 Keebler sold its value brand business, which resulted in a pretax gain of $5.7 million in the first quarter. On a consolidated basis, after tax and minority interest, the gain on the sale of the value brands business of $1.8 million is included in the results for the forty weeks ended October 7, 2000. Additionally, operating results of the value brands business are not included in the twelve or forty week period ended October 7, 2000, however the comparable twelve and forty weeks ended October 9, 1999 do include the operating results of the value brands business.

During the second quarter of fiscal 1999, the Board of Directors of Keebler approved a plan to close its Sayreville, New Jersey, production facility due to excess capacity within Keebler's 18 plant production network. As a result of this plan, the Company recorded a pre-tax non-recurring charge of $69.2 million, or $.25 per share after tax and minority interest. During the second quarter of

fiscal 2000, this facility was sold, which resulted in an adjustment to the previous charge of approximately $1.0 million for carrying costs and other facility expenses which were less than had originally been estimated. The sale of the Sayreville facility resulted in a pretax gain of $2.0 million during the quarter. On a consolidated basis, after tax and minority interest, the gain on this transaction was $0.7 million.

                                                              For the Twelve Weeks Ended           For the Forty Weeks Ended
                                                          ---------------------------------   ----------------------------------
                                                          October 7, 2000   October 9, 1999   October 7, 2000    October 9, 1999
                                                          ---------------   ---------------   ---------------    ---------------
                                                                      (Unaudited)                        (Unaudited)
Sales                                                         100.00%           100.00%           100.00%           100.00%
Gross margin                                                   55.00%            50.01%            54.63%            51.95%
Selling, marketing, and administrative expenses                43.64%            43.34%            43.57%            43.71%
Depreciation and amortization                                   3.99%             3.46%             3.89%             3.33%
Insurance proceeds                                             (0.30)%            0.00%            (0.14)%            0.00%
Non-recurring charge                                           (0.14)%            0.00%            (0.07)%            2.15%
Interest                                                        2.60%             1.87%             2.60%             1.94%
Income (loss) before income taxes and  minority interest        5.21%             1.35%             4.78%             0.82%
Income  taxes                                                   2.10%             0.81%             2.05%             0.59%
Net income (loss)                                               1.27%            (0.93)%            1.06%            (0.37)%

CONSOLIDATED RESULTS

TWELVE WEEKS ENDED OCTOBER 7, 2000 COMPARED TO TWELVE WEEKS ENDED OCTOBER 9,
1999

Sales. For the twelve weeks ended October 7, 2000, sales were $1,023.0 million, or 4.1% higher than sales for the comparable period in the prior year, which were $982.7 million. Sales increased 4.3%, 4.5% and 2.7% at Keebler, Flowers Bakeries and Mrs. Smith's Bakeries, respectively, from the third quarter of fiscal 1999. Additional sales analysis is included under the discussion of business segments.

Gross Margin. Gross margin for the third quarter of fiscal 2000 was $562.6 million, or 14.5% higher than gross margin reported a year ago of $491.5 million. As a percent of sales, gross margin was 55.0% for the third quarter of fiscal 2000, compared to 50.0% for the third quarter of fiscal 1999. Keebler improved margins to 61.7% during the period, up from 58.7% during the same period last year. Flowers Bakeries' margins improved to 54.7% from 52.9% during the third quarter of fiscal 1999. Mrs. Smith's margins increased substantially to 27.6% in the third quarter of fiscal 2000, as compared to margins of 8.9% in the same period a year ago. Mrs. Smith's margins were negatively effected in fiscal 1999 by mechanical breakdown and product contamination associated with the production realignment project.

Selling, Marketing and Administrative Expenses. During the third quarter of fiscal 2000, selling, marketing and administrative expenses were $446.4 million, or 43.6% of sales as compared to $425.8 million, or 43.3% of sales reported a year ago. Flowers Bakeries selling, marketing and administrative expenses increased to 46.0% of sales during the third quarter of fiscal 2000 versus 43.2% in the same period a year ago. Keebler's selling, marketing and administrative expenses were 46.3% of sales in the third quarter of fiscal 2000 as compared to 45.4% of sales in the third quarter of fiscal 1999. Mrs. Smith's Bakeries' selling, marketing and administrative expenses improved as a percent of sales to 26.4% in the third quarter of fiscal 2000 from 28.9% in the same period last year. During fiscal 1999, Mrs. Smith's incurred higher than expected distribution costs due to the production realignment as well as increased advertising and promotions. These excessive costs were not present in the current quarter.

Depreciation and Amortization. Depreciation and amortization expense was $40.9 million for the third quarter of fiscal 2000, an increase of 20.3% over the

corresponding period in the prior year, which was $34.0 million. This increase is due primarily to acquisitions and capital expenditures.

Proceeds from Insurance Policies. The Company maintains insurance for property damage, mechanical breakdown, product liability, product contamination and business interruption applicable to its production facilities. During fiscal 1999, Mrs. Smith's incurred substantial costs and expenses related to mechanical breakdown and product contamination at certain plants. Mrs. Smith's filed claims under the Company's insurance policies for a portion of these costs that it believes to be insured. In the quarter ended October 7, 2000, Mrs. Smith's Bakeries recovered insurance proceeds of $3.1 million related to mechanical breakdown, product contamination and business interruption coverage. Mrs. Smith's continues to pursue recovery under various insurance policies for covered losses. The claims process is lengthy and its outcome cannot be predicted with certainty. If future insurance proceeds are recovered, they will be reported as a separate line item, net of claims preparation expenses.

Non-recurring Charge. During the fourth quarter of fiscal 1998, Flowers Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million of which $32.2 million was related to operations of Flowers Bakeries. In the twelve weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of $1.4 million. This adjustment relates to Flowers Bakeries decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of our growing foodservice business. This bakery will be operational in early 2001.

Interest Expense. For the third quarter of fiscal 2000, net interest expense was $26.6 million, an increase of $8.2 million or 44.6% over the corresponding period in the prior year, which was $18.4 million. Flowers' interest expense increased $5.2 million to $16.5 million in the third quarter of fiscal 2000 from $11.3 million in the third quarter of fiscal 1999. Keebler's interest expense increased $3.0 million to $10.1 million in the third quarter of fiscal 2000 as compared to $7.1 million in the same period of fiscal 1999. The increases are due to increased debt levels resulting from acquisitions, capital improvements, funding of operating losses at Mrs. Smith's Bakeries and higher interest rates in the current period as compared to the same period last year.

Income (Loss) Before Income Taxes and Minority Interest. Income before income taxes and minority interest for the third quarter of fiscal 2000 was $53.2 million, an increase of $39.9 million from $13.3 million reported in the third quarter of fiscal 1999. After adjusting third quarter of each year for the non-recurring items and insurance proceeds, income before income taxes and minority interest increased $35.4 million in the third quarter of fiscal 2000. These results are reflective of an increase in income from operations of $12.7 million at Keebler, a decrease in income from operations at Flowers Bakeries of $3.1 million and a reduction in the net loss at Mrs. Smith's Bakeries of $28.5 million. These increases in operating income at the segment level were partially offset by increased interest cost noted above and unallocated corporate expenses that decreased by $5.5 million from third quarter of fiscal 1999.

Income Taxes. Income taxes during the third quarter of fiscal 2000 were provided at an estimated effective rate of 40.3%. The effective rate differs from the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, other intangibles and goodwill.

Net Income (Loss). Net income for the third quarter of fiscal 2000 was $13.0 million, an increase of $22.1 million from the net loss of $9.1 million reported a year ago. This is reflective of the items noted above. A further discussion of the comparative results of operations by business segment follows.

                                                                         FOR THE TWELVE WEEKS ENDED
                                          -----------------------------------------------------------------------------------------
                                          OCTOBER 7, 2000  % OF SALES     OCTOBER 9, 1999   % OF SALES    CHANGE ($'S)   CHANGE (%)
                                          ---------------  ----------     ---------------   ----------    ------------   ----------
Sales                                         $233,571       100.0%           $223,459        100.0%        $10,112          4.5%
Gross margin                                  $127,662        54.7%           $118,278         52.9%        $ 9,384          7.9%
Selling, marketing, and administrative        $107,519        46.0%           $ 96,594         43.2%        $10,925         11.3%
Depreciation and amortization                 $  9,238         4.0%           $  7,726          3.5%        $ 1,512         19.6%
Income from operations (EBIT)                 $ 10,905         4.7%           $ 13,958          6.2%        $(3,053)       -21.9%

Sales. Sales at Flowers Bakeries for the third quarter of fiscal 2000 were $233.6 million, an increase of 4.5% over sales of $223.5 million reported during the same period a year ago. Acquisitions accounted for 3.1% of this increase. After adjusting for the effect of acquisitions, the overall sales increase of 1.4% is primarily attributable to a shift in product mix toward higher priced branded products.

Gross Margin. Flowers Bakeries' gross margin improved to 54.7% of sales for the third quarter of fiscal 2000, compared to 52.9% of sales for the comparable period in the prior year. Lower ingredient cost and improved pricing was partially offset by higher labor, energy and packaging costs.

Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses increased to $107.5 million as compared to $96.6 million in the third quarter of fiscal 1999. These expenses increased to 46.0% of sales during the third quarter of fiscal 2000 from 43.2% in the third quarter of fiscal 1999. The increase in absolute terms as well as a percent of sales was composed of increases in labor, rent and energy costs, as well as integration costs associated with the Kroger market expansion. These increases were partially offset by decreases in advertising expenditures.

Depreciation and Amortization. Depreciation and amortization increased to $9.2 million in the third quarter of fiscal 2000 from $7.7 million in the same period last year. This increase is primarily attributable to capital expenditures and increased amortization resulting from the Kroger acquisition.

Operating Income. The factors noted above resulted in operating income of $10.9 million in the twelve weeks ended October 7, 2000, a decrease of $3.1 million from operating income of $14.0 million reported during the third quarter of fiscal 1999.

                                                                        FOR THE TWELVE WEEKS ENDED
                                         --------------------------------------------------------------------------------------
                                         OCTOBER 7, 2000  % OF SALES   OCTOBER 9, 1999   % OF SALES   CHANGE ($'S)   CHANGE (%)
                                         ---------------  ----------   ---------------   ----------   ------------   ----------
Sales                                        $147,193       100.0%         $143,361        100.0%       $ 3,832         2.7%
Gross margin                                 $ 40,611        27.6%         $ 12,792          8.9%       $27,819       217.5%
Selling, marketing, and administrative       $ 38,926        26.4%         $ 41,442         28.9%       $(2,516)       -6.1%
Depreciation and amortization                $  6,699         4.6%         $  4,908          3.4%       $ 1,791        36.5%
Loss from operations (EBIT)                  $ (5,014)       -3.4%         $(33,558)       -23.4%       $28,544       -85.1%

Sales. Sales at Mrs. Smith's Bakeries, excluding intersegment sales of $14.5 million, were $147.2 million in the third quarter of fiscal 2000 as compared to $143.4 million for the comparable period in the prior year, an increase of $3.8 million or 2.7%. Overall volumes decreased 3.0% from the same quarter last year, however average case price increased 5.9% which is due to both a price increase and favorable mix shift toward higher priced items. Retail sales were up approximately 11.7% from prior years, primarily due to favorable mix and increased volume. An increase in foodservice sales of 9.4% was driven by

favorable pricing trends and slight volume increases. Snack and deli sales decreased by 1.4% and 20.2%, respectively. The small decrease in snack sales was a combination of falling volumes partially offset by a shift in product mix towards higher priced products. The drop in deli sales was primarily volume driven. Mrs. Smith's sales are highly seasonal with the bulk of retail sales occurring in the holiday season during our fourth quarter. Management believes that our sales will continue to show growth next quarter as compared to the fourth quarter of last year.

Gross Margin. Mrs. Smith's Bakeries' gross margin for the third quarter of fiscal 2000 was 27.6% of sales compared to 8.9% reported a year ago. Prior year margins were unusually depressed due to costs associated with the manufacturing and production realignment that was in progress at the time. Current margins, while significantly improved, continued to suffer as Mrs. Smith's Bakeries sells inventory produced earlier in the year at higher operating costs.

Selling, Marketing and Administrative Expenses. Mrs. Smith's Bakeries' selling, marketing and administrative expenses were $38.9 million or 26.4% of sales during the third quarter of fiscal 2000 as compared to $41.4 million or 28.9% of sales during the same period a year ago. Distribution costs during the quarter were 1.7% lower than the same quarter last year and 11.2% better on a per case shipped basis. Fiscal 1999 distribution expenses were higher due to production and manufacturing realignment that caused unusually high freight expenses. Advertising and marketing expenses were level with prior years and administrative expenses were reduced approximately 5.4% when compared to the third quarter of fiscal 1999.

Depreciation and Amortization. Depreciation and amortization for Mrs. Smith's Bakeries in the third quarter of fiscal 2000 was $6.7 million as compared to $4.9 million in the same period of last year. This increase is due to substantial capital expenditures associated with the production realignment that was completed earlier this year.

Operating Loss. Mrs. Smith's Bakeries experienced an operating loss of $5.0 million for the third quarter of fiscal 2000 excluding proceeds from insurance claims of $3.1 million, as compared to an operating loss of $33.6 million in the third quarter of fiscal 1999. The third quarter of fiscal 1999 included substantial cost due to delays and mechanical breakdowns associated with the production realignment plan. While Mrs. Smith's Bakeries has not fully recovered, the third quarter of fiscal 2000 showed substantial improvement. With the production realignment completed, Mrs. Smith's expects to improve operating results in the fourth quarter of fiscal 2000 and into fiscal 2001.

                                                                         FOR THE TWELVE WEEKS ENDED
                                         ---------------------------------------------------------------------------------------
                                         OCTOBER 7, 2000  % OF SALES   OCTOBER 9, 1999   % OF SALES   CHANGE ($'S)    CHANGE (%)
                                         ---------------  ----------   ---------------   ----------   ------------    ----------
Sales                                       $642,203        100.0%         $615,844        100.0%       $26,359           4.3%
Gross margin                                $396,041         61.7%         $361,755         58.7%       $34,286           9.5%
Selling, marketing, and administrative      $297,282         46.3%         $279,315         45.4%       $17,967           6.4%
Depreciation and amortization               $ 23,114          3.6%         $ 19,480          3.2%       $ 3,634          18.7%
Income from operations (EBIT)               $ 75,645         11.8%         $ 62,960         10.2%       $12,685          20.1%

Sales. Sales at Keebler for the third quarter of fiscal 2000 increased $26.4 million or 4.3% to $642.2 million from $615.8 million reported a year ago. Excluding the revenues of Austin of $46.2 million and adjusting for the sales related to the value brands business which was sold in the first quarter of fiscal 2000, net sales declined $11.7 million and 1.9%. Sales increases in core branded channels was more than offset by volume shortfalls in private label, contract packing and low priced retail products.

Gross Margin. Gross margin at Keebler was $396.0 million and 61.7% of sales during the third quarter of fiscal 2000 as compared to $361.8 million and 58.7% of sales during the same period a year ago. The improved margins were mainly

attributable to improved productivity and cost savings as well as lower raw material costs. The increase in gross margin is also reflective of the growth in Keebler's branded business and the sale of its value brands business during the first quarter resulting in a product mix shift toward higher margin branded products.

Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses were $297.3 million and 46.3% of sales in the third quarter of fiscal 2000 as compared to $279.3 million and 45.4% in the third quarter of fiscal 1999. Expenses related to Austin that were not present in prior year accounted for 0.5% of the increase. Excluding Austin, additional branded volume contributed to increases in selling expenses. Rising fuel cost and higher maintenance cost due to expansion and relocation of a major distribution center negatively effected distribution costs. Marketing expenses as a percent of sales were flat as compared to prior year.

Depreciation and Amortization. Depreciation and amortization in the third quarter of fiscal 2000 was $23.1 million as compared to $19.5 million in the same period of last year. Austin accounted for $0.3 million of this increase due to adjustments made during the quarter.

Operating Income. Operating income, excluding nonrecurring items, increased $12.7 million to $75.6 million for the third quarter of fiscal 2000 from $63.0 million, excluding nonrecurring charges, during the third quarter of fiscal 1999. The increase is reflective of increased sales of higher margin, branded products and efficiencies gained in production realignments.

FORTY WEEKS ENDED OCTOBER 7, 2000 COMPARED TO FORTY WEEKS ENDED OCTOBER 9, 1999

Sales. For the forty weeks ended October 7, 2000, sales were $3,317.5 million, or 3.0% higher than sales for the comparable period in the prior year, which were $3,222.2 million. Sales during the first three quarters of fiscal 2000 increased 5.3% at Flowers Bakeries and 2.7% at Keebler over their respective sales during the first three quarters of fiscal 1999. Mrs. Smith's Bakeries' sales increased 0.1% over the prior year. Additional sales analysis is included under the discussion of business segments.

Gross Margin. For the forty weeks ended October 7, 2000, gross margin was $1,812.2 million, an increase of $138.4 million or 8.3% higher than gross margin reported for the same period last year of $1,673.8 million. As a percent of sales, gross margin was 54.6% as compared to 52.0% for the same period last year. Keebler improved margins to 60.1% during the period up from 57.4% during the same period last year and Flowers Bakeries' margins improved to 54.7% from 53.0% in the prior year. Gross margins at Mrs. Smith's Bakeries improved to 28.1% from 23.8% in the same period a year ago.

Selling, Marketing and Administrative Expenses. For the forty weeks ended October 7, 2000, selling, marketing and administrative expenses were $1,445.3 million, or 43.6% of sales as compared to $1,408.4 million, or 43.7% of sales reported a year ago. Flowers Bakeries' selling, marketing and administrative expenses increased to 43.9% of sales as compared to 42.5% during the first three quarters of fiscal 1999. Mrs. Smith's Bakeries selling, marketing and administrative expenses decreased to 30.1% of sales as compared to 32.4% in the same period a year ago. Keebler's selling, marketing and administrative expenses were 45.5% percent of sales for both the forty-week periods ended October 7, 2000 and October 9, 1999.

Depreciation and Amortization. Depreciation and amortization expense was $129.1 million for the forty weeks ended October 7, 2000, an increase of 20.4% over the corresponding period in the prior year, which was $107.2 million. This increase is due primarily to capital expenditures and acquisitions.

Proceeds from Insurance Policies. The Company maintains insurance for property damage, mechanical breakdown, product liability, product contamination and business interruption applicable to its production facilities. During fiscal 1999, Mrs. Smith's incurred substantial costs and expenses related to mechanical breakdown and product contamination at certain plants. Mrs. Smith's filed claims

under the Company's insurance policies for a portion of these costs that it believes to be insured. During the forty weeks ended October 7, 2000, Mrs. Smith's recovered insurance proceeds of $4.8 million related to mechanical breakdown, product contamination and business interruption coverage. Mrs. Smith's continues to pursue recovery under various insurance policies for losses sustained. The claims process is lengthy and its outcome cannot be predicted with certainty. If future insurance proceeds are recovered, they will be reported as a separate line item, net of claims preparation expenses.

Non-recurring Charge. During the fourth quarter of fiscal 1998, Flowers Industries, Inc. recorded a pre-tax non-recurring charge of $68.3 million of which $32.2 million was related to operations of Flowers Bakeries. In the twelve weeks ended October 7, 2000, Flowers Bakeries reported an adjustment to this previously recorded non-recurring charge of $1.4 million. This adjustment relates to Flowers Bakeries' decision to reopen a closed bakery located in Norfolk, Virginia in order to meet the demands of our growing foodservice business. This bakery will be operational in early 2001. During the second quarter of fiscal 1999, Keebler recorded a non-recurring charge of $69.2 million. Adjustments to Keebler's reserve totaling $1.0 million were made during the second quarter of fiscal 2000 to reflect decreased carrying cost associated with the Sayreville, New Jersey facility that was sold during the period. See discussion under the heading "Matters Affecting Analysis" above.

Interest Expense. For the forty weeks ended October 7, 2000, net interest expense was $86.2 million, an increase of 38.1% over the corresponding period in the prior year, which was $62.4 million. Flowers' interest expense increased $18.1 million to $52.0 million in the forty week period ended October 7, 2000 from $33.9 million in the same period last year. The increase is due to increased debt levels resulting from acquisitions, capital improvements, funding of operating losses at Mrs. Smith's Bakeries and higher interest rates in the current period as compared to the same period last year. Keebler's interest expense increased $5.7 million to $34.2 million in the first three quarters of fiscal 2000 as compared to $28.5 million in the same period of fiscal 1999.

Income Before Income Taxes and Minority Interest. Income before income taxes and minority interest for the forty weeks ended October 7, 2000, was $158.7 million, an increase of $132.1 million over income before income taxes and minority interest of $26.6 million reported in the forty weeks ended October 9, 1999. After adjusting income for the non-recurring charges and insurance proceeds, income before income taxes and minority interest increased $55.7 million in the forty weeks ended October 7, 2000. These results are reflective of increases in income from operations of $53.5 million at Keebler and $2.4 million at Flowers Bakeries, a reduction in the net loss at Mrs. Smith's Bakeries of $20.2 million and increased interest expense of $23.8 million. Additionally, unallocated corporate expenses decreased $3.5 million from the forty weeks ended October 9, 1999.

Income Taxes. Income taxes for the forty weeks ended October 7, 2000, were provided at an estimated effective rate of 42.9%. The effective rate differs from the statutory rate due to nondeductible expenses, principally amortization of intangibles, including trademarks, trade names, other intangibles and goodwill.

Net Income (Loss). Net income for the forty weeks ended October 7, 2000 was $35.2 million, an increase of $47.2 million over the net loss of $12.0 million reported a year ago. This is reflective of the items noted above. A further discussion of the comparative results of operations by business segment follows.

                                                                           FOR THE FORTY WEEKS ENDED
                                           ----------------------------------------------------------------------------------------
                                           OCTOBER 7, 2000  % OF SALES    OCTOBER 9, 1999  % OF SALES     CHANGE ($'S)   CHANGE (%)
                                           ---------------  ----------    ---------------  ----------     ------------   ----------
Sales                                         $782,257        100.0%          $743,080       100.0%         $39,177          5.3%
Gross margin                                  $427,885         54.7%          $393,848        53.0%         $34,037          8.6%
Selling, marketing, and administrative        $343,403         43.9%          $315,745        42.5%         $27,658          8.8%
Depreciation and amortization                 $ 28,884          3.7%          $ 24,866         3.3%         $ 4,018         16.2%
Income from operations (EBIT)                 $ 55,598          7.1%          $ 53,237         7.2%         $ 2,361          4.4%

Sales. Sales at Flowers Bakeries for the forty weeks ended October 7, 2000 were $782.3 million, an increase of 5.3% over sales of $743.1 million reported a year ago. After adjusting for the increase related to the Kroger acquisition of 3.7%, the remaining 1.6% increase from the prior year was primarily attributable to increased pricing and a shift in product mix toward higher priced branded products as well as lower ingredient costs.

Gross Margin. Flowers Bakeries' gross margin improved to 54.7% of sales for the forty weeks ended October 7, 2000, compared to 53.0% of sales for the comparable period in the prior year. Improved pricing and production efficiencies primarily contributed to this increase.

Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses for the forty weeks ended October 7, 2000, increased to $343.4 million as compared to $315.7 million for the comparable period in the prior year. As a percent of sales, these expenses increased to 43.9% in the first three quarters of fiscal 2000 from 42.5% in same period a year ago. The increase was composed of increases in labor, rent and energy costs, as well as start-up costs associated with the Kroger acquisition. These increases were partially offset by decreases in advertising costs.

Depreciation and Amortization. Depreciation and amortization increased to $28.9 million in the forty week period ended October 7, 2000 from $24.9 million in the same period last year. This increase is primarily attributable to capital expenditures and increased amortization due to the Kroger acquisition.

Operating Income. Operating income, excluding adjustments to non-recurring charges, increased 4.4% to $55.6 million for the forty weeks ended October 7, 2000 from $53.2 million during the comparable period last year. This increase is reflective of the increasing margins and continued cost control measures implemented at Flowers Bakeries.

                                                                            FOR THE FORTY WEEKS ENDED
                                          -----------------------------------------------------------------------------------------
                                          OCTOBER 7, 2000  % OF SALES    OCTOBER 9, 1999   % OF SALES     CHANGE ($'S)   CHANGE (%)
                                          ---------------  ----------    ---------------   -----------    ------------   ----------
Sales                                         $423,574       100.0%          $423,353         100.0%        $   221          0.1%
Gross margin                                  $118,864        28.1%          $100,769          23.8%        $18,095         18.0%
Selling, marketing, and administrative        $127,703        30.1%          $137,346          32.4%        $(9,643)        -7.0%
Depreciation and amortization                 $ 21,650         5.1%          $ 14,129           3.3%        $ 7,521         53.2%
Loss from operations (EBIT)                   $(30,489)       -7.2%          $(50,706)        -12.0%        $20,217        -39.9%

Sales. Sales at Mrs. Smith's Bakeries, excluding intersegment sales of $48.5 million, were $423.6 million for the forty weeks ended October 7, 2000 as compared to $423.4 million for the comparable period in the prior year, an increase of $0.2 million or 0.1%. Overall, volumes decreased 3.9% from the prior year, however average case prices increased 4.1% which is due to both a price increase and favorable product mix shift. Foodservice sales increased 4.7% due to improved pricing and volume increases. Current year-to-date retail sales were flat when compared to prior year. While retail volumes were down, there was a

significant shift in product mix toward higher priced products. Year to date snack and deli sales decreased by 1.4% and 7.9% respectively, as compared to the prior year. The small decrease in snack was a combination of falling volumes offset by a shift in product mix towards higher priced products. The drop in deli sales was primarily volume driven with little pricing or product mix effects. Mrs. Smith's sales are highly seasonal with the bulk of retail sales occurring in the holiday season during the fourth quarter.

Gross Margin. Mrs. Smith's Bakeries' gross margin for the forty week period ended October 7, 2000 was 28.1% of sales compared to 23.8% reported a year ago. Margins continue to be depressed as Mrs. Smith's Bakeries works through higher cost inventory that was produced during the plant restructuring. However, Mrs. Smith's margins are improving as the year progresses and the fourth quarter should result in further improvement of gross margin due to higher retail sales and lower cost inventory being produced.

Selling, Marketing and Administrative Expenses. Mrs. Smith's Bakeries' selling, marketing and administrative expenses were $127.7 million or 30.1% of sales during the forty week period ended October 7, 2000 as compared to $137.3 million or 32.4% of sales during the same period a year ago. Expenses in the first three quarters of fiscal 1999 included significant increases in estimates for customer deductions and trade promotions and increased reserves for certain out-of-code, damaged or discontinued inventory. These costs were not incurred to the same extent in the current year period.

Depreciation and Amortization. Depreciation and amortization expense in the forty week period ended October 7, 2000 was $21.7 million as compared to $14.1 million in the same period of last year. This increase is due to substantial capital improvements associated with the production realignment.

Operating Loss. Mrs. Smith's Bakeries experienced an operating loss, excluding insurance proceeds, of $30.5 million during the forty week period ended October 7, 2000 as compared to an operating loss of $50.7 million in the same period last year. Sales and margins were slightly higher during the first three quarters of fiscal 2000 as compared to the same period in fiscal 1999. The first three quarters of fiscal 1999 included significant increases in estimates for customer deductions and trade promotions and increased reserves for certain out-of-code, damaged or discontinued inventory which were not present to the same extent in the first three quarters of fiscal 2000. Mrs. Smith's has shown significant improvement in the last twelve months but as the results show, has not completed the recovery. Mrs. Smith's expects to continue showing improvement in the next quarter and to build on this foundation in 2001.

                                                                            FOR THE FORTY WEEKS ENDED
                                          ----------------------------------------------------------------------------------------
                                          OCTOBER 7, 2000  % OF SALES    OCTOBER 9, 1999   % OF SALES    CHANGE ($'S)   CHANGE (%)
                                          ---------------  ----------    ---------------   -----------   ------------   ----------
Sales                                        $2,111,635      100.0%         $2,055,724       100.0%         $55,911         2.7%
Gross margin                                 $1,269,428       60.1%         $1,180,594        57.4%         $88,834         7.5%
Selling, marketing, and administrative       $  961,009       45.5%         $  935,606        45.5%         $25,403         2.7%
Depreciation and amortization                $   72,547        3.4%         $   62,651         3.0%         $ 9,896        15.8%
Income from operations (EBIT)                $  235,872       11.2%         $  182,337         8.9%         $53,535        29.4%

Sales. Sales at Keebler for the forty week period ended October 7, 2000 increased $55.9 million and 2.7% to $2,111.6 million from $2,055.7 million reported a year ago. Excluding the Austin sales and adjusting for the sales related to the value brands business which was sold in the first quarter of fiscal 2000, net sales declined 1.9%. Volume declines in lower margin contract packing and value business reflect the shift away from lower margin business. While we the market is becoming more competitive, we feel that Keebler is positioned for continued growth. New products and focused marketing such as the Sesame Street program should reap continued benefits in the fourth quarter and next year.

Gross Margin. Gross margin at Keebler was $1,269.4 million and 60.1% of sales for the forty weeks ended October 7, 2000, as compared to $1,180.6 million and 57.4% of sales during the same period a year ago. Sales related to Austin, which have a lower gross margin than Keebler or President products, negatively affected the margin by approximately 0.9%. The improved margins were mainly attributable to improved productivity and cost savings as well as lower raw material costs. The increase in gross margin is also reflective of the growth in Keebler's branded business and the sale of its value brands business during the first quarter, resulting in a product mix shift toward higher margin branded products.

Selling, Marketing and Administrative Expenses. Selling, marketing and administrative expenses were $961.0 million and 45.5% of sales for the forty week period ended October 7, 2000, as compared to $935.6 million and 45.5% in same period a year ago. Excluding Austin expenses, selling, marketing and administrative expenses as a percent of sales was slightly higher in the first three quarters of fiscal 2000 than in the same period last year. The increase was due primarily to increased branded sales volume, transition expenses from converting certain non-core independent distributor routes acquired in the President acquisition to Keebler's direct store delivery system and higher fuel costs. Offsetting these increases were one-time gains on the sale of the Sayreville facility of $2.0 million in the second quarter and on the sale of the value brands business of $5.7 million in the first quarter.

Depreciation and Amortization. Depreciation and amortization for the forty week period ended October 7, 2000 was $72.5 million as compared to $62.7 million in the same period of last year. This increase is primarily a result of the depreciation and amortization of $5.6 million related to the Austin acquisition that occurred during the first quarter of fiscal 2000.

Operating Income. Operating income, excluding nonrecurring items, increased $53.5 million to $235.9 million for the forty weeks ended October 7, 2000 from $182.3 million, excluding nonrecurring charges, during the same period in the prior year. The primary factors contributing to growth in operating income were increased sales of higher margin, branded products and efficiencies gained in production realignments which resulted in higher gross margin. Selling, marketing and administrative expenses remained constant as a percent of sales, however, after adjusting for gains on facility and business sales, they increased slightly due to higher fuel and other distribution costs associated with increased branded volume.

Liquidity and Capital Resources:

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. On October 26, 2000, Flowers Industries, Inc. and Keebler Foods Company announced that an agreement was reached for a series of transactions that will result in the sale of Keebler Foods Company to Kellogg Company and the spin-off to FII shareholders of a new company, Flowers Foods, Inc. As a result of the completion of this transaction, it is expected that Flowers Foods, Inc., consisting of Flowers Bakeries and Mrs. Smith's Bakeries businesses, will have significantly less debt and accordingly, more financial flexibility. The expected debt level of Flowers Foods upon completion of the transactions will be approximately $250 million.

Net cash provided by operating activities for the forty weeks ended October 7, 2000 was $188.5 million. Positive net cash flow of $236.6 million was provided from net income for the forty weeks. Contributing to operating cash flows was the income tax benefit of $21.5 million on stock options exercised. Accounts receivable increased $10.6 million due primarily to increasing sales. A net inventory increase of $12.9 million was attributable to the seasonal increase in inventory at Mrs. Smith's Bakeries. A decrease in other assets of $9.7 million is primarily due to the collection of an income tax refund at Flowers. Also reducing working capital sources were tax payments of $21.3 million at Keebler and spending of $21.1 million against plant and facility closing costs and severance.

Net cash disbursed for investing activities for the forty weeks ended October 7, 2000 of $337.0 million included capital expenditures of $17.7 million at Flowers Bakeries, $20.7 million at Mrs. Smith's Bakeries and $53.2 million at Keebler. The capital expenditures were incurred principally to update and enhance production and distribution facilities, as well as management information systems at Flowers Bakeries. Keebler used $253.8 million to fund the acquisition of Austin and paid $10.0 million for a licensing agreement with the Sesame Workshop, formerly known as the Children's Television Workshop. Net cash proceeds of $23.4 million were received from the disposal of other assets.

For the forty weeks ended October 7, 2000, cash provided by financing activities was $132.9 million. The Company paid dividends to shareholders of $52.1 million. FII paid dividends of $39.2 million during the period and Keebler paid dividends totaling $28.5 million during the period, of which $15.6 million was paid to FII as a result of its 55% ownership of Keebler. Dividends are declared at the discretion of the Board of Directors based on an assessment of the Company's financial position and other considerations. Contributing to the increase were net cash proceeds of $13.0 million from the receivables securitization under Keebler's Receivable Purchase Agreement and $10.4 million of cash generated from employee stock options exercised during the first three quarters of fiscal 2000. Keebler had treasury stock purchases totaling $10.0 million during the period. Consolidated debt increased $171.7 million primarily due to the use of existing credit facilities to finance the Austin acquisition.

At October 7, 2000, cash equivalents were $23.8 million. Consolidated long-term debt was $1,374.1 million and current maturities of long-term debt were $58.3 million at October 7, 2000. As a result of the consolidation of Keebler, the Company's balance sheet reflects Keebler's indebtedness of $596.8 million at October 7, 2000; 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.

On March 30, 2000, FII amended its $500 million Syndicated Loan Facility and the $80.0 million loan facility agreement relating to its distributor program (the "Distributor Facility"). The amendments provided for increased loan borrowing margins and facility fees and added and amended certain financial covenants. The covenants currently in effect include, among others: (i) a maximum leverage ratio of .65 to 1; (ii) an adjusted fixed charges coverage ratio; (iii) minimum adjusted consolidated EBITDA at specified levels for each fiscal quarter; (iv) a borrowing base covenant requiring that FII's total indebtedness, measured quarterly, not exceed specified percentages of the book value of accounts receivable, inventory, property, plant and equipment and the fair market value of FII's interest in Keebler; (v) a prohibition on acquisitions; (vi) a negative pledge on all assets of the Company; (vii) a limit on capital expenditures of $40 million for fiscal 2000 and $37.5 million per fiscal year thereafter; and
(viii) limits on cash dividends unless the Company would have, following payment thereof, at least $15 million availability under the unused commitments and borrowing base tests of the Loan Facility.

The Company was in compliance with all covenants under its Loan Facility as in effect on October 7, 2000 and believes that, in light of its current cash position, its cash flow from operating activities and its amended credit facilities, it can comply with the current terms of its Loan Facility, Distributor Facility and other credit facilities and can meet presently foreseeable financial requirements.

Year 2000 Issue

The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact to its on-going business as a result of the "Year 2000 Issue." However, it is possible that the full impact of the date change, which was of concern due

to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarter or year-end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adversely affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers or suppliers.

The above statement in its entirety is designated a Year 2000 readiness disclosure under the Year 2000 Information and Readiness Disclosure Act.

Forward-Looking Statements:

Statements contained in this filing that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. Other factors that may cause actual results to differ from forward-looking statements and that may affect the company's prospects in general include, but are not limited to, changes in general economic and business conditions (including the baked foods markets), the company's ability to operate the manufacturing lines according to schedule and train personnel to run the new production capacity, the availability of capital on acceptable terms, actions of competitors and customers, the extent to which the company is able to develop new products and markets for its products, the likelihood that all conditions to the Kellogg transactions will be fulfilled, and the ability to obtain financing for Flowers Foods, Inc. on acceptable terms.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

In the normal course of business, the Company is exposed to commodity price and interest rate risks, primarily related to the purchase of raw materials and packaging supplies and changes in interest rates. The Company 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 in our report on Form 10-K for the fiscal year ended January 1, 2000.

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. To qualify as a hedge, a commodity agreement must reduce the exposure of the Company to price risk and must show a high correlation of changes in value with the value of the hedged item. Assuming a ten percent decrease in market price, the fair value of open contracts with a notional amount of $85.0 million at October 7, 2000 would be impacted by $(6.3) million.

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 instrument. Amounts payable or receivable under the 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. The fair value of the interest rate swap agreements at October 7, 2000, with a notional amount of $316.5 million, remains comparable to year-end. Additionally, interest rates have not fluctuated materially from year end and therefore, the sensitivity analysis performed as of January 1, 2000 for interest rate swap agreements remains a valid estimate.

EXHIBIT 99.3

Financial statements of Keebler Foods Company for the fiscal year ended January 1, 2000, filed as an exhibit to the Flowers Industries, Inc. Annual Report on Form 10-K on March 31, 2000.

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Keebler Foods Company and Subsidiaries at January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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.

PricewaterhouseCoopers LLP

Chicago, Illinois
February 1, 2000, except note 18, as to
which the date is March 6, 2000

                                                              JANUARY 1, 2000     January 2, 1999
                                                              ---------------     ---------------

ASSETS

CURRENT ASSETS:

     Cash and cash equivalents                                   $   20,717          $   23,515
     Trade accounts and notes receivable, net                        65,052             141,077
     Inventories, net:
         Raw materials                                               34,243              31,722
         Package materials                                           13,907              13,081
         Finished goods                                             126,954             120,550
         Other                                                        1,176               1,024
                                                                 ----------          ----------
                                                                    176,280             166,377

     Deferred income taxes                                           46,252              57,713
     Other                                                           27,278              26,636
                                                                 ----------          ----------
         Total current assets                                       335,579             415,318

PROPERTY, PLANT AND EQUIPMENT, NET                                  553,031             564,524

GOODWILL, NET                                                       370,188             391,449

TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET                  211,790             226,084

PREPAID PENSION                                                      33,240              38,205

ASSETS HELD FOR SALE                                                  6,662               2,972

OTHER ASSETS                                                         17,693              17,228
                                                                 ----------          ----------

         Total assets                                            $1,528,183          $1,655,780
                                                                 ==========          ==========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                                   JANUARY 1, 2000       January 2, 1999
                                                                                   ---------------       ---------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

     Current maturities of long-term debt                                            $     37,283          $    112,730
     Trade accounts payable                                                               147,862               143,572
     Other liabilities and accruals                                                       237,447               232,087
     Income taxes payable                                                                  23,603                10,779
     Plant and facility closing costs and severance                                        11,290                11,018
                                                                                     ------------          ------------
         Total current liabilities                                                        457,485               510,186

LONG-TERM DEBT                                                                            419,160               541,765

OTHER LIABILITIES:
     Deferred income taxes                                                                124,389               147,098
     Postretirement/postemployment obligations                                             64,383                63,754
     Plant and facility closing costs and severance                                        12,062                15,563
     Deferred compensation                                                                 24,581                19,368
     Other                                                                                 16,808                28,745
                                                                                     ------------          ------------
         Total other liabilities                                                          242,223               274,528

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
     Preferred stock ($.01 par value; 100,000,000 shares authorized and
         none issued)                                                                          --                    --
     Common stock ($.01 par value; 500,000,000 shares authorized and
         84,655,874 and 84,125,164 shares issued, respectively)                               846                   841
     Additional paid-in capital                                                           182,686               169,532
     Retained earnings                                                                    255,813               167,608
     Treasury stock                                                                       (30,030)               (8,680)
                                                                                     ------------          ------------
         Total shareholders' equity                                                       409,315               329,301
                                                                                     ------------          ------------

         Total liabilities and shareholders' equity                                  $  1,528,183          $  1,655,780
                                                                                     ============          ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                                          Years Ended
                                                                  -----------------------------------------------------------
                                                                  JANUARY 1, 2000       January 2, 1999       January 3, 1998
                                                                  ---------------       ---------------       ---------------

NET SALES                                                           $  2,667,771          $  2,226,480          $  2,065,184

COSTS AND EXPENSES:
    Cost of sales                                                      1,150,553               938,896               888,031
    Selling, marketing and administrative expenses                     1,227,481             1,080,044             1,026,245
    Other                                                                 25,834                11,501                 9,511
    Restructuring and impairment charge                                   66,349                    --                    --
                                                                    ------------          ------------          ------------
INCOME FROM OPERATIONS                                                   197,554               196,039               141,397

    Interest (income)                                                     (1,700)               (3,763)               (1,191)
    Interest expense                                                      37,874                30,263                35,038
                                                                    ------------          ------------          ------------
INTEREST EXPENSE, NET                                                     36,174                26,500                33,847
                                                                    ------------          ------------          ------------
INCOME BEFORE INCOME TAX EXPENSE                                         161,380               169,539               107,550
    Income tax expense                                                    73,175                72,962                45,169
                                                                    ------------          ------------          ------------
INCOME BEFORE EXTRAORDINARY ITEM                                          88,205                96,577                62,381

EXTRAORDINARY ITEM:
    Loss on early extinguishment of debt, net of tax                          --                 1,706                 5,396
                                                                    ------------          ------------          ------------
NET INCOME                                                          $     88,205          $     94,871          $     56,985
                                                                    ============          ============          ============

BASIC NET INCOME PER SHARE:
    Income before extraordinary item                                $       1.05          $       1.16          $       0.80
    Extraordinary item                                                        --                  0.02                  0.07
                                                                    ------------          ------------          ------------
    Net income                                                      $       1.05          $       1.14          $       0.73
                                                                    ============          ============          ============
WEIGHTED AVERAGE SHARES OUTSTANDING                                       83,759                83,254                77,604
                                                                    ============          ============          ============

DILUTED NET INCOME PER SHARE:
    Income before extraordinary item                                $       1.01          $       1.10          $       0.77
    Extraordinary item                                                        --                  0.02                  0.07
                                                                    ------------          ------------          ------------
    Net income                                                      $       1.01          $       1.08          $       0.70
                                                                    ============          ============          ============
WEIGHTED AVERAGE SHARES OUTSTANDING                                       87,645                87,486                80,562
                                                                    ============          ============          ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                              COMMON STOCK      ADDITIONAL     RETAINED        TREASURY STOCK
                                            -----------------    PAID-IN       EARNINGS      -------------------
                                            SHARES     AMOUNT    CAPITAL       (DEFICIT)     SHARES       AMOUNT         TOTAL
                                            ------     ------   ----------     ---------     ------      --------       --------

BALANCE AT DECEMBER 28, 1996                77,638      $776      $148,613      $ 15,752        --       $     --       $165,141

    Purchase of treasury shares                 --        --            --            --       (43)           (75)           (75)

    Net income                                  --        --            --        56,985        --             --         56,985
                                            ------      ----      --------      --------      ----       --------       --------

BALANCE AT JANUARY 3, 1998                  77,638       776       148,613        72,737       (43)           (75)       222,051

    Exercise of Bermore warrant              6,136        61        19,740            --        --             --         19,801

    Purchase of treasury shares                 --        --            --            --      (292)        (8,605)        (8,605)

    Exercise of employee stock options         351         4         1,179            --        --             --          1,183

    Net income                                  --        --            --        94,871        --             --         94,871
                                            ------      ----      --------      --------      ----       --------       --------

BALANCE AT JANUARY 2, 1999                  84,125       841       169,532       167,608      (335)        (8,680)       329,301

    Purchase of treasury shares                 --        --            --            --      (646)       (21,350)       (21,350)

    Exercise of employee stock options         531         5        13,154            --        --             --         13,159

    Net income                                  --        --            --        88,205        --             --         88,205
                                            ------      ----      --------      --------      ----       --------       --------

BALANCE AT JANUARY 1, 2000                  84,656      $846      $182,686      $255,813      (981)      $(30,030)      $409,315
                                            ======      ====      ========      ========      ====       ========       ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                                               Years Ended
                                                                         -------------------------------------------------------
                                                                         JANUARY 1, 2000     January 2, 1999     January 3, 1998
                                                                         ---------------     ---------------     ---------------

CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES
    Net income                                                              $  88,205           $  94,871           $  56,985
    Adjustments to reconcile net income to cash from
      operating activities:
        Depreciation and amortization                                          84,125              69,125              60,708
        Deferred income taxes                                                 (11,248)             10,075              18,548
        Accretion on Seller Note                                                   --                  --               2,376
        Loss on early extinguishment of debt, net of tax                           --               1,706               3,761
        Loss (gain) on sale of property, plant and equipment                    1,799                 424                (358)
        Restructuring and impairment charge                                    46,071                  --                  --
        Other                                                                      --               1,460                  --
    Changes in assets and liabilities:
        Trade accounts and notes receivable, net                              (26,975)             (5,082)             38,187
        Inventories, net                                                       (9,903)            (13,830)                203
        Income taxes payable                                                   12,824              (4,556)             16,113
        Other current assets                                                     (642)             (2,845)               (966)
        Trade accounts payable and other current liabilities                    9,840                 869              36,806
        Plant and facility closing costs and severance                         (3,641)             (5,373)            (13,715)
    Other, net                                                                  6,771              (2,319)              1,044
                                                                            ---------           ---------           ---------
           Cash provided from operating activities                            197,226             144,525             219,692

CASH FLOWS USED BY INVESTING ACTIVITIES
    Capital expenditures                                                     (100,685)            (66,798)            (48,429)
    Proceeds from property disposals                                            3,904                 917               6,950
    Purchase of President International, Inc., net of cash acquired                --            (444,818)                 --
                                                                            ---------           ---------           ---------
           Cash used by investing activities                                  (96,781)           (510,699)            (41,479)

CASH FLOWS (USED BY) PROVIDED FROM FINANCING ACTIVITIES
    Purchase of treasury stock                                                (21,350)             (8,605)                (75)
    Exercise of options and warrant                                             3,203              20,577                  --
    Proceeds from receivables securitization                                  103,000                  --                  --
    Deferred debt issue costs                                                      --              (1,845)             (1,344)
    Long-term debt borrowings                                                      --             425,000             109,750
    Long-term debt repayments                                                (113,052)           (157,626)           (271,310)
    Revolving facility, net                                                   (85,000)             85,000                  --
    Income tax benefit related to stock options exercised                       9,956                  --                  --
                                                                            ---------           ---------           ---------
           Cash (used by) provided from financing activities                 (103,243)            362,501            (162,979)
                                                                            ---------           ---------           ---------
           (Decrease) increase in cash and cash equivalents                    (2,798)             (3,673)             15,234
           Cash and cash equivalents at beginning of period                    23,515              27,188              11,954
                                                                            ---------           ---------           ---------
           Cash and cash equivalents at end of period                       $  20,717           $  23,515           $  27,188
                                                                            =========           =========           =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

BUSINESS AND OWNERSHIP

Keebler Foods Company ("the Company" or "Keebler"), a manufacturer and distributor of food products, was acquired by INFLO Holdings Corporation ("INFLO") on January 26, 1996. INFLO was owned by Artal Luxembourg S. A. ("Artal"), a private investment company, Flowers Industries, Inc. ("Flowers"), a New York Stock Exchange-listed company, Bermore, Limited ("Bermore"), a privately held corporation and the parent of G.F. Industries, Inc. ("GFI") and certain members of Keebler's current management. On November 20, 1997, INFLO was merged into Keebler Corporation (the "Merger"), and subsequently changed its name to Keebler Foods Company. The financial statements as of and for all periods subsequent to January 26, 1996 have been restated to reflect the Merger as if it had been effective January 26, 1996. On January 29, 1998, Keebler made an initial public offering of 13,386,661 shares of common stock ("the Offering"). As part of the transaction, Flowers acquired additional shares of common stock from Artal and Bermore so that its ownership of outstanding stock increased to approximately 55%. Concurrent with the Offering, Bermore exercised a warrant to purchase 6,135,781 shares of common stock that had been issued in conjunction with the acquisition of Sunshine Biscuits, Inc. ("Sunshine"). The exercise of the warrant resulted in Keebler receiving $19.8 million of cash proceeds. Artal and Bermore sold all of the shares in the Offering, with none of the proceeds going to Keebler. In addition, during 1998, Bermore, through a series of transactions, transferred its shares held to Claremont Enterprises, Limited ("Claremont"), a privately held Bahamian limited company. On January 21, 1999, Keebler made a secondary public offering of 16,200,000 shares of common stock. Artal and Claremont sold all of the shares, with no proceeds going to Keebler. As a result, Artal's ownership percentage decreased from approximately 21% to 2% and Claremont's ownership percentage was reduced from approximately 6% to 5% of the outstanding common stock. Management's ownership remained at approximately 2% and Flowers' ownership remained at approximately 55%. During 1999, all remaining shares owned by both Artal and Claremont were sold in the open market. Keebler is comprised of primarily the following wholly-owned subsidiaries: Keebler Company, Bake-Line Products, Inc. ("Bake-Line"), Sunshine, President International, Inc. ("President"), Keebler Leasing Corp., Keebler Funding Corporation and Johnston's Ready Crust Company. On January 4, 1999, Keebler engaged in a series of corporate-entity transactions that resulted in Sunshine and President being merged into Keebler Company. Consequently, these former subsidiaries of Keebler Foods Company are currently wholly-owned subsidiaries of Keebler Company. Additional operating subsidiaries of Keebler Company include Elfin Equity Company, L.L.C., Hollow Tree Company, L.L.C., Hollow Tree Financial Company, L.L.C. and Godfrey Transport, Inc.

FISCAL YEAR

Keebler's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The 1999 and 1998 fiscal years consisted of fifty-two weeks and the 1997 fiscal year consisted of fifty-three weeks.

PRINCIPLES OF CONSOLIDATION

All subsidiaries are wholly-owned and included in the consolidated financial statements of Keebler. Intercompany accounts and transactions have been eliminated.

GUARANTEES OF NOTES

The subsidiaries of Keebler that are not Guarantors of the Senior Subordinated Notes are inconsequential (which means that the total assets, revenues, income or equity of such non-guarantors, both individually and on a combined basis, is less than 3% of Keebler's consolidated assets, revenues, income or equity), individually and in the aggregate, to the consolidated financial statements of Keebler. The guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors in the Senior Subordinated Notes.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PRESENTATION (CONTINUED)

RECLASSIFICATIONS

Certain reclassifications of prior years' data have been made to conform with the current year reporting.

2. ACQUISITION OF PRESIDENT INTERNATIONAL, INC.

On September 28, 1998, Keebler acquired President International, Inc. from President International Trade and Investment Corporation, a company limited by shares under the International Business Companies Ordinance of the British Virgin Islands, for an aggregate purchase price of $446.1 million, excluding related fees and expenses paid of $4.5 million. The acquisition of President was a cash transaction funded 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 by Keebler has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of President based on respective fair values. The acquisition has resulted in an unallocated excess purchase price over fair value of net assets acquired of $329.2 million, which is being amortized on a straight-line basis over a forty year period.

Results of operations for President from September 28, 1998, have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at the beginning of fiscal year 1997. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase, additional depreciation of the property, plant and equipment acquired and amortization of the trademarks, trade names, other intangibles and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been reported had the President acquisition been effected on the assumed date.

                                                      Unaudited
(IN THOUSANDS, EXCEPT PER SHARE DATA)           For the Years Ended
                                          ----------------------------------
                                          January 2, 1999    January 3, 1998
                                          ---------------    ---------------

Net sales..............................       $2,583.5           $2,501.5
Income before extraordinary item.......       $  104.7           $   56.7
Net income.............................       $  102.7           $   49.3
Diluted net income per share:
    Income before extraordinary item...       $   1.20           $   0.70
    Net income.........................       $   1.18           $   0.61

3. RESTRUCTURING AND IMPAIRMENT CHARGE

As part of the continuing process of integrating the business of President into the Company's operations, on May 14, 1999, Keebler announced the decision to close its manufacturing facility in Sayreville, New Jersey due to excess capacity within the Company's 15-plant manufacturing network. As a result, a pre-tax restructuring and impairment charge to operating income of $66.3 million was recorded in 1999. The restructuring and impairment charge included $20.2 million for cash costs related to severance and other exit costs from the Sayreville facility. The remaining $46.1 million was non-cash charges for asset impairments related to the Sayreville closing, including write-downs of property, plant and equipment at Sayreville and equipment at other locations, and a proportionate reduction of goodwill acquired in the acquisition of Sunshine in June 1996. The impairment charge for equipment at other locations resulted from a combination of factors. The acquisition of President brought a new capability to Keebler's production network. The President baking process is principally based on shorter, more flexible ovens compared to the larger ovens common to Keebler and Sunshine bakeries. This new capability resulted in a comprehensive analysis of system-wide production needs. The acquisition and resulting exit plans of Keebler, Sunshine and President, when considered together, resulted in redundant productive equipment, which ultimately became idle.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. RESTRUCTURING AND IMPAIRMENT CHARGE (CONTINUED)

The original $69.2 million charge recorded in the second quarter of 1999 was reduced by a fourth quarter adjustment of $2.9 million. The adjustment was for costs related to severance and other exit costs from the facility due to lower-than-expected severance costs and an earlier-than-expected disposal of the facility. Of the total $66.3 million charge, approximately $65.6 million was recorded as plant and facility closing costs and severance, with the remaining $0.7 million recorded as other liabilities and accruals. Approximately 650 employees were expected to be terminated as a result of the closing of the Sayreville facility, of which approximately 600 employees were represented by unions. At January 1, 2000, approximately 595 employees under union contract and approximately 45 employees not under union contract had been terminated.

The following table sets forth the activity related to the liabilities accrued in conjunction with the restructuring and impairment charge:

                                     January 2,                                              JANUARY 1,
(IN THOUSANDS)                          1999       Provision      Spending     Adjustment       2000
                                     ----------    ---------      --------     ----------    ----------

  Severance ....................      $     --      $ 15,564      $(12,442)      $ (1,085)    $  2,037
  Facility closure .............            --         4,570          (438)        (1,565)       2,567
  Fixed asset impairment .......            --        37,824       (37,824)            --           --
  Goodwill impairment ..........            --         7,600        (7,600)            --           --
  Other ........................            --         3,650        (1,724)          (209)       1,717
                                      --------      --------      --------       --------     --------
      Total ....................      $     --      $ 69,208      $(60,028)      $ (2,859)    $  6,321
                                      ========      ========      ========       ========     ========

At January 1, 2000, $6.0 million remained for plant and facility closing costs and severance accruals and $0.3 million for other liabilities and accruals. Substantially all of the remaining severance liability is expected to be spent in 2000, as nearly all employees have been terminated. Production at the Sayreville, New Jersey manufacturing facility ceased on September 3, 1999. Spending for exit costs associated with the closure of the facility will continue into the year 2000 as the facility is prepared for sale. Spending for exit costs related to the facility closure is expected to continue for eighteen months or until the facility is disposed of, whichever occurs earlier. The majority of the remaining reserves are cash costs.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

All highly liquid instruments purchased with an original maturity of three months or less are classified as cash equivalents. The carrying amount of cash equivalents approximates fair value due to the relatively short maturity of these investments.

TRADE ACCOUNTS RECEIVABLE

Substantially all of Keebler's trade accounts receivable are from retail dealers and wholesale distributors. Keebler performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Trade accounts receivable, as shown on the consolidated balance sheets, were net of allowances of $8.6 million as of January 1, 2000 and $7.8 million as of January 2, 1999.

INVENTORIES

Inventories are stated at the lower of cost or market with cost determined principally by the last-in, first-out ("LIFO") method. Inventories stated under the LIFO method represent approximately 94% of total inventories at both January 1, 2000 and at January 2, 1999. Because Keebler has adopted a natural business unit single pool approach to determining LIFO inventory cost, classification of the LIFO reserve by inventory component is impractical. There was no reserve required at January 1, 2000 or January 2, 1999 to state the inventory on a LIFO basis.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

At January 1, 2000 and January 2, 1999, inventories are shown net of an allowance for slow-moving and aged inventory of $6.7 million and $9.6 million, respectively.

Keebler often enters into exchange traded commodity futures and options contracts to protect or hedge against adverse raw material price movements related to anticipated inventory purchases. Realized gains or losses on contracts are determined based on the stated market value at the time the contracts are liquidated or expire and are deferred in inventory until the underlying raw material is purchased. Gains or losses realized from the liquidation or expiration of the contracts are recognized as part of the cost of raw materials. Cost of sales was increased by losses on futures and options transactions of $9.2 million, $7.1 million and $3.8 million in the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. The notional amount of open futures and options contracts at January 1, 2000 and January 2, 1999 was $48.7 million and $61.7 million, respectively. The fair values of the open futures and options contracts at January 1, 2000 and January 2, 1999, based on the stated market value at those dates, were $44.1 million and $57.9 million, respectively. The open contracts at January 1, 2000, will expire between March 2000 and December 2000.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost. Depreciation expense is computed using the straight-line method based on the estimated useful lives of the depreciable assets. Certain facilities and equipment held under capital leases are classified as property, plant and equipment and amortized using the straight-line method over the lease terms, and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense.

TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES

Trademarks, trade names and other intangibles are stated at cost and are amortized on a straight-line basis over a period of twenty to forty years. Accumulated amortization of trademarks, trade names and other intangibles was $18.9 million and $11.8 million at January 1, 2000 and January 2, 1999, respectively.

GOODWILL

Goodwill represents the excess cost over the fair value of the tangible and identifiable intangible net assets of acquired businesses. Goodwill is amortized on a straight-line basis over a period of forty years. Accumulated amortization of goodwill was $14.7 million and $4.9 million at January 1, 2000 and January 2, 1999, respectively.

REVENUE RECOGNITION

Revenue from the sale of products is recognized at the time of the shipment to customers.

RESEARCH AND DEVELOPMENT

Activities related to new product development and major improvements to existing products and processes are expensed as incurred and were $13.1 million for the year ended January 1, 2000, and $10.2 million for the years ended January 2, 1999 and January 3, 1998, respectively.

ADVERTISING AND CONSUMER PROMOTION

Advertising and consumer promotion costs are generally expensed when incurred or no later than when the advertisement appears or the event is run. Advertising and consumer promotion expense was $87.3 million, $87.2 million and $67.6 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. There were no deferred advertising costs at January 1, 2000 or January 2, 1999.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DERIVATIVE FINANCIAL INSTRUMENTS

Keebler uses derivative financial instruments as part of an overall strategy to manage market risk. Keebler uses forward commodity futures and options contracts to hedge existing or future exposures to changes in commodity prices. Interest rate swap agreements are used to reduce the impact of changes in interest rates. Keebler does not enter into these derivative financial instruments for trading or speculative purposes (See Note 8).

INCOME TAXES

The consolidated financial statements reflect the application of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes." Keebler files a consolidated federal income tax return.

IMPAIRMENT OF LONG-LIVED AND INTANGIBLE 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 determination as to whether there has been an impairment of long-lived assets and the related unamortized goodwill, is 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 were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The new statement establishes accounting and reporting standards for derivative instruments and hedging activities and requires that all derivatives be recognized as either assets or liabilities in the statement of financial position 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. However, in June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133 - an amendment to FASB Statement No. 133." Citing concerns about companies' ability to both modify their information systems for year 2000 readiness and become educated with the new derivatives and hedging standard, the FASB has delayed the effective date on SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. We have not yet determined the impact SFAS No. 133 may have on the consolidated financial statements.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

(IN THOUSANDS)                            JANUARY 1, 2000     January 2, 1999
                                          ---------------     ---------------

Land ..............................          $   16,290          $   18,374
Buildings .........................             138,288             140,907
Machinery and equipment ...........             437,032             424,574
Office furniture and fixtures .....              90,266              76,447
Delivery equipment ................               6,689               7,208
Construction in progress ..........              68,156              51,717
                                             ----------          ----------
                                                756,721             719,227
Accumulated depreciation ..........            (203,690)           (154,703)
                                             ----------          ----------
     Total ........................          $  553,031          $  564,524
                                             ==========          ==========

Property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the depreciable assets. Buildings are depreciated over a useful life of ten to forty years. Machinery and equipment is depreciated over a useful life of three to twenty-five years. Office furniture and fixtures are depreciated over a useful life of three to fifteen years. Delivery equipment is depreciated over a useful life of two to twelve years.

6. ASSETS HELD FOR SALE

On May 14, 1999, management announced the closure of the Sayreville, New Jersey manufacturing facility in order to eliminate excess capacity within Keebler's manufacturing network. As part of the total restructuring and impairment charge, the Sayreville facility was placed for sale together with other idle machinery and equipment held at various Keebler facilities. Disposition of the remaining assets held for sale is expected to occur within the next eighteen months without a significant gain or loss.

Also in 1999, land in Fort Worth, Texas, which had been acquired in conjunction with the President acquisition in 1998, was placed for sale. This land, along with a warehouse in Houston, Texas and a distribution center in Kensington, Connecticut, which had both been held for sale during 1998, were disposed of in the current year without a significant gain or loss. Additionally, in June 1999, the Atlanta, Georgia manufacturing facility, which had been held for sale, was sold for $1.2 million with a realized loss of approximately $0.6 million. During 1998, Keebler had recognized an impairment charge of $0.9 million in order to reflect the Atlanta, Georgia manufacturing facility at fair value.

(IN THOUSANDS)                                 JANUARY 1, 2000     January 2, 1999
                                               ---------------     ---------------

Self insurance reserves ................          $   52,266          $   52,202
Employee compensation ..................              72,527              73,017
Marketing and consumer promotions ......              60,954              53,027
Other ..................................              51,700              53,841
                                                  ----------          ----------
     Total .............................          $  237,447          $  232,087
                                                  ==========          ==========

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. OTHER CURRENT LIABILITIES AND ACCRUALS (CONTINUED)

Keebler obtains insurance to manage potential losses and liabilities related to workers' compensation, health and welfare claims and general, product and vehicle liability. Keebler has elected to retain a significant portion of the expected losses through the use of deductibles and stop-loss limitations. Provisions for losses expected under these programs are recorded based on Keebler's estimates of aggregate liability for claims incurred. These estimates utilize Keebler's prior experience and actuarial assumptions provided by the Company's insurance carrier. The total estimated liability for these losses at January 1, 2000 and January 2, 1999 was $52.3 million and $52.2 million, respectively, and is included in other current liabilities and accruals. Keebler has collateralized its liability for potential self-insurance losses in several states by obtaining standby letters of credit which aggregate to approximately $18.6 million.

(IN THOUSANDS)                   Interest Rate    Final Maturity       JANUARY 1, 2000     January 2, 1999
                                 -------------    ------------------   ---------------     ---------------

Bridge Facility .............        6.263%       September 26, 1999       $     --            $ 75,000
Revolving Facility ..........        5.843%       September 28, 2004             --              85,000
Term Facility ...............        5.814%       September 28, 2004        314,000             350,000
Senior Subordinated Notes ...       10.750%             July 1, 2006        124,400             124,400
Other Senior Debt ...........       Various                2001-2005         10,455              11,805
Capital Lease Obligations ...       Various                2002-2042          7,588               8,290
                                                                           --------            --------
                                                                            456,443             654,495
Less: Current maturities ....                                                37,283             112,730
                                                                           --------            --------
     Total ..................                                              $419,160            $541,765
                                                                           ========            ========

At January 1, 2000 and January 2, 1999, Keebler's primary credit financing was provided by a $700.0 million Credit Facility, consisting of $350.0 million under the Revolving Facility and $350.0 million under the Term Facility. At January 2, 1999, financing was also provided under a $125.0 million Bridge Facility.

The current outstanding balance on the Term Facility at January 1, 2000, was $314.0 million, with quarterly scheduled principal payments through the final maturity of September 2004. The Revolving Facility, with no outstanding balance and an available balance of $350.0 million at January 1, 2000, also has a final maturity of September 2004, but with no scheduled principal payments. Certain letters of credit totaling $28.7 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 0.125% - 0.30% based on the relationship of debt to adjusted earnings. At January 1, 2000, the commitment fee was 0.125%.

At January 2, 1999, the outstanding balance on the Term Facility was $350.0 million and the Revolving Facility had an outstanding balance of $85.0 million and an available balance of $265.0 million. Certain letters of credit totaling $42.2 million reduced the available balance on the Revolving Facility and any unused borrowings under the Revolving Facility were subject to a commitment fee. The commitment fee varied from 0.125% - 0.30% based on the relationship of debt to adjusted earnings with a minimum commitment fee of 0.20% required through March 28, 1999. The outstanding balance on the Bridge Facility at January 2, 1999, was $75.0 million, with an additional $50.0 million in available borrowings.

Interest on the Credit Facility is calculated based on a 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 LIBO Rate 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 was calculated in the same manner as the Credit Facility and also was restricted by the same financial covenants.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DEBT AND LEASE COMMITMENTS (CONTINUED)

The $75.0 million Bridge Facility outstanding at January 2, 1999, that had a final maturity of September 1999, with no scheduled principal payments, was refinanced on January 29, 1999. Keebler entered into a Receivables Purchase Agreement ("Agreement") to replace the $75.0 million of debt held under the Bridge Facility, allowing funds to be borrowed at a lower cost to the Company. The accounting for this Agreement is governed by SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under the guidelines of SFAS No. 125, a special-purpose entity was created, Keebler Funding Corporation, as a subsidiary of Keebler Foods Company. All transactions under this Agreement occur through Keebler Funding Corporation and are treated as a sale of accounts receivable and not as a debt instrument. At January 1, 2000, a net $103.0 million of accounts receivable had been sold at fair value, which is below the maximum amount currently available under the Agreement.

In conjunction with the President acquisition on September 28, 1998, Term Loan A was extinguished by using $145.0 million of borrowings under the new Credit Facility. Keebler recorded a before-tax extraordinary charge of $2.8 million related primarily to expensing certain bank fees which were being amortized and which were incurred at the time Term Loan A was issued. The related after-tax charge was $1.7 million.

At January 3, 1998, Keebler's primary credit financing was provided by a $380.0 million Second Amended and Restated Credit Agreement ("Credit Agreement") consisting of a $140.0 million Revolving Loan facility and a $240.0 million Term Loan of which the outstanding balance at January 3, 1998 was $156.0 million. The amendment to the Credit Agreement was entered into on April 8, 1997, to obtain more favorable terms, fees and interest rates. The interest expense, including commitment fee, on the Credit Agreement was calculated in substantially the same manner as is done under the current Credit Facility.

During the fourth quarter of 1997, using existing cash resources, Keebler pre-paid $70.0 million of principal on Term Loan A; $30.0 million on December 8, 1997 and $40.0 million on November 10, 1997. The pre-payments resulted in the recognition of a $1.1 million after-tax extraordinary charge related to the expensing of certain unamortized bank fees which were incurred at the time Term Loan A was issued.

On November 21, 1997, Keebler settled a Seller Note with a payment of $31.7 million funded through working capital. Keebler assumed the $32.5 million Seller Note, previously held by INFLO, as a result of the Merger. The Seller Note did not bear interest until January 26, 1999 and was recorded at a discounted value of $24.4 million on January 26, 1996. The discount was being amortized over three years at an effective interest rate of 10.0%. Keebler recorded a before-tax extraordinary charge of $2.6 million on the early extinguishment of debt. The related after-tax charge was $1.6 million.

In conjunction with the amendment to the Credit Agreement on April 8, 1997, Term Loans B and C were extinguished using $40.0 million of borrowings under the Revolving Loan facility, $109.8 million of increased borrowings against Term Loan A and $3.8 million from cash resources. Keebler recorded a before-tax extraordinary charge of $4.6 million related primarily to expensing certain unamortized bank fees which were incurred at the time Term Loans B and C were issued. The related after-tax charge was $2.7 million.

Interest of $37.5 million, $24.0 million and $39.0 million was paid on debt for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.

Aggregate scheduled annual maturities of long-term debt as of January 1, 2000 are as follows:

(IN THOUSANDS)

2000 ....................        $ 37,283
2001 ....................          42,162
2002 ....................          68,647
2003 ....................         105,596
2004 ....................          75,769
2005 and thereafter .....         126,986
                                 --------
     Total ..............        $456,443
                                 ========

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DEBT AND LEASE COMMITMENTS (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair market value of financial instruments, which includes short- and long-term borrowings, was estimated using discounted cash flow analyses based on current interest rates which would be obtained for similar financial instruments. The carrying value of cash and cash equivalents and short-term debt approximates fair value because of the short-term maturity of the instruments. The fair value of long-term debt was $417.2 million and $536.6 million at January 1, 2000 and January 2, 1999, respectively, which was based on current rates offered to Keebler for similar debt with the same maturities.

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. The interest rate swap agreements result in Keebler paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts. The interest rate differential to be paid or received is accrued as interest rates change and is recorded as interest expense. The fair values of the swap agreements were obtained from the Bank of Nova Scotia and were estimated using market prices at each respective year end. The fair values of the swap agreements are typically not recognized in the financial statements as Keebler accounts for the agreements as hedges. In 1998, Keebler had entered into four swap transactions expiring between 2001 and 2004. There were no new swap transactions entered into during 1999.

On July 1, 1998, Keebler entered into a swap transaction with the Bank of Nova Scotia, who also serves as the administrative agent for the lenders under the Credit Facility, which matures on July 1, 2001. The swap transaction had the effect of converting the fixed rate of 10.75% on $124.0 million of the Notes to a rate of 11.33% through July 3, 2000. In addition, on September 30, 1998 and October 5, 1998, Keebler entered into two swap transactions with the Bank of Nova Scotia both maturing on September 30, 2004. Each swap transaction converts the base rate on $105.0 million of the Credit Facility to fixed rate debt of 5.084% and 4.89%, respectively. The estimated fair values of the hedged swap agreements at January 1, 2000 and January 2, 1999, were a net receivable of $7.9 million and $1.1 million, respectively.

In 1999, Keebler also maintained an interest rate swap that no longer served as a hedge with the Bank of Nova Scotia, which has a notional amount of $170.0 million and a fixed rate obligation of 5.0185% through February 1, 2001. During the year, $2.8 million was recognized in income from operations in order to mark-to-market the interest rate swap. The receivable resulting from this transaction was recorded as a $0.5 million current receivable in other current assets and a $2.3 million long-term receivable in other assets in the consolidated balance sheet.

(IN THOUSANDS)                           JANUARY 1, 2000    January 2, 1999
                                         ---------------    ---------------

Land ..............................             $    980           $    980
Buildings .........................                2,894              2,894
Machinery and equipment ...........                2,842              2,853
Other leased assets ...............                    1                  1
                                                --------           --------
                                                   6,717              6,728
Accumulated depreciation ..........                 (417)              (242)
                                                --------           --------
     Total ........................             $  6,300           $  6,486
                                                ========           ========

                                                            Capital          Operating
(IN THOUSANDS)                                               Leases            Leases
                                                            --------         ---------

2000 .............................................          $  1,046          $ 32,230
2001 .............................................             1,063            26,690
2002 .............................................             1,390            21,375
2003 .............................................               449            18,725
2004 .............................................             4,827            11,152
2005 and thereafter ..............................             1,324            24,312
                                                            --------          --------
Total minimum payments ...........................            10,099          $134,484
                                                                              ========
Amount representing interest .....................            (2,511)
                                                            --------
Obligations under capital lease ..................             7,588
Obligations due within one year ..................              (670)
                                                            --------
Long-term obligations under capital leases .......          $  6,918
                                                            ========

Rent expense for all operating leases was $50.1 million, $38.7 million and $36.1 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.

9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE

During 1998, as part of accounting for the acquisition of President, Keebler recognized costs pursuant to a plan to exit certain activities and operations of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the allocation of the purchase price and totaled $12.8 million. Staff reductions were estimated at $6.7 million, with the balance of the reserves allocated to costs associated with manufacturing, sales and distribution facility closings, which principally include lease termination and carrying costs. Initially, it was estimated that 410 employees were to be terminated as a result of this plan, of which approximately 175 employees were represented by a union. At January 1, 2000, approximately 40 employees not under union contract had been terminated. In addition, during the year management reviewed its exit plan and made a determination that approximately 110 employees not under union contract, would not be terminated. During the year ended January 1, 2000, Keebler adjusted accruals previously established in the accounting for the President acquisition by reducing goodwill and other intangibles by $4.5 million to recognize exit costs that are now expected to be less than initially anticipated. The remainder of management's exit plan is expected to be substantially complete before the end of 2000, with only noncancelable lease obligations to be paid over the next six years concluding in 2006.

During 1996, as part of acquiring Keebler and Sunshine, management 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 manufacturing, distribution and sales force facilities and information system exit costs. Severance, outplacement and other related costs associated with staff reductions were initially estimated at $30.7 million. Costs incurred related to the closing of manufacturing, distribution and sales force facilities, which include primarily severance and lease termination and carrying costs, were expected to total $39.9 million. Approximately 1,420 employees were terminated as a result of this plan. An additional $6.8 million was anticipated for lease costs related to exiting legacy information systems. During the year ended January 1, 2000, Keebler adjusted accruals previously established in the accounting for the Keebler acquisition by reducing goodwill and other intangibles by $0.5 million and reversing $1.3 million into income from operations to recognize exit costs that are now expected to be less than initially anticipated. The $1.3 million was credited to operating income as it had originally been charged to income from operations in the year ended January 3, 1998, January 2, 1999 or January 1, 2000. During the year ended January 2, 1999, Keebler also adjusted accruals previously established in the accounting for the Keebler and Sunshine 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. Only noncancelable lease obligations are anticipated to extend beyond 2000, to be paid over the next six years concluding in 2006.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE (CONTINUED)

In addition, during the years ended January 1, 2000, January 2, 1999 and January 3, 1998, Keebler expensed an additional $0.8 million, $2.8 million and $2.7 million, respectively. These charges were principally for costs related to the closure of distribution facilities not included in the original plan adopted by management for the acquisition of Keebler Company.

The following table sets forth the activity in Keebler's plant and facility closing costs and severance liabilities exclusive of the liabilities resulting from the restructuring and impairment charge recorded in 1999:

(IN THOUSANDS)               December 28, 1996      Provision           Spending             Adjustment        January 3, 1998
                             -----------------      ---------           --------             ----------        ---------------
KEEBLER COMPANY

  Severance ...........            $ 3,293            $   85            $ (3,147)            $       --            $   231
  Facility closure ....             13,933             2,482              (3,910)                    --             12,505
  Other ...............              3,771               100              (1,976)                    --              1,895
                                   -------            ------            --------             ----------            -------
    Subtotal ..........             20,997             2,667              (9,033)                    --             14,631
                                   -------            ------            --------             ----------            -------

SUNSHINE BISCUITS, INC

  Severance ...........            $ 3,114            $   --            $ (3,002)            $       --            $   112
  Facility closure ....             11,873                --              (4,138)                    --              7,735
  Other ...............                 --                --                  --                     --                 --
                                   -------            ------            --------             ----------            -------
    Subtotal ..........             14,987                --              (7,140)                    --              7,847
                                   -------            ------            --------             ----------            -------

      TOTAL ...........            $35,984            $2,667            $(16,173)            $       --            $22,478
                                   =======            ======            ========             ==========            =======

(IN THOUSANDS)                  January 3, 1998      Provision          Spending             Adjustment         January 2, 1999
                                ---------------      ---------          --------             ----------         ---------------
KEEBLER COMPANY

  Severance ...........            $   231            $  139            $   (293)            $      (28)            $    49
  Facility closure ....             12,505             2,662              (3,265)                  (418)             11,484
  Other ...............              1,895                --              (1,689)                  (182)                 24
                                   -------            ------            --------             ----------             -------
    Subtotal ..........             14,631             2,801              (5,247)                  (628)             11,557
                                   -------            ------            --------             ----------             -------

SUNSHINE BISCUITS, INC

  Severance ...........            $   112            $   --            $    (26)            $       --             $    86
  Facility closure ....              7,735                --              (2,388)                (3,120)              2,227
  Other ...............                 --                --                  --                     --                  --
                                   -------            ------            --------             ----------             -------
    Subtotal ..........              7,847                --              (2,414)                (3,120)              2,313
                                   -------            ------            --------             ----------             -------

PRESIDENT INTERNATIONAL, INC.
                                                                                                                    -------
  Severance ...........            $    --            $6,653            $    (59)            $       --             $ 6,594
  Facility closure ....                 --             5,670                  --                     --               5,670
  Other ...............                 --               447                  --                     --                 447
                                   -------            ------            --------             ----------             -------
    Subtotal ..........                 --            12,770                 (59)                    --              12,711
                                   -------            ------            --------             ----------             -------

      TOTAL ...........            $22,478            $15,571           $ (7,720)            $   (3,748)            $26,581
                                   =======            ======            ========             ==========             =======

(IN THOUSANDS)                January 2, 1999       Provision           Spending             Adjustment        JANUARY 1, 2000
                              ---------------       ---------           --------             ----------        ---------------
KEEBLER COMPANY

  Severance ..............         $    49            $   25            $    (50)            $       --             $    24
  Facility closure .......          11,484               751              (2,646)                (1,760)              7,829
  Other ..................              24                --                 (14)                   (10)                 --
                                   -------            ------            --------             ----------             -------
      Subtotal ...........          11,557               776              (2,710)                (1,770)              7,853
                                   -------            ------            --------             ----------             -------

SUNSHINE BISCUITS, INC ...

  Severance ..............         $    86            $   --            $    (23)            $       --             $    63
  Facility closure .......           2,227                --                (265)                    --               1,962
  Other ..................              --                --                  --                     --                  --
                                                      ------            --------             ----------             -------
      Subtotal ...........           2,313                --                (288)                    --               2,025
                                                      ------            --------             ----------             -------

PRESIDENT INTERNATIONAL, INC.

     Severance ...........         $ 6,594            $   --            $   (576)            $   (3,189)            $ 2,829
     Facility closure ....           5,670                --                 (83)                  (991)              4,596
     Other ...............             447                --                (118)                  (319)                 10
                                                      ------            --------             ----------             -------
         Subtotal ........          12,711                --                (777)                (4,499)              7,435
                                                      ------            --------             ----------             -------

           TOTAL .........         $26,581            $  776            $ (3,775)            $   (6,269)            $17,313
                                   =======            ======            ========             ==========             =======

10. EMPLOYEE BENEFIT PLANS

The Retirement Plan for Salaried and Certain Hourly--Paid Employees of Keebler Company (the "pension plan") is a trusteed, noncontributory, defined--benefit, pension plan. The pension plan covers certain salaried and hourly--paid employees. Assets held by the pension plan consist primarily of common stocks, government securities, bonds, mortgages and money market funds. Benefits provided under the pension plan are primarily based on years of service and the employee's final level of compensation. Keebler's funding policy is to contribute annually not less than the ERISA minimum funding requirements. Effective December 31, 1998, the pension plans of President were merged with Keebler's pension plan.

Pension expense included the following components:

                                                                      Years Ended
                                            --------------------------------------------------------------
(IN THOUSANDS)                              JANUARY 1, 2000         January 2, 1999        January 3, 1998
                                            ---------------         ---------------        ---------------
Service cost ..........................         $ 13,364               $  9,040               $  8,560
Interest cost .........................           32,841                 31,080                 29,673
Expected return on plan assets ........          (41,887)               (39,352)               (37,935)
Amortization of prior service cost ....              689                    689                     --
Amortization of net loss ..............               43                     --                     --
                                                --------               --------               --------
Pension expense .......................         $  5,050               $  1,457               $    298
                                                ========               ========               ========

The expected long--term rate of return on plan assets was 8.7% for the year ended January 1, 2000 and 9.0% for the years ended January 2, 1999 and January 3, 1998, respectively.

(IN THOUSANDS)                                             JANUARY 1, 2000         January 2, 1999
                                                           ---------------         ---------------
Change in projected benefit obligation:
  Benefit obligation at beginning of year ...........         $(520,312)              $(437,334)
  Service cost ......................................           (13,364)                 (9,040)
  Interest cost .....................................           (32,841)                (31,080)
  Amendments ........................................                --                  (4,874
  Actuarial gain (loss) .............................            60,261                 (45,871)
  Acquisition .......................................                --                 (22,805
  Benefits and expenses paid ........................            30,009                  30,692
  Curtailment gain ..................................               897                      --
                                                              ---------               ---------
  Benefit obligation at year end ....................          (475,350)               (520,312)
                                                              ---------               ---------

Change in plan assets:
  Fair value of plan assets at beginning of year ....           565,710                 499,379
  Actual return on plan assets ......................             2,253                  77,731
  Employer contributions ............................               115                      --
  Acquisition .......................................                --                  19,292
  Benefits and expenses paid ........................           (30,009)                (30,692)
                                                              ---------               ---------
  Fair value of plan assets at year end .............           538,069                 565,710
                                                              ---------               ---------
  Funded status .....................................            62,719                  45,398
  Unrecognized actuarial gain .......................           (37,209)                (16,538)
  Unrecognized prior service cost ...................             7,730                   9,230
  Contributions subsequent to measurement date ......                --                     115
                                                              ---------               ---------
  Prepaid pension ...................................         $  33,240               $  38,205
                                                              =========               =========

The pension plan uses the September 30 preceding the fiscal year end as the measurement date. Assumptions used in accounting for the pension plan at each of the respective year ends are as follows:

                                                                        Years Ended
                                                -------------------------------------------------------------
                                                JANUARY 1, 2000       January 2, 1999         January 3, 1998
                                                ---------------       ---------------         ---------------
Discount rate ............................           7.5%                   6.5%                   7.3%
Rate of compensation level increases .....           4.5                    4.0                    4.0

As a result of the closure of the Sayreville, New Jersey manufacturing facility in 1999, the plan recognized a net curtailment gain of $0.1 million resulting from a liability gain of $0.9 million offset by the recognition of $0.8 million of unrecognized prior service cost.

The plan assets, as of January 1, 2000 and January 2, 1999, include 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 and an unfunded plan for certain highly compensated current and former executives ("the excess retirement plan"). Benefits provided are based on years of service.

                                                                     Years Ended
                                            --------------------------------------------------------------
(IN THOUSANDS)                              JANUARY 1, 2000         January 2, 1999        January 3, 1998
                                            ---------------         ---------------        ---------------
Interest cost .........................         $    698               $    722               $    732
                                                --------               --------               --------
Plan expense ..........................         $    698               $    722               $    732
                                                ========               ========               ========

The unfunded status of the supplemental retirement plan and the amounts recognized in the consolidated balance sheets are as follows:

(IN THOUSANDS)                                                    JANUARY 1, 2000        January 2, 1999
                                                                  ---------------        ---------------
Change in projected benefit obligation:
  Benefit obligation at beginning of year ............              $ (11,119)              $ (10,303)
  Interest cost ......................................                   (698)                   (722)
  Actuarial gain (loss) ..............................                    944                    (844)
  Benefits and expenses paid .........................                    640                     750
                                                                    ---------               ---------
  Benefit obligation at year end .....................                (10,233)                (11,119)
  Fair value of plan assets ..........................                     --                      --
                                                                    ---------               ---------
  Funded status ......................................                (10,233)                (11,119)
  Unrecognized actuarial loss (gain) .................                   (558)                    387
  Benefit payments subsequent to measurement date ....                    168                     109
                                                                    ---------               ---------
  Accrued obligation .................................              $ (10,623)              $ (10,623)
                                                                    =========               =========

The excess retirement plan expense includes the following components:

                                                                              Years Ended
                                                      ------------------------------------------------------------
(IN THOUSANDS)                                        JANUARY 1, 2000       January 2, 1999        January 3, 1998
                                                      ---------------       ---------------        ---------------
Service cost ..............................              $    431              $    173               $    306
Interest cost .............................                   155                    78                     43
Amortization of net loss (gain) ...........                     8                   (47)                   (84)
                                                         --------              --------               --------
Pension expense ...........................              $    594              $    204               $    265
                                                         ========              ========               ========

The unfunded status of the excess retirement plan and the amounts recognized in the consolidated balance sheets are as follows:

(IN THOUSANDS)                                                  JANUARY 1, 2000          January 2, 1999
                                                                ---------------          ---------------
Change in projected benefit obligation:
  Benefit obligation at beginning of year ...........              $  (2,395)              $  (1,085)
  Service cost ......................................                   (431)                   (173)
  Interest cost .....................................                   (155)                    (78)
  Actuarial loss ....................................                   (158)                 (1,076)
  Benefits and expenses paid ........................                     31                      17
                                                                   ---------               ---------
  Benefit obligation at year end ....................                 (3,108)                 (2,395)
  Fair value of plan assets .........................                     --                      --
                                                                   ---------               ---------
  Funded status .....................................                 (3,108)                 (2,395)
  Unrecognized actuarial loss .......................                    501                     351
  Benefit payments subsequent to measurement date ...                     17                      --
                                                                   ---------               ---------
  Accrued obligation ................................              $  (2,590)              $  (2,044)
                                                                   =========               =========

                                                                         Years Ended
                                                ------------------------------------------------------------
                                                JANUARY 1, 2000       January 2, 1999        January 3, 1998
                                                ---------------       ---------------        ---------------
Discount rate ............................           7.5%                   6.5%                   7.3%
Rate of compensation level increase ......           4.5                    4.0                    4.0

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 the years ended January 1, 2000, January 2, 1999 and January 3, 1998, Keebler expensed contributions of $2.5 million, $2.3 million and $2.6 million, respectively.

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 $6.8 million, $8.9 million and $10.5 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.

11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

Keebler provides certain medical and life insurance benefits for eligible retired employees. The medical plan, which covers nonunion and certain union 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:

(IN THOUSANDS)                                                                 Years Ended
                                                      -------------------------------------------------------------
                                                      JANUARY 1, 2000        January 2, 1999        January 3, 1998
                                                      ---------------        ---------------        ---------------
Service cost ...............................              $  2,178               $  2,045               $  2,242
Interest cost ..............................                 3,424                  3,961                  3,888
Amortization of prior service cost .........                  (115)                  (115)                    --
Amortization of net gain ...................                  (375)                    --                     --
                                                          --------               --------               --------
Net periodic postretirement benefit cost ...              $  5,112               $  5,891               $  6,130
                                                          ========               ========               ========

(IN THOUSANDS)                                                       JANUARY 1, 2000         January 2, 1999
                                                                    -----------------        ---------------
Change in accumulated postretirement benefit obligation:
  Benefit obligation at beginning of year ...............              $ (56,269)              $ (56,690)
  Service cost ..........................................                 (2,178)                 (2,045)
  Interest cost .........................................                 (3,424)                 (3,961)
  Amendments ............................................                  8,531                      --
  Actuarial gain ........................................                    717                   3,641
  Acquisition ...........................................                     --                  (1,598)
  Curtailment gain ......................................                    108                      --
  Benefits and expenses paid ............................                  4,411                   4,384
                                                                       ---------               ---------
  Benefit obligation at year end ........................                (48,104)                (56,269)
  Fair value of plan assets .............................                     --                      --
                                                                       ---------               ---------
  Funded status .........................................                (48,104)                (56,269)
  Unrecognized actuarial gain ...........................                 (8,187)                 (7,856)
  Unrecognized prior service cost .......................                 (8,897)                   (574)
  Benefit payments subsequent to measurement date .......                    880                     978
                                                                       ---------               ---------
  Postretirement obligation .............................              $ (64,308)              $ (63,721)
                                                                       =========               =========

The plan was amended in 1999 for a change in the calculation of retiree contribution rates that resulted in an $8.5 million reduction to the benefit obligation and a corresponding decrease in unrecognized prior service cost. In addition, as a result of the closure of the Sayreville, New Jersey manufacturing facility in 1999, the plan also recognized a net curtailment gain of $0.2 million resulting in a liability reduction of $0.1 million plus the recognition of $0.1 million of unrecognized prior service credit.

The accumulated postretirement benefit obligation was determined using a weighted average discount rate of 7.5%, 6.5% and 7.3% for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. The plan uses the September 30 preceding the fiscal year end as the measurement date.

The weighted average annual assumed rate of increase in the cost of covered benefits was 8.0% for 1999 declining to an ultimate trend rate of 5.0% in 2002. A 1% increase in the trend rate for health care costs would have increased the accumulated benefit obligation for the year ended January 1, 2000 by $1.9 million and the net periodic benefit cost by $0.3 million. A 1% decrease in the trend rate for health care costs would have decreased the accumulated benefit obligation and net periodic benefit cost by $1.8 million and $0.3 million, respectively, for the year ended January 1, 2000.

Keebler also provides postemployment 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 sheets at January 1, 2000 and January 2, 1999 was $5.5 million and $4.7 million, respectively.

                                                                      Years Ended
                                             ------------------------------------------------------------
(IN THOUSANDS)                               JANUARY 1, 2000        January 2, 1999       January 3, 1998
                                             ---------------        ---------------       ---------------
Current:
  Federal .............................         $ 71,794               $ 58,269               $ 22,172
  State ...............................            6,739                  4,618                  3,840
                                                --------               --------               --------
Current provision for income taxes ....           78,533                 62,887                 26,012
Deferred:
  Federal .............................           (4,837)                 8,494                 17,203
  State ...............................             (521)                 1,581                  1,954
                                                --------               --------               --------
Deferred provision for income taxes ...           (5,358)                10,075                 19,157
                                                --------               --------               --------
                                                $ 73,175               $ 72,962               $ 45,169
                                                ========               ========               ========

The differences between the income tax expense calculated at the federal statutory income tax rate and Keebler's consolidated income tax expense are as follows:

                                                                               Years Ended
                                                       ----------------------------------------------------------
(IN THOUSANDS)                                         JANUARY 1, 2000       January 2, 1999      January 3, 1998
                                                       ---------------       ---------------      ---------------
State income taxes (net of federal benefit)                 5,849                 5,813                 3,766
Intangible amortization ...................                 6,306                 3,160                 1,836
All others ................................                 4,537                 4,650                 1,924
                                                         --------              --------              --------
                                                         $ 73,175              $ 72,962              $ 45,169
                                                         ========              ========              ========

The deferred tax assets and deferred tax (liabilities) recorded on the consolidated balance sheets consist of the following:

(IN THOUSANDS)                                             JANUARY 1, 2000         January 2, 1999
                                                           ---------------         ---------------
Depreciation ...................................              $ (57,604)              $(108,866)
Trademarks, trade names and intangibles ........                (64,887)                (49,348)
Prepaid pension ................................                (13,327)                (14,283)
Inventory valuation ............................                   (559)                 (6,779)
Other ..........................................                (10,503)                     --
                                                              ---------               ---------
                                                               (146,880)               (179,276)
                                                              ---------               ---------
Net operating loss carryforwards ...............                     --                  80,195
Postretirement/postemployment benefits .........                 26,778                  26,171
Plant and facility closing costs and severance .                 17,469                  23,728
Workers' compensation ..........................                  5,695                  14,769
Incentives and deferred compensation ...........                  7,801                  12,063
Employee benefits ..............................                 11,000                  10,879
Other ..........................................                     --                   6,436
                                                              ---------               ---------
                                                                 68,743                 174,241
Valuation allowance ............................                     --                 (84,350)
                                                              ---------               ---------
                                                              $ (78,137)              $ (89,385)
                                                              =========               =========

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. INCOME TAXES (CONTINUED)

In 1998, net operating loss carryforwards were approximately $207.1 million. All net operating loss carryforwards were used in 1999 to offset gains incurred through the Section 338 income tax election, which adjusted the tax basis of all assets and liabilities that resulted from the Keebler acquisition. The intangible asset related to the Keebler acquisition was reduced by $11.8 million as a result of resolving the preacquisition tax basis of acquired assets and liabilities. In 1999, the previously established valuation allowance on deferred tax assets of $84.4 million was eliminated due to the resolution of the uncertainty regarding the availability of preacquisition net operating losses.

Income taxes paid, net of refunds, were approximately $49.6 million, $67.1 million and $9.9 million for the years ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively.

13. SHAREHOLDERS' EQUITY

COMMON STOCK

There were no cash dividends declared for the years ended January 1, 2000, January 2, 1999 or January 3, 1998. Keebler's ability to pay cash dividends is limited by the Credit Facility 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 proceeds 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 shares of the Company's common stock. Keebler repurchased the remaining authorized shares in 1999, which fulfilled the treasury stock plan. The share repurchase program was primarily instituted to offset dilution, which may result from the exercise and sale of shares related to employee stock options. The repurchases of shares of common stock are recorded as treasury stock using the cost method and result in a reduction of shareholders' equity. Should the treasury shares be reissued, Keebler intends to use a first-in, first-out method of reissuance.

14. STOCK OPTION PLAN

Keebler has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of options equals the fair value (market value) of the underlying stock options at the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock--Based Compensation," and has been determined as if Keebler had accounted for its employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The following table summarizes the pro forma disclosures regarding net income and earnings per share for the years ended January 1, 2000, January 2, 1999 and January 3, 1998:

(IN THOUSANDS EXCEPT PER SHARE DATA)                                                 YEARS ENDED
                                                             -----------------------------------------------------------
                                                             JANUARY 1, 2000      January 2, 1999        January 3, 1998
                                                             ---------------      ---------------        ---------------
Net income:
   As reported ...................................              $ 88,205              $ 94,871              $ 56,985
   Pro forma .....................................              $ 86,890              $ 91,032              $ 55,032
Basic net income per share:
   As reported ...................................              $   1.05              $   1.14              $   0.73
   Pro forma .....................................              $   1.04              $   1.09              $   0.71
Diluted net income per share:
   As reported ...................................              $   1.01              $   1.08              $   0.70
   Pro forma .....................................              $   0.99              $   1.04              $   0.68
Weighted average grant date fair value of options
   granted during the year .......................              $  11.88              $   8.53              $   8.09

These pro forma amounts may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, which is variable, and additional options may be granted in future years. In 1999 and 1998, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective input assumptions including the expected stock price volatility. Because Keebler's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of the pro forma disclosures for 1997, the fair value for the options was estimated at the date of grant using a present value approach as Keebler was not a public company.

For options granted, the following weighted average assumptions were used to determine the fair value:

                                                                                    YEARS ENDED
                                                              --------------------------------------------------------------
                                                              JANUARY 1, 2000         January 2, 1999        January 3, 1998
                                                              ---------------         ---------------        ---------------
Dividend yield ...................................                   0.0%                   0.0%                   0.0%
Expected volatility ..............................                  24.8%                  27.2%                   0.0%
Risk-free interest rate ..........................                  5.76%                  5.04%                  6.00%
Expected option life (years) .....................                     5                      5                      5

Under Keebler's 1996 Stock Option Plan, 9,673,594 shares of Keebler's stock were 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.

The following table summarizes the 1996 Stock Option Plan activity:

                                                                   YEAR ENDED JANUARY 3, 1998
                                                              ------------------------------------
                                                                                       Weighted
                                                                                        Average
                                                               Options              Exercise Price
                                                              ---------             --------------
Outstanding at the beginning of the period .....              6,802,471               $    1.98
Granted ........................................                 49,873                    5.23
Exercised ......................................                     --                      --
Forfeited ......................................                     --                      --
Expired ........................................                     --                      --
                                                              ---------
Outstanding at the end of the period ...........              6,852,344               $    2.01
                                                              =========
Exercisable at the period end ..................              1,587,243               $    1.98
                                                              =========

                                                                   YEAR ENDED JANUARY 3, 1998
                                                              ------------------------------------
                                                                                       Weighted
                                                                                        Average
                                                               Options              Exercise Price
                                                              ---------             --------------
Outstanding at the beginning of the period .....              6,852,344               $    2.01
Granted ........................................                     --                      --
Exercised ......................................                351,177                    2.21
Forfeited ......................................                 44,887                    3.23
Expired ........................................                     --                      --
                                                              ---------
Outstanding at the end of the period ...........              6,456,280               $    1.99
                                                              =========
Exercisable at the period end ..................              4,433,774               $    1.98
                                                              =========

                                                                   YEAR ENDED JANUARY 3, 1998
                                                              ------------------------------------
                                                                                       Weighted
                                                                                        Average
                                                               Options              Exercise Price
                                                              ---------             --------------
Outstanding at the beginning of the period .....              6,456,280               $    1.99
Granted ........................................                     --                      --
Exercised ......................................                491,570                    2.23
Forfeited ......................................                 45,081                    1.93
Expired ........................................                     --                      --
                                                              ---------
Outstanding at the end of the period ...........              5,919,629               $    1.97
                                                              =========
Exercisable at the period end ..................              4,493,801               $    1.96
                                                              =========

Exercise prices as of January 1, 2000, for options outstanding under the 1996 Stock Option Plan ranged from $1.74 to $5.23. The weighted average remaining contractual life of these options is approximately six and one-half years.

Under Keebler's 1998 Omnibus Stock Incentive Plan, 6,500,000 shares of Keebler's stock were 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.

The following table summarizes the 1998 Omnibus Stock Incentive Plan activity:

                                                                   YEAR ENDED JANUARY 3, 1998
                                                              ------------------------------------
                                                                                       Weighted
                                                                                        Average
                                                               Options              Exercise Price
                                                              ---------             --------------
Outstanding at the beginning of the period .....                     --               $      --
Granted ........................................              2,737,836                   25.03
Exercised ......................................                     --                      --
Forfeited ......................................                 22,200                   27.31
Expired ........................................                     --                      --
                                                              ---------
Outstanding at the end of the period ...........              2,715,636               $   25.01
                                                              =========
Exercisable at the period end ..................                     --                      --
                                                              =========

                                                                   YEAR ENDED JANUARY 3, 1998
                                                              ------------------------------------
                                                                                       Weighted
                                                                                        Average
                                                               Options              Exercise Price
                                                              ---------             --------------
Outstanding at the beginning of the period .....              2,715,636               $   25.01
Granted ........................................                270,234                   34.98
Exercised ......................................                 39,140                   24.82
Forfeited ......................................                123,634                   25.27
Expired ........................................                  5,494                   27.31
                                                              ---------
Outstanding at the end of the period ...........              2,817,602               $   25.96
                                                              =========
Exercisable at the period end ..................                899,699               $   25.74
                                                              =========

Exercise prices as of January 1, 2000, for options outstanding under the 1998 Omnibus Stock Incentive Plan ranged from $24.00 to $39.25. The weighted average remaining contractual life of these options is approximately five years.

Under Keebler's Non-Employee Director Stock Plan, 300,000 shares of Keebler's stock were authorized for future grant. All options granted have ten year terms and vest automatically upon grant.

The following table summarizes the Non-Employee Director Stock Plan activity:

                                                                   YEAR ENDED JANUARY 3, 1998
                                                              ------------------------------------
                                                                                       Weighted
                                                                                        Average
                                                               Options              Exercise Price
                                                              ---------             --------------
Outstanding at the beginning of the period .....                     --               $      --
Granted ........................................                 22,500                   27.44
Exercised ......................................                     --                      --
Forfeited ......................................                     --                      --
Expired ........................................                     --                      --
                                                                 ------
Outstanding at the end of the period ...........                 22,500               $   27.44
                                                                 ======
Exercisable at the period end ..................                 22,500               $   27.44
                                                                 ======

                                                                   YEAR ENDED JANUARY 3, 1998
                                                              ------------------------------------
                                                                                       Weighted
                                                                                        Average
                                                               Options              Exercise Price
                                                              ---------             --------------

Outstanding at the beginning of the period .....                 22,500               $   27.44
Granted ........................................                  7,500                   30.75
Exercised ......................................                     --                      --
Forfeited ......................................                     --                      --
Expired ........................................                     --                      --
                                                                 ------
Outstanding at the end of the period ...........                 30,000               $   28.27
                                                                 ======
Exercisable at the period end ..................                 30,000               $   28.27
                                                                 ======

Exercise prices as of January 1, 2000 for options outstanding under the Non-Employee Director Stock Plan ranged from $27.44 to $30.75. The weighted average remaining contractual life of these options is approximately eight and one-half years.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. NET INCOME PER SHARE

Basic net income per share is calculated using the weighted average number of common shares outstanding during each period. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during each period. The common equivalent shares arise from the 1996 Stock Option Plan, the 1998 Omnibus Stock Incentive Plan, the Non-Employee Director Stock Plan and the warrant issued in connection with the Sunshine acquisition and are calculated using the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share:

                                                                                     Years Ended
                                                               ---------------------------------------------------------
(IN THOUSANDS)                                                 JANUARY 1, 2000     January 2, 1999       January 3, 1998
                                                               ---------------     ---------------       ---------------
NUMERATOR:
   Income before extraordinary item .................              $88,205              $96,577              $62,381
   Extraordinary item, net of tax ...................                   --                1,706                5,396
                                                                   -------              -------              -------
   Net income .......................................              $88,205              $94,871              $56,985
                                                                   =======              =======              =======
DENOMINATOR:
   Denominator for Basic Net Income Per Share
        Weighted Average Shares .....................               83,759               83,254               77,604
   Effect of Dilutive Securities:
        Stock options ...............................                3,886                3,992                2,168
        Warrants ....................................                   --                  240                  790
                                                                   -------              -------              -------
        Diluted potential common shares .............                3,886                4,232                2,958
                                                                   -------              -------              -------
   Denominator for Diluted Net Income Per Share .....               87,645               87,486               80,562
                                                                   =======              =======              =======

For the year ended January 1, 2000, there were weighted average options to purchase 143,122 shares of common stock at an exercise price ranging from $32.13 to $39.25, which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. For the year ended January 2, 1999, there were weighted average options to purchase 96,478 shares of common stock at an exercise price ranging from $28.88 to $32.13, which were excluded from the computation of diluted net income per share as the exercise price of the options exceeded the average market price of common shares; and therefore, the effect would have been antidilutive. There were no antidilutive securities for the year ended January 3, 1998.

16. SEGMENT INFORMATION

In 1998, Keebler adopted SFAS 131 "Disclosures about Segments of an Enterprise and Related Information." Keebler's reportable segments are Branded and Specialty. The reportable segments were determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The nature of the customers, products and method of distribution can vary by sales channel. The reportable segments represent an aggregation of similar sales channels. The Branded segment is comprised of sales channels that principally market brand name cookie, cracker and brownie products to retail outlets, as well as private label biscuit products. Either a Keebler sales employee or a distributor sells products in the Branded segment. The sales channels in the Specialty segment primarily sell cookie and cracker products that are manufactured on a made-to-order basis or that are produced in individual packs to be used in various institutions (i.e., restaurants, hospitals, etc.), as well as cookies manufactured for the Girl Scouts of the U.S.A. Many of the products sold by the Specialty segment are done so through the use of brokers.

Keebler evaluates the performance of the reportable segments and allocates resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. The accounting policies for each reportable segment are the same as those described for the total company in Note 4 "Summary of Significant Accounting Policies." The cost of sales, however, used to determine a segment's profit contribution is calculated using standard costs for each product, whereas actual cost of sales is used to determine consolidated income from operations.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. SEGMENT INFORMATION (CONTINUED)

There are no intersegment transactions that result in revenue or profit
(loss). Asset information by reportable segment is not presented, as Keebler does not report or generate such information internally. However, depreciation expense included in the determination of a segment's profit contribution has been presented. The depreciation expense for each reportable segment reflects the amount absorbed in the standard cost of products sold, as well as the depreciation that relates to assets used entirely by the respective segment. The following table presents certain information included in the profit contribution of each segment for the years ended January 1, 2000, January 2, 1999 and January 3, 1998. Prior year numbers have been restated for reclassifications between reportable segments.

                                                       Branded           Specialty
(IN THOUSANDS)                                         Segment            Segment          Other (1)           Total
                                                     ----------          ---------         ---------        -----------
YEAR ENDED JANUARY 1, 2000:

NET SALES TO EXTERNAL CUSTOMERS ...........          $2,099,257          $568,514          $    --          $2,667,771
DEPRECIATION EXPENSE ......................              22,820             6,700           35,014              64,534
PROFIT CONTRIBUTION .......................             339,847           119,705               --             459,552

Year Ended January 2, 1999:

Net sales to external customers ...........          $1,798,347          $428,133          $    --          $2,226,480
Depreciation expense ......................              24,457             6,563           28,383              59,403
Profit contribution .......................             277,791            90,746               --             368,537

Year Ended January 3, 1998:

Net sales to external customers ...........          $1,646,627          $418,557          $    --          $2,065,184
Depreciation expense ......................              20,798             5,602           27,331              53,731
Profit contribution .......................             223,437            83,795               --             307,232

(1) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.

The net sales to external customers from the reportable segments equal the consolidated net sales of Keebler. A reconciliation of segment profit contribution to total consolidated income from continuing operations before income tax expense for the years ended January 1, 2000, January 2, 1999 and January 3, 1998 is as follows:

                                                                                Years Ended
                                                            ------------------------------------------------------
(IN THOUSANDS)                                              JANUARY 1, 2000     January 2, 1999    January 3, 1998
                                                            ---------------     ---------------    ---------------
INCOME BEFORE INCOME TAX EXPENSE:

Reportable segment's profit contribution.................      $  459,552         $  368,537         $  307,232
Unallocated functional support costs (1).................         195,649            172,498            165,835
Restructuring and impairment charge......................          66,349                 --                 --
Interest expense, net....................................          36,174             26,500             33,847
                                                               ----------         ----------         ----------
   Income before Income Tax Expense......................      $  161,380         $  169,539         $  107,550
                                                               ==========         ==========         ==========

(1) Includes support costs such as distribution, research and development, corporate administration and other (income) expense, which are not allocated internally to reportable segments.

Net sales to external customers consist of cookies, crackers and other baked goods for all periods presented. All long-lived assets at January 1, 2000 and January 2, 1999 are located in the United States. Net sales to external customers made outside the United States, as well as to any single customer, are not material to consolidated net sales for the years ended January 1, 2000, January 2, 1999 and January 3, 1998.

                                             Quarter 1                Quarter 2               Quarter 3              Quarter 4
                                        -------------------     --------------------     -------------------     ------------------
(IN MILLIONS EXCEPT PER SHARE DATA)       1999        1998        1999         1998        1999        1998       1999       1998*
                                        -------     -------     -------      -------     -------     -------     -------    -------
Net sales ............................  $ 852.0     $ 636.8     $ 587.9      $ 490.0     $ 615.8     $ 499.9     $ 612.1    $ 599.8
Gross profit .........................    471.3       372.7       330.5        281.3       354.6       294.4       360.8      339.2
Restructuring and impairment charge ..       --          --        69.2           --          --          --        (2.9)        --
Income before extraordinary item .....     32.7        14.1       (21.4)        19.4        32.1        29.0        44.8       34.1
Extraordinary item ...................       --          --          --           --          --         1.7          --         --
Net income (loss) ....................     32.7        14.1       (21.4)        19.4        32.1        27.3        44.8       34.1

Basic net income per share:
   Income before extraordinary item ..  $  0.39     $  0.17     $ (0.25)     $  0.23     $  0.38     $  0.35     $  0.53    $  0.41
   Extraordinary item ................       --          --          --           --          --        0.02          --         --
                                        -------     -------     -------      -------     -------     -------     -------    -------
   Net income (loss) .................  $  0.39     $  0.17     $ (0.25)     $  0.23     $  0.38     $  0.33     $  0.53    $  0.41
                                        =======     =======     =======      =======     =======     =======     =======    =======

Diluted net income per share:
   Income before extraordinary item ..  $  0.37     $  0.16     $ (0.24)     $  0.22     $  0.37     $  0.33     $  0.51    $  0.39
   Extraordinary item ................       --          --          --           --          --        0.02          --         --
                                        -------     -------     -------      -------     -------     -------     -------    -------
   Net income (loss) .................  $  0.37     $  0.16     $ (0.24)     $  0.22     $  0.37     $  0.31     $  0.51    $  0.39
                                        =======     =======     =======      =======     =======     =======     =======    =======

* Quarter 4, 1998 includes the operating results of President from the acquisition date of September 28, 1998 through January 2, 1999.

18. SUBSEQUENT EVENTS

On March 6, 2000, Keebler acquired Austin Quality Foods, Inc. ("Austin"), for $252.4 million, in a business combination that will be accounted for as a purchase. Austin is a leading producer and marketer of single serve baked snacks, including cracker sandwiches and bite-sized crackers and cookies. Keebler will finance the acquisition with borrowings under its existing credit facilities.

On February 23, 2000, the Board of Directors declared an initial quarterly cash dividend of $0.1125 per common share payable on March 22, 2000, to stockholders of record on March 8, 2000.

On February 2, 2000, Keebler's Board of Directors authorized the repurchase, at management's discretion, of up to an additional $30.0 million in shares of Keebler common stock. Purchases will be made through the open market or through private transactions. The share repurchase program was approved primarily to offset future dilution, which may result from the exercise and sale of shares related to employee stock options.

On January 4, 2000, Keebler sold its Birmingham, Alabama and North Little Rock, Arkansas bakeries and the SUNNY and GREGS brands to Consolidated Biscuit Company ("Consolidated"). Keebler received $17.0 million from Consolidated, which is estimated to result in an after-tax gain of approximately $3.5 million that will be included in income from operations during the first quarter of fiscal 2000.

REPORT OF INDEPENDENT ACCOUNTANTS

THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KEEBLER FOODS COMPANY

Our report on the consolidated financial statements of Keebler Foods Company and Subsidiaries is included on page F-2 of the Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page F-1 of the Form 10-K.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.

PricewaterhouseCoopers LLP

Chicago, Illinois
February 1, 2000

------------------------------------------------------------------------------------------------------------------------
                     COL. A                         COL. B               COL. C                COL. D          COL. E
------------------------------------------------------------------------------------------------------------------------
                                                                        ADDITIONS
                                                                 ------------------------
                                                   BALANCE AT    CHARGED TO    CHARGED TO                     BALANCE AT
                                                   BEGINNING       COSTS/        OTHER                           END
                   DESCRIPTION                     OF PERIOD      EXPENSES      ACCOUNTS      DEDUCTIONS      OF PERIOD
                   -----------                     ----------    ----------    ----------     ----------      ----------
Those valuation and qualifying accounts
which are deducted in the balance sheet
from the assets to which they apply:

YEAR ENDED JANUARY 1, 2000

       For discounts and doubtful accounts ....     $ 7,782      $ 22,474      $     --        $(21,688)(2)     $ 8,568
                                                    =======      ========      ========        ========         =======

       For deferred taxes .....................     $84,350      $     --      $(84,350)(4)    $     --         $    --
                                                    =======      ========      ========        ========         =======

       For inventory reserves .................     $ 9,614      $  4,026      $     --        $ (6,965)(3)     $ 6,675
                                                    =======      ========      ========        ========         =======

YEAR ENDED JANUARY 2, 1999

       For discounts and doubtful accounts ....     $ 4,965      $ 20,148      $  2,879(1)     $(20,210)(2)     $ 7,782
                                                    =======      ========      ========        ========         =======

       For deferred taxes .....................     $84,350      $     --      $     --        $     --         $84,350
                                                    =======      ========      ========        ========         =======

       For inventory reserves .................     $ 6,782      $  7,484      $  1,807(1)     $ (6,459)(3)     $ 9,614
                                                    =======      ========      ========        ========         =======

YEAR ENDED JANUARY 3, 1998

       For discounts and doubtful accounts ....     $ 5,390      $ 18,970     $     --        $(19,395)(2)     $ 4,965
                                                    =======      ========     ========        ========         =======

       For deferred taxes .....................     $84,350      $     --     $     --        $     --         $84,350
                                                    =======      ========     ========        ========         =======

       For inventory reserves .................     $ 5,508      $  9,716     $     --        $ (8,442)(3)     $ 6,782
                                                    =======      ========     ========        ========         =======

(1) Amount acquired in the acquisition of President International, Inc.

(2) Primarily charges against reserves, net of recoveries.

(3) Inventory write-offs, net.

(4) Amount eliminated due to the resolution of a pre-acquisition contingency.

EXHIBIT 99.4

Portions of the Quarterly Report on Form 10-Q for the forty weeks ended October 7, 2000 of Keebler Foods Company filed with the SEC on November 21, 2000.

                                                          OCTOBER 7, 2000    January 1, 2000
                                                          ---------------    ----------------
ASSETS

CURRENT ASSETS:

     Cash and cash equivalents                              $   20,469          $   20,717
     Trade accounts and notes receivable, net                   52,367              65,052
     Inventories, net:
         Raw materials                                          28,120              34,243
         Package materials                                      17,170              13,907
         Finished goods                                        137,273             126,954
         Other                                                   2,080               1,176
                                                            ----------          ----------
                                                               184,643             176,280

     Deferred income taxes                                      34,668              46,252
     Other                                                      38,583              27,278
                                                            ----------          ----------
         Total current assets                                  330,730             335,579

PROPERTY, PLANT AND EQUIPMENT, NET                             610,337             553,031

GOODWILL, NET                                                  527,611             370,188

TRADEMARKS, TRADE NAMES AND OTHER INTANGIBLES, NET             239,177             211,790

PREPAID PENSION                                                 30,914              33,240

ASSETS HELD FOR SALE                                             1,159               6,662

OTHER ASSETS                                                    17,140              17,693
                                                            ----------          ----------
         Total assets                                       $1,757,068          $1,528,183
                                                            ==========          ==========

                                                                                 OCTOBER 7, 2000      January 1, 2000
                                                                               ------------------   ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

     Current maturities of long-term debt                                        $    50,660           $    37,283
     Trade accounts payable                                                          146,750               147,862
     Other liabilities and accruals                                                  237,406               237,447
     Income taxes payable                                                              1,138                23,603
     Plant and facility closing costs and severance                                   12,232                11,290
                                                                                 -----------           -----------
         Total current liabilities                                                   448,186               457,485

LONG-TERM DEBT                                                                       546,104               419,160

OTHER LIABILITIES:

     Deferred income taxes                                                           127,544               124,389
     Postretirement/postemployment obligations                                        63,546                64,383
     Plant and facility closing costs and severance                                    7,397                12,062
     Deferred compensation                                                            26,312                24,581
     Other                                                                            20,398                16,808
                                                                                 -----------           -----------
         Total other liabilities                                                     245,197               242,223

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
     Preferred stock ($.01 par value; 100,000,000 shares authorized and
         none issued)                                                                     --                    --
     Common stock ($.01 par value; 500,000,000 shares authorized and
         86,348,001 and 84,655,874 shares issued, respectively)                          863                   846
     Additional paid-in capital                                                      207,492               182,686
     Retained earnings                                                               349,238               255,813
     Treasury stock                                                                  (40,012)              (30,030)
                                                                                 -----------           -----------
         Total shareholders' equity                                                  517,581               409,315
                                                                                 -----------           -----------
         Total liabilities and shareholders' equity                              $ 1,757,068           $ 1,528,183
                                                                                 ===========           ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                               TWELVE          TWELVE                FORTY               FORTY
                                                            WEEKS ENDED      WEEKS ENDED           WEEKS ENDED        WEEKS ENDED
                                                          OCTOBER 7, 2000   OCTOBER 9, 1999      OCTOBER 7, 2000     OCTOBER 9, 1999
                                                          ----------------   ---------------     ---------------     ---------------
NET SALES                                                  $ 642,203           $ 615,844           $ 2,111,635        $ 2,055,724

COSTS AND EXPENSES:
   Cost of sales                                             254,237             261,244               870,967            899,296
   Selling, marketing and administrative expenses            301,752             284,375               983,999            952,066
   Other                                                      10,569               7,265                20,797             22,025
   Restructuring and impairment charge                            --                  --                  (996)            69,208
                                                           ---------           ---------           -----------        -----------
INCOME FROM OPERATIONS                                        75,645              62,960               236,868            113,129

   Interest (income)                                          (1,517)               (249)               (3,002)            (1,190)
   Interest expense                                           11,568               7,346                37,189             29,687
                                                           ---------           ---------           -----------        -----------
INTEREST EXPENSE, NET                                         10,051               7,097                34,187             28,497
                                                           ---------           ---------           -----------        -----------

INCOME BEFORE INCOME TAX EXPENSE                              65,594              55,863               202,681             84,632
   Income tax expense                                         24,644              23,742                80,767             41,204
                                                           ---------           ---------           -----------        -----------

NET INCOME                                                 $  40,950           $  32,121           $   121,914        $    43,428
                                                           =========           =========           ===========        ===========


BASIC NET INCOME PER SHARE                                 $    0.48           $    0.38           $      1.44        $      0.52
WEIGHTED AVERAGE SHARES OUTSTANDING                           84,994              83,708                84,365             83,785

DILUTED NET INCOME PER SHARE                               $    0.46           $    0.37           $      1.39        $      0.50
WEIGHTED AVERAGE SHARES OUTSTANDING                           88,240              87,423                87,728             87,741

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                           FORTY                 FORTY
                                                                        WEEKS ENDED           WEEKS ENDED
                                                                      OCTOBER 7, 2000       OCTOBER 9, 1999
                                                                      ------------------    ------------------
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES
    Net income                                                            $ 121,914           $  43,428
    Adjustments to reconcile net income to cash from
       operating activities:
        Depreciation and amortization                                        72,547              62,651
        Deferred income taxes                                                22,367             (11,018)
        (Gain) loss on sale of property, plant and equipment                 (1,623)                249
        Gain on sale of value brands assets                                  (5,700)                 --
        Restructuring and impairment charge                                    (615)             46,071
        Income tax benefit related to stock options exercised                18,875               8,838
    Changes in assets and liabilities:
        Trade accounts and notes receivable, net                             10,890             (35,241)
        Inventories, net                                                       (211)            (10,853)
        Income taxes payable                                                (21,329)             (4,651)
        Other current assets                                                (10,202)             (7,827)
        Trade accounts payable and other current liabilities                (17,313)             27,016
        Plant and facility closing costs and severance                      (17,592)             11,554
    Other, net                                                                2,819               7,622
                                                                          ---------           ---------
           Cash provided from operating activities                          174,827             137,839

CASH FLOWS USED BY INVESTING ACTIVITIES
    Capital expenditures                                                    (53,174)            (68,637)
    Proceeds from property disposals                                          8,617               2,833
    Purchase of Sesame Street license                                       (10,000)                 --
    Proceeds from sale of value brands assets                                17,000                  --
    Purchase of Austin Quality Foods, Inc., net of cash acquired           (253,797)                 --
                                                                          ---------           ---------
           Cash used by investing activities                               (291,354)            (65,804)

CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES
    Purchase of treasury stock                                               (9,982)            (21,350)
    Exercise of employee stock options                                        5,948               2,741
    Proceeds from receivables securitization                                 13,000             125,000
    Long-term debt repayments                                               (34,198)           (103,861)
    Revolving facility, net                                                 170,000             (77,800)
    Dividends paid                                                          (28,489)                 --
                                                                          ---------           ---------
           Cash provided from (used by) financing activities                116,279             (75,270)
                                                                          ---------           ---------
           Decrease in cash and cash equivalents                               (248)             (3,235)
           Cash and cash equivalents at beginning of period                  20,717              23,515
                                                                          ---------           ---------
           Cash and cash equivalents at end of period                     $  20,469           $  20,280
                                                                          =========           =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

1. BASIS OF PRESENTATION

INTERIM FINANCIAL STATEMENTS

The unaudited interim consolidated financial statements included herein were prepared pursuant to the rules and regulations for interim reporting under the Securities Exchange Act of 1934. Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements were omitted. The interim consolidated financial statements and notes should be read in conjunction with the annual audited consolidated financial statements and notes thereto. The accompanying unaudited interim consolidated financial statements contain all adjustments, consisting only of normal adjustments, which in the opinion of management were necessary for a fair statement of the results for the interim periods. Results for the interim periods are not necessarily indicative of results for the full year.

FISCAL YEAR

Keebler's fiscal year consists of thirteen four week periods (fifty-two or fifty-three weeks) and ends on the Saturday nearest December 31. The first quarter consists of four four-week periods.

RECLASSIFICATIONS

Certain reclassifications of prior period data have been made to conform with the current period reporting.

2. ACQUISITION OF AUSTIN QUALITY FOODS, INC.

On March 6, 2000, Keebler Foods Company ("Keebler") acquired Austin Quality Foods, Inc. ("Austin") from R&H Trust Co. (Jersey) Limited, as Trustee, HB Marketing & Franchising L.P., 697163 Alberta Ltd., and William C. Burkhardt, for a purchase price, net of cash acquired, of $253.7 million, excluding related fees and expenses paid of approximately $3.0 million. The acquisition of Austin was a cash transaction funded with approximately $235.0 million from borrowings under the $700.0 million Senior Credit Facility Agreement dated as of September 28, 1998, and the remainder from cash received on additional sales of accounts receivable under Keebler's Receivables Purchase Agreement.

The acquisition of Austin by Keebler has been accounted for as a purchase. The total purchase price and the fair value of liabilities assumed have been allocated to the tangible and intangible assets of Austin based on respective fair values. The acquisition has resulted in an unallocated excess purchase price over fair value of net assets acquired of $168.5 million, which is being amortized on a straight-line basis over a forty year period.

Results of operations for Austin from March 6, 2000 to October 7, 2000 have been included in the consolidated statements of operations. The following unaudited pro forma information has been prepared assuming the acquisition had taken place at the beginning of each respective fiscal year reported. The unaudited pro forma information includes adjustments for interest expense that would have been incurred related to financing the purchase, additional depreciation of the property, plant and equipment acquired and amortization of the trademarks, trade names, other intangibles and goodwill arising from the acquisition. The unaudited pro forma consolidated results of operations are not necessarily indicative of the results that would have been reported had the Austin acquisition been effected on the first day of the year reported.

                                                                                             Unaudited
(IN THOUSANDS EXCEPT PER SHARE DATA)                                                 For the Forty Weeks Ended
                                                                                ------------------------------------
                                                                                 October 7, 2000    October 9, 1999
                                                                                -----------------  -----------------
Net sales.......................................................................  $    2,139,130      $   2,217,917
Net income......................................................................  $      117,478      $      42,148
Diluted net income per share....................................................  $         1.35      $         .48

3. ASSETS HELD FOR SALE

On May 2, 2000, the Sayreville, New Jersey manufacturing facility, which had been held for sale after its closure, was sold for $7.5 million. The sale resulted in a pre-tax gain of approximately $2.0 million, which was recorded in other income during the first half of the year. Disposition of the remaining assets held for sale is expected to occur within the next thirty-three months without a significant gain or loss.

(IN THOUSANDS)                                                 Interest Rate        Final Maturity          OCTOBER 7,2000
                                                               -------------        --------------          --------------
Revolving Facility..................................                6.845%         September 28, 2004           $ 170,000
Term Facility.......................................                6.827%         September 28, 2004             287,000
Senior Subordinated Notes...........................               10.750%               July 1, 2006             124,400
Other Senior Debt...................................               Various                  2001-2005               8,840
Capital Lease Obligations...........................               Various                  2002-2042               6,524
                                                                                                                ---------
                                                                                                                  596,764
Less: Current maturities............................                                                               50,660
                                                                                                                ---------
     Total..........................................                                                            $ 546,104
                                                                                                                =========

On March 6, 2000, Keebler utilized existing credit facilities in order to finance the acquisition of Austin. The additional borrowings were under the Revolving Facility, which was originally entered into on September 28, 1998. At October 7, 2000, the outstanding balance on the Revolving Facility was $170.0 million, with an available balance of $180.0 million.

5. RESTRUCTURING AND IMPAIRMENT CHARGE

In May of 1999, Keebler closed its manufacturing facility in Sayreville, New Jersey, which resulted in a pre-tax restructuring and impairment charge, in 1999, to operating income of $66.3 million in total. In the second quarter of 2000, the charge was reduced by an adjustment of $1.0 million. The adjustment related to severance and other exit costs from the facility closure due to lower-than-expected severance costs and the earlier-than-expected sale of the facility. The restructuring and impairment charge included $19.2 million for cash costs related to severance and other exit costs from the Sayreville facility. The remaining $46.1 million were non-cash charges for asset impairments related to the Sayreville closing, including write-downs of property, plant and equipment at Sayreville and equipment at other locations, and a proportionate reduction of goodwill acquired in the Sunshine Biscuits, Inc. acquisition in June 1996. Approximately 650 employees were terminated as a result of the closing of the Sayreville facility, of which approximately 600 employees were represented by unions.

(IN THOUSANDS)              January 1, 2000          Provision            Spending               Adjustment         OCTOBER 7, 2000
                            ---------------         -----------         ------------            -------------       ---------------
Severance...................   $2,037               $      --               $(1,196)               $  (140)               $  701
Facility closure............    2,567                      --                  (852)                (1,556)                  159
Other.......................    1,717                      --                    56                    700                 2,473
                               ------               ---------               -------                -------                ------
    Total...................   $6,321               $      --               $(1,992)               $  (996)               $3,333
                               ======               =========               =======                =======                ======

At October 7, 2000, $3.2 million remained for plant and facility closing costs and severance accruals and $.1 million for other liabilities and accruals. Only costs related to the settlement of worker's compensation claims (included in other above), and health and welfare payments are expected to extend beyond the year ended December 30, 2000.

6. PLANT AND FACILITY CLOSING COSTS AND SEVERANCE

In conjunction with the March 6, 2000 Austin acquisition, Keebler has recognized estimated costs pursuant to a plan to exit certain activities of the acquired company. These exit costs, for which there is no future economic benefit, were provided for in the purchase price allocation and were equal to $14.5 million. Spending equal to $8.8 million has occurred through October 7, 2000. Staff reductions of approximately 80 non-union employees are expected as part of the exit plan. Approximately 75 employees had been terminated at October 7, 2000. The remaining terminations are expected to occur by February 23, 2001. Spending on exit costs is expected to be substantially complete before the end of 2001, with primarily health and welfare payments extending beyond that timeframe.

During 1998, as part of acquiring President International, Inc. ("President"), Keebler provided for $12.8 million in exit costs in the allocation of the purchase price. At January 1, 2000, there remained $7.4 million in reserves of which $2.8 million was spent during the first three quarters of 2000. There were 260 employees at January 1, 2000, still expected to be terminated as part of the exit plan, of which approximately 175 were represented by a union. Throughout the first forty weeks of 2000, approximately 150 employees under union contract and approximately 35 employees not under union contract had been terminated. The remaining terminations are scheduled to occur in the fourth quarter of 2000.

In the second quarter of the current year, Keebler adjusted accruals previously established in the accounting for the Keebler and Sunshine acquisitions by reducing goodwill and other intangibles by $0.5 million and $1.1 million, respectively, to recognize exit costs that are now expected to be less than initially anticipated.

                                     January 1,                                                             OCTOBER 7,
(IN THOUSANDS)                          2000         Provision          Spending          Adjustment          2000
                                     ----------     ---------           --------           ----------       ---------
KEEBLER COMPANY
   Severance ....................     $    24          $    --          $     --           $    --           $    24
   Facility closure .............       7,829               --            (1,430)             (500)            5,899
                                      -------          -------          --------           -------           -------
       Subtotal .................       7,853               --            (1,430)             (500)            5,923
                                      -------          -------          --------           -------           -------

SUNSHINE BISCUITS, INC
   Severance ....................     $    63          $    --          $    (17)          $    --           $    46
   Facility closure .............       1,962               --              (689)           (1,116)              157
                                      -------          -------          --------           -------           -------
       Subtotal .................       2,025               --              (706)           (1,116)              203
                                      -------          -------          --------           -------           -------

PRESIDENT INTERNATIONAL, INC
   Severance ....................     $ 2,829          $    --          $ (2,235)          $    --           $   594
   Facility closure .............       4,596               --              (569)               --             4,027
   Other ........................          10               --               (10)               --                --
                                      -------          -------          --------           -------           -------
       Subtotal .................       7,435               --            (2,814)               --             4,621
                                      -------          -------          --------           -------           -------

AUSTIN QUALITY FOODS, INC
   Severance ....................     $    --          $13,979          $ (8,398)          $    --           $ 5,581
   Facility closure .............          --              479              (408)               --                71
   Other ........................          --               28                (5)               --                23
                                      -------          -------          --------           -------           -------
       Subtotal .................          --           14,486*           (8,811)               --             5,675
                                      -------          -------          --------           -------           -------

         Total ..................     $17,313          $14,486          $(13,761)          $(1,616)          $16,422
                                      =======          =======          ========           =======           =======

* Recorded as part of the purchase price allocation.

7. SEGMENT INFORMATION

Keebler has adopted Statement of Financial Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" for reporting segment information. Keebler's reportable segments are Branded and Specialty. The reportable segments were determined using Keebler's method of internal reporting, which divides and analyzes the business by sales channel. The nature of the customers, products and method of distribution can vary by sales channel. The reportable segments represent an aggregation of similar sales channels. The Branded segment is comprised of sales channels that principally market brand name cookie and cracker products to retail outlets. Either a Keebler sales employee or a distributor sells products in the Branded segment. The sales channels in the Specialty segment primarily sell cookie, cracker and brownie products that are manufactured on a made-to-order basis or that are produced in individual packs to be used in various institutions (i.e., restaurants, hospitals, etc.), as well as cookies manufactured for the Girl Scouts of the U.S.A. Many of the products sold by the Specialty segment are done so through the use of brokers.

KEEBLER FOODS COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

7. SEGMENT INFORMATION (CONTINUED)

Keebler evaluates the performance of the reportable segments and allocates resources based on the segment's profit contribution, defined as earnings before certain functional support costs, amortization, interest and income taxes. While the accounting policies for each reportable segment are the same as for the total company, the cost of sales used to determine a segment's profit contribution is calculated using standard costs for each product, whereas actual cost of sales is used to determine consolidated income from operations.

There are no intersegment transactions that result in revenue or profit. Asset information by reportable segment is not presented, as Keebler does not report or generate such information internally. However, depreciation expense included in the determination of a segment's profit contribution has been presented. The depreciation expense for each reportable segment reflects the amount absorbed in the standard cost of products sold, as well as the depreciation that relates to assets used entirely by the respective segment. The following table presents certain information included in the profit contribution of each segment for the twelve weeks ended October 7, 2000 and October 9, 1999 and the forty weeks ended October 7, 2000 and October 9, 1999. Prior year amounts have been restated for reclassifications between reportable segments.

                                            Branded        Specialty
                                            Segment         Segment       Other (a)       Total
                                          ----------       ----------     ---------     ----------
                                                             (IN THOUSANDS)
TWELVE WEEKS ENDED OCTOBER 7, 2000:
NET SALES TO EXTERNAL CUSTOMERS ........  $  512,412       $129,791       $    --       $  642,203
DEPRECIATION EXPENSE ...................       5,205          2,404         9,475           17,084
PROFIT CONTRIBUTION ....................      92,896         23,108            --          116,004

TWELVE WEEKS ENDED OCTOBER 9, 1999:
Net sales to external customers ........  $  479,598       $136,246       $    --       $  615,844
Depreciation expense ...................       5,297          2,034         7,673           15,004
Profit contribution ....................      83,362         17,759            --          101,121

FORTY WEEKS ENDED OCTOBER 7, 2000:
NET SALES TO EXTERNAL CUSTOMERS ........  $1,597,553       $514,082       $    --       $2,111,635
DEPRECIATION EXPENSE ...................      19,194          9,216        25,743           54,153
PROFIT CONTRIBUTION ....................     264,305        103,594            --          367,899

FORTY WEEKS ENDED OCTOBER 9, 1999:
Net sales to external customers ........  $1,533,543       $522,181       $    --       $2,055,724
Depreciation expense ...................      15,804          6,275        25,510           47,589
Profit contribution ....................     240,905         90,148            --          331,053

(a) Represents expenses incurred by the functional support departments that are not allocated to the reportable segments.

The net sales to external customers from the reportable segments equal the consolidated net sales of Keebler. A reconciliation of segment profit contribution to total consolidated income from continuing operations before income tax expense for the twelve weeks ended October 7, 2000 and October 9, 1999 and the forty weeks ended October 7, 2000 and October 9, 1999 is as follows:

                                                     Twelve Weeks Ended                     Forty Weeks Ended
                                             ---------------------------------     ------------------------------------
                                             OCTOBER 7, 2000   October 9, 1999     OCTOBER 7, 2000      October 9, 1999
                                             ---------------   ---------------     ---------------      ---------------
                                                                           (IN THOUSANDS)
INCOME BEFORE INCOME TAX EXPENSE:

Reportable segment's profit contribution ....     $116,004          $101,121          $ 367,899           $331,053
Unallocated functional support costs (b) ....       40,359            38,161            132,027            148,716
Restructuring and impairment charge .........           --                --               (996)            69,208
Interest expense, net .......................       10,051             7,097             34,187             28,497
                                                  --------          --------          ---------           --------
   Income before Income Tax Expense .........     $ 65,594          $ 55,863          $ 202,681           $ 84,632
                                                  ========          ========          =========           ========

(b) Includes support costs such as distribution, research and development, corporate administration and other (income) expense, which are not allocated internally to reportable segments.

8. SALE OF VALUE BRANDS ASSETS

On January 4, 2000, Keebler sold its Birmingham, Alabama, and North Little Rock, Arkansas bakeries and the SUNNY and GREGS brands to Consolidated Biscuit Company. As a result of the sale, Keebler recorded a $5.7 million pre-tax gain in other income during the first quarter of 2000.

9. INCOME TAXES

During the quarter, Keebler decreased the annual effective tax rate from 41.0% to 39.8%. The effective tax rate declined due to increased earnings, the adoption of a change in the tax basis of the assets acquired and liabilities assumed in the Keebler acquisition, in accordance with the Internal Revenue Code
Section 338, and a satisfactory resolution of certain income tax contingencies. Partially offsetting the reduction in the effective tax rate was the increase in intangible amortization expense as a result of the Austin acquisition. The effective tax rate remains above the federal statutory rate due to nondeductible expenses, primarily the amortization of intangibles, resulting from the Sunshine, President and Austin acquisitions.

10. SUBSEQUENT EVENTS

On October 26, 2000, Kellogg Company announced it reached an agreement to acquire Keebler Foods Company in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Completion of the merger is subject to customary closing conditions and regulatory approvals. There can be no assurance that such approvals will be obtained. The transaction is expected to close during the first quarter of 2001.

On November 7, 2000, the Board of Directors of Keebler declared a quarterly cash dividend of $0.1125 per common share payable on December 20, 2000, to stockholders of record on December 6, 2000.