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Flowers Industries, Inc. (Abridged)

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DOI: 10.1108/case.darden.2016.000125

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 UVA-F-0812

FLOWERS INDUSTRIES, INC. (ABRIDGED)

In early March 1985, Marty Wood, senior vice president and chief financial officer (CFO) of
Flowers Industries, Inc., knew that changes taking place in the food industry could present important
opportunities for the company. Anticipating those opportunities, Wood proposed that Flowers issue
$50 million in long-term securities. Among the alternatives considered were a common stock issue,
a straight debt issue, and an issue of convertible subordinated debentures.

The Flowers management team felt that the convertibles offered a unique opportunity to
leverage the company’s balance sheet prudently at a time when it did not immediately require the
capital and, therefore, was able to retain significant control over the process. As Wood stated, “The
best time to go to market is when you don’t need the capital, so you can walk away if the terms are
not acceptable. Plus, we were at an all-time high on the stock, and the conversion premium added to
that multiple.”

The Company

Flowers Industries, Inc., produced a variety of branded baked-snack and convenience foods.
Founded in 1919, Flowers grew to be a Fortune 500 company and, in 1985, operated 36 profit
centers in 14 states of the U.S. Sunbelt.1 The company’s philosophy was summed up by former chair
Langdon S. Flowers, “We don’t want to be the biggest food company; we simply want to be the
most profitable.”

Flowers was one of the nation’s largest wholesale baking companies. With fiscal 1984 sales
of $603 million, Flowers was only smaller than Continental Baking (acquired by Ralston Purina in
1984), which Drexel Burnham Lambert estimated had sales approximating $1,599.5 million in 1984;
Campbell Taggart (acquired by Anheuser-Busch in 1982), which Drexel estimated had sales of
$1,050 million in 1984; and Interstate Bakeries (an independent, publicly owned company), which
posted sales of $685.6 million in 1984. Flowers’s market area was concentrated in the southeast—
the nation’s fastest-growing region with some penetration in midwestern and southwestern markets.

1
Flowers Industries, Inc., was headquartered in Thomasville, Georgia.

This case was prepared by Stephanie M. Summers (MBA ’89) under the supervision of Robert F. Bruner. It was written
as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright © 1989 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To
order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced,
stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 5/93. ◊
 -2- UVA-F-0812

Flowers operated in two business segments: baked foods (bread, cakes, pies, and cookies),
which accounted for 87% of the company’s sales; and convenience foods (frozen vegetables, fruit
cobblers, and food ingredients), which accounted for 13% of sales.

Operations

Flowers’s operational goals were to

o Be the least-cost producer in the markets it served,

o Distribute its products efficiently,
o Expand its product line,
o Increase its market share and geographic penetration through acquisitions.

A key to Flowers’s operational efficiency was the company’s unique “reciprocal baking” production
system. Each reciprocal baking plant utilized long, efficient production runs that minimized
downtime for production changeovers and produced only one or two products, which were then
hauled between production facilities in 500 company-owned tractor-trailer rigs. In this way, Flowers
was not only the least-cost producer of bread in the Atlanta market, for example, but in all the
markets served by the Atlanta plant. The reciprocal baking system incurred higher distribution costs,
but lower product costs (more than offsetting them). Through acquisitions, Flowers had established a
network of highly automated plants, each located within 300 miles of other Flowers locations. This
strategic clustering of its production plants facilitated reciprocal baking by minimizing shipping
distance between plants.

In an industry where the rest of its competitors were approximately 100% unionized,
Flowers’s workforce was 76% nonunion by contract, with 96% of the company’s employees covered
by Flowers’s benefit programs versus union-sponsored plans. Among the benefit programs
administered by Flowers was the pension fund, which was overfunded by $33 million. The company
believed that it enjoyed greater flexibility in managing its operations for productivity than its heavily
unionized competitors did.

Growth Goal

The company maintained a growth goal of 15% for earnings per share in the face of industry
growth of only 1%. Possible avenues for future growth included new products, increased market
penetration, and acquisitions. Although the company pursued all of those alternatives, it did not have
the resources at its disposal for new product development on the scale necessary to achieve its
growth goal, nor could it compete on a marketing dollar basis with the other major players in the
industry to steal share in currently mature markets. Flowers did not want to gain share through price
cutting, especially when industry-wide price-cutting was affecting margins. Continental Baking,
prior to its acquisition by Ralston, was the big price cutter in the industry, and industry analysts felt
 -3- UVA-F-0812

that Ralston’s profitability criteria would demand more stable pricing on Continental’s part. A
similar pressure was expected to be exerted on Campbell Taggart by its parent Anheuser-Busch.
Most analysts expected prices to firm at this time, and Flowers, as least-cost producer, would benefit
most under that scenario.

Growth by Acquisition

A significant portion of Flowers’s sales growth came from acquisitions. Flowers’s

management pursued an opportunistic acquisition strategy: The company was committed to making
good acquisitions for long-term growth when those acquisitions were available. In making
acquisitions, the company was willing to endure short-term earnings pressure to achieve long-term
growth. Acquisitions were the primary focus of the company’s growth plans.

Flowers sought underperforming, often unprofitable small food companies that provided
immediate capacity and customers, if not earnings, at favorable prices. The company was able to
improve productivity in turnaround acquisitions by automating the facilities and integrating the
newly acquired operations into its reciprocal baking system. Many of the company’s acquisitions
were small operations using short, inefficient production runs to produce a full product line in a
single plant. When integrated into the reciprocal baking system, acquired plants were able to use
longer, more efficient production runs, allowing the company to achieve significant purchasing and
cost efficiencies of scale. In this way, Flowers generated profits from previously unprofitable
facilities. Acquisition activity tended to increase in tough market environments, when small
operations were most hurt by their relative inefficiency.

Improving acquired turnaround situations had been a more profitable means of expansion for
Flowers than building its own capacity because of the relatively low investment needed to acquire
underperforming operations. The company’s acquisition strategy focused on limiting the size of
individual acquisitions to avoid “betting the company on one roll of the dice,” as Wood phrased it.
With the company’s operations scattered throughout the Sunbelt, management felt that plenty of
growth-by-acquisition opportunities were still available. In fact, Flowers’s management had looked
at a number the preceding year, turning down acquisitions with combined sales volume exceeding $1
billion, because either it did not fit operationally or management felt they could not achieve the
company’s profitability goals. Flowers had invested over $28 million in acquisitions over the
previous three years. Wood expected that the company would at least maintain its current acquisition
pace, and he thought it likely that the future would present even greater acquisition opportunities.
 -4- UVA-F-0812

The company had always financed acquisitions based on balance sheet requirements at the
time of each transaction. Management had not set aside a pool of funds to be used for acquisitions.
Typically, Flowers would issue notes that carried a moratorium of at least two years on principal
repayment to a company’s previous owner. Flowers used this lag in principal repayment to improve
the operations of the newly acquired facility. Of the major acquisitions made in the prior four years,
five were in the snack-food division.

Flower Industries–Acquisitions

Date Company Revenues

01/04/1984 Sunbeam Cookie Co. $5.6 million
Abilene, TX
12/08/1983 Jack’s Cookie Co. 14.2 million
Tampa, FL (combined)
United Biscuit Co.
of America
Grand Rapids, MI
11/21/1983 Vann’s Baking Corp. 4.0 million
Memphis, TN
06/03/1983 Griffin Pie Co. 27.0 million
London, KY
07/23/1982 Jack’s Cookie Co. 28.0 million
Charlotte, NC
12/01/1981 Purity Baking Company 30.0 million
Charleston, WV
Betsy Ross $25.0 million
Bluefield, WV

Because Flowers acquired underperforming operations, the company’s sales were usually
boosted before earnings experienced material gains. Sales and earnings growth in any given year
were generally not related: sales gains came from current acquisitions (as well as from new products,
population growth, etc.); earnings growth stemmed from improved productivity in previously
acquired plants. Approximately 50% to 60% of the company’s sales growth was external, from
acquisitions, while virtually 100% of earnings growth was developed internally.

The Baking Industry

The baking industry was characterized by low growth. Annual compound revenue growth
averaged 3% during the 1974 to 1984 period while profits dropped, with earnings per share
decreasing an average of 6% per year for the industry as a whole over the same period. This growth
rate compared with 8% compound revenue growth and 6% earnings growth for the Standard &
Poor’s (S&P) 500 Index. Flowers achieved a compound annual growth rate of 17% in both sales and
earnings per share for the same period.
 -5- UVA-F-0812

Flowers’s Financial Record

Flowers’s stated goals for financial performance were 15% compound growth of fully diluted
earnings per share, 20% return on beginning shareholders’ equity, and 15% return on invested
capital. Exhibits 1 and 2 provide recent financial statements. The company’s long-term debt carried
an average interest cost of 9%, which compared with the current prime rate of 10.5%.

Flowers was known among Wall Street food analysts as the most-profitable baking company
in terms of profit margins. The company’s pretax profit margin of 6.6% compared with an industry
average of 4.1%. Based on information available from publicly traded baking companies, Flowers’s
return on equity of 18.4% compared with an industry average of 9.1%, and the company’s 9% return
on assets compared with an industry average of approximately 3%.2 Exhibit 3 provides data on the
company’s financial position and results versus those of the baking industry. Flowers’s stock had a
beta of 0.70. The company had no antitakeover provisions in place. The Flowers family and
management owned 30% of the common shares outstanding; institutional investors owned 20%.
Wall Street analysts estimated that the company would earn $1.15 per share in fiscal 1985 and $1.35
per share in fiscal 1986.

Financing Opportunities

Wood believed the company should consider raising approximately $50 million in
anticipation of continued acquisition opportunities in the industry and the ongoing capital
expenditures required to maintain its least-cost producer advantage. Wood was also interested in
exchanging the $5 million of bank term debt on the balance sheet for longer-term financing, which
would not require continued annual cash outflows for principal repayment. Flowers’s growing
business offered many investment opportunities to put its operating cash flow to work. Wood also
thought the company should have the financial flexibility to move quickly should attractive
acquisition opportunities arise in the future. Exhibit 4 provides historical cash flow information.
Exhibit 5 gives an internal cash flow forecast that Wood developed to project the available funds
should significant acquisition opportunities arise in the future.

Wood knew that the company’s stock, trading at an all-time high of 20 times earnings, was
selling at a substantial premium to the market and to its historic trading multiples. In his career with
the company, Wood had seen the stock trade as low as four times the earnings in the early 1970s.

2
According to the 1984 Fortune magazine listing of the 500 largest publicly held corporations in the United States,
Flowers ranked 23rd for total returns to investors in 1983 (86.9%) and 26th for the 10-year average total return to
investors (32.2%).
 -6- UVA-F-0812

Several Wall Street analysts had written in January that the stock, trading at a 60% premium
to the S&P 400 based on 1985 estimates, was fully valued. Exhibit 6 provides historical information
regarding the stock’s performance versus the S&P Food Index. Wood wondered how the valuation
of the company’s stock relative to the market would affect demand for the common stock offering.
He thought the company should be making use of its equity to capitalize on the market’s recognition
of the company’s performance, but he knew that significant dilution to current shareholders would
have a negative impact on the company’s return to shareholders.

A public issue of long-term bonds was another possibility. He suspected that the company
would garner a BBB rating from Standard & Poor’s for a bond issue of about $50 million. Yields on
Aaa corporate bonds were 11.89, and corporate Baa bonds were yielding 13.12%. Wood expected
that, if the company were to issue straight debt with a 20-year maturity, the coupon would be
approximately 13.8%.

Wood had recently noticed that many companies were issuing equity-linked debt, and he
wondered if this option might be appropriate for the company. An issue of convertible bonds would
allow the company to borrow funds at a lower rate than straight debt because the convertible bond
holder had the option to convert the bond into a fixed number of shares of the underlying common
stock at a premium to the current trading price.3 With the stock trading at an all-time high, he liked
the idea of being able, in effect, to issue equity at a substantial premium.

Wood had been watching convertible bond issues and thought the company should be able to
sell its equity at a 20% premium through this method. He had noticed that several recent convertible
debt issues had coupons ranging from 7.25% to 9.75%. An executive of one of those issuers
explained that convertibles were cheap: the interest costs were low enough relative to the cost of
straight debt to offset the dilutive impact of the convertible feature on earnings per share. The shares
optioned by the convertible holders were included in the calculation of fully diluted earnings per
share, and the related interest charged was added back to net income to avoid, in effect, double
counting the cost of capital.

Wood suspected that the real underlying cost of convertibles was higher than initially
indicated by the low coupon. He knew that convertibles were especially attractive if conversion did
not occur, because the company would be able to borrow at less than the going rate without diluting
common shareholdings. He had every reason to expect, however, that the company would continue
its performance in the future, and that the stock would therefore appreciate. Wood wondered if the
company would be better off waiting and issuing stock at the higher values he expected in the future,

3
The number of shares of common stock received per convertible bond is determined by applying a premium to the
current price of the common stock. For example, if company X’s common stock traded at $10 per share, and company X
issued bonds convertible at $12 per share (a 20% premium) the bondholder would receive 83.3 shares of stock for the
bond upon conversion ($1,000 per bond per $12 per share) by applying the face value of the bond toward purchase of
common stock. One offering that particularly caught Wood’s attention was the recent issue by Citizens and Southern
Bank of Atlanta (C&S). C&S issued $25 million of convertible subordinated debt at 8.75%, convertible into common
stock at a 20% premium.
 -7- UVA-F-0812

especially since the company did not require the funds for immediate use but wanted the flexibility
on hand, primarily for future acquisitions.

The Proposed Offering

The company’s investment bankers proposed a structure for the offering as outlined in
Exhibit 7. The Flowers’s senior management team had questions about this proposal. Given the long
life of the conversion option, they wanted to make sure that they did not sell the company’s equity at
too low a price. An important uncertainty was the effect these variables would have on the price
received for the bonds. Management looked at some recent convertible offerings to gauge investor
preference. Exhibit 8 summarizes recent offerings and results.

The previous two years had seen a significant increase in the issuance of convertible
securities over historical levels. In 1982, 73 issues worth $3.6 billion came to market, which grew to
151 new issues worth $9.4 billion in 1983. An additional $4 billion of convertible securities were
issued (in 80 issues) in 1984, bringing the par value of total convertibles outstanding to some $50
billion. Market observers felt that the convertibles appealed to investors, because they had lower
volatility and better current income than common stocks but allowed investors to participate in any
potential upward movements of the underlying stock.

Since the beginning of 1985, the markets had remained volatile. Bond market weakness
triggered some selling in the stock market. Interest rates, however, increased over the previous week,
as seen in Exhibit 9. On Friday, March 1, the company’s common stock traded between $20.25 and
$19.75 and closed the day at $19.75.

The structure proposed by the investment bankers was, Wood felt, within the range of other
recent convertible structures. He knew that investment bankers often looked at the premium and
payback (also known as “years to breakeven”) on comparable convertibles outstanding to value new
issues. Exhibit 10 provides data on comparable convertible issues in the market at that time, and
Exhibit 11 provides data on BBB straight-debt comparables of various maturities.

Wood knew that a convertible bond could be thought of as a bond-and-warrant package, so it

could be valued as a straight bond plus a call option on the common stock. He had heard that options
were a play on the volatility of the underlying instrument, measured in terms of the standard
deviation of a stock’s daily prices, as shown in Exhibit 12. Volatility could therefore be used as a
surrogate for an estimate of future stock prices in option valuation: stocks with higher volatility, by
definition, had a greater probability of reaching a given strike price than stocks with lower volatility.

Although this concept was too simplistic to fully incorporate the many variables involved in
a convertible bond, he thought it would be useful to value the convertible bond as a package of
straight debt plus call options in order to set a bounding value. Wood wondered if this bound would
accurately reflect the true value of the convertible; that is, whether it would be able to capture fully
the interaction between the straight debt component and the option portion of the convertible.
 -8- UVA-F-0812

Exhibit 1
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Consolidated Statement of Income
(amounts in thousands, except per-share data)

For the year ended

June 30, July 2, July 3,
1984 1983 1982
Sales $602,995 $522,254 $461,062
Other income 3,481 2,225 3,000

606,476 524,479 464,062

Cost of goods sold 323,621 272,351 246,004

Selling, delivery, & admin
exp. 20,711 196,697 170,839
Depreciation & amortization 16,795 14,862 12,859
Interest 5,184 5,367 5,345

566,311 489,277 435,047

Income before taxes 40,165 35,202 29,015

Federal and state
income taxes 18,025 15,988 12,730

Net income $22,140 $19,214 $16,285

Per share:
Primary $0.94 $0.83 $0.77
Fully diluted $0.94 $0.83 $0.71

Source: Flowers Industries Form 8–K, 27 February 1985.

 -9- UVA-F-0812

Exhibit 2
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Balance Sheet
30-Jun 2-Jul 30-Jun 2-Jul
Assets 1984 1983 Liabilities and stockholders’ equity 1984 1983
Current Assets: Current Liabilities:
Cash and temporary investments $23,699 $21,187 Long-term debt $4,125 $3,895
Accounts receivable 41,505 34,932 Accounts payable 29,898 24,879
Inventories 28,289 27,011 Accrued taxes other than income taxes 3,054 2,813
Prepaid expenses 1,443 1,575 Income taxes 2,699 5,674
94,936 84,705 Accrued compensation, interest, and other
liabilities 25,623 21,459
Property, plant, and equipment, at
cost 65,399 58,720
less accumulated depreciation 154,654 136,774
Long-term notes payable 30,131 28,363
Other assets and deferred charges: Industrial revenue bonds 27,263 20,030
Property held for sale 1,693 1,437 Deferred income taxes 12,115 9,951
Investments, at cost 757 1,331 Redeemable preferred stock 1,349 1,821
Unamortized loan cost 566 525 136,257 118,885
Construction funds held by trustees 4,035 2,188
Miscellaneous 772 560 Common stockholders’ equity:
(7,823) (6,041) Common stock–$.625 par value, authorized

Cost in excess of net tangible assets 5,502 5,660 30,000,000 shares, issued 23,606,612 14,754 14,754
Capital in excess of par value 10,502 10,502
$262,915 $233,180 Retained earnings 104,442 90,015
Less common stock in treasury,
412,304 and 273,045 shares, respectively (3,040) (976)

126,658 114,295
$262,915 $233,180
 -10- UVA-F-0812

Exhibit 3
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Comparative Analysis, 1984

Baking
Assets: Industry Flowers
Cash and equivalents 8.30% 9.00%
Accounts and notes receivable 18.60 15.80
Inventory 12.90 10.80
All other current 1.90 0.50

Total current assets 41.7.0 36.10

Fixed assets 48.80 58.80
Intangibles 1.50 2.10
All other noncurrent 8.00 2.90
Total assets 100.00% 100.00%

Liabilities and net worth:

Short-term notes payable 4.40% 0.00%
Current maturities long-term debt 4.80 1.60
Accounts and notes payable 15.80 11.40
Accrued expenses 7.30 11.90
All other current 2.30 0.00

Total current liabilities 34.60 24.90

Long-term debt 24.70 22.30
All other noncurrent 2.90 4.60

Total liabilities 62.20 51.80

Net worth 37.80 48.0
Total liabilities and net worth 100.00% 100.00%

Income data:
Net sales 100.00% 100.00%
Cost of sales 61.00 53.40

Gross profit 39.00 46.10

Operating expenses 33.80 36.40

Operating profit 5.20 9.70

All other expenses (net) 1.10 3.60
Profit before taxes 4.10 6.62
Source: Robert Morris Associates Annual Statement Ratios.
 -11- UVA-F-0812

Exhibit 4
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Historical Cash Flow

1984 1983 1982

Net income 22,140 19,214 16,285
Depreciation and amortization 16,795 14,862 12,859
Deferred taxes 2,164 2,452 758
Other 94 152 121

Cash flow from operations 41,193 36,680 30,023

Changes in working capital 1,087 (1,814) 3,336

Cash internally generated 42,280 34,866 33,359

(24,409
Capital expenditures1 (29,716) (23,807) )

12,564 11,059 8,950

Dividends paid (7,705) (6,337) (4,771)

4,859 4,722 4,179

(13,426
Acquisitions (7,611) (7,388) )

(2,752) (2,666) (9,247)

Financing activities 5,264 3,694 3,973

Net change in cash and

short-term investments 2,512 1,028 (5,274)
1
Net of disposals
 -12- UVA-F-0812

Exhibit 5
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Cash Flow Projections

Assumptions
Tax rate 45.00% Working capital % sales 5.00%
Sales and EBIT growth 5.00% Deferred taxes growth 15.00%
(Conservative to use 15% sales growth for cash flow projection) Depreciation % sales 2.80%
Changes in PPE (% sales) 5.00% Dividend growth per quarter $0.01
(Assumes half of sales growth is from acquisitions.) Shares outstanding (000) 23,607
Acquisition $ growth 15.00%

1984 Actual 1985E 1986E 1987E 1988E 1989E Dividend Projections

Sales $602,995 $693,444 $797,461 $917,080 $1,054,642 $1,212,838 1984 (actual) $0.33 $7,705
Working capital 29,537 34,672 39,873 45,854 52,732 60,642 Q1 0.09
Q2 0.095
EBIT 46,349 $53,301 $61,297 $70,491 $81,065 $93,224 Q3 0.1
Old interest 5,184 5,184 5,184 5,184 5,184 5,184 Q4 0.105
FY1985 0.39 $9,207
Profit before taxes $41,165 $48,117 $56,113 $65,307 $75,881 $88,040 Q1 0.11
Taxes @ 45% 18,524 21,653 25,251 29,388 34,146 39,618 Q2 0.115
Q3 0.12
Net income $22,641 $26,465 $30,862 $35,919 $41,734 $48,422 Q4 0.125
Depreciation 16,884 19,416 22,329 25,678 29,530 33,959 FY1986 0.47 $11,095
Deferred taxes 2,164 2,489 2,862 3,291 3,785 4,353 Q1 0.13
Q2 0.135
Cash flow from operations $41,689 $48,370 $56,053 $64,888 $75,049 $86,734 Q3 0.14
Changes in working capital (3,552) (5,135) (5,201) (5,981) (6,878) (7,910) Q4 0.145
FY1987 0.55 $12,984
$38,137 $43,234 $50,852 $58,907 $68,171 $78,824 Q1 0.15
Dividends (7,705) (9,207) (11,095) (12,984) (14,872) (16,761) Q2 0.155
Q3 0.16
$30,432 $34,028 $39,757 $45,923 $53,299 $62,063 Q4 0.165
Changes in PP&E ($27,684) ($34,672) ($39,873) ($45,854) ($52,732) ($60,642) FY1988 0.63 $14,872
Q1 0.17
Preacquisition cash flow $2,748 ($645) ($116) $69 $567 $1,422 Q2 0.175
Acquisitions (7,611) (8,753) (10,066) (11,575) (13,312) (15,308) Q3 0.18
Q4 0.185
Prefinancing cash flow ($4,863) ($9,397) ($10,182) ($11,506) ($12,745) ($13,887) FY1989 $0.71 $16,761
 -13- UVA-F-0812

Exhibit 6
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Stock Price History

1978 1979 1980 1981 1982 1983

Price
High $5.00 $3.92 $5.00 $5.67 $10.17 $14.17
Low $2.75 $3.17 $4.25 $3.67 $4.50 $9.33

P/E
High 12.5× 8.5× 9.3× 9.1× 14.3× 17.0×
Low 6.9× 6.9× 5.4× 5.9× 6.3× 11.2×

Flowers as a Percentage of
S&P 400
High P/E 137% 110% 93% 97% 123% 137%
Low P/E 95% 105% 78% 79% 76% 114%
Average P/E 120% 108% 88% 87% 104% 127%
Earnings 5% 4% 5% 6% 8% 8%
Source: “Flowers Industries,” Bonnie Rivers, J. C. Bradford & Co., 16 January 1984. Adjusted for
subsequent 3-for-2 stock split.
 -14- UVA-F-0812

Exhibit 7
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Convertible Offering Structure Proposed by Merrill Lynch

Interest rate: 8.25%

Maturity: 2005

Conversion: Convertible at any time prior to maturity into shares of the company’s
common stock at a conversion price of $24, subject to adjustment in
certain events, such as a common stock dividend or stock split.

Redemption premium: Redeemable at any time on or after March 1, 1987 or earlier if the
closing price of the common stock equals or exceeds 140% of the
conversion price during at least 20 out of 30 consecutive trading days
ending within five days prior to notice of redemption. Redeemable at
declining prices (see below) until March 1, 1995 and thereafter at par.
Redemption price will include accrued interest to the redemption date.
Any debentures called for redemption that are not converted into
common stock on or before the redemption date are subject to be
purchased at the redemption price by one or more investment bankers or
other purchasers, who may agree with the company to purchase such
debentures and convert them into the company’s common stock.

Sinking fund: Annual sinking fund payments begin March 1, 1995 and will total 7.5%
of the principal amount of debentures issued. Sinking fund payments are
calculated to retire 75% of the debt from the issue prior to maturity.

Overallotment option
(green shoe): The underwriters will have the option to purchase from the company up
to an additional $7.5 million in principal of debentures at the price to
public, less the underwriting discount, to cover any overallotments.
 -15- UVA-F-0812

Exhibit 7 (continued)

Redemption Premiums for Convertible Debentures

Percentage Percentage
Year (of par) Year (of par)
1985 108.25 1990 104.13
1986 107.425 1991 103.3
1987 106.6 1992 102.475
1988 105.775 1993 101.65
1989 104.95 1994 100.83

Thereafter, the convertible debentures are redeemed at 100% of the principal

amount, in each case together with accrued interest, to the date fixed for
redemption.
 -16- UVA-F-0812

Exhibit 8
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Recent Public Offerings of Convertible Debentures

Amount Coupon Conversion Years Call

Date Company (millions) (%) Description Maturity Premium Protection Rating
Nov 84 Communications Industries $50 9.00 convertible debs 2009 18.70% 3 Ba2/BB–
Wachovia Corporation $100 8.75 convertible sub debs 2009 23.40% 2 Aa2/AA

Dec 84 Computervision Corporation $100 8.00 convertible sub debs 2009 21.62% 2 BB–

Feb 95 Johnstown American $35 9.75 convertible sub debs 1995 14.80% 2 B2/B–
Texas Air Corporation $30 10.00 exchangeable sub debs1 2005 10.00% 2 Caa/CCC
Citizens & Southern Bank $25 8.75 convertible sub notes 2010 20.30% 3 A–
H.J. Heinz Company $41 7.25 convertible sub debs 2015 30.00% 3 Aa3/A+
Bay Banks, Inc. $30 8.75 convertible sub debs 2010 22.00% 3 Baa
CooperVision $200 8.63 convertible sub debs 2005 22.00% 2 Ba2/BB–
1
exchangeable into Continental Airlines Stock
 -17- UVA-F-0812

Exhibit 9
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Money Market Rates1

Latest Week Week Ago

Federal funds 8.63% 8.04%
Commercial paper 8.5 8.7
New treasury bills, 3 month 8.22 8.46
Certificates of deposit, 3 month 8.7 8.85
U.S. governments (1994–1999) 11.29 11.62
New Aa industrials 12.38 12.75
New Aaa utilities 12.50% 12.88%
1
Figures cited are as of February 20, 1985.
Source: Business Week (4 March 1985).
 -18- UVA-F-0812

Exhibit 10
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Convertible Debt Comparables for Companies Rated BBB−

Shares Conversion Dividend Current Current Current Current Per-Share Conversion Years
Received Price Income Yield to Stock Yield Convert Yield on Income Income Premium to
per Bond per Share per Bond Maturity Price on Stock Price Convert Spread1 Spread per Share Breakeven2
Alaska Airlines 2003 55.17 $18.13 $7.72 7.31% $19.13 0.73% $1,170 7.69% $82.25 $1.49 (1.00) -0.67
Crown Zellerbach 2009 24.84 40.25 24.84 9.04 32.38 3.09 1,020 9.07 67.67 2.72 7.88 2.89
Fischbach 2005 27.78 36 27.78 8.35 36.5 2.74 1,014 8.38 57.17 2.06 (0.50) -0.24
Intern’l Lease Finance 2003 64.52 15.5 0 8.28 16 0 1,090 8.49 92.54 1.43 (0.50) -0.35
Keystone International 2005 49.31 20.28 23.67 8.19 18 2.67 1,030 8.25 61.31 1.24 2.28 1.83
Leggett & Platt 2001 48.66 20.55 23.36 7.17 20.88 2.3 1,090 7.45 57.85 1.19 (0.32) -0.27
M/A-Communications 2006 27.4 36.5 6.03 9.41 20.38 1.08 985 9.39 86.46 3.16 16.13 5.11
Moran Energy 2008 57.01 17.54 22.8 11.11 10.63 3.76 805 10.8 64.14 1.13 6.92 6.15
Paine Webber 2008 18.89 52.94 11.33 8.97 38.5 1.56 930 8.87 71.16 3.77 14.44 3.83
Protective Corporation 2006 82.85 12.07 51.37 4.34 21.63 2.87 1,791 5.58 48.58 0.59 (9.56) -16.29
Research-Cottrell 2006 58.82 17 18.82 8.38 19.75 1.62 1,210 8.68 86.21 1.47 (2.75) -1.88
SRI Corporation 2008 47.06 21.25 32 8.85 17.5 3.89 990 8.84 55.52 1.18 3.75 3.18
Tidewater, Inc., 2005 15.5 64.5 13.95 12.9 18.25 4.93 630 12.3 63.54 4.1 46.25 11.28

Flowers Industries 20053 41.67 $24.00

$16.25 8.25% $20.00 1.95% $1,000 8.25% $71.25 $1.71 $4.00 2.34

All issues cited are sinking-fund debentures outstanding in February 1985 with similar call protection. Yield to maturities are as of February 1.

1
Income differential defined as interest income paid by convertible less the annual dividend income that would be received by converting into the underlying common stock.
2
Assumes dividend of underlying security remains constant.
3
As outlined by Merrill Lynch representatives.

Source: Standard & Poor’s Bond Guide, February 1985.

 -19- UVA-F-0812

Exhibit 11
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Straight Debt and Treasury Comparables
Companies Rated BBB–

Yield to
Maturity 20-Year Maturities maturity
2008 Home Group 14.36%
2005 Dayton Power & Light 13.4
2005 Jim Walter Corporation 13.1
2003 Northwest Industries 14.34

15-Year Maturities
2000 Armco Steel 14.06
2000 Carter Hawley Hale 13.09
2000 Inland Steel 13.52
1999 Integrated Resources 14.57
1999 Paine Webber 13.14

10-Year Maturities
1995 Armco Steel 12.69
1995 Carter Hawley Hale 13.54
1995 Inland Steel 13.01
1995 Montgomery Ward Credit 13.78
1995 National Steel 13.36

5-Year Maturities
1991 CP National 13.2
1990 Fremont General 13.67
1990 Montgomery Ward Credit 12.3
1989 Inland Steel 12.27
1989 National Steel Corp. 12.96%

All issues cited are sinking fund debentures outstanding in February

1985.
Yield to maturities cited are as of February 1985.
Source: Standard & Poor’s Bond Guide, February 1985.
 -20- UVA-F-0812

Exhibit 11 (continued)

Government Bonds

Maturity Yield Maturity Yield

1987 10.05% 1993 11.28%
1988 10.5 1994 11.34
1989 10.8 1995 11.28
1990 11.02 1996 11.33
1991 11.25 2001 11.52
1992 11.38% 2005 11.57%

Source: Barron’s, 17 February 1985.

 -21- UVA-F-0812

Exhibit 12
FLOWERS INDUSTRIES, INC. (ABRIDGED)
Worksheet for Estimating Volatility: Flowers Industries, Inc., Daily Stock Prices

Price Relatives Log Rj - (Log Rj -

Day Stock Price Sj Rj = Sj/Sj - 1 Log Rj Mean Mean)/2
0 $17.13
1 17.25 1.007 0.003 0.001002 0.000001
2 17 0.986 –0.006 –0.00849 0.000072
3 17.375 1.022 0.009 0.00732 0.000053
4 17.375 1 0 –0.00215 0.000004
5 17.5 1.007 0.003 0.000957 0
6 18 1.029 0.012 0.010078 0.000101
7 18.375 1.021 0.009 0.006798 0.000046
8 18.5 1.007 0.003 0.000788 0
9 18.75 1.014 0.006 0.003673 0.000013
10 18.5 0.987 –0.006 –0.00798 0.000063
11 18.125 0.98 –0.009 –0.01104 0.000122
12 18.25 1.007 0.003 0.000828 0
13 18.375 1.007 0.003 0.000808 0
14 18.25 0.993 –0.003 –0.00512 0.000026
15 18.25 1 0 –0.00215 0.000004
16 18 0.986 –0.006 –0.00814 0.000066
17 17.875 0.993 –0.003 –0.00518 0.000026
18 18 1.007 0.003 0.00087 0
19 18.25 1.014 0.006 0.003834 0.000014
20 19 1.041 0.017 0.015334 0.000235
21 19.875 1.046 0.02 0.017397 0.000302
22 19.875 1 0 –0.00215 0.000004
23 19.125 0.962 –0.017 –0.01886 0.000355
24 19.75 1.033 0.014 0.011809 0.000139
25 20.125 1.019 0.008 0.006012 0.000036
26 20.625 1.025 0.011 0.008502 0.000072
27 20.25 0.982 –0.008 –0.01012 0.000102
28 20.375 1.006 0.003 0.000516 0
29 20.625 1.012 0.005 0.00314 0.000009
30 $19.88 0.964 –0.016 –0.01824 0.000332
 -22- UVA-F-0812

Exhibit 12 (continued)

Estimate of daily variance (0.00212 ÷ 30) × (30 ÷ 29) = 0.000076

Estimate of annual variance (0.000076) × 365 = 0.027848
Estimate of annual volatility (0.027848 ÷ (1 ÷ 2) = 0.166877

Exhibit covers 30 days prior to February 28, 1985.

Estimated Volatilities of Other Food-Processing Companies

American Brands 21%
General Foods 21
Beatrice 24
Ralston Purina 29
Dart & Kraft 20%

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