<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
SAGEBRUSH, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
SAGEBRUSH, INC.
3238 WEST MAIN STREET
CLAREMONT, NORTH CAROLINA 28610
January 13, 1998
Dear Sagebrush Shareholders:
You are cordially invited to attend a special meeting of shareholders (the
"Sagebrush Special Meeting") of Sagebrush, Inc., a North Carolina corporation
("Sagebrush"), to be held at the Gateway Hotel, 909 Highway 70, S.W., in
Hickory, North Carolina, on January 27, 1998, at 10:00 a.m., local time. At the
Sagebrush Special Meeting, you will be asked to consider and vote upon a
proposal to approve the Agreement and Plan of Merger dated as of November 14,
1997 (the "Agreement") among Sagebrush, WSMP, Inc., a North Carolina corporation
("WSMP"), WSMP Acquisition, Inc., a North Carolina corporation and wholly-owned
subsidiary of WSMP ("Sub"), and Messrs. L. Dent Miller and Charles F. Connor,
Jr., and the related Plan of Merger (the "Plan of Merger"), pursuant to which
Sub will merge with and into Sagebrush (the "Merger") and each share of
Sagebrush common stock ("Sagebrush Common Stock"), other than shares held by
dissenting shareholders, will be converted into the right to receive .3214
shares of WSMP common stock ("WSMP Common Stock"), subject to adjustment as
described below. It is expected that the exchange of shares of WSMP Common Stock
for shares of Sagebrush Common Stock will be tax-free to the shareholders of
Sagebrush for federal income tax purposes.
If the Merger is approved by the Sagebrush shareholders at the Sagebrush
Special Meeting and the other conditions of the Agreement are satisfied
(including approval by the shareholders of WSMP), then the number of shares of
WSMP Common Stock to be received for each share of Sagebrush Common Stock (the
"Exchange Ratio") will be determined based upon the simple average of the last
sale price per share of WSMP Common Stock on The Nasdaq Stock Market on the ten
consecutive trading days next preceding the date on which the shareholders of
Sagebrush shall have approved the Merger (the "Average WSMP Closing Price"). If
the Average WSMP Closing Price is greater than $23.34, then the Exchange Ratio
shall be adjusted to become $7.50 divided by the Average WSMP Closing Price. If
the Average WSMP Closing Price is less than $21.78, then the Exchange Ratio
shall be adjusted to become $7.00 divided by the Average WSMP Closing Price.
This adjustment factor is designed to assure that the market value of the WSMP
Common Stock exchanged for each share of Sagebrush Common Stock will be not less
than $7.00 and not more than $7.50 per share. On January 9, 1998, the closing
price of the WSMP common stock on The Nasdaq Stock Market was $18.50 per share.
THE ENCLOSED NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND JOINT PROXY
STATEMENT-PROSPECTUS CONTAIN IMPORTANT INFORMATION CONCERNING THE SAGEBRUSH
SPECIAL MEETING AND THE PROPOSED MERGER, INCLUDING DETAILS AS TO THE
DETERMINATION OF THE EXCHANGE RATIO. PLEASE CAREFULLY READ THESE MATERIALS AND
THOUGHTFULLY CONSIDER THE INFORMATION CONTAINED IN THEM.
Whether or not you plan to attend the Sagebrush Special Meeting, you are
urged to complete, sign, date and promptly return the enclosed proxy card to
assure that your shares of Sagebrush common stock will be voted at the Sagebrush
Special Meeting. If you attend the Sagebrush Special Meeting, then you may vote
in person, whether or not you have previously submitted a proxy.
THE BOARD OF DIRECTORS OF SAGEBRUSH HAS APPROVED THE AGREEMENT AND THE PLAN
OF MERGER AND BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF,
THE SHAREHOLDERS OF SAGEBRUSH. ACCORDINGLY, THE BOARD OF DIRECTORS OF SAGEBRUSH
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF SAGEBRUSH VOTE "FOR" APPROVAL OF THE
AGREEMENT AND THE PLAN OF MERGER.
Sincerely,
/s/ L. Dent Miller
L. Dent Miller
President, Chief Executive Officer and
Secretary
<PAGE> 3
SAGEBRUSH, INC.
3238 WEST MAIN STREET
CLAREMONT, NORTH CAROLINA 28610
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 27, 1998
---------------------
To the Shareholders of Sagebrush, Inc.:
A special meeting of shareholders (the "Sagebrush Special Meeting") of
Sagebrush, Inc., a North Carolina corporation ("Sagebrush"), will be held at the
Gateway Hotel, 909 Highway 70, S.W., in Hickory, North Carolina, at 10:00 a.m.,
local time, on January 27, 1998, to consider and act upon:
1. A proposal to approve the Agreement and Plan of Merger dated as of
November 14, 1997 among WSMP, Inc., a North Carolina corporation ("WSMP"),
Sagebrush, WSMP Acquisition, Inc., a North Carolina corporation and
wholly-owned subsidiary of WSMP ("Sub"), and Messrs. L. Dent Miller and
Charles F. Connor, Jr., (the "Agreement"), and the related Plan of Merger
(the "Plan of Merger"), pursuant to which Sub will merge with and into
Sagebrush and each share of Sagebrush common stock ("Sagebrush Common
Stock"), other than shares held by dissenting shareholders, will be
converted into the right to receive .3214 shares of WSMP common stock,
subject to adjustment in certain circumstances. See "The
Merger -- Description of the Merger; Exchange Ratio" in the accompanying
Joint Proxy Statement-Prospectus. A copy of the Agreement and the Plan of
Merger set forth therein are attached to the accompanying Joint Proxy
Statement-Prospectus as Appendix A.
2. The transaction of such other business as may properly come before
the Sagebrush Special Meeting or any adjournments or postponements thereof.
Only holders of record of Sagebrush Common Stock at the close of business
on January 7, 1998 are entitled to notice of and to vote at the Sagebrush
Special Meeting or any adjournments or postponements thereof. The affirmative
vote of the holders of a majority of the outstanding shares of Sagebrush is
required to approve the Agreement and the Plan of Merger.
L. Dent Miller
President, Chief Executive Officer and
Secretary
January 13, 1998
- --------------------------------------------------------------------------------
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY, WHETHER OR
NOT YOU PLAN TO ATTEND THE SAGEBRUSH SPECIAL MEETING. PLEASE DO NOT SEND IN ANY
CERTIFICATES FOR YOUR SHARES OF SAGEBRUSH COMMON STOCK AT THIS TIME.
THE BOARD OF DIRECTORS OF SAGEBRUSH UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE TO APPROVE THE AGREEMENT AND THE PLAN OF MERGER AT THE SAGEBRUSH SPECIAL
MEETING.
ANY SAGEBRUSH SHAREHOLDER SHALL HAVE THE RIGHT TO DISSENT FROM THE CONSUMMATION
OF THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT AND THE PLAN OF MERGER AND
RECEIVE PAYMENT OF THE FAIR VALUE OF HIS OR HER SHARES UPON COMPLIANCE WITH THE
PROCEDURES PRESCRIBED BY CHAPTER 55, ARTICLE 13, OF THE GENERAL STATUTES OF
NORTH CAROLINA. SEE "THE MERGER -- DISSENTERS' RIGHTS" AND "DISSENTERS' RIGHTS"
IN THE JOINT PROXY STATEMENT-PROSPECTUS THAT ACCOMPANIES THIS NOTICE AND THE
FULL TEXT OF CHAPTER 55, ARTICLE 13, ATTACHED THERETO AS APPENDIX C FOR A
DESCRIPTION OF THESE PROCEDURES.
- --------------------------------------------------------------------------------
<PAGE> 4
JOINT PROXY STATEMENT
<TABLE>
<S> <C>
WSMP, INC. SAGEBRUSH, INC.
SPECIAL MEETING OF SHAREHOLDERS SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 27, 1998 TO BE HELD ON JANUARY 27, 1998
</TABLE>
---------------------
WSMP, INC.
COMMON STOCK
PROSPECTUS
---------------------
This Joint Proxy Statement-Prospectus is being furnished to the holders of
shares (the "Sagebrush Shareholders") of common stock ("Sagebrush Common Stock")
of Sagebrush, Inc., a North Carolina corporation ("Sagebrush"), in connection
with a solicitation of proxies by the Sagebrush Board of Directors (the
"Sagebrush Board") for use at a Special Meeting of Sagebrush Shareholders, or at
any adjournment or postponement thereof (the "Sagebrush Special Meeting"), to be
held on January 27, 1998 at 10:00 a.m., local time, at the Gateway Hotel, 909
Highway 70, S.W., in Hickory, North Carolina. At the Sagebrush Special Meeting,
the Sagebrush Shareholders will be asked to consider and vote upon a proposal to
approve that certain Agreement and Plan of Merger dated as of November 14, 1997
(the "Agreement") among WSMP, Inc., a North Carolina corporation ("WSMP"),
Sagebrush, WSMP Acquisition, Inc., a North Carolina corporation and wholly-owned
subsidiary of WSMP ("Sub"), and Messrs. L. Dent Miller ("Miller") and Charles F.
Connor, Jr. ("Connor"), and the related Plan of Merger (the "Plan of Merger"). A
copy of the Agreement and the Plan of Merger set forth therein is attached to
this Joint Proxy Statement-Prospectus as Appendix A and is incorporated herein
by reference. See "Sagebrush Special Meeting."
This Joint Proxy Statement-Prospectus is also being furnished to the holders
of shares (the "WSMP Shareholders") of common stock of WSMP and of the
associated preferred stock purchase rights (the "Rights") issued pursuant to
that certain Rights Agreement dated as of September 2, 1997 (the "Rights
Agreement") between WSMP and the Rights Agent named therein (such stock and the
accompanying Rights being the "WSMP Common Stock") in connection with a
solicitation of proxies by the WSMP Board of Directors (the "WSMP Board") for
use at a Special Meeting of WSMP Shareholders, or at any adjournment or
postponement thereof (the "WSMP Special Meeting"), to be held on January 27,
1998 at 11:00 a.m., local time, at the Gateway Hotel, 909 Highway 70, S.W., in
Hickory, North Carolina. At the WSMP Special Meeting, the WSMP Shareholders will
be asked to consider and vote upon (1) a proposal to issue shares of WSMP Common
Stock pursuant to the Agreement and the related Plan of Merger and (2) a
proposal to amend the WSMP Articles of Incorporation to increase the number of
shares of authorized WSMP Common Stock from 10,000,000 to 100,000,000. See "WSMP
Special Meeting."
This Joint Proxy Statement-Prospectus also relates to the shares of WSMP
Common Stock offered hereby to the Sagebrush Shareholders upon consummation of
the proposed Merger.
Upon consummation (the "Effective Time") of the merger of Sub with and into
Sagebrush pursuant to the Agreement and the Plan of Merger (the "Merger"), each
share of Sagebrush Common Stock will be converted into the right to receive
.3214 (as adjusted pursuant to the Agreement, the "Exchange Ratio") of a share
(with cash in lieu of fractional shares) of WSMP Common Stock (the "Per Share
Stock Consideration"). The Exchange Ratio will be adjusted pursuant to the
Agreement to assure that the market value of the WSMP Common Stock exchanged for
each share of Sagebrush Common Stock will be not less than $7.00 and not more
than $7.50 per share. For a more complete description of the Agreement and the
Merger, see "The Merger" and "Risk Factors -- Risks Associated with the
Prospective Merger -- Adjustment of Exchange Ratio."
The last sale price of WSMP Common Stock as reported by The Nasdaq Stock
Market ("NASDAQ") on January 9, 1998 was $18.50 per share and on September 25,
1997, the last trading day preceding public announcement of the proposed Merger,
was $20.00 per share. The last sale price of Sagebrush Common Stock as reported
by NASDAQ on January 9, 1998 was $6.63 per share and on September 25, 1997 was
$5.69 per share.
THIS JOINT PROXY STATEMENT-PROSPECTUS AND FORMS OF PROXY ARE FIRST BEING
MAILED TO SHAREHOLDERS OF WSMP AND SAGEBRUSH ON OR ABOUT JANUARY 13, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
TO BE CONSIDERED IN EVALUATING THE MERGER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS JANUARY 13, 1998.
---------------------
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... v
SUMMARY..................................................... 1
General................................................... 1
The Companies............................................. 1
WSMP Special Meeting and Vote Required.................... 1
Sagebrush Special Meeting and Vote Required; Voting
Agreement of Messrs. Connor and Miller................. 2
The Merger; Exchange Ratio................................ 2
Conditions to the Merger.................................. 3
Recommendations of Boards of Directors.................... 3
Opinion of Sagebrush's Financial Advisor.................. 3
Effective Time of the Merger.............................. 3
Termination; Termination Fee; Expenses.................... 4
Waiver; Amendment......................................... 4
Certain Federal Income Tax Consequences................... 5
Interests of Certain Persons in the Merger................ 5
Treatment of Sagebrush Options............................ 5
Comparative Rights of Shareholders of WSMP and
Sagebrush.............................................. 5
Dissenters' Rights........................................ 5
Accounting Treatment...................................... 6
Restrictions on Resale by Affiliates...................... 6
Risk Factors.............................................. 6
Regulatory Approvals...................................... 6
Share Information and Market Prices....................... 6
Comparative Historical and Pro Forma Per Share Data....... 7
RISK FACTORS................................................ 9
Risks Associated with the Prospective Merger.............. 9
Risks Associated with both WSMP and Sagebrush............. 10
Risks Associated with WSMP................................ 10
Risks Associated with Sagebrush........................... 11
WSMP SPECIAL MEETING........................................ 12
General................................................... 12
Matters to be Considered.................................. 12
Solicitation of Proxies................................... 12
Record Date and Voting Rights............................. 13
Recommendation of WSMP Board.............................. 13
SAGEBRUSH SPECIAL MEETING................................... 13
General................................................... 13
Matters to be Considered.................................. 14
Solicitation of Proxies................................... 14
Record Date and Voting Rights............................. 14
Recommendation of Sagebrush Board......................... 15
PRICE RANGE OF WSMP AND SAGEBRUSH COMMON STOCK.............. 15
THE MERGER.................................................. 17
Description of the Merger; Exchange Ratio................. 17
Background of the Merger.................................. 17
Reasons of WSMP for the Merger............................ 20
Reasons of Sagebrush for the Merger....................... 22
Opinion of Sagebrush's Financial Advisor.................. 24
</TABLE>
(ii)
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Effective Time........................................ 28
Exchange of Certificates; Fractional Shares............... 28
Dissenting Shareholders................................... 29
Voting Agreement of Connor and Miller..................... 29
Effect on Sagebrush Options............................... 29
Conduct of Business Prior to the Merger and Other
Covenants.............................................. 29
Effect on Sagebrush Benefit Plans......................... 30
Conditions to the Merger.................................. 31
Termination of the Agreement; Termination Fee............. 33
Waiver; Amendment; Expenses............................... 34
Certain Federal Income Tax Consequences................... 34
Interests of Certain Persons in the Merger................ 35
Accounting Treatment...................................... 36
Regulatory Approvals...................................... 37
Restrictions on Resale by Affiliates; Registration
Rights................................................. 37
SELECTED FINANCIAL DATA..................................... 37
Selected Financial Data of WSMP, Inc. .................... 38
Selected Financial Data of Sagebrush, Inc. ............... 39
Selected Unaudited Pro Forma Combined Financial Data...... 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF WSMP......................... 41
General................................................... 41
Results of Operations..................................... 41
36 Weeks Ended November 7, 1997 Compared with 36 Weeks
Ended November 1, 1996................................. 42
Fiscal 1997 Compared to Fiscal 1996; Fiscal 1996 Compared
to Fiscal 1995......................................... 43
Liquidity and Capital Resources........................... 45
Inflation................................................. 46
Impact of Recently Issued Accounting Pronouncements....... 46
Cautionary Statement as to Forward-Looking Information.... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SAGEBRUSH.................... 48
General................................................... 48
Results of Operations..................................... 49
Thirty-Six Weeks Ended September 12, 1997 Compared to
Thirty-Six Weeks Ended September 6, 1996............... 50
Fiscal 1996 Compared to Fiscal 1995....................... 51
Fiscal 1995 Compared to Fiscal 1994....................... 52
Quarterly Results......................................... 53
Liquidity and Capital Resources........................... 53
Inflation................................................. 54
Impact of Recently Issued Accounting Pronouncements....... 54
Cautionary Statement as to Forward-Looking Information.... 55
CERTAIN INFORMATION REGARDING WSMP.......................... 55
Restaurant Franchising.................................... 55
Restaurant Operations..................................... 57
Food Processing........................................... 58
Employees................................................. 59
Working Capital........................................... 60
Marketing and Advertising................................. 60
Competition............................................... 60
</TABLE>
(iii)
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trademarks................................................ 60
Regulation................................................ 61
Properties,............................................... 61
Legal Proceedings......................................... 61
Executive Officers and Directors.......................... 62
Directors' Compensation................................... 63
Summary Compensation Table................................ 64
Option Grants in Last Fiscal Year......................... 65
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................. 65
Employment Contracts and Change in Control Agreements..... 65
Compensation Committee Interlocks and Insider
Participation.......................................... 66
Certain Relationships and Related Party Transactions...... 66
Principal Shareholders and Management Ownership........... 69
CERTAIN INFORMATION REGARDING SAGEBRUSH..................... 71
Business.................................................. 71
Properties................................................ 76
Sagebrush Principal Shareholders and Management
Ownership.............................................. 77
DESCRIPTION OF WSMP CAPITAL STOCK........................... 78
Description of WSMP Common Stock.......................... 78
Description of the Rights................................. 78
COMPARATIVE RIGHTS OF SHAREHOLDERS OF WSMP AND SAGEBRUSH.... 79
Authorized Capital Stock.................................. 79
Directors................................................. 79
Dividends and Other Distributions......................... 80
Exculpation and Indemnification........................... 80
Shareholder Vote Required for Certain Matters............. 80
Notice of Shareholder Meetings............................ 81
Shareholder Rights Plan................................... 81
Anti-Takeover Statutes.................................... 81
Amendments to Articles of Incorporation and Bylaws........ 81
DISSENTERS' RIGHTS.......................................... 81
AMENDMENT TO THE WSMP ARTICLES OF INCORPORATION............. 83
LEGAL OPINIONS.............................................. 84
EXPERTS..................................................... 84
SHAREHOLDER PROPOSALS....................................... 85
OTHER MATTERS............................................... 85
INDEX TO FINANCIAL STATEMENTS............................... F-1
Consolidated Financial Statements of WSMP................. F-2
Consolidated Financial Statements of Sagebrush............ F-25
Unaudited Pro Forma Combined Financial Statements......... F-39
APPENDIX A -- Agreement and Plan of Merger.................. A-1
APPENDIX B -- Opinion of Interstate/Johnson Lane
Corporation............................................... B-1
APPENDIX C -- Article 13 of the North Carolina Business
Corporation Act........................................... C-1
</TABLE>
---------------------
(iv)
<PAGE> 8
A REGISTRATION STATEMENT RELATING TO THE SECURITIES OFFERED BY THIS JOINT
PROXY STATEMENT-PROSPECTUS HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY WSMP OR SAGEBRUSH. THIS
JOINT PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO EXCHANGE OR
SELL, OR A SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, THE SECURITIES
OFFERED BY THIS JOINT PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT-PROSPECTUS
SPEAKS AS OF THE DATE HEREOF UNLESS OTHERWISE SPECIFICALLY INDICATED.
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT-PROSPECTUS REGARDING WSMP,
AND PRO FORMA INFORMATION, HAS BEEN FURNISHED BY WSMP, AND INFORMATION HEREIN
REGARDING SAGEBRUSH HAS BEEN FURNISHED BY SAGEBRUSH. NEITHER THE DELIVERY OF
THIS JOINT PROXY STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES
OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF WSMP OR SAGEBRUSH SINCE THE DATE
HEREOF OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
THIS JOINT PROXY STATEMENT-PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH
FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS. SEE "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF WSMP" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SAGEBRUSH."
AVAILABLE INFORMATION
WSMP has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the securities to be issued in connection with the Merger. For
further information pertaining to the securities of WSMP to which this Joint
Proxy Statement-Prospectus relates, reference is made to the Registration
Statement, including the exhibits and schedules filed as a part thereof. As
permitted by the rules and regulations of the Commission, certain information
included in the Registration Statement is omitted from this Joint Proxy
Statement-Prospectus. In addition, WSMP and Sagebrush are subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the public reference room of
the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
copies of such materials can be obtained by mail from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, at prescribed rates. The Commission maintains an Internet web site that
contains reports, proxy statements and other information regarding issuers, such
as WSMP and Sagebrush, that file electronically with the Commission. The address
of that site is http://www.sec.gov. In addition, copies of such material are
available for inspection and reproduction at the public reference facilities of
the Commission at its New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048; and at its Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Reports, proxy statements and other information concerning WSMP and Sagebrush
may also be inspected at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
(v)
<PAGE> 9
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS JOINT PROXY STATEMENT-PROSPECTUS AND IS NOT INTENDED TO BE COMPLETE.
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY STATEMENT-PROSPECTUS AND IN
THE ACCOMPANYING APPENDICES.
GENERAL
This Joint Proxy Statement-Prospectus, notice of the Sagebrush Special
Meeting to be held on January 27, 1998 and notice of the WSMP Special Meeting to
be held on January 27, 1998 and forms of proxies solicited in connection
therewith are first being mailed to the Sagebrush Shareholders and the WSMP
Shareholders on or about January 13, 1998. At the WSMP Special Meeting, holders
of shares of WSMP Common Stock will consider and vote on proposals to issue
shares of WSMP Common Stock in connection with the Merger and to amend the WSMP
Articles of Incorporation to increase the number of shares of authorized WSMP
Common Stock to 100,000,000. At the Sagebrush Special Meeting, holders of shares
of Sagebrush Common Stock will consider and vote upon a proposal to approve the
Agreement and the Plan of Merger. A copy of the Agreement and the Plan of Merger
set forth therein is attached hereto as Appendix A and is incorporated herein by
this reference. See "WSMP Special Meeting" and "Sagebrush Special Meeting."
THE COMPANIES
WSMP. WSMP is a food processing and restaurant company that was organized
in 1970 under the laws of the State of North Carolina. The food processing
business is conducted in two divisions of WSMP, consisting of a prepared foods
division and a ham curing division. The restaurant business is generally
conducted through subsidiaries and consists of 27 company-owned and 47
franchised units at the date of this Joint Proxy Statement-Prospectus. The
principal executive offices of WSMP are located at 1 WSMP Drive, Claremont,
North Carolina 28610, and its telephone number is (704) 459-7626. All references
herein to WSMP refer to WSMP, Inc. and its subsidiaries, unless the context
otherwise requires.
For additional information regarding WSMP, see "Certain Information
Regarding WSMP."
Sagebrush. Sagebrush owns and operates 33 "Sagebrush Steakhouse & Saloon"
restaurants in North Carolina, South Carolina, Tennessee and Virginia. The
Sagebrush restaurant concept is to serve high-quality, moderately-priced meals
in a casual, family-oriented atmosphere suggestive of a Texas roadhouse. The
principal executive offices of Sagebrush are located at 3238 West Main Street,
Claremont, North Carolina 28610, and its telephone number is (704) 459-0821. All
references herein to Sagebrush refer to Sagebrush, Inc., a North Carolina
corporation, and its subsidiaries, unless the context otherwise requires. For
additional information about Sagebrush, see "Certain Information Regarding
Sagebrush"
Sub. Sub, a North Carolina corporation, is a wholly-owned subsidiary of
WSMP and is not engaged in any significant business activity other than its
participation in the Merger.
WSMP SPECIAL MEETING AND VOTE REQUIRED
The WSMP Special Meeting will be held on January 27, 1998 at 11:00 a.m.,
local time, at the Gateway Hotel, 909 Highway 70, S.W., Hickory, North Carolina.
At that time, the WSMP Shareholders will be asked to consider and vote upon (i)
the issuance of shares of WSMP Common Stock in connection with the Merger (the
"Issuance") and (ii) an amendment to the WSMP Articles of Incorporation to
increase the number of shares of authorized WSMP Common Stock to 100,000,000
(the "Articles Amendment" and, together with the Issuance, the "WSMP Matters").
The record holders of WSMP Common Stock at the close of business on January 7,
1998 (the "WSMP Record Date") are entitled to notice of and to vote at the WSMP
Special Meeting. On the WSMP Record Date, there were approximately 838 holders
of record of WSMP Common Stock and 3,633,914 shares of WSMP Common Stock
outstanding.
1
<PAGE> 10
Each share of WSMP Common Stock entitles its holder to one vote. The
presence in person or by proxy of a majority of the outstanding shares of WSMP
Common Stock will constitute a quorum for the conduct of business at the WSMP
Special Meeting. The affirmative vote of a majority of the votes cast at the
WSMP Special Meeting is required to approve each of the WSMP Matters. As of the
WSMP Record Date, directors and executive officers of WSMP beneficially owned
36,069 shares of WSMP Common Stock, or 1.0% of the shares entitled to vote at
the WSMP Special Meeting. It is currently expected that each such director and
executive officer of WSMP will vote the shares of WSMP Common Stock owned by him
or her for approval of the WSMP Matters. In addition, as of the WSMP Record Date
the directors and executive officers of Sagebrush beneficially owned 100,224
shares of WSMP Common Stock, or 2.8% of the shares entitled to vote at the WSMP
Special Meeting. Of this amount, 100,000 shares of WSMP Common Stock were
beneficially owned by Connor. It is currently expected that each such director
and executive officer of Sagebrush will vote the shares of WSMP Common Stock
owned by him or her for approval of the WSMP Matters. See "WSMP Special
Meeting."
SAGEBRUSH SPECIAL MEETING AND VOTE REQUIRED; VOTING AGREEMENT OF MESSRS. CONNOR
AND MILLER
The Sagebrush Special Meeting will be held on January 27, 1998 at 10:00
a.m., local time, at the Gateway Hotel, 909 Highway 70, S.W., Hickory, North
Carolina, at which time the Sagebrush Shareholders will consider and vote upon a
proposal to approve the Agreement and the Plan of Merger (the "Sagebrush
Matter"). The record holders of Sagebrush Common Stock at the close of business
on January 7, 1998 (the "Sagebrush Record Date") are entitled to notice of and
to vote at the Sagebrush Special Meeting. On the Sagebrush Record Date, there
were approximately 66 holders of record of Sagebrush Common Stock and 5,925,000
shares of Sagebrush Common Stock outstanding.
Each share of Sagebrush Common Stock entitles its holder to one vote. The
affirmative vote of the holders of a majority of the outstanding shares of
Sagebrush Common Stock is required to approve the Agreement and the Plan of
Merger. As of the Sagebrush Record Date, directors and executive officers of
Sagebrush beneficially owned approximately 3,327,981 shares of Sagebrush Common
Stock, or 56.2% of the Sagebrush Common Stock entitled to vote at the Sagebrush
Special Meeting, all of which are expected to be voted in favor of the Agreement
and the Plan of Merger. In the Agreement, Connor and Miller, who together own or
control 3,065,757 shares of Sagebrush Common Stock (51.7% of the shares entitled
to vote at the Sagebrush Special Meeting), agreed to vote such shares in favor
of the Agreement and the Plan of Merger. In addition, as of the Sagebrush Record
Date, directors and executive officers of WSMP beneficially owned 323,383 shares
of Sagebrush Common Stock, or 5.5% of the shares entitled to vote at the
Sagebrush Special Meeting, all of which are expected to be voted in favor of the
Agreement and the Plan of Merger. See "Sagebrush Special Meeting."
THE MERGER; EXCHANGE RATIO
In the Merger, subject to the terms of the Agreement, Sub will merge with
and into Sagebrush, which will be the surviving entity (as such, the "Surviving
Subsidiary"), and each outstanding share of Sagebrush Common Stock, other than
shares held by dissenting shareholders, will be converted into the right to
receive 0.3214 of a share of WSMP Common Stock, subject to adjustment as
described below, with cash to be paid in lieu of any resulting fractional shares
of WSMP Common Stock. Each share of WSMP Common Stock issued in the Merger will
be issued together with one Right, and all references herein to shares of WSMP
Common Stock issuable as merger consideration shall be deemed to include the
associated Rights. Such ratio of 0.3214 share of WSMP Common Stock per 1.0000
share of Sagebrush Common Stock, as the same may be adjusted, is referred to
herein as the "Exchange Ratio."
If the Average WSMP Closing Price (as defined below) is greater than
$23.34, then the Exchange Ratio shall be adjusted to become $7.50 divided by the
Average WSMP Closing Price. If the Average WSMP Closing Price is less than
$21.78, then the Exchange Ratio shall be adjusted to become $7.00 divided by the
Average WSMP Closing Price. The adjustment factor is designed to assure that the
market value of the WSMP Common Stock exchanged for each share of Sagebrush
Common Stock will be not less than $7.00
2
<PAGE> 11
and not more than $7.50 per share. See "Risk Factors -- Risks Associated with
the Prospective Merger -- Adjustment of Exchange Ratio."
The term "Average WSMP Closing Price" means the simple average of the last
sale prices per share of WSMP Common Stock on NASDAQ (as reported by NASDAQ) on
the ten consecutive Trading Days next preceding the date on which the
shareholders of Sagebrush approve the Merger. A "Trading Day" is any day on
which the WSMP Common Stock is actually sold on NASDAQ (as reported by NASDAQ).
No fractional shares of WSMP Common Stock will be issued in the Merger.
Holders of Sagebrush Common Stock otherwise entitled to a fractional share will
be paid an amount in cash, without interest, determined by multiplying the
fraction by the fair market value of the WSMP Common Stock determined by
reference to the last sale price of the WSMP Common Stock for the Trading Day
concluded most immediately prior to the effectiveness of the Merger. See "The
Merger -- Description of the Merger."
Each share of WSMP Common Stock outstanding prior to the Merger will
continue to be outstanding after the Effective Time. Each share of Sub common
stock will be converted, upon the Merger, into one share of Sagebrush Common
Stock.
CONDITIONS TO THE MERGER
The Merger is subject to the satisfaction of certain conditions, including,
among others, approval of the Agreement and the Plan of Merger by the Sagebrush
Shareholders, approval of the Issuance by the WSMP Shareholders, receipts of
consents under certain contracts and agreements of WSMP and Sagebrush, receipt
of assurances regarding the accounting and tax consequences of the Merger and
other customary conditions to closing. See "The Merger -- Conditions to the
Merger."
RECOMMENDATIONS OF BOARDS OF DIRECTORS
The Board of Directors of Sagebrush (the "Sagebrush Board") and the Board
of Directors of WSMP (the "WSMP Board") have unanimously approved the Agreement
and the transactions contemplated thereby. The Sagebrush Board believes that the
merger is in the best interests of Sagebrush and its shareholders and recommends
that such shareholders vote "FOR" the matter to be voted upon by them in
connection with the Merger. The WSMP Board believes that the Merger is in the
best interests of WSMP and its shareholders and recommends that such
shareholders vote "FOR" the matters to be voted upon by them in connection with
the Merger. For a discussion of the factors considered by the Sagebrush Board
and the WSMP Board in reaching their respective conclusions, see "The
Merger -- Background of the Merger," "-- Reasons of WSMP for the Merger" and
"--Reasons of Sagebrush for the Merger."
OPINION OF SAGEBRUSH'S FINANCIAL ADVISOR
Interstate/Johnson Lane Corporation ("I/JL"), which has served as financial
advisor to Sagebrush in connection with the Merger, has rendered its opinion to
the Sagebrush Board that the consideration proposed to be paid by WSMP to the
holders of Sagebrush Common Stock in the Merger is fair to such holders from a
financial point of view. Such opinion was delivered to the Sagebrush Board at
its meeting of November 14, 1997 and again on the date of this Joint Proxy
Statement-Prospectus. A copy of the opinion delivered by I/JL on the date hereof
is attached hereto as Appendix B and should be read in its entirety with respect
to assumptions made, matters considered and limitations of the review undertaken
by I/JL. See "The Merger -- Opinion of Sagebrush's Financial Advisor."
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction or waiver of the conditions to
the obligations of WSMP, Sub and Sagebrush to consummate the Merger as set forth
in the Agreement, they will effect the Merger by causing Articles of Merger to
be filed with the Secretary of State of the State of North Carolina. The
Effective Time shall occur at the time of such filing or at such later time as
may be specified in such Articles of Merger with the prior written consent of
WSMP, Sub and Sagebrush. See "The Merger -- The Effective Time."
3
<PAGE> 12
TERMINATION; TERMINATION FEE; EXPENSES
The Agreement may be terminated and the Merger abandoned at any time prior
to the Effective Time (i) by written consent of WSMP and Sagebrush, (ii) by
either WSMP or Sagebrush in the event of a material misrepresentation, material
breach of warranty or material breach of any covenant or other agreement by the
other party (which breach has not been cured, in the case of a warranty,
covenant or other agreement, within 30 days following receipt of written notice
of breach), (iii) by either WSMP or Sagebrush in the event that the Merger shall
not have been consummated by 11:59 p.m., Eastern time, on April 30, 1998 (or, if
earlier, by such time on the fifth day following the date on which the Sagebrush
Shareholders shall have approved the Merger), provided that failure to
consummate the Merger by such time is not caused by a material breach of the
Agreement by the terminating party, (iv) by either WSMP or Sagebrush in the
event that any of the conditions precedent to the obligations of such party to
consummate the Merger cannot be satisfied or fulfilled by 11:59 p.m., Eastern
time, on April 30, 1998, provided that the terminating party is not then guilty
of a material misrepresentation or of a material, uncured breach of warranty,
covenant or agreement, (v) by WSMP in the event that the Agreement and the Plan
of Merger are not approved by the required vote at the Sagebrush Special Meeting
or by Sagebrush in the event that the Issuance is not approved by the required
vote at the WSMP Special Meeting, (vi) by WSMP or Sagebrush if the Sagebrush
Board, after having determined in good faith, after consultation with counsel,
that the taking of action or the failure to take action (or to withdraw or
modify a recommendation) is necessary or appropriate in execution of the
directors' duties under applicable law (a "Board Determination"), fails to make
or withdraws, modifies or changes its recommendation to the Sagebrush
Shareholders that they approve the Agreement and the Merger, or (vii) by
Sagebrush or WSMP if the WSMP Board, after having made a Board Determination,
fails to make or withdraws, modifies or changes its recommendation to the WSMP
Shareholders that they approve the Agreement and the Plan of Merger. Sagebrush
and WSMP have agreed that, in light of the provision of the Agreement adjusting
the Exchange Ratio, no adjustment of the Exchange Ratio will constitute a basis
for a Board Determination.
In the event of the termination of the Agreement and the abandonment of the
Merger pursuant to clause (vi) above, not later than ten days following delivery
of notice of such termination and abandonment, Sagebrush will pay to WSMP, as
liquidated damages (and not as a penalty), $1,500,000 plus the aggregate amount
of WSMP's documented legal, investment banking, accounting and other
out-of-pocket expenses incurred in pursuit of the Merger. In the event of
termination of the Agreement and abandonment of the Merger pursuant to clause
(vii) above, not later than ten days following delivery of notice of such
termination and abandonment, WSMP will pay to Sagebrush, as liquidated damages
(and not as a penalty), $1,500,000 plus the aggregate amount of Sagebrush's
documented legal, investment banking, accounting and other out-of-pocket
expenses incurred in pursuit of the Merger. Termination will not relieve any
party from liability for any breach of the Agreement, except insofar as the
liquidated damages provisions shall relieve the parties from liability for
termination and abandonment pursuant solely to clauses (vi) and (vii) above.
Each party to the Agreement has agreed to bear all expenses incurred by it
in connection with the Agreement and the transactions contemplated thereby.
See "The Merger -- Termination of the Agreement."
WAIVER; AMENDMENT
WSMP and Sub, on the one hand, or Sagebrush and Messrs. Miller and Conner,
on the other hand, may at any time by a signed writing (1) extend the time for
performance of any of the obligations or other acts of the other, (2) waive any
inaccuracies in the representations and warranties contained in the Agreement or
in any document delivered thereto or (3) waive compliance with any of the
agreements, covenants or conditions contained therein. The Agreement may be
amended by an instrument in writing signed on behalf of the parties thereto,
provided that no amendment executed after the Sagebrush Special Meeting shall
reduce either the number of shares of WSMP Common Stock into which each share of
Sagebrush Common Stock shall be converted in the Merger or the payment terms for
fractional interests. See "The Merger -- Waiver; Amendment; Expenses."
4
<PAGE> 13
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization under Section
368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). Kennedy
Covington Lobdell & Hickman, L.L.P. has delivered an opinion, based upon certain
customary assumptions and representations, to the effect that, for Federal
income tax purposes, no gain or loss will be recognized by the Sagebrush
Shareholders as a result of the Merger to the extent that they receive WSMP
Common Stock solely in exchange for their Sagebrush Common Stock. With respect
to Sagebrush Common Stock exchanged for cash (whether pursuant to the exchange
of fractional shares or as a result of the exercise of dissenters' rights), the
Merger will be treated as a sale, and normal recognition and gain and loss
treatment will apply. See "The Merger -- Certain Federal Income Tax
Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Charles F. Connor, Jr., Chairman of the Board and a director of Sagebrush,
will enter into a two-year consulting agreement with WSMP, and L. Dent Miller,
President, Chief Executive Officer and a director of Sagebrush, will enter into
a two-year employment agreement with WSMP. The Agreement obligates Sagebrush, as
the surviving corporation, to indemnify the directors and officers of Sagebrush
and its predecessors from and after the Merger against certain liabilities
arising prior to the Merger. From and after the Effective Time, WSMP will
guarantee the due and timely payment and performance of these indemnification
obligations. See "The Merger -- Interests of Certain Persons in the Merger."
TREATMENT OF SAGEBRUSH OPTIONS
At the Effective Time, each option (a "Sagebrush Option") to purchase
Sagebrush Common Stock granted by Sagebrush under the 1995 Stock Option Plan of
Sagebrush (the "Sagebrush Option Plan") then outstanding, whether or not then
exercisable, shall be converted into and shall become a right to purchase WSMP
Common Stock, and WSMP shall assume each Sagebrush Option in accordance with the
terms of the Sagebrush Option Plan and the terms of the agreement by which the
Sagebrush Option is evidenced, except that: (i) WSMP and the Compensation
Committee of the WSMP Board thereafter shall administer the Sagebrush Option
Plan and the Sagebrush Options; (ii) each Sagebrush Option assumed by WSMP may
be exercised solely for shares of WSMP Common Stock; (iii) the number of shares
of WSMP Common Stock subject to each such Sagebrush Option shall be the number
of whole shares of WSMP Common Stock (omitting any fractional share) determined
by multiplying the number of shares of Sagebrush Common Stock subject to such
Sagebrush Option immediately prior to the Effective Time (without regard to any
limitations imposed by vesting schedules) by the Exchange Ratio, and (iv) the
per share exercise price under each such Sagebrush Option shall be adjusted by
dividing such exercise price by the Exchange Ratio and rounding up to the
nearest cent. See "The Merger -- Description of the Merger."
COMPARATIVE RIGHTS OF SHAREHOLDERS OF WSMP AND SAGEBRUSH
At the Effective Time, holders of Sagebrush Common Stock will become
holders of WSMP Common Stock. WSMP and Sagebrush are both organized under the
laws of North Carolina; however, certain differences in the rights of their
shareholders arise from differing provisions of their respective articles of
incorporation and bylaws. See "Comparative Rights of Shareholders of WSMP and
Sagebrush."
DISSENTERS' RIGHTS
Any Sagebrush Shareholder who does not vote in favor of the proposal to
approve the Agreement and the Merger and who complies strictly with the
applicable provisions of Article 13 of the North Carolina Business Corporation
Act, as amended (the "NCBCA"), may have the right to dissent and be paid cash
for the "fair value" for such holder's shares of Sagebrush Common Stock. The
applicable provisions of Article 13 of the NCBCA are attached to this Joint
Proxy Statement-Prospectus as Appendix C. WSMP Shareholders do not have
dissenters' rights with respect to the Merger or the Issuance under the NCBCA.
To perfect dissenters' rights of appraisal, a Sagebrush Shareholder (i) must
give Sagebrush written notice of such holder's intent to
5
<PAGE> 14
demand payment for such holder's shares if the Merger is effectuated, which
notice must be actually received by Sagebrush before the vote is taken at the
Sagebrush Special Meeting, and (ii) must not vote any shares of Sagebrush Common
Stock in favor of the Merger. Shares of Sagebrush Common Stock held by
dissenting holders will not be converted into shares of WSMP Common Stock in the
Merger and after the Effective Time will represent only the right to receive
such consideration as is determined to be due such dissenting holders pursuant
to the NCBCA. Sagebrush Common Stock outstanding immediately prior to the
Effective Time and held by a shareholder who withdraws such holder's demand for
dissenters' rights or fails to perfect such rights will be deemed to be
converted at the Effective Time into the right to receive shares of WSMP Common
Stock, without interest. See "Dissenters' Rights" and Appendix C hereto.
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a "pooling of
interests" for accounting and financial reporting purposes. See "The
Merger -- Accounting Treatment."
RESTRICTIONS ON RESALE BY AFFILIATES
The shares of WSMP Common Stock to be issued to Sagebrush Shareholders in
the Merger have been registered under the Securities Act. Such shares may be
traded freely and without restriction by those shareholders not deemed to be
"affiliates" of Sagebrush as that term is defined under the Securities Act. Any
subsequent transfer of such shares, however, by any person who is an affiliate
of Sagebrush at the time the Merger is submitted for vote of the Sagebrush
Shareholders will be subject to certain restrictions on resale. Such
restrictions are expected to apply to Miller and Connor and to the other
incumbent directors and executive officers of Sagebrush. WSMP has agreed to
register the shares of WSMP Common Stock received by those affiliates of
Sagebrush who acquire in the Merger beneficial ownership of a number of shares
of WSMP Common Stock in excess of one percent of the total number of shares of
WSMP Common Stock outstanding after giving effect to the Merger to permit the
public resale of such shares by such person and such person's permitted
transferees. In connection with the registration of such shares, WSMP has
agreed, within 30 days after the Effective Time, to prepare and file with the
Commission, and thereafter use its reasonable best efforts to be declared
effective, a registration statement with respect to such shares. See "The
Merger -- Restrictions on Resale by Affiliates; Registration Rights."
RISK FACTORS
An investment in WSMP or Sagebrush, and the Merger itself, are subject to a
variety of risk factors. See "Risk Factors."
REGULATORY APPROVALS
No federal or state regulatory requirements must be complied with and no
such regulatory approvals must be obtained as a condition to consummation of the
Merger. See "The Merger -- Regulatory Approvals."
SHARE INFORMATION AND MARKET PRICES
The WSMP Common Stock and the Sagebrush Common Stock are traded on NASDAQ
under the symbols "WSMP" and "SAGE," respectively. As of the WSMP Record Date,
there were 3,633,914 shares of WSMP Common Stock outstanding, held by
approximately 838 holders of record. As of the Sagebrush Record Date, there were
5,925,000 shares of Sagebrush Common Stock outstanding, held by approximately 66
holders of record.
6
<PAGE> 15
The following table sets forth the last sale price reported by NASDAQ for
shares of WSMP Common Stock and Sagebrush Common Stock on September 25, 1997,
the last trading day preceding public announcement of the proposed Merger, and
on January 9, 1998. The Sagebrush Common Stock Equivalent represents the last
sale price of a share of WSMP Common Stock on the applicable date multiplied by
the assumed Exchange Ratio of .3214.
<TABLE>
<CAPTION>
SAGEBRUSH
WSMP SAGEBRUSH COMMON STOCK
COMMON STOCK COMMON STOCK EQUIVALENT
------------ ------------ ------------
<S> <C> <C> <C>
September 25, 1997.................................... $20.00 $5.69 $6.43
January 9, 1998....................................... $18.50 $6.63 $5.95
</TABLE>
The Exchange Ratio is subject to an adjustment designed to assure that the
market value of the WSMP Common Stock exchanged for each share of Sagebrush
Common Stock will be not less than $7.00 and not more than $7.50 per share. See
"The Merger -- Description of the Merger; Exchange Ratio" and "Risk
Factors -- Risks Associated with the Prospective Merger -- Adjustment of
Exchange Ratio." For additional information regarding the market prices of the
WSMP Common Stock and the Sagebrush Common Stock, see "Price Range of WSMP and
Sagebrush Common Stock."
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth selected comparative per share data for each
of WSMP and Sagebrush on an historical basis and selected unaudited pro forma
comparative per share data reflecting the consummation of the Merger as if it
had occurred as of February 26, 1994. The Merger is accounted for in the
accompanying pro forma per share data using the pooling-of-interests accounting
method.
WSMP and Sagebrush expect that the combined company will achieve benefits
from the Merger, including operating cost savings and revenue enhancements. The
unaudited pro forma per share data do not reflect, however, any direct costs,
potential savings or revenue enhancements that are expected to result from the
consolidation of operations of WSMP and Sagebrush and therefore do not purport
to be indicative of the results of future operations.
The comparative per share data presented herein are based upon or derived
from, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of WSMP and the historical
consolidated financial statements and the related notes thereto of Sagebrush.
The results of WSMP for the 36 weeks ended November 7, 1997 and November 1, 1996
and of Sagebrush for the 36 weeks ended September 12, 1997 and September 6, 1996
are not necessarily indicative of results expected for the entire fiscal year.
All adjustments, consisting of only normal recurring adjustments, for a fair
statement of results of interim periods have been included.
<TABLE>
<CAPTION>
WSMP
----------------------------------------------------------------------
AS OF AND FOR THE
AS OF AND FOR THE FISCAL YEAR ENDED 36 WEEKS ENDED
------------------------------------------ -------------------------
FEBRUARY 24, FEBRUARY 23, FEBRUARY 28, NOVEMBER 1, NOVEMBER 7,
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations per common share(1):
Historical.......................... $ .38 $ (.55) $ .36 $ .14 $ .40
Pro forma combined(2)............... -- .12 .56 -- .60
Cash dividends per common share....... -- -- -- -- --
Book value per common share:
Historical(5)....................... $6.63 $ 5.96 $6.27 $6.11 $7.08
Pro forma combined(2)(5)............ -- -- 6.49 -- 7.13
</TABLE>
7
<PAGE> 16
<TABLE>
<CAPTION>
SAGEBRUSH
------------------------------------------------------------------------
AS OF AND FOR THE
AS OF AND FOR THE FISCAL YEAR ENDED 36 WEEKS ENDED
---------------------------------------- -----------------------------
DECEMBER 30, DECEMBER 29, JANUARY 3, SEPTEMBER 6, SEPTEMBER 12,
1994 1995 1997 1996 1997
------------ ------------ ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income from continuing operations
per common share(1):
Historical(4)..................... $ -- $ -- $ .39 $ .28 $ .32
Pro forma equivalent(3)........... -- .04 .18 -- .19
Cash dividends per common share..... -- -- -- -- --
Book value per common share:
Historical(4)(5).................. $ -- $ -- $2.19 $2.08 $2.32
Pro forma equivalent(3)........... -- -- 2.09 -- 2.29
</TABLE>
- ---------------
(1) WSMP and Sagebrush anticipate that the combined company will incur
Merger-related expenses totaling approximately $1.25 million. Such expenses
include only financial advisory fees, legal and accounting expenses and
other miscellaneous transaction costs; they do not include any costs
relating to possible restaurant conversions or closures or any other costs
that may arise in connection with the Merger. These Merger-related expenses
are expected to be charged to the operations of WSMP and Sagebrush as
incurred. The effects of these costs have not been reflected in the
historical or pro forma income per share from continuing operations for
either WSMP or Sagebrush.
(2) Pro forma per share amounts for WSMP have been calculated assuming that the
Merger occurred at February 26, 1994 and had been accounted for using the
pooling of interests method. See "Unaudited Pro Forma Combined Financial
Statements" elsewhere in this Joint Proxy Statement-Prospectus.
(3) The Sagebrush equivalent pro forma per share amounts are calculated by
multiplying the WSMP pro forma combined per share amounts by the assumed
Exchange Ratio of .3214 share of WSMP Common Stock for each share of
Sagebrush Common Stock. The Exchange Ratio is subject to adjustment in the
event that the Average WSMP Closing Price is greater than $23.34 or less
than $21.78. See "The Merger -- Description of the Merger; Exchange Ratio."
(4) Sagebrush consummated a reorganization in conjunction with an initial public
offering in January 1996. Prior to such reorganization and offering, the
Company's business was conducted by a group of related corporations
affiliated by substantially common management and control. Most of these
corporations had elected to be treated as S Corporations for federal and
state income tax purposes. In connection with the Sagebrush initial public
offering, these corporations became wholly-owned subsidiaries of, or
transferred all of their assets to, Sagebrush. As such, historical earnings
and book value per share have not been shown for fiscal years prior to the
consummation of the initial public offering.
(5) Historical book value per share for both WSMP and Sagebrush is computed by
dividing shareholders' equity by the number of shares of common stock
outstanding at the end of each period. Pro forma combined book value per
share for WSMP is computed by dividing pro forma shareholders' equity,
including the effect of pro forma adjustments, by the pro forma number of
shares of common stock which would have been outstanding had the Merger been
consummated as of February 26, 1994.
8
<PAGE> 17
RISK FACTORS
The following risk factors should be carefully considered by WSMP
Shareholders in deciding whether to approve the WSMP Matters and by Sagebrush
Shareholders in deciding whether to approve the Agreement and Plan of Merger.
RISKS ASSOCIATED WITH THE PROSPECTIVE MERGER
Synergies May Not Materialize. In determining that the Merger is in the
best interest of its shareholders, the WSMP Board considered revenue
enhancements, cost savings, operating efficiencies and other synergies that
might result from the integration of the WSMP and Sagebrush businesses. There
can be no assurance, however, that such benefits will be accomplished
successfully or as rapidly as desired. To that extent, WSMP's results of
operations will not benefit from the Merger.
Adjustment of Exchange Ratio. The Exchange Ratio of .3214 share of WSMP
Common Stock for each outstanding share of Sagebrush Common Stock is subject to
increase or decrease based on changes in the market price of WSMP Common Stock.
The adjustment is designed to assure that the market value of the WSMP Common
Stock exchanged for each share of Sagebrush Common Stock will be between $7.00
and $7.50 per share. The market price of WSMP Common Stock at the Effective Time
may vary from its market price as of September 25, 1997, the last trading day
prior to public announcement of the execution of the Agreement, and its prices
as of the date of this Joint Proxy Statement-Prospectus and the date on which
the WSMP Special Meeting and Sagebrush Special Meeting are held. To the extent
that the Average WSMP Closing Price is less than $21.78, WSMP will be required
to issue a greater number of shares of WSMP Common Stock in the Merger to
Sagebrush Shareholders. This increase would, among other things, result in lower
earnings per share for WSMP upon consummation of the Merger. To the extent that
the Average WSMP Closing Price is greater than $23.34, WSMP will be required to
issue a fewer number of shares of WSMP Common Stock in the Merger to Sagebrush
Shareholders. This decrease would, among other things, result in the former
Sagebrush Shareholders owning a lesser proportion of the combined company. For
example, if the Average WSMP Closing Price were $23.34, then the Exchange Ratio
would be .3214 and the Sagebrush Shareholders would be entitled to receive up to
1,904,295 shares of WSMP Common Stock. If the Average WSMP Closing Price were
$15.00, then the Exchange Ratio would be .4667 and the Sagebrush Shareholders
would be entitled to receive up to 2,937,596 shares of WSMP Common Stock. If the
Average WSMP Closing Price were $30.00, then the Exchange Ratio would be .2500
and the Sagebrush Shareholders would be entitled to receive up to 1,481,250
shares of WSMP Common Stock. On January 9, 1998, the closing sale price of the
WSMP Common Stock was $18.50 per share. Neither WSMP nor Sagebrush can terminate
the Agreement as a result of having made a Board Determination because of any
adjustment of the Exchange Ratio.
Stock Price Volatility. Quarterly financial results of WSMP or of other
food service or food production companies, changes in general conditions in the
economy, in the food service or food production industry or the capital markets
could cause, in any such case, the market price of the WSMP Common Stock to
fluctuate significantly. In addition, many stocks traded on NASDAQ have recently
experienced extreme price and volume fluctuations. Such broad market
fluctuations also may adversely affect the price of the WSMP Common Stock, which
has experienced significant appreciation in recent months. See "Price Range of
WSMP and Sagebrush Common Stock."
Shares Eligible for Future Sale. Immediately following the Merger, Connor
and Miller will beneficially own approximately 19% of the outstanding WSMP
Common Stock, assuming an Exchange Ratio of .3214 and based upon their ownership
of shares of WSMP Common Stock and Sagebrush Common Stock on the WSMP Record
Date and the Sagebrush Record Date, respectively. Connor and Miller may not sell
the WSMP Common Stock issued to them in the Merger except pursuant to an
effective registration statement under the Securities Act covering such sale or
in compliance with Rule 145 promulgated under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
WSMP is obligated under the Agreement, for a specified period and subject to
certain limitations and qualifications, to effect the registration under the
Securities Act of the sale of the WSMP Common Stock issued to Connor, Miller and
certain other affiliates of Sagebrush in the Merger. See "The
Merger -- Restrictions on Resale by Affiliates." No prediction can be made as to
the effect, if any, that market sales of WSMP Common Stock by
9
<PAGE> 18
Miller and Connor or other shareholders pursuant to such registration rights, or
the availability of such shares for such future sales, will have on the market
price of WSMP Common Stock prevailing from time to time. Sales of substantial
amounts of WSMP Common Stock, or the perception that such sales could occur,
could adversely affect prevailing market prices for WSMP Common Stock and could
impair WSMP's future ability to raise capital through an offering of its equity
securities.
RISKS ASSOCIATED WITH BOTH WSMP AND SAGEBRUSH
Restaurant Industry Competition. The restaurant industry is intensely
competitive with respect to concept, price, service, location and food quality.
There are many well-established competitors with substantially greater financial
and other resources than WSMP and Sagebrush. Such competitors may be better
established in or decide to enter the markets where WSMP's and Sagebrush's
restaurants are or may be located. The restaurant business is often affected by
changes in consumer tastes, national, regional or local economic conditions,
demographic trends, traffic patterns and the type, number and location of
competing restaurants. WSMP's and Sagebrush's revenues are derived primarily
from the sale of ham and beef, and, therefore, a change in consumer preferences
for, or adverse publicity associated with, ham or beef could have adverse
effects on their sales and profitability. See "Certain Information Regarding
WSMP" and "Certain Information Regarding Sagebrush."
Adverse Changes in Food Costs; Availability of Supplies. The profitability
of each of WSMP and Sagebrush is dependent on its ability to anticipate and
react to changes in food prices in general, and, in particular, in the case of
Sagebrush, to changes in beef prices, and, in the case of WSMP, to changes in
ham prices. While management of each company has historically been able to
anticipate and react to changing prices through their purchasing practices and
menu price adjustments so as to avoid any material adverse effect on
profitability, there can be no assurance that they will be able to do so in the
future. There can be no assurance that fluctuations in the cost of beef or the
price of other food supplies will not adversely affect results of operations of
the combined companies. In addition, both WSMP and Sagebrush are dependent upon
regular deliveries of food supplies from particular suppliers. Any interruptions
or stoppages in such deliveries could adversely affect them until arrangements
with alternate suppliers were made. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Sagebrush," "Certain
Information Regarding WSMP" and "Certain Information Regarding
Sagebrush -- Business -- Restaurant Operations."
Government Regulation of Food Service Business. Food service businesses
are subject to extensive state and local government regulations, including those
relating to the sale of food and alcoholic beverages. The loss, lapse or
suspension of a restaurant's food or liquor license could have adverse effects.
In addition, restaurant operating costs are affected by increases in costs of
providing health care benefits, the minimum hourly wage, unemployment tax rates,
sales taxes and other similar matters over which WSMP and Sagebrush have no
control. See "Certain Information Regarding WSMP -- Regulation" and "Certain
Information Regarding Sagebrush -- Governmental Regulation and Potential
Liability."
RISKS ASSOCIATED WITH WSMP
Food Production Growth Strategy and Customer Base. WSMP's ability to
expand revenues from food production, including home meal replacement, will
depend upon its ability to negotiate requirements contracts with bulk purchasers
and resellers, its ability to hire and train skilled personnel, market
acceptance and other factors, some of which are beyond its control. There can be
no assurance that WSMP will be able to expand such revenues or that such
operations can be conducted profitably or as profitably as WSMP's restaurant
businesses. In addition, a significant portion of WSMP's food product sales are
concentrated among very few customers. While management believes that such
customers ultimately could be replaced if they were lost, such a loss would
nevertheless slow sales growth in the short run. WSMP's revenues from such
operations also could decline if and when its customers' sales went into
decline, even if WSMP's customer relationships remained strong. See "Certain
Information Regarding WSMP -- Food Processing."
Food Production Industry Competition. The food production business is
highly competitive and is often affected by changes in tastes and eating habits
of the public, economic conditions affecting spending habits, population and
traffic patterns. In its production of retail and institutional ham products,
WSMP faces strong
10
<PAGE> 19
price competition from a variety of large meat processing concerns and smaller
local and regional operations. In sales of biscuit and yeast roll products, WSMP
competes with a number of large bakeries in various parts of the country, as
well as national frozen meal manufacturers, with competition strongest for sales
to institutional food vendors. See "Certain Information Regarding
WSMP -- Competition."
Government Regulation. WSMP and its franchisees are subject to laws
governing relationships with employees, including minimum wage requirements,
overtime, working conditions and citizenship requirements. WSMP also is subject
to federal regulation and state laws governing the offer and sale of franchises.
Many state laws impose substantive requirements on franchise agreements,
including limitations on non-competition provisions and on termination or
non-renewal of franchises. Some states require that certain materials be
registered before franchises can be offered or sold therein. Bills also have
been introduced in Congress that would provide for federal regulation of
substantive aspects of the franchisor-franchisee relationship. Such legislation
could limit, among other things, the duration and scope of non-competition
provisions, the ability of the franchisor to terminate or refuse to renew the
franchise and the ability of the franchisor to designate sources of supply. The
failure to obtain or retain approvals to sell franchises could adversely affect
the Company. See "Certain Information Regarding WSMP -- Regulation."
"Year 2000" Issues. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. "Year 2000" issues affect virtually all companies and
organizations, including WSMP. WSMP has engaged consultants to study aspects of
its information systems and to make recommendations with a view to upgrading and
improving such systems. WSMP management expects to identify and resolve WSMP's
specific "Year 2000" issues as part of this study and the implementation of its
consultants' recommendations.
RISKS ASSOCIATED WITH SAGEBRUSH
Small Number of Sagebrush Restaurants; Limited Geographical
Area. Sagebrush's 33 restaurants are located in western North Carolina (17),
eastern Tennessee (9), northwestern South Carolina (4) and Virginia (3). The
results achieved to date by Sagebrush's relatively small restaurant base may not
be indicative of the results that would be achieved by a larger number of
restaurants in a broader market area. Because of this relatively small base of
restaurants, an unsuccessful new restaurant could have a more significant
adverse effect on Sagebrush's results of operations than would be the case in a
larger restaurant company. Sagebrush's results of operations may also be
materially and disproportionately affected by changes in economic, weather or
other conditions in the relatively small geographic area in which its
restaurants are located. Given this geographic concentration, adverse publicity
relating to Sagebrush could also have a more pronounced adverse effect on
Sagebrush's overall sales than might be the case if Sagebrush's restaurants were
more geographically dispersed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Sagebrush."
Risks Associated with Sagebrush Expansion Strategy. Sagebrush has
experienced substantial growth in recent years. Sagebrush, since opening its
first Sagebrush restaurant in October 1990, opened three restaurants in 1991,
five in 1992, four in 1993, six in 1994, three in 1995 and six in 1996.
Sagebrush opened six restaurants in fiscal 1997 and, were the Merger not to
occur, currently plans to open from five to seven additional restaurants in
fiscal 1998. Sagebrush's ability to expand depends upon a number of factors,
including the selection and availability of suitable locations, the hiring and
training of sufficiently skilled personnel, the securing of required
governmental approvals and permits, the availability of adequate financing and
other factors, some of which are beyond the control of Sagebrush. There can be
no assurance that Sagebrush will be able to open all of its planned new
restaurants or that, if opened, those restaurants can be operated profitably.
Moreover, the opening of additional restaurants in the same market areas as
existing restaurants could have the effect of attracting customers away from
existing restaurants. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Sagebrush -- Liquidity and Capital
Resources," "Certain Information Regarding Sagebrush -- Business -- Site
Selection," " -- Converting Facilities to the Sagebrush Concept" and
" -- Restaurant Industry and Competition."
11
<PAGE> 20
WSMP SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is first being mailed to the WSMP
Shareholders on or about January 13, 1998 and is accompanied by the Notice of
Special Meeting of Shareholders and a form of proxy that is solicited by the
WSMP Board for use at the WSMP Special Meeting to be held on January 27, 1998,
at 11:00 a.m., local time, at the Gateway Hotel, 909 Highway 70, S.W., in
Hickory, North Carolina, and at any adjournments or postponements thereof.
MATTERS TO BE CONSIDERED
At the WSMP Special Meeting, WSMP Shareholders will be asked, in accordance
with the shareholder approval requirements of the National Association of
Securities Dealers, Inc. (the "NASD"), to consider and vote upon the issuance of
shares of WSMP Common Stock in the Merger. The NASD requires shareholder
approval of such Issuance because the number of shares of WSMP Common Stock to
be issued in the Merger is expected to exceed 20% of the shares of WSMP Common
Stock and voting power outstanding immediately prior thereto. In addition, the
WSMP Shareholders will be asked to consider and vote upon an amendment to the
WSMP Articles of Incorporation increasing the number of authorized shares of
WSMP Common Stock to 100,000,000. The Issuance and such Articles Amendment are
referred to herein together as the "WSMP Matters." The WSMP Shareholders also
may be asked to vote upon a proposal to adjourn or postpone the WSMP Special
Meeting, which adjournment or postponement could be used for the purpose, among
others, of allowing additional time for the soliciting of additional votes to
approve the WSMP Matters.
SOLICITATION OF PROXIES
A holder of WSMP Common Stock may use the accompanying proxy if such
shareholder is unable to attend the WSMP Special Meeting in person or wishes to
have his or her shares voted by proxy even if such shareholder does attend the
meeting. A shareholder may revoke any proxy given pursuant to this solicitation
by delivering to the Secretary of WSMP, prior to or at the WSMP Special Meeting,
a written notice revoking the proxy or a duly executed proxy relating to the
same shares bearing a later date; however, attendance at the WSMP Special
Meeting will not in and of itself constitute a revocation of a proxy. All
written notices of revocation and other communications with respect to the
revocation of WSMP proxies should be addressed to: Secretary, WSMP, Inc., 1 WSMP
Drive, Claremont, North Carolina 28610. For such notice of revocation or later
proxy to be valid, however, it must actually be received by WSMP prior to the
vote of the shareholders at the WSMP Special Meeting. All shares represented by
valid proxies received pursuant to this solicitation, and not revoked before
they are exercised, will be voted in the manner specified therein. If no
specification is made, the proxies will be voted in favor of approval of the
WSMP Matters. The WSMP Board is unaware of any other matters that may be
presented for action at the WSMP Special Meeting. If other matters do properly
come before the WSMP Special Meeting, however, it is intended that shares
represented by proxies in the accompanying form will be voted or not voted by
the persons named in the proxies in their discretion, provided that no proxy
that is voted against approval and adoption of the WSMP Matters will be voted in
favor of any adjournment or postponement of the WSMP Special Meeting for the
purpose of soliciting additional proxies.
The entire cost of soliciting the proxies from the WSMP Shareholders will
be borne by WSMP; provided, however, that WSMP and Sagebrush have each agreed to
pay one-half of the printing costs of this Joint Proxy Statement-Prospectus and
related materials. In addition to the solicitation of the proxies by mail, WSMP
will request banks, brokers and other record holders to send proxies and proxy
material to the beneficial owners of the stock and secure their voting
instructions, if necessary. WSMP will reimburse such record holders for their
reasonable expenses in doing so. If necessary, WSMP may also use several of its
regular employees, who will not be specially compensated, to solicit proxies
from shareholders, either personally or by telephone, telegram, facsimile or
special delivery letter.
12
<PAGE> 21
RECORD DATE AND VOTING RIGHTS
Pursuant to the provisions of the NCBCA, January 7, 1998 has been fixed as
the record date for determination of WSMP Shareholders entitled to notice of and
to vote at the WSMP Special Meeting. Accordingly, only holders of shares of
record at the close of business on that date of WSMP Common Stock will be
entitled to notice of and to vote at the WSMP Special Meeting. The number of
outstanding shares of WSMP Common Stock entitled to vote at the WSMP Special
Meeting is 3,633,914. On the WSMP Record Date, there were approximately 838
holders of record of WSMP Common Stock. In accordance with North Carolina law,
abstentions from voting will be counted for purposes of determining whether a
quorum exists at the WSMP Special Meeting. Furthermore, shares represented by
proxies returned by a broker holding such shares in nominee or "street" name
will be counted for purposes of determining whether a quorum exists, even if
such shares are not voted in matters where discretionary voting by the broker is
not allowed ("broker non-votes"). In addition, abstentions from voting and
broker non-votes will not be deemed to have been cast either "for" or "against"
the proposals considered at the meeting and, therefore, will have no effect on
the adoption of such proposals.
Each share of WSMP Common Stock entitles its holder to one vote. The
affirmative vote of a majority of the votes cast at the WSMP Special Meeting is
required to approve the WSMP Matters, provided that, in the case of the
Issuance, at least 50% of the votes entitled to be cast are voted at the WSMP
Special Meeting, and, in the case of the Articles Amendment, a majority of the
shares entitled to vote are represented at the WSMP Special Meeting in person or
by proxy. As of the WSMP Record Date, 36,069 shares of WSMP Common Stock, or
approximately 1.0% of the shares entitled to be voted at the WSMP Special
Meeting, were beneficially owned by directors and executive officers of WSMP. It
is currently expected that each such director and executive officer of WSMP will
vote the shares of WSMP Common Stock owned by him for approval of the WSMP
Matters. In addition, as of the WSMP Record Date, the directors and executive
officers of Sagebrush beneficially owned 100,224 shares of WSMP Common Stock, or
approximately 2.8% of the shares entitled to vote at the WSMP Special Meeting.
Of this amount, 100,000 shares of WSMP Common Stock were beneficially owned by
Connor. It is currently expected that each such director and executive officer
of Sagebrush will vote the shares of WSMP Common Stock owned by him for approval
of the WSMP Matters.
See "Certain Information Regarding WSMP -- Principal Shareholders and
Management Ownership" for additional information with respect to beneficial
ownership of WSMP Common Stock by persons and entities owning more than 5% of
such stock and more detailed information with respect to beneficial ownership of
WSMP Common Stock by directors and executive officers of WSMP.
RECOMMENDATION OF WSMP BOARD
The WSMP Board has unanimously approved the WSMP Matters, the Agreement and
the transactions contemplated thereby. The WSMP Board believes that the WSMP
Matters are in the best interests of WSMP and the WSMP Shareholders and
recommends that the WSMP Shareholders vote "FOR" the WSMP Matters. See "The
Merger -- Reasons of WSMP for the Merger" and "Amendment to the WSMP Articles of
Incorporation."
SAGEBRUSH SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is first being mailed to the
Sagebrush shareholders on or about January 13, 1998, and is accompanied by the
Notice of Special Meeting of Shareholders and a form of proxy that is solicited
by the Sagebrush Board for use at the Sagebrush Special Meeting to be held on
January 27, 1998, at 10:00 a.m., local time, at the Gateway Hotel, 909 Highway
70, S.W., in Hickory, North Carolina, and at any adjournments or postponements
thereof.
13
<PAGE> 22
MATTERS TO BE CONSIDERED
At the Sagebrush Special Meeting, the Sagebrush Shareholders will vote on a
proposal to approve the Agreement and the Plan of Merger. The holders of
Sagebrush Common Stock may also be asked to vote upon a proposal to adjourn or
postpone the Sagebrush Special Meeting, which adjournment or postponement could
be used for the purpose, among others, of allowing additional time for the
soliciting of additional votes to approve the Agreement and the Plan of Merger.
SOLICITATION OF PROXIES
A holder of Sagebrush Common Stock may use the accompanying proxy if such
shareholder is unable to attend the Sagebrush Special Meeting in person or
wishes to have his or her shares voted by proxy even if such shareholder does
attend the meeting. A shareholder may revoke any proxy given pursuant to this
solicitation by delivering to the Secretary of Sagebrush, prior to or at the
Sagebrush Special Meeting, a written notice revoking the proxy or a duly
executed proxy relating to the same shares bearing a later date; however,
attendance at the Sagebrush Special Meeting will not in and of itself constitute
a revocation of a proxy. All written notices of revocation and other
communications with respect to the revocation of Sagebrush proxies should be
addressed to: Secretary, Sagebrush, Inc., 3238 West Main Street, Claremont,
North Carolina 28610. For such notice of revocation or later proxy to be valid,
however, it must actually be received by Sagebrush prior to the vote of the
shareholders at the Sagebrush Special Meeting. All shares represented by valid
proxies received pursuant to this solicitation, and not revoked before they are
exercised, will be voted in the manner specified therein. If no specification is
made, the proxies will be voted in favor of approval of the Agreement. The
Sagebrush Board is unaware of any other matters that may be presented for action
at the Sagebrush Special Meeting. If other matters do properly come before the
Sagebrush Special Meeting, however, it is intended that shares represented by
proxies in the accompanying form will be voted or not voted by the persons named
in the proxies in their discretion. Sagebrush will not utilize the services of a
proxy soliciting firm with the solicitation of proxies in connection with the
Sagebrush Special Meeting.
The entire cost of soliciting the proxies from the Sagebrush Shareholders
will be borne by Sagebrush; provided, however, that WSMP and Sagebrush have each
agreed to pay one-half of the printing costs of this Joint Proxy
Statement-Prospectus and related materials. In addition to the solicitation of
the proxies by mail, Sagebrush will request banks, brokers and other record
holders to send proxies and proxy material to the beneficial owners of the stock
and secure their voting instructions, if necessary. Sagebrush will reimburse
such record holders for their reasonable expenses in doing so. If necessary,
Sagebrush may also use several of its regular employees, who will not be
specially compensated, to solicit proxies from shareholders, either personally
or by telephone, telegram, facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
The Sagebrush Board has fixed January 7, 1998 as the Sagebrush Record Date
for the determination of the holders of Sagebrush Common Stock entitled to
receive notice of and to vote at the Sagebrush Special Meeting. Only the holders
of Sagebrush Common Stock on the Sagebrush Record Date are entitled to receive
notice of and vote at the Special Meeting and at any adjournment or
postponements thereof. At the close of business on the Sagebrush Record Date,
there were 5,925,000 shares of Sagebrush Common Stock outstanding held by
approximately 66 holders of record. Each share of Sagebrush Common Stock
outstanding on the Sagebrush Record Date entitles its holder to one vote as to
(i) the approval of the Agreement and the Plan of Merger and (ii) any other
proposal that may properly come before the Sagebrush Special Meeting.
Each share of Sagebrush Common Stock entitles its holder to one vote.
Pursuant to the NCBCA, approval of the Agreement and the Plan of Merger will
require the affirmative vote of the holders of a majority of the outstanding
shares of Sagebrush Common Stock. As of the Sagebrush Record Date, 3,327,981
shares of Sagebrush Common Stock, or approximately 56.2% of the shares entitled
to be voted at the Sagebrush Special Meeting, were beneficially owned by
directors and executive officers of Sagebrush. It is currently expected that
each such director and executive officer of Sagebrush will vote the shares of
Sagebrush Common Stock beneficially owned by him for approval of the Agreement
and the Plan of Merger. In the Agreement, Connor
14
<PAGE> 23
and Miller, who together owned or controlled 3,065,757 shares of Sagebrush
Common Stock (approximately 51.7% of the shares entitled to be voted at the
Meeting) on the Sagebrush Record Date, agreed to vote such shares in favor of
the Agreement and the Plan of Merger. As of the Sagebrush Record Date, directors
and executive officers of WSMP beneficially owned 323,383 shares of Sagebrush
Common Stock, or approximately 5.5% of the shares entitled to be voted at the
Sagebrush Special Meeting, all of which are expected to be voted in favor of the
Agreement and the Plan of Merger.
APPROVAL OF THE AGREEMENT AND THE PLAN OF MERGER REQUIRES THE AFFIRMATIVE
VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF SAGEBRUSH COMMON STOCK. FAILURE
OF A HOLDER OF SAGEBRUSH COMMON STOCK TO VOTE SUCH SHARES IN FAVOR OF THE
AGREEMENT AND THE PLAN OF MERGER WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST"
THE AGREEMENT AND THE PLAN OF MERGER. BECAUSE APPROVAL OF THE AGREEMENT AND THE
PLAN OF MERGER REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES OF SAGEBRUSH COMMON STOCK, ABSTENTIONS AND BROKER NON-VOTES
ALSO WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. ACCORDINGLY, THE SAGEBRUSH
BOARD URGES THE HOLDERS OF SAGEBRUSH COMMON STOCK TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE.
RECOMMENDATION OF SAGEBRUSH BOARD
The Sagebrush Board has unanimously approved the Agreement and the Plan of
Merger and believes that the Merger is in the best interests of Sagebrush and
its shareholders and recommends that the holders of Sagebrush Common Stock vote
"FOR" the Sagebrush Matter. In making its recommendation, the Sagebrush Board
has considered, among other things, the opinion of I/JL that the consideration
to be received by Sagebrush Shareholders in the Merger is fair from a financial
point of view. See "The Merger -- Reasons of Sagebrush for the Merger" and
"-- Opinion of Sagebrush's Financial Advisor."
SAGEBRUSH SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
PRICE RANGE OF WSMP AND SAGEBRUSH COMMON STOCK
The WSMP Common Stock and the Sagebrush Common Stock are traded on NASDAQ
under the symbols "WSMP" and "SAGE," respectively.
Quarterly high and low closing sales prices for WSMP Common Stock are
presented below as reported by NASDAQ and reflect the five-for-four stock split,
effected in the form of a stock dividend, declared February 22, 1995 and
distributed April 11, 1995.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
---------------- -------------- --------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter........................ $12.75 $ 9.00 $5.38 $4.25 $5.60 $4.25
Second Quarter....................... $15.75 $11.88 $6.50 $4.88 $5.00 $4.25
Third Quarter........................ $24.50 $12.50 $8.00 $6.13 $5.25 $4.00
Fourth Quarter....................... $29.00* $18.50* $9.50 $6.50 $5.25 $4.25
</TABLE>
- ---------------
* Through January 9, 1998
No cash dividends have been declared from the beginning of fiscal 1996 to
the date hereof on the WSMP Common Stock.
15
<PAGE> 24
Quarterly high and low closing sales prices for Sagebrush Common Stock are
presented below as reported by NASDAQ from January 11, 1996, the date that the
Sagebrush Common Stock began trading publicly. There was no market for the
Sagebrush Common Stock prior to Sagebrush's initial public offering in January
1996.
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter..................................... $8.50 $5.75 $7.25 $5.75
Second Quarter.................................... $6.88 $5.00 $9.25 $6.88
Third Quarter..................................... $5.75 $5.00 $9.03 $7.63
Fourth Quarter.................................... $7.13 $5.56 $7.75 $6.00
</TABLE>
The high and low closing sales prices of Sagebrush Common Stock for the
first quarter of 1998 (through January 9, 1998) were $6.79 and $6.50,
respectively.
Prior to its initial public offering in January 1996, Sagebrush's dividend
policy was based primarily on considerations relating to the "S Corporation"
status of most of the related corporations that had previously conducted
Sagebrush's business under Subchapter S of the Code and for state income tax
purposes and the fact that most of these related corporations were capitalized
through equity investments with any associated debt being incurred at the
shareholder level. As a result of their S Corporation status, the net income of
most of these related corporations was taxed directly to their shareholders
rather than to the respective corporations. Because of these factors, each of
the related corporations historically distributed all of its net income to its
shareholders on a current basis. Sagebrush (including all of the related
predecessor corporations) paid total cash dividends of $888,000 in 1996 and
$3,962,000 in 1995. The S Corporation elections of all applicable predecessor
corporations were terminated in connection with the reorganization of Sagebrush
and its predecessor corporations incident to the initial public offering of
Sagebrush. Following that reorganization and the termination of those S
Corporation elections, Sagebrush has been subject to corporate income taxation
as a "C Corporation" and has paid no dividends as a public company.
16
<PAGE> 25
THE MERGER
THE FOLLOWING SUMMARY OF CERTAIN TERMS AND CONDITIONS OF THE AGREEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT AND THE PLAN OF MERGER
INCLUDED THEREIN, WHICH IS INCORPORATED HEREIN BY REFERENCE AND IS INCLUDED AS
APPENDIX A TO THIS JOINT PROXY STATEMENT-PROSPECTUS.
DESCRIPTION OF THE MERGER; EXCHANGE RATIO
At the Effective Time, Sub will merge with and into Sagebrush, the separate
corporate existence of Sub will cease, and Sagebrush will survive and continue
to exist as the Surviving Subsidiary. Subject to the satisfaction or waiver of
certain conditions set forth in the Agreement and described more fully in
"-- Conditions to the Merger," the Merger will become effective upon the filing
of Articles of Merger with the Secretary of State of the State of North Carolina
in accordance with Section 55-11-05 of the NCBCA. The Merger will have the
effects prescribed by Section 55-11-06 of the NCBCA, and the articles of
incorporation and bylaws of the Surviving Subsidiary will be those of Sagebrush
as in effect immediately prior to the Effective Time.
At the Effective Time, by virtue of the Merger and without any action on
the part of the holder of any share of Sagebrush Common Stock or the holder of
any share of Sub Common Stock: (a) each issued and outstanding share of Sub
Common Stock shall be converted into one share of common stock of the Surviving
Subsidiary, which shall constitute the only issued and outstanding shares of
capital stock of the Surviving Subsidiary; and (b) each issued and outstanding
share of Sagebrush Common Stock (other than any share as to which dissenter's
appraisal rights have been perfected pursuant to Article 13 of the NCBCA) shall
be converted into the right to receive .3214 share of WSMP Common Stock, subject
to adjustment as provided below (the "Merger Consideration"). Each share of WSMP
Common Stock issued in the Merger shall be issued together with one Right in
accordance with the terms and conditions of the Rights Agreement. (Each
reference in this Joint Proxy Statement-Prospectus to the shares of WSMP Common
Stock issuable as Merger Consideration shall be deemed to include a reference to
the Rights associated therewith.)
If the Average WSMP Closing Price is greater than $23.34, then the Exchange
Ratio shall be adjusted to become $7.50 divided by the Average WSMP Closing
Price. If the Average WSMP Closing Price is less than $21.78, then the Exchange
Ratio shall be adjusted to become $7.00 divided by the Average WSMP Closing
Price. See "Risk Factors -- Risks Associated with the Prospective
Merger -- Adjustment of Exchange Ratio." In the event that Sagebrush or WSMP
changes the number of shares of Sagebrush Common Stock or WSMP Common Stock,
respectively, outstanding prior to the Effective Time as a result of a split,
combination or reclassification with respect to such stock or as a result of a
dividend or other distribution on or exchange or redemption of or for such
stock, and the record or effective date therefor or thereof shall be prior to
the Effective Time, then the Exchange Ratio shall be equitably adjusted.
BACKGROUND OF THE MERGER
WSMP and Sagebrush have common roots in WSMP and its growth in Claremont,
North Carolina. The Chairman of the Board of Sagebrush, Mr. Charles F. Connor,
Jr., co-founded WSMP in 1970 and served WSMP at various times as Executive Vice
President, Chief Financial Officer, Secretary and Treasurer until retiring from
WSMP in 1988. The President and Chief Executive Officer of Sagebrush, L. Dent
Miller, served WSMP through much of the same period, functioning as Vice
President of Franchising and then as Executive Vice President until he, too,
retired from WSMP in 1988. Both Connor and Miller maintained cordial
relationships with WSMP management while operating Sagebrush from nearby
headquarters in Claremont.
WSMP management has long been interested in Sagebrush as family-oriented
steakhouses such as Sagebrush have gained in popularity while budget steakhouse
sales have stabilized. WSMP sold or leased to Connor and Miller several of the
earliest Sagebrush restaurant sites, which had been Western Steer restaurants in
Morganton, North Carolina, Rock Hill, South Carolina, and Knoxville, Tennessee.
17
<PAGE> 26
Upon consummation of Sagebrush's initial public offering in January 1996,
WSMP and several members of its management became Sagebrush shareholders. The
close relationships between executive officers of the two companies were
strengthened as a result.
In November 1996, Sagebrush engaged an investment banking firm to assist
Sagebrush in exploring strategic alternatives to maximize shareholder value,
including the possible sale or merger of Sagebrush. Over the course of the next
several months, the investment banking firm identified and contacted a number of
restaurant companies and financial buyers to ascertain their level of interest
in a transaction with Sagebrush. None of the persons contacted by the investment
banking firm expressed serious interest in a transaction with Sagebrush. In
accordance with the terms of the letter agreement entered into between Sagebrush
and the investment banking firm, the engagement terminated in March 1997.
Informal talks concerning a possible combination of WSMP and Sagebrush
began in the summer of 1997 between the Chief Executive Officer of WSMP, James
C. Richardson, Jr., and Mr. Miller. Early discussions focused upon possible
operational efficiencies and synergies that might be achieved through a business
combination.
Pricing and valuation emerged as key concerns of both companies as the
talks grew more serious. WSMP engaged the services of Pauli & Company
Incorporated ("Pauli") for advice and assistance relative to strategic business
and financial issues. In mid-August, Messrs. Miller and Richardson, joined by
the President and Chief Operating Officer of WSMP, David R. Clark, met in
Claremont with principals of Pauli to discuss their pricing concerns and
valuation alternatives.
On September 17, 1997, Messrs. Connor, Miller, Richardson and Clark met
again with Pauli, in Charlotte, to continue their discussion of pricing and
valuation issues and the possible acquisition of Sagebrush by WSMP in a
stock-for-stock merger. Ultimately it was agreed that the capital markets'
evaluation of WSMP and Sagebrush was the best way to determine relative values.
The parties agreed to use, as benchmark values for the two companies, the
then-current market values of $17.50 per share of WSMP Common Stock and $5.625
per share of Sagebrush Common Stock. These values implied an exchange ratio of
.3214 share of WSMP Common Stock per share of Sagebrush Common Stock.
On September 25, 1997, WSMP submitted to Sagebrush a proposed letter of
intent to pursue a stock-for-stock merger with a fixed exchange ratio of .3214.
The WSMP Board met and approved the submission of the letter of intent. After
informal discussions among members of the Sagebrush Board and various
modifications of the proposed letter of intent, and, in light of the fact that
the proposed letter of intent did not contractually commit the parties to a
transaction, later that same day, Sagebrush and WSMP executed the letter of
intent as modified and jointly issued a news release the following morning.
On October 3, 1997, the Sagebrush Board met and discussed in detail the
proposed acquisition of Sagebrush by WSMP. After reviewing certain issues
related to Mr. Connor's position as a significant shareholder of WSMP and the
fact that Mr. Miller was expected to become an employee of WSMP upon the
consummation of the Merger, the Sagebrush Board established a Special Committee
of the Sagebrush Board (the "Sagebrush Special Committee") consisting of the
members of the Sagebrush Board (Messrs. Barry W. Whisnant and C. Kenneth Wilcox)
who were not officers or employees of Sagebrush and who were not affiliated with
WSMP and had no material interest in the proposed transaction (other than as
Sagebrush Shareholders). The Sagebrush Special Committee was established to (i)
consider the proposed transaction with WSMP, (ii) provide direction and guidance
to management of Sagebrush in proceeding with negotiations concerning the
proposed transaction or, as determined by the Sagebrush Special Committee,
conducting such negotiations itself, (iii) make its own independent
determination whether the proposed transaction would be in the best interests of
Sagebrush and the Sagebrush Shareholders and (iv) make recommendations to the
full Sagebrush Board with respect thereto, including its recommendation as to
whether the proposed transaction with WSMP should be approved by the Sagebrush
Board and recommended to the Sagebrush Shareholders for their approval. In
furtherance of its purposes, the Sagebrush Special Committee was authorized to
engage special independent counsel (other than Sagebrush's regular corporate
counsel) and a financial advisor to advise the Sagebrush Special Committee and
the Sagebrush Board as to the financial terms of the proposed transaction.
Following establishment of the Special Committee at the
18
<PAGE> 27
October 3, 1997 meeting of the Sagebrush Board, representatives of I/JL made a
presentation. The Special Committee deferred engaging a financial advisor,
however, until it had engaged and consulted with independent counsel.
On October 9, 1997, the Sagebrush Special Committee engaged the firm of
Moore & Van Allen, PLLC ("Moore & Van Allen") to serve as special independent
counsel to the Sagebrush Special Committee. With the assistance of Moore & Van
Allen, the Sagebrush Special Committee reviewed a proposed engagement letter
submitted by I/JL to serve as financial advisor to the Sagebrush Special
Committee and, after considering the proposed terms of the engagement and the
qualifications of I/JL to serve as financial advisor, on October 14, 1997
decided to engage I/JL to serve in such capacity. The Sagebrush Special
Committee believed that, in light of I/JL's extensive knowledge of background
information on both WSMP and Sagebrush, having I/JL as its financial advisor
would be advantageous to the Sagebrush Special Committee.
During the period from October 14 to November 6, 1997, I/JL conducted
financial due diligence and performed various analyses as described under "The
Merger -- Opinion of Sagebrush's Financial Advisor." During the same period,
Moore & Van Allen participated in meetings between representatives of WSMP,
Sagebrush and their respective counsel and kept the members of the Sagebrush
Special Committee informed of developments in the negotiations regarding the
draft Agreement. WSMP also conducted a due diligence investigation of Sagebrush.
Promptly after execution of the letter of intent, the parties delegated to
their legal counsel the task of producing a definitive merger agreement and
ancillary agreements, including a consulting agreement for Connor and an
employment agreement for Miller. Counsel met to discuss the first draft of the
definitive merger agreement on October 15, 1997. The text of the definitive
merger agreement was refined in subsequent meetings and discussions among
counsel to the parties from the latter part of October into November. Connor's
consulting agreement and Miller's employment agreement also were negotiated and
documented.
On November 6, 1997, the Sagebrush Special Committee met and, after hearing
and considering a report from Moore & Van Allen regarding the status of the
merger negotiations and being advised with respect to their fiduciary duties and
their role as an ad hoc committee of independent directors, heard an oral
presentation by I/JL regarding the financial due diligence conducted to date and
the preliminary results of the analyses performed by I/JL. The members of the
Sagebrush Special Committee concluded, after hearing I/JL's presentation, that
they needed additional time to study and evaluate the information presented to
them by I/JL and requested the representatives of I/JL to meet with them again
after they had had an opportunity to do so.
On November 10, 1997, the Sagebrush Special Committee met again with
representatives of I/JL to discuss the proposed financial terms of the Merger
and the analyses performed by I/JL. At this meeting, the Sagebrush Special
Committee members expressed to the representatives of I/JL their concerns about
the proposed fixed exchange ratio, in particular their concern that the price to
be received by the Sagebrush Shareholders for their shares of Sagebrush Common
Stock would be subject to the risk of a decline in the market price of WSMP
Common Stock between the date of execution of the Agreement and the Effective
Date of the Merger. After reviewing the information prepared by I/JL about the
historical financial performance of Sagebrush and WSMP, the Sagebrush Special
Committee members also expressed concerns about the possible increased market
risk the Sagebrush Shareholders would be assuming by exchanging their equity
interests in Sagebrush for an equity interest in WSMP. In addition, they noted
the results of the pro forma dilution analysis performed by I/JL which indicated
the Merger could be expected to be accretive to WSMP's earnings per share in
fiscal year 1998 by approximately 59.3% and in fiscal year 1999 by approximately
62.8%. After discussing these concerns with the representatives of I/JL present
and considering the analyses performed by I/JL, the Sagebrush Special Committee
concluded that a price of at least $7.00 per share for the Sagebrush Common
Stock would be fair to the Sagebrush Shareholders. After the representatives of
I/JL indicated that I/JL would be prepared to render an opinion to the Sagebrush
Board with respect to the fairness from a financial point of view to the
Sagebrush Shareholders of a price of $7.00 per share of Sagebrush Common Stock,
the Sagebrush Special Committee decided to negotiate for the inclusion of a
price protection provision in the Agreement.
19
<PAGE> 28
Immediately after the conclusion of the November 10, 1997 meeting, the
Sagebrush Special Committee members met with members of senior management of
WSMP to inform them of the results of the Sagebrush Special Committee's
deliberations. The members of the Sagebrush Special Committee, who were joined
by the other two members of the Sagebrush Board, informed the representatives of
WSMP present that, before they could recommend to the Sagebrush Board that they
approve the Merger and recommend that the Sagebrush Shareholders vote for the
approval of the Merger, the Agreement would have to be modified to include a
price protection provision providing for an adjustment in the Exchange Ratio to
assure that the Sagebrush Shareholders would receive for each share of Sagebrush
Common Stock WSMP Common Stock having a market value at the Effective Date of
not less than $7.00.
On November 11 and 12, 1997, representatives of Sagebrush, including
members of the Sagebrush Special Committee, met either in person or participated
in telephone conference calls with representatives of WSMP to negotiate the
terms of the price protection provision requested by the Sagebrush Special
Committee. During this period, the members of the Sagebrush Special Committee
were in contact periodically with representatives of I/JL regarding such
negotiations, the outcome of which was the adjustment factor of the Exchange
Ratio putting a "collar" of $7.00 to $7.50 around the market value of the WSMP
Common Stock to be exchanged for each share of Sagebrush Common Stock.
On November 13, 1997 the Sagebrush Special Committee met with counsel by
telephone conference call to discuss the results of the previous two days'
negotiations. They considered the WSMP response to the Sagebrush Special
Committee's request for price protection and concluded, subject to receiving
assurances from I/JL that I/JL would still be prepared to render a fairness
opinion, that WSMP's insistence on the adjustment factor also including a
provision to assure that the market value of the WSMP Common Stock exchanged for
each share of Sagebrush Common Stock will not be more than $7.50 was acceptable.
Immediately after the telephonic meeting concluded, counsel communicated with a
representative of I/JL and received assurances that I/JL was still willing to
render its opinion that the consideration to be received by the Sagebrush
Shareholders in the Merger was fair from a financial point of view. The
Sagebrush Special Committee then communicated to the other members of the
Sagebrush Board that the Sagebrush Special Committee was prepared to unanimously
recommend to the Sagebrush Board that the Sagebrush Board approve the Agreement
and recommend to the Sagebrush Shareholders that they approve the Merger.
On November 14, 1997, the Sagebrush Board met by telephone conference call.
At the meeting, the Sagebrush Board discussed in detail the proposed Merger and
the status of the current draft of the Agreement. Members of the Sagebrush
Special Committee then unanimously recommended to the Sagebrush Board that
Sagebrush enter into the Agreement and proceed with the Merger. The Sagebrush
Board then unanimously adopted and approved the Agreement and the Plan of Merger
and authorized the execution and delivery of the Agreement.
Also on November 14, 1997, the WSMP Board met, unanimously approved the
Agreement, the Merger and the Issuance and recommended the Issuance to the WSMP
Shareholders for their consideration.
The Agreement was executed and delivered by the parties on Saturday,
November 15, 1997.
REASONS OF WSMP FOR THE MERGER
The WSMP Board believes that the Agreement and the transactions
contemplated thereby are in the best interests of WSMP and its shareholders.
Accordingly, the WSMP Board has unanimously approved the Agreement, the Merger
and the Issuance and unanimously recommends that the WSMP Shareholders vote
"FOR" the Issuance.
In evaluating the business combination with Sagebrush, the WSMP Board
reviewed presentations from, and discussed the terms and conditions of the
Agreement with, executive officers and legal counsel of WSMP. The WSMP Board
considered a number of factors, including, in addition to the factors identified
in "-- Background of the Merger," the factors listed below, in reaching its
determination to approve the Agreement and the transactions contemplated
thereby. In view of the wide variety of factors considered by the WSMP Board in
connection with its evaluation of the Merger, the WSMP Board did not consider it
20
<PAGE> 29
practicable to, and did not attempt to, quantify or otherwise assign relative
weights to the specific factors that it considered in reaching its
determination. In addition, individual members of the WSMP Board may have given
different weights to different factors.
(i) Economics of Facility Conversions -- The WSMP Board considered
management's opinion that the Merger presents the opportunity to convert as many
as ten or fifteen underutilized Western Steer restaurant facilities into
Sagebrush restaurants within two years. In evaluating the importance of this
opportunity, the WSMP Board noted that Sagebrush restaurants have historically
generated higher revenues and better profit margins than many Western Steer
restaurants, particularly the older Western Steer Family Restaurants. It also
noted the experience of Sagebrush management in executing facility conversions
and the considerable cost and timing advantages of converting an existing
facility into a Sagebrush restaurant as compared to building a new restaurant on
newly purchased real estate.
(ii) Strategic Benefits in Consolidating Industry -- The WSMP Board
considered management's view of recent trends in the U.S. food service industry,
particularly a trend toward consolidation, and management's view that the Merger
with Sagebrush would further WSMP's strategic objective of supplementing
internal growth with an acquisition to increase WSMP's existing market presence
and expand its operations into new markets. The WSMP Board noted the
complementary nature of the businesses of the two companies and considered
management's view that the acquisition would give WSMP the ability to leverage
its existing relationships with suppliers and customers and compete more
effectively with larger restaurant chains. The WSMP Board considered economies
of scale, cost savings and other synergies that management believes may develop
over time.
(iii) Information Concerning WSMP and Sagebrush -- In evaluating the terms
of the Merger, the WSMP Board considered, among other things, information
(including the results of its due diligence investigation) with respect to the
financial condition, results of operations, businesses and prospects of WSMP and
Sagebrush and current industry, economic and market conditions. The WSMP Board
also took into account the quality and experience of Sagebrush's management
team.
(iv) Integration of Sagebrush -- The WSMP Board considered WSMP's record of
realizing the benefits of prior strategic initiatives, including operational,
marketing, administrative, financial and personnel issues, with respect to the
prospects for successfully integrating Sagebrush and realizing potential
benefits of the Merger.
(v) Terms and Conditions of the Agreement -- The WSMP Board considered the
terms and conditions of the Agreement. In its review, it noted that the assumed
Exchange Ratio of .3214 corresponded to contemporaneous market prices for the
WSMP Common Stock and the Sagebrush Common Stock and that the Merger is intended
to qualify as a reorganization within the meaning of Section 368(a) of the Code
and for pooling-of-interests accounting treatment. The WSMP Board took into
account the provisions of the Agreement that require Connor and Miller to vote
their Sagebrush shares "FOR" the Merger and would require Sagebrush to pay to
WSMP a $1,500,000 termination fee, plus WSMP's actual expenses, if the Agreement
were terminated and the Merger abandoned in certain circumstances. The WSMP
Board also considered the proposed arrangements with respect to Connor and
Miller as described under "-- Interests of Certain Persons in the Merger."
(vi) Effect on Public Market for WSMP Common Stock -- The WSMP Board took
into account the effects of the Issuance in connection with the Merger. Among
other effects, the WSMP Board considered that the Issuance would result in a
more liquid public market for the WSMP Common Stock, which would facilitate
WSMP's ability to consummate possible future acquisitions by offering potential
acquisition targets WSMP Common Stock.
The WSMP Board believes that each of WSMP and Sagebrush currently is
well-managed and possesses management philosophies and a strategic focus that
are compatible with those of the other and that each company would contribute
complementary business strengths resulting in a better-diversified combined
company. The WSMP Board also believes that the Merger will enhance the ability
of the combined company to compete effectively in the rapidly changing food
service industry and to take advantage of opportunities for
21
<PAGE> 30
growth and diversification that might otherwise not become available. There can
be no assurance, however, that the results desired by the WSMP Board in
approving the Merger will be achieved.
For a discussion of the ownership of WSMP Common Stock by the WSMP Board,
see "Certain Information Regarding WSMP -- Principal Shareholders and Management
Ownership."
THE WSMP BOARD RECOMMENDS THAT THE WSMP SHAREHOLDERS VOTE "FOR" THE
ISSUANCE.
REASONS OF SAGEBRUSH FOR THE MERGER
In reaching its decision to approve the Agreement and the Plan of Merger at
its November 14, 1997 meeting, the Sagebrush Board consulted with Sagebrush's
senior management and its financial and legal advisors, and considered various
factors, including the unanimous recommendation of the Sagebrush Special
Committee that Sagebrush enter into the Agreement and consummate the Merger. In
reaching their decisions to recommend approval of the Agreement and the Merger,
the Sagebrush Board and the Sagebrush Special Committee considered the various
factors described below.
Financial Terms of the Merger. The Sagebrush Special Committee considered
the Exchange Ratio and, in particular, the provisions of the Agreement that
provide for the Exchange Ratio to be adjusted in the event the Average WSMP
Closing Price is less than $21.78. The adjustment to the Exchange Ratio is
designed to assure that Sagebrush Shareholders will receive for each share of
Sagebrush Common Stock shares of WSMP Common Stock having a market value based
on the Average WSMP Closing Price (which may be higher or lower than the actual
market price of WSMP Common Stock as of the Effective Date) of at least $7.00.
This price protection provision, which was not included in WSMP's original
proposal to acquire Sagebrush, was added to the Agreement at the insistence of
the Sagebrush Special Committee to address the Sagebrush Special Committee's
concerns about the possible adverse effect on the Sagebrush Shareholders of the
combination of a fixed exchange ratio and a rapid decline in the market price of
WSMP Common Stock between the date the Agreement was signed and the Effective
Date.
The Sagebrush Special Committee also considered the fact that such an
adjustment in the Exchange Ratio, in the event the Average WSMP Closing Price is
less than $21.78, will increase the percentage of the equity of the combined
company that would be owned by the Sagebrush Shareholders. The Sagebrush Special
Committee believed the corresponding adjustment of the Exchange Ratio in the
event the Average WSMP Closing Price is greater than $23.34, which imposes an
upper limit of $7.50 on the price Sagebrush Shareholders would receive for their
Sagebrush Common Stock in the Merger, was justified in light of the price
protection WSMP was willing to give Sagebrush Shareholders against a decline in
the market value of WSMP Common Stock between the date the Agreement was signed
and the Effective Date.
The Sagebrush Special Committee considered the premium the Merger
Consideration will represent over the closing prices of the Sagebrush Common
Stock at various dates before the Merger was announced and the results of
analyses performed by I/JL regarding premiums paid in other restaurant company
change of control transactions. Using the closing price of the Sagebrush Common
Stock on the day of the announcement of the proposed Merger as the measure of
such premium, Sagebrush Shareholders will receive a premium of 12% over the
closing price of the Sagebrush Common Stock one day before the proposed Merger
was announced and a premium of 17% over the closing price of Sagebrush Common
Stock one month before the proposed Merger was announced. The Sagebrush Special
Committee also noted that the $7.00 minimum and the $7.50 maximum value of WSMP
Common Stock to be received with respect to each share of Sagebrush Common Stock
are 23.0% and 31.8% greater, respectively, than the $5.69 closing price of the
Sagebrush Common Stock on September 25, 1997, the last trading day preceding
public announcement of the proposed merger.
The Sagebrush Special Committee also considered the other material analyses
performed by I/JL. They included an analysis of selected comparable restaurant
companies, a discounted cash flow analysis used to determine a range of present
values per share of Sagebrush Common Stock and a pro forma dilution analysis.
For a summary of the material analyses performed by I/JL, see "-- Opinion of
Sagebrush's Financial Advisor."
22
<PAGE> 31
In light of the recent increase in the market price of WSMP Common Stock,
the Sagebrush Special Committee considered carefully the risk of post-Merger
fluctuations in the market value of WSMP Common Stock. From June 13, 1996 to
November 13, 1997 (a period of 16 months), the closing price of WSMP Common
Stock increased by approximately 350% from $5.00 to $22.375 per share. I/JL
expressed no opinion as to what the value of the WSMP Common Stock would be upon
consummation of the Merger or at any time thereafter. I/JL did, however, use
independent investment research reports on Sagebrush and WSMP, earnings
estimates contained therein and information with respect to WSMP provided by the
analysts regarding different components of revenues in order to analyze how
projected growth for WSMP could be achieved. While any estimates of future
performance are subject to inherent risks and uncertainties, the Sagebrush
Special Committee believed these earnings estimates formed a reasonable basis
for assessing the market risk of WSMP Common Stock after consummation of the
Merger. The Sagebrush Special Committee then concluded that, taking into
consideration the benefits accruing to the Sagebrush Shareholders from the
Merger, accepting WSMP Common Stock as the sole form of Merger Consideration is
an acceptable risk. The Sagebrush Special Committee also considered that an
investment in WSMP Common Stock after giving effect to the Merger would likely
have greater liquidity than an investment in Sagebrush Common Stock.
The Sagebrush Special Committee considered the need, in the absence of the
Merger, to continue using substantially all of Sagebrush's available cash flow
from operations to finance the opening of additional restaurants and increase
Sagebrush's earnings. The Merger presents attractive growth opportunities
because the combined company will have available to it in the form of existing
restaurants owned by WSMP a number of restaurant facilities that could be
remodeled to develop additional Sagebrush restaurants. Remodeling existing
facilities for the Sagebrush concept as opposed to constructing new facilities
requires a smaller capital investment of approximately $500,000 per restaurant
compared to the cost of erecting a new building with purchased property of from
$1.2 million to $1.6 million.
Recommendation of the Sagebrush Special Committee. The Sagebrush Board
considered the procedural fairness of the negotiations leading to approval of
the Merger and execution of the Agreement. The Sagebrush Board noted that the
final Merger Consideration and terms of the Merger were negotiated at arms
length by Sagebrush, I/JL and the Sagebrush Special Committee. These
negotiations led to the Sagebrush Special Committee's recommendation on November
14, 1997 that the Sagebrush Board approve the Agreement and the Merger.
Likelihood of the Availability of Other Strategic Alternatives. The
Sagebrush Board also considered whether desirable strategic alternatives to
maximize shareholder value, other than the Merger or Sagebrush's remaining
independent, were likely to be available to Sagebrush. Based upon the contacts
with prospective purchasers made by Sagebrush (through an investment banking
firm engaged by Sagebrush and otherwise) during 1996 and 1997 and management's
assessment of the likelihood of attracting further interest from those or other
prospective purchasers, the Sagebrush Board concluded that it could not
reasonably expect another prospective purchaser to propose a transaction with
Sagebrush on terms more favorable than those proposed by WSMP. The Sagebrush
Board also noted that no third parties had approached Sagebrush with respect to
an acquisition or other business combination transaction after announcement of
the execution of the letter of intent between Sagebrush and WSMP on September
25, 1997.
Advice of Financial Advisor and Fairness Opinion. The Sagebrush Board
considered the opinion of I/JL that, as of November 14, 1997, the consideration
proposed to be paid by WSMP in the Merger to the Sagebrush Shareholders was fair
to such shareholders from a financial point of view. See "-- Opinion of
Sagebrush's Financial Advisor."
Nonfinancial Terms of the Merger. The Sagebrush Board also considered all
of the nonfinancial terms of the Agreement, including the structure of the
transaction as a tax-free reorganization for federal income tax purposes,
whereby the Sagebrush Shareholders would not recognize gain or loss on their
receipt of the WSMP Common Stock in the Merger in exchange for their Sagebrush
Common Stock, and the requirement that Sagebrush and WSMP receive an opinion of
counsel to that effect as a closing condition. The Sagebrush Board also
considered its continued right to terminate the Agreement prior to the Effective
Date if it were to determine that such action is necessary in the exercise of
the Sagebrush's Board's duties to the Sagebrush
23
<PAGE> 32
Shareholders. The Sagebrush Board also noted the likelihood that the conditions
to the consummation of the Merger would be met on a timely basis.
The foregoing discussion of the information and factors considered by the
Sagebrush Special Committee and the Sagebrush Board is not intended to be
exhaustive, but it is believed to include all of the material factors considered
by them. In reaching these determinations to approve the Merger, the Sagebrush
Board and the Sagebrush Special Committee did not assign any relative or
specific weights to the foregoing factors, and individual directors may have
given differing weights to different factors. After deliberating with respect to
the Merger and the transactions contemplated thereby and considering, among
other things, the matters discussed above, the Sagebrush Board unanimously
approved the Agreement and the transactions contemplated thereby as being in the
best interests of the Sagebrush Shareholders, and authorized the execution,
delivery and performance of the Agreement.
At its subsequent meeting on January 12, 1998, the Sagebrush Board reviewed
a draft of this Joint Proxy Statement-Prospectus and a draft of the I/JL Update
Opinion (as defined below), determined that there were no subsequent events
affecting its conclusions with respect to the Agreement, unanimously confirmed
its approval of the Merger and determined to recommend the Agreement and the
Plan of Merger to the Sagebrush Shareholders for approval at the Sagebrush
Special Meeting.
FOR THE REASONS DESCRIBED ABOVE, THE SAGEBRUSH BOARD BELIEVES THAT THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE SAGEBRUSH SHAREHOLDERS AND,
ACCORDINGLY, UNANIMOUSLY RECOMMENDS THAT THE SAGEBRUSH SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE AGREEMENT AND THE PLAN OF MERGER.
OPINION OF SAGEBRUSH'S FINANCIAL ADVISOR
I/JL was engaged by the Sagebrush Special Committee to render an opinion to
the Sagebrush Board with respect to the fairness from a financial point of view
to the Sagebrush Shareholders of the consideration proposed to be received by
them from WSMP in the Merger.
On November 14, 1997 I/JL delivered a written opinion (the "I/JL November
Opinion") to the Sagebrush Board to the effect that, as of such date, and based
on the assumptions made, matters considered and limits of review set forth in
such opinion, the consideration proposed to be paid by WSMP in the Merger to the
Sagebrush Shareholders was fair to such shareholders from a financial point of
view. I/JL has updated its written opinion as of the date of this Joint Proxy
Statement-Prospectus (the "I/JL Update Opinion"; together with the I/JL November
Opinion, the "I/JL Opinions").
THE FULL TEXT OF THE I/JL UPDATE OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
I/JL, IS ATTACHED AS APPENDIX B TO THIS JOINT PROXY STATEMENT-PROSPECTUS. THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW
UNDERTAKEN BY I/JL IN THE I/JL NOVEMBER OPINION ARE SUBSTANTIALLY THE SAME AS
THOSE CONTAINED IN THE I/JL UPDATE OPINION. SAGEBRUSH SHAREHOLDERS SHOULD READ
THE I/JL UPDATE OPINION CAREFULLY AND IN ITS ENTIRETY. THE FOLLOWING SUMMARY OF
THE I/JL OPINIONS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINIONS. THE I/JL OPINIONS, WHICH ARE ADDRESSED TO THE SAGEBRUSH BOARD,
ARE DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW TO THE
SAGEBRUSH SHAREHOLDERS OF THE CONSIDERATION PROPOSED TO BE PAID BY WSMP IN THE
MERGER, DO NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR ANY RELATED TRANSACTION
AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY SAGEBRUSH SHAREHOLDER AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE AT THE SAGEBRUSH SPECIAL MEETING.
In arriving at the I/JL Opinions, I/JL, among other things: (i) reviewed
certain publicly available financial, operating and other data with respect to
Sagebrush and WSMP, including the consolidated financial statements of Sagebrush
and WSMP for recent fiscal years and interim periods to September 12, 1997, in
the
24
<PAGE> 33
case of Sagebrush, and to November 7, 1997, in the case of WSMP, and certain
other relevant financial and operating data relating to Sagebrush and WSMP made
available to I/JL from published sources and from the internal records of
Sagebrush and WSMP; (ii) reviewed the Agreement and certain related documents;
(iii) reviewed the Current Reports on Form 8-K filed by Sagebrush and WSMP with
respect to the Merger; (iv) reviewed a draft of this Joint Proxy
Statement-Prospectus; (v) reviewed the historical market prices and trading
activity for Sagebrush Common Stock and WSMP Common Stock and compared them with
those of certain public companies which I/JL deemed to be reasonably similar to
Sagebrush or WSMP, respectively; (vi) compared the results of operations of
Sagebrush and WSMP with those of certain other public companies which I/JL
deemed to be reasonably similar to Sagebrush; (vii) compared the proposed
financial terms of the Merger with the financial terms, to the extent publicly
available, of selected business combinations in the restaurant industry, which
I/JL deemed to be relevant; (viii) reviewed and discussed with representatives
of management of Sagebrush and management of WSMP certain information regarding
the business and financial aspects of the Merger, including financial forecasts
relating to cost savings and other potential synergies anticipated to result
from the Merger and the underlying assumptions made; (ix) made inquiries
regarding and discussed the Merger, the Agreement and other matters related
thereto with counsel to the Sagebrush Special Committee; and (x) reviewed such
other analyses and performed such other examinations and took into account such
other matters as I/JL deemed appropriate.
In preparing the I/JL Opinions, I/JL did not assume any obligation to
verify any of the information supplied or otherwise made available to I/JL and
relied on all such information as being complete and accurate in all material
respects. With respect to the financial forecasts for Sagebrush and WSMP
prepared by their respective managements, I/JL assumed, with the consent of
Sagebrush and WSMP, that such forecasts were reasonably prepared on bases
reflecting at the time of preparation the best available estimates and judgments
of their respective managements as to (i) the expected future financial
performance of Sagebrush and of WSMP and (ii) the anticipated cost savings,
revenue enhancements and other potential synergies (including the timing, amount
and achievability thereof) anticipated to result from the Merger, and that such
forecasts provided a reasonable basis upon which I/JL could, in part, form its
opinions. Such projections and estimates are based on numerous variables and
assumptions which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those set forth in such projections.
I/JL also assumed, with Sagebrush's consent, that there were no material
changes in Sagebrush's or WSMP's assets, financial condition, results of
operations, business or prospects since the respective dates of their last
financial statements reviewed by I/JL. I/JL further assumed, with Sagebrush's
consent, that (i) in the course of obtaining the necessary regulatory and third
party consents for the Merger, no restriction will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger, and (ii) the
Merger will be consummated in accordance with the terms and provisions of the
Agreement, without any amendments to, and without any waiver by WSMP of, any of
the material conditions to its obligations thereunder. In addition, I/JL did not
assume responsibility for making an independent evaluation, appraisal or
physical inspection of the assets or individual properties of Sagebrush or WSMP,
nor was I/JL furnished with any such evaluations or appraisals. Finally, the
I/JL Opinions were necessarily based upon economic, monetary, market and other
conditions as they existed on and could be evaluated as of the date of such
opinions. The I/JL Opinions did not address the merits of the underlying
decision by Sagebrush and WSMP to engage in the Merger. In addition, I/JL
expressed no opinion as to what the value of the WSMP Common Stock would be upon
consummation of the Merger or at any time thereafter.
Set forth below is a summary of the material analyses performed by I/JL in
connection with the I/JL November Opinion. All market data is as of November 13,
1997, which is one day prior to the delivery of the I/JL November Opinion. The
closing price for WSMP Common Stock of $22.375 on November 13, 1997 is used to
calculate the appropriate transaction multiples. In connection with the I/JL
Update Opinion, I/JL performed procedures to update certain of such analyses and
reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
Comparable Company Analysis. Based on publicly available earnings
estimates, closing stock prices on November 13, 1997 and other financial
information, I/JL reviewed and compared actual and estimated
25
<PAGE> 34
selected financial, operating and stock market information and financial ratios
of Sagebrush, WSMP and a group of eleven restaurants consisting of Austin Steaks
& Saloon, Inc.; Boston Chicken, Inc.; Family Steakhouse of Florida; Logan's
Roadhouse, Inc.; Lone Star Steakhouse & Saloon; Outback Steakhouse, Inc.;
Rainforest Cafe, Inc.; Rare Hospitality International Inc.; Roadhouse Grill;
Ryan's Family Steakhouses, Inc.; and Timber Lodge Steakhouse, Inc. (the
"Comparable Companies").
I/JL noted for the Sagebrush Board that, among other things, based on
September 12, 1997 financial statements for the trailing 12 month period and the
Sagebrush Common Stock closing price of $6.00 on November 13, 1997: (i)
Sagebrush had an enterprise value (defined as the market value of equity plus
short and long term debt, including capitalized lease obligations, minus cash
and marketable securities) to sales multiple of 0.76x compared to a median of
0.88x for the Comparable Companies; (ii) Sagebrush had an enterprise value to
EBITDA multiple of 5.81x and an enterprise value to EBIT multiple of 8.42x, as
compared to the median enterprise value/EBITDA and enterprise value/EBIT
multiples for the Comparable Companies of 7.51x and 11.18x; (iii) Sagebrush had
a price to book value ratio of 2.59x at November 13, 1997, as compared to the
median price to book ratio for the Comparable Companies of 1.43x; and (iv)
Sagebrush had a price to earnings ratio of 13.33x at November 13, 1997 based on
the EPS for the latest 12 months ended September 12, 1997, as compared to the
median price to earnings ratio for the Comparable Companies of 16.83x. Based on
the multiples and ratios derived from analysis of the Comparable Companies, I/JL
determined that the value of the Sagebrush Common Stock ranged from $3.36 to
$8.04 per share (from $6.99 to $8.04 per share excluding the $3.36 implied
equity value based on the median book value multiple). I/JL noted that the
average size and liquidity of the Comparable Companies was substantially greater
than Sagebrush, resulting in higher median multiples.
Discounted Cash Flow Analysis. I/JL performed a discounted cash flow
analysis to determine a range of present values per share of Sagebrush Common
Stock assuming Sagebrush was sold at the end of fiscal 2001. Based on the
Sagebrush's estimated EBIT for 1997 and 1998, I/JL estimated EBIT for 1999
through 2001 to increase by 15% annually. I/JL also made certain assumptions
about capital expenditures and working capital needs in each year to arrive at
free cash flow projections for fiscal years 1997 to 2001.
For the terminal value I/JL assumed that Sagebrush would be sold at the end
of fiscal 2001 at an EBITDA multiple range consistent with multiples for actual
transactions in the restaurant industry and with the EBITDA multiple to be paid
pursuant to the Agreement (6.0 to 8.0 times EBITDA). The free cash flow streams
and terminal values were presently valued using a range of discount rates from
15% to 17%. Applying the above multiples and discount rates, I/JL determined
that the value of Sagebrush Common Stock ranged from $34.2 to $51.9 million, or
$5.74 to $8.71 per share.
Analysis of Selected Comparable Restaurant Merger Transactions. I/JL
reviewed the consideration paid in the following seven transactions
(Acquiror/Target) announced since January 1, 1995: Apple South Inc./DF&R
Restaurants Inc.; Shoney's Inc./TPI Enterprises; CKE Restaurants/Summit Family
Restaurant; Buffets Inc./HomeTown Buffet Inc.; Longhorn Steaks, Inc./Bugaboo
Creek Steak Houses Inc.; Compass Group PLC/DAKA International Inc.; and Port
Royal Holdings Inc./Krystal Co. (collectively, the "Comparable Transactions").
For each company merged or to be merged in such transactions, I/JL compiled
ratios illustrating, among other things, enterprise value to latest 12 months
net sales, enterprise value to latest 12 months EBITDA, enterprise value to
latest 12 months EBIT and equity value to net income.
The ratios are as follows: (i) a median ratio of enterprise value to latest
12 months' net sales of .70x; (ii) a median ratio of enterprise value to EBITDA
of 9.26x; (iii) a median ratio of enterprise value to EBIT of 18.19x; and (iv) a
median ratio of equity value to net income of 28.99x. The consideration to be
paid to the Sagebrush Shareholders is based on the closing price of WSMP, one
day prior to delivery of the I/JL November Opinion, of $22.375 and represented
ratios of enterprise value to latest 12 months' net sales of .90x, enterprise
value to latest 12 months' EBITDA of 6.93x, enterprise value to latest 12
months' EBIT of 10.05x and equity value to latest 12 months' net income of
16.03x. I/JL noted that the median ratios in the Comparable Transactions were
higher than the ratios calculated with respect to the consideration to be paid
to the Sagebrush Shareholders. I/JL did not believe, however, that this analysis
was as relevant as the other
26
<PAGE> 35
valuation methodologies given that all the median ratios included transactions
consummated more than 12 months ago or were calculated based on low operating
results in some cases.
No other company or transaction used in the above analysis as a comparison
is identical to Sagebrush, WSMP or the proposed Merger. Accordingly, an analysis
of the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
acquisition or public trading multiples of the companies to which Sagebrush,
WSMP and the proposed Merger are being compared.
Pro Forma Dilution Analysis. Using estimates for earnings per share of
Sagebrush of $.50 in 1997 and $.63 in 1998 and estimates for WSMP of $.54 in
1998 and $.76 in 1999 and estimates as to the cost savings and other potential
synergies anticipated to result from the Merger, I/JL compared estimated
earnings per share ("EPS") for WSMP on a stand-alone basis to the estimated EPS
for WSMP on a pro forma combined basis for WSMP's fiscal year 1998 and 1999.
I/JL noted that, based upon estimates by Sagebrush's management of cost savings,
revenue enhancements and operating synergies and after giving effect to certain
assumptions as to, among other things, the number of shares to be outstanding in
each period, the Merger could be expected to be accretive to WSMP's EPS in
fiscal year 1998 by approximately 59.3%, and in calendar year 1999 by
approximately 62.8%.
Other Analysis. I/JL also reviewed investment research reports on
Sagebrush and WSMP prepared by securities analysts at Wheat, First Securities,
Inc., in the case of Sagebrush, and Pauli, in the case of WSMP. In the
investment research reports, I/JL analyzed the earnings estimates and the
different components of revenues in order to determine how projected growth
would be achieved. In addition, I/JL reviewed and analyzed the historical
financial performance of Sagebrush and WSMP with emphasis on margins and growth
trends.
The foregoing is a summary of the material analyses performed by I/JL in
connection with preparing the I/JL Opinions and does not purport to be a
complete description of the analyses performed by I/JL. The preparation of a
fairness opinion is not susceptible to partial analysis or summary description.
I/JL believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses and of the
factors considered, without considering all analyses and factors, would create
an incomplete view of the process underlying the analyses. In addition, I/JL may
have given various analyses more or less weight than other analyses, and may
have deemed various assumptions more or less probable than other assumptions, so
that the ranges of valuations resulting from any particular analysis described
above should not be taken to be I/JL's view of the actual values of Sagebrush,
WSMP or the combined company. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that such analysis was
given greater weight than any other analysis.
In performing its analyses, I/JL made numerous assumptions with respect to
industry performance, regulatory, general business and economic conditions and
other matters, many of which are beyond the control of Sagebrush and WSMP. The
analyses performed by I/JL are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
those suggested by such analyses. Such analyses were prepared solely as part of
I/JL's analysis in connection with the delivery of the I/JL's opinion of the
fairness of the consideration to be paid by WSMP from a financial point of view.
The analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future.
Pursuant to the terms of I/JL's engagement, Sagebrush has agreed to pay
I/JL a fee of $75,000. Sagebrush also has agreed to reimburse I/JL for its
reasonable out-of-pocket expenses and to indemnify I/JL, its affiliates, and
their respective partners, directors, officers, agents, consultants, employees
and controlling persons against certain liabilities, including liabilities under
the federal securities laws.
I/JL has performed various financial advisory and investment banking
services for Sagebrush in the past, for which I/JL has received compensation,
and may provide such services to Sagebrush or WSMP in the future. In the
ordinary course of its business, I/JL trades the shares of Sagebrush Common
Stock and WSMP
27
<PAGE> 36
Common Stock for its own account and for the accounts of its customers, and,
accordingly, may at any time hold a long or short position in such securities.
THE EFFECTIVE TIME
Subject to the satisfaction or waiver of certain conditions contained in
the Agreement, the parties will cause Articles of Merger to be filed with the
Secretary of State of the State of North Carolina. The Effective Time shall be
the time of such filing or such later time as may be specified in such Articles
of Merger. From and after the Effective Time, the holders of certificates
theretofore representing Sagebrush Common Stock shall cease to have any rights
with respect thereto (other than dissenter's rights to the extent applicable
pursuant to Article 13 of the NCBCA). Their sole right shall be to receive
Merger Consideration and, if applicable, cash in lieu of fractional shares. At
the Effective Time, the stock transfer books of Sagebrush shall be closed, and
no transfer of any shares of Sagebrush Common Stock theretofore outstanding
shall thereafter be made.
EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
As soon as practicable after the Effective Time, each holder of Sagebrush
Common Stock converted into the right to receive Merger Consideration, upon
surrender to an exchange agent designated by WSMP (the "Exchange Agent"), of
certificates previously representing Sagebrush Common Stock, will be entitled to
receive certificates representing Merger Consideration and a check for the
applicable cash amount, for fractional shares. As promptly as practicable after
the closing date, the Exchange Agent shall deliver or mail to each shareholder
of Sagebrush a letter of transmittal and instructions for use in surrendering
the certificates that immediately prior to the Effective Time represented shares
of Sagebrush Common Stock. Upon the surrender of such certificates, together
with such letter of transmittal and such other documents as may reasonably be
requested, WSMP shall promptly cause the Merger Consideration to be issued and
delivered to the persons entitled thereto. No dividend or other distribution
payable following the closing with respect to shares of WSMP Common Stock to be
received as Merger Consideration shall be paid, and there shall be no right to
vote such shares of WSMP Common Stock, until the Sagebrush shareholder has
tendered certificates representing shares of Sagebrush Common Stock to be
exchanged for Merger Consideration. Such tender when made, however, shall relate
back to the Effective Time for the purposes of any rights to receive dividends
and other distributions with respect to WSMP Common Stock distributable to
holders of record after the Effective Time. No interest will be paid or accrued
on the Merger Consideration upon the surrender of the certificate or
certificates representing shares of Sagebrush Common Stock or on dividends or
other distributions deferred as described in the immediately preceding sentence.
With respect to any certificate for Sagebrush Common Stock that has been lost or
destroyed, WSMP shall cause the Merger Consideration attributable to such
certificate to be paid upon receipt of evidence and indemnity reasonably
satisfactory to it of the shares represented thereby.
THE SAGEBRUSH SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES UNTIL
THEY RECEIVE TRANSMITTAL FORMS AND INSTRUCTIONS.
No fractional shares of WSMP Common Stock will be issued in the Merger. All
fractions of a share of WSMP Common Stock to which a holder of Sagebrush Common
Stock immediately prior to the Effective Time would otherwise be entitled, at
the Effective Time, shall be aggregated. If a fraction results from such
aggregation, then such shareholder shall be entitled to receive from WSMP an
amount in cash, without interest, in lieu of such fractional share of WSMP
Common Stock equal to the product of such fraction and the Exchange Ratio
multiplied by the fair market value of one share of WSMP Common Stock, such fair
market value to be determined conclusively by WSMP (absent manifest error) by
reference to the last sale price reported by NASDAQ for the WSMP Common Stock
for the Trading Day concluded most recently prior to the Effective Time.
28
<PAGE> 37
DISSENTING SHAREHOLDERS
Any Sagebrush shareholder who shall have lawfully dissented from the Merger
in accordance with the NCBCA and who shall have properly exercised such holder's
rights to demand payment of the value of the holder's shares (the "Dissenting
Shares") as provided in the NCBCA (a "Dissenting Shareholder") shall thereafter
have only such rights as are provided to a Dissenting Shareholder by the NCBCA
and shall have no rights to receive Merger Consideration; provided, however,
that, if a Dissenting Shareholder shall withdraw (in accordance with the NCBCA)
such holder's demand for such appraisal or shall become ineligible for such
appraisal, then such holder's Dissenting Shares shall thereupon cease to be
Dissenting Shares and shall be converted into and shall represent only the right
to receive Merger Consideration, without interest thereon, upon surrender of the
certificate or certificates representing the Dissenting Shares. See "Dissenters'
Rights."
VOTING AGREEMENT OF CONNOR AND MILLER
In the Agreement, Connor and Miller, who (at the Sagebrush Record Date)
together owned or controlled 3,065,757 shares of Sagebrush Common Stock, or
approximately 51.7% of the shares entitled to be voted at the Sagebrush Special
Meeting, agreed to vote such shares in favor of the Agreement and the Plan of
Merger.
EFFECT ON SAGEBRUSH OPTIONS
At the Effective Time, each outstanding Sagebrush Option to purchase
Sagebrush Common Stock granted by Sagebrush under the Sagebrush Option Plan,
whether or not then exercisable, shall be converted into a right to purchase
WSMP Common Stock, and WSMP shall assume each Sagebrush Option in accordance
with the terms of the Sagebrush Option Plan and the terms of the applicable
option agreement, except that from and after the Effective Time: (i) WSMP and
the Compensation Committee of the WSMP Board shall be substituted for Sagebrush
and the committee of the Sagebrush Board administering the Sagebrush Option
Plan; (ii) each Sagebrush Option assumed by WSMP may be exercised solely for
shares of WSMP Common Stock; (iii) the number of shares of WSMP Common Stock
subject to each such Sagebrush Option shall be the number of whole shares of
WSMP Common Stock (omitting any fractional share) determined by multiplying the
number of shares of Sagebrush Common Stock subject to such Sagebrush Option
immediately prior to the Effective Time (without regard to any limitations
imposed by vesting schedules) by the Exchange Ratio; and (iv) the per share
exercise price under each such Sagebrush Option shall be adjusted by dividing
such exercise price by the Exchange Ratio and rounding up to the nearest cent.
In addition, and notwithstanding clauses (iii) and (iv) of the first sentence
hereof, each Sagebrush Option that is an "incentive stock option" shall be
adjusted as required by Section 424 of the Code so as not to constitute a
modification, extension or renewal of the option within the meaning of Section
424(h) of the Code.
As soon as practicable following the consummation of the Merger, WSMP shall
file with the Commission a registration statement on Form S-8 covering the
shares of WSMP Common Stock issuable upon exercise of the Sagebrush Options and
shall use its best efforts to maintain the effectiveness of such registration
statement for as long as any Sagebrush Options remain outstanding. With respect
to any individuals who become subject to the reporting requirements of Section
16(a) of the Exchange Act by virtue of the Merger, WSMP shall administer the
Sagebrush Option Plan in a manner that complies with Rule 16b-3 promulgated
under the Exchange Act.
CONDUCT OF BUSINESS PRIOR TO THE MERGER AND OTHER COVENANTS
Prior to the closing, except as expressly contemplated by the Agreement,
(1) without the prior written consent of WSMP, Sagebrush will, and (2) without
the prior written consent of Sagebrush, WSMP will, (a) conduct its business in
the ordinary and usual course, use reasonable efforts to keep intact its
business organizations and goodwill and use reasonable efforts to keep available
the services of their respective officers and employees and maintain good
relationships with suppliers, lenders, creditors, distributors, employees,
customers and others; (b) continue properly and promptly (i) to file when due
all periodic reports and other
29
<PAGE> 38
documents required to be filed by it with the Commission and all federal, state,
local, foreign and other tax returns, reports and declarations required to be
filed by it (except where the failure to file any such tax returns, reports and
declarations would not be reasonably likely to have a material adverse effect)
and (ii) to pay, or make full and adequate provision for the payment of, all
taxes and governmental charges due from or payable by it, (except where the
failure to make the prompt payment of such taxes or charges would not be
reasonably likely to have a material adverse effect); (c) not (i) amend or
restate its charter, except in the case of WSMP to change the name of WSMP or to
increase the number of authorized directors of WSMP, or (ii) split, combine or
reclassify any of its securities, or declare, set aside or pay any dividend or
other distribution on any of its securities, or make or agree or commit to make
any exchange for or redemption of any of its securities payable in cash, stock
or property; (d) not issue or agree to issue any additional shares of, or
options, warrants or other rights of any kind to acquire any shares of, its
capital stock of any class, except upon the exercise of currently outstanding
options, warrants, convertible securities and other rights, agreements and
commitments; (e) not create, incur, assume or guarantee any long-term
indebtedness for borrowed money or, except in the ordinary course of business
and consistent with past practice, any short-term indebtedness for borrowed
money; (f) not (i) adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, warrant, pension, retirement, deferred compensation,
employment, severance, termination, change in control or other employee benefit
plan, agreement, trust fund or arrangement for the benefit or welfare of any
officer, director, employee or consultant or (ii) agree to any increase in the
compensation payable or to become payable to, or any increase in the contractual
term of employment of, any officer, director, employee or consultant, except in
the ordinary course of business and generally consistent with past practice; (g)
not sell, lease, mortgage, encumber or otherwise dispose of or grant any
interest in any of its assets or properties, except in the ordinary course of
business and consistent with past practice and except for liens for taxes not
yet due or liens that are not material in amount or effect and do not impair the
use of the property; (h) not (i) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other
organization or division thereof engaged in any business (including, in
particular, restaurant operations) or any equity interest therein; (ii) enter
into any contract or agreement (other than in the ordinary course of business
consistent with past practice) that would be material to WSMP or Sagebrush, as
the case may be; or (iii) authorize or make any capital expenditure or
expenditures individually in excess of $10,000 or in the aggregate in excess of
$50,000; and (i) not enter into any agreement, commitment or understanding,
whether in writing or otherwise, with respect to any of the matters referred to
in clauses (c) through (h) above.
The Agreement also contains various interim covenants, including those
requiring the parties (1) to use their best, good faith efforts to take
necessary actions to effect the Merger; (2) to obtain all necessary shareholder
approvals; (3) to cooperate in the preparation of the Registration Statement and
this Joint Proxy Statement-Prospectus; (4) to refrain from issuing press
releases regarding the Merger without the other party's prior approval (except
as otherwise required by applicable law or regulation); (5) to provide the other
party with reasonable access to information regarding such party under the
condition that no such confidential information be shared with any third party
except as required by applicable law; (6) to refrain from soliciting or
encouraging any alternative business combination transactions (subject to the
fiduciary obligations of each of the WSMP Board and the Sagebrush Board); (7) to
take steps necessary to ensure that the Agreement and the Merger will not
trigger any anti-takeover laws of the State of North Carolina; (8) to maintain
for at least seven years from the closing date the books, records and other
documents of Sagebrush, its subsidiaries and their respective predecessors and
to afford to current and former shareholders of Sagebrush and its predecessors,
and their accountants, counsel and representatives, full access to such records
(but only to the extent that such shareholders can demonstrate a reasonable need
for such access), during normal business hours for such seven-year period; and
(9) to not knowingly take any actions that would cause the transactions
contemplated by the Agreement to fail to qualify for pooling-of-interests
accounting treatment consistent with generally accepted accounting principles
and the rules and regulations of the Commission or to be treated as a
"reorganization" within the meaning of Section 368(a) of the Code.
EFFECT ON SAGEBRUSH BENEFIT PLANS
WSMP will cause the Surviving Subsidiary to maintain for its employees
immediately following the Merger either (1) the employee benefit plans of
Sagebrush ("Sagebrush Benefit Plans") or (2) benefit plans,
30
<PAGE> 39
programs and arrangements of WSMP providing benefits substantially equivalent in
total to the benefits provided by the Sagebrush Benefit Plans ("Successor
Plans"). WSMP agrees to endeavor to continue in effect for employees of the
Surviving Subsidiary such Sagebrush Benefit Plans or such Successor Plans,
subject to the right to amend or terminate any such plans, programs or
arrangements if the Board of Directors of the Surviving Subsidiary shall deem
any such action to be desirable and in the best interests of the Surviving
Subsidiary.
CONDITIONS TO THE MERGER
The obligation of WSMP, Sagebrush and Sub to effect the Merger is subject
to satisfaction or waiver of the following conditions at or prior to the
Effective Time: (1) such parties shall have received a copy, certified by the
Secretary of Sagebrush, of resolutions duly adopted (and not subsequently
modified or rescinded) by the Sagebrush Board adopting and approving the
Agreement, recommending the Merger to the Sagebrush Shareholders and directing
the submission of the Agreement and the Merger to a vote of such shareholders;
(2) such parties shall have received a copy, certified by the Secretary of
Sagebrush, of resolutions duly adopted (and not subsequently modified or
rescinded) by a majority of the shares of Sagebrush Common Stock present in
person or represented by proxy at a meeting of the Sagebrush Shareholders, a
quorum being present throughout such meeting, approving the Agreement and
authorizing the Merger; (3) such parties shall have received a copy, certified
by the Secretary of Sub, of resolutions duly adopted (and not subsequently
modified or rescinded) by the Board of Directors of Sub adopting and approving
the Agreement, recommending the Merger to WSMP, as the sole shareholder of Sub,
and directing the submission of the Agreement and the Merger to a vote of such
shareholder; (4) such parties shall have received a copy, certified by the
Secretary of WSMP, of resolutions duly adopted (and not subsequently modified or
rescinded) by WSMP, as the sole shareholder of Sub, approving the Agreement and
authorizing the Merger; (5) such parties shall have received a copy, certified
by the Secretary of WSMP, of resolutions duly adopted (and not subsequently
modified or rescinded) by the WSMP Board adopting and approving this Agreement,
recommending the Merger and the issuance of the Merger Consideration to the WSMP
Shareholders and directing the submission of the Agreement, the Merger and the
issuance of the Merger Consideration to a vote of such shareholders; (6) such
parties shall have received a copy, certified by the Secretary of WSMP, of
resolutions duly adopted (and not subsequently modified or rescinded) by a
majority of the shares of WSMP Common Stock present in person or represented by
proxy at a meeting of the shareholders of WSMP, a quorum being present
throughout such meeting, approving the issuance of the Merger Consideration
under the Agreement; (7) the Registration Statement, of which this Joint Proxy
Statement-Prospectus constitutes a part, shall have been declared effective by
the Commission under the Securities Act, the Registration Statement shall remain
effective thereunder, no "stop order" proceedings with respect to the
Registration Statement shall be pending or threatened by the Commission, and the
shares of WSMP Common Stock issuable as Merger Consideration shall have been
approved for listing on NASDAQ; (8) there shall not be in effect any preliminary
or permanent injunction or other order by any federal or state authority
prohibiting the consummation of the Merger; (9) there shall have been obtained
all consents that, in the reasonable judgment of each of WSMP, Sub and
Sagebrush, are necessary or desirable in connection with the consummation of the
transactions contemplated hereby such that, were they not obtained, it would be
inadvisable to proceed with the Merger; and (10) such parties shall have
received an opinion letter from counsel to Sagebrush, dated as of the Effective
Time, in form and substance reasonably satisfactory to each of them, to the
effect that (a) the Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code, (b) the exchange in the Merger of Sagebrush
Common Stock for WSMP Common Stock will not give rise to gain or loss for
federal income tax purposes to the Sagebrush Shareholders with respect to such
exchange (except that a shareholder who receives cash hereunder (as a result of
the exercise of dissenter's rights or in lieu of a fractional share) will
recognize a taxable gain or loss with respect to the shares of stock that such
shareholder exchanges or is deemed to exchange for such cash consideration), and
(c) no gain or loss for federal income tax purposes will be recognized by
Sagebrush, WSMP or Sub in the transactions effecting the Merger, it being
understood that no opinion will be given as to the federal income tax
consequences to those shareholders of Sagebrush, if any, subject to special
treatment under the Code.
31
<PAGE> 40
The obligations of WSMP and Sub to effect the Merger shall be subject to
satisfaction or waiver of the following additional conditions at or prior to the
Effective Time: (1) the representations and warranties of Sagebrush, Miller and
Connor set forth in the Agreement shall be true and correct in all material
respects as of the date of the Agreement and, without consideration of any
disclosure amendments to the Agreement and except in such respects as would have
no material adverse effect on Sagebrush, as of the Effective Time (as if made at
such time); (2) Sagebrush, Miller and Connor shall have performed in all
material respects the covenants and agreements required by the Agreement to be
performed by them at or prior to the closing; (3) WSMP shall have received from
Sagebrush an officers' certificate, executed by the Chief Executive Officer and
the Chief Financial Officer of Sagebrush (in their capacities as such) and dated
the closing date, confirming satisfaction of the conditions stated in clauses
(1) and (2) above insofar as such conditions refer to Sagebrush; (4) WSMP shall
have received from Miller and Connor a certificate, executed by each of them and
dated the closing date, confirming satisfaction of the conditions stated in
clauses (1) and (2) above insofar as such conditions refer to Miller and Connor;
(5) Miller shall have executed and delivered to WSMP the Miller Employment
Agreement (as defined below); (6) Connor shall have executed and delivered to
WSMP the Connor Consulting Agreement (as defined below); (7) WSMP shall have
received: (a) an opinion letter of counsel to Sagebrush, dated the closing, in
form and substance reasonably satisfactory to WSMP, conforming to certain
provisions of the Agreement; (b) a "cold comfort" letter from Deloitte & Touche
LLP, dated the closing date, in form and substance reasonably satisfactory to
WSMP, covering certain financial information; and (c) such other documents as
WSMP may reasonably request, in each case reasonably satisfactory in form and
substance to WSMP; (8) the holders of not more than 3% of the outstanding shares
of Sagebrush Common Stock shall have perfected their dissenters' appraisal
rights pursuant to Article 13 of the NCBCA by having given written notice of
their intent to demand payment for their shares and not voting for the Merger;
(9) WSMP shall have received an Affiliate Agreement executed by each of Miller
and Connor, each of the other persons (if any) that Sagebrush reasonably
believes to be an "affiliate" of Sagebrush and such other persons (if any) as
counsel to WSMP might reasonably consider to be "affiliates" of Sagebrush; (10)
WSMP shall have received a letter from Deloitte & Touche LLP, dated as of the
Effective Time, in form and substance reasonably satisfactory to WSMP, to the
effect that the transactions contemplated hereby, including the Merger, will
qualify for pooling-of-interests accounting treatment if consummated in
accordance with the Agreement; and (11) the individuals whose resignations are
contemplated by the Agreement shall have resigned from their positions as of the
Effective Time.
The obligation of Sagebrush to effect the Merger shall be subject to
satisfaction or waiver of the following additional conditions at or prior to the
Effective Time: (1) the representations and warranties of WSMP and Sub set forth
in the Agreement shall be true and correct in all material respects as of the
date of the Agreement and, without consideration of any disclosures amendments
to the Agreement and except in such respects as would have no material adverse
effect on WSMP, as of the Effective Time (as if made at such time); (2) WSMP and
Sub shall have performed in all material respects the covenants and agreements
required by the Agreement to be performed by them at or prior to the closing;
(3) Sagebrush shall have received from WSMP an officers' certificate, executed
by the President and the Chief Financial Officer of WSMP (in their capacities as
such) and dated the closing date, confirming satisfaction of the conditions
stated in clauses (1) and (2) above; (4) WSMP shall have executed and delivered
to Miller the Miller Employment Agreement; (5) WSMP shall have executed and
delivered to Connor the Connor Consulting Agreement; and (6) Sagebrush shall
have received: (a) an opinion letter of counsel to WSMP, dated the closing date,
in form and substance reasonably satisfactory to Sagebrush, conforming to
certain provisions of the Agreement; (b) a "cold comfort" letter from Deloitte &
Touche LLP, dated the closing date, in form and substance reasonably
satisfactory to Sagebrush, covering certain financial information; (c) an
opinion letter of I/JL, dated the closing date, in form reasonably satisfactory
to Sagebrush, confirming the opinion of such firm delivered on or about the date
of this Agreement, to the effect that the Merger is fair to the shareholders of
Sagebrush from a financial point of view; and (d) such other documents as
Sagebrush may reasonably request, in each case reasonably satisfactory in form
and substance to Sagebrush.
32
<PAGE> 41
TERMINATION OF THE AGREEMENT; TERMINATION FEE
The Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time, notwithstanding any other provision of the
Agreement and, with respect to any of subsections (1) through (5) and (7) and
(8) below, notwithstanding approval thereof by the WSMP Shareholders and the
Sagebrush Shareholders: (1) by written consent of WSMP and Sagebrush; (2) by
either WSMP or Sagebrush in the event of a material misrepresentation or
material breach of warranty of the other party contained in the Agreement (which
breach has not been cured, in the case of a breach of warranty, within thirty
days following receipt of written notice thereof by the breaching party); (3) by
either WSMP or Sagebrush in the event of a material breach of any covenant or
agreement by the other party contained in the Agreement (which breach has not
been cured within thirty days following receipt of written notice thereof by the
breaching party); (4) by either WSMP or Sagebrush in the event that the Merger
shall not have been consummated by 11:59 P.M., Eastern time, on April 30, 1998
(or, if earlier, by such time on the fifth day following the date on which the
Sagebrush Shareholders shall have approved the Merger), provided that failure to
consummate the Merger by such time is not caused by a material breach of this
Agreement by the terminating party; (5) by either WSMP or Sagebrush in the event
that any of the conditions precedent to the obligations of such party to
consummate the Merger cannot be satisfied or fulfilled by the time specified in
clause (4) above, provided that the terminating party is not then guilty of a
material misrepresentation or of a material, uncured breach of a warranty,
covenant or agreement as contemplated by clauses (2) and (3) above; (6) by
either WSMP or Sagebrush in the event that less than all of the shareholder
approvals to be sought by Sagebrush or to be sought by WSMP are obtained at the
first meeting of shareholders convened for the purpose of obtaining such
approvals; (7) by WSMP or Sagebrush if the Sagebrush Board, after having
determined in good faith, after consultation with counsel to Sagebrush, that the
taking of action or the failure to take action (or to withdraw, modify or change
a recommendation) is necessary or appropriate in execution of such directors'
duties under the NCBCA (a "Sagebrush Board Determination"), fails to make or
withdraws, modifies or changes its recommendation to the Sagebrush Shareholders
that they approve the Agreement and the Merger; or (8) by Sagebrush or WSMP if
the WSMP Board, after having determined in good faith, after consultation with
counsel to WSMP, that the taking of action or the failure to take action (or to
withdraw, modify or change a recommendation) is necessary in execution of such
directors' duties under the NCBCA (a "WSMP Board Determination"), fails to make
or withdraws, modifies or changes its recommendation to the WSMP Shareholders
that they approve the Agreement and the Merger. The parties have agreed that, in
light of the provisions of the Agreement for adjusting the Exchange Ratio, no
such adjustment of the Exchange Ratio shall constitute a basis for a WSMP Board
Determination or a Sagebrush Board Determination.
In the event of the termination of the Agreement and the abandonment of the
Merger, the Agreement shall immediately become void and of no effect, without
any liability on the part of any party thereto or its affiliates, directors,
officers or shareholders, with certain exceptions stated in the Agreement. In
the event of the termination of the Agreement and the abandonment of the Merger
pursuant to clause (7) above, not later than ten days following delivery of
notice of such termination and abandonment by or to Sagebrush, Sagebrush will
pay to WSMP, as liquidated damages (and not as a penalty), $1,500,000 plus the
aggregate amount of its documented legal, investment banking, accounting and
other out-of-pocket expenses incurred in pursuit of the Merger and other
transactions contemplated by the Agreement. In the event of termination of the
Agreement and the abandonment of the Merger pursuant to clause (8) above, not
later than ten days following the delivery of notice of such termination and
abandonment by or to WSMP, WSMP will pay to Sagebrush, as liquidated damages
(and not as a penalty), $1,500,000 plus the aggregate amount of its documented
legal, investment banking, accounting and other out-of-pocket expenses incurred
in pursuit of the Merger and other transactions contemplated by the Agreement.
Any such payment of liquidated damages shall be made by wire transfer of
immediately available funds to an account designated for such purpose by the
terminating party in its notice of termination and abandonment. Termination will
not relieve any party from liability for any breach of the Agreement, except
insofar as the liquidated damages provisions shall relieve Sagebrush from
liability for termination and abandonment pursuant solely to clause (7) above
and except insofar as such provisions shall relieve WSMP from liability for
termination and abandonment pursuant solely to clause (8) above.
33
<PAGE> 42
WAIVER; AMENDMENT; EXPENSES
WSMP and Sub, on the one hand, or Sagebrush and Miller and Connor, on the
other hand, may at any time by a signed writing (1) extend the time for the
performance of any of the obligations or other acts of the other, (2) waive any
inaccuracies in the representations and warranties contained in the Agreement or
in any document delivered pursuant thereto or (3) waive compliance with any of
the agreements, covenants or conditions contained therein.
The Agreement may not be amended except by an instrument in writing signed
on behalf of the parties thereto; provided however, that no amendment executed
after approval of the Merger and the Agreement by the Sagebrush Shareholders
shall reduce either the number of shares of WSMP Common Stock into which each
share of Sagebrush Common Stock shall be converted in the Merger or the payment
terms for fractional interests.
Each party to the Agreement will bear all expenses incurred by it in
connection with the Agreement and the transactions contemplated thereby.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain federal income tax consequence of the
Merger is based on the current provisions of the Code, applicable Treasury
regulations, judicial authority and administrative rulings and practice. This
discussion, however, does not address all aspects of federal income taxation
that may be relevant to a particular Sagebrush Shareholder in light of such
Shareholder's investment circumstances and to certain types of shareholders
subject to special treatment under the federal income tax laws (for example,
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers or persons who are not citizens or residents of the United States
or who are foreign corporations, foreign partnerships or foreign estates or
trusts) and does not discuss any aspects of state, local or foreign taxation.
Further, this discussion assumes that (i) all Sagebrush Shareholders hold their
shares of Sagebrush Common Stock as capital assets and that (ii) as of the time
the Merger is effected, the likelihood that the Rights attached to the WSMP
Common Stock received by the Sagebrush Shareholders in the Merger will be
exercised is both remote and uncertain.
There can be no assurance that the Internal Revenue Service (the "IRS")
will not take a view contrary to those expressed herein. No ruling from the IRS
has been or will be sought with respect to any aspect of the Merger. Moreover,
legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to Sagebrush Shareholders.
In connection with the filing of the Registration Statement of which this
Joint Proxy Statement-Prospectus constitutes a part, Kennedy Covington Lobdell &
Hickman, L.L.P. delivered a tax opinion to Sagebrush and WSMP. The following
discussion summarizes the conclusions set forth in such opinion, and is
qualified in its entirety by reference to such opinion (including the
assumptions contained therein), which is an exhibit to the Registration
Statement.
EACH SAGEBRUSH SHAREHOLDER AND SAGEBRUSH OPTION HOLDER IS URGED TO CONSULT
HIS OWN TAX ADVISER AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND FOREIGN
TAX LAWS AND OF CHANGES IN APPLICABLE TAX LAWS.
In the opinion of Kennedy Covington Lobdell & Hickman, L.L.P., counsel to
Sagebrush, (a) the proposed Merger will constitute a reorganization within the
meaning of Section 368(a)(1) of the Code; (b) the Sagebrush Shareholders will
recognize no gain or loss for federal income tax purposes on the exchange in the
Merger of their shares of Sagebrush Common Stock for shares of WSMP Common Stock
to the extent of such exchange; (c) the aggregate federal income tax basis of
the WSMP Common Stock for which shares of Sagebrush Common Stock are exchanged
in the Merger will be the same as the aggregate federal income tax basis of such
shares of Sagebrush Common Stock exchanged therefor (less any proportionate part
of such basis allocable to any fractional interest in any share of WSMP Common
Stock); (d) the holding period of WSMP Common Stock for which shares of
Sagebrush Common Stock are exchanged in the Merger will
34
<PAGE> 43
include the period that such shares of Sagebrush Common Stock were held by the
holder; and (e) a Sagebrush Shareholder who receives cash in lieu of a
fractional share interest of WSMP Common Stock in the Merger will be treated for
federal income tax purposes as if the fractional share of WSMP Common Stock had
been received and then redeemed for cash and will recognize a capital gain or
loss in an amount equal to the difference between the cash received and the
proportionate part of the aggregate federal income tax basis of such Sagebrush
Shareholder's Sagebrush Common Stock allocable to such fractional share
interest.
A Sagebrush Shareholder who exercises the right to dissent in connection
with the Merger and receives only cash in exchange for such holder's Sagebrush
Common Stock will be treated as having received such cash as a distribution in
redemption of such Sagebrush Common Stock and will recognize a capital gain or
loss equal to the difference between the amount of cash received and the
adjusted basis of such holder's shares of Sagebrush Common Stock, unless such
payment, under each such holder's particular facts and circumstances, is deemed
to have the effect of a dividend distribution and not a redemption treated as an
exchange under the principles of Section 302 of the Code.
If the Merger were not to constitute a reorganization under Section
368(a)(1) of the Code, then each Sagebrush Shareholder would recognize a capital
gain or loss equal to the difference between (i) the fair market value of the
WSMP Common Stock, cash and other property received and (ii) the aggregate
federal income tax basis of such holder's shares of Sagebrush Common Stock.
Capital gains or capital losses, as the case may be, recognized by a
Sagebrush Shareholder upon the sale or exchange of Sagebrush Common Stock (or,
with respect to fractional shares, the fractional interest in WSMP Common Stock
deemed sold or exchanged) in connection with the Merger will be long-term
capital gains or losses if the Sagebrush Shareholder has held, or is deemed to
have held, for more than one year the Sagebrush Common Stock sold or exchanged
or deemed sold or exchanged in the Merger. Individuals, however, will be
eligible to have any such long-term capital gains subject to a 20% long-term
capital gains federal income tax rate (rather than a 28% long-term capital gains
federal income tax rate) only if they have held, or are deemed to have held, the
stock sold or exchanged for more than eighteen months.
The consummation of the Merger is conditioned upon the receipt by Sagebrush
and WSMP of an opinion of Kennedy Covington Lobdell & Hickman, L.L.P., counsel
to Sagebrush, dated the closing date, in substantially the same form as the
opinion delivered to Sagebrush described above.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Sagebrush's management have interests in the Merger that
are in addition to their interests as shareholders of Sagebrush generally.
Indemnification of Directors and Officers. From and after the Effective
Time, the Surviving Subsidiary, to the fullest extent permitted by applicable
law, shall indemnify, defend and hold harmless all persons who on or at any time
prior to the Effective Time serve or have served as directors or officers of
Sagebrush or any of its predecessors from and against any loss, damages,
liabilities, costs or expenses incurred by them in connection with any claim,
action, suit, proceeding or investigation that is based upon or arises from the
actions, conduct or omissions of such indemnified party at or prior to the
Effective Time in his or her capacity as such director or officer or in any
other capacity in which he or she is serving or served at the request of
Sagebrush or any of its predecessors. In connection therewith, the Surviving
Subsidiary will pay any expenses incurred by any such indemnified party in
advance of the final disposition of any such claim to the fullest extent
permitted by applicable law. Such rights to indemnification are in addition to
any other rights to indemnification that any such indemnified person may have
under applicable law or the Amended and Restated Articles of Incorporation or
Bylaws of Sagebrush. WSMP has guaranteed the due and timely payment and
performance by the Surviving Subsidiary of such indemnification obligations.
Miller Employment Agreement and Connor Consulting Agreement. In connection
with the Merger, WSMP will enter into an Employment Agreement (the "Miller
Employment Agreement") with Miller, who is the President and Chief Executive
Officer of Sagebrush, and a Consulting and Noncompetition Agreement (the "Connor
Consulting Agreement") with Connor, who is the Chairman of the Board of
Sagebrush.
35
<PAGE> 44
The Miller Employment Agreement contemplates that, following the Merger,
WSMP will restructure its restaurant operations into a single wholly-owned
subsidiary (the "Restaurant Subsidiary"). The Miller Employment Agreement
provides that Miller will be the President of the Restaurant Subsidiary for a
term of two years following the Effective Time. Under the Miller Employment
Agreement, WSMP will pay Miller an annual base salary of $200,000 in equal
bi-monthly installments. Any increases in Miller's salary, as well as the
payment of any bonuses and the grant of any stock options to Miller, will be at
the discretion of the Chief Operating Officer of WSMP, subject to ratification
of the Compensation Committee of the WSMP Board. In addition, Miller will be
entitled to certain fringe benefits as part of his employment with WSMP,
including reimbursement for reasonable and necessary business expenses, four
weeks of vacation per year, participation in WSMP's health and life insurance
plans and the use of a vehicle of similar make, model and year as is presently
provided to Miller by Sagebrush. The Miller Employment Agreement includes a
covenant by Miller not to disclose confidential information of WSMP, as well as
a covenant not to engage in competition with WSMP within a 25-mile radius of any
WSMP place of business or solicit the employment of any WSMP employees for a
period of two years following the termination of his employment with WSMP. In
addition, during the term of the Miller Employment Agreement, subject to his
right to continue to operate and manage certain other restaurants referred to
therein, Miller is prohibited from engaging in any outside activity which is
detrimental to WSMP or which interferes with the performance of his duties under
the Miller Employment Agreement. WSMP may terminate the Miller Employment
Agreement prior to the second anniversary of the Effective Time for cause or
upon the disability of Miller. In connection with any termination for cause or
disability (other than a termination for cause triggered by the engagement by
Miller in prohibited outside activities), WSMP shall continue to pay Miller his
annual base salary for the remainder of the two-year term.
The Connor Consulting Agreement provides that Connor will be a consultant
to WSMP for a period of two years following the Effective Time. As an
independent contractor and a consultant to WSMP, Connor's principal duties will
be to (a) consult with and advise WSMP on the management and operation of its
restaurant franchising and restaurant operations business and (b) market and
promote WSMP's restaurant franchising and restaurant operations business. Under
the Connor Consulting Agreement, WSMP will pay Connor an annual consulting fee
of $175,000 in equal bi-monthly installments. During the term of the Connor
Consulting Agreement, Connor will be entitled to participate in WSMP's health
and life insurance plans. The Connor Consulting Agreement contains a covenant by
Connor not to disclose confidential information of WSMP, as well as a covenant
not to engage in competition with WSMP within a 25-mile radius of any WSMP place
of business or solicit the employment of any WSMP employees during the term of
the Connor Consulting Agreement. In addition, during the term of the Connor
Consulting Agreement, subject to his right to continue to operate and manage
certain other restaurants referred to therein, Connor is prohibited from
engaging in any outside activity which is detrimental to WSMP or which
interferes with the performance of his duties under the Connor Consulting
Agreement. WSMP may terminate the Connor Consulting Agreement prior to the
second anniversary of the Effective Time for cause; provided, however, that WSMP
will continue to pay Connor his annual salary for the remainder of the two-year
term unless his employment is terminated because of engagement in prohibited
outside activities or violation of his covenant not to disclose confidential
information or his covenant not to compete.
Registration Rights. Certain affiliates (as defined in Rules 144 and
145(c) under the Securities Act) of Sagebrush, including Connor and Miller, and
their permitted transferees, have the right to have the shares of WSMP Common
Stock that they receive in the Merger registered under the Securities Act to
permit the public resale thereof. See "Restrictions on Resale by Affiliates;
Registration Rights."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, (i) the
recorded assets of WSMP and Sagebrush will be carried forward to the
consolidated financial statements of WSMP at their recorded amounts, (ii) income
of WSMP will include income of WSMP and Sagebrush for the entire year in which
the Merger occurs, and (iii) the reported income of WSMP and Sagebrush will be
combined and restated as income for prior periods of WSMP.
36
<PAGE> 45
REGULATORY APPROVALS
No federal or state regulatory requirements must be complied with and no
such regulatory approvals must be obtained as a condition to consummation of the
Merger.
RESTRICTIONS ON RESALE BY AFFILIATES; REGISTRATION RIGHTS
The shares of WSMP Common Stock to be issued to Sagebrush Shareholders in
the Merger have been registered under the Securities Act. Such shares may be
traded freely and without restriction by those shareholders not deemed to be
"affiliates" of Sagebrush as that term is defined under the Securities Act. Any
subsequent transfer of such shares, however, by any person who is an affiliate
of Sagebrush at the time the Merger is submitted for vote of the Sagebrush
Shareholders will, under existing law, require either (a) the further
registration under the Securities Act of the shares of WSMP stock to be
transferred, (b) compliance with Rule 145 promulgated under the Securities Act
(permitting limited sales under certain circumstances) or (c) the availability
of another exemption from registration. An "affiliate" of Sagebrush, as defined
by the rules of the Commission promulgated under the Securities Act, is a person
who directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, Sagebrush. The foregoing
restrictions are expected to apply to Miller and Connor and to the other
incumbent directors and executive officers of Sagebrush. "Stop transfer"
instructions will be given by WSMP to the transfer agent with respect to the
WSMP Common Stock to be received by persons subject to the restrictions
described above, and the certificates for such stock will be appropriately
legended.
As a condition to the Merger, affiliates of Sagebrush have entered into an
Affiliate Agreement, whereby such affiliates have agreed not to sell, pledge,
transfer or otherwise dispose of any WSMP Common Stock issued to them in the
Merger, except pursuant to an effective registration statement or in compliance
with Rule 145 or an exemption from the registration requirements of the
Securities Act, and will not sell, transfer or otherwise dispose of any such
WSMP Common Stock until after such time as financial results covering at least
30 days of post-merger operations of the combined entity have been published by
WSMP. WSMP has agreed that it will, within 30 days after the conclusion of
WSMP's first 28-day accounting period following the Effective Time, file with
the Commission or publish in a report filed with the Commission or in a
quarterly earnings report, press release or other public issuance financial
results covering at least 30 days (or 28 days if, in the judgment of WSMP, that
will preserve a pooling-of-interests accounting treatment) of combined
operations of WSMP and Sagebrush.
WSMP has covenanted to prepare and file with the Commission, within 30 days
after the Effective Time, and thereafter shall use its reasonable best efforts
to cause to be declared effective by the Commission, a registration statement
providing for the registration under the Securities Act of those shares of WSMP
Common Stock issued as Merger Consideration in the Merger to or for the benefit
of each person who, at the time of the meeting of shareholders of Sagebrush at
which the Merger is approved, is an affiliate (as defined in Rules 144 and
145(c) under the Securities Act) of Sagebrush and who acquires beneficial
ownership in the Merger of a number of shares of WSMP Common Stock in excess of
one percent of the total number of shares of WSMP Common Stock outstanding after
giving effect to the Merger, to permit the public resale of such shares by each
such person, the direct owners of any such shares beneficially held by such
person or such person's approved transferees.
SELECTED FINANCIAL DATA
The following tables present selected financial data for each of WSMP and
Sagebrush on an historical basis and unaudited pro forma selected financial data
reflecting the consummation of the Merger. The unaudited pro forma selected
financial data have been prepared giving effect to the Merger using the pooling
of interests method of accounting. For a description of the effect of
pooling-of-interests accounting on the Merger and the historical financial
statements of WSMP, see "The Merger -- Accounting Treatment."
WSMP and Sagebrush expect that the combined company will achieve benefits
from the Merger, including operating cost savings and revenue enhancements. The
unaudited pro forma selected financial data
37
<PAGE> 46
do not reflect, however, any direct costs, potential savings or revenue
enhancements that are expected to result from the consolidation of operations of
WSMP and Sagebrush and therefor do not purport to be indicative of the results
of future operations.
The selected financial data presented herein are based upon and derived
from, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of WSMP and the historical
consolidated financial statements and the related notes thereto of Sagebrush,
both of which are included in this Joint Proxy Statement-Prospectus. See
"Consolidated Financial Statements of WSMP" and "Consolidated Financial
Statements of Sagebrush." The information set forth in the unaudited selected
pro forma financial data should be read in connection with the Unaudited Pro
Forma Combined Financial Statements and Notes thereto appearing elsewhere
herein. Results of WSMP for the 36 weeks ended November 7, 1997 and of Sagebrush
for the 36 weeks ended September 12, 1997 are not necessarily indicative of
results expected for the entire year. All adjustments, consisting of only normal
recurring adjustments, for a fair statement of results of interim periods have
been included.
SELECTED FINANCIAL DATA OF WSMP, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 36 WEEKS ENDED
------------------------------------------------------------------------ -------------------------
FEBRUARY 28, FEBRUARY 23, FEBRUARY 24, FEBRUARY 25, FEBRUARY 26, NOVEMBER 7, NOVEMBER 1,
1997(1) 1996 1995 1994 1993 1997 1996
------------ ------------ ------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Operating revenues
Food sales(2)............ $85,070 $76,583 $91,232 $70,032 $73,504 $75,172 $58,475
Franchise, royalty and
other fees............. 2,683 2,856 2,868 3,027 3,419 1,350 1,856
------- ------- ------- ------- ------- ------- -------
Total operating
revenues............. $87,753 $79,439 $94,100 $73,059 $76,923 $76,522 $60,331
======= ======= ======= ======= ======= ======= =======
Total operating income
(loss)................. $ 1,626 $ (703) $ 2,245 $ (39) $ 2,344 $ 2,719 $ 1,548
======= ======= ======= ======= ======= ======= =======
Earnings (loss) before
income taxes........... $ 1,171 $(2,711) $ 1,508 $ (925) $ 1,103 $ 2,382 $ 693
======= ======= ======= ======= ======= ======= =======
Net earnings(loss)(3 and
4)..................... $ 1,121 $(1,495) $ 1,097 $ (785) $ 670 $ 1,512 $ 425
======= ======= ======= ======= ======= ======= =======
Net earnings (loss) per
common and common
equivalent share(5 and
6)..................... $ .36 $ (.55) $ .38 $ (.30) $ .23 $ .40 $ .14
======= ======= ======= ======= ======= ======= =======
Net earnings (loss) per
common share assuming
full dilution (5 and
6)..................... $ .35 $ (.55) $ .38 $ (.30) $ .23 $ .40 $ .14
======= ======= ======= ======= ======= ======= =======
Dividends per share(5 and
6)..................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= ======= =======
Book value per
share(6)............... $ 6.27 $ 5.96 $ 6.63 $ 6.22 $ 6.73 $ 7.08 $ 6.11
======= ======= ======= ======= ======= ======= =======
SELECTED BALANCE SHEET DATA
Total assets............... $43,127 $41,634 $46,721 $50,077 $50,284 $47,571 $41,667
======= ======= ======= ======= ======= ======= =======
Long-term debt............. $13,720 $14,921 $18,473 $21,495 $23,881 $11,986 $13,792
======= ======= ======= ======= ======= ======= =======
Shareholders' equity(5).... $18,290 $16,444 $17,638 $16,584 $16,804 $23,901 $16,873
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) 53-week year.
(2) In December 1993, WSMP entered into a new agreement with its largest
customer of bakery products whereby WSMP would purchase the meat components
and the customer's brand name packaging from the customer, produce and
package the final meat-filled bakery product and sell the finished product
to the customer. Prior to this agreement, sales to this customer consisted
only of the bakery component and cost of production and packaging. The meat
component and packaging were supplied and owned by the customer throughout
the process. Purchases by WSMP of the meat component and packaging during
fiscal 1995 and fiscal 1994 totaled $23,441,000 and $4,764,000,
respectively. These amounts are reported
38
<PAGE> 47
as both sales and cost of goods sold during fiscal 1995 and fiscal 1994 and
account for approximately $18,677,000 of the increase in food sales between
fiscal 1994 and fiscal 1995.
(3) The net loss for February 25, 1994 includes a charge against earnings
reflecting the cumulative effect of a change in accounting for income taxes
in the amount of $245,000 related to the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
(4) Net earnings for February 28, 1997 includes an extraordinary gain from early
extinguishment of debt totaling $414,784 (net of income taxes in the amount
of $250,862).
(5) Earnings (loss) per share are based on the weighted average number of shares
of WSMP Common Stock and dilutive common equivalent shares outstanding
during each fiscal year. The weighted average number of shares used in the
calculations of earnings per common and common equivalent shares are
3,091,063 in fiscal 1997; 2,729,517 in fiscal 1996; 2,879,021 in fiscal
1995; 2,624,015 in fiscal 1994; and 2,875,100 in fiscal 1993. The weighted
average number of shares used in the calculation of earnings per common
share -- assuming full dilution are 3,228,800 in fiscal 1997; 2,729,517 in
fiscal 1996; 2,953,286 in fiscal 1995; 2,624,015 in fiscal 1994; and
2,875,100 in fiscal 1993.
(6) Per share amounts give retroactive recognition of the five-for-four stock
split, effected in the form of a stock dividend, declared in 1995.
SELECTED FINANCIAL DATA OF SAGEBRUSH, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 36 WEEKS ENDED
-------------------------------------------------------------------- -----------------------------
JANUARY 3, DECEMBER 29, DECEMBER 30, DECEMBER 31, JANUARY 1, SEPTEMBER 12, SEPTEMBER 6,
1997(1) 1995 1994 1993 1993 1997 1996
---------- ------------ ------------ ------------ ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT
DATA:
Net sales................ $42,110 $34,020 $28,664 $19,272 $10,577 $34,459 $26,815
Net income............... $ 2,459 $ 3,524 $ 3,155 $ 1,887 $ 774 $ 1,942 $ 1,729
Net income per
share(2)............... $ .39 -- -- -- -- $ .32 $ .28
SELECTED BALANCE SHEET
DATA:
Total assets............. $17,205 $10,820 $ 8,736 $ 5,577 $ 3,574 $21,705 $15,994
Long-term debt, including
current maturities..... -- $ 2,188 $ 1,387 $ 1,028 $ 953 $ 2,502 --
Shareholders' equity..... $13,789 $ 6,345 $ 5,514 $ 3,178 $ 1,830 $13,747 $13,059
</TABLE>
- ---------------
(1) 53-week year.
(2) Sagebrush consummated an initial public offering in January 1996. Prior to
such offering, its business was conducted by a group of corporations
affiliated by substantially common management and control. Most of these
corporations had elected to be treated as S Corporations for federal and
state income tax purposes. In connection with the Sagebrush initial public
offering, these corporations became wholly-owned subsidiaries of, or
transferred all of their assets to, Sagebrush. As such, historical earnings
per share have not been shown for fiscal years prior to the consummation of
the initial public offering.
39
<PAGE> 48
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected unaudited pro forma combined financial data presented below
provide financial information giving effect to the Merger (but excluding the
costs of the Merger) on a pooling-of-interests basis as if it had occurred as of
February 26, 1994. The financial information of Sagebrush has been adjusted to
conform to WSMP's presentation format. The unaudited pro forma information is
provided for informational purposes only and is not necessarily indicative of
actual results that would have been achieved had the Merger been consummated as
of February 26, 1994 or of future results. Such information is derived from the
Unaudited Pro Forma Combined Financial Statements appearing elsewhere in this
Joint Proxy Statement-Prospectus and should be read in conjunction with, and is
qualified in its entirety by reference to, such information, including the Notes
thereto.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 36 WEEKS
-------------------------------------------- ENDED
FEBRUARY 28, FEBRUARY 23, FEBRUARY 24, NOVEMBER 7,
1997 1996 1995 1997
------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Pro Forma Combined Statements of Earnings
Data:
Operating revenues:
Food Sales................................ $141,045 $124,786 $134,435 $109,624
Franchise, royalty and other fees......... 2,214 2,398 2,386 1,393
-------- -------- -------- --------
Total operating revenues.......... $143,259 $127,184 $136,821 $111,017
======== ======== ======== ========
Total operating income............ $ 5,826 $ 3,133 $ 5,726 $ 6,027
======== ======== ======== ========
Earnings before income taxes................ $ 4,367 $ 653 $ 4,624 $ 5,574
======== ======== ======== ========
Net earnings................................ $ 3,068 $ 557 $ 2,977 $ 3,454
======== ======== ======== ========
Net earnings per common and common
equivalent share.......................... $ .56 $ .12 $ -- $ .60
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding............. 5,435 4,808 -- 5,727
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 7,
1997
-----------
(IN THOUSANDS)
<S> <C>
Pro Forma Combined Balance Sheet Data:
Total assets.............................................. $69,277
=======
Long-term debt, including current installments............ $14,488
=======
Shareholders' equity...................................... $37,647
=======
</TABLE>
40
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF WSMP
GENERAL
The following analysis of the financial condition and results of operations
of WSMP should be read in conjunction with the Consolidated Financial Statements
of WSMP, including the Notes thereto, included elsewhere in this Joint Proxy
Statement-Prospectus. Fiscal 1996 consisted of 53 weeks. All other fiscal years
presented herein consisted of 52 weeks. WSMP's fiscal quarters consist of
accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively. References
herein to (a) fiscal 1997, fiscal 1996, fiscal 1995, fiscal 1994 and fiscal 1993
are to the fiscal years ended February 28, 1997, February 23, 1996, February 24,
1995, February 25, 1994 and February 26, 1993, respectively, and (b) the first
36 weeks of fiscal 1998 and the first 36 weeks of fiscal 1997 are to the 36
weeks ended November 7, 1997 and November 1, 1996, respectively.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, percentages that
certain items reflected in the financial data bear to operating revenue of WSMP.
<TABLE>
<CAPTION>
36 WEEKS ENDED
FISCAL -------------------------
--------------------------------------------------- NOVEMBER 7, NOVEMBER 1,
1997 1996 1995 1994 1993 1997 1996
------- ------- ------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Restaurant food sales................ 30.1% 32.4% 30.7% 42.5% 46.1% 36.5% 30.8%
Manufacturing sales.................. 66.8 64.0 66.3 53.4 49.5 61.7 66.2
Franchise, royalty and other fees.... 3.1 3.6 3.0 4.1 4.4 1.8 3.0
------- ------- ------- ------- ------- ------- -------
Total operating revenue...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold................... 72.6 71.4 70.4 63.1 59.6 68.4 72.2
Operating expenses................... 13.5 16.1 15.4 21.2 22.3 16.8 13.9
Selling, general and administrative
expenses........................... 9.0 10.0 8.7 11.7 10.9 8.4 8.5
Depreciation and amortization........ 3.0 3.4 3.1 4.1 4.1 2.8 2.9
------- ------- ------- ------- ------- ------- -------
Total operating income
(loss)..................... 1.9 (0.9) 2.4 (0.1) 3.1 3.6 2.5
Total other income
(expenses)................. (0.6) (2.5) (0.8) (1.2) (1.6) (0.5) (1.4)
------- ------- ------- ------- ------- ------- -------
Earnings before income taxes and
extraordinary item and cumulative
effect of change in accounting
principle.......................... 1.3 (3.4) 1.6 (1.3) 1.5 3.1 1.1
Provision for income taxes........... 0.5 (1.5) 0.4 (0.5) 0.6 1.1 0.4
------- ------- ------- ------- ------- ------- -------
Earnings before extraordinary item
and cumulative effect of change in
accounting principle............... 0.8 (1.9) 1.2 (0.8) 0.9 2.0 .7
Extraordinary gain from early
extinguishment of debt............. 0.5 -- -- -- -- -- --
Cumulative effect of change in
accounting principle............... -- -- -- (0.3) -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).................. 1.3% (1.9)% 1.2% (1.1)% 0.9% 2.0% 0.7%
======= ======= ======= ======= ======= ======= =======
Operating Revenues:
Food processing.................... $58,615 $50,869 $62,336 $39,010 $38,064 $47,219 $39,922
Restaurant operations.............. 26,455 25,714 28,896 31,022 35,440 27,953 18,553
Restaurant franchising............. 2,683 2,856 2,868 3,027 3,419 1,350 1,856
------- ------- ------- ------- ------- ------- -------
Total operating revenues..... $87,753 $79,439 $94,100 $73,059 $76,923 $76,522 $60,331
======= ======= ======= ======= ======= ======= =======
</TABLE>
41
<PAGE> 50
<TABLE>
<CAPTION>
36 WEEKS ENDED
FISCAL -------------------------
--------------------------------------------------- NOVEMBER 7, NOVEMBER 1,
1997 1996 1995 1994 1993 1997 1996
------- ------- ------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Profits:
Food processing.................... $ 1,845 $ 778 $ 4,111 $ 2,099 $ 3,784 $ 2,814 $ 1,272
Restaurant operations.............. 2,877 1,063 1,649 816 829 2,417 2,117
Restaurant franchising............. 1,661 1,799 1,279 1,741 1,870 940 1,078
Corporate expenses................. (4,757) (4,343) (4,794) (4,695) (4,139) (3,452) (2,919)
------- ------- ------- ------- ------- ------- -------
Operating income................. 1,626 (703) 2,245 (39) 2,344 2,719 1,548
Other income (expense)............... 1,367 3 1,256 954 547 743 430
Interest expense..................... (1,822) (2,011) (1,993) (1,840) (1,788) (1,080) (1,285)
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income taxes
(benefit).......................... $ 1,171 $(2,711) $ 1,508 $ (925) $ 1,103 $ 2,382 $ 693
======= ======= ======= ======= ======= ======= =======
</TABLE>
36 WEEKS ENDED NOVEMBER 7, 1997 COMPARED WITH 36 WEEKS ENDED NOVEMBER 1, 1996
Restaurant Revenues. Restaurant food sales for the first 36 weeks of
fiscal 1998 totaled $28.0 million, representing an increase of $9.4 million from
the same period of fiscal 1997. This increase is attributed to a net increase in
WSMP-owned units. See "Certain Information Regarding WSMP -- Certain
Relationships and Related Party Transactions." Same-store sales for the current
36-week period remained consistent with the prior period, decreasing only 0.3%.
Food Processing Revenues. Revenues from the food processing business
increased $7.3 million, or 18.3%, during the first 36 weeks of fiscal 1998 over
the comparable prior period. This increase occurred in the prepared foods
division, which experienced an increase totaling $8.0 million. Approximately
$4.0 million of the increase relates to sales of frozen sandwich items, with the
remaining increase relating to sales of newly developed home meal replacement
items. This increase helped offset a decrease in revenue in the ham curing
division totaling $691,000, reflecting a planned reduction in sales of
lower-margin items.
Franchise, Royalty and Other Fees. Franchise, royalty and other fees for
the first 36 weeks of fiscal 1998 declined $506,000 from the corresponding
period of fiscal 1997. This decrease is attributable to a net decline in the
number of franchise units from 73 at the beginning of fiscal 1997 to 47 at the
end of the third quarter of fiscal 1998. A major portion of this reduction is
the result of WSMP's acquisition of several franchised units during fiscal 1998.
Cost of Goods Sold. Cost of goods sold as a percentage of operating
revenue decreased to 68.4% during the first 36 weeks of fiscal 1998 from 72.2%
for the corresponding period of the previous year. This improvement is the
result of a shift in total revenues from the food processing business toward the
restaurant business, as well as margin improvements in the food processing
business. The restaurant business, which experiences higher margins than the
food processing business, accounted for 37.2% of total food sales in the third
quarter of fiscal 1998, compared with 31.7% in the same quarter of fiscal 1997.
In addition, margin improvements were realized in the food processing business,
as cost of goods sold as a percentage of that business' revenue decreased to
88.9% from 91.7% for the previous 36-week period. This improvement is
attributable to increased revenues in the prepared foods division and a shift in
sales toward higher-margin products in the ham curing division.
Operating Expenses. Operating expenses as a percentage of operating
revenue increased to 16.8% during the first 36 weeks of fiscal 1998, compared to
13.9% for the same period in fiscal 1997. Since these expenses are associated
primarily with restaurant food sales, this increase is primarily due to the
shift in total revenue distribution toward the restaurant business, which
generates the highest proportion of operating expenses. In addition, within the
restaurant business, WSMP experienced an increase in operating expenses as a
percentage of that business' revenues from 42.4% for the first 36 weeks of
fiscal 1997 to 45.0% for the current period. This increase relates primarily to
rent expense on the 17 franchised units acquired in fiscal 1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased $1.4 million for the first 36 weeks of fiscal 1998 over the
comparable period of fiscal 1997. Approximately $638,000 of the increase
occurred in the restaurant business as a result of the increase in number of
WSMP units. In addition,
42
<PAGE> 51
selling expenses increased $284,000 in the food processing business as part of
efforts to bring about the increase in sales discussed previously. Corporate
expenses also increased during the current 36-week period due primarily to
nonrecurring increases in legal and accounting costs, as well as increases in
investor relations cost.
Depreciation and Amortization. Depreciation and amortization expense
increased $391,000 for the first 36 weeks of fiscal 1998, as compared with the
same period of fiscal 1997. The majority of this increase relates to the
amortization of goodwill and of the covenant not to compete that were recorded
incident to the acquisition of 14 franchised restaurants at the beginning of
fiscal 1998.
Other Income (Expense). Net other expense totaled $337,000 during the
first 36 weeks of fiscal 1998, compared with $854,000 during the corresponding
period of fiscal 1997. This decrease reflects a reduction in interest expense
totaling $205,000 resulting from debt reduction, as well as additional gains on
the sale of assets totaling $296,000.
Provision for Income Taxes. For the 36 weeks ended November 7, 1997,
WSMP's effective tax rate was 36.5%. This reflects a combined federal and state
rate of 37.6%, reduced by the effect of certain tax credits earned during fiscal
1998. The reduction in the effective tax rate from the previous year is due
primarily to higher earnings during fiscal 1998 in states with lower income tax
rates.
FISCAL 1997 COMPARED TO FISCAL 1996; FISCAL 1996 COMPARED TO FISCAL 1995
Restaurant Revenues. Revenues from WSMP-owned restaurants for fiscal 1997
increased $741,000, or 2.9%, in comparison with fiscal 1996. This change was
driven by increases in same-store sales totaling $2,448,000, or 11.3%, which is
primarily the result of more efficient marketing efforts and a milder winter
than in the previous year. In addition, fiscal 1997 reflects 53 weeks of sales
activity, compared to 52 weeks in fiscal 1996. (See Note 1 to Consolidated
Financial Statements of WSMP.) The increase in same-store sales was offset by
the effect of a net reduction in the number of WSMP-owned units from 23 at the
beginning of fiscal 1996 to 18 at February 28, 1997.
WSMP-owned restaurant revenues for fiscal 1996 decreased $3.2 million, or
11.0%, in comparison with fiscal 1995. Approximately $1.7 million of the
decrease is the result of closing seven restaurant units during these years,
three of which were closed in fiscal 1996. In addition, same-store sales
declined 5.8%, or $1.5 million, during this period. Approximately $1.0 million
of the decrease in same-store sales occurred in the fourth quarter of fiscal
1996 and is attributed to the severe winter weather experienced during January
and February of 1996. The remaining decrease reflects increased competition in
certain markets where these restaurants are located.
Food Processing Revenues. Revenues from food processing increased $7.8
million to $58.9 million during fiscal 1997, compared to $51.1 million in fiscal
1996. This increase was driven by improved volume in the bakery division, which
experienced an increase in revenues totaling $9.6 million in fiscal 1997 as
compared to fiscal 1996. Late in fiscal 1995, the largest customer of the bakery
discontinued one of its product lines which accounted for approximately $13.5
million of fiscal 1995 sales. Although actions to replace this business were put
in place early in fiscal 1996, benefits from these actions were realized at a
slower pace than originally expected, and significant improvements in bakery
sales did not occur until late in the fourth quarter of fiscal 1996. Sales in
the bakery division continued to improve during fiscal 1997 and have returned to
their original level.
Offsetting this increase in the bakery division is a decrease in revenues
totaling $1.8 million, or 15.0%, in the ham curing division during fiscal 1997
as compared to fiscal 1996. This decrease in revenues is primarily the result of
a change made in the ham curing process to address a spoilage issue discovered
in fiscal 1996. This change has resulted in a longer curing process and has
reduced the number of hams which can be processed during a year.
Revenues from the food processing segment totaled $51.1 million during
fiscal 1996 compared to $62.6 million during fiscal 1995. Approximately $11.0
million of this decrease occurred in the bakery division which
43
<PAGE> 52
had total revenues of $38.3 million in fiscal 1996. This decrease is the result
of the loss of the product line in late fiscal 1995, as discussed above.
Franchise, Royalty and Other Fees. Franchise, royalty and other fees
declined from $2.9 million in fiscal 1996 to $2.7 million in fiscal 1997. This
decrease is primarily the result of a reduction in the number of franchised
units from 75 at the beginning of fiscal 1996 to 68 at the end of fiscal 1997.
The effect of this reduction in units is offset by fiscal 1997 reflecting 53
weeks of activity as compared to 52 weeks in fiscal 1996. (See Note 1 to
Consolidated Financial Statements of WSMP.)
Franchise, royalty and other fees remained relatively constant at $2.9
million for fiscal 1996 and fiscal 1995. Although 13 franchised units closed
during these years, the impact was offset by the opening of nine higher-volume
franchise units, primarily under the Bennett's and Prime Sirloin concepts.
Cost of Goods Sold. Cost of goods sold as a percentage of food sales
increased to 74.9% in fiscal 1997 from 74.1% in fiscal 1996 due to a shift in
total revenues between the food processing and restaurant businesses. Food
processing, which by its nature experiences lower margins than the restaurant
business, accounted for 68.9% of total food sales in fiscal 1997 compared with
66.9% in fiscal 1996. Although this shift in revenues resulted in a decrease in
margins for WSMP overall, margins within the food processing business improved
during fiscal 1997. In fiscal 1997, cost of goods sold in the food processing
business was 91.8% of that business's revenue, compared to 92.4% in 1996.
Margins in the bakery division improved 1.6 basis points between fiscal 1997 and
fiscal 1996 as sales increased without corresponding increases in fixed costs.
The increase in margins in the bakery division was partially offset by a decline
in margins in the ham curing division, totaling 3.0 basis points, brought about
by increases in the average cost of raw hams during fiscal 1997 as well as the
reduction in number of hams produced. Cost of goods sold as a percentage of
revenues for the restaurant business totaled 37.3% in fiscal 1997, showing
little change from the fiscal 1996 total of 37.9%.
Cost of goods sold as a percentage of food sales increased to 74.1% in
fiscal 1996 from 72.6% in fiscal 1995 as a result of a decline in margins in
both divisions of the food processing business during fiscal 1996. Cost of goods
sold in the food processing business was 92.4% of that business's revenues for
fiscal 1996, compared to 88.2% for fiscal 1995. Margins in the bakery declined
2.5 basis points between fiscal 1995 and fiscal 1996 due to the decrease in
sales during fiscal 1996 and the inability to reduce certain fixed costs
proportionally. The remaining decline in margins between fiscal 1995 and fiscal
1996 occurred in the ham curing division. A portion of this decline is
attributed to a shift in the product mix during fiscal 1996. Also contributing
to this division's decrease in margins was a $1.0 million increase in sales
returns and credits during fiscal 1996 attributed primarily to an isolated
deficiency in the curing process which resulted in a recall of improperly cured
ham product. Although WSMP was able to mitigate the problem by reprocessing a
portion of the returned hams, the cost of reprocessing as well as the
unrecoverable cost of damaged product disposed of by WSMP and its customers
impacted total margins in the ham curing division negatively.
The decline in margins in the food processing segment during fiscal 1996,
as compared to fiscal 1995, was mitigated by a positive swing in margins in the
restaurant business. Cost of goods sold in the restaurant business, as a
percentage of its revenues, improved to 37.9% in fiscal 1996 from 39.0% in
fiscal 1995. Management attributes this positive swing to better control over
costs in fiscal 1996 as well as the closing of several less profitable
restaurant units during these years.
Operating Expenses. As discussed in Note 1 to the Consolidated Financial
Statements of WSMP, operating expenses include indirect costs associated with
restaurant product sales and other revenues, which consist of franchise, royalty
and other fees. Total operating expenses as a percentage of revenues of the
restaurant and franchising businesses decreased to 40.9% in fiscal 1997 from
44.7% in fiscal 1996. This is the direct result of the improvements in same
store sales experienced during fiscal 1997 in the restaurant business. Operating
expenses in the restaurant business totaled $11.3 million in fiscal 1997, or
42.6% of that business's revenues, compared to $12.1 million, or 46.9%, in
fiscal 1996. Operating expenses in the franchising business also improved as a
percentage of that business's revenues from 25.3% in fiscal 1996 to 24.8% in
fiscal 1997 as a result of cost cutting measures taken during fiscal 1997.
44
<PAGE> 53
Total operating expenses as a percentage of revenues of the restaurant and
franchising businesses totaled 44.7% in fiscal 1996 compared to 45.7% in fiscal
1995. This decrease is primarily the result of additional operating expense
incurred in the franchising business in fiscal 1995 as part of designing and
opening a new franchised Prime Sirloin prototype designed to capitalize on the
industry's success with larger buffet-style formats, as well as higher
write-offs for uncollectible royalties in fiscal 1995. Fiscal 1996 operating
expense for the franchising business totaled $772,000, or 25.3% of its total
revenues, compared to $1.3 million, or 45.2%, for fiscal 1995. Although total
operating expense in the restaurant business decreased from $13.2 million during
fiscal 1995 to $12.1 million during fiscal 1996, these expenses increased as a
percentage of restaurant business revenue from 45.8% in fiscal 1995 to 46.9% in
fiscal 1996. Management attributes this percentage increase to the severe winter
during January and February of 1996 which had a significant negative impact on
fiscal 1996 sales.
Selling, General and Administrative. Selling, general and administrative
expenses remained relatively constant between fiscal 1996 and fiscal 1997 at
$7.9 million. Reductions in these expenses occurred during fiscal 1997 in the
restaurant and food processing businesses totaling $302,000 and $139,000,
respectively, but were offset by higher expenses at the corporate level for
advertising and product development.
Selling, general and administrative expenses decreased $264,000 in fiscal
1996 compared to fiscal 1995. This decrease is primarily the result of
reductions in corporate overhead totaling $451,000 as well as reductions in
costs relating to the food processing business, offset by an increase in
advertising and other administrative costs in the restaurant business of
approximately $218,000.
Depreciation and Amortization. Depreciation and amortization expense has
declined for the last three fiscal years from $2.9 million in fiscal 1995, to
$2.7 million in fiscal 1996, to $2.6 million in fiscal 1997. This reduction is
primarily attributed to the closing and selling of restaurant properties that
has occurred during these years.
Other Income (Expense). WSMP recorded equity in losses of affiliates
totaling $107,000 in fiscal 1997 and $338,000 in fiscal 1996, compared with
equity in earnings of affiliates totaling $115,000 in fiscal 1995. Approximately
$208,000 of the equity losses recorded in fiscal 1996 is the result of
write-downs in assets by certain subsidiaries to reflect permanent impairments
in value. The remaining losses in both fiscal 1997 and fiscal 1996 are primarily
due to operating losses in two unconsolidated subsidiaries, formed late in
fiscal 1995, which failed to perform as originally expected. The two restaurant
units which generated these losses were closed in fiscal 1997.
During fiscal 1997, WSMP recognized a net extraordinary gain on the early
extinguishment of debt totaling $414,784, which is net of income taxes of
$250,862, when it replaced its Senior Note obligations which were scheduled to
mature on October 1, 1997, with long-term promissory notes with two banks. (See
Note 7 to Consolidated Financial Statements of WSMP.) The two life insurance
companies which held the Senior Notes agreed to a discount totaling $787,651
upon the early retirement of this debt. Offsetting this amount were certain
unamortized loan costs totaling $73,208 relating to the Senior Notes which were
written off as part of the early refinancing. In addition, offsetting the net
gain resulting from the Senior Note refinancing was a prepayment penalty
totaling $48,797 which WSMP incurred upon the early payment of an SBA loan which
was secured by a restaurant property sold during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
WSMP had working capital of $4.5 million at November 7, 1997, reflecting an
increase of $1.6 million from February 28, 1997. Accounts receivable,
inventories and accounts payable increased between February 28, 1997 and
November 7, 1997 as a result of the increased level of sales. Cash and cash
equivalents decreased during the first 36 weeks of fiscal 1998 from $2.4 million
to $828,000. Profitable operations, the sale of certain assets and proceeds
received from the exercise of stock options during the first 36 weeks of fiscal
1998 generated cash totaling $313,000, $3.1 million and $496,000, respectively.
This was offset by capital expenditures and repayments of long-term debt
totaling $3.0 million and $3.1 million, respectively.
45
<PAGE> 54
Total other assets increased from $6.1 million at February 28, 1997 to $8.0
million at November 7, 1997. Part of this change is attributable to the purchase
of 14 franchised units from WSMP's largest franchisee. This transaction resulted
in WSMP recording $2.5 million as excess of cost over fair value of net assets
of businesses acquired. In addition, a non-competition agreement was entered
into with the former franchisee as part of this acquisition, resulting in WSMP
recording an asset for the covenant not to compete. Also contributing to the
change in total other assets is the sale of certain properties held for sale
during the first 36 weeks of fiscal 1998. As part of these and other property
sales, WSMP received notes totaling $1.1 million, resulting in the increase in
total noncurrent notes receivable.
During fiscal 1997, WSMP entered into an agreement with a bank to provide a
$6.0 million revolving credit facility, secured by a lien on WSMP's
manufacturing inventory and receivables. At November 7, 1997, approximately $4.0
million was outstanding under this facility. Management believes that this
facility is adequate to meet the current operating needs of WSMP and that WSMP
can obtain such additional credit facilities as may be necessary to support
future working capital needs. WSMP does not have any significant commitments for
future capital expenditures.
INFLATION
The effects of inflation on the costs of labor, materials and supplies and
plant and equipment have resulted in increased costs to WSMP during the past
three years. Ongoing programs of cost control and elimination of overhead
expenses have helped to offset much of the impact of inflation. Although WSMP
cannot determine the precise effect of inflation on its business, the restaurant
operations are believed to be the most susceptible to the adverse effects of
inflation as compared to other divisions of WSMP. This is due to price
discounting which has prevailed in the family and fast food segments of the U.S.
restaurant industry for the past three years, making it difficult to cover
increased cost by increasing menu prices.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
WSMP adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" ("SFAS No. 121"), during 1996. It requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. It also requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. WSMP
management has reviewed all long-lived assets as of August 15, 1997 and believes
that the carrying amounts reported in the balance sheet for that date represent
the amounts expected to be recovered over the remaining useful lives of those
assets.
In June 1996 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
WSMP management believes that the implementation of the Statement will not have
any material impact on WSMP's financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
128"), to simplify the standards for computing earnings per share ("EPS") and
make them comparable to international EPS standards. SFAS 128 is effective for
periods ending after December 15, 1997 and can not be adopted at an earlier
date. SFAS 128 will require dual presentation of basic and diluted EPS on the
face of the statement of current earnings and a reconciliation of the components
of the basic and diluted EPS calculations in the notes to the financial
statements. Basic EPS excludes dilution and is computed by dividing net earnings
by the weighted-average number of common shares outstanding for the period.
Diluted EPS is similar to fully diluted EPS pursuant to Accounting Principles
Board Opinion No. 15 ("APB No. 15"). WSMP will adopt SFAS 128 in the quarter and
year ending February 27, 1998. Had the new standard been adopted as of February
26, 1994, basic EPS would have been $0.40, $(0.55), and $0.41 for the fiscal
years ended
46
<PAGE> 55
February 28, 1997, February 23, 1996 and February 24, 1995, respectively.
Additionally, diluted EPS as calculated using SFAS 128 would have been the same
as primary EPS using Accounting Principles Board Opinion No. 15.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This standard establishes standards of reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This Statement will be effective for
WSMP's fiscal year ending February 26, 1999, and WSMP does not intend to adopt
this Statement prior to the effective date. Had WSMP adopted this Statement as
of February 26, 1994, comprehensive income would not have been materially
different than reported net income in the accompanying historical consolidated
statements of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). This Statement requires
disclosure of financial and descriptive information about reportable operating
segments, revenues by products or services and assets by geographic areas. WSMP
management has not yet determined what additional disclosures will be required
under SFAS No. 131.
CAUTIONARY STATEMENT AS TO FORWARD-LOOKING INFORMATION
Statements contained in this Joint Proxy Statement-Prospectus as to WSMP's
outlook for sales, operations, capital expenditures and other amounts, budgeted
amounts and other projections of future financial or economic performance of
WSMP, and statements of WSMP's plans and objectives for future operations, are
"forward-looking" statements and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements include, without limitation: adverse changes in
economic, weather or other conditions in the geographic area in which WSMP's
restaurants are located; risks associated with WSMP's creation of new products;
additional costs due to increased prices of raw hams; increased competition;
adverse changes in consumer preferences for country ham or bakery products;
adverse changes in the availability of supplies; adverse changes in governmental
regulation relating to WSMP's business; the loss of the services of any of
WSMP's key management or other personnel; and other factors that generally
affect WSMP's operations and the restaurant industry in general. See "Risk
Factors."
47
<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SAGEBRUSH
GENERAL
Since opening the first Sagebrush restaurant in Hickory, North Carolina in
October 1990, Sagebrush's operations have grown to include 33 restaurants in
North Carolina, South Carolina, Tennessee and Virginia at January 2, 1998. From
fiscal 1993 to fiscal 1996, Sagebrush's revenues increased from approximately
$19.3 million to $42.1 million. Sagebrush's revenues for the 36 weeks ended
September 12, 1997 were $34.5 million. The rapid growth in Sagebrush's revenues
has resulted primarily from an increase in the number of Sagebrush's
restaurants. Sagebrush opened three restaurants in fiscal 1991, five in fiscal
1992, four in fiscal 1993, six in fiscal 1994, three in fiscal 1995, six in
fiscal 1996 and six in fiscal 1997. Sagebrush closed one underperforming
restaurant in Asheville, North Carolina as of the close of business on January
3, 1997. Sagebrush's operating income has increased from $2.0 million in fiscal
1993 to $3.9 million in fiscal 1996. Sagebrush's operating income for the 36
weeks ended September 12, 1997 was $3.3 million. Sagebrush believes that these
favorable trends in both its revenues and operating income have been achieved as
a result of its attracting and retaining experienced employees, implementing an
effective management development program and adopting measures to ensure strict
compliance with its operating standards and procedures.
Substantially all of Sagebrush's revenues are derived from restaurant sales
with approximately 9% of such revenues attributable to sales of alcoholic
beverages.
Cost of restaurant sales consists of food, beverage and supply costs.
Labor costs include salaries, wages and benefits of all restaurant level
employees.
Other operating expenses principally consist of restaurant occupancy costs
such as rent, utilities, building maintenance, insurance and taxes, as well as
equipment rentals and repairs, bank transaction charges and miscellaneous
restaurant expenses.
General and administrative expenses consist of wages for management,
supervisory and other corporate personnel and other personnel costs, costs of
advertising and promotions and other expenses.
Depreciation of property and equipment is provided primarily over the
estimated useful lives of the respective assets on a straight-line basis.
Amortization expense principally includes pre-opening costs which consist
of labor costs, costs of hiring and training personnel, and certain other costs
relating to opening new restaurants. These costs are capitalized until the
restaurant is opened and then amortized over a twelve-month period.
In connection with the reorganization effected immediately prior to the
completion of the initial public offering of Sagebrush Common Stock in January
1996, the S Corporation elections of certain of the corporations that had
previously conducted Sagebrush's business were terminated, and salaries payable
to certain of Sagebrush's principal executive officers were increased to more
representative levels. If the increase in executive salaries had been in effect
since the beginning of fiscal 1995, expenses would have increased by
approximately $500,000 in fiscal 1995.
The following analysis of the financial condition and results of operations
of Sagebrush should be read in conjunction with the Consolidated Financial
Statements of Sagebrush, including the Notes thereto, included elsewhere in this
Joint Proxy Statement-Prospectus. Fiscal 1996 and fiscal 1992 consisted of 53
weeks. All other fiscal years presented herein consisted of 52 weeks.
Sagebrush's fiscal quarters consist of accounting periods of 12, 12, 12 and 16
or 17 weeks, respectively. References herein to (a) fiscal 1997, fiscal 1996,
fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992 and fiscal 1991 are to the
fiscal years ended January 2, 1998, January 3, 1997, December 29, 1995, December
30, 1994, December 31, 1993, January 1, 1993 and December 27, 1991,
respectively, and (b) the first 36 weeks of 1997 and the first 36 weeks of 1996
are to the 36 weeks ended September 12, 1997 and September 6, 1996,
respectively.
48
<PAGE> 57
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of
revenues -- restaurant sales represented by items in Sagebrush's consolidated
statements of income.
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
FISCAL ----------------------------
------------------------------------- SEPTEMBER 12, SEPTEMBER 6,
1992 1993 1994 1995 1996 1997 1996
----- ----- ----- ----- ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues -- restaurant sales....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
Operating costs and expenses:
Cost of restaurant sales......... 38.7 38.3 38.0 37.4 36.9 37.1 36.5
Labor costs...................... 28.0 26.6 26.2 26.3 27.1 27.7 26.9
Other operating expenses......... 14.3 14.1 14.2 15.4 14.6 14.3 15.2
General and administrative
expenses...................... 7.4 7.0 7.0 7.0 8.5 7.3 8.4
Depreciation..................... 2.0 1.8 1.8 2.2 2.3 2.7 2.4
Amortization (principally of pre-
opening costs)................ 2.5 1.8 1.2 1.0 1.0 1.4 .7
Store closing cost............... -- -- -- -- .4 -- --
-----
Total operating costs and
expenses...................... 92.9 89.6 88.4 89.3 90.8 90.5 90.1
----- ----- ----- ----- ----- ----- -----
Operating income (loss)............ 7.1 10.4 11.6 10.7 9.2 9.5 9.9
Other income, net.................. .9 .4 .3 .3 .2 .1 .2
Interest income.................... -- -- -- -- .3 .0 .4
Interest expense................... (.7) (.3) (.3) (.4) (.1) (.4) (.1)
----- ----- ----- ----- ----- ----- -----
Income before income taxes......... 7.3 10.5 11.6 10.6 9.6 9.2 10.4
Income tax provision............... -- .7 .6 .2 3.7 (3.6) (4.0)
----- ----- ----- ----- ----- -----
Net income......................... 7.3% 9.8% 11.0% 10.4% 5.9% 5.6% 6.4%
===== ===== ===== ===== ===== ===== =====
Pro forma net income(1)............ 5.6%
=====
</TABLE>
- ---------------
(1) Includes pro forma effects of executive salaries ($500,000) and income taxes
($1.2 million).
The following table sets forth selected operating data for the periods
indicated.
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
FISCAL ----------------------------
-------------------------------------------------------- SEPTEMBER 6, SEPTEMBER 12,
1991 1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurants open at the
beginning of the
period............... 1 4 9 13 19 22 22 27
Restaurants opened
during the period.... 3 5 4 6 3 6 4 4
Restaurants open at the
end of the period.... 4 9 13 19 22 28 26 31
Restaurant sales....... $1,955 $10,577 $19,272 $28,664 $34,020 $42,110 $26,815 $34,459
Weighted average sales
per restaurant....... 1,240 1,602 1,746 1,783 1,677 1,726 1,149 1,186
Weighted average weekly
sales per
restaurant........... 23.8 30.2 33.6 34.3 32.2 32.6 31.9 32.9
</TABLE>
49
<PAGE> 58
The table below presents a progression of restaurant sales presented by the
year in which Sagebrush's restaurants began operations. Results for the first
year of each restaurant's operations reflect its sales from the date of opening
through fiscal year end (in the case of fiscal 1997, through the end of the
first 36 weeks thereof).
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
RESTAURANT OPENINGS FISCAL --------------------------------
- ----------------------------- --------------------------------------------------------------- SEPTEMBER 6, SEPTEMBER 12,
YEAR NUMBER 1990 1991 1992 1993 1994 1995 1996 1996 1997
- ---- ------ ---- ------ ------- ------- ------- ------- ------- ------------ -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990................. 1 $222 $1,225 $ 1,681 $ 1,873 $ 2,094 $ 2,110 $ 2,126 $ 1,453 $ 1,415
1991................. 3 730 4,343 4,886 5,100 5,168 5,200 3,504 3,368
1992................. 5* 4,553 8,707 9,008 8,726 8,522 5,885 4,891
1993................. 4 3,806 6,675 6,410 6,452 4,368 4,451
1994................. 6 5,787 9,419 9,324 6,296 6,486
1995................. 3 2,187 4,892 3,337 3,176
1996................. 6 5,594 1,972 6,808
1997................. 4 3,864
-- ---- ------ ------- ------- ------- ------- ------- ------- -------
$222 $1,955 $10,577 $19,272 $28,664 $34,020 $42,110 $26,815 $34,459
== ==== ====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
* Includes one restaurant that was later closed as of the close of business on
January 3, 1997.
THIRTY-SIX WEEKS ENDED SEPTEMBER 12, 1997 COMPARED TO THIRTY-SIX WEEKS ENDED
SEPTEMBER 6, 1996
Revenues. Restaurant sales increased 28.5% to $34.5 million for the first
36 weeks of 1997 as compared to $26.8 million for the comparable period of 1996.
The increase in sales was the result of an increase in the number of restaurants
operated offset by a .8% decrease in same store sales.
Cost of restaurant sales. Cost of restaurant sales increased $3,000,000,
or 30.7%, from $9.8 million to $12.8 million and as a percentage of revenues
increased from 36.5% to 37.1%. This increase is due mostly to higher meat prices
offset somewhat by lower produce prices.
Labor costs. Labor costs increased $2,314,000, or 32.1%, from $7.2 million
to $9.5 million, and as a percentage of revenues increased from 26.9% to 27.7%.
The increase in dollars and percent of revenue is primarily due to new
restaurants, which have higher initial labor costs, and changes in the minimum
wage over the past year.
Other operating expenses. Other operating expenses increased $853,000, or
21.0%, from $4.1 million to $4.9 million, and as a percentage of revenues
decreased from 15.2% to 14.3% due to the leveraging of fixed costs.
General and administrative expenses. General and administrative expenses
increased $259,000, or 11.5%, from $2.3 million to $2.5 million, and as a
percentage of revenues decreased from 8.4% to 7.3%.
Depreciation. Depreciation increased $281,000, or 44.1%, from $637,000 to
$918,000, and as a percentage of revenues increased from 2.4% to 2.7% primarily
because of increased investment in property and equipment due to Sagebrush's
opening of new restaurants. All restaurants opened during fiscal 1997 have been
built on real property purchased by Sagebrush rather than leased.
Amortization. Amortization of pre-opening costs increased $325,000, or
165.5%, from $196,000 to $521,000, and as a percentage of revenues increased
from .7% to 1.4%. The increase is primarily due to the expansion program begun
after Sagebrush's initial public offering in January 1996.
Other income. Other income, which principally represents accounting fees
charged to certain related non-Sagebrush restaurants, decreased slightly as a
percentage of restaurant sales.
Interest income. Sagebrush had interest income during the first 36 weeks
of fiscal 1996 as a result of temporary investment of a portion of the proceeds
from Sagebrush's initial public offering which was completed in January 1996.
50
<PAGE> 59
Interest expense. Sagebrush had interest expense during the first 36 weeks
of fiscal 1997 as a result of borrowings to finance restaurant expansion.
Income tax provision. Sagebrush's effective tax rate for the first 36
weeks of fiscal 1997 was 39.2%. Prior to January 1996, most of the corporations
comprising Sagebrush were S Corporations for federal and state income tax
purposes, with taxable income allocated to shareholders rather than taxed at the
corporate level. All applicable S Corporation elections were terminated in
January 1996 in connection with the reorganization effected in connection with
Sagebrush's initial public offering.
Net income. Net income was $1,942,000 for the first 36 weeks of fiscal
1997, an increase of 12.3% over net income of $1,729,000 for the comparable
period of 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Revenues increased $8.1 million, or 23.8%, from $34.0 million in
fiscal 1995 to $42.1 million in fiscal 1996. This increase resulted from an
increase in the number of restaurants operated by Sagebrush from 22 to 28, as
well as a slight increase in revenues of .6% for restaurants open over eighteen
months.
Cost of restaurant sales. Cost of restaurant sales increased $2.8 million,
or 22.1%, from $12.7 million to $15.5 million, and as a percentage of revenues
decreased from 37.4% to 36.9%. This decrease as a percentage of revenues
principally resulted from reduced food costs realized from lower market prices
and improved purchasing practices.
Labor costs. Labor costs increased $2.5 million, or 27.6%, from $9.0
million to $11.4 million, principally due to the increase in the number of
restaurants. As a percentage of revenues, labor costs increased from 26.3% to
27.1%. The increase is primarily the result of an increase in costs associated
with Sagebrush's management training program due to the increased number of
restaurant openings in fiscal 1996.
Other operating expenses. Other operating expenses increased $900,000, or
17.2%, from $5.2 million to $6.1 million, and as a percentage of revenues
decreased from 15.4% to 14.6%. The improvement as a percentage of sales was due
to most operating expenses rising less than the percentage increase in sales and
three restaurants being owned rather than leased.
General and administrative expenses. General and administrative expenses
increased $1.2 million, or 50.0%, from $2.4 million to $3.6 million, and as a
percentage of revenues increased from 7.0% to 8.5%. Adjusting fiscal 1995
general and administrative expenses for the approximately $500,000 increase in
executive pay related to the reorganization effected in connection with
Sagebrush's initial public offering, general and administrative expenses for
fiscal 1995 as a percentage of revenue would have been 8.4%.
Depreciation. Depreciation increased $215,000, or 28.2%, from $761,000 to
$976,000, and as a percentage of revenues increased from 2.2% to 2.3% primarily
because of increased investment in property and equipment related to the new
restaurants.
Amortization. Amortization of pre-opening costs increased $121,000, or
38.7%, from $314,000 to $435,000, and as a percentage of revenues remained
constant. The increase was due to an increase in the number of restaurants
opened in fiscal 1996 compared to fiscal 1995.
Store closing cost. During the fourth quarter of fiscal 1996, Sagebrush
recorded a pre-tax charge of $168,000 relating to the closing of its restaurant
in Asheville, North Carolina at the close of business on January 3, 1997. The
restaurant was unprofitable and did not meet company operating expectations. The
declining sales at this restaurant were primarily attributable to a poor
location. The charge includes the expenses of closing and writing down assets to
estimated net realizable value.
Other income. Other income, which principally represents accounting fees
charged to certain related non-Sagebrush restaurants, declined due to a decrease
in the number of those restaurants.
Interest income. Sagebrush had interest income during fiscal 1996 as a
result of investments of the proceeds from Sagebrush's initial public offering.
51
<PAGE> 60
Interest expense. Interest expense decreased $105,000 from $151,000 to
$46,000 primarily as a result of a decrease in Sagebrush's borrowings in fiscal
1996.
Income tax provision. Sagebrush's effective tax rate for fiscal 1996 was
39.0%. Prior to January 1996, most of the corporations comprising Sagebrush were
S corporations for federal and state income tax purposes, with taxable income
allocated to shareholders rather than taxed at the corporate level. All
applicable S Corporation elections were terminated in January 1996 in connection
with the reorganization effected in connection with Sagebrush's initial public
offering.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues. Revenues increased $5.3 million, or 18.7%, from $28.7 million in
fiscal 1994 to $34.0 million in fiscal 1995. This increase resulted from an
increase in the number of restaurants operated by Sagebrush from 19 to 22 and
was offset slightly by a decrease in revenues of 1.9% in restaurants open for
both fiscal years. Three of the restaurants experienced revenue decreases
significantly greater than the average decrease in restaurants open for both
periods. The remaining ten restaurants open for both periods had an average
sales growth of .8%.
Cost of restaurant sales. Cost of restaurant sales increased $1.8 million,
or 16.9%, from $10.9 million to $12.7 million, and as a percentage of revenues
decreased from 38.0% to 37.4%. This decrease as a percentage of revenues
principally resulted from reduced food costs (primarily beef and potatoes)
realized from lower market prices and improved purchasing practices, as well as
improved security and waste management.
Labor costs. Labor costs increased $1.4 million, or 19.1%, from $7.5
million to $9.0 million, principally due to the increase in the number of
restaurants. As a percentage of revenues, labor costs increased slightly from
26.2% to 26.3%.
Other operating expenses. Other operating expenses increased $1.1 million,
or 29.0%, from $4.1 million to $5.2 million, and as a percentage of revenues
increased from 14.2% to 15.4%. This increase as a percentage of revenues
principally resulted from certain of Sagebrush's leases with affiliates being
amended to conform the terms thereof to the terms of other leases with
affiliates and certain third parties, which provide for contingent rental
payments based on a percentage of the applicable restaurant's gross sales.
General and administrative expenses. General and administrative expenses
increased $360,000, or 17.8%, from $2.0 million to $2.4 million, and as a
percentage of revenues remained constant at 7.0%.
Depreciation. Depreciation increased $235,000, or 44.6%, from $526,000 to
$761,000, and as a percentage of revenues increased from 1.8% to 2.2% primarily
because of increased investment in property and equipment.
Amortization. Amortization of pre-opening costs decreased $38,000, or
10.9%, from $352,000 to $314,000, and as a percentage of revenues decreased from
1.2% to 1.0%.
Other income. Other income, which principally represents accounting fees
charged to certain related non-Sagebrush restaurants, remained constant as a
percentage of restaurant sales.
Interest expense. Interest expense increased $76,000 from $75,000 to
$151,000 as a result of Sagebrush's incurring additional indebtedness during
late 1994 and early 1995 principally to fund new store openings.
52
<PAGE> 61
QUARTERLY RESULTS
The following table sets forth Sagebrush's revenues, income before income
taxes, income before income taxes as a percentage of revenues, and number of
restaurants in operation at the end of the period for each quarter of fiscal
1995 and fiscal 1996 and for each of the first three quarters of fiscal 1997. In
the opinion of Sagebrush's management, the unaudited financial statements from
which these data have been derived include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. Sagebrush's fiscal quarters consist of 12, 12, 12
and 16 or 17 weeks, respectively (16 weeks in fiscal 1995 and 17 weeks in fiscal
1996).
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
-------------------------------------- ---------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues-restaurant sales......... $7,224 $7,698 $8,460 $10,638 $7,832 $8,932 $10,051 $15,295
Income before income taxes........ $ 753 $ 717 $ 916 $ 1,215 $ 773 $ 998 $ 1,018 $ 1,245
Income before income taxes as a
percentage of revenues........... 10.4% 9.3% 10.8% 11.4% 9.9% 11.2% 10.1% 8.1%
Restaurants in operation at end of
quarter.......................... 19 20 21 22 23 23 26 28
<CAPTION>
FISCAL 1997
-----------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues-restaurant sales......... $10,616 $11,555 $12,288
Income before income taxes........ $ 940 $ 1,127 $ 1,125
Income before income taxes as a
percentage of revenues........... 8.9% 9.8% 9.2%
Restaurants in operation at end of
quarter.......................... 28 30 31
</TABLE>
Quarterly results have been, and in the future are likely to be,
substantially affected by the timing of new restaurant openings. Sagebrush
management believes that there is a degree of seasonality in Sagebrush's
business with sales being lower in January and February of each year. The first
quarter of fiscal 1996 was impacted by unusually severe weather in most of the
area served by Sagebrush.
LIQUIDITY AND CAPITAL RESOURCES
At September 12, 1997, Sagebrush had approximately $1.7 million in cash and
short-term investments, $2.5 million in long-term debt and $13.7 million in
shareholders' equity. Sagebrush's long-term debt consists of term loans with a
commercial bank that are secured by certain parcels of real estate owned by
Sagebrush. These loans bear interest at the bank's prime rate (8.5% at September
12, 1997) and mature at various times from January 2007 to September 2007. At
September 12, 1997, Sagebrush had a revolving credit facility with a commercial
bank that provided for borrowings up to $3.0 million. This facility expires on
January 31, 1998, but Sagebrush believes that it can be renewed. Advances under
the line of credit are unsecured, limited to short-term working capital purposes
and bear interest at the bank's prime rate (8.5% at September 12, 1997). At
September 12, 1997, $1.4 million was outstanding under the line. The maximum
amount outstanding during the year was $2.4 million.
Sagebrush primarily requires capital for the development and opening of new
restaurants. Sagebrush's substantial growth has not historically required
significant additional working capital. Sales are predominantly cash, and the
business does not require the maintenance of significant receivables or
inventories. In addition, it is common to receive trade credit on the purchase
of food, beverage and supplies, thereby reducing the need for incremental
working capital to support sales increases.
Prior to fiscal 1997, Sagebrush established most of its restaurants by
leasing and renovating existing facilities to the Sagebrush concept. In fiscal
1997, however, five of the six restaurants opened were established by purchasing
land and building a new restaurant due to the increased difficulty of finding
suitable buildings in desirable locations that can be leased and renovated.
Sagebrush anticipates this trend will continue in the future. Sagebrush's cost
of opening a restaurant when Sagebrush leases and renovates an existing building
is approximately $500,000, including the costs of renovating the facility,
purchasing necessary equipment and training personnel. Sagebrush's cost of
building a restaurant on land Sagebrush purchases ranges from $1.2 million to
$1.6 million, with the largest variance related to the cost of land. Assuming
that Sagebrush opens from five to seven restaurants in fiscal 1998, Sagebrush
management expects capital expenditures to range from $6.8 million to $9.8
million. Sagebrush management believes that available cash, cash generated by
operations and available borrowings under Sagebrush's $3.0 million line of
credit together with the real estate secured borrowings described below and
other long-term indebtedness will be adequate to fund Sagebrush's working
capital and capital expenditure requirements at least through the first six
months of fiscal 1998.
53
<PAGE> 62
Sagebrush management expects to finance part of the cost of establishing new
restaurants opened on real property purchased by Sagebrush by borrowings from
commercial banks secured by such real property. In the event that Sagebrush's
operating results fall short of its projections or the borrowings described
above are insufficient to fund its capital expenditure requirements, Sagebrush
could be required to seek additional financing. For any such additional
financing, Sagebrush will consider borrowings from commercial lenders and other
sources of debt financing as well as equity financing. No assurance can be
given, however, that Sagebrush will be able to obtain any such additional
financing when needed upon terms satisfactory to Sagebrush.
Sagebrush opened six restaurants in fiscal 1997 -- one each in Mount Airy,
Salisbury, Lenoir and Denver, North Carolina, Lexington, South Carolina and
Roanoke, Virginia. Sagebrush now operates 33 restaurants in North Carolina,
South Carolina, Tennessee and Virginia. In addition, construction has started on
restaurants in Aiken, South Carolina and Sanford, North Carolina, both of which
will open in fiscal 1998. Sagebrush plans to open a total of five to seven
restaurants in fiscal 1998.
INFLATION
The impact of inflation on food, labor, equipment, land and construction
costs could affect Sagebrush's operations. A majority of Sagebrush's employees
are paid hourly rates related to federal and state minimum wage laws. In
addition, most of Sagebrush's leases require Sagebrush to pay taxes, insurance,
maintenance, repairs and utility costs, and these costs are subject to
inflationary pressures. Sagebrush may attempt to offset the effect of inflation
through periodic menu price increases, economies of scale in purchasing and cost
controls and efficiencies at existing restaurants. While Sagebrush has seen
price increases in certain categories, management believes that inflation has
had no significant impact on costs during the third quarter of 1997, primarily
because the largest single item of expense, food costs, has remained relatively
stable during this period.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Sagebrush adopted SFAS No. 121, which requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. It also requires that long-
lived assets and certain identifiable intangibles to be disposed of be reported
at the lower of carrying amount or fair value less cost to sell. Sagebrush
management has reviewed all long-lived assets as of September 12, 1997 and
believes that the carrying amounts reported in the balance sheet for that date
represent the amounts expected to be recovered over the remaining useful lives
of those assets.
In June 1996 the FASB issued SFAS No. 125, which provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This Statement is generally effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. Sagebrush management believes that the
implementation of the Statement will not have any material impact on Sagebrush's
financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128 to simplify the standards
for computing EPS and make them comparable to international EPS standards. SFAS
128 is effective for periods ending after December 15, 1997 and can not be
adopted at an earlier date. SFAS 128 will require dual presentation of basic and
diluted EPS on the face of the statement of current earnings and a
reconciliation of the components of the basic and diluted EPS calculations in
the notes to the financial statements. Basic EPS excludes dilution and is
computed by dividing net earnings by the weighted-average number of common
shares outstanding for the period. Diluted EPS is similar to fully diluted EPS
pursuant to APB No. 15. Sagebrush believes that the adoption of SFAS 128 would
not result in earnings per share materially different than earnings per share
presented in the accompanying historical consolidated statements of income.
In June 1997, FASB issued SFAS No. 130, which establishes standards of
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Sagebrush
54
<PAGE> 63
believes that the adoption of this Statement will result in no difference
between comprehensive income and net income as reported in the accompanying
historical consolidated statements of income.
In June 1997, the FASB issued SFAS No. 131, which requires disclosure of
financial and descriptive information about reportable operating segments,
revenues by products or services and revenues and assets by geographic areas.
Sagebrush management has not yet determined what additional disclosures will be
required under SFAS No. 131.
CAUTIONARY STATEMENT AS TO FORWARD-LOOKING INFORMATION
Statements contained in this Joint Proxy Statement-Prospectus as to
Sagebrush's outlook for sales, operations, capital expenditures and other
amounts, budgeted amounts and other projections of future financial or economic
performance of Sagebrush, and statements of Sagebrush's plans and objectives for
future operations, are "forward-looking" statements and are being provided in
reliance upon the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Important factors that could cause actual results or events
to differ materially from those projected, estimated, assumed or anticipated in
any such forward-looking statements include, without limitation: the significant
effect on Sagebrush's results of operations that one or several of its
restaurants could have were it or they to be unsuccessful; adverse changes in
economic, weather or other conditions in the relatively small geographic area in
which Sagebrush's restaurants are located; risks associated with Sagebrush's
expansion, including those associated with locating appropriate restaurant
sites, establishing restaurants at those locations, hiring and training
sufficiently skilled management and other personnel, securing required
governmental approvals and permits and obtaining adequate financing; increased
competition; adverse changes in consumer preferences; increased food costs;
adverse changes in the availability of supplies; adverse changes in governmental
regulation relating to Sagebrush's business; the loss or suspension of any of
Sagebrush's licenses or permits; the loss of the services of any of Sagebrush's
key management or other personnel; and other factors that generally affect
Sagebrush's operations and the restaurant industry in general. See "Risk
Factors."
CERTAIN INFORMATION REGARDING WSMP
WSMP operates three principal lines of business: restaurant franchising,
restaurant operations and food processing.
RESTAURANT FRANCHISING
Western Steer Restaurant Franchising Operations. The most significant part
of WSMP's franchising operations currently centers around the "Western Steer"
chain of restaurants, consisting of the "Western Steer Family Restaurant"
concept and the "Western Steer -- Steaks, Buffet & Bakery" concept. The Western
Steer Family Restaurant concept originated in 1975 as a family-oriented,
reasonably-priced steakhouse restaurant. It featured a rustic western-style
design, steaks and other entrees cooked to order and an "all-you-can-eat" buffet
food bar. Beginning in 1992, the Company began an extensive program of
renovation of this concept, which included updating the buffet food bar, adding
an in-house bakery and changing the store appearance to highlight a new format.
Restaurants updated to this new format have been renamed "Western
Steer -- Steaks, Buffet & Bakery."
At November 7, 1997, WSMP had 35 franchised Western Steer restaurants
located in North Carolina (7), Kentucky (7), West Virginia (6), Georgia (4),
South Carolina (4), Florida (3), Virginia (2), Maryland and Tennessee. Of this
total, 20 were operated as Western Steer -- Steaks, Buffet & Bakery restaurants
and 15 as Western Steer Family Restaurants. WSMP no longer offers the Western
Steer Family Restaurant franchise and believes that many of the existing units
will eventually elect to convert to the Western Steer -- Steaks, Buffet & Bakery
format. Although the decision regarding whether and when to
55
<PAGE> 64
renovate rests with the franchisee, WSMP encourages its franchisees to renovate
franchised restaurants and provides assistance in doing so, primarily through
consulting with franchisees regarding the renovations and subsequent operational
changes and training of franchisee personnel. The primary costs of renovating
franchised restaurants are borne by the franchisees.
The average weekly sales volume during the 36 weeks ended November 7, 1997
for franchised Western Steer -- Steaks, Buffet & Bakery restaurants that have
been open for one year or more was $23,600. This represents a slight decrease
from the weekly average of $24,650 for the 36 weeks ended November 1, 1996. The
average weekly sales volume during the first 36 weeks of fiscal 1998 for Western
Steer Family Restaurant units that have been open for one year or more was
$20,200, representing a decrease of 3.3% from the average for the comparable
period of fiscal 1997, which totaled $20,900.
WSMP granted five franchises during fiscal 1997 for Western
Steer -- Steaks, Buffet & Bakery restaurants which opened in North Carolina (2),
Maryland (2) and Virginia. The two franchise units opened in Maryland represent
units previously owned by WSMP that were sold during fiscal 1997. In addition,
one new franchise was opened in West Virginia during the first 36 weeks of
fiscal 1998.
At November 7, 1997, major shareholders of WSMP had ownership interests in
four of WSMP's franchised restaurants. See "-- Certain Relationships and Related
Party Transactions."
Prime Sirloin Restaurant Franchising Operations. In 1987, WSMP acquired
Prime Sirloin, Inc., a regional franchised steakhouse chain composed of seven
units and headquartered in Morristown, Tennessee. This concept, although similar
to Western Steer, was slightly more upscale, with larger building designs and a
higher average ticket price. Due to the success of the Western Steer redesign,
management has offered its Prime Sirloin franchise operators a remodel and
redesign program similar to the Western Steer reformat.
During fiscal 1995, WSMP management introduced a new Prime Sirloin
prototype designed to capitalize on the industry's success with larger
buffet-style formats. This "mega-sized" prototype centers around a budget steak
and buffet concept with seating for over 400 patrons. Significant alterations
from the original Prime Sirloin design include a panoramic entry, which gives
customers a view of the buffet and dining area, a "double-line" system,
directing guests to the buffet floor quickly and a "scatter-bar" buffet design
which allows guests to visit different areas for different phases of their
meals. The new Prime Sirloin design costs approximately $2.1 million per unit,
and each unit is anticipated to gross approximately $2.3 million to $2.7 million
in first year sales. The first prototype Prime Sirloin franchise was opened in
Spartanburg, South Carolina in August 1994. During fiscal 1996, two additional
prototype franchises were opened, in Bristol, Tennessee and Greenville, South
Carolina. No new Prime Sirloin franchises were sold or opened during fiscal
1997, and no new prototype franchise units are planned for fiscal 1998. It is
anticipated that a franchised Western Steer in Maryland will convert to a
franchised Prime Sirloin, however, in fiscal 1998.
At November 7, 1997, there were seven franchised Prime Sirloin restaurants
located in South Carolina (2), Tennessee, Maryland, Virginia, Florida and
Georgia. Five of these are operated in the "Prime Sirloin -- Buffet, Bakery &
Steaks" remodeled format. Of these, the Bristol, Tennessee location, which
opened during fiscal 1996, is operated through a joint venture in which WSMP has
a 50% equity interest.
During the first 36 weeks of fiscal 1998, the average weekly sales volume
for Prime Sirloin -- Buffet, Bakery & Steaks franchises open for one year or
more was $33,900. This represents a decrease from the average of $37,300 for the
comparable period during fiscal 1997.
Bennett's Smokehouse & Saloon Restaurant Franchising Operations. In 1990,
WSMP became a subfranchisor of Bennett's Bar-B-Que, Inc., ("Bennett's"), based
in Denver, Colorado, with development rights exclusively in Tennessee, North
Carolina and Virginia and expansion rights elsewhere in the United States,
except for Colorado, Texas and metropolitan Atlanta. As a sub-franchiser, the
Company pays royalty fees to the franchiser equal to 1% of revenues for each
Bennett's restaurant owned or sub-franchised by WSMP.
In 1994, WSMP management redesigned the Bennett's Bar-B-Que concept into
Bennett's Smokehouse & Saloon, a Texas roadhouse concept merging steaks and
barbecue in a 186-seat casual dinner house. This
56
<PAGE> 65
concept represented WSMP's entry into the rapidly expanding casual dining
market. At November 7, 1997, WSMP had three franchised Bennett's
restaurants -- two in Tennessee and one in West Virginia.
One new West Virginia franchise was opened during fiscal 1997. WSMP
management has not actively pursued franchise expansion during fiscal 1998, but
instead has focused efforts on improving operations in existing units.
Other Restaurant Franchising Operations. WSMP has created the "Mom 'n'
Pop's Buffet and Bakery" restaurant concept to fit existing Western Steer
buildings in areas in which competition has grown or in which past performance
necessitates other market approaches. This restaurant concept consists of food
bars from which customers make selections. At fiscal 1997 year-end, there were
two franchised units under this concept, both located in Georgia. At the present
time, the Company does not consider these restaurants or their franchising as
being significant to its overall operations.
Restaurant Franchising Generally. WSMP utilizes standard franchise
agreements for its Western Steer; Western Steer -- Steaks, Buffet & Bakery;
Prime Sirloin; Prime Sirloin -- Buffet, Bakery & Steaks; and Bennett's
Smokehouse & Saloon restaurants. The terms of the franchise agreement depend
upon when the agreement was executed. Generally, franchise agreements executed
prior to 1990 are for a period of 20 years, renewable for a period of 20 years,
whereas those executed after that date have 10-year terms. The initial franchise
fee is $25,000. In addition, royalty fees of 3% of the franchised restaurant's
gross sales throughout the term of the agreement are also payable to the
Company. Franchise agreements executed after 1981 require the franchisee to pay
WSMP an advertising fee of 2% of each franchised restaurant's gross sales.
Although WSMP reserves the right to collect this total fee, it is not currently
charging an advertising fee to its franchise units. All agreements provide for
an exclusive territory and for in-term and post-term non-competition agreements.
No single franchisee or group of franchisees under common control provides
revenues equal to 10% or more of WSMP's consolidated revenues.
RESTAURANT OPERATIONS
Western Steer, Prime Sirloin, and Bennett's Restaurant Operations. At the
date of this Joint Proxy Statement-Prospectus, WSMP owned and operated 21
Western Steer -- Steaks, Buffet & Bakery restaurants, located in North Carolina
(17), Virginia (2) and Tennessee (2), as well as five Prime Sirloin -- Buffet,
Bakery & Steaks restaurants, all located in North Carolina. Of that amount, 13
Western Steer restaurants and one Prime Sirloin restaurant were purchased on
March 1, 1997 from six corporations under the common control of Cecil R. Hash
(the "Hash Companies"). See "-- Certain Relationships and Related Party
Transactions." Three other Western Steer restaurants have been acquired during
fiscal 1998 and are included in these totals. One Bennett's Smokehouse & Saloon
restaurant is owned by WSMP and is located in North Carolina.
WSMP does not intend to build or acquire any Western Steer, Prime Sirloin
or Bennett's restaurants during the remainder of fiscal 1998. Should such an
opportunity arise, however, WSMP will evaluate it upon its merits.
Other Restaurant Operations. WSMP operates three Western Steer -- Steaks,
Buffet & Bakery restaurants in Kentucky for a franchisee and two Prime
Sirloin -- Buffet, Bakery & Steaks restaurants in South Carolina for
franchisees. Management does not consider the operation of these restaurants, in
total, significant to WSMP's overall operations.
Seasonality of Restaurant Operations. WSMP considers its restaurant
operations to be somewhat seasonal in nature, with stronger sales during the
Christmas season and spring, weaker sales during the mid-summer and late winter.
57
<PAGE> 66
Openings And Closings of Particular WSMP-Owned Restaurants. Following is a
summary of all WSMP-owned restaurants opened/acquired and closed during the last
three fiscal years and to the date of this Joint Proxy Statement-Prospectus
during fiscal 1998:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL TO JANUARY 13, 1998
1995 1996 1997 IN FISCAL 1998
------ ------ ------ -------------------
<S> <C> <C> <C> <C>
Western Steer restaurants
Opened/acquired................................ 0 0 0 16
Closed......................................... 3 3 3 4
Total at period end............................ 15 12 9 21
Prime Sirloin restaurants
Opened/acquired................................ 1 1 0 1
Closed......................................... 0 1 0 1
Total at period end............................ 5 5 5 5
Bennett's Bar-B-Que restaurants
Opened......................................... 0 0 0 0
Closed......................................... 0 0 0 0
Total at period end............................ 1 1 1 1
Other restaurants
Opened......................................... 0 0 1 0
Closed......................................... 1 0 0 3
Total at period end............................ 2 2 3 0
Total restaurants at period end.................. 26 23 18 27
</TABLE>
Restaurant Operations Generally. For the first 36 weeks of fiscal 1998,
the average meal price for WSMP-owned Western Steer restaurants was $5.88 and
the average meal price for WSMP-owned Prime Sirloin restaurants was $6.50. Meal
prices vary on geographic location, degree of renovation and whether the
restaurant is WSMP-owned or franchised.
WSMP has established a purchase program with Institutional Food House, Inc.
("IFH") of Hickory, North Carolina, which allows WSMP-owned restaurants and
franchisees to obtain substantially all staple items on a regular basis from one
purchasing source and promotes the consistency and high quality of goods
delivered to its restaurants and participating franchisees. This purchase
program is voluntary for franchisees, which are free to buy their food from IFH
or elsewhere so long as it meets WSMP's specifications. WSMP's management does
not believe that loss of the IFH agreement would have a material adverse effect
on WSMP.
FOOD PROCESSING
Mom 'N' Pop's Ham Curing Division. Through its Ham Curing division, WSMP
produces cured hams and ham products for the retail and institutional markets.
In WSMP's modern curing facilities in Claremont, North Carolina, the atmospheric
conditions of traditional air curing of pork hams are simulated, resulting in a
curing process that fully cures raw hams in a period of approximately 80 days.
WSMP cured over 8.3 million pounds of ham during fiscal 1997 in its 55,000
square foot facility.
WSMP produces whole cured hams, packaged cured ham slices, pre-portioned
ham for portion control customers and various "side meat" products. A portion of
ham production is sold directly or through distributors to retail supermarkets
under the "Mom 'n' Pop's" brand name, primarily in North Carolina, South
Carolina, Virginia, Tennessee, Alabama and Georgia. The remainder of production
is sold to institutional food distributors. One supermarket customer accounted
for 23.5% of cured ham sales during fiscal 1997. WSMP is confident, based upon
historical customer demand, that numerous other outlets exist for these
products.
Raw hams are available from numerous sources, although WSMP relies mainly
upon two suppliers for most of its hams. Loss of one or both of these suppliers
would not have a material adverse effect upon WSMP.
58
<PAGE> 67
Sales for WSMP's Ham Curing division are seasonal in nature, with sales
volume increases occurring around Thanksgiving, Christmas and Easter. WSMP
mitigates the seasonality of its sales by continuing to buy hams in non-peak
periods and by storing them until peak seasons.
Mom 'N' Pop's Prepared Foods Division. WSMP produces through its prepared
foods division a variety of fully cooked items that are sold frozen or
refrigerated to retail and institutional customers. This division includes all
items produced and packaged as part of the bakery and sandwich packaging
operations, as well as items being developed and packaged for the developing
home meal replacement market. Within its bakery and sandwich packaging
operations, WSMP produces a variety of biscuits, yeast rolls and other
flour-based products. Its biscuits are processed both plain and as sandwiches
filled with items such as sausage, cheese, eggs and country ham. These frozen
products are directly marketed under the "Mom 'N' Pop's" brand name to
institutional buyers, vending companies, delicatessens and supermarkets and are
also packed for several of WSMP's customers under private labels. WSMP's yeast
rolls are used primarily in frozen microwavable sandwiches. WSMP packs
microwavable hamburger, cheeseburger, chicken, barbecue and other sandwiches
using its own fresh baked yeast rolls for two customers under custom
manufacturing agreements. In addition, similar sandwiches are produced under the
"Mom 'N' Pop's" brand name and marketed directly to supermarkets, vending
companies and institutional buyers.
The ingredients used in the bakery and sandwich packaging operation are
purchased primarily from five vendors, but alternative sources are available.
Three customers accounted for approximately 84.6% of sales during fiscal 1997.
One of these customers, Hudson Foods, Inc., accounted for approximately 75.4% of
bakery sales, and WSMP has entered into a contractual arrangement to supply that
company's requirements for those products. WSMP's management believes that the
loss of this customer would have an adverse short-term effect on WSMP, but that
the long-term impact would be minimal due to the demand for WSMP's food products
from other customers and potential customers.
During fiscal 1997, WSMP announced its entry into the "home meal
replacement" category, including individually packaged, refrigerated meats,
vegetables, desserts and other items for sale through supermarkets. WSMP has
developed experience in the home meal replacement field over the last two years
as a result of other research and development efforts in its bakery operations.
It is using specialized tray and barrier films in modified atmosphere packaging
of home meal replacement items. WSMP is working with a major supermarket chain
on the roll-out of these products.
Although WSMP does not consider its prepared foods division to be seasonal,
its somewhat slower sales periods typically occur in the mid-summer months.
Food Processing Revenues. Revenues for the two divisions that comprise
WSMP's food processing line of business were as follows for the past three
fiscal years:
<TABLE>
<CAPTION>
FISCAL PREPARED FOODS DIVISION HAM CURING DIVISION
------ ----------------------- -------------------
<S> <C> <C>
1997........................................ $48,200,000 $10,400,000
1996........................................ $38,600,000 $12,300,000
1995........................................ $49,600,000 $12,800,000
</TABLE>
For the 36 weeks ended November 7, 1997, revenues from the Prepared Foods
and Ham Curing Divisions totalled $40,500,000 and $6,700,000, respectively.
EMPLOYEES
WSMP employed 1,858 persons (1,446 full-time and 412 part-time) in its
operations at November 7, 1997. These included 71 administrative and accounting
personnel, 592 Prepared Foods and Ham Curing employees and 1,195 restaurant
workers. WSMP offers its employees various benefits, including major medical
health insurance coverage and participation in its cafeteria plan, its
profit-sharing retirement plan and its employee stock purchase plan. None of
WSMP's employees is represented by a union. WSMP has experienced no work
stoppage attributed to labor disputes and considers its employee relations to be
good.
59
<PAGE> 68
WORKING CAPITAL
WSMP's working capital needs for its restaurant franchising and restaurant
operations businesses do not vary appreciably on a seasonal basis or from year
to year. All WSMP-owned and most franchised restaurants participate in WSMP's
IFH purchase program and do not carry substantial food inventories. WSMP does
not provide customers or franchisees with the right to return products, other
than major grocery store chains which it may supply, except where required under
contract law. Also, WSMP does not give extended payment terms to its customers
or franchisees. WSMP's food production segment working capital needs vary with
the seasonality of its revenues.
MARKETING AND ADVERTISING
WSMP relies upon advertising to help promote its Western Steer, Prime
Sirloin, and Bennett's restaurants. Local advertising has been the
responsibility of individual restaurant operators. WSMP and its Western Steer,
Prime Sirloin and Bennett's franchisees have advertised their restaurants
primarily in newspapers and billboards and with point-of-sale materials.
Most Western Steer franchisees, through franchise agreements or
supplementary agreements, are obligated to pay WSMP an advertising fee of 2% of
the gross sales of each franchised restaurant. This fee is intended to provide
funds for future national, regional and local advertising of Western Steer
restaurants.
WSMP actively markets its ham and bakery products to large grocery
distributors, institutional food brokers and, in some cases, directly to grocery
chains. WSMP utilizes a combination of direct employees and food brokers to
market these products. WSMP's Chief Executive Officer and Chief Operating
Officer are also actively involved with marketing to the largest food
manufacturing customers.
COMPETITION
The restaurant and food manufacturing businesses are highly competitive and
are often affected by changes in tastes and eating habits of the public, as well
as economic conditions affecting spending habits, population and traffic
patterns. WSMP-operated restaurants and Western Steer and Prime Sirloin
restaurants operated by franchisees generally compete with national and regional
family-oriented restaurant chains, local establishments and fast food
restaurants. WSMP's management believes that family-oriented steakhouses compete
primarily on the basis of consistency and quality of product, price and location
of restaurants. In marketing franchises, WSMP competes with numerous other
family steakhouse and restaurant franchisers, many of which have superior
financial resources and sales volume.
In its production of retail and institutional ham products, WSMP faces
strong price competition from a variety of large meat processing concerns and
smaller local and regional operations. WSMP's management does not believe that
any one company is dominant in the sale of ham products. The principal methods
of competition in the sale of ham products are price, quality and name
recognition. In sales of biscuit and yeast roll products, WSMP competes with a
number of large bakeries in various parts of the country, as well as national
frozen meal manufacturers, with competition strongest for sales to institutional
food vendors. The principal methods of competition for the sale of bakery
products are price and quality.
TRADEMARKS
WSMP has registered the Western Steer logotype and the names "Western
Steer," "Western Steer Family Restaurant," "Western Steer -- Steaks, Buffet &
Bakery," "Prime Sirloin -- Buffet, Bakery & Steaks," the "Prime Sirloin"
logotype and the "Mom 'n' Pop's" logotype, and variations thereof, as well as
several distinct Western Steer menu items, as trademarks and service marks with
the United States Patent and Trademark Office. WSMP actively uses these
trademarks to identify its restaurants and products and believes that they are
important to its business. Generally, trademarks remain valid as long as they
are used properly for identification purposes.
60
<PAGE> 69
REGULATION
WSMP is subject to Federal Trade Commission regulations relating to
disclosure requirements in the sale of franchises. Many states also have laws
regulating franchise operations, including registration and disclosure
requirements in the offer and sale of franchises and the application of
statutory standards regulating franchise relationships. WSMP believes that it is
operating in substantial compliance with applicable laws and regulations
governing its operations.
The conduct of WSMP's businesses is subject to various other federal and
state laws, including the Food, Drug and Cosmetic Act and the Occupational
Safety and Health Act. The Company is also subject to the Fair Labor Standards
Act, which governs such matters as minimum wages, overtime and other working
conditions. A significant portion of WSMP's food service personnel are paid at
rates related to the federal minimum wage, and, accordingly, future increases in
the minimum wage will increase WSMP's labor cost.
WSMP provides standard Food and Drug Administration warranties to its
retailers and distributors of ham or bakery products concerning the
unadulterated nature of its products and their introduction into interstate
commerce.
WSMP believes itself to be in material compliance with federal, state and
local provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment and believes that such
compliance should not have a material effect on its capital expenditures,
earnings or competitive position.
PROPERTIES
WSMP owns its principal office, warehouse, ham-curing and bakery
facilities, which are located on a 62-acre tract in Claremont, North Carolina.
The executive offices of WSMP are located in a 23,000-square-foot building.
The principal ham curing plant is contained in a modern 55,000-square-foot
building. WSMP's bakery operations occupy buildings totaling 137,460 square
feet, including 18,941 square feet of freezer and cooler space.
WSMP also owns various parcels of undeveloped property in North Carolina
for future development or sale. In addition, it owns four properties that were
previously operated as restaurants, three of which are vacant and one of which
is leased to others, in North Carolina, Florida, Georgia and Tennessee.
Of the 32 restaurants owned by WSMP and its wholly-owned subsidiaries as of
November 7, 1997, 11 were located on property owned by WSMP or its subsidiaries
in North Carolina (9), Florida and Georgia. The 21 other restaurants operated by
WSMP or its subsidiaries at that date were held under long-term leases in North
Carolina (17), South Carolina (2) and Tennessee (2).
Substantially all of WSMP's restaurant properties, as well as WSMP's
corporate headquarters, ham curing facility and bakery facility, are pledged as
collateral under long-term debt obligations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of WSMP -- Liquidity
and Capital Resources" and Note 7 to Consolidated Financial Statements of WSMP
for details about WSMP's long-term debt.
LEGAL PROCEEDINGS
WSMP is involved in various claims and legal proceedings in the ordinary
course of its business, the resolution of which management believes will not
have a material effect on WSMP's business or financial condition. WSMP intends
to prosecute or defend vigorously, as the case may be, all such matters.
61
<PAGE> 70
EXECUTIVE OFFICERS AND DIRECTORS
WSMP's officers are elected annually by the WSMP Board and serve
indefinitely at the pleasure of the WSMP Board. The following table sets forth
certain information with respect to the executive officers and directors of WSMP
at November 7, 1997:
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION SINCE
- ---- --- -------- ---------
<S> <C> <C> <C>
Richard F. Howard.............. 48 Chairman of the Board and Secretary 1988
James C. Richardson, Jr. ...... 48 Vice Chairman of the Board and Chief 1988
Executive Officer
David R. Clark................. 41 President and Chief Operating Officer 1996
James M. Templeton............. 60 Senior Vice President, Real Estate 1988
and Assistant Secretary
Ken L. Moser................... 53 Senior Vice President, Restaurants 1984
and Franchising
Larry D. Hefner................ 48 Senior Vice President, Sales 1991
Matthew V. Hollifield.......... 31 Vice President of Finance and 1995
Treasurer
James T. Hood.................. 42 Vice President, Restaurant Operations 1996
Bill H. Brown.................. 61 Vice President of Product Development 1997
Ken D. Breiner................. 49 Vice President of Food Service 1997
James W. Berry................. 54 Controller and Assistant Treasurer 1981
Bobby G. Holman................ 61 Director
Lewis C. Lanier................ 48 Director
William R. McDonald............ 53 Director
Richard F. Hendrickson......... 57 Director
E. Edwin Bradford.............. 54 Director
</TABLE>
Mr. Howard became a director in 1987 and has served as Chairman of the
Board of Directors since 1993. He also serves as Secretary to WSMP. Mr. Howard
has served as Executive Vice President of WSMP from 1989 to 1993 and as Chief
Financial Officer and Treasurer from 1989 to 1994. He has been Secretary and
Treasurer of WSMP's management firm, HERTH Management, Inc., and of RSH
Management, Inc., since 1993.
Mr. Richardson became a director in 1987. He is WSMP's Chief Executive
Officer and Vice Chairman of the Board of Directors, positions he assumed in
1993 and 1996, respectively. He has served WSMP as an executive officer since
1987, including Executive Vice President from 1989-1993, and as President from
1993 to 1996. Since 1993 Mr. Richardson has been President of HERTH Management,
Inc., the Company's management firm, and of RSH Management, Inc.
Mr. Clark is WSMP's President and Chief Operating Officer, a position he
was appointed to in 1996. From 1994 to 1996, he served as Executive Vice
President and Chief Operating Officer of Bank of Granite, located in Granite
Falls, North Carolina. Prior to joining Bank of Granite, Mr. Clark served 13
years with BB&T, a bank and trust company with headquarters in Wilson, North
Carolina, serving in various capacities, including President of BB&T of South
Carolina, and President of the Northwest Region of North Carolina. Mr. Clark has
been a director of WSMP since 1996.
Mr. Templeton, a director since 1988, serves WSMP as Senior Vice President
of Real Estate. He served WSMP as Vice President of Real Estate from 1988 to
1994, when he assumed his present position. He is presently Vice-President of
Administration of HERTH Management, Inc., a position he has held since 1991, and
has been Vice-President of RSH Management, Inc. since 1987.
Mr. Hollifield was an audit manager with the accounting firm of Deloitte &
Touche LLP prior to assuming the position of Vice President of Accounting, Chief
Accounting Officer and Assistant Secretary of WSMP in 1995 and had been employed
by that accounting firm since 1988. In February 1997, he was named Vice
President of Finance and Treasurer of WSMP.
62
<PAGE> 71
Mr. Hood has been an employee of WSMP since 1984. He served as Director of
Western Steer Operations from 1991 to 1996 and was named Vice President in 1996.
Prior to joining WSMP in 1996, Mr. Brown served as Director of Research and
Development for Shoney's Inc. from 1994 to 1996. For 22 years prior to that, he
was Director of Culinary Development for Morrison's Restaurants, Inc.
Prior to joining the Company in 1996, Mr. Breiner was President of Foods
Spectrum, Inc., an Atlanta based concept development company, from 1994 to 1996.
In addition, from 1989 to 1994, he served as Director of Purchasing and Research
and Development for RTM Restaurant Group, Arby's largest franchisee and owner of
Mrs. Winner's Chicken and Biscuits.
All other executive officers have been employed by WSMP in their respective
positions or similar positions for more than five years.
Mr. Holman served as WSMP's Chief Financial Officer and Treasurer from 1994
until his retirement in February 1997. He now is a consultant to the WSMP. Prior
to joining WSMP, he had been an Assistant Vice President with Aetna Life &
Casualty Insurance Company in Hartford, Connecticut, and managing director of
the Food Industry segment of Aetna's Bond Investment Department, since 1985. Mr.
Holman has served as a director of WSMP since 1994.
Mr. Lanier is a member of the law firm of Horger, Horger, Lanier,
Culclasure & Knight, LLP, of Orangeburg, South Carolina, having joined its
predecessor in 1985. Mr. Lanier, who was first elected to the WSMP Board in
1988, serves on the Executive Compensation Committee, the Sensitive Transactions
Committee and the Audit Committee.
Mr. McDonald has been a director since 1991. He serves on the Executive
Compensation Committee, the Sensitive Transactions Committee and the Audit
Committee. He is Branch Manager of American Pharmaceutical Services, a
subsidiary of Living Centers of America that provides pharmaceutical needs and
prescription services to nursing homes, and has held that position with American
or its predecessors since 1989. Mr. McDonald also serves as Mayor of the City of
Hickory, North Carolina, an elective office that he has held since 1981.
Mr. Hendrickson was elected to the WSMP Board in 1993, after having
previously served on the WSMP Board from 1988 to 1991. He is Vice-President of
York Properties, Inc. of Raleigh, North Carolina, a real estate firm that he has
served since 1985. Mr. Hendrickson is a member of the Executive Compensation
Committee, the Sensitive Transactions Committee and the Audit Committee.
Mr. Bradford was first elected to the WSMP Board in 1993. He owns Bradford
Communications, Inc., a Hickory, North Carolina marketing and advertising firm,
which he founded in 1977.
Upon completion of the Merger, WSMP and L. Dent Miller will enter into the
Miller Employment Agreement pursuant to which Miller will serve WSMP with
responsibility for all of its restaurant operations. See "The
Merger -- Interests of Certain Persons in the Merger." Miller, age 64, has
served Sagebrush as President, Chief Executive Officer and Secretary since 1995.
Miller also is a director of Sagebrush. From 1988 through 1995, Miller served
Connor Management, Inc., a restaurant management company that was a predecessor
to Sagebrush, as Executive Vice President.
DIRECTORS' COMPENSATION
During fiscal 1997, outside directors were paid $2,000 per meeting
attended. Directors who are employees of WSMP or are members of the HERTH
Management, Inc. ("HERTH") group, or who have material contracts with WSMP,
receive no payment for their service as directors.
63
<PAGE> 72
SUMMARY COMPENSATION TABLE
The following information relates to compensation paid by WSMP to its Chief
Executive Officer and to the four other most highly compensated executive
officers of WSMP (collectively, the "Named Executive Officers of WSMP") for
services in all capacities during the three fiscal years ended February 28,
1997:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------
NAME AND FISCAL OTHER ANNUAL OPTION ALL OTHER
PRINCIPAL POSITION YEAR SALARY(L) BONUS COMPENSATION AWARDS COMPENSATION
- ------------------ ------ --------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard F. Howard.......... 1997 $485,600(2) -- -- -- --
Chairman of the Board 1996 $495,000(2) -- -- -- --
and Secretary 1995 $495,000(2) -- -- -- --
James C. Richardson, Jr.... 1997 $476,500(2)
Vice Chairman of the 1996 $487,550(2) -- -- -- --
Board and Chief Executive 1995 $487,550(2) -- -- -- --
Officer
James M. Templeton......... 1997 $221,100(2) -- -- -- --
Senior Vice President 1996 $200,000(2) -- -- -- --
of Real Estate 1995 $200,000(2) -- -- -- --
David R. Clark(3).......... 1997 $251,800(2)(4) $73,500 $50,000 100,000(5) --
President and Chief 1996 -- -- -- -- --
Operating Officer 1995 -- -- -- -- --
Bobby G. Holman............ 1997 $128,000 -- -- -- --
Chief Financial Officer 1996 $130,000 -- 17,656(6) -- --
and Treasurer 1995 $104,400(4) -- -- 62,500(5) --
</TABLE>
- ---------------
(1) Includes WSMP's contribution under its Employee Profit-Sharing and Salary
Deferral Plan. WSMP provides this benefit only upon salary amounts, not upon
amounts paid to HERTH for management services. Also includes WSMP's matching
portion due under its Employee Stock Purchase Plan.
(2) Represents compensation paid to HERTH for management services rendered.
Amounts assigned to Messrs. Howard, Richardson, and Templeton represent the
allocation provided to WSMP by HERTH at WSMP's request and may not represent
any sum actually paid to such persons by HERTH. Mr. Clark's salary
represents $126,800 paid to him by WSMP during fiscal 1997 and reimbursed to
WSMP by HERTH, as well as an additional $125,000 that HERTH provided in its
allocation.
(3) Mr. Clark was hired as President and Chief Operating Officer as of July 1,
1996 at a base salary of $200,000 per year and a bonus calculated upon
increases in WSMP's stock value during his tenure. Mr. Clark also received a
one-time bonus of $50,000, shown above as "Other Annual Compensation," to
compensate him for additional compensation foregone when he became a WSMP
officer. HERTH reimburses WSMP for Mr. Clark's base salary. WSMP is solely
responsible for bonuses.
(4) Represents a partial year.
(5) Mr. Clark was granted options to purchase 100,000 shares in fiscal 1997.
During fiscal 1995, Mr. Holman was granted an option to purchase 62,500
shares (as adjusted for a subsequent stock split), exercisable as to 20%
after each year of service following issuance; this option was subsequently
modified to become exercisable immediately. These options were issued at the
closing price of the WSMP Common Stock at the date of issuance, or $5.875
and $4.00 (as adjusted for a subsequent stock split), respectively.
(6) Reimbursement for moving expenses.
64
<PAGE> 73
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents information relating to option grants to the
Named Executive Officers of WSMP and the potential realizable value of each
grant of options assuming annualized appreciation of WSMP Common Stock at the
rate of 5% and 10% over the term of the option.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SHARES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard F. Howard........... -- -- -- -- -- --
James C. Richardson, Jr. ... -- -- -- -- -- --
James M. Templeton.......... -- -- -- -- -- --
David R. Clark.............. 50,000(1) 30.8 $5.88 7/1/06 $184,738 $468,162
50,000(2) 30.8 $5.88 7/1/06 $184,738 $468,162
Bobby G. Holman............. 62,500(3) 38.4 $4.00 5/16/04 $157,224 $398,436
</TABLE>
- ---------------
(1) Such options become exercisable, beginning July 1, 1997, with respect to 20%
of the underlying shares per year.
(2) Such options are immediately exercisable.
(3) Such options were granted to Mr. Holman during fiscal 1995, and at that time
were exercisable, beginning May 16, 1995, with respect to 20% of the
underlying shares per year. During fiscal 1997, such options were modified
to become immediately exercisable.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table presents certain information about stock options
exercised by the Named Executive Officers of WSMP during fiscal 1997 and the
value of unexercised options held by them at February 28, 1997.
<TABLE>
<CAPTION>
NO. OF SHARES VALUE OF
SHARES UNDERLYING UNEXERCISED
ACQUIRED UNEXERCISED IN-THE-MONEY
ON OPTIONS AT OPTIONS AT
EXERCISE FEBRUARY 28, 1997 FEBRUARY 28, 1997(1)
----------------- --------------------------- ---------------------------
VALUE
NAME NO. REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard F. Howard............... -- -- 125,000 -- $744,000 --
James C. Richardson, Jr. ....... -- -- 125,000 -- $744,000 --
James M. Templeton.............. -- -- 62,500 -- $362,500 --
David R. Clark.................. -- -- 50,000 50,000 $156,000 $156,000
Bobby G. Holman................. 25,000 $125,000 37,500 -- $187,500 --
</TABLE>
- ---------------
(1) The closing price of WSMP Common Stock on February 28, 1997 was $9.00 per
share.
The exercise price of stock options previously awarded to the Named
Executive Officers of WSMP has not been adjusted or amended, although the
Executive Compensation Committee did amend Mr. Holman's options to make them
immediately exercisable immediately rather than exercisable over a period of
five years.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
On June 30, 1996, Mr. Clark and WSMP executed an Employment Contract (the
"Employment Contract") providing that Mr. Clark would serve as President and
Chief Executive Officer of WSMP for a term of three years at an annual base
salary of $200,000 and an annual bonus based on WSMP's financial performance. In
the event Mr. Clark's employment is terminated by WSMP without cause or Mr.
Clark resigns from employment for good reason during the initial three-year
term, then WSMP is obligated to pay Mr. Clark a lump sum severance payment equal
to the total sum of his base salary as would be due in the
65
<PAGE> 74
aggregate for the remainder of the three-year term. In the event of a
termination without cause or a resignation for good reason during any renewal
term of the Employment Contract, such lump sum severance payment shall equal
three months of Mr. Clark's then existing base salary. Under the Employment
Contract, WSMP granted to Mr. Clark options to purchase an aggregate of 100,000
shares of WSMP Common Stock, and agreed to consider Mr. Clark for participation
in any subsequent options made available to senior management of WSMP at the
discretion of the WSMP Board. WSMP also agreed to appoint Mr. Clark to fill the
first available vacancy on the WSMP Board. Mr. Clark subsequently filled this
vacancy and currently serves as a member of the WSMP Board. In addition, WSMP
agreed to obtain coverage for Mr. Clark under a directors and officers liability
insurance policy, and to indemnify Mr. Clark to the fullest extent permitted by
applicable law in the event Mr. Clark is made a party to certain threatened or
pending actions, suits or proceedings by reason of his performing services as an
officer or director of WSMP.
Messrs. Clark, Hefner, Richardson, Howard and Templeton (each, an
"Executive") have each entered into a Change in Control Agreement with WSMP (the
"Change in Control Agreements"). The Change in Control Agreements provide that,
if a change in control of WSMP occurs, then the following benefits will be
provided by WSMP: three times the amount of the annual base salary of the
Executive; three times the amount of the largest annual cash bonus paid or
payable to such person; the aggregate spread between the exercise prices of all
outstanding unexercised options of WSMP and the higher of the closing price of
WSMP Common Stock or the highest price paid in connection with a change in
control of WSMP; and a gross-up payment for all liabilities resulting from
payments under the Change in Control Agreements. A change in control of WSMP
shall have occurred if: (1) the individuals who constituted the WSMP Board as of
the date of the Change in Control Agreements cease to constitute a majority of
the WSMP Board; (2) any "person" (as defined in the Change in Control
Agreements) acquires 15% of WSMP Common Stock; (3) any of certain business
combinations are consummated, unless the beneficial owners of WSMP's Common
Stock before such combination own more than 50% of such stock after the business
combination; or (4) WSMP is liquidated or dissolved. Payments under the Change
in Control Agreements are payable upon a change in control of WSMP, whether or
not an Executive's employment is terminated. The term of each Change in Control
Agreement is ten years unless it earlier expires upon the termination of an
Executive's employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation Committee of the WSMP Board consists of Messrs.
Lanier, McDonald and Hendrickson, none of whom was an employee or a current or
former officer of WSMP or any of its subsidiaries during fiscal 1997. There are
no "interlocking" memberships on the Executive Compensation Committee of the
WSMP Board to the compensation committee of any other company.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
HERTH Management, Inc. provides management services to WSMP, reviews and
supervises financing, provides cost analysis services, real estate services,
strategic planning services and reviews franchisee relationships. HERTH provides
the full-time services of Messrs. Howard, Richardson, Clark and Templeton and
reimburses WSMP for half of the salary of Mr. Holman. (WSMP is responsible for
payment of any bonuses awarded to Mr. Clark). WSMP currently operates under a
written contract with HERTH (the "HERTH Contract"), which was approved by the
shareholders of WSMP at their 1995 annual meeting for annual compensation of
$1,500,000 per year and a term expiring in 1999. The WSMP Board recently
extended this contract until 2002. Each of Messrs. Howard, Richardson and
Templeton are also paid salaries by WSMP of $1.00 per year. HERTH is a
corporation whose shareholders are Messrs. Richardson, Templeton and Edgell and
Columbia Hill, L.L.C. ("Columbia") and whose officers are Messrs. Richardson and
Templeton. The HERTH Contract was assigned to HERTH by RSH Management, Inc.
("RSH") with WSMP's consent in 1993, RSH having provided management services to
WSMP from 1988 through 1993.
WSMP maintains fire and general property, automobile liability, premises
liability, product liability, worker's compensation, director and officer
liability, and certain key employee life insurance coverages, which insurance
has been provided since prior to 1979, through County-Wide Insurance Agency,
Inc. ("County-Wide"). County-Wide received payments of $1,113,000 during fiscal
1997, and $835,362 through Novem-
66
<PAGE> 75
ber 7, 1997 in fiscal 1998, in connection with such insurance, of which sums
County-Wide retained approximately 10% as commissions. Charles F. Connor, Jr.,
Chairman of the Board of Sagebrush, is a principal of County-Wide. WSMP places
its insurance requirements out to bid every three years (approximately) to
insure that its prices paid are as fair and equitable as could be obtained
through unaffiliated parties. Connor is Chairman of the Sagebrush Board and, as
of December 1, 1997, owned 100,000 shares of WSMP Common Stock.
Denver Equipment Company ("Denver") and Howard Furniture Company ("Howard")
are companies that sell restaurant equipment and supplies, and restaurant
furnishings, respectively, to WSMP, as well as to affiliated and unaffiliated
franchises and to the public in general. During fiscal 1997, Denver was paid a
total of $522,400, and Howard a total of $39,700, for purchases made by WSMP.
Denver received $686,908 and Howard received $54,745 for purchases through
November 7, 1997 in fiscal 1998. These companies have as their majority owner
Richard S. Howard, the father of director Richard F. Howard; Connor has a 10%
equity interest in Denver. WSMP believes that the furnishings and equipment
purchased from Denver and Howard were purchased on terms as fair and equitable
as could have been obtained from unaffiliated third parties.
Since 1981, WSMP has utilized Bradford Communications, Inc. ("BCI") to
provide WSMP with certain marketing and advertising services. As a part of its
services to WSMP, BCI develops advertising programs for all segments of WSMP,
including contracting for media space and time and placing all advertising for
WSMP-owned and -operated restaurants, as well as developing marketing tools for
the food processing divisions. During fiscal 1997, WSMP paid BCI a total of
$354,700 for packaging, design and marketing, media plan development and
research, development of advertising concepts and associated services. Of the
total received by BCI, it paid out on behalf of WSMP $219,000 for media,
printing expenses, mechanical and consultant costs. BCI received $240,000 for
services rendered through November 7, 1997 in fiscal 1998. BCI renders such
services to the public in general. The owner of BCI, Mr. E. Edwin Bradford, has
been a WSMP director since 1993.
In January 1996, WSMP received 111,983 shares of Sagebrush Common Stock as
part of a transaction leading to the initial public offering of Sagebrush Common
Stock. WSMP received these shares in exchange for shares of certain restaurant
corporations that were predecessors of Sagebrush. The Sagebrush Common Stock was
unregistered and restricted in the possession of WSMP. Although the initial
public offering price of the Sagebrush Common Stock was $7.00 per share, in the
view of WSMP these shares were worth substantially less because of the trading
restriction on them. Columbia Hill, L.L.C. is a North Carolina limited liability
company whose owners are Messrs. Richardson (40%), Clark (45%) and Hefner (15%).
Columbia offered to purchase these shares at $7 per share, or $783,881, payable
10% in cash with the balance represented by a promissory note secured by the
unconditional guaranties of Messrs. Richardson, Clark and Hefner. WSMP accepted
the offer, having determined that such terms were acceptable and more favorable
than WSMP could receive from any third-party purchaser. The promissory note is
payable in two years, with interest accruing at the prime rate and with
mandatory pro-rata paydown of principal if any of the stock is resold prior to
the due date. At the time of the offer, Sagebrush Common Stock was trading on
NASDAQ at $7.00 per share. At closing, it was trading at $7.25.
During fiscal 1997, WSMP placed on the market for sale a restaurant
property in Hildebran, North Carolina, that it had been leasing to various
short-term operators since closing the facility as a WSMP restaurant in 1991.
After failing to receive any offers for the property listed at its appraised
price of $220,000, WSMP sold the property, which had a book value of $52,000, to
its officer and director James M. Templeton for the cash price of $150,000. WSMP
believes that the price and terms of this transaction were at least as fair and
equitable to WSMP, if not more favorable, than could have been obtained from an
unaffiliated third party.
During fiscal 1998, WSMP sold two former restaurant properties in Panama
City, Florida and one former restaurant property in Black Mountain, North
Carolina, and its 80% equity interest in a franchised restaurant in St.
Augustine, Florida, all to Catawba Valley Real Estate, Inc. ("CVRE"), a North
Carolina corporation whose principal shareholder is James M. Templeton.
The two Panama City properties were sold for $650,000 and $350,000,
respectively, with cash down payments to WSMP of $130,000 and $10,000,
respectively, and with promissory notes to WSMP for the
67
<PAGE> 76
balances owing of $520,000 and $340,000, respectively. The promissory notes,
secured by the real estate, provide for monthly payments of principal and
interest (at 8.5%) amortized over 15 years with a five-year call. The Black
Mountain property was sold for $500,000 in cash. WSMP believes that the price
and terms of these transactions were at least as fair and equitable to WSMP, if
not more favorable, than could have been obtained from unaffiliated third
parties.
The sale price for WSMP's interest in its St. Augustine, Florida franchise
was $160,000, which CVRE paid in cash. This was the price at which the remaining
20% shareholder had the right to purchase WSMP's 80% interest and so was
considered by WSMP to be the highest price attainable for the property.
On March 1, 1997, WSMP acquired 14 of its franchised restaurants from six
corporations under the common control of Cecil R. Hash. These restaurants,
located in North Carolina, Virginia and Tennessee, represent the largest group
of franchised restaurants under common control of a franchisee. The Hash
Companies paid WSMP approximately $535,000 in royalty, accounting and
advertising fees during fiscal 1997. The purchase price for these restaurants
was $3,767,500, payable as follows: $500 in cash, $954,500 in assumed
liabilities, $2,012,500 in WSMP Common Stock (223,611 shares valued at $9 per
share) and a total of $800,000 in promissory notes.
The notes are unsecured, are due and payable as to both principal and
interest on March 1, 1999 and bear interest at the rate of 5% per annum until
paid. WSMP registered the WSMP Common Stock with the Commission in March 1997.
Hash controls the Hash Companies and has been the major contributor to the
success of the Hash Companies' restaurants. He and WSMP entered into a
non-competition agreement to preserve the goodwill, proprietary rights and
"going business" value of the restaurants for the benefit of WSMP as the new
owner.
In consideration for Hash's covenant not to compete, WSMP issued to Hash
98,750 shares of WSMP Common Stock. Such shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act and are subject to
recovery by WSMP for no consideration upon the death of Hash or upon his breach
of the Noncompetition Agreement. The number of shares subject to recovery in
either of such circumstances declines in a straight line from 98,750 to zero
over the 15-year term of the Noncompetition Agreement. Should a sufficient
number of shares no longer be available for recovery at the time of Hash's death
or breach of the Noncompetition Agreement, WSMP is entitled to recover an amount
in cash equal to the product of $9 and the number of shares subject to recovery.
Hash is the former president of WSMP, is a former owner of HERTH and
remains a major owner of WSMP Common Stock. Upon Hash's decision to retire from
the active operation of restaurants, WSMP pursued the opportunity to acquire
these restaurants. WSMP's management believes that the terms negotiated with
Hash were as favorable as the terms that WSMP could have obtained from an
unaffiliated third party.
Messrs. Howard, Connor and Templeton had interests in an aggregate of four
of WSMP's franchised restaurants at November 7, 1997. Mr. Hash also had such
interests until the closing of the transaction with the Hash Companies disclosed
above. Royalty fees, accounting fees and advertising fees to WSMP from these
restaurants aggregated $923,000 during fiscal 1997, and the four remaining
restaurants generated $142,000 in fee income during fiscal 1998 through November
7, 1997. No receivables from any of these restaurants were written off during
fiscal 1997 or the current fiscal year.
WSMP from time to time may enter into restaurant joint ventures, or sales
or leases of vacant restaurant properties, with entities that may include any of
Messrs. Connor, Richardson, Templeton or Howard upon such terms and conditions
as WSMP finds acceptable and upon terms as fair and equitable as could be
obtained with an unaffiliated third party. Except as otherwise stated herein, no
transactions of this nature were entered into during fiscal 1997 or fiscal 1998.
Upon completion of the Merger, L. Dent Miller will become an executive
officer of WSMP. Miller is a greater-than-10% owner of two corporations that
lease real property to WSMP. Annual rentals under these leases are currently
$96,000 and $60,000, respectively.
68
<PAGE> 77
All material transactions with affiliated parties of WSMP are first
reviewed by the Sensitive Transactions Committee of the Board, which is composed
of three independent directors. Upon recommendation of this Committee, such
transactions are then presented to the WSMP Board, where they must be approved
by a majority of the independent directors. Also, WSMP periodically obtains
bids, quotations or appraisals from unaffiliated third parties to assure that
the products and services received from affiliates are on terms at least as fair
and equitable to WSMP as could have been obtained from unaffiliated third
parties.
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth, as of the WSMP Record Date and upon
consummation of the Merger at the assumed Exchange Ratio of .3214, information
relative to WSMP Common Stock ownership by (i) each person known by WSMP's
management to own beneficially 5% or more of the total outstanding shares of
WSMP Common Stock, (ii) each director of WSMP, (iii) each Named Executive
Officer of WSMP and (iv) all directors and executive officers of WSMP as a
group.
<TABLE>
<CAPTION>
AS OF JANUARY 7, 1998
---------------------------------------------------------
SHARES PERCENTAGE OF SHARES PERCENTAGE OF
NAME AND ADDRESS OWNED OUTSTANDING OWNED OUTSTANDING
OF BENEFICIAL OWNER OF RECORD SHARES BENEFICIALLY SHARES
- ----------------------------- --------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
RSH Management, Inc.......... 918,312 25.3 918,312 25.3
P. O. Box 399 (2) (4) (2)(4)
Claremont, NC 28610
HERTH Management, Inc........ 300,923 8.2 1,219,235 33.5
P. O. Box 399 (3) (4) (2)(4)
Claremont, NC 28610
Columbia Hill, LLC(5)........ -0- -0- 1,219,235 33.5
P.O. Box 39 (2)(3)
Claremont, N.C. 28610
Capital Factors, Inc.(6)..... 125,000 3.4 1,344,235 37.0
3200 Devine Street
Columbia, S.C. 29205
Richard F. Howard............ 390 * 75,309 2.1
P. O. Box 399 (1)
Claremont, NC 28610
James C. Richardson, Jr...... 7,500 * 1,351,735 37.2
P. O. Box 399 (2)(3)(5)(6)
Claremont, NC 28610
David R. Clark............... 1,250 * 1,280,485 35.2
P. O. Box 399 (1)(2)(3)(5)
Claremont, NC 28610
Gregory A. Edgell............ 1,875 * 1,346,110 37.0
3200 Devine Street (5) (2)(3)(6)(7)
Columbia, SC 29205
James M. Templeton........... 4,237 * 1,273,472 35.0
P O. Box 399 (1)(2)(3)
Claremont, NC 28610
Larry D. Hefner.............. 10,000 * 1,229,235 33.8
P.O. Box 519 (2)(3)(5)
Claremont, N.C. 28610
Lewis C. Lanier.............. -0- -0- -0- -0-
Route 5, Box 863
Orangeburg, SC 29115
William R. McDonald, III..... -0- -0- -0- -0-
1004 North Center Street
Hickory, NC 28601
Richard F. Hendrickson....... 7,500 * 7,500 *
P. O. Box 10007
Raleigh, NC 27605
<CAPTION>
UPON CONSUMMATION OF THE MERGER
--------------------------------------------------------
SHARES PERCENTAGE OF SHARES PERCENTAGE OF
NAME AND ADDRESS OWNED OUTSTANDING OWNED OUTSTANDING
OF BENEFICIAL OWNER OF RECORD SHARES BENEFICIALLY SHARES
- ----------------------------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
RSH Management, Inc.......... 918,312 16.2 918,312 16.2
P. O. Box 399
Claremont, NC 28610
HERTH Management, Inc........ 300,923 5.3 1,219,235 21.5
P. O. Box 399
Claremont, NC 28610
Columbia Hill, LLC(5)........ 35,991 * 1,255,226 22.2
P.O. Box 39
Claremont, N.C. 28610
Capital Factors, Inc.(6)..... 125,000 2.2 1,344,235 23.8
3200 Devine Street
Columbia, S.C. 29205
Richard F. Howard............ 10,615 * 85,615 1.5
P. O. Box 399
Claremont, NC 28610
James C. Richardson, Jr...... 64,093 1.1 1,444,319 25.5
P. O. Box 399
Claremont, NC 28610
David R. Clark............... 1,250 * 1,316,476 23.3
P. O. Box 399
Claremont, NC 28610
Gregory A. Edgell............ 1,875 * 1,346,110 23.8
3200 Devine Street
Columbia, SC 29205
James M. Templeton........... 5,361 * 1,274,596 22.5
P O. Box 399
Claremont, NC 28610
Larry D. Hefner.............. -0- -0- 1,265,226 22.4
P.O. Box 519
Claremont, N.C. 28610
Lewis C. Lanier.............. -0- -0- -0- -0-
Route 5, Box 863
Orangeburg, SC 29115
William R. McDonald, III..... -0- -0- -0- -0-
1004 North Center Street
Hickory, NC 28601
Richard F. Hendrickson....... 7,500 * 7,500 *
P. O. Box 10007
Raleigh, NC 27605
</TABLE>
69
<PAGE> 78
<TABLE>
<CAPTION>
AS OF JANUARY 7, 1998
---------------------------------------------------------
SHARES PERCENTAGE OF SHARES PERCENTAGE OF
NAME AND ADDRESS OWNED OUTSTANDING OWNED OUTSTANDING
OF BENEFICIAL OWNER OF RECORD SHARES BENEFICIALLY SHARES
- ----------------------------- --------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
E. Edwin Bradford............ 1,250 * 1,250 *
361 Tenth Avenue Drive, NE
Hickory, NC 28603
Bobby G. Holman.............. 1,228 * 1,228 *
P. O. Box 399
Claremont, NC 28610
All directors and executive
officers as a group (16
persons)................... 36,069 1.0 1,565,304 43.1
<CAPTION>
UPON CONSUMMATION OF THE MERGER
--------------------------------------------------------
SHARES PERCENTAGE OF SHARES PERCENTAGE OF
NAME AND ADDRESS OWNED OUTSTANDING OWNED OUTSTANDING
OF BENEFICIAL OWNER OF RECORD SHARES BENEFICIALLY SHARES
- ----------------------------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
E. Edwin Bradford............ 1,250 * 1,250 *
361 Tenth Avenue Drive, NE
Hickory, NC 28603
Bobby G. Holman.............. 1,228 * 1,250 *
P. O. Box 399
Claremont, NC 28610
All directors and executive
officers as a group (16
persons)................... 104,011 1.8 1,669,237 29.5
</TABLE>
- ---------------
* Less than one percent.
(1) Messrs. Howard, Clark and Templeton own presently exercisable options to
purchase 75,000, 50,000 and 50,000 shares, respectively, which shares are
deemed to be owned beneficially by the respective optionees. Other current
or former officers, including Messrs. Clark, Hollifield and Hefner, have
been granted options to purchase a total of 167,500 shares, options for
11,500 being presently exercisable and deemed to be owned beneficially by
the respective optionees.
(2) All of the shares held by RSH are also deemed to be owned beneficially by
each of its shareholders. RSH has informed WSMP that voting or disposition
of its shares may only be effected by the consent of the holders of a
majority of its outstanding shares. The shareholders of RSH, and their
ownership percentages of RSH, are Messrs. Richardson (0.4%), Edgell (0.4%),
Templeton (0.2%), Columbia (0.9%) and HERTH (98.1%). Beneficial ownership of
other than a pro rata interest in the shares is disclaimed by each
shareholder of RSH.
(3) The shares held by HERTH are also deemed to be owned beneficially by each of
its shareholders. HERTH has informed WSMP that voting or disposition of its
shares may only be effected by the consent of the holders of a majority of
its outstanding shares. The shareholders of HERTH, and their ownership
percentages of HERTH, are Richardson (22%), Templeton (11%), Edgell (22%)
and Columbia (45%). Beneficial ownership of other than a pro rata interest
in the shares is disclaimed by each shareholder of HERTH.
(4) The RSH listing includes 148,676 shares held by HERTH for the benefit of
RSH. The HERTH listing excludes these shares.
(5) Columbia is a North Carolina limited liability company whose owners are
Messrs. Clark (45%), Richardson (40%) and Hefner (15%).
(6) Capital Factors, Inc. ("Capital Factors") is a South Carolina corporation
whose shareholders are Messrs. Richardson (50%) and Edgell (50%). All of the
shares held by Capital Factors are also deemed to be owned beneficially by
each of its shareholders. Capital Factors has informed WSMP that voting or
disposition of its shares may only be effected by the consent of the holders
of a majority of its outstanding shares. Beneficial ownership of other than
a pro rata interest in the shares is disclaimed by each shareholder of
Capital Factors.
(7) Includes 625 shares held by spouse as custodian for minor children.
Beneficial ownership of such shares is disclaimed.
70
<PAGE> 79
CERTAIN INFORMATION REGARDING SAGEBRUSH
BUSINESS
General. Sagebrush owns and operates "Sagebrush Steakhouse & Saloon"
restaurants in North Carolina, South Carolina, Tennessee, and Virginia.
Sagebrush opened the first Sagebrush restaurant in Hickory, North Carolina in
October 1990. Sagebrush's operations have expanded since then to include a total
of 33 Sagebrush restaurants. The weighted average annualized sales per
restaurant for the twelve months ended January 3, 1997 were approximately $1.7
million each. Sagebrush, which was incorporated in North Carolina in 1992 and
had no operations prior to Sagebrush's initial public offering in January 1996,
reorganized and consolidated the operations of the 23 corporations (the "Related
Corporations") which had conducted Sagebrush's business prior to such initial
public offering (such reorganization and consolidation is hereinafter referred
to as the "Reorganization"). In September 1996, Sagebrush streamlined and
simplified its organizational structure by, among other things, consolidating
certain of its operations in newly-formed entities in North Carolina, South
Carolina and Tennessee.
The Sagebrush Concept. The Sagebrush concept is to serve high-quality,
moderately-priced meals in a casual, family-oriented atmosphere suggestive of a
Texas roadhouse. Sagebrush seeks to locate its restaurants in smaller cities and
suburban areas where they fill a significant market niche. Sagebrush restaurants
are distinguished from other family-oriented steakhouses in these smaller
markets (many of which are cafeteria-style) by their full table service and
attentive wait staff, full bar service, entertaining atmosphere, distinctive
decor and consistently high-quality food. Sagebrush distinguishes its
restaurants from other full-service restaurants through their family orientation
which is accomplished by offering lower priced food (such as hamburgers and
sandwiches) at dinner, placing less emphasis on alcohol sales as compared to
most competitors and offering features designed to appeal to children. Sagebrush
believes that the combination of these factors makes its concept attractive to a
broad range of consumers in the markets it serves.
Sagebrush Menu. Sagebrush's selective menu features high-quality aged
steaks, prime rib, chops, ribs, chicken and fish along with hamburgers and
chicken sandwiches. Sagebrush's dinner menu includes nine steak entrees which
are cut daily from specially-selected U.S.D.A. choice aged western beef and
prepared using Sagebrush's special seasoning. In addition to the regular menu
items, each restaurant has a daily, specially-priced "Blue Plate Special" at
lunch which is selected by its general manager and typically features fish,
chicken or pork chops. Each restaurant also has a "Little Pistols" children's
menu featuring hamburgers and sandwiches. All steaks come with a choice of Texas
fries, baked potato or baked sweet potato, a fresh garden salad and Texas toast.
The menu also includes specialty appetizers, desserts and full bar service where
legally permitted. Sagebrush periodically tests new menu items in an effort to
update and adapt to changing customer preferences.
Sagebrush's dinner entrees, which are also available at lunch, range in
price from $8.49 to $19.99, lunch entrees range in price from $4.29 to $5.99,
and appetizers are priced from $2.29 to $9.99. The average check per customer,
including beverages, is approximately $13.10 for dinner and $7.55 for lunch.
Menu prices are generally the same at each restaurant except for those located
in resort areas where seasonal factors require slightly higher prices. Sales of
alcoholic beverages, which are available in all but two of Sagebrush's
restaurants, account for approximately 9% of Sagebrush's revenues. Each
restaurant typically serves from 150-250 customers at lunch and from 250-300
customers at dinner during the week and from 100-300 customers at lunch and from
700-900 customers at dinner on weekends. Sagebrush's restaurants do not serve
breakfast.
Atmosphere and Decor. Sagebrush's restaurants feature a casual,
family-oriented atmosphere suggestive of a Texas roadhouse. The restaurants
feature wood booths and walls, and a mix of western memorabilia and other
collectibles, including license plates and signs from around the United States,
photographs of sports figures and movie stars, and a replica of an antique
jukebox featuring country music. In all areas of the restaurants, complimentary
peanuts are offered and customers are encouraged to drop their shells on the
floor. Special effort is made to make families with children feel welcome. A
"Little Pistols" children's menu featuring hamburgers and sandwiches is
available, birthdays are recognized in a special manner by the wait staff and
servers offer balloons to children.
71
<PAGE> 80
Site Selection; Converting Facilities; Building New Restaurants. Sagebrush
considers the location of its restaurants to be important to its long-term
success and devotes significant effort to the investigation and evaluation of
potential sites. Sagebrush's site selection process focuses on trade area
demographics, population density and household income levels, and specific site
characteristics such as visibility, accessibility, traffic volume and parking as
well as proximity to shopping centers, hotels and motels, colleges and
universities, large employers and tourist attractions. Sagebrush also reviews
potential competition and the profitability of restaurants operating in the
area. Senior management inspects and approves each restaurant site.
All but one of Sagebrush's restaurants are located in freestanding
buildings that are generally located near interstate highways or other main
thoroughfares. Prior to 1996, Sagebrush leased all but one of its restaurant
sites, and, with the exception of the Clemmons and Kernersville, North Carolina
restaurants, had established all of its restaurants by leasing or buying
existing restaurant facilities or other buildings in the targeted areas of
expansion, and converting them to the Sagebrush concept. Sagebrush continued
this method of expansion in the first part of 1996 as the first four restaurants
opened in 1996 were conversions of existing buildings, one of which was
purchased rather than leased. Sagebrush's cost of opening a restaurant when it
leases and renovates an existing building is approximately $500,000, including
the costs of renovating the facility, purchasing equipment (if necessary) and
training personnel.
Recent restaurant openings, however, represent a method of expansion that
may be relied upon by Sagebrush more in the future. In fiscal 1996 and 1997,
Sagebrush opened six restaurants on purchased property using its new prototype
plan. The prototype restaurant seats 245 customers and occupies 6,500 square
feet. While Sagebrush will continue to attempt to locate facilities to lease or
buy and convert, Sagebrush expects a higher proportion of locations in the
future will be established by purchasing land and building a restaurant using
the prototype plan. This is primarily due to the difficulty of finding suitable
buildings in desirable locations that can be leased and renovated. Sagebrush's
cost of building a restaurant on land Sagebrush purchases ranges from $1.2
million to $1.6 million, with the largest variance related to the cost of land.
As of January 2, 1998, 25 of Sagebrush's restaurants are conversions of existing
facilities and eight are prototype facilities built on land purchased by
Sagebrush.
Because Sagebrush has established most of its restaurants in existing
buildings which it remodeled for the Sagebrush concept, restaurant sizes vary
from approximately 4,500 to 8,500 square feet with the tables in the dining area
seating from approximately 150 to 280 people. The bar area of a typical
restaurant generally has seating capacity for approximately 20 people. Most of
Sagebrush's restaurants also have a private banquet room seating from 25 to 50
people. Although the banquet facilities are often used for private parties, they
can also be used for general customer seating during peak dining hours.
Sagebrush's prototype facility is approximately 6,500 square feet and contains
208 dining seats and 37 seats in the bar area.
Restaurant Locations. The following table sets forth the location, opening
date, seating capacity (excluding bar area and private rooms) and approximate
square footage of each of Sagebrush's restaurants:
<TABLE>
<CAPTION>
SEATING APPROXIMATE
DATE OPENED CAPACITY SQ. FOOTAGE
-------------- -------- -----------
<S> <C> <C> <C>
NORTH CAROLINA:
Hickory October 1990 158 5,000
Statesville October 1991 256 6,500
Boone June 1992 270 8,500
Hickory (Viewmont) July 1992 280 7,000
Morganton March 1993 252 6,300
Winston-Salem September 1993 180 6,500
Clemmons December 1993 265 6,800
Waynesville January 1994 270 6,800
Brevard March 1994 196 6,000
Arden August 1994 256 6,300
Wilkesboro September 1994 221 6,300
Monroe December 1994 236 6,800
</TABLE>
72
<PAGE> 81
<TABLE>
<CAPTION>
SEATING APPROXIMATE
DATE OPENED CAPACITY SQ. FOOTAGE
-------------- -------- -----------
<S> <C> <C> <C>
Kernersville June 1995 200 6,800
Mount Airy January 1997 208 6,500
Salisbury April 1997 245 6,500
Lenoir August 1997 245 6,500
Denver October 1997 245 6,500
SOUTH CAROLINA:
Rock Hill December 1992 246 6,300
Gaffney December 1995 212 8,000
Greenwood November 1996 196 6,800
Lexington December 1997 250 10,000
TENNESSEE:
Pigeon Forge September 1991 172 4,500
Oak Ridge November 1991 204 8,000
Knoxville February 1992 202 7,500
Kingsport February 1993 144 6,000
Sevierville May 1994 173 4,500
Gatlinburg April 1995 168 6,800
Johnson City March 1996 226 9,000
Alcoa June 1996 204 7,500
Morristown September 1996 226 9,000
VIRGINIA:
Lynchburg July 1996 204 9,000
Colonial Heights October 1996 188 5,850
Roanoke June 1997 245 6,500
</TABLE>
Management and Employees. The management staff of a typical restaurant
consists of a general manager, a manager, an assistant manager and a kitchen
manager. Each restaurant also employs from 40 to 100 hourly employees, many of
whom work part-time. The general manager of each restaurant has primary
responsibility for the day-to-day operations of the restaurant and is
responsible for maintaining company-established operating procedures. Two of the
managers are present at each restaurant from Monday through Thursday and three
of the managers are present at each restaurant from Friday through Sunday of
each week. General managers are required to supervise both the opening and
closing of their restaurant several times per week. Sagebrush currently has four
area supervisors, each of whom currently oversees from six or seven restaurants,
and one director of training, who oversees one existing store and all new stores
from pre-opening through approximately twelve weeks of operations.
Sagebrush seeks managers with substantial restaurant experience and
requires all new managers, most of whom are college graduates, to complete a
28-day orientation and training program at its Rock Hill, South Carolina
restaurant. The orientation and training program, which is conducted by
Sagebrush's director of training, is designed to educate new managers in all
aspects of Sagebrush's operations, including Sagebrush's philosophy, management
strategy, policies, procedures and operating standards. Sagebrush's managers are
required to know how to perform every job in a restaurant. Sagebrush also has
hired consultants to assist in its training of junior managers. After their
initial training, managers attend monthly training sessions at Sagebrush's
headquarters. Sagebrush's senior management meets bi-weekly with area
supervisors to discuss restaurant operations. Senior management also receives
daily and weekly reports prepared by general managers and staff accountants
summarizing each restaurant's operations for the preceding week. Based upon
these reports, senior management is able to closely monitor and supervise each
restaurant's operations. Additionally, members of senior management regularly
visit each restaurant to ensure that Sagebrush's philosophy, strategy and
standards of quality are being adhered to in all aspects of restaurant
operations.
73
<PAGE> 82
A restaurant's general manager usually does the hiring for his or her
restaurant and is responsible for overseeing the training of new employees. The
general managers delegate certain of their responsibilities to the manager,
assistant manager and kitchen manager of the restaurant. The initial training
period for new employees lasts one to two weeks and is characterized by
on-the-job training by a certified unit trainer. All food servers are required
to pass a written test examining their knowledge of the menu and operating
procedures before they are allowed to serve customers. Ongoing training of
employees is the responsibility of each restaurant's general manager.
Restaurant managers are compensated by means of a base salary and an
incentive arrangement pursuant to which they receive additional compensation
based on their restaurant's pre-tax earnings. Sagebrush also sponsors contests
for general managers based on the achievement of specified sales goals.
Sagebrush generally prefers to draw a restaurant's general manager from within
Sagebrush's organization. Sagebrush's hourly employees are generally paid at
rates ranging from the minimum wage ($2.13 per hour for wait staff) to $9.00 per
hour.
Restaurant Reporting. Each restaurant's general manager is primarily
responsible for providing financial and other reports to Sagebrush's management.
The general managers prepare weekly reports on daily sales, cash deposits,
customer counts, purchases, inventory and labor costs which are reviewed by
staff accountants. Monthly profit and loss statements are prepared for each
restaurant and reviewed by management. Physical inventory of beef is taken on a
daily basis and physical inventories of all other food, beverage and supply
items are taken on a bi-weekly basis.
Quality Assurance. Sagebrush has adopted a number of measures to ensure
strict compliance with its operating standards and procedures. Sagebrush's
senior management monitors each restaurant by reviewing the weekly reports
prepared by Sagebrush's general managers and staff accountants, and by making
regular visits to and inspections of each restaurant. In order to avoid employee
theft, Sagebrush has a strict policy that the back door of each of its
restaurants must be locked and secured by an alarm at all times unless a manager
is present at the door. Sagebrush also engages an independent service to visit
periodically each of Sagebrush's restaurants on an anonymous basis and to submit
reports to senior management focusing on factors such as food quality, wait
service and cleanliness and to summarize the overall dining experience at each
such restaurant.
Ingredients and Purchasing. As part of its commitment to using fresh,
high-quality ingredients, Sagebrush purchases only U.S.D.A. choice aged western
beef. Steaks are hand cut daily at each restaurant. In order to ensure the
uniform quality and freshness of the food served in its restaurants, Sagebrush
establishes rigid specifications for all of its meat and produce. Sagebrush
monitors the prices and specifications of the products it purchases in order to
ensure that it can consistently serve high quality food at competitive prices.
Sagebrush currently purchases most of its food products from one supplier,
Biggers Brothers, Inc., from whom purchases during the first 36 weeks of fiscal
1997 accounted for approximately 90% of Sagebrush's total food and beverage
costs and approximately 85% of its total cost of restaurant sales. Sagebrush
believes, however, that products of comparable quality are available, or upon
short notice can be made available, from alternative suppliers. While food and
supplies are shipped directly to the restaurants, invoices for purchases are
sent by the supplier to Sagebrush's headquarters in Claremont, North Carolina
for payment.
Marketing and Advertising. Sagebrush uses radio advertising in all
markets. Most markets are clustered around media centers such as Charlotte,
Asheville, and Winston-Salem, North Carolina, Knoxville and Johnson City,
Tennessee and Roanoke, Virginia. Sagebrush utilizes billboard advertising for
restaurants located in close vicinity to interstate highways. Sagebrush uses
aggressive direct local marketing campaigns, including school programs, hotel
marketing, charitable and community events. Sagebrush does not advertise in
newspapers or by distributing coupons.
Restaurant Industry and Competition. The restaurant industry generally,
and Sagebrush's business specifically, are intensely competitive with respect to
concept, price, service, location and food quality and there are many
well-established competitors, including a number of other steakhouse and
family-oriented restaurants with concepts similar to Sagebrush's, with
substantially greater financial and other resources than Sagebrush. Some of
Sagebrush's competitors have been in existence for a substantially longer period
than
74
<PAGE> 83
Sagebrush and may be better established in or decide to enter the markets where
Sagebrush's restaurants are or may be located. The restaurant business is often
affected by changes in consumer tastes, national, regional or local economic
conditions, demographic trends, traffic patterns, and the type, number and
location of competing restaurants. Sagebrush's revenues are derived primarily
from the sale of beef and, therefore, a change in consumer preferences for, or
adverse publicity associated with, beef could have an adverse effect on
Sagebrush's sales and profitability. In addition, factors such as inflation,
increased cost of food, labor and benefits and the lack of experienced
management and hourly employees may adversely affect the restaurant industry in
general and Sagebrush's restaurants and its ability to expand in particular.
Sagebrush endeavors to compete with other restaurants primarily on the
basis of service, value, location and providing high quality meals in a casual,
family-oriented atmosphere. While Sagebrush believes that it competes for
customers with a broad variety of other restaurants, there are several
restaurant chains, including Rare Hospitality, Inc. and Lone Star Steakhouse &
Saloon, Inc., which have restaurant concepts very similar to Sagebrush's and
which currently operate in, or may further expand into, Sagebrush's geographic
market areas and may be significant competitors.
Employees. As of November 7, 1997, Sagebrush employed approximately 1,933
persons, of whom 16 were corporate personnel, 152 were restaurant managers or
supervisors and approximately 1,765 were hourly employees. Of the 16 corporate
employees, four were in management and twelve were in administrative positions.
None of Sagebrush's employees is covered by a collective bargaining agreement.
Sagebrush considers its employee relations to be good.
Trademarks. Sagebrush has registered the service mark SAGEBRUSH STEAKHOUSE
& SALOON(R) with the United States Patent and Trademark Office. Sagebrush
regards its service mark as having significant value and as being an important
factor in the marketing of its restaurants. While Sagebrush is aware of names
and marks similar to the service mark of Sagebrush used by other persons in
certain geographic areas, it does not believe that such uses will adversely
affect Sagebrush. It is Sagebrush's policy to oppose vigorously any infringement
of its marks in its marketing area.
Government Regulation and Potential Liabilities. Sagebrush is subject to
various federal, state and local laws affecting its business. Each of
Sagebrush's restaurants is subject to licensing and regulation by a number of
governmental authorities, which include alcoholic beverage control, health,
safety, sanitation, building and fire agencies in the state or municipality in
which the restaurant is located. Difficulties in obtaining or failing to obtain
the required licenses or approvals could delay or prevent the development of new
restaurants in particular areas.
Approximately 9% of Sagebrush's revenues are attributable to the sale of
alcoholic beverages. Alcoholic beverage control regulations require each of
Sagebrush's restaurants to apply to a state authority and, in certain locations,
to county or municipal authorities for a license or permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of Sagebrush's restaurants,
including the minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The loss, lapse or suspension of a
restaurant's food or liquor licenses could adversely affect Sagebrush.
Sagebrush may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to the
intoxicated person. Sagebrush carries liquor liability coverage as part of its
existing comprehensive general liability insurance and has never been named as a
defendant in a lawsuit involving such a dram-shop statute.
Although Sagebrush has established and maintains high standards for
ingredients and food preparation at its restaurants, the restaurant and food
service industry generally is subject to potential liability for injuries to
customers resulting from food poisoning or similar causes due to faulty
ingredients or inadequate food
75
<PAGE> 84
preparation. Incidents of food poisoning at other restaurants or restaurant
chains have adversely affected such restaurants' business and reputation.
Sagebrush's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits. Significant numbers of Sagebrush's food service and preparation
personnel are paid at hourly rates and increases in the federal minimum wage
could increase Sagebrush's labor costs.
Sagebrush's development and construction of additional restaurants will be
subject to compliance with applicable zoning, land use and environmental laws
and regulations. Compliance with federal, state and local environmental laws has
not historically had a significant impact on Sagebrush's capital expenditures,
earnings and competitive position.
PROPERTIES
Sagebrush, which maintains its executive offices in Claremont, North
Carolina, owns and operates 33 restaurants. Sagebrush owns the property upon
which its Alcoa, Greenwood, Kernersville, Knoxville, Mount Airy, Salisbury,
Denver and Roanoke restaurants are located and leases its other restaurant
sites. Sagebrush's executive offices and 14 of its restaurants are located on
properties owned directly or indirectly by certain shareholders of Sagebrush and
are leased to Sagebrush. Sagebrush's remaining 10 restaurants are located on
properties owned by unaffiliated parties. The following table sets forth certain
information relating to the leases entered into in connection with Sagebrush's
facilities:
<TABLE>
<CAPTION>
APPROXIMATE
BASE RENT APPROXIMATE DATE OF
PER BASIS FOR DATE OF EXPIRATION
BASE RENT/ SQ. FOOT/ CALCULATION OF EXPIRATION OF LAST RENEWAL
LOCATION MONTH(1) MONTH(2) ADDITIONAL RENT(3) CURRENT TERM OPTION
- -------- ---------- --------- -------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
LEASES WITH RELATED PARTIES:
Claremont, N.C.
(executive offices)................ $2,300 $0.23 -- (4) --
Arden, N.C......................... $6,500 $1.03 5% of gross sales May 2004 May 2019
Boone, N.C......................... $8,000 $0.94 5% of gross sales May 2002 May 2012
Brevard, N.C....................... $4,000 $0.67 5% of gross sales February 2004 February 2019
Hickory, N.C....................... $6,000 $1.20 -- September 2000 September 2005
Hickory, N.C. (Viewmont)........... $6,000 $0.86 5% of gross sales July 2002 July 2012
Johnson City, Tenn................. $8,200 $0.91 -- January 1998 January 2008
Kingsport, Tenn.................... $6,000 $1.00 5% of gross sales December 2003 December 2018
Monroe, N.C........................ $6,000 $0.88 (5) September 2004 September 2019
Morganton, N.C..................... $6,000 $0.95 5% of gross sales February 1998 February 2013
Morristown, Tenn................... $8,000 $0.89 6% of gross sales November 2002 November 2007
Sevierville, Tenn.................. $6,500 $1.44 5% of gross sales April 2004 April 2019
Statesville, N.C................... $3,500 $0.54 -- October 1998 October 2012
Waynesville, N.C................... $4,000 $0.59 -- December 2003 December 2018
Wilkesboro, N.C.................... $5,200 $0.83 (6) August 2004 August 2019
LEASES WITH UNRELATED PARTIES:
Clemmons, N.C...................... $5,700 $0.84 4% of gross sales January 2009 January 2019
Colonial Heights, Va............... $6,547 $1.12 (7) September 2006 September 2016
Gaffney, S.C....................... $5,000 $0.63 -- October 2005 October 2015
Gatlinburg, Tenn................... $2,917 $0.43 5% of gross sales December 1999 December 2009
Lynchburg, Va...................... $5,000 $0.56 5% of gross sales September 2012 September 2012
Rock Hill, S.C..................... $3,440 $0.55 5% of gross sales October 2002 October 2012
Winston-Salem, N.C................. $6,200 $0.95 (8) August 2000 August 2005
GROUND LEASES WITH UNRELATED PARTIES:
Knoxville, Tenn.................... $ 700 N/A (9) December 1999 December 1999
Oak Ridge, Tenn.................... $2,645 $0.33 2% of gross sales February 2004 February 2014
Pigeon Forge, Tenn................. $1,873 $0.42 -- June 1998 June 2008
</TABLE>
- ---------------
(1) Base rent for the leases generally does not include taxes, utilities or
insurance, for which Sagebrush is responsible. Additionally, most of the
leases provide either for (a) periodic adjustments in the rent
76
<PAGE> 85
payable based on changes in the prime rate or (b) specified increased
payments either during the renewal terms or at other specified times.
(2) Because many of Sagebrush's restaurants are conversions of existing
facilities of varying sizes, and because the additional rental payments are
based on gross sales and are not necessarily related to restaurant sizes,
comparisons of base rents per square foot among restaurants may not be
meaningful.
(3) Certain of the leases provide for contingent rental payments based on a
percentage of the applicable restaurant's gross sales. The additional rent
payable under these leases is generally equal to the difference between the
total base rent paid under the lease during the preceding year and the
indicated percentage of such restaurant's gross sales for such year.
(4) This property is leased on a month to month basis.
(5) Under this lease, Sagebrush is required to pay as contingent rent by October
5 of each year an amount equal to 5% of this restaurant's gross sales in
excess of $1,440,000 for the twelve-month period ending on September 20 of
such year.
(6) Under this lease, Sagebrush is required to pay as contingent rent by August
31 of each year an amount equal to 5% of this restaurant's gross sales in
excess of $1,248,000 for the twelve-month period ending on August 16 of such
year.
(7) Under this lease, Sagebrush is required to pay as contingent rent each year
an amount equal to 3% of this restaurant's gross sales in excess of
$2,000,000 for the prior calendar year.
(8) Under this lease, Sagebrush is required to pay as contingent rent by March 1
of each year an amount equal to 5% of this restaurant's gross sales in
excess of $1,200,000 for the prior calendar year.
(9) Lease of additional parking area. Under a purchase agreement, Sagebrush is
obligated to purchase this property for no greater than $144,000 no later
than December 31, 1999.
SAGEBRUSH PRINCIPAL SHAREHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth certain information with respect to the
beneficial ownership of Sagebrush Common Stock, as of the Sagebrush Record Date,
by (i) each person known by Sagebrush to be the beneficial owner of more than 5%
of the outstanding Common Stock, (ii) each director of Sagebrush, (iii) certain
executive officers of Sagebrush and (iv) all directors and executive officers of
Sagebrush as a group. Except as noted, the shareholders named below have sole
voting and investment power with respect to the shares of Sagebrush Common Stock
shown as beneficially owned by them.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
- ------------------------------------ ------------------ -------------------------
<S> <C> <C>
Charles F. Connor, Jr.(1)................................ 1,582,241(2) 26.7%
L. Dent Miller(1)........................................ 1,362,140 23.0
Michael A. Shubert(3).................................... 340,295 5.7
Barry W. Whisnant(4)..................................... 7,000 (5)
C. Kenneth Wilcox(6)..................................... 113,400 1.9
All directors and executive officers as a group(9
persons)............................................... 3,327,981 56.2
</TABLE>
- ---------------
(1) The address of each such person is Post Office Box 730, Claremont, North
Carolina 28610.
(2) Includes 57,218 shares held by Mr. Connor's wife, as to which shares Connor
claims beneficial ownership. Also includes 100,000 shares held by
County-Wide, a corporation of which Connor is the majority shareholder.
(3) The information concerning beneficial ownership set forth above and in this
note is derived from a Schedule 13G dated February 7, 1997. The Schedule 13G
indicates that such amount excludes 10,000 shares of Sagebrush Common Stock
held by Mr. Shubert's wife, as to which shares Mr. Shubert disclaims
beneficial ownership. Mr. Shubert's address is Highway 70 East, P.O. Box
459, Claremont, North Carolina 28610.
(4) Mr. Whisnant's address is Post Office Box 1473, Hickory, North Carolina
28603.
(5) Less than one percent.
(6) Mr. Wilcox's address is Post Office Box 1758, Boone, North Carolina 28607.
77
<PAGE> 86
DESCRIPTION OF WSMP CAPITAL STOCK
WSMP's Articles of Incorporation authorize the issuance of 10,000,000
shares of WSMP Common Stock and 2,500,000 shares of preferred stock ("WSMP
Preferred Stock"). As of the WSMP Record Date, there were 3,633,914 shares of
WSMP Common Stock issued and outstanding and approximately 838 record holders
thereof. All outstanding shares of WSMP Common Stock are validly issued, fully
paid and nonassessable, and the shares of WSMP Common Stock to be outstanding
upon completion of the Merger will be fully paid and nonassessable.
The WSMP Board has the authority to issue WSMP Preferred Stock in one or
more series, to fix the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued shares of WSMP Preferred Stock and to fix
the number of shares constituting any series and the designations of such
series, without any further vote or action by the shareholders. Although it has
no current intention to do so, the WSMP Board, without shareholder approval, can
issue WSMP Preferred Stock with voting and conversion rights that could
adversely affect the voting power of the holders of WSMP Common Stock.
DESCRIPTION OF WSMP COMMON STOCK
The holders of WSMP Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders of WSMP. Subject to the preferences
that may be applicable to any outstanding preferred stock, the holders of WSMP
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the WSMP Board out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of WSMP, the
holders of WSMP Common Stock are entitled to share ratably in all the assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The holders of WSMP Common Stock have
no preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the WSMP Common Stock.
DESCRIPTION OF THE RIGHTS
WSMP has adopted a shareholder rights plan pursuant to which the holder of
each share of WSMP Common Stock also holds a Right that may be exercised for
WSMP Preferred Stock or WSMP Common Stock upon the occurrence of certain
"triggering events" specified in the Rights Agreement dated as of September 2,
1997 between WSMP and American Stock Transfer and Trust Company. Shareholder
rights plans such as WSMP's plan are intended to encourage potential hostile
bidders for a "target" corporation to negotiate with the board of directors of
such corporation in order to avoid occurrence of the "triggering events"
specified in such plans. Shareholder rights plans are intended to give the
directors of a target corporation the opportunity to assess the fairness and
appropriateness of a proposed transaction in order to determine whether or not
it is in the best interest of the corporation and its shareholders.
Notwithstanding these purposes and intentions of shareholder rights plans, such
plans, including the WSMP plan, could have the effect of discouraging a business
combination that at least some shareholders believe to be in their best
interests. The Merger will not trigger the exercisability of Rights under the
Rights Agreement. The provisions of the Rights Agreement are discussed below.
On August 28, 1997, the WSMP Board declared a dividend distribution of one
Right for each share of WSMP Common Stock to WSMP shareholders of record at the
close of business on September 10, 1997. Each Right entitles the record holder
to purchase from WSMP one one-hundredth of a share of Junior Participating
Preferred Stock, Series A, of WSMP at a purchase price of $30. The Rights are
attached to the WSMP Common Stock and are not exercisable except under the
limited circumstances set forth in the Rights Agreement relating to the
acquisition of, or the commencement of a tender offer for, 15% or more of the
WSMP Common Stock. In the event that a person or group acquires 15% or more of
the WSMP Common Stock without WSMP's consent (an "Acquiring Person"), each
holder of a Right, other than the Acquiring Person, will be entitled to acquire,
upon payment of the exercise price of $30, that number of shares of WSMP Common
Stock having a market value equal to twice the exercise price. The Rights may be
redeemed at a price of $.001 per Right by WSMP any time prior to any person or
group acquiring 15% or more of the WSMP
78
<PAGE> 87
Common Stock and will expire on September 10, 2007. Until the Rights separate
from the WSMP Common Stock, each new share of WSMP Common Stock, including
shares issued or issuable pursuant to the Merger, will have a Right attached.
The Rights do not have voting or dividend rights and, until they become
exercisable, have no dilutive effect on the earnings of WSMP.
COMPARATIVE RIGHTS OF SHAREHOLDERS OF WSMP AND SAGEBRUSH
At the Effective Time, holders of Sagebrush Common Stock will become
holders of WSMP Common Stock. The following is a summary of material differences
between the rights of holders of Sagebrush Common Stock and the rights of
holders of WSMP Common Stock. Since WSMP and Sagebrush are both organized under
the laws of North Carolina, any differences arise from differing provisions of
their respective articles of incorporation and bylaws.
The following summary does not purport to be a complete statement of the
provisions affecting, and differences between, the rights of holders of
Sagebrush Common Stock and of WSMP Common Stock. In particular, the
identification of specific provisions or differences is not meant to indicate
that other equally or more significant differences do not exist. This summary is
qualified in its entirety by reference to the governing corporate instruments of
Sagebrush and WSMP.
AUTHORIZED CAPITAL STOCK
WSMP. WSMP's authorized capital stock currently consists of 10,000,000
shares of WSMP Common Stock and 2,500,000 shares of WSMP Preferred Stock,
100,000 shares of which have been designated by the WSMP Board as Junior
Participating Preferred Stock, Series A. At the WSMP Special Meeting, the WSMP
shareholders will vote on a proposal to increase the number of authorized shares
of WSMP Common Stock to 100,000,000 shares. The WSMP Articles of Incorporation
authorize the WSMP Board to issue shares of WSMP Preferred Stock in one or more
series and to fix the designation, powers, preferences and rights of the shares
of WSMP Preferred Stock in each such series. As of the WSMP Record Date,
3,633,914 shares of WSMP Common Stock and no shares of WSMP Preferred Stock were
outstanding.
Sagebrush. Sagebrush's authorized capital stock consists of 60,000,000
shares, divided into the following classes: 50,000,000 shares of Sagebrush
Common Stock and 10,000,000 shares of preferred stock ("Sagebrush Preferred
Stock"). The Sagebrush Articles of Incorporation authorize the Sagebrush Board,
to the fullest extent permitted by applicable law, to determine the preferences,
limitations and relative rights of the Sagebrush Preferred Stock or to create
one or more series of Sagebrush Preferred Stock and to determine the
preferences, limitations and relative rights of each such series, as the
Sagebrush Board may from time to time determine. As of the Sagebrush Record
Date, 5,925,000 shares of Sagebrush Common Stock and no shares of Sagebrush
Preferred Stock were outstanding.
DIRECTORS
WSMP. The WSMP Bylaws provide for a board of directors having nine
members, until such number of directors shall be otherwise determined by a
resolution adopted by a majority of the WSMP Board.
The WSMP Board is divided into three classes with the directors serving
staggered three-year terms. Under the WSMP Articles of Incorporation and the
WSMP Bylaws, WSMP directors may be removed with or without cause only by a vote
of 75% of the outstanding shares of WSMP Common Stock entitled to vote in the
election of directors. The WSMP Shareholders have the right to cumulate their
votes in the election of directors.
Sagebrush. The Sagebrush Bylaws provide for a board having not less than
three nor more than nine members, as shall be determined from time to time by
resolution of the shareholders or the Sagebrush Board. Currently, the Sagebrush
Board consists of four directors.
All of Sagebrush's directors are elected each year. Under Sagebrush's
Bylaws, a director may be removed with or without cause by shareholder vote if
the number of votes cast to remove him exceeds the number of
79
<PAGE> 88
votes cast not to remove him. The entire Sagebrush Board may be removed, with or
without cause, by the vote of shareholders holding a majority of the votes
entitled to be cast at any election of directors. The Sagebrush Shareholders do
not have the right to cumulate their votes in the election of directors.
DIVIDENDS AND OTHER DISTRIBUTIONS
WSMP. Although WSMP is not directly impeded from paying dividends, certain
financial covenants included in its loan documents may have the effect of
restricting such payments in certain circumstances. WSMP's management
anticipates that for the foreseeable future earnings will be retained to support
the operation and expansion of WSMP's business and that WSMP will not pay cash
dividends.
Sagebrush. While Sagebrush is not subject to any restrictions on its
ability to pay dividends, Sagebrush's management anticipates that for the
foreseeable future earnings will be retained to support the operation and
expansion of Sagebrush's business and that Sagebrush will not pay cash
dividends.
EXCULPATION AND INDEMNIFICATION
WSMP. There is no provision in the WSMP Articles of Incorporation for
indemnifying or limiting the liability of any director of WSMP for monetary
damages for breach of duty as a director. Nevertheless, in accordance with
provisions of the NCBCA, WSMP has by resolution of the WSMP Board provided that,
in addition to the indemnification of directors and officers otherwise provided
by the NCBCA, WSMP shall, to the fullest extent allowed by law, indemnify its
directors, executive officers and certain other designated officers against any
and all liability and litigation expenses, including reasonable attorneys' fees,
arising out of their status or activities as directors or officers, except for
liability or litigation expense incurred on account of activities that were at
the time known or reasonably should have been known by such director or officer
to be clearly in conflict with the best interests of WSMP.
Sagebrush. The Sagebrush Articles of Incorporation provide that, to the
fullest extent permitted by applicable law, no director of Sagebrush will have
any personal liability arising out of any action whether by or in the right of
Sagebrush or otherwise for monetary damages for breach of a duty as a director
of Sagebrush. The Sagebrush Bylaws require Sagebrush to indemnify its directors,
but not its officers who are not directors, to the fullest extent permitted by
law against liabilities arising out of each such person's status as such. Under
the NCBCA, Sagebrush may by action of the Sagebrush Board indemnify its officers
to the same extent.
SHAREHOLDER VOTE REQUIRED FOR CERTAIN MATTERS
WSMP. The NCBCA provides that, unless a corporation's governance documents
provide otherwise, certain business combinations including mergers require the
approval of a majority of the outstanding shares of each voting group of the
corporation entitled to vote on the subject transaction. The WSMP Bylaws require
the affirmative vote of 75% of the outstanding shares of each class of capital
stock of WSMP entitled to vote in order to authorize or adopt (a) any agreement
for the merger or consolidation of WSMP with or into any other corporation which
is required by law to be approved by shareholders; (b) any sale, lease, transfer
or other disposition by WSMP of all or any substantial part of the assets of
WSMP to any other corporation, person or entity; or (c) any issuance or delivery
of securities of WSMP in exchange or payment for any securities, properties or
assets of any other person in any transaction in which the authorization or
approval of shareholders of WMSP is required by law or by any agreement to which
WSMP is a party. This supermajority voting requirement is not applicable,
however, to (i) any transaction approved by resolution of the WSMP Board or (ii)
any merger or consolidation of WSMP with, or any sale or lease by or to WSMP of
any subsidiary thereof or any of the assets of, any corporation of which a
majority of the outstanding shares of stock is owned by record or beneficially
by WSMP or its subsidiaries. In addition, the affirmative vote of 75% of the
outstanding shares of each class of capital stock of WSMP is required to amend
or repeal this supermajority voting requirement.
Sagebrush. Unlike WSMP, Sagebrush does not have any supermajority voting
requirements for business combinations and its voting requirements are governed
by the provisions of the NCBCA.
80
<PAGE> 89
NOTICE OF SHAREHOLDER MEETINGS
WSMP. The WSMP Bylaws provide that written notice of shareholder meetings
shall be delivered to shareholders of record entitled to vote at the meeting not
less than 10 nor more than 50 days before the date of the meeting. When a
shareholder meeting is adjourned for 30 days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. When a meeting is
adjourned for less than 30 days in any one adjournment, it is not necessary to
give any notice of the adjourned meeting other than by announcement at the
meeting at which the adjournment is taken.
Sagebrush. The Sagebrush Bylaws provide that written notice of shareholder
meetings shall be given to shareholders of record entitled to vote at the
meeting, either personally or by mail, not less than 10 nor more than 60 days
before the date of the meeting. When a shareholder meeting is adjourned for more
than 120 days after the date fixed for the original meeting, or if a new record
date is fixed for the adjourned meeting, or if the time, date and place for the
adjourned meeting are not announced prior to adjournment, then notice of the
adjourned meeting shall be given as in the case of the original meeting;
otherwise, it is not necessary to give any notice of the adjourned meeting other
than by announcement at which the adjournment is taken.
SHAREHOLDER RIGHTS PLAN
WSMP. WSMP has adopted the shareholder rights plan described in
"Description of WSMP Capital Stock -- Description of the Rights."
Sagebrush. Sagebrush does not have a shareholder rights plan.
ANTI-TAKEOVER STATUTES
In accordance with the provisions of such statutes, WSMP and Sagebrush have
each elected not to be governed by either the North Carolina Control Share
Acquisition Act or the North Carolina Shareholder Protection Act.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
WSMP. The WSMP Bylaws may be amended or repealed and new bylaws may be
adopted by the affirmative vote of a majority of the WSMP Board. The WSMP Bylaws
prohibit the WSMP Board from adopting bylaws that: (a) require more than a
majority of the voting shares for a quorum at a regular meeting of the
shareholders or more than a majority of the votes cast to constitute action by
the shareholders, unless higher percentages are required by law; (b) increase or
decrease the number of directors; or (c) alter or repeal any bylaws adopted or
amended by the shareholders.
Under the NCBCA, an amendment to the WSMP Articles of Incorporation
generally requires the recommendation of the WSMP Board and the approval of
either a majority of all shares entitled to vote thereon or a majority of the
votes cast thereon, depending upon the nature of the amendment. In accordance
with the NCBCA, the WSMP Board may condition its submission of a proposed
amendment on any basis.
Sagebrush. The Sagebrush Bylaws may be amended or repealed and new bylaws
may be adopted by action of the Sagebrush Board or the Sagebrush Shareholders.
Under the NCBCA, an amendment to the Sagebrush Articles of Incorporation
generally requires the recommendation of the Sagebrush Board and the approval of
either a majority of all shares entitled to vote thereon or a majority of the
votes cast thereon, depending upon the nature of the amendment. In accordance
with the NCBCA, the Sagebrush Board may condition its submission of a proposed
amendment on any basis.
DISSENTERS' RIGHTS
Under North Carolina law, holders of Sagebrush Common Stock who do not vote
in favor of the Agreement and the Plan of Merger and who comply with certain
notice requirements and other procedures will have the right to dissent and to
be paid cash for the "fair value" of their shares. Such "fair value" as finally
determined under such procedures may be more or less than the consideration to
be received by other
81
<PAGE> 90
shareholders of Sagebrush under the terms of the Agreement. Failure to follow
such procedures precisely may result in loss of dissenters' rights. Holders of
WSMP Common Stock have no dissenters' rights relative to the Merger, the
Issuance or the Articles Amendment.
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under the NCBCA and is qualified in its entirety by the
full text of Chapter 55, Article 13 of the NCBCA ("Article 13"), which is
reprinted in its entirety as Appendix C to this Joint Proxy Statement-Prospectus
and is incorporated herein by reference.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his or her name only if he or she dissents with respect to
all shares beneficially owned by any one person and notifies Sagebrush in
writing of the name and address of each person on whose behalf he or she asserts
dissenters' rights. The rights of a partial dissenter shall be determined as if
the shares as to which he or she dissents and his or her other shares were
registered in the names of different shareholders. A beneficial owner may assert
dissenters' rights as to shares held on his or her behalf only if he or she (a)
submits to Sagebrush the record shareholder's written consent to the dissent not
later than the time the beneficial shareholder asserts dissenters' rights and
(b) asserts dissenters' rights with respect to all shares of which he or she is
the beneficial owner.
Shares of Sagebrush Common Stock held by dissenting holders will not be
converted into WSMP Common Stock in the Merger and after the Effective Time will
represent only the right to receive such consideration as is determined to be
due to such dissenting holders pursuant to the NCBCA. Sagebrush Common Stock
outstanding immediately prior to the Effective Time and held by a shareholder
who withdraws such shareholder's demand for dissenters' rights or fails to
perfect such rights will be deemed to be converted at the Effective Time into
the right to receive shares of WSMP Common Stock without interest.
A holder of shares of Sagebrush Common Stock wishing to exercise
dissenters' rights: (a) must give to Sagebrush, and Sagebrush must actually
receive before the vote on the Merger Agreement is taken, written notice of the
holder's intent to demand payment for his or her shares if the Merger is
consummated; and (b) must not vote his or her shares in favor of the Merger. If
the Merger Agreement is approved by holders of the requisite number of
outstanding shares of Sagebrush Common Stock, then Sagebrush will, no later than
ten days following shareholder approval of the Merger, mail a written
dissenters' notice to all shareholders who gave the aforementioned notice of
intent to demand payment. Such dissenters' notice will: (a) state where the
payment demand must be sent and where and when certificates for certificated
shares must be deposited; (b) inform holders of uncertificated shares to what
extent transfer of the shares will be restricted after the payment demand is
received; (c) supply a form for demanding payment; (d) set a date by which
Sagebrush must receive the payment demand, which date may not be fewer than
thirty nor more than sixty days after the date on which the dissenters' notice
is sent; and (e) be accompanied by a copy of Article 13. To exercise his or her
dissenters' rights, a shareholder sent a dissenters' notice must demand payment
and deposit his or her share certificates in accordance with the terms of the
notice. A shareholder failing to do so will not be entitled to payment for his
or her shares under Article 13. A shareholder who demands payment and deposits
his or her share certificates in accordance with the terms of the notice will
retain all other rights of a shareholder until consummation of the Merger. All
notices, demands and other communications directed to Sagebrush in connection
with the appraisal process should be sent to Sagebrush at 3238 West Main Street,
Claremont, North Carolina, 28610, Attention: Secretary.
Within 30 days after receipt of a payment demand by a shareholder made in
compliance with the above-described procedures, Sagebrush will pay such
shareholder the amount Sagebrush estimates to be the value of his or her shares,
plus interest accrued to the date of payment. Such payment will be accompanied
by: (a) Sagebrush's balance sheet as of the fiscal year ended January 3, 1997,
an income statement and a statement of cash flows for that year and the latest
available interim financial statements; (b) an explanation of how Sagebrush
estimated the fair value of the shares; (c) an explanation of how the interest
was calculated; (d) a statement of the dissenter's right to demand payment if he
or she is dissatisfied with Sagebrush's payment, if Sagebrush fails to make
payment within thirty days of a dissenter's acceptance or if Sagebrush, having
failed to consummate the Merger, fails to return deposited share certificates or
release the transfer
82
<PAGE> 91
restrictions imposed on uncertificated shares within sixty days after the date
set for demanding payment; and (e) a copy of Article 13.
If: (a) a dissenter believes that the amount paid by Sagebrush is less than
the fair value of his shares or that the interest due is incorrectly calculated;
(b) Sagebrush fails to make payment to a dissenter who accepts Sagebrush's offer
within thirty days after the acceptance; or (c) Sagebrush, having failed to
consummate the Merger, fails to return deposited stock certificates to a
dissenter or release the transfer restrictions imposed on uncertificated shares
within sixty days after the date set for demanding payment, then the dissenter
may notify Sagebrush in writing of his or her own estimate of the fair value of
his or her shares and the amount of interest due and demand payment of the
amount in excess of the payment by Sagebrush for the fair value of his or her
shares and interest due. A dissenter will waive his or her right to demand
payment as described in this paragraph, and will be deemed to have withdrawn his
or her dissent and demand for payment, unless he or she notifies Sagebrush of
his or her demand in writing within thirty days after Sagebrush (x) offers
payment for his or her shares or (y) fails to take the actions described in
clause (b) or (c) of this paragraph, as the case may be.
If a demand for payment as described above remains unsettled, then a
shareholder may commence a proceeding within sixty days after the earlier of (a)
the date payment is made or (b) the date of the dissenter's payment demand and
petition the court to determine the fair value of the shares and accrued
interest. A dissenter who takes no action during this sixty-day period will be
deemed to have withdrawn his or her dissent and demand for payment.
Upon service on it of the petition filed with the court, Sagebrush will pay
to the dissenter the amount offered by it as described above. The court may, in
its discretion, make all dissenters whose demands remain unsettled parties to
the proceeding. Each dissenter made a party to the proceeding by the court will
be entitled to judgment for the amount, if any, by which the court finds that
the fair value of his or her shares, plus interest, exceeds the amount paid by
Sagebrush upon service of the petition filed with the court. The court may
appoint one or more appraisers to receive evidence and recommend decision the
question of fair value. Parties to the proceeding are entitled to the same
discovery rights as parties in other civil proceedings. Since Sagebrush is a
"public corporation," no party to the proceeding will have the right to trial by
jury.
The court may assess the costs of a proceeding described above, including
the compensation and expenses of appointed appraisers, as it finds equitable.
With respect to the fees and expenses of counsel and experts for the parties to
the proceeding, the court may assess such costs against: (a) Sagebrush and in
favor of any or all dissenters if it finds that Sagebrush did not substantial
comply with the above-described procedures; or (b) either Sagebrush or a
dissenter or in favor of either or any other party, if it finds that the party
against whom such costs are assessed acted arbitrarily, vexatiously or not in
good faith with respect to the dissenters' rights provided under Article 13. In
addition, if the court finds that the services of counsel to any dissenter were
of substantial benefit to other dissenters and that the costs of such services
should not be assessed against Sagebrush, then the court may award to such
counsel reasonable fees to be paid out of the amounts to the dissenters who were
benefited.
AMENDMENT TO THE WSMP ARTICLES OF INCORPORATION
WSMP is currently authorized to issue 10,000,000 shares of WSMP Common
Stock. The WSMP Board has unanimously approved a proposed amendment to the WSMP
Articles of Incorporation that would increase the number of authorized shares of
WSMP Common Stock to 100,000,000. The principal purpose of this proposed
amendment would be to position WSMP to use WSMP Common Stock to finance its
business and to acquire other businesses and to effect stock splits in
appropriate circumstances.
It is WSMP's intention to finance its operations through, among other
things, the issuance from time to time of various debt and equity securities and
to consider the issuance of additional shares of WSMP Common Stock through stock
splits and stock dividends in appropriate circumstances. Accordingly, the
continued availability of shares of WSMP Common Stock is necessary to provide
WSMP with the flexibility to take advantage of opportunities in such situations.
WSMP Common Stock also may be issued as
83
<PAGE> 92
consideration in future acquisitions. There are, at present, no plans,
understandings, agreements or arrangements concerning the issuance of additional
shares of WSMP Common Stock, except for (i) the Merger Consideration and (ii)
shares presently reserved for issuance.
Authorized but unissued shares of WSMP Common Stock may be issued from time
to time to such persons and for such consideration as the WSMP Board may
determine and holders of the then outstanding shares of WSMP stock may or may
not be given the opportunity to vote thereon, depending upon the nature of any
such transactions, applicable law, the rules and policies of applicable stock
exchanges and the judgment of the WSMP Board regarding the submission thereof to
WSMP's shareholders. Shareholders have no preemptive rights to subscribe to
newly issued shares. Issuance of WSMP Common Stock (or the issuance of
authorized but unissued WSMP Preferred Stock or other capital stock) could have
the effect of discouraging an attempt to acquire control of WSMP.
The WSMP Board believes that the proposed increase in the number of
authorized shares of WSMP Common Stock will provide flexibility needed to meet
corporate objectives and is in the best interests of WSMP and its shareholders.
The increase in the number of authorized shares of WSMP Common Stock will, if
approved by the requisite vote of WSMP Shareholders, be adopted by WSMP
regardless of whether the Merger is consummated. Likewise, consummation of the
Merger is not conditioned upon shareholder approval of this proposal.
The affirmative vote of a majority of votes cast is required for approval
of the Articles Amendment, subject to the applicable quorum requirement. See
"WSMP Special Meeting." If the proposal is approved, then WSMP intends to
restate its Articles of Incorporation at the time of the amendment. Officers of
WSMP will make appropriate filings in the State of North Carolina and will take
any other action necessary to implement the amendment and restatement.
THE WSMP BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT WSMP SHAREHOLDERS
VOTE FOR THE PROPOSAL TO AMEND THE WSMP ARTICLES OF INCORPORATION.
LEGAL OPINIONS
The legality of the WSMP Common Stock to be issued in the Merger has been
passed upon by Simpson Aycock, P.A., Morganton, North Carolina. Certain tax
consequences of the Merger will be passed upon by Kennedy Covington Lobdell &
Hickman, L.L.P., Charlotte, North Carolina.
EXPERTS
The consolidated financial statements of WSMP as of February 28, 1997 and
February 23, 1996 and for each of three years in the period ended February 28,
1997 included in this Joint Proxy Statement-Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of Sagebrush as of January 3, 1997
and December 29, 1995 and for each of the three years in the period ended
January 3, 1997 included in this Joint Proxy Statement-Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
Representatives of Deloitte & Touche LLP are expected to be present at the
WSMP Special Meeting and at the Sagebrush Special Meeting. In each case, such
representatives will have the opportunity to make a statement if they so desire
and are expected to be available to respond to appropriate questions.
84
<PAGE> 93
SHAREHOLDER PROPOSALS
WSMP Shareholders may submit proposals to be considered for shareholder
action at the 1998 annual meeting of shareholders of WSMP if they do so in
accordance with applicable regulations of the Commission. Any such proposals
must be submitted to the Secretary of WSMP no later than February 20, 1998 in
order to be considered for inclusion in WSMP's proxy materials for such annual
meeting.
Sagebrush will hold a 1998 annual meeting of shareholders only if the
Merger is not consummated before the time of such meeting (which is currently
scheduled for May 7, 1998). In the event that such a meeting is held, any
proposals of shareholders intended to be presented at the 1998 annual meeting
must have been received by the Secretary of Sagebrush no later than December 8,
1997 in order to be considered for inclusion in Sagebrush's proxy materials for
such annual meeting.
OTHER MATTERS
As of the date of this Joint Proxy Statement-Prospectus, the Sagebrush
Board and the WSMP Board know of no matters that will be presented for
consideration at the Sagebrush Special Meeting or the WSMP Special Meeting other
than as described in this Joint Proxy Statement-Prospectus. If any other matters
shall properly come before either the Sagebrush Special Meeting or the WSMP
Special Meeting, or any adjournment or postponement of either of them, and be
voted upon, then the enclosed proxies will be deemed to confer discretionary
authority on the individuals named as proxies therein to vote the shares
represented by such proxies as to any such matters. The persons named as proxies
intend to vote or not to vote in accordance with the recommendation of the
management of Sagebrush and of WSMP, respectively.
85
<PAGE> 94
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF WSMP:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of February 28, 1997,
February 23, 1996 and November 7, 1997................. F-3
Consolidated Statements of Operations for the fiscal years
ended February 28, 1997, February 23, 1996 and February
24, 1995 and for the 36 weeks ended November 7, 1997
and November 1, 1996................................... F-4
Consolidated Statements of Shareholders' Equity for the
fiscal years ended February 28, 1997, February 23, 1996
and February 24, 1995 and for the 36 weeks ended
November 7, 1997....................................... F-5
Consolidated Statements of Cash Flow for the fiscal years
ended February 28, 1997, February 23, 1996 and February
24, 1995 and for the 36 weeks ended November 7, 1997
and November 1, 1996................................... F-6
Notes to Consolidated Financial Statements for the fiscal
years ended February 28, 1997, February 23, 1996 and
February 24, 1995...................................... F-7
CONSOLIDATED FINANCIAL STATEMENTS OF SAGEBRUSH:
Independent Auditors' Report.............................. F-25
Consolidated Balance Sheets as of January 3, 1997,
December 29, 1995 and September 12, 1997............... F-26
Consolidated Statements of Income for the fiscal years
ended January 3, 1997, December 29, 1995 and December
30, 1994 and the 36 weeks ended September 12, 1997 and
September 6, 1996...................................... F-27
Consolidated Statements of Shareholders' Equity for the
fiscal years ended January 3, 1997, December 29, 1995
and December 30, 1994 and the 36 weeks ended September
12, 1997............................................... F-28
Consolidated Statements of Cash Flow for the fiscal years
ended January 3, 1997, December 29, 1995 and December
30, 1994 and the 36 weeks ended September 12, 1997 and
September 6, 1996...................................... F-29
Notes to Consolidated Financial Statements for the fiscal
years ended January 3, 1997, December 29, 1995 and
December 30, 1994...................................... F-30
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS:
Unaudited Pro Forma Combined Balance Sheet as of November
7, 1997................................................ F-40
Unaudited Pro Forma Combined Statement of Earnings:
For the 36 weeks ended November 7, 1997 (WSMP) and
September 12, 1997 (Sagebrush)........................ F-41
For the years ended February 28, 1997 (WSMP) and
January 3, 1997 (Sagebrush)........................... F-42
For the years ended February 23, 1996 (WSMP) and
December 29, 1995 (Sagebrush)......................... F-43
For the years ended February 24, 1995 (WSMP) and
December 30, 1994 (Sagebrush)......................... F-44
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-45
</TABLE>
F-1
<PAGE> 95
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
WSMP, Inc.
Claremont, North Carolina
We have audited the accompanying consolidated balance sheets of WSMP, Inc.
and subsidiaries as of February 28, 1997 and February 23, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended February 28, 1997. These
financial statements are the responsibility of WSMP's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of WSMP, Inc. and subsidiaries at
February 28, 1997 and February 23, 1996, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended February
28, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
May 19, 1997
F-2
<PAGE> 96
WSMP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997, FEBRUARY 23, 1996 AND NOVEMBER 7, 1997
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 23, NOVEMBER 7,
1997 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,424,982 $ 430,311 $ 828,201
Marketable equity securities (at fair value; cost of:
1997 -- $155,768 and 1996 -- $140,555).................. 171,910 148,997 191,592
Accounts receivable, net:
Trade and others (Notes 2 and 6)........................ 3,206,256 3,341,871 5,648,739
Related party (Notes 2 and 19).......................... 254,744 484,951 165,087
Current portion of notes receivable, net:
Related party (Notes 2 and 19).......................... 563,644 772,329 472,602
Other (Note 2).......................................... 409,996 639,692 543,515
Inventories (Notes 3 and 6)............................... 6,210,990 5,553,641 7,816,408
Income taxes refundable................................... 343,557 -- 259,087
Prepaid expenses and other................................ 27,710 486,128 183,453
Deferred income taxes (Note 10)........................... 454,259 518,490 421,576
----------- ----------- -----------
Total current assets............................... 14,068,048 12,376,410 16,530,260
----------- ----------- -----------
Property plant and equipment, net (Notes 4 and 7)........... 22,952,785 25,288,033 23,054,518
----------- ----------- -----------
Other assets:
Properties held for sale (Notes 5 and 7).................. 3,277,670 1,569,752 1,680,993
Excess of cost over fair value of net assets of business
acquired, net (Note 14)................................. 628,186 662,321 2,967,689
Covenant not to compete................................... 847,731
Noncurrent notes receivable (Note 2)...................... 470,345 204,941 570,747
Noncurrent related party notes receivable (Notes 2 and
19)..................................................... 963,117 515,944 1,558,399
Investment in affiliates (Note 16)........................ 374,533 381,533 --
Investment in restricted equity securities (Notes 16 and
19)..................................................... -- 242,050 --
Other..................................................... 391,916 393,390 360,938
----------- ----------- -----------
Total other assets................................. 6,105,767 3,969,931 7,986,497
----------- ----------- -----------
Total assets....................................... $43,126,600 $41,634,374 $47,571,275
=========== =========== ===========
Current liabilities:
Notes payable -- bank (Note 6)............................ $ 4,027,776 $ 4,000,000 $ 4,012,162
Current installments of long term debt (Note 7)........... 1,297,792 2,030,953 1,531,868
Trade accounts payable.................................... 2,879,309 2,810,229 3,037,401
Income taxes payable...................................... 9,572 -- 59,836
Other accounts payable (Note 9)........................... 2,952,899 2,550,872 3,376,133
----------- ----------- -----------
Total current liabilities.......................... 11,167,348 11,392,054 12,017,400
Deferred franchise fees..................................... -- 5,000 --
Deferred income taxes (Note 10)............................. 1,247,504 903,639 1,198,854
Long-term debt, excluding current installments (Note 7)..... 12,422,150 12,890,060 10,454,334
----------- ----------- -----------
Total liabilities.................................. 24,837,002 25,190,753 23,670,588
----------- ----------- -----------
Commitments and contingencies (Notes 11 and 17)
Shareholders' equity (Notes 7, 13, and 20):
Preferred stock -- par value $.10, authorized 2,500,000;
no shares issued
Common stock -- par value $1, authorized 10,000,000
shares; issued: 1997 -- 2,919,088 and
1996 -- 2,760,338....................................... 2,919,088 2,760,338 3,373,859
Capital in excess of par value............................ 7,141,097 6,579,347 10,775,911
Unrealized gain on securities available for sale.......... 10,059 5,278 19,299
Retained earnings......................................... 8,219,354 7,098,658 9,731,618
----------- ----------- -----------
Total shareholders' equity......................... 18,289,598 16,443,621 23,900,687
----------- ----------- -----------
Total liabilities and shareholders' equity......... $43,126,600 $41,634,374 $47,571,275
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 97
WSMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 23, 1996 AND FEBRUARY 24, 1995
AND FOR THE 36 WEEKS ENDED NOVEMBER 7, 1997 AND NOVEMBER 1, 1996
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 36 WEEKS ENDED
------------------------------------------ --------------------------
FEBRUARY 28, FEBRUARY 23, FEBRUARY 24, NOVEMBER 7, NOVEMBER 1,
1997 1996 1995 1997 1996
------------ ------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operation revenues:
Food Sales (Note 15)................................ $85,070,341 $76,582,926 $91,231,774 $75,171,911 $58,474,782
Franchise, royalty and other fees (Note
19 -- includes related party transactions totaling
$923,000 in 1997, $1,079,000 in 1996 and
$1,044,000 in 1995)............................... 2,682,732 2,856,284 2,868,199 1,349,889 1,855,748
----------- ----------- ----------- ----------- -----------
Total operating revenues...................... 87,753,073 79,439,210 94,099,973 76,521,800 60,330,530
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold (Note 19 -- includes related
party transactions totaling $513,000 in 1997,
$474,000 in 1996 and $506,000 in 1995)............ 63,680,524 56,743,742 66,275,140 52,355,204 43,553,248
Operating expenses (Note 19 -- includes related
party transactions totaling $706,000 in 1997,
$825,000 in 1996 and $883,000 in 1995)............ 11,924,356 12,775,983 14,530,232 12,826,558 8,388,051
Selling, general and administrative expenses (Note
19 -- includes related party transactions totaling
$2,014,000 in 1997, $2,320,000 in 1996 and
$2,236,000 in 1995)............................... 7,898,182 7,906,971 8,171,310 6,450,900 5,062,188
Depreciation and amortization....................... 2,624,490 2,715,271 2,878,624 2,170,482 1,779,179
----------- ----------- ----------- ----------- -----------
Total costs and expenses...................... 86,127,552 80,141,967 91,855,306 73,803,144 58,782,666
----------- ----------- ----------- ----------- -----------
Operating income (loss)....................... 1,625,521 (702,757) 2,244,667 2,718,656 1,547,864
----------- ----------- ----------- ----------- -----------
Other income (expense):
Other income (including interest) (Note
19 -- includes related party transactions totaling
$167,000 in 1997, $192,000 in 1996 and $189,000 in
1995)............................................. 1,046,219 809,737 949,208 561,371 798,440
Net gain on dispositions of assets (net of
write-downs) (Note 19 -- includes gains (losses)
on sales of assets to related parties totaling
$353,000 in 1997, $(360,000) in 1996 and $128,000
in 1995).......................................... 758,646 220,199 940,091 553,566 257,530
Net gain on sale of restricted equity securities to
related party (Note 19)........................... 541,831 -- -- -- --
Equity in earnings (loss) of affiliates............. (107,000) (338,366) 115,000 (14,000) (95,000)
Interest expense.................................... (1,822,339) (2,011,567) (1,993,094) (1,079,965) (1,285,376)
Other expense (Note 19 -- includes related party
transactions totaling $99,000 in 1997, $80,000 in
1996 and $153,000 in 1995)........................ (871,388) (688,580) (747,471) (358,110) (530,090)
----------- ----------- ----------- ----------- -----------
Net other expense............................. (454,031) (2,008,577) (736,266) (337,138) (854,496)
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes and extraordinary
item................................................ 1,171,490 (2,711,334) 1,508,401 2,381,518 693,368
----------- ----------- ----------- ----------- -----------
Provision for income taxes (benefit) (Note 10):
Current............................................. 60,401 (104,843) 490,064 890,755 286,617
Deferred............................................ 405,177 (1,111,502) (78,333) (21,501) (18,284)
----------- ----------- ----------- ----------- -----------
Total provision for income taxes (benefit)............ 465,578 (1,216,345) 411,731 869,254 268,333
----------- ----------- ----------- ----------- -----------
Earnings (loss) before extraordinary item............. 705,912 (1,494,989) 1,096,670 1,512,264 425,035
Extraordinary gain from early extinguishment of debt
(net of income taxes of $250,862) (Note 7).......... 414,784 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net earnings (loss)........................... $ 1,120,696 $(1,494,989) $ 1,096,670 $ 1,512,264 $ 425,035
=========== =========== =========== =========== ===========
Earnings (loss) per common and common equivalent share
(Note 1):
Earnings (loss) before extraordinary item........... $ .23 $ (.55) $ .38 $ .40 $ .14
Extraordinary gain from early extinguishment of
debt.............................................. .13 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net earnings (loss)........................... $ .36 $ (.55) $ .38 $ .40 $ .14
=========== =========== =========== =========== ===========
Earnings (loss) per common share -- assuming full
dilution (Note 1):
Earnings (loss) before extraordinary item........... $ .22 $ (.55) $ .38 $ .40 $ .14
Extraordinary gain from early extinguishment of
debt.............................................. .13 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net earnings (loss)........................... $ .35 $ (.55) $ .38 $ .40 $ .14
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 98
WSMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 23, 1996 AND FEBRUARY 24, 1995
AND FOR THE 36 WEEKS ENDED NOVEMBER 7, 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
CAPITAL IN SECURITIES
COMMON EXCESS OF AVAILABLE RETAINED
STOCK PAR VALUE FOR SALE EARNINGS
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at February 25, 1994.................... $2,133,489 $ 6,419,972 $ -- $8,030,604
Net earnings.................................. 1,096,670
Common stock purchased and retired (5,000
shares) (Note 20).......................... (5,000) (30,625) -- --
Five-for-four stock split effected in the form
of a 25% stock dividend (Note 20): Shares
issued..................................... 531,849 -- -- (531,849)
Fractional shares payable in cash............. -- -- -- (1,778)
Unrealized loss on securities available for
sale....................................... -- -- (5,214) --
---------- ----------- ------- ----------
Balance at February 24, 1995.................... 2,660,338 6,389,347 (5,214) 8,593,647
Net loss...................................... -- -- -- (1,494,989)
Common stock options exercised (100,000
shares)
(Note 13).................................. 100,000 190,000 -- --
Unrealized gain on securities available for
sale....................................... -- -- 10,492 --
---------- ----------- ------- ----------
Balance at February 23, 1996.................... 2,760,338 6,579,347 5,278 7,098,658
Net earnings.................................. -- -- -- 1,120,696
Common stock options exercised (158,750
shares) (Note 13).......................... 158,750 561,750 -- --
Unrealized gain on securities available for
sale....................................... -- -- 4,781 --
---------- ----------- ------- ----------
Balance at February 28, 1997.................... 2,919,088 7,141,097 10,059 8,219,354
Net earnings (Unaudited)...................... -- -- -- 1,512,264
Common stock options exercised (131,000
shares) (Unaudited)........................ 131,000 1,035,721 -- --
Common stock issued (323,771 shares)
(Unaudited)................................ 323,771 2,599,093 -- --
Unrealized gain on securities available for
sale (Unaudited)........................... -- -- 9,240 --
---------- ----------- ------- ----------
Balance at November 7, 1997 (Unaudited)......... $3,373,859 $10,775,911 $19,299 $9,731,618
========== =========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 99
WSMP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 23, 1996 AND FEBRUARY 24, 1995
AND FOR THE 36 WEEKS ENDED NOVEMBER 7, 1997 AND NOVEMBER 1, 1996
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 36 WEEKS ENDED
------------------------------------------ -------------------------
FEBRUARY 28, FEBRUARY 23, FEBRUARY 24, NOVEMBER 7, NOVEMBER 1,
1997 1996 1995 1997 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................. $ 1,120,696 $(1,494,989) $ 1,096,670 $ 1,512,264 $ 425,035
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Extraordinary gain on extinguishment of debt (before
effect of income taxes) (Note 7)................... (665,646) -- -- -- --
Net gain on sale of restricted equity securities to
related parties.................................... (541,831) -- -- -- --
Depreciation and amortization........................ 2,624,490 2,715,271 2,878,624 2,170,482 1,779,180
Depreciation on properties leased to others.......... 293,894 282,104 379,599 154,841 194,668
Deferred income taxes, net........................... 405,177 (1,111,502) (78,333) (21,501) (18,284)
Net gain on dispositions of assets (net of
write-downs)....................................... (758,646) (220,199) (940,091) (553,566) (257,530)
Provision for losses on receivables.................. 223,358 216,039 430,128 19,244 178,883
Equity in loss (earnings) of affiliates.............. 107,000 338,366 (115,000) 14,000 95,000
Other non-cash adjustments to earnings............... (183,475) 152,598 (90,679) 605,482 20,978
Changes in operating assets and liabilities (net of
effects from purchase of restaurant companies)
providing (using) cash:
Receivables........................................ 335,383 49,830 (848,883) (2,452,990) (1,262,187)
Inventories........................................ (657,349) (427,306) (627,401) (1,485,366) (891,603)
Income taxes refundable, prepaid expense and other
assets........................................... 114,862 (247,472) (4,598) (42,542) 141,304
Trade accounts payable............................. 69,080 (206,547) (1,396,535) (132,769) 332,948
Other accrued liabilities.......................... 371,599 (262,280) 113,428 525,015 354,386
----------- ----------- ----------- ----------- ----------
Total adjustments.............................. 1,737,896 1,278,902 (299,741) (1,199,670) 667,743
Net cash provided by (used in) operating
activities................................... 2,858,592 (216,087) 796,929 312,594 1,092,778
----------- ----------- ----------- ----------- ----------
Cash flows from investing activities:
Capital expenditures to related parties.............. (416,415) (325,210) (386,359) (342,851) (289,131)
Capital expenditures -- other........................ (2,232,688) (1,278,677) (807,489) (2,645,201) (777,673)
Proceeds from sales of assets to related parties..... 1,013,388 1,079,955 623,734 950,000 785,000
Proceeds from sales of assets to others.............. 1,208,447 2,087,983 3,082,789 2,164,064 215,037
Deposits, net of refunds............................. 47,942 (121,554) (12,581) 4,868 (14,887)
Decrease (increase) in marketable equity
securities......................................... (15,213) (11,425) 36,528 (4,908) (3,508)
Decrease in related party notes receivables.......... 289,913 203,874 417,574 179,452 176,460
Decrease (increase) in other notes receivable........ 220,164 287,897 (1,635) 396,953 319,030
Other investing activities, net...................... (92,322) (175,539) (292,251) -- --
----------- ----------- ----------- ----------- ----------
Net cash provided by (used in) investing
activities................................... 23,216 1,747,304 2,660,310 702,377 410,328
----------- ----------- ----------- ----------- ----------
Cash flows from financing activities:
Net proceeds (repayments) under short-term borrowing
agreements......................................... 27,776 1,000,000 (375,000) (15,614) --
Proceeds from issuance of long-term debt............. 8,125,000 85,000 250,000 -- --
Principal payments on long-term debt................. (9,760,413) (3,916,026) (3,364,013) (3,092,338) (1,657,017)
Cash restricted for secured letter of credit (Note
17)................................................ -- 500,000 (500,000) -- --
Proceeds from exercise of stock options.............. 720,500 290,000 -- 496,200 --
Acquisition of treasury stock........................ -- -- (35,625) -- --
----------- ----------- ----------- ----------- ----------
Net cash used in financing activities.......... (887,137) (2,041,026) (4,024,638) (2,611,752) (1,657,017)
----------- ----------- ----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents... 1,994,671 (509,809) (567,399) (1,596,781) (153,911)
Cash and cash equivalents at beginning of period....... 430,311 940,120 1,507,519 2,424,982 430,311
----------- ----------- ----------- ----------- ----------
Cash and cash equivalents at end of period............. $ 2,424,982 $ 430,311 $ 940,120 $ 828,201 $ 276,400
=========== =========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 100
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 23, 1996, AND FEBRUARY 24, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of WSMP, Inc.
and subsidiaries in which it has an ownership percentage greater than 50%
(collectively, "WSMP"). These subsidiaries, all of which are 100% owned unless
otherwise indicated, are as follows:
<TABLE>
<S> <C>
Brunswick Assoc., Inc. Price Food Systems, LLC (80%)
D&S Foods, LLC (60%) Prime Sirloin, Inc.
Elloree Foods, Inc. Seven Stars, Inc.
Georgia WSMP, Inc. South Carolina WSMP, Inc.
Greenville Food Systems, Inc. St. Augustine Foods, Inc. (80%)
Kentucky WSMP, Inc. Sunshine WSMP, Inc.
Matthews Prime Sirloin, Inc. Tennessee WSMP, Inc.
Naples Foods, Inc. (55%) Virginia WSMP, Inc.
</TABLE>
All significant intercompany accounts and transactions are eliminated in
consolidation.
Financial Statement Presentation
Financial statements for fiscal 1996 and fiscal 1995 have been
reclassified, where applicable, to conform to the financial statement
presentations used in fiscal 1997.
Fiscal Year
WSMP's fiscal year ends on the last Friday in February. Fiscal 1997
represents a fifty-three week period. Fiscal 1996 and fiscal 1995 represent
fifty-two week periods.
Cash and Cash Equivalents
WSMP considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investments
WSMP classifies its investments in debt and equity securities as
available-for-sale. Securities classified as available-for-sale are carried at
fair market value with unrealized gains and losses excluded from earnings but
shown as a separate component of shareholders' equity. All investments of WSMP
are comprised of marketable equity securities held in broker managed accounts.
Realized and unrealized gains and losses on investments were not significant in
fiscal 1997, fiscal 1996 or fiscal 1995.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs which do not significantly extend useful lives of assets
are charged to earnings whereas additions and betterments, including interest
costs incurred during construction, are capitalized. Gains and losses on
dispositions are reflected in other income except for gains on traded properties
which are reflected in the basis of the new asset.
Depreciation of property, plant and equipment is provided over the
estimated useful lives of the respective assets on the straight-line basis.
Leasehold improvements are depreciated over the shorter of their estimated
F-7
<PAGE> 101
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
useful lives or terms of the respective leases. Property under capital leases is
amortized in accordance with WSMP's normal depreciation policy.
Depreciation on properties leased to others is combined with other expenses
related to rental income and reported as other expense.
WSMP evaluates its long-lived assets used in operations for indicators of
impairment and, if found, calculates the undiscounted cash flows estimated to be
generated by those assets. If the cash flows are less than the assets' carrying
amount, WSMP records an impairment loss for the difference between the carrying
amount and estimated fair value. See Note 5 with regard to assets to be disposed
of.
Intangible Assets
The excess of cost over fair value of net assets of businesses acquired is
being amortized on the straight-line method over periods of fifteen and forty
years ($162,113 over fifteen years and $933,100 over forty years as of February
28, 1997).
Investments in Affiliates
Investments in common stock of unconsolidated affiliates are accounted for
using the equity method.
Costs and Expenses
Cost of goods sold includes the direct and indirect costs of tangible
products sold by the food processing segment and the direct costs of tangible
products sold through restaurant operations. Operating expenses include
additional indirect costs such as labor, insurance and occupancy costs, other
than depreciation, associated with restaurant product sales and other revenues.
Selling, general and administrative expenses reflect costs of marketing, selling
and general administration not included in cost of goods sold or operating
expenses.
Advertising Costs
WSMP expenses advertising costs as incurred. Advertising expense for fiscal
1997, fiscal 1996 and fiscal 1995 was $2,268,677, $2,183,076 and $2,175,206,
respectively.
Pre-opening Expenses
Pre-opening expenses associated with new restaurant openings are expensed
as incurred.
Income Taxes
Income taxes are provided for temporary differences between the tax and
financial accounting basis of assets and liabilities using the asset and
liability method. The tax effects of such differences are reflected in the
balance sheet at the enacted tax rate applicable to the years when such
differences are scheduled to reverse. The effect on deferred taxes of a change
in tax rates is recognized in the period that includes the enactment date.
Franchise, Royalty and Other Fees
Initial franchise fees are recognized as revenue when substantially all of
the services required of WSMP by the franchise agreement have been performed,
which is generally the date the franchised unit opens. Area franchise
development fees are not recognized until the developer exercises his option and
opens a restaurant pursuant to the area development agreement. At the time WSMP
has substantially performed all obligations for initial service relating to the
restaurant, WSMP recognizes the pro rata portion of the fee allocated to the
F-8
<PAGE> 102
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option to develop that particular restaurant. Royalty and other fees are accrued
as earned based on franchisees' sales.
Earnings Per Share
Earnings per share is based on the weighted average number of common shares
and dilutive common equivalent shares outstanding during each fiscal year.
Common equivalent shares relate to outstanding stock options. The weighted
average number of shares used in the calculation of earnings per common and
common equivalent shares are 3,091,063 in fiscal 1997, 2,729,517 in fiscal 1996
and 2,879,021 in fiscal 1995. The weighted average number of shares used in the
calculation of earnings per common share assuming full dilution are 3,228,800 in
fiscal 1997, 2,729,517 in fiscal 1996 and 2,953,286 in fiscal 1995.
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.
Interim Financial Information
The accompanying unaudited financial information for the 30 weeks ended
November 11, 1997 and November 1, 1996 has been prepared on substantially the
same basis as the audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information set forth therein. The results of
interim periods are not necessarily indicative of results to be expected for the
entire fiscal year.
2. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accounts receivable:
Trade accounts receivable (less allowance for doubtful
receivables of $35,000 in 1997 and $55,000 in 1996).... 2,958,263 $3,020,818
Accounts receivable -- franchisees (less allowance for
doubtful receivables of $20,215 in 1997 and $252,814 in
1996).................................................. 247,993 321,053
Accounts receivable -- related parties (less allowance for
doubtful receivables of $62,500 in 1996) (See Note
19).................................................... 254,744 484,951
---------- ----------
Total accounts receivable, net.................... $3,461,000 $3,826,822
========== ==========
Notes receivable -- related parties; interest rates 4.5% to
12% (See Note 19)......................................... $1,526,761 $1,288,273
Less current portion........................................ 563,644 772,329
---------- ----------
Noncurrent related parties notes receivable............... $ 963,117 $ 515,944
========== ==========
Notes receivable -- other: interest rates 6% to 12% (less
allowance for doubtful receivables of $58,323 in 1997 and
$216,693 in 1996)......................................... $ 880,341 $ 844,633
Less current portion........................................ 409,996 639,692
---------- ----------
Noncurrent notes receivable............................... $ 470,345 $ 204,941
========== ==========
</TABLE>
F-9
<PAGE> 103
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Noncurrent notes receivable have maturities ranging from 1997 to 2004.
Trade accounts receivable are generated by sales of the food processing
segment and have terms ranging between fourteen and thirty days. A concentration
of receivables exists relating to one bakery customer which accounted for 61.4%
and 57.5% of the food processing segment sales in fiscal 1997 and fiscal 1996,
respectively. Receivables from this customer totaled $1,392,622 and $1,366,216
and represent 46.5% and 44.4% of the total at February 28, 1997 and at February
23, 1996, respectively.
An analysis of the allowance for doubtful notes and accounts receivable is
as follows:
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGE
FISCAL YEAR BEGINNING TO COSTS AND BALANCE AT
ENDED OF YEAR EXPENSES DEDUCTIONS(1) END OF YEAR
- ----------- ---------- ---------------- ------------- -----------
<S> <C> <C> <C> <C>
1997................................ $587,007 $223,358 $696,827 $113,538
1996................................ $542,000 $216,039 $171,032 $587,007
1995................................ $440,000 $430,128 $328,128 $542,000
</TABLE>
- ---------------
(1) Uncollectible receivables charged against the allowance.
3. INVENTORIES
A summary of inventories, by major classification, follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Hams in curing process...................................... $1,734,178 $1,326,420
Other food (includes cured hams)............................ 2,716,670 2,818,418
Supplies.................................................... 1,760,142 1,408,803
---------- ----------
Totals............................................ $6,210,990 $5,553,641
========== ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
The major components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Land.......................................... $ 4,182,979 $ 5,204,997
Land improvements............................. 10 years 1,095,487 1,378,849
Buildings..................................... 20-40 years 15,145,307 16,523,205
Leasehold improvements........................ 5-20 years 1,461,722 1,274,897
Machinery and equipment....................... 5-15 years 16,279,383 15,650,598
Machinery and equipment.......................
under capital leases........................ 5-15 years 972,939 1,065,925
Furniture and fixtures........................ 5-10 years 3,838,556 3,946,543
Automotive equipment.......................... 2-5 years 597,586 626,492
Construction in progress...................... 22,791 313,110
----------- -----------
Total............................... 43,596,750 45,984,616
----------- -----------
Less accumulated depreciation................. 20,643,965 20,696,583
----------- -----------
Property, plant and equipment, net............ $22,952,785 $25,288,033
=========== ===========
</TABLE>
Depreciation and amortization expense of property, plant and equipment was
$2,874,250, $2,960,325 and $3,198,638 for fiscal 1997, fiscal 1996 and fiscal
1995, respectively. Accumulated depreciation applicable to property under
capital leases was $105,355, $544,391 and $445,066 for fiscal 1997, fiscal 1996
and fiscal 1995,
F-10
<PAGE> 104
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Approximately $5,998 in interest costs were capitalized in fiscal
1996. No interest costs were capitalized in fiscal 1997 or fiscal 1995.
5. PROPERTIES HELD FOR SALE
During fiscal 1991, WSMP began a restructuring of its owned restaurant
operations to improve profitability by, among other things, updating restaurant
formats and disposing of less profitable stores. As a result of this
restructuring, WSMP has closed various stores and transferred the related real
properties, in addition to certain undeveloped land holdings, from the
classification of property, plant and equipment to other assets as properties
held for sale. WSMP is selling these properties as reasonable purchase offers
are received. At February 28, 1997, WSMP had $3,277,670 in properties held for
sale. These properties are being carried at their estimated fair value less
estimated selling costs.
6. SHORT-TERM NOTES PAYABLE
On November 22, 1996, WSMP entered into an agreement with a bank to provide
a $6,000,000 revolving credit facility, which replaced the existing $4,000,000
line of credit with another bank. This credit facility is secured by a lien upon
WSMP's manufacturing inventory and receivables (approximately $8,461,000 in the
aggregate) and expires on November 22, 1998. At February 28, 1997, $4,027,776
was outstanding under this facility.
The weighted average interest rate on short-term borrowings was 8.77% and
9.36% at February 28, 1997 and February 23, 1996, respectively.
7. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
10% Senior Notes payable to insurance companies............. $ -- $ 9,062,249
Variable rate Industrial Revenue Bonds maturing in 2005..... 2,845,000 3,175,000
Prime plus 1% bank note maturing 2002....................... 4,979,808 --
Prime plus 1% bank note maturing 1998....................... 1,900,000 --
Prime plus 1/2% to 1 1/2% notes payable to banks maturing
1998 to 2012.............................................. 1,043,278 718,490
4.5% Settlement Notes maturing in 1998 (see Note 19)........ 430,000 610,000
6.0% to 11.0% other notes payable maturing 1998 to 2005..... 1,666,301 980,771
9.25% to 11.5% capitalized lease obligations maturing in
1998 to 2004 (see Note 11)................................ 855,555 374,503
----------- -----------
Total long-term debt.............................. 13,719,942 14,921,013
----------- -----------
Less current installments......................... 1,297,792 2,030,953
----------- -----------
Long term debt, excluding current installments.... $12,422,150 $12,890,060
=========== ===========
</TABLE>
The applicable prime interest rate at February 28, 1997 was 8.25%. The
variable rate payable on the Industrial Revenue Bonds at February 28, 1997 was
3.44%. At February 28, 1997, the net book value of WSMP's property, plant and
equipment and properties held for sale pledged as collateral under the above
obligations was $21,301,185.
During fiscal 1997, WSMP replaced its Senior Note obligations, which were
scheduled to mature on October 1, 1997, with long-term note agreements with two
banks. One of the agreements provides financing in the amount of $5 million at a
rate of "prime" plus 1% for a five year term with principal payments to be made
F-11
<PAGE> 105
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on a ten-year amortization basis with a final balloon payment on January 15,
2002. The second agreement provides financing of $1.9 million at a rate of
"prime" plus 1% and is payable on December 30, 1998. The notes are
collateralized by deeds of trusts on certain real property which previously
collateralized the Senior Note obligations. In addition, WSMP is required to
meet certain financial requirements regarding tangible net worth, working
capital, debt ratio and ratio of interest coverage.
During fiscal 1997, WSMP recognized an extraordinary gain of $414,784, net
of income taxes of $250,862, on the early extinguishment of debt. The two major
life insurance companies which held the Senior Notes agreed to a discount
totaling $787,651 upon the early retirement of this debt. In addition, as part
of this refinancing, WSMP wrote-off unamortized loan costs relating to the
Senior Notes totaling $73,208. Also during fiscal 1997, WSMP incurred a
prepayment penalty totaling $48,797 upon the early payment of a Small Business
Association loan which was secured by a restaurant property sold during the
year.
At February 28, 1997, WSMP was not in compliance with certain covenants
relating to the Industrial Revenue Bonds and the newly acquired term bank debt.
These violations relate to the maximum amount of new debt which can be incurred
during a fiscal year. WSMP has received waivers of these violations from its
lenders.
Long-term debt maturities, including capital leases (Note 11), subsequent
to February 28, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- -----------
<S> <C>
1998........................................................ 1,297,792
1999........................................................ 4,069,566
2000........................................................ 1,134,472
2001........................................................ 1,172,281
2002........................................................ 3,997,126
Later years................................................. 2,048,705
-----------
Total............................................. $13,719,942
===========
</TABLE>
8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the financial instruments listed below have
been determined by WSMP using available market information and appropriate
valuation methodologies. Considerable judgment is required, however, to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
WSMP could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-------------------------
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 2,424,982 $ 2,424,982
Marketable equity securities.............................. 171,910 171,910
Accounts receivable....................................... 3,461,000 3,461,000
Notes receivable.......................................... 2,407,102 2,524,859
Liabilities:
Accounts payable.......................................... 2,879,309 2,879,309
Short-term debt........................................... 4,027,776 4,027,776
Long-term debt (excluding capital leases)................. 12,864,387 12,854,189
</TABLE>
F-12
<PAGE> 106
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FEBRUARY 23, 1996
-------------------------
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 430,311 $ 430,311
Marketable equity securities.............................. 148,997 148,997
Accounts receivable....................................... 3,826,822 3,826,822
Notes receivable.......................................... 2,132,906 2,047,913
Restricted equity securities.............................. 242,050 720,891
Liabilities:
Accounts payable.......................................... 2,810,299 2,810,229
Short-term debt........................................... 4,000,000 4,000,000
Long-term debt (excluding capital leases)................. 14,546,510 14,488,742
</TABLE>
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and short-term debt are a reasonable estimate of their fair
value. Marketable equity securities are classified as available-for-sale and
carried at their fair value.
The fair value of notes receivable is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
The fair value of the restricted equity securities is based on the fair
value of non-restricted securities of the same class and issue which are
actively traded in the over-the-counter market.
Interest rates that are currently available to WSMP for issuance of debt
with similar terms and remaining maturities are used to estimate fair value for
debt instruments using discounted cash flows.
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued salaries and wages.................................. $ 520,388 $ 650,407
Accrued insurance claims.................................... 710,657 644,180
Taxes, other than income.................................... 426,337 323,059
Accrued interest............................................ 19,717 85,297
Gift certificates outstanding............................... 304,185 331,955
Other....................................................... 981,187 515,974
---------- ----------
Total............................................. $2,962,471 $2,550,872
========== ==========
</TABLE>
F-13
<PAGE> 107
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The provision for income taxes (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----------- ---------
<S> <C> <C> <C>
Current:
Federal..................................... $ 25,616 $ (135,072) $ 421,663
State....................................... 34,785 30,229 68,401
Total current....................... 60,401 (104,843) 490,064
Deferred:
Federal..................................... 377,569 (916,840) (102,544)
State....................................... 27,608 (194,662) 24,211
-------- ----------- ---------
Total deferred...................... 405,177 (1,111,502) (78,333)
-------- ----------- ---------
Total provision for income taxes
(benefit)......................... $465,578 $(1,216,345) $ 411,731
======== =========== =========
</TABLE>
Actual provisions for income tax expense (benefit) are different from
amounts computed by applying a statutory federal income tax rate to earnings
(loss) before income taxes. The computed amount is reconciled to total income
tax expense (benefit) as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ------------------------ ----------------------
PERCENT OF PERCENT OF PERCENT OF
PRETAX PRETAX PRETAX
AMOUNT EARNINGS AMOUNT LOSS AMOUNT EARNINGS
-------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Computed tax (benefit) at
statutory rate................ $398,307 34.0 $ (921,854) (34.0) $ 512,856 34.0
Tax effect resulting from:
State income taxes net of
federal tax benefit......... 26,826 2.3 (141,481) (5.2) 92,584 6.1
New general business credits
(net)....................... (21,285) (1.8) (96,867) (3.6) (110,308) (7.3)
Permanent differences......... 32,548 2.8 9,978 .4 (8,992) (.6)
Tax benefit of pre-acquisition
(SRLY) losses utilized...... (22,390) (.8) (82,307) (5.4)
Other......................... 29,182 2.4 (43,731) (1.6) 7,898 .5
-------- --- ----------- ----- --------- ---
Provision for income taxes
(benefit)..................... $465,578 39.7 $(1,216,345) (44.8) $ 411,731 27.3
======== === =========== ===== ========= ===
</TABLE>
F-14
<PAGE> 108
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The approximate tax effect of each type of temporary difference and
carryforward that gave rise to WSMP's deferred income tax assets and liabilities
for fiscal 1997 and fiscal 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- --------------------------------------
ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current:
Allowance for doubtful
receivables......... $ 42,789 $ -- $ 42,789 $ 219,944 $ -- $ 219,994
Inventory............. 67,226 -- 67,226 59,904 -- 59,904
Accrued promotional
expense............. 67,836 -- 67,836 9,788 -- 9,788
Accrued bonus......... -- -- 13,701 -- 13,701
Accrued vacation
pay................. 51,254 -- 51,254 46,847 -- 46,847
Reserve for returns... 60,299 -- 60,299 56,216 -- 56,216
Installment sales..... -- (93,748) (93,748) -- (133,704) (133,704)
Unrealized gain on
securities available
for sale............ -- (6,083) (6,083) -- (3,164) (3,164)
State loss
carryforward........ 139,686 -- 139,686 123,908 -- 123,908
General business
credit
carryforward........ 125,000 -- 125,000 125,000 -- 125,000
---------- ----------- ----------- ---------- ----------- -----------
Total
current...... $ 554,090 $ (99,831) $ 454,259 $ 655,358 $ (136,868) $ 518,490
========== =========== =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- --------------------------------------
ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Noncurrent:
Property, plant and
equipment........... $ -- $(1,781,168) $(1,781,168) $ -- $(1,806,103) $(1,806,103)
Writedown of property
held for sale....... 54,646 -- 54,646 54,342 -- 54,342
Earnings in
unconsolidated
subsidiaries........ -- (21,105) (21,105) 175,156 -- 175,156
Restricted marketable
equity securities... -- -- -- 58,269 -- 58,269
Deferred franchise
fees................ -- -- -- 1,874 -- 1,874
General business
credit
carryforward........ 206,351 -- 206,351 365,732 -- 365,732
Alternative minimum
tax credit
carryforward........ 293,771 -- 293,771 247,092 -- 247,092
Federal loss
carryforward........ 107,668 -- 107,668 45,033 -- 45,033
Pre-acquisition (SRLY)
loss carryforward... 57,184 -- 57,184 89,544 -- 89,544
State loss
carryforward........ 335,800 -- 335,800 393,162 -- 393,162
Less valuation
allowance........... (500,651) -- (500,651) (527,740) -- (527,740)
---------- ----------- ----------- ---------- ----------- -----------
Total
noncurrent... $ 554,769 $(1,802,273) $(1,247,504) $ 902,464 $(1,806,103) $ (903,639)
========== =========== =========== ========== =========== ===========
Total current
and
noncurrent... $1,108,859 $(1,902,104) $ (793,245) $1,557,822 $(1,942,971) $ (385,149)
========== =========== =========== ========== =========== ===========
</TABLE>
F-15
<PAGE> 109
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of February 28, 1997, operating loss carryovers of approximately
$7,600,000 are available to offset future taxable income in various states. The
carryover periods range from five to fifteen years, which will result in
expirations of varying amounts beginning in fiscal 1998 and continuing through
fiscal 2012.
Various credits and loss carryforwards also exist to offset future federal
income taxes. As of February 28, 1997, alternative minimum tax credit carryovers
are approximately $294,000 and general business credit carryforwards are
approximately $331,000. The general business credits will expire in varying
amounts beginning in fiscal 2007. In addition, pre-acquisition (SRLY) loss
carryforwards of approximately $57,200 are available to offset future taxable
income of certain consolidated subsidiaries and expire in varying amounts
beginning in fiscal 2002.
11. LEASED PROPERTIES
Six of WSMP's restaurant locations are operated in leased premises. The
related leases are classified as operating leases, and their terms are effective
for varying periods until 2007, except for one lease for land which expires in
2022. Most contain terms that provide for a modest increase in rental payments
at specified intervals within the lease term. As of February 28, 1997, future
minimum rental payments required under these leases and under capital leases,
which are for machinery and equipment, are summarized as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
------------------------------------
MINIMUM
MINIMUM SUBLEASE CAPITAL
FISCAL YEAR PAYMENTS RECEIPTS TOTAL LEASES TOTAL
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998................................. $ 764,902 $ 199,760 $ 565,142 $ 267,901 $ 833,043
1999................................. 759,510 199,760 559,750 263,526 823,276
2000................................. 616,620 199,760 416,860 215,401 632,261
2001................................. 417,921 169,000 248,921 175,521 424,442
2002................................. 382,300 169,000 213,300 73,407 286,707
2003-2007............................ 1,607,583 760,583 847,000 92,378 939,378
2008-2012............................ 150,000 -- 150,000 -- 150,000
2013-2017............................ 60,000 -- 60,000 -- 60,000
Later years.......................... 70,150 -- 70,150 -- 70,150
---------- ---------- ---------- ---------- ----------
Total minimum lease
payments................. $4,828,986 $1,697,863 $3,131,123 $1,088,134 $4,219,257
========== ========== ========== ==========
Less amount representing interest.......................................... 232,579
----------
Present value of minimum lease payments under capital leases (see Note
7)....................................................................... $ 855,555
==========
</TABLE>
Rental expenses charged to earnings are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Real estate......................................... $ 826,029 $ 923,442 $1,061,057
Less sublease rentals............................... (199,760) (202,760) (227,148)
Equipment........................................... 290,312 211,349 196,673
--------- --------- ----------
Total..................................... $ 916,581 $ 932,031 $1,030,582
========= ========= ==========
</TABLE>
12. EMPLOYEE BENEFITS
On March 1, 1994, WSMP established an employee stock purchase plan through
which employees, after meeting minimum eligibility requirements, may contribute
up to 10% of their base earnings toward the purchase of WSMP Common Stock. The
plan provides that WSMP will make matching contributions of 25% of the
employee's contribution. Participation in the plan is voluntary and all
contributions of WSMP are
F-16
<PAGE> 110
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
funded monthly and vest immediately. WSMP's contributions to the plan totaled
$12,569, $17,046 and $10,091 in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. WSMP also maintains a 401-k Retirement Plan for its employees. The
Plan provides that WSMP will make a matching contribution of up to 25% of an
employee's voluntary contribution, limited to the lesser of 8% of that
employee's annual compensation or $9,500 for fiscal 1997. WSMP's contributions
to this Plan were $77,132, $71,340 and $67,869 in fiscal 1997, fiscal 1996 and
fiscal 1995, respectively. WSMP also provides employee health insurance benefits
under a 501-c(9) trust arrangement. These benefits are partially self-funded by
WSMP. WSMP has $45,000 per claim and $1,000,000 annual aggregate stop loss
coverage on group medical claims with an insurance carrier. A third-party
administrator handles all claims. Company contributions to this plan were
$434,648, $466,116 and $388,488 in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. Certain officers of WSMP are trustees of the stock purchase plan,
the retirement plan and the employee health plan. WSMP also has two employee
stock option plans as described in Note 13.
13. EMPLOYEE STOCK OPTIONS
WSMP's 1987 Incentive Stock Option Plan provides for the issuance of up to
625,000 shares of WSMP Common Stock to key employees, including officers, of
WSMP. WSMP may grant Incentive Stock Options ("ISOs") or nonqualified stock
options to eligible employees.
WSMP's 1987 Special Stock Option Plan, as amended, provides for the
issuance of up to 625,000 shares of WSMP Common Stock to key management
employees, including officers of WSMP. All options granted under this Plan are
nonqualified stock options. During fiscal 1994, options for 100,000 shares were
repriced from $9.50 to the fair market value at the date of repricing.
All options must be granted at not less than 100% of the fair market value
of the WSMP Common Stock at the date of the grant and must be exercised no later
than ten years from the date of grant.
A summary of the changes in shares under option and the weighted-average
exercise prices for both Plans follows. The number of shares and exercise prices
give retroactive recognition of the five-for-four stock split, effected in the
form of a stock dividend declared in 1995.
<TABLE>
<CAPTION>
INCENTIVE STOCK SPECIAL STOCK
OPTION PLAN OPTION PLAN
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at February 25, 1994............................ 125,000 $2.90 562,500 $3.41
Cancelled............................................. (12,500) 2.90 -- --
Issued................................................ 196,875 4.82 -- --
-------- --------
Balance at February 24, 1995............................ 309,375 $4.12 562,500 $3.41
Cancelled............................................. (12,500) 2.90 -- --
Exercised............................................. (100,000) 2.90 -- --
-------- --------
Balance at February 23, 1996............................ 196,875 $4.82 562,500 $3.41
Cancelled............................................. (10,000) 5.20 -- --
Issued................................................ 50,000 5.88 50,000 5.88
Exercised............................................. (33,750) 4.31 (125,000) 4.60
-------- --------
Balance at February 28, 1997............................ 203,125 $5.14 487,500 $3.36
======== ========
Exercisable at February 28, 1997........................ 42,500 $5.20 487,500 $3.36
======== ========
</TABLE>
F-17
<PAGE> 111
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the range of exercise prices and weighted average remaining
life for options outstanding under each Plan at February 28, 1997 is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE SHARES REMAINING
PRICE OUTSTANDING LIFE
-------- ----------- ----------
<S> <C> <C> <C>
Special Stock Option Plan:.......................... $2.90 187,500 46 months
3.20 250,000 56 months
5.88 50,000 112 months
Incentive Stock Option Plan:........................ 4.00 37,500 87 months
5.20 115,625 96 months
5.88 50,000 112 months
</TABLE>
WSMP applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for stock-based
compensation relating to options granted in fiscal 1997 since the exercise price
of the option approximated the fair market value on the date of grant. No stock
options were granted in fiscal 1996. Had compensation for fiscal 1997 stock
options granted been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), WSMP's net earnings and earnings per common share amounts for fiscal 1997
would approximate the following pro forma amounts:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net Earnings................................................ $1,120,696 $987,172
Earnings per Common and Common Equivalent Share............. .36 .32
Earnings per Common Share -- Assuming Full Dilution......... .35 .31
</TABLE>
The fair value of each option granted during fiscal 1997 is estimated as
$3.90 on the date of grant using the Black-Scholes option pricing model with the
following assumptions: expected volatility of 44.2%; no expected dividend yield;
risk-free interest rate of 6.65%; and expected life of six years. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts.
14. OTHER INFORMATION
Accumulated amortization of intangible assets is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Excess of cost over fair value of net assets of businesses
acquired.................................................. $467,028 $432,892
</TABLE>
15. LINES OF BUSINESS
WSMP operates in three principal lines of business. Segment information is
presented as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant operations....... $26,454,848 30.1 $25,714,219 32.4 $28,895,738 30.7
Food processing............. 58,872,627 67.1 51,085,716 64.3 62,563,395 66.5
Restaurant franchising...... 2,682,732 3.1 2,856,284 3.6 2,868,199 3.0
----------- ----- ----------- ----- ----------- -----
88,010,207 100.3 79,656,219 100.3 94,327,332 100.2
Elimination of inter-segment
sales(1).................... (257,134) (.3) (217,009) (.3) (227,359) (.2)
----------- ----- ----------- ----- ----------- -----
$87,753,073 100.0 $79,439,210 100.0 $94,099,973 100.0
=========== ===== =========== ===== =========== =====
</TABLE>
F-18
<PAGE> 112
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating profit:
Restaurant operations....... $ 2,877,253 45.1 $ 1,063,137 29.2 $ 1,649,443 23.4
Food processing............. 1,845,188 28.9 778,407 21.4 4,110,751 58.4
Restaurant franchising...... 1,660,285 26.0 1,799,409 49.4 1,278,794 18.2
----------- ----- ----------- ----- ----------- -----
6,382,726 100.0 3,640,953 100.0 7,038,988 100.0
===== ===== =====
Corporate expenses.......... (4,757,205) (4,343,710) (4,794,321)
Other income................ 1,368,308 2,990 1,256,828
Interest expense............ (1,822,339) (2,011,567) (1,993,094)
----------- ----------- -----------
Earnings (loss) before
income taxes and
extraordinary item....... $ 1,171,490 $(2,711,334) $ 1,508,401
=========== =========== ===========
Identifiable assets:
Restaurant operations....... $12,421,474 28.8 $15,423,186 37.0 $18,115,517 38.8
Food processing............. 22,094,616 51.2 18,809,910 45.2 19,646,658 42.0
Restaurant franchising...... 611,816 1.4 608,775 1.5 688,049 1.5
Corporate................... 7,998,694 18.6 6,792,503 16.3 8,271,177 17.7
----------- ----- ----------- ----- ----------- -----
$43,126,600 100.0 $41,634,374 100.0 $46,721,401 100.0
=========== ===== =========== ===== =========== =====
Depreciation and amortization:
Restaurant operations....... $ 1,131,061 43.1 $ 1,228,662 45.3 $ 1,316,636 45.7
Food processing............. 1,259,365 48.0 1,256,931 46.3 1,314,001 45.7
Restaurant franchising...... 37,149 1.4 38,079 1.4 38,082 1.3
Corporate................... 196,915 7.5 191,599 7.0 209,905 7.3
----------- ----- ----------- ----- ----------- -----
$ 2,624,490 100.0 $ 2,715,271 100.0 $ 2,878,624 100.0
=========== ===== =========== ===== =========== =====
Capital expenditures:
Restaurant operations....... $ 2,850,664 61.8 $ 950,576 50.5 $ 574,272 47.5
Food processing............. 1,573,575 34.1 774,615 41.1 368,497 30.5
Restaurant franchising...... 50,550 4.2
Corporate................... 185,287 4.1 157,337 8.4 214,876 17.8
----------- ----- ----------- ----- ----------- -----
$ 4,609,526 100.0 $ 1,882,528 100.0 $ 1,208,195 100.0
=========== ===== =========== ===== =========== =====
</TABLE>
- ---------------
(1) Intersegment sales are recorded based on prevailing prices and relate solely
to the food processing segment.
During fiscal 1997, fiscal 1996 and fiscal 1995, a single customer of
WSMP's bakery products accounted for 61%, 57% and 63%, respectively, of the food
processing segment sales and 41%, 37% and 42%, respectively, of WSMP's total
operating revenues.
16. INVESTMENT IN AFFILIATES
During fiscal 1997, fiscal 1996 and fiscal 1995, WSMP maintained
investments in several companies which operate Prime Sirloin restaurants,
Sagebrush Steakhouse & Saloons, Mom 'n' Pop's Buffet & Bakery restaurants,
Western Steer Family Restaurants and Bennett's Smokehouse & Saloons. All of the
companies
F-19
<PAGE> 113
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are accounted for under the equity method. Names of these companies and
percentages of ownership are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OWNED PERCENTAGE OWNED PERCENTAGE OWNED
AT FEBRUARY 28, 1997 AT FEBRUARY 23, 1996 AT FEBRUARY 24, 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Georgia Buffet Restaurants, Inc.... 50% 50% 50%
Greenville Foods, Inc.............. -- 50% 50%
Knoxville Foods, Inc............... -- -- 50%
Primo Foods, Inc................... 50% 50% 50%
Sagebrush of Asheville, Inc........ -- -- 50%
Sagebrush of Rock Hill, Inc........ -- -- 50%
Spartanburg Foods, Inc............. -- 50% 50%
Starke Foods, Inc.................. 50% 50% 50%
</TABLE>
Summarized financial information for the above companies is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current Assets..................................... $ 300,576 $ 345,227 $ 476,187
Noncurrent Asset................................... 1,419,930 2,222,646 2,181,774
Current Liabilities................................ 597,738 1,664,067 1,559,115
Noncurrent Liabilities............................. 415,371 185,017 76,577
Operating Revenue.................................. 5,190,358 8,640,624 9,566,779
Gross Profit....................................... 3,076,669 5,000,389 5,686,828
Net Earnings (loss)................................ 53,469 (828,279) 173,298
</TABLE>
Dividends received from these companies totaled $91,000 and $143,500 in
fiscal 1996 and fiscal 1995, respectively. No dividends were received in fiscal
1997.
At the beginning of fiscal 1996, WSMP owned 50% of three corporations
(Knoxville Foods, Inc., Sagebrush of Asheville, Inc. and Sagebrush of Rock Hill,
Inc.) which operated Sagebrush Steakhouse and Saloon restaurants. In January
1996, a reorganization was effected for these corporations immediately prior to
an initial public offering of common stock by Sagebrush, Inc. As part of this
reorganization, WSMP exchanged to Sagebrush, Inc. its shares of common stock in
these three corporations for cash totaling $87,098 and 111,983 shares of
Sagebrush, Inc. common stock. These shares of stock are designated restricted
securities and their resale is subject to the conditions and limitations of Rule
144 adopted under the Securities Act of 1933. This transaction was accounted for
as a like-kind exchange and a gain of $59,648 was recognized based on the book
value of the equity investments in the three 50% owned corporations at the
transaction date, the total fair value of the stock and cash received and the
percentage of the total proceeds received in cash. The restricted shares of
common stock in Sagebrush, Inc. are shown separately on the face of the balance
sheet at February 23, 1996 as "Investment in restricted securities" and are
carried at cost, which represents the book value of the equity investment in the
three corporations at the transaction date, adjusted for the cash proceeds
received and the gain recognized on the transaction. These securities were sold
during fiscal 1997 (see Note 19).
17. COMMITMENTS AND CONTINGENCIES
On May 3, 1994, WSMP guaranteed a loan obligation of one of its franchisees
in an amount not to exceed $322,000. The loan is collateralized by certain
restaurant equipment purchased by the franchisee.
During fiscal 1995, WSMP was required to provide a secured letter of credit
in the amount of $500,000 to its insurance carrier for outstanding worker's
compensation and general liability claims. This letter of credit was secured by
$500,000 on deposit with the issuing financial institution. Since this deposit
was restricted, it was presented in other non-current assets at February 24,
1995. During fiscal 1996, WSMP gave the financial
F-20
<PAGE> 114
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
institution a security interest in a restaurant property with a total book value
of $517,360, in lieu of the $500,000 deposit.
18. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest..................................... $1,887,919 $2,006,154 $2,004,431
Income taxes................................. $ 414,666 $ 207,171 $ 673,500
</TABLE>
WSMP received accounts and notes receivable totaling $355,000, $1,198,392
and $385,537 from the sale of property, plant and equipment in fiscal 1997,
fiscal 1996 and fiscal 1995, respectively.
WSMP acquired machinery and equipment totaling $694,298 and $278,641
through capital leases during fiscal 1997 and fiscal 1996, respectively. In
fiscal 1997, WSMP purchased a restaurant property by exchanging land with a book
value of $260,236 and assuming a note payable in the amount of $527,695.
Accounts receivable from certain franchisees totaling $84,762, $46,173 and
$110,156 in fiscal 1997, fiscal 1996 and fiscal 1995, respectively, were
converted into notes receivable.
In fiscal 1996, WSMP exchanged shares representing a 50% ownership interest
in three unconsolidated subsidiaries which operate Sagebrush Steakhouse and
Saloon restaurants to Sagebrush, Inc. for $87,098 and 111,983 shares of common
stock of Sagebrush, Inc. (see Note 16). In fiscal 1997, WSMP sold these shares
of stock and received cash and a note receivable totaling $78,388 and $705,493,
respectively (see Note 19).
WSMP transferred deposits to property, plant and equipment totaling $14,346
in fiscal 1995.
In fiscal 1995, WSMP executed a note payable and obtained a note receivable
for $92,165 relating to the settlement of certain lawsuits with two franchisees.
19. TRANSACTIONS WITH RELATED PARTIES
Related party transactions during fiscal 1997, fiscal 1996 and fiscal 1995
arose in connection with the following relationships:
Certain current and past officers, directors and principal shareholders of
WSMP have ownership interests in franchisee companies as well as an insurance
company, a marketing services company and a travel agency which transact
business with WSMP. In addition, immediate family members of a director and
principal shareholder have ownership interests in three companies from which
WSMP purchases restaurant equipment, furnishings and supplies.
Under a contract with a management services company owned by certain
officers and directors, WSMP receives general management services, which
include, among other things, the review and supervision of financing, cost
analysis services and review of franchise relationships. Management fees paid
under this contract are in lieu of salary compensation for certain of WSMP's
senior executives. Effective April 1, 1996, this contract was renewed for a
three-year period at an annual maximum management fee of $1,500,000, payable
quarterly in advance.
WSMP has mutual leasing agreements with a partnership and corporations
which include a principal shareholder. During fiscal 1995, a restaurant property
was sold to a corporation which includes this principal shareholder at a price
of $624,000, and WSMP recognized a gain on the sale totaling $128,000. During
fiscal 1997, a second restaurant property was sold to a corporation which
includes this shareholder at a price of $785,000, and WSMP recognized a gain on
the sale totaling $252,000.
F-21
<PAGE> 115
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1997, WSMP sold a restaurant property to an individual who is
an executive officer and principal shareholder of WSMP at a price of $150,000,
giving WSMP a gain of $103,000.
During fiscal 1996, WSMP advanced $43,938 to the employee stock purchase
plan to allow the plan to purchase 9,500 shares of WSMP common stock from an
outside investor. This advance was repaid in fiscal 1997 as the plan received
contributions and the shares were allocated to participant accounts.
During fiscal 1997, WSMP sold certain restricted equity securities to a
corporation which is owned by two principal shareholders and executive officers
of WSMP for cash totaling $78,388 and an 8.5% two-year promissory note in the
amount of $705,493. The promissory note is supported by personal guarantees
received from the two principal shareholders and executive officers.
During fiscal 1996, WSMP sold certain secured promissory notes without
recourse to an individual who is an executive officer and principal shareholder
of WSMP. Most of the notes were secured by purchase money mortgages and were
generated through various sales of real estate. The notes, which had face values
totaling $1,440,000, were sold without recourse and WSMP received cash proceeds
from the sale totaling $1,080,000.
Litigation involving an unrelated party holding a security interest in the
trade receivables of a bankrupt company, which was one of WSMP's significant
customers and vendors, was settled in May 1993. Under the terms of this
settlement, WSMP agreed to pay $1,200,000, comprised of an initial payment of
$230,000 in 1993, four annual payments of $180,000 each on April 1 beginning in
1994 and a final payment of $250,000 on April 1, 1998. Interest on the unpaid
principal balance is payable quarterly at 4.5%. Under the terms of a guaranty
and hold harmless agreement with WSMP's chief executive officer, who was a
former principal of the bankrupt company, WSMP obtained unsecured promissory
notes from such officer in amounts sufficient to reimburse WSMP for all payments
of principal and interest required by the settlement agreement and to liquidate
the net receivable and accrued interest thereon arising from the initial set-off
discussed above. The terms of the promissory notes correspond to the payment
terms stipulated by the settlement agreement. WSMP's financial statements as of
February 28, 1997 reflect both the remaining settlement liability of $430,000
and the related receivable.
WSMP's related party transactions are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Franchise, royalty and other fees from related
party franchisee companies....................... $ 923,000 $1,079,000 $1,044,000
Management services expense........................ 1,500,000 1,500,000 1,500,000
Purchases of restaurant equipment, furnishings and
construction..................................... 416,000 325,000 386,000
Purchases of other services and supplies........... 569,000 872,000 632,000
Casualty insurance premiums........................ 1,113,000 1,334,000 1,066,000
Sales of restaurant properties..................... 935,000 -- 624,000
Sale of restricted equity securities............... 784,000 -- --
Sale of notes receivable........................... -- 1,080,000 --
Income from leased properties...................... 52,000 90,000 90,000
Leasing of property................................ 206,000 224,000 334,000
</TABLE>
F-22
<PAGE> 116
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Related party accounts receivable arise in the ordinary course of business
and relate to unpaid franchise, royalty and other fees as well as short-term
advances to 50%-owned affiliates. Notes receivable from related parties relate
primarily to long-term advances to 50%-owned affiliates, notes generated from
the sales of assets to related parties and the settlement notes from WSMP's
chief executive officer. Related party receivables are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accounts receivable......................................... $ 254,744 $ 484,951
Notes receivable (interest rates ranging from 4.5% to 12%,
payable over 1 to 5 years)................................ $1,526,761 $1,288,273
</TABLE>
20. CAPITAL STOCK
On February 22, 1995, the Board of Directors announced a five-for-four
stock split effected in the form of a 25% stock dividend. In connection
therewith, 531,849 shares of WSMP Common Stock and $1,778 for fractional shares
were distributed on April 11, 1995 to shareholders of record as of March 15,
1995.
During fiscal 1995, WSMP acquired and retired 5,000 shares of WSMP common
stock at a cost of $35,625.
WSMP is authorized to issue 2,500,000 shares of preferred stock with a par
value of ten cents per share in one or more series. All rights and preferences
of each series are to be established by WSMP prior to issuance. There are no
issues of this class of stock outstanding at February 28, 1997.
21. PURCHASE OF RESTAURANTS
On March 1, 1997, WSMP acquired fourteen franchised restaurants from
various corporations predominantly owned by a former executive officer of WSMP
for a total purchase price of $3,767,500 payable as follows: $500 in cash;
$309,500 in assumed current liabilities; $645,000 in assumed long-term
liabilities; $2,012,500 in WSMP Common Stock; and a two-year 5% promissory note
in the amount of $800,000. As part of this transaction, 223,611 shares of WSMP
Common Stock were issued to the selling corporations.
In addition, existing lease agreements for eleven of the restaurant
properties were assigned to WSMP, and WSMP signed new lease agreements on the
remaining three properties. All of these leases are classified as operating
leases, and future minimum payments are as follows: $864,000 in fiscal 1998;
$777,000 in fiscal 1999; $586,000 in fiscal 2000; $528,000 in fiscal 2001;
$476,000 in fiscal 2002; and $1,486,000 subsequent to fiscal 2002.
Also as part of this transaction, the former executive officer, who was
also WSMP's single largest franchisee, entered into a fifteen-year
non-competition agreement with WSMP in exchange for 98,750 shares of WSMP common
stock. These shares are restricted securities and their resale is subject to
certain conditions.
22. INTERIM PERIOD INFORMATION (UNAUDITED)
The summary of inventories, by major classification, at November 7, 1997
follows:
<TABLE>
<S> <C>
Hams in curing process...................................... $1,248,506
Other food (includes cured hams)............................ 5,063,877
Supplies.................................................... 1,504,025
----------
Totals............................................ $7,816,408
==========
</TABLE>
F-23
<PAGE> 117
WSMP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), was issued to simplify the standards for
computing earnings per share ("EPS") and make them comparable to international
EPS standards. SFAS 128 is effective for periods ending after December 15, 1997
and cannot be adopted at an earlier date. SFAS 128 will require dual
presentation of basic and diluted EPS on the face of the statement of current
earnings and a reconciliation of the components of the basic and diluted EPS
calculations in the notes to the financial statements. Basic EPS excludes
dilution and is computed by dividing net earnings by the weighted average number
of common shares outstanding for the period. Diluted EPS is similar to fully
diluted EPS pursuant to Accounting Principles Board ("APB") Opinion No. 15. The
Company will adopt SFAS 128 in the quarter and year ending February 27, 1998.
Had the new standard been applied for the 36 weeks ended November 7, 1997,
diluted EPS would have been the same as primary EPS under APB Opinion No. 15.
Basic EPS would have been as follows:
<TABLE>
<CAPTION>
36 WEEKS ENDED
-------------------------
NOVEMBER 7, NOVEMBER 1,
1997 1996
----------- -----------
<S> <C> <C>
Basic EPS................................................... .47 .15
========= =========
Weighted average number of common shares outstanding........ 3,242,056 2,760,338
========= =========
</TABLE>
23. PROPOSED MERGER (UNAUDITED)
On November 14, 1997, WSMP and Sagebrush, Inc. executed an Agreement and
Plan of Merger (the "Agreement") whereby a newly-organized subsidiary of WSMP
will merge with and into Sagebrush, Inc. Each outstanding share of Sagebrush
common stock will be converted into the right to receive 0.3214 of a share of
WSMP common stock, subject to adjustment as described below (the "Exchange
Ratio"). If the average WSMP common stock closing price is greater than $23.34,
the Exchange Ratio will be adjusted to become $7.50 divided by the average WSMP
common stock closing price as defined in the Agreement. If the average WSMP
closing price is less than $21.78, the Exchange Ratio will be adjusted to become
$7.00 divided by the average WSMP common stock closing price. This transaction
is expected to be consummated in January 1998 and accounted for as a pooling of
interests.
F-24
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Sagebrush, Inc.:
We have audited the accompanying consolidated balance sheets of Sagebrush,
Inc. and subsidiaries as of January 3, 1997 and December 29, 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three fiscal years in the period ended January 3, 1997. As
discussed in Note 1, the financial statements as of December 29, 1995 and for
each of the two fiscal years in the period then ended include the combined
accounts of several commonly owned corporations which became wholly-owned
subsidiaries of Sagebrush, Inc. in January, 1996 in connection with its initial
public offering of its common stock. These financial statements are the
responsibility of Sagebrush's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sagebrush, Inc. and subsidiaries at January
3, 1997 and December 29, 1995, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended January 3,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
February 27, 1997
F-25
<PAGE> 119
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997, DECEMBER 29, 1995 AND SEPTEMBER 12, 1997
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 29, SEPTEMBER 12,
1997 1995 1997
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2).................... $ 1,570,515 $ 2,145,809 $ 1,718,301
Related party receivables (Note 6).................... 24,175 127,423 21,845
Other receivables..................................... 250,761 58,870 149,797
Inventories (Note 2).................................. 495,848 411,675 563,872
Pre-opening costs, net (Note 2)....................... 509,210 131,434 537,988
Prepaid and other current assets (Note 1)............. 80,613 370,390 53,198
----------- ----------- -----------
Total current assets.......................... 2,931,122 3,245,601 3,045,001
Property and equipment, net (Notes 2 and 3)............. 14,262,732 7,562,432 18,650,315
Other assets............................................ 11,293 12,266 10,080
----------- ----------- -----------
Total assets.................................. $17,205,147 $10,820,299 $21,705,396
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank (Note 4)......................... $ 460,000 $ -- $ 1,393,750
Current portion of long term debt..................... -- -- 181,760
Accounts payable (including $115,094 at January 3,
1997 and $98,724 at December 29, 1995 to related
parties)........................................... 1,688,867 1,220,206 2,187,073
Accrued salaries...................................... 283,467 414,625 575,260
Taxes other than income............................... 313,010 188,338 431,820
Other accrued liabilities............................. 462,807 463,893 622,967
----------- ----------- -----------
Total current liabilities..................... 3,208,151 2,287,062 5,392,630
Long term debt (Notes 4 and 6) (including $4,822 at
December 29, 1995 to related parties)................. -- 2,187,909 2,320,287
Deferred income taxes (Note 7).......................... 208,471 549 245,971
----------- ----------- -----------
Total liabilities............................. 3,416,622 4,475,520 7,958,888
----------- ----------- -----------
Shareholders' equity (Note 1):
Common stock ($1.00 par value; 50,000,000 shares
authorized; 6,300,000 shares issued and outstanding
at January 3, 1997)................................ 6,300,000 -- 5,925,000
Common stock of combined companies.................... -- 535,202 --
Additional paid-in capital............................ 7,369,068 7,261,164 5,760,318
Retained earnings (deficit)........................... 119,457 (1,451,587) 2,061,190
----------- ----------- -----------
Total shareholders' equity.................... 13,788,525 6,344,779 13,746,508
----------- ----------- -----------
Total liabilities and shareholders' equity.... $17,205,147 $10,820,299 $21,705,396
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 120
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
AND THE 36 WEEKS ENDED SEPTEMBER 12, 1997 AND SEPTEMBER 6, 1996
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 36 WEEKS ENDED
----------------------------------------- ----------------------------
JANUARY 3, DECEMBER 29, DECEMBER 30, SEPTEMBER 12, SEPTEMBER 6,
1997 1995 1994 1997 1996
----------- ------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES -- Restaurant sales.... $42,110,051 $34,019,810 $28,664,211 $34,458,657 $26,815,083
OPERATING COSTS AND EXPENSES
(Notes 5 and 6)
Cost of restaurant sales...... 15,546,906 12,732,990 10,888,664 12,778,759 9,778,589
Labor costs................... 11,422,845 8,953,428 7,519,222 9,534,052 7,219,775
Other operating expenses
(including $2,090,560,
$1,926,178 and $990,979 for
fiscal years 1996, 1995 and
1994, respectively, paid to
related parties)........... 6,133,256 5,233,973 4,055,921 4,917,297 4,064,498
General and administrative
expenses................... 3,560,928 2,373,978 2,014,452 2,516,034 2,257,372
Depreciation.................. 975,827 760,881 526,328 918,312 637,123
Amortization (principally of
pre-opening costs)......... 435,238 313,780 352,040 520,878 196,159
Store closing costs........... 167,890 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating costs
and expenses........ 38,242,890 30,369,030 25,356,627 31,185,332 24,153,516
----------- ----------- ----------- ----------- -----------
Operating income................ 3,867,161 3,650,780 3,307,584 3,273,325 2,661,567
Other income.................... 84,150 101,175 84,957 47,498 60,400
Interest income................. 128,826 -- -- 1,288 104,892
Interest expense................ (45,609) (150,980) (74,915) (129,799) (37,413)
----------- ----------- ----------- ----------- -----------
Income before income taxes (Note
7)............................ 4,034,528 3,600,975 3,317,626 3,192,312 2,789,446
Income tax provision............ (1,575,296) (76,915) (163,052) (1,250,579) (1,059,989)
----------- ----------- ----------- ----------- -----------
Net income...................... $ 2,459,232 $ 3,524,060 $ 3,154,574 $ 1,941,733 $ 1,729,457
=========== =========== =========== =========== ===========
Net income per share............ $ 0.39 -- -- $ 0.32 $ 0.28
=========== =========== ===========
Weighted average shares
outstanding................... 6,288,949 -- -- 6,143,865 6,283,730
=========== =========== ===========
Pro forma -- unaudited (Note 11)
Historical income before
income taxes............... $ 3,600,975
Pro forma adjustment for
compensation............... (500,000)
-----------
Pro forma income before income
taxes...................... 3,100,975
Pro forma income taxes........ (1,209,380)
-----------
Pro forma net income.......... $ 1,891,595
===========
Pro forma net income per
share...................... $ 0.35
===========
Pro forma weighted average
shares outstanding......... 5,462,748
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 121
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
AND THE 36 WEEKS ENDED SEPTEMBER 12, 1997
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.............. $ 210,200 $ 3,572,386 $ (604,168) $ 3,178,418
Issuance of common stock................ 245,000 2,205,000 -- 2,450,000
Capital contributions................... -- 294,468 -- 294,468
Net income.............................. -- -- 3,154,574 3,154,574
S Corporation distributions and
dividends paid....................... -- -- (3,563,663) (3,563,663)
---------- ----------- ----------- -----------
BALANCE AT DECEMBER 30, 1994.............. 455,200 6,071,854 (1,013,257) 5,513,797
Issuance of common stock................ 80,002 925,000 -- 1,005,002
Capital contributions................... -- 264,310 -- 264,310
Net income.............................. -- -- 3,524,060 3,524,060
S Corporation distributions and
dividends paid....................... -- -- (3,962,390) (3,962,390)
---------- ----------- ----------- -----------
BALANCE AT DECEMBER 29, 1995.............. 535,202 7,261,164 (1,451,587) 6,344,779
Payments to and exchanges with
shareholders related to
reorganization....................... 3,964,798 (9,117,298) -- (5,152,500)
Net proceeds of public offering......... 1,800,000 9,225,202 11,025,202
Net income.............................. -- -- 2,459,232 2,459,232
S Corporation distributions and
dividends paid....................... -- -- (888,188) (888,188)
---------- ----------- ----------- -----------
BALANCE AT JANUARY 3, 1997................ 6,300,000 7,369,068 119,457 13,788,525
Share repurchase (Unaudited)............ (375,000) (1,608,750) (1,983,750)
Net income (Unaudited).................. -- -- 1,941,733 1,941,733
---------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 12, 1997
(Unaudited)............................. $5,925,000 $ 5,760,318 $ 2,061,190 $13,746,508
========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 122
SAGEBRUSH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
AND THE 36 WEEKS ENDED SEPTEMBER 12, 1997 AND SEPTEMBER 6, 1996
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 36 WEEKS ENDED
----------------------------------------- ----------------------------
JANUARY 3, DECEMBER 29, DECEMBER 30, SEPTEMBER 12, SEPTEMBER 6,
1997 1995 1994 1997 1996
----------- ------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 2,459,232 $ 3,524,060 $ 3,154,574 $ 1,941,733 $ 1,729,457
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 975,827 760,881 526,328 918,312 637,123
Amortization (principally of pre-opening
costs).................................. 435,238 313,780 352,040 520,877 196,159
Changes in operating assets and
liabilities providing (using) cash:
Receivables............................. (88,643) 52,925 (83,446) 103,294 (105,565)
Inventories............................. (84,173) (36,385) (156,814) (68,024) (54,789)
Pre-opening costs....................... (813,014) (225,845) (442,562) (549,656) (487,216)
Prepaid and other assets................ (79,159) (372,064) 52,873 28,629 (54,252)
Deferred income tax..................... 207,922 (21,961) 1,804 37,500 --
Trade accounts payable and other accrued
liabilities........................... 461,809 474,946 462,563 1,068,969 647,878
----------- ----------- ----------- ----------- -----------
Total adjustments....................... 1,015,807 946,277 712,786 2,059,901 779,338
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities........................ 3,475,039 4,470,337 3,867,360 4,001,634 2,508,795
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (including $931,879,
$287,368, and $397,438 in fiscal years
1996, 1995 and 1994, respectively, paid
to related parties)..................... (7,676,127) (2,311,057) (2,479,601) (5,305,895) (4,018,090)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt............ 460,000 1,329,629 262,000 3,483,750 --
Repayment of debt......................... (2,187,909) (529,163) (202,588) (47,953) (2,187,909)
Repurchase of common stock................ -- -- -- (1,983,750) --
Purchase of assets related to
reorganization.......................... (1,652,500) -- -- -- (1,652,500)
Cash paid to shareholders related to
reorganization.......................... (3,500,000) -- -- -- (3,500,000)
S Corporation distributions and dividends
paid.................................... (888,188) (3,962,390) (3,563,663) -- (888,188)
Proceeds of issuance of common stock...... 11,394,391 -- -- -- 11,394,391
Capital contributions..................... -- 1,506,312 2,725,468 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities.............. 3,625,794 (1,655,612) (778,783) 1,452,047 3,165,794
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................... (575,294) 503,668 608,976 147,786 1,656,499
Cash and cash equivalents at beginning of
period.................................... 2,145,809 1,642,141 1,033,165 1,570,515 2,145,809
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ 1,570,515 $ 2,145,809 $ 1,642,141 $ 1,718,301 $ 3,802,308
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest.................... $ 45,609 $ 147,810 $ 74,915 $ 129,799 $ 37,149
=========== =========== =========== =========== ===========
Cash paid for income taxes................ $ 1,496,642 $ 132,088 $ 176,489 $ 861,776 $ 655,442
=========== =========== =========== =========== ===========
Supplemental schedule of noncash investing
and financing activities:
Sagebrush issued common stock in exchange
for notes receivable of $27,000 and
$264,000 in fiscal 1995 and 1994,
respectively.
Sagebrush acquired land in fiscal 1994 in
exchange for cash of $85,000 and a note
payable of $300,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 123
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
1. BASIS OF PRESENTATION AND INITIAL PUBLIC OFFERING OF COMMON STOCK
The consolidated financial statements as of and for the year ended January
3, 1997 ("fiscal 1996") include the accounts of Sagebrush, Inc. and its
subsidiaries, all of which are wholly-owned. The financial statements as of and
for the years ended December 29, 1995 ("fiscal 1995") and December 30, 1994
("fiscal 1994") represent combined financial statements of Sagebrush, Inc. and
affiliated companies prior to the reorganization discussed below. All
intercompany accounts and transactions have been eliminated in the
consolidated/combined financial statements.
The combined financial statements for fiscal 1995 and 1994 include the
accounts of Sagebrush, Inc. and 22 corporations operating restaurants (the
"Restaurant Corporations") under the name of "Sagebrush Steakhouse and Saloon."
In addition, to the extent considered attributable to "Sagebrush Steakhouse and
Saloon" restaurants, the combined financial statements include the accounts of
Connor Management, Inc. ("Connor Management"), which provided development,
management and administrative services to the Restaurant Corporations and to
certain other corporations operating other restaurants. The Restaurant
Corporations and Connor Management are collectively referred to as the "Related
Corporations." In connection with Sagebrush's initial public offering in January
1996, a reorganization was effected which resulted in the Related Corporations
becoming wholly-owned subsidiaries of, or transferring all of their assets to
Sagebrush, Inc., with shareholders of such corporations becoming shareholders of
Sagebrush, Inc. The combination was accounted for at historical cost in a manner
similar to a pooling of interests due to the entities being under common
management and control and the absence of significant monetary consideration to
the shareholders. The Restaurant Corporations and the applicable operations and
accounts of Connor Management, Inc., as well as Sagebrush, Inc., are
collectively referred to herein as "Sagebrush."
This reorganization was effected immediately prior to the initial public
offering of common stock of Sagebrush in January 1996. In conjunction with the
reorganization of the Related Corporations, Sagebrush completed the initial
public offering of its common stock, selling 1,700,000 shares in January 1996
and 100,000 shares in February 1996 upon the underwriter's exercise of its
over-allotment option. Net proceeds from the offering were $11,025,000. A
portion of the net proceeds were used to repay corporate indebtedness (see Note
4) and to fund cash payments to or for the benefit of current shareholders in
connection with the reorganization. The remaining portion of the net proceeds
has been used to finance the development of additional restaurants and for other
general corporate purposes.
In connection with the reorganization, the shareholders of the Related
Corporations (other than those formed to operate the Gatlinburg, Kernersville
and Gaffney restaurants) contributed their capital stock in these corporations
to Sagebrush, Inc. for an aggregate of 4,500,000 shares of Sagebrush, Inc.
common stock and cash of $3.5 million. As a result of the reorganization,
shareholders of these corporations became the shareholders of Sagebrush, Inc.,
owning all 4,500,000 shares of its common stock outstanding immediately prior to
its initial public offering. Proceeds of the initial public offering were also
used to purchase the assets of the Gatlinburg, Kernersville and Gaffney
restaurants for a total consideration of approximately $1.7 million, which
represents the historical cost of such assets. The accounts of the Gatlinburg,
Kernersville and Gaffney restaurants, opened in April, June and December of
1995, respectively, are included in the combined financial statements as of and
for the year ended December 29, 1995. In connection with the reorganization and
the completion of the public offering, the following structural and
organizational changes were effected: (i) the Related Corporations formerly
operating as S Corporations became subject to corporate income taxation as C
Corporations and (ii) salaries payable to certain executive officers were
adjusted to more representative levels as a result of the termination of the S
Corporation elections and the elimination of the related distributions.
Costs associated with the public offering were offset against proceeds from
the sale of stock. Such costs incurred prior to December 29, 1995 totaled
$369,000 and have been included in prepaid and other current assets on the
balance sheet as of that date.
F-30
<PAGE> 124
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1996, in order to streamline Sagebrush's operations and
organizational structure, Sagebrush, Inc. caused, among other things, (a) the
assets and liabilities of the North Carolina Restaurant Corporations to be
transferred in liquidation to a North Carolina limited liability company, (b)
the assets and liabilities of the South Carolina Restaurant Corporations to be
transferred in liquidation to a South Carolina limited liability company, (c)
the assets and liabilities of the Tennessee Restaurant Corporations to be
transferred to a Delaware limited partnership, and (d) Sagebrush of Virginia,
Inc. (which owned and operated all of Sagebrush's Virginia restaurants) and
Connor Management to be liquidated into Sagebrush, Inc.
Certain information concerning the corporations included in the combined
financial statements follows:
<TABLE>
<CAPTION>
COMMON STOCK OF
COMBINED COMPANIES
SHARES ISSUED
AS OF
COMMENCEMENT DECEMBER 29,
ENTITY OF OPERATIONS 1995
- ------ ------------- ------------------
<S> <C> <C>
Sagebrush, Inc.................................... 2
Connor Management, Inc............................ 1,000
Tumbleweed, Inc................................... Oct 1990 100
Tumbleweed of Pigeon Forge, Inc................... Sep 1991 10,000
Tumbleweed of Statesville, Inc.................... Oct 1991 100
Oak Ridge Foods, Inc.............................. Nov 1991 10,000
Knoxville Foods, Inc.............................. Feb 1992 1,000
Sagebrush of Asheville, Inc....................... Apr 1992 1,000
Sagebrush of Boone, Inc........................... Jun 1992 1,000
Viewmont Foods, Inc............................... Jul 1992 1,000
Sagebrush of Rock Hill, Inc....................... Dec 1992 30,000
Kingsport Foods, Inc.............................. Feb 1993 10,000
Sagebrush of Morganton, Inc....................... Mar 1993 35,000
Sagebrush of Winston, Inc......................... Sep 1993 35,000
Sagebrush of Clemmons, Inc........................ Dec 1993 40,000
Sagebrush of Waynesville, Inc..................... Jan 1994 35,000
Sagebrush of Brevard, Inc......................... Mar 1994 40,000
Sagebrush of Sevierville, Inc..................... May 1994 35,000
Sagebrush of Arden, Inc........................... Aug 1994 40,000
Sagebrush of Wilkesboro, Inc...................... Sep 1994 40,000
Sagebrush of Monroe, Inc.......................... Dec 1994 40,000
Gatlinburg Foods, Inc............................. Apr 1995 40,000
Forsyth Land Company.............................. Jun 1995 50,000
Sagebrush of Gaffney, Inc......................... Dec 1995 40,000
-------
Total................................... 535,202
=======
</TABLE>
All shares are recorded at a par or stated value of $1.00.
At December 29, 1995, the Related Corporations had varying percentages of
common ownership with five individuals and one corporation (and its
subsidiaries) having direct and indirect ownership interest in all of the
Related Corporations in amounts greater than 50%.
In November 1995, Sagebrush amended and restated its articles of
incorporation to authorize the issuance of up to 50,000,000 shares of common
stock and 10,000,000 shares of preferred stock in one or more series, with such
preferences, limitations and relative rights as will be determined by the Board
of Directors at the time of issuance. No shares of preferred stock have been
issued.
F-31
<PAGE> 125
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
Sagebrush's fiscal year ends on the Friday nearest December 31. Fiscal 1996
includes 53 weeks, fiscal 1995 and fiscal 1994 include 52 weeks. Quarterly
results are presented based on 12, 12, 12 and 16 or 17 week quarters.
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.
Cash and Cash Equivalents
Sagebrush considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories, representing food items and supplies, are stated at the lower
of cost (first-in, first-out) or market.
Pre-opening Costs
Labor costs and costs of hiring and training personnel and certain other
direct costs related to opening new restaurants are capitalized until the
restaurant is opened and then amortized over a twelve month period.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs which do not significantly extend the useful lives of assets are charged
to earnings; additions, betterments and interest costs incurred during
construction are capitalized. Gains and losses on dispositions are charged or
credited to operations. Depreciation of property and equipment is provided
primarily over the estimated useful lives of the respective assets on a
straight-line basis. Generally, the depreciable lives are the shorter of 15
years or the term of the related land leases for buildings, 15 years for land
improvements, and five to seven years for furniture and equipment. Leasehold
improvements are amortized over the shorter of 15 years or the maximum term of
the related lease.
Effective January 1, 1996, Sagebrush adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Sagebrush has
evaluated the carrying values of its long-lived assets in operations based on
the criteria set forth in this statement and has determined that no writedown
for impairment is necessary as of January 3, 1997.
Costs and Expenses
The principal costs and expenses of Sagebrush's operations include (i) cost
of restaurant sales, which consists principally of food, beverage and supply
costs, (ii) labor costs, which consist primarily of wages for
F-32
<PAGE> 126
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
wait staff and food preparers, (iii) other operating expenses, which principally
consist of occupancy costs such as rent, utilities, building maintenance,
insurance and taxes, as well as equipment rentals and repairs, bank transaction
charges and miscellaneous restaurant expenses, and (iv) general and
administrative expenses, consisting of wages for management, supervisory and
other corporate personnel and other personnel costs, costs of advertising and
promotions and other expenses.
Advertising
Sagebrush expenses the production cost of advertising as incurred.
Advertising expense was $619,000 in fiscal 1996, $515,000 in fiscal 1995 and
$310,000 in fiscal 1994.
Income Taxes
Prior to fiscal 1996, nineteen of the Restaurant Corporations and Connor
Management were S Corporations for purposes of the Internal Revenue Code. These
S Corporations were exempt from federal and state income taxes, and applicable
taxable income or loss was allocated to the shareholders. The remaining three
Restaurant Corporations, all of which began operations in 1992, were C
Corporations. For the C Corporations and Sagebrush, Inc., income taxes were
provided for temporary differences between the tax and financial accounting
bases of assets and liabilities using the asset and liability method. The tax
effects of such differences are reflected in the balance sheet using the enacted
tax rates expected to apply in the period in which the differences reverse (See
Note 7). Beginning in fiscal 1996, all of the former S Corporations converted to
C Corporations and income taxes are provided using the asset and liability
method discussed above.
Fair Value of Financial Instruments
The carrying amounts of Sagebrush's financial instruments approximate their
fair values due to short terms to maturity (including debt which was repaid in
January 1996 from the proceeds of the public offering).
Earnings Per Share
Earnings per share are calculated on the weighted average shares of common
stock and dilutive common stock equivalents.
Interim Financial Information
The accompanying unaudited financial information for the 36 weeks ended
September 12, 1997 and September 6, 1996 has been prepared on substantially the
same basis as the audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information set forth therein. The results of
interim periods are not necessarily indicative of results to be expected for the
entire fiscal year.
F-33
<PAGE> 127
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
The major components of property and equipment are as follows:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 29,
1997 1995
----------- ------------
<S> <C> <C>
Land.................................................... $ 2,329,338 $ 385,943
Land improvements....................................... 402,050 210,137
Buildings............................................... 3,392,287 1,746,681
Leasehold improvements.................................. 4,739,772 3,530,624
Machinery and equipment................................. 3,706,605 2,593,290
Furniture and fixtures.................................. 1,785,906 1,136,240
Construction in progress................................ 852,154 --
----------- ----------
Total Cost.............................................. 17,208,112 9,602,915
Less accumulated depreciation........................... 2,945,380 2,040,483
----------- ----------
Property and equipment, net............................. $14,262,732 $7,562,432
=========== ==========
</TABLE>
4. FINANCING ARRANGEMENTS
During fiscal 1996, Sagebrush had a commitment from a commercial bank for a
revolving credit facility providing for borrowings of up to $6.0 million (with a
participation by another bank for advances over $3.0 million). Advances under
the line were unsecured and limited to short-term working capital purposes. The
facility expired on January 31, 1997.
Borrowings under this line of credit as of January 3, 1997 totaled
$460,000, which was also the maximum amount outstanding during fiscal 1996. The
average amount outstanding during fiscal 1996 was $102,426. Both the interest
rate at January 3, 1997 and the weighted average rate for fiscal 1996 were
8.25%.
In January 1997, Sagebrush obtained a commitment from a commercial bank for
a revolving credit facility providing for borrowings of up to $3.0 million.
Advances under the line will be unsecured and limited to short-term working
capital purposes. The facility will expire on January 31, 1998 and the interest
rate for borrowings will be the bank's prime rate.
All long-term debt existing at December 29, 1995, was paid off at face
value subsequent to December 29, 1995 using proceeds from the public offering of
common stock. Accordingly, at December 29, 1995, current maturities of long-term
debt of $907,002 were classified as long-term debt due to Sagebrush's intention
and ability to refinance such debt with equity securities.
Debt with originally scheduled maturities as of December 29, 1995 was as
follows:
<TABLE>
<CAPTION>
INSTALLMENTS FINAL DECEMBER 29,
PAYEE PAYABLE RATE MATURITY 1995
- ----- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C>
Bank.................................. Monthly Prime + 1% 2004 $ 381,468
Monthly Prime - 1% 2006 273,309
Monthly Prime + 1% 1995 29,606
Monthly Prime + 1% 1997 30,522
Monthly Prime + .5% 1997 147,134
Monthly Prime + .5% 1996 643,314
Monthly 9% 2000 389,646
Related party......................... Monthly Prime + 1% 1996 4,822
Other................................. Monthly 8% 1999 288,088
----------
Total....................... $2,187,909
==========
</TABLE>
F-34
<PAGE> 128
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The applicable prime rate at December 29, 1995 was 8.5%.
5. LEASED PROPERTIES
Certain premises occupied by Sagebrush are under operating leases with
terms expiring from 1997 through 2012. Two of the restaurants are in buildings
owned by Sagebrush and located on land that is leased; Sagebrush owns both the
building and land for four of the restaurants; the remaining restaurant
buildings and land are leased. Most of the leases are with related parties (Note
6).
The leases have remaining renewal clauses, exercisable at the option of the
lessee, of one to 15 years, some of which provide for increased rents. Certain
of the leases are for equipment as well as for premises. In addition, certain
leases contain provisions providing for contingent rentals based on a percentage
of gross sales or for scheduled increases in base rents.
Future minimum rental payments required under operating leases are
summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1997........................................................ $1,396,191
1998........................................................ 990,378
1999........................................................ 968,603
2000........................................................ 879,890
2001........................................................ 776,290
Thereafter.................................................. 3,264,883
----------
Total............................................. $8,276,235
==========
</TABLE>
Rental expense charged to operations was $1,663,579, $1,434,154 and
$1,085,628 (which includes contingent rentals of $197,760, $162,915 and $59,034)
in fiscal 1996, 1995 and 1994, respectively.
6. TRANSACTIONS WITH RELATED PARTIES
Sagebrush has transactions, in the normal course of business, with certain
related individuals and with certain corporations in which Sagebrush's principal
shareholders have a substantial direct or indirect ownership interest. These
transactions are summarized below:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 29, DECEMBER 30,
1997 1995 1994
---------- ------------ ------------
<S> <C> <C> <C>
During the Year:
Rents paid (Note 5)........................... $1,133,875 $1,002,283 $792,463
Equipment and supply purchases................ 1,083,281 492,125 397,438
Insurance expenses............................ 708,780 685,584 664,851
Store decorating costs paid................... 96,503 37,399 55,294
Fees received for accounting services provided
to other restaurants........................ 80,950 83,025 73,625
End of Year:
Receivables from shareholders (paid
subsequently)............................... -- 27,000 --
Other related party receivables............... 24,175 100,423 --
Accounts payable.............................. 115,094 98,724 --
Notes payable (Note 4)........................ -- 4,822 --
</TABLE>
Other related party receivables primarily consist of receivables from other
restaurants managed by Connor Management, Inc.
F-35
<PAGE> 129
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Prior to fiscal 1996, income taxes have been provided for the three C
Corporations (see Note 2). Deferred income taxes for the three C Corporations,
arising principally from loss carryforwards and the temporary differences in
book and tax depreciation, were not material in any of the years presented prior
to fiscal 1996. See Note 10 for discussion of pro forma income taxes. The tables
below present information related to the income tax provision for fiscal 1996.
<TABLE>
<CAPTION>
FISCAL 1996
---------------------
AMOUNT PERCENT
---------- -------
<S> <C> <C>
STATUTORY RATE RECONCILIATION
Pre-tax earnings............................................ $4,034,528 100.0%
Federal income tax at statutory rate........................ 1,371,740 34.0
State income taxes -- net of federal tax benefit............ 185,812 4.6
Other....................................................... 17,744 .4
---------- -----
Total income tax provision........................ $1,575,296 39.0%
========== =====
COMPONENTS OF INCOME TAX PROVISION
Current:
Federal................................................... $1,015,128 64.4%
State..................................................... 209,931 13.4
---------- -----
Total current............................................... 1,225,059 77.8
Deferred:
Federal................................................... 294,296 18.7
State..................................................... 55,941 3.5
---------- -----
Total deferred.................................... 350,237 22.2
---------- -----
Total income tax provision........................ $1,575,296 100.0%
========== =====
</TABLE>
The tax effect of cumulative temporary differences and carryforwards that
gave rise to the deferred tax assets and liabilities at January 3, 1997, are as
follows:
<TABLE>
<CAPTION>
JANUARY 3, 1997
------------------------------------
ASSETS LIABILITIES TOTAL
-------- ----------- ---------
<S> <C> <C> <C>
Excess tax over book depreciation................ $ -- $(288,158) $(288,158)
Pre-opening costs................................ -- (30,875) (30,875)
Basis write-up, reorganization................... 116,679 -- 116,679
Other, net....................................... -- (6,117) (6,117)
-------- --------- ---------
Total.................................. $116,679 $(325,150) $(208,471)
======== ========= =========
</TABLE>
Management has evaluated the realizability of the deferred tax asset and
believes that no valuation allowance is necessary at January 3, 1997.
F-36
<PAGE> 130
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE STOCK OPTION PLAN
Sagebrush adopted a stock option plan which became effective as of the
closing date of the public offering. The plan allows for incentive and
non-qualified stock options and stock appreciation rights to be granted to those
key employees that the Compensation Committee of the Board of Directors may
select. A total of 600,000 shares of common stock have been reserved for
issuance upon exercise of the options to be granted. Options granted may have a
maximum term of ten years and may be granted until November 1, 2005. At January
3, 1997, there were 241,000 shares available for grant. Option information is
summarized as follows:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at December 29, 1995............................ -- --
Granted in fiscal 1996.................................... 387,500 $8.875
Canceled or expired in fiscal 1996........................ (28,500) 8.875
------- ------
Outstanding at January 3, 1997.............................. 359,000 $8.875
======= ======
</TABLE>
All options granted are incentive stock options with the option price no
less than the fair market value of the common stock on the date of grant.
Options begin vesting two years after the grant date and are fully vested after
five years. The outstanding stock options at January 3, 1997 have a weighted
average exercise price of $8.875 and a weighted average contractual life of
9 1/2 years.
Sagebrush applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock options granted. Had
compensation cost for Sagebrush's stock option plan been determined based on the
fair value at the grant dates for the awards under those plans consistent with
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," Sagebrush's pro forma net income and net income
per share for the year ended January 3, 1997 would have been $2,356,000 and
$.37, respectively.
The fair value of options granted under Sagebrush's stock option plan
during fiscal 1996 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 25%, risk free interest rate of 6.5%, and
expected lives of 4 1/2 years. The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future amounts.
9. EMPLOYEE HEALTH INSURANCE BENEFITS
Sagebrush provides employee health insurance benefits under a 419(e) trust
arrangement. These benefits are partially funded by Sagebrush. Sagebrush has
$25,000 per participant and $1,000,000 annual aggregate stop loss coverage on
group medical claims with an insurance carrier. A third-party administrator
handles all claims. Sagebrush's contributions to this plan were approximately
$121,000, $121,000 and $120,000 in fiscal 1996, 1995 and 1994, respectively.
Sagebrush provides no post-retirement or post-employment benefits.
10. COMMITMENTS, CONTINGENCIES AND LITIGATION
See Note 5 concerning commitments related to lease agreements.
Sagebrush had a purchase commitment of approximately $400,000 as of January
3, 1997 for construction of a restaurant in Salisbury, NC.
Sagebrush knows of no material pending legal proceedings to which Sagebrush
or any of its subsidiaries or related companies is a party.
F-37
<PAGE> 131
SAGEBRUSH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PRO FORMA DATA (UNAUDITED)
In connection with the reorganization described in Note 1, certain of the
Restaurant Corporations and Connor Management became wholly-owned subsidiaries
of Sagebrush, Inc. and terminated their elections to be treated as S
Corporations. The Related Corporations distributed all S Corporation earnings
through the date of such termination from available cash and, as stated in Note
1, Sagebrush, Inc. paid approximately $5.2 million of the proceeds from the
offering to or for the benefit of its current shareholders as part of the
reorganization.
Pro forma net income reflects an anticipated increase in compensation
expense and the application of corporate income taxes to pro forma income before
income taxes at an effective tax rate of 39% of $500,000 and $1,200,000,
respectively, which reflects the estimated combined federal and state income tax
rate.
Pro forma net income per share is calculated as if all shares of Sagebrush,
Inc. common stock outstanding immediately prior to the offering (4,500,000) were
outstanding since December 31, 1994 and include additional shares (962,748)
issued at the offering price of $7.00 per share, reduced by offering expenses
and underwriting discounts of 11.1%, to fund the distribution of S Corporation
earnings undistributed at December 29, 1995 and the $5.2 million referred to
above.
12. PROPOSED MERGER (UNAUDITED)
On November 14, 1997, Sagebrush and WSMP, Inc. executed an Agreement and
Plan of Merger (the "Agreement") whereby a newly-organized subsidiary of WSMP,
Inc. will merge with and into Sagebrush. Each outstanding share of Sagebrush
common stock will be converted into the right to receive 0.3214 of a share of
WSMP common stock, subject to adjustment as described below (the "Exchange
Ratio"). If the average WSMP common stock closing price is greater than $23.34,
the Exchange Ratio will be adjusted to become $7.50 divided by the average WSMP
common stock closing price as defined in the Agreement. If the average WSMP
closing price is less than $21.78, the Exchange Ratio will be adjusted to become
$7.00 divided by the average WSMP common stock closing price. This transaction
is expected to be consummated in January 1998 and accounted for as a pooling of
interests.
13. INTERIM PERIOD (UNAUDITED)
On May 12, 1997, Sagebrush repurchased 375,000 shares of its common stock
in a negotiated block purchase from an institutional investor at a price of
$5.25 per share.
F-38
<PAGE> 132
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma combined financial information assumes that the
Merger has occurred and has been accounted for on a pooling of interests basis
for all periods presented. It further assumes that WSMP's acquisition of the 14
franchised restaurants (the "Hash units") from various corporations
predominantly owned by a former executive officer of WSMP occurred on September
12, 1994. See "Certain Relationships and Related Party Transactions".
The following unaudited pro forma balance sheets combine WSMP's
consolidated balance sheet as of November 7, 1997 with Sagebrush's consolidated
balance sheet as of September 12, 1997, giving effect to the Merger as if it had
occurred on November 7, 1997. The unaudited pro forma statements of earnings
combine WSMP's consolidated statements of earnings for the thirty-six weeks
ended November 7, 1997 and for each of the three years in the period ended
February 28, 1997 with Sagebrush's consolidated statements of earnings for the
36 weeks ended September 12, 1997 and each of the three years in the period
ended January 3, 1997, respectively, giving effect to the Merger as if it had
occurred on February 26, 1994, accounted for as a pooling of interests. The
historical information of WSMP has been derived from the unaudited consolidated
financial statements of WSMP for the 36 weeks ended November 7, 1997 and the
audited consolidated financial statements for each of the three years in the
period ended February 28, 1997, which are included elsewhere in this Joint Proxy
Statement-Prospectus, and should be read in conjunction with such financial
statements and notes thereto. The historical financial information of Sagebrush
included in these pro forma financial statements has been derived from the
unaudited consolidated financial statements of Sagebrush for the 36 weeks ended
September 12, 1997 and the audited consolidated financial statements for each of
the three years in the period ended January 3, 1997. These audited Consolidated
Financial Statements are included elsewhere in this Joint Proxy
Statement-Prospectus, and should be read in conjunction with such financial
statements and notes hereto.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the consolidated financial position or
operating results that would have occurred had the Merger been consummated on
February 26, 1994, nor is it indicative of future operating results or financial
position. The managements of both WSMP and Sagebrush believe that the
assumptions used in the following statements provide a reasonable basis on which
to present the pro forma data. In the opinion of the managements of both WSMP
and Sagebrush, the above-mentioned unaudited interim consolidated financial
statements of the respective companies include all adjustments necessary for a
fair presentation of the results for unaudited interim periods. WSMP and
Sagebrush anticipate that the combined company will incur merger-related
expenses totaling approximately $1.25 million. Such expenses include only
financial advisory fees, legal and accounting expenses and other miscellaneous
transaction costs; they do not include any costs relating to possible restaurant
conversions or closures or any other costs that may arise in connection with the
merger. These merger-related expenses are expected to be charged to the
operations of WSMP and Sagebrush as incurred. The effects of these costs have
not been reflected in the historical or pro forma combined financial
information.
F-39
<PAGE> 133
WSMP, INC. AND SAGEBRUSH, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------------- ----------------------------
WSMP SAGEBRUSH
AS OF AS OF
NOVEMBER 7, SEPTEMBER 12,
1997 1997 COMBINED ADJUSTMENTS COMBINED
----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.......... $ 828,201 $ 1,718,301 $ 2,546,502 $ -- $ 2,546,502
Marketable equity securities....... 191,592 -- 191,592 -- 191,592
Accounts receivable, net...........
Trade and others................. 5,648,739 149,797 5,798,536 -- 5,798,536
Related party.................... 165,087 21,845 186,932 -- 186,932
Current portion of notes
receivable, net..................
Related party.................... 472,602 -- 472,602 -- 472,602
Other............................ 543,515 -- 543,515 -- 543,515
Inventories........................ 7,816,408 563,872 8,380,280 -- 8,380,280
Pre-opening costs, net............. 537,988 537,988 -- 537,988
Prepaid expenses and other......... 442,540 53,198 495,738 -- 495,738
Deferred income taxes.............. 421,576 -- 421,576 -- 421,576
----------- ----------- ----------- ----------- -----------
Total current assets........ 16,530,260 3,045,001 19,575,261 -- 19,575,261
----------- ----------- ----------- ----------- -----------
Property, Plant and Equipment, net... 23,054,518 18,650,315 41,704,833 -- 41,704,833
----------- ----------- ----------- ----------- -----------
Other Assets:
Properties held for sale........... 1,680,993 -- 1,680,993 -- 1,680,993
Excess of cost over fair value of
net assets of businesses
acquired, net.................... 2,967,689 -- 2,967,689 -- 2,967,689
Covenant not to compete............ 847,731 -- 847,731 -- 847,731
Noncurrent notes receivable........ 570,747 -- 570,747 -- 570,747
Noncurrent notes
receivable -- related party...... 1,558,399 -- 1,558,399 -- 1,558,799
Other.............................. 360,938 10,080 371,018 -- 371,018
----------- ----------- ----------- ----------- -----------
Total other assets.......... 7,986,497 10,080 7,996,577 -- 7,996,577
----------- ----------- ----------- ----------- -----------
Total assets................ $47,571,275 $21,705,396 $69,276,671 $ -- $69,276,671
=========== =========== =========== =========== ===========
Current Liabilities
Notes payable -- bank.............. $ 4,012,162 1,393,750 5,405,912 $ -- 5,405,912
Current installments of long-term
debt............................. 1,531,868 181,760 1,713,628 -- 1,713,628
Trade accounts payable............. 3,037,401 2,187,073 5,224,474 -- 5,224,474
Other accrued liabilities.......... 3,435,969 1,630,047 5,066,016 -- 5,066,016
----------- ----------- ----------- ----------- -----------
Total current liabilities... 12,017,400 5,392,630 17,410,030 -- 17,410,030
Deferred income taxes................ 1,198,854 245,971 1,444,825 -- 1,444,825
Long-term debt, excluding current
installments....................... 10,454,334 2,320,287 12,774,621 -- 12,774,621
----------- ----------- ----------- ----------- -----------
Total liabilities........... 23,670,588 7,958,888 31,629,476 -- 31,629,476
----------- ----------- ----------- ----------- -----------
Shareholders' Equity
Common stock....................... 3,373,859 5,925,000 9,298,859 (4,020,705)(A) 5,278,154
Capital in excess of par value..... 10,775,911 5,760,318 16,536,229 4,020,705(A) 20,556,934
Unrealized gain on securities
available for sale............... 19,299 -- 19,299 -- 19,299
Retained earnings.................. 9,731,618 2,061,190 11,792,808 -- 11,792,808
----------- ----------- ----------- ----------- -----------
Total shareholders' equity........... 23,900,687 13,746,508 37,647,195 -- 37,647,195
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders'
equity............................. $47,571,275 $21,705,396 $69,276,671 $ -- $69,276,671
=========== =========== =========== =========== ===========
</TABLE>
F-40
<PAGE> 134
WSMP, INC. AND SAGEBRUSH, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------------------------------------- ----------------------------
WSMP SAGEBRUSH
THIRTY-SIX THIRTY-SIX
WEEKS WEEKS
ENDED ENDED TOTAL PRO
NOVEMBER 7, SEPTEMBER 12, (B) FORMA
1997 1997 RECLASSIFICATIONS COMBINED ADJUSTMENTS COMBINED
----------- ------------- ----------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue
Food sales............... $75,171,911 $34,458,657 $ (6,947) $109,623,621 $ -- $109,623,621
Franchise, royalty and
other fees............. 1,349,889 -- 43,898 1,393,787 -- 1,393,787
----------- ----------- --------- ------------ ----------- ------------
Total operating revenue.... 76,521,800 34,458,657 36,952 111,017,408 -- 111,017,408
----------- ----------- --------- ------------ ----------- ------------
Cost and expenses
Cost of goods sold....... 52,355,204 12,778,759 166,319 65,300,282 -- 65,300,282
Operating expenses....... 12,826,558 14,451,349 219,399 27,497,306 -- 27,497,306
Selling, general and
administrative......... 6,450,900 2,516,034 (383,597) 8,583,337 -- 8,583,337
Depreciation and
amortization........... 2,170,482 1,439,190 -- 3,609,672 -- 3,609,672
----------- ----------- --------- ------------ ----------- ------------
Total costs and expenses... 73,803,144 31,185,332 2,121 104,990,597 -- 104,990,597
----------- ----------- --------- ------------ ----------- ------------
Operating income........... 2,718,656 3,273,325 34,830 6,026,811 -- 6,026,811
----------- ----------- --------- ------------ ----------- ------------
Other income (expense):
Other income............. 561,371 47,498 (43,898) 564,971 -- 564,971
Net gain on disposition
of assets.............. 553,566 -- 9,068 562,634 -- 562,634
Equity in loss of
affiliates............. (14,000) -- -- (14,000) -- (14,000)
Interest expense......... (1,079,965) (128,511) -- (1,208,476) -- (1,208,476)
Other expense............ (358,110) -- -- (358,110) -- (358,110)
----------- ----------- --------- ------------ ----------- ------------
Net other expense........ (337,138) (81,013) (34,830) (452,981) -- (452,981)
----------- ----------- --------- ------------ ----------- ------------
Earnings before income
taxes.................... 2,381,518 3,192,312 -- 5,573,830 -- 5,573,830
----------- ----------- --------- ------------ ----------- ------------
Provision for income
taxes.................... 869,254 1,250,579 -- 2,119,833 -- 2,119,833
----------- ----------- --------- ------------ ----------- ------------
Net earnings............... $ 1,512,264 $ 1,941,733 $ -- $ 3,453,997 $ -- $ 3,453,997
=========== =========== ========= ============ =========== ============
Earnings per common and
common equivalent
share.................... $ .40 .32 .35 .60
=========== =========== ============ ============
Earnings per common and
common equivalent share
assuming full dilution..... $ .40 $ .32 .35 .60
=========== =========== ============ ============
Weighted average common and
common equivalent shares
outstanding.............. 3,752,632 6,143,865 9,896,497 (4,169,227)(A) 5,727,270
=========== =========== ============ =========== ============
Weighted average common and
common equivalent shares
assuming full dilution... 3,806,343 6,143,865 9,950,208 (4,169,227)(A) 5,780,981
=========== =========== ============ =========== ============
</TABLE>
F-41
<PAGE> 135
WSMP, INC. AND SAGEBRUSH, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------
WSMP SAGEBRUSH
FISCAL FISCAL
YEAR YEAR
ENDED ENDED (C)
FEBRUARY 28, JANUARY 3, (B) HASH
1997 1997 RECLASSIFICATIONS COMBINED UNITS
------------ ----------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenue
Food sales....................... $85,070,341 $42,110,051 $ (10,149) $127,170,243 $ 13,874,417
Franchise, royalty and other
fees........................... 2,682,732 -- 80,950 2,763,682 --
----------- ----------- --------- ------------ ------------
Total operating revenue............ 87,753,073 42,110,051 70,801 129,933,925 13,874,417
----------- ----------- --------- ------------ ------------
Cost and expenses
Cost of goods sold............... 63,680,524 15,546,906 224,334 79,451,764 5,257,487
Operating expenses............... 11,924,356 17,556,101 (419,410) 29,061,047 7,358,515
Selling, general and
administrative................. 7,898,182 3,560,928 191,508 11,650,618 549,358
Depreciation and amortization.... 2,624,490 1,411,065 4,035,555 396,906
Store closing costs.............. -- 167,890 (167,890) -- --
----------- ----------- --------- ------------ ------------
Total costs and expenses........... 86,127,552 38,242,890 (171,458) 124,198,984 13,562,266
----------- ----------- --------- ------------ ------------
Operating income................... 1,625,521 3,867,161 242,259 5,734,941 312,151
----------- ----------- --------- ------------ ------------
Other income (expense):
Other income..................... 1,046,219 212,976 (80,950) 1,178,245 --
Net gain/(loss) on disposition of
assets......................... 758,646 -- (161,309) 597,337 (625)
Net gain on sale of restricted
equity to related party........ 541,831 -- -- 541,831 --
Equity in loss of affiliates..... (107,000) -- -- (107,000) --
Interest expense................. (1,822,339) (45,609) -- (1,867,948) --
Other expense.................... (871,388) -- -- (871,388) --
----------- ----------- --------- ------------ ------------
Net other income (expense)......... (454,031) 167,367 (242,259) (528,923) (625)
----------- ----------- --------- ------------ ------------
Earnings before income taxes and
extraordinary items.............. 1,171,490 4,034,528 -- 5,206,018 311,526
----------- ----------- --------- ------------ ------------
Provision for income taxes......... 465,578 1,575,296 -- 2,040,874 --
----------- ----------- --------- ------------ ------------
Earnings before extraordinary
item............................. 705,912 2,459,232 -- 3,165,144 311,526
Extraordinary gain from early
extinguishment of debt........... 414,784 -- -- 414,784 --
----------- ----------- --------- ------------ ------------
Net earnings....................... $ 1,120,696 $ 2,459,232 $ -- $ 3,579,928 $ 311,526
=========== =========== ========= ============ ============
Earnings per common and common
equivalent share................. $ .36 $ .39
=========== ===========
Earnings per common and common
equivalent share assuming full
dilution......................... $ .35 $ .39
=========== ===========
Weighted average common and common
equivalent shares outstanding.... 3,091,063 6,288,949
=========== ===========
Weighted average common and common
equivalent shares assuming full
dilution......................... 3,228,800 6,288,949
=========== ===========
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
HASH PRO FORMA
ACQUISITION MERGER COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Operating revenue
Food sales....................... $ -- $ -- $141,044,660
Franchise, royalty and other
fees........................... (549,197)(D) -- 2,214,485
--------- ----------- ------------
Total operating revenue............ (549,197) -- 143,259,145
--------- ----------- ------------
Cost and expenses
Cost of goods sold............... -- -- 84,709,251
Operating expenses............... (425,412)(D) (67,500)(E) 35,926,650
Selling, general and
administrative................. (123,784)(D) 5,485(F) 12,081,677
Depreciation and amortization.... 283,159(G) -- 4,715,620
Store closing costs.............. -- -- --
--------- ----------- ------------
Total costs and expenses........... (266,037) (62,015) 137,433,198
--------- ----------- ------------
Operating income................... (283,160) 62,015 5,825,947
--------- ----------- ------------
Other income (expense):
Other income..................... -- (52,500)(E) 1,125,745
Net gain/(loss) on disposition of
assets......................... -- (249,708)(H) 347,004
Net gain on sale of restricted
equity to related party........ -- (541,831)(I) --
Equity in loss of affiliates..... -- -- (107,000)
Interest expense................. (85,676)(L) -- (1,953,624)
Other expense.................... -- -- (871,388)
--------- ----------- ------------
Net other income (expense)......... (85,676) (844,039) (1,459,263)
--------- ----------- ------------
Earnings before income taxes and
extraordinary items.............. (368,836) (782,024) 4,366,684
--------- ----------- ------------
Provision for income taxes......... 121,495(N) (304,989)(M) 1,713,534
(143,846)(M)
--------- ----------- ------------
Earnings before extraordinary
item............................. (346,485) (477,035) 2,653,150
Extraordinary gain from early
extinguishment of debt........... -- -- 414,784
--------- ----------- ------------
Net earnings....................... $(346,485) $ (477,035) $ 3,067,934
========= =========== ============
Earnings per common and common
equivalent share................. $ .56
============
Earnings per common and common
equivalent share assuming full
dilution......................... $ .55
============
Weighted average common and common
equivalent shares outstanding.... 322,361(O) (4,267,681)(A) 5,434,692
=========== ============
Weighted average common and common
equivalent shares assuming full
dilution......................... 322,361(O) (4,267,681)(A) 5,572,429
=========== ============
</TABLE>
F-42
<PAGE> 136
WSMP, INC. AND SAGEBRUSH, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------
WSMP SAGEBRUSH
FISCAL YEAR FISCAL YEAR
ENDED ENDED (C)
FEBRUARY 23, DECEMBER 29, (B) HASH
1996 1995 RECLASSIFICATIONS COMBINED UNITS
------------ ------------ ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating revenue
Food sales..................... $ 76,582,926 $34,019,810 $ (5,575) $110,597,161 $14,189,131
Franchise, royalty and other
fees......................... 2,856,284 -- 83,025 2,939,309 --
------------ ----------- ----------- ------------ -----------
Total operating
revenue................ 79,439,210 34,019,810 77,450 113,536,470 14,189,131
------------ ----------- ----------- ------------ -----------
Cost and expenses
Cost of goods sold............. 56,743,742 12,732,990 170,474 69,647,206 5,450,055
Operating expenses............. 12,775,983 14,187,401 (538,936) 26,424,448 7,234,908
Selling, general and
administrative............... 7,906,971 2,373,978 306,671 10,587,620 538,185
Depreciation and
amortization................. 2,715,271 1,074,661 -- 3,789,932 387,529
------------ ----------- ----------- ------------ -----------
Total costs and
expenses............... 80,141,967 30,369,030 (61,791) 110,449,206 13,610,677
------------ ----------- ----------- ------------ -----------
Operating income
(loss)................. (702,757) 3,650,780 139,241 3,087,264 578,454
------------ ----------- ----------- ------------ -----------
Other income (expense):
Other income................... 809,737 101,175 (84,057) 826,855 --
Net gain/(loss) on disposition
of assets.................... 220,199 -- (55,184) 165,015 --
Equity in loss of affiliates... (338,366) -- -- (338,366) --
Interest expense............... (2,011,567) (150,980) -- (2,162,547) --
Other expense.................. (688,580) -- -- (688,580) --
------------ ----------- ----------- ------------ -----------
Net other expense........ (2,008,577) (49,805) (139,241) (2,197,623) --
------------ ----------- ----------- ------------ -----------
Earnings (loss) before income
taxes.......................... (2,711,334) 3,600,975 -- 889,641 578,454
------------ ----------- ----------- ------------ -----------
Provision for income taxes
(benefit)...................... (1,216,345) 76,915 -- (1,139,430) --
-- -- -- -- --
------------ ----------- ----------- ------------ -----------
Net earnings (loss)...... $ (1,494,989) $ 3,524,060 $ -- $ 2,029,071 $ 578,454
============ =========== =========== ============ ===========
Earnings (loss) per common and
common equivalent Share........ $ (.55) $ .65 -- -- --
============ =========== =========== ============ ===========
Earnings per common and common
equivalent share assuming full
dilution....................... $ (.55) .65 -- -- --
============ =========== =========== ============ ===========
Weighted average common and
common equivalent shares
outstanding.................... 2,729,517 5,462,748 -- -- --
============ =========== =========== ============ ===========
Weighted average common and
common equivalent shares
assuming full dilution......... 2,729,517 5,462,748 -- -- --
============ =========== =========== ============ ===========
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------
HASH PRO FORMA
ACQUISITION MERGER COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Operating revenue
Food sales..................... $ -- $ -- $124,786,292
Franchise, royalty and other
fees......................... (541,259)(D) -- 2,398,050
----------- ----------- ------------
Total operating
revenue................ (541,259) -- 127,184,342
----------- ----------- ------------
Cost and expenses
Cost of goods sold............. -- -- 75,097,261
Operating expenses............. (429,364)(D) (90,000)(E) 33,139,992
Selling, general and
administrative............... (111,895)(D) 330,280(F) 11,344,190
Depreciation and
amortization................. 292,536(G) -- 4,469,997
----------- ----------- ------------
Total costs and
expenses............... (248,723) 240,280 124,051,440
----------- ----------- ------------
Operating income
(loss)................. (292,536) (240,280) 3,132,902
----------- ----------- ------------
Other income (expense):
Other income................... -- (90,000)(E) 736,855
Net gain/(loss) on disposition
of assets.................... -- (59,648)(P) 105,367
Equity in loss of affiliates... -- (47,000)(K) (385,366)
Interest expense............... (85,676)(L) -- (2,248,223)
Other expense.................. -- -- (688,580)
----------- ----------- ------------
Net other expense........ (85,676) (196,648) (2,479,947)
----------- ----------- ------------
Earnings (loss) before income
taxes.......................... (378,212) (436,928) 652,955
----------- ----------- ------------
Provision for income taxes
(benefit)...................... 225,597(N) 1,327,465(J) 95,727
(147,503)(M) (170,402)(M)
----------- ----------- ------------
Net earnings (loss)...... $ (456,306) $(1,593,991) $ 557,228
=========== =========== ============
Earnings (loss) per common and
common equivalent Share........ -- -- $ .12
=========== =========== ============
Earnings per common and common
equivalent share assuming full
dilution....................... -- -- $ .12
=========== =========== ============
Weighted average common and
common equivalent shares
outstanding.................... 322,361(O) (3,707,021)(A) 4,807,605
=========== =========== ============
Weighted average common and
common equivalent shares
assuming full dilution......... 322,361(O) (3,707,021)(A) 4,807,605
=========== =========== ============
</TABLE>
F-43
<PAGE> 137
WSMP, INC. AND SAGEBRUSH, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------
WSMP SAGEBRUSH
FISCAL YEAR FISCAL YEAR
ENDED ENDED (C)
FEBRUARY 24, DECEMBER 30, (B) HASH
1995 1994 RECLASSIFICATIONS COMBINED UNITS
------------ ------------ ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating revenue
Food sales...................... $91,231,774 $28,664,211 $ (7,836) $119,888,149 $14,547,011
Franchise, royalty and other
fees.......................... 2,868,199 -- 73,625 2,941,824 --
----------- ----------- --------- ------------ -----------
Total operating revenue... 94,099,973 28,664,211 65,789 122,829,973 14,547,011
----------- ----------- --------- ------------ -----------
Cost and expenses
Cost of goods sold.............. 66,275,140 10,888,664 82,429 77,246,233 5,575,459
Operating expenses.............. 14,530,232 11,575,143 (314,154) 25,791,221 7,379,971
Selling, general and
administrative................ 8,171,310 2,014,452 223,889 10,409,651 525,973
Depreciation and amortization... 2,878,624 878,368 -- 3,756,992 395,797
----------- ----------- --------- ------------ -----------
Total costs and
expenses................ 91,855,306 25,356,627 (7,836) 117,204,097 13,877,200
----------- ----------- --------- ------------ -----------
Operating income.................. 2,244,667 3,307,584 73,625 5,625,876 669,811
----------- ----------- --------- ------------ -----------
Other income (expense):
Other income.................... 949,208 84,957 (73,625) 960,540 15
Net gain/(loss) on disposition
of assets..................... 940,091 -- -- 940,091 (111)
Equity in earnings (loss) of
affiliates.................... 115,000 -- -- 115,000 --
Interest expense................ (1,993,094) (74,915) -- (2,068,009) --
Other expense................... (747,471) -- -- (747,471) --
----------- ----------- --------- ------------ -----------
Net other income (expense)........ (736,266) 10,042 (73,625) (799,849) (96)
----------- ----------- --------- ------------ -----------
Earnings before income taxes...... 1,508,401 3,317,626 -- 4,826,027 669,715
----------- ----------- --------- ------------ -----------
Provision for income taxes 411,731 163,052 -- 574,783
----
----------- ----------- --------- ------------ -----------
Net earnings...................... $ 1,096,670 $ 3,154,574 $ -- $ 4,251,244 $ 669,715
=========== =========== ========= ============ ===========
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------
HASH PRO FORMA
ACQUISITION MERGER COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Operating revenue
Food sales...................... $ -- $ -- $134,435,160
Franchise, royalty and other
fees.......................... (556,120)(D) -- 2,385,704
--------- ----------- ------------
Total operating revenue... (556,120) -- 136,820,864
--------- ----------- ------------
Cost and expenses
Cost of goods sold.............. -- -- 82,821,692
Operating expenses.............. (440,114)(D) (90,000)(E) 32,641,078
Selling, general and
administrative................ (116,006)(D) 375,000(F) 11,194,618
Depreciation and amortization... 284,268(G) -- 4,437,057
--------- ----------- ------------
Total costs and
expenses................ (271,852) 285,000 131,094,445
--------- ----------- ------------
Operating income.................. (284,268) (285,000) 5,726,419
--------- ----------- ------------
Other income (expense):
Other income.................... -- (90,000)(E) 870,555
Net gain/(loss) on disposition
of assets..................... -- -- 939,980
Equity in earnings (loss) of
affiliates.................... -- (127,000)(K) (12,000)
Interest expense................ (85,676)(L) -- (2,153,685)
Other expense................... -- -- (747,471)
--------- ----------- ------------
Net other income (expense)........ (85,676) (217,000) (1,102,621)
--------- ----------- ------------
Earnings before income taxes...... (369,944) (502,000) 4,623,798
--------- ----------- ------------
Provision for income taxes 261,189(N) 1,130,822(J) 1,626,736
(144,278)(M) (195,780)(M)
--------- ----------- ------------
Net earnings...................... $(486,855) $(1,437,042) $ 2,977,062
========= =========== ============
</TABLE>
F-44
<PAGE> 138
WSMP, INC. AND SAGEBRUSH, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
A. The pro forma adjustments to common stock, capital in excess of par
value and weighted average shares outstanding, reflect the reduction in the
combined common stock of WSMP and Sagebrush arising from the application of the
Exchange Ratio.
B. The reclassifications of the historical financial statements reflect
adjustments necessary to conform Sagebrush's financial statement presentation to
that of WSMP.
C. Effective March 1, 1997, WSMP purchased the Hash Units for a total
purchase price of $3,767,500. The Hash Units column represents the operations of
the Hash Units for the periods prior to March 1, 1997.
D. Prior to being purchased by WSMP, the 14 Hash units paid royalty and
accounting fees to WSMP. These amounts were recognized as operating revenue by
WSMP and were charged to operating expense and to selling, general and
administrative expense by the Hash Units. A pro forma adjustment is made to
eliminate the effect of these transactions on a combined basis.
E. WSMP leased a restaurant property to Sagebrush. The related income and
expense recorded by the respective companies is eliminated through a pro forma
adjustment.
F. The pro forma adjustment to selling, general and administrative expense
reflects additional compensation expense that will be paid under compensation
and consulting arrangements entered into as part of the Merger. Prior to
Sagebrush's initial public offering in January 1996, the executives that will be
paid under the compensation and consulting agreements received nominal salaries.
G. The pro forma adjustment represents the amortization of intangible
assets and additional depreciation expense resulting from the purchase of the
Hash Units.
H. WSMP sold to Sagebrush the restaurant property discussed in Note E. WSMP
recognized a gain on the sale totaling $249,708, which is eliminated through a
pro forma adjustment.
I. WSMP sold the 111,983 shares of Sagebrush common stock that it received
as part of the restructuring discussed in Note P and recognized a gain of
$541,831. This gain is eliminated through a pro forma adjustment.
J. Prior to the reorganization that occurred in January 1996, most of the
related corporations that had previously conducted Sagebrush's business were
taxed as S Corporations and were not subject to corporate income taxes. This pro
forma adjustment to income taxes reflects income taxes as if all of such related
companies had been subject to income taxes, assuming a blended rate (federal and
state) of 39% for the periods ending December 29, 1995 and December 3, 1994.
K. Prior to the reorganization discussed in Note P, WSMP recognized equity
in earnings of affiliates as a result of its 50% investment in the three
Sagebrush companies. This income is eliminated through a pro forma adjustment.
L. The pro forma adjustment represents interest expense related to debt
incurred in connection with the acquisition of the Hash Units. This debt
represents unsecured term loans maturing within two to five years, with interest
charged at rates ranging from 5% to 9.75%.
M. The pro forma adjustment for income taxes reflects the income tax effect
of other pro forma adjustments using a blended federal and state tax rate of
39%.
N. The pro forma adjustment includes an income tax provision related to the
historical operating results of the Hash Units using a blended federal and state
rate of 39%.
O. The increases in weighted average shares outstanding reflect the shares
issued in connection with the Hash acquisition.
F-45
<PAGE> 139
WSMP, INC. AND SAGEBRUSH, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
P. WSMP owned 50% of three corporations that previously operated Sagebrush
Steakhouse and Saloon restaurants. In January 1996, a reorganization was
effected for these and the other corporations that had previously conducted
Sagebrush's business immediately prior to the initial public offering of
Sagebrush Common Stock. As part of such reorganization, WSMP exchanged to
Sagebrush its shares of common stock in the three corporations for cash totaling
$87,098 and 111,983 shares of Sagebrush Common Stock. This transaction was
accounted for as a like-kind exchange by WSMP, and a gain of $59,648 was
recognized. This gain is eliminated through a pro forma adjustment.
F-46
<PAGE> 140
APPENDIX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger dated as of November 14, 1997 is among
WSMP, Inc., a North Carolina corporation ("WSMP"), Sagebrush, Inc., a North
Carolina corporation ("Sagebrush"), WSMP Acquisition, Inc., a North Carolina
corporation and wholly-owned subsidiary of WSMP ("Sub"; Sagebrush and Sub being
the "Constituent Corporations"), and Messrs. L. Dent Miller ("Miller") and
Charles F. Connor, Jr. ("Connor"; Miller and Connor being the "Sagebrush
Shareholders").
WHEREAS, the parties hereto consider it advisable and in the best interests
of the Constituent Corporations and WSMP, and in the best interests of the
shareholders of Sagebrush and of WSMP, that the businesses of Sagebrush and WSMP
be combined through a merger (the "Merger") of Sub with and into Sagebrush on
the terms and conditions set forth in this Agreement (Sub and Sagebrush, after
the Merger, being the "Surviving Subsidiary").
NOW, THEREFORE, the parties hereto do hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the terms identified in this Article shall have
the meanings indicated.
1.1 Affiliate: When used with respect to a Person, an "Affiliate" of that
Person is a Person that directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
that Person, within the meaning of Rule 144(a)(1) under the Securities Act.
1.2 Affiliate Agreement: That certain agreement between WSMP and each of
the several Persons referred to in Sections 6.11 and 7.2(i) substantially in the
form attached hereto as Exhibit 1.2.
1.3 Agreement: This Agreement and Plan of Merger, including the Exhibits
hereto.
1.4 Audited Financial Statements: The combined or consolidated balance
sheets, income statements, statements of shareholders' equity and statements of
cash flows as at December 30, 1994, December 29, 1995 and January 3, 1997 and
for the fiscal years then ended, in the case of Sagebrush, and as at February
24, 1995, February 23, 1996 and February 28, 1997 and for the fiscal years then
ended, in the case of WSMP, in each instance as reported on by Auditors and
included in the Sagebrush SEC Reports or the WSMP SEC Reports, respectively.
1.5 Auditors: With respect to each of WSMP and Sagebrush, Deloitte &
Touche LLP, independent certified public accountants, in each case currently
retained for the purpose of auditing financial statements of such party.
1.6 Closing: The consummation of the Merger, as provided in Article VII
hereof.
1.7 Closing Date: The date upon which the Closing occurs.
1.8 Code: The Internal Revenue Code of 1986, as amended to the date as of
which any reference thereto is relevant under this Agreement.
1.9 Consulting and Noncompete Agreement: That certain agreement between
WSMP and Charles F. Connor, Jr. in the form attached hereto as Exhibit 1.9.
1.10 Counsel to WSMP: Simpson Aycock, P.A., 204 East McDowell Street,
Morganton, North Carolina 28655.
1.11 Counsel to Sagebrush: Kennedy Covington Lobdell & Hickman, L.L.P.,
NationsBank Corporate Center, Suite 4200, 100 North Tryon Street, Charlotte,
North Carolina 28202-4006.
A-1
<PAGE> 141
1.12 Employment and Noncompete Agreement: That certain agreement between
WSMP and L. Dent Miller in the form attached hereto as Exhibit 1.12.
1.13 ERISA: The Employee Retirement Income Security Act of 1974, as
amended to the date as of which any reference thereto is relevant under this
Agreement.
1.14 Exchange Act: The Securities Exchange Act of 1934, as amended to the
date as of which any reference thereto is relevant under this Agreement.
1.15 Exchange Ratio: See the definition of "Merger Consideration" below.
1.16 Financial Advisor to WSMP: Pauli & Company Incorporated, 7773 Forsyth
Boulevard, St. Louis, Missouri 63105-1817.
1.17 Financial Advisor to Sagebrush: Interstate/Johnson Lane Corporation,
Interstate Tower, Charlotte, North Carolina 28201.
1.18 GAAP: Generally accepted accounting principles, as in effect on the
date of any statement, report or determination that purports to be, or is
required to be, prepared or made in accordance with GAAP. All references herein
to financial statements prepared in accordance with GAAP shall mean in
accordance with GAAP consistently applied throughout the periods to which
reference is made.
1.19 IRS: The Internal Revenue Service.
1.20 Joint Proxy Statement: A proxy statement of WSMP and of Sagebrush,
designed to comply with Regulation 14A under the Exchange Act, prepared jointly
for use by WSMP in soliciting proxies to approve issuance of the Merger
Consideration in the Merger as contemplated by Section 5.1 of this Agreement and
for use by Sagebrush in soliciting proxies to approve this Agreement and the
transactions contemplated hereby, including the Merger, as contemplated by
Section 6.1 of this Agreement. The Joint Proxy Statement will be combined with,
and constitute a part of, the Registration Statement.
1.21 Lien: Any lien, mortgage, security interest, pledge, charge, claim,
reservation or other encumbrance of any kind.
1.22 Material Adverse Change: With respect to a Person, a material adverse
change in the business, condition (financial or otherwise), operations or
prospects of such Person.
1.23 Material Adverse Effect: With respect to a Person, a material adverse
effect on the business, condition (financial or otherwise), operations or
prospects of such Person.
1.24 Merger Consideration: 0.3214 share of WSMP Common Stock, subject to
adjustment as provided in Section 2.11 of this Agreement, to be paid in the
Merger in exchange for each outstanding share of Sagebrush Common Stock. Such
ratio of 0.3214 share of WSMP Common Stock per 1.0000 share of Sagebrush Common
Stock, as the same may be adjusted, is referred to herein as the "Exchange
Ratio."
1.25 NASD: The National Association of Securities Dealers, Inc.
1.26 NASDAQ: The National Association of Securities Dealers, Inc.
Automated Quotation system.
1.27 NCBCA: The North Carolina Business Corporation Act, as amended to the
date as of which any reference thereto is relevant under this Agreement.
1.28 Per Share Cash Amount: The Exchange Ratio multiplied by the fair
market value of one share of WSMP Common Stock, determined conclusively by WSMP
(absent manifest error) by reference to the last sale price reported by NASDAQ
for the WSMP Common Stock for the Trading Day (as defined in Section 2.11(b) of
this Agreement) concluded most recently prior to the Effective Time.
1.29 Person: An individual, a corporation, a partnership, a limited
liability company, an association, a joint-stock company, a trust, an
unincorporated organization, a government or a political subdivision thereof.
1.30 Prospectus: The prospectus relating to the Registration Statement, in
the form used in connection with any "offer," "offer to sell," "offer for sale"
or "sale" of WSMP Common Stock, including any and all
A-2
<PAGE> 142
documents incorporated therein by reference, as amended and supplemented from
time to time. The Prospectus will be combined with the Joint Proxy Statement.
1.31 Registration Statement: A registration statement of WSMP on Form S-4
under the Securities Act, prepared by WSMP to cover the offer and sale, in the
Merger, of WSMP Common Stock to holders of Sagebrush Common Stock as
contemplated by Rule 145(a)(2) under the Securities Act. WSMP shall not be
required to maintain the effectiveness of the Registration Statement under the
Securities Act for the purpose of resale of any WSMP Common Stock by any such
Person. The Registration Statement will be combined with the Joint Proxy
Statement.
1.32 Required Sagebrush Consents: the consent of (a) Peoples Bank under
each of the following promissory notes issued by Sagebrush and Sagebrush of
North Carolina, LLC in favor of Peoples Bank (i) $3,000,000 promissory note
dated January 31, 1997, (ii) $850,000 promissory note dated January 31, 1997,
(iii) $850,000 promissory note dated May 14, 1997 and (iv) $850,000 promissory
note dated September 10, 1997 and (b) Roslyn Farm Associates, L.P. under the
Lease with Sagebrush dated April 8, 1996.
1.33 Required WSMP Consents: (a) the consent of National Bank of Canada
under a certain Financing and Security Agreement with WSMP dated as of November
22, 1996; (b) the consent of First Century Bank under a certain Note and a
certain Security Agreement with WSMP each dated December 31, 1996; (c) the
consent of SouthTrust Bank of North Carolina under a certain Loan Agreement with
WSMP dated as of January 19, 1997, as amended as of January 17, 1997; and (d)
the consent of NationsBank, N.A. under a certain Reimbursement Agreement dated
June 1, 1997.
1.34 Sagebrush Balance Sheet: The most recent balance sheet included in
the Audited Financial Statements of Sagebrush.
1.35 Sagebrush Common Stock: The Common Stock of Sagebrush.
1.36 Sagebrush Disclosure Document: The document delivered by Sagebrush to
WSMP at or prior to the date of this Agreement (and the receipt of which is
hereby acknowledged), containing certain disclosures regarding Sagebrush as
described in Articles IV and VI hereof.
1.37 Sagebrush Facilities: All automobiles, warehouses, stores, plants,
production facilities, manufacturing facilities, processing facilities, fixtures
and improvements owned or leased by Sagebrush or otherwise used by Sagebrush in
connection with the operation of its business or leased or subleased by
Sagebrush to others.
1.38 Sagebrush Option: An option to purchase Sagebrush Common Stock
granted by Sagebrush under the Sagebrush Option Plan.
1.39 Sagebrush Option Plan: The 1995 Stock Option Plan of Sagebrush, as in
effect and on file with the SEC on the date hereof.
1.40 Sagebrush SEC Report: A document filed by Sagebrush with the SEC
pursuant to the Exchange Act and referred to in clause (b), (c) or (d) of
Section 4.7 of this Agreement.
1.41 SEC: The Securities and Exchange Commission.
1.42 Securities Act: The Securities Act of 1933, as amended to the date as
of which any reference thereto is relevant under this Agreement.
1.43 Subsidiary: With respect to any Person, a second Person of which
fifty percent or more of the effective voting power, or the effective power to
elect a majority of the Board of Directors or similar governing body, or fifty
percent or more of the equity interest, is owned by the first Person, directly
or indirectly.
1.44 Sub Common Stock: The Common Stock of Sub.
1.45 Takeover Laws: Any and all "moratorium," "control share," "fair
price," "business combination" and other anti-takeover laws of the State of
North Carolina, including Articles 9 and 9A of the NCBCA.
A-3
<PAGE> 143
1.46 WSMP Balance Sheet: The most recent consolidated balance sheet
included in the Audited Financial Statements of WSMP.
1.47 WSMP Common Stock: The Common Stock of WSMP.
1.48 WSMP Disclosure Document: The document delivered by WSMP to Sagebrush
at or prior to the date of this Agreement (and the receipt of which is hereby
acknowledged), containing certain disclosures regarding WSMP as described in
Article III hereof.
1.49 WSMP Facilities: All automobiles, warehouses, stores, plants,
production facilities, manufacturing facilities, processing facilities, fixtures
and improvements owned or leased by WSMP or otherwise used by WSMP in connection
with the operation of its business or leased or subleased by WSMP to others.
1.50 WSMP SEC Report: A document filed by WSMP with the SEC pursuant to
the to the Exchange Act and referred to in clause (b), (c) or (d) of Section 3.7
of this Agreement.
ARTICLE II
THE MERGER
2.1 The Merger. At the Effective Time (as defined below), upon the terms
and subject to the conditions of this Agreement and the NCBCA, Sub shall be
merged with and into Sagebrush. As soon as practicable after satisfaction or
waiver of the conditions set forth in Article VII, WSMP, Sub and Sagebrush will
effect the Merger by causing to be filed Articles of Merger (substantially in
the form attached hereto as Exhibit 2.1), prepared as prescribed in Section
55-11-05 of the NCBCA, with the Secretary of State of the State of North
Carolina. The Plan of Merger, which is a part of the Articles of Merger, is
incorporated herein by reference, and adoption of this Agreement by the Board of
Directors of the Constituent Corporations and approval by the shareholders of
the Constituent Corporations shall, among other things, constitute adoption and
approval of the Plan of Merger. The Merger shall become effective at the time of
such filing or at such later time as may be specified in such Articles of Merger
with the prior written consent of WSMP, Sub and Sagebrush (the time the Merger
becomes effective being referred to in this Agreement as the "Effective Time").
Promptly following the Effective Time, the parties will make all such other
filings and recordings, if any, as may be required by the NCBCA in furtherance
of the Merger. Sagebrush shall be the surviving corporation in the Merger, and
all its purposes, objects, rights, privileges, powers and franchises shall
continue unaffected and unimpaired by the Merger.
2.2 Charter of Sagebrush. (a) At the Effective Time, by virtue of the
Merger, Article 2 of the Amended and Restated Articles of Incorporation of
Sagebrush shall be amended to read in full as follows: "ARTICLE 2: The total
number of shares of stock that the Corporation shall be authorized to issue is
1,000 shares of Common Stock of no par value."
(b) The Amended and Restated Articles of Incorporation of Sagebrush as in
effect immediately prior to the Effective Time, amended as provided in
subsection (a), shall be the articles of incorporation of the Surviving
Subsidiary unless and until amended in the manner provided by law and by such
Amended and Restated Articles of Incorporation.
2.3 Bylaws of Sagebrush. The Bylaws of Sagebrush as in effect immediately
prior to the Effective Time shall be the bylaws of the Surviving Subsidiary by
virtue of the Merger unless and until amended or repealed in the manner provided
by law, by the articles of incorporation of the Surviving Subsidiary and by such
Bylaws.
2.4 Directors and Officers. At and after the Effective Time, the directors
of WSMP at the Effective Time shall be the directors of the Surviving
Subsidiary. At and after the Effective Time, the officers of the Surviving
Subsidiary shall be as follows: L. Dent Miller, President; James C. Richardson,
Jr., Vice President and Assistant Secretary; David R. Clark, Vice President and
Assistant Secretary; and Matthew V. Hollifield, Treasurer and Secretary.
A-4
<PAGE> 144
2.5 Conversion. At the Effective Time, by virtue of the Merger and without
any action on the part of the holder of any share of Sagebrush Common Stock or
the holder of any share of Sub Common Stock:
(a) Each issued and outstanding share of Sub Common Stock shall be
converted into one share of common stock of the Surviving Subsidiary, which
shall constitute the only issued and outstanding shares of capital stock of the
Surviving Subsidiary.
(b) Each issued and outstanding share of Sagebrush Common Stock (other than
any share as to which dissenter's appraisal rights have been perfected pursuant
to Article 13 of the NCBCA) shall be converted into the right to receive Merger
Consideration. Each share of WSMP Common Stock issued in the Merger shall be
issued together with one Preferred Stock Purchase Right (each, a "Preferred
Stock Purchase Right") in accordance with the terms and conditions of the Rights
Agreement dated as of September 2, 1997 between WSMP and American Stock Transfer
& Trust Company, as amended to the date of this Agreement (the "Rights
Agreement"). Each reference in this Agreement to the shares of WSMP Common Stock
issuable as Merger Consideration shall be deemed to include a reference to the
Preferred Stock Purchase Right associated therewith.
(c) From and after the Effective Time, the holders of certificates
theretofore representing Sagebrush Common Stock shall cease to have any rights
with respect thereto (other than dissenter's rights to the extent applicable
pursuant to Article 13 of the NCBCA); their sole right shall be to receive
Merger Consideration pursuant to subsection (b) and, if applicable, cash in lieu
of fractional shares pursuant to Section 2.6.
2.6 Fractional Shares. All fractions of a share WSMP Common Stock to which
a holder of Sagebrush Common Stock immediately prior to the Effective Time would
otherwise be entitled, at the Effective Time, shall be aggregated. If a fraction
results from such aggregation, then such shareholder shall be entitled, after
the later of the Effective Time and the surrender of such shareholder's
certificate or certificates that represented such Sagebrush Common Stock, to
receive from WSMP an amount in cash, without interest, in lieu of such
fractional share of WSMP Common Stock equal to the product of such fraction and
the Per Share Cash Amount.
2.7 Surrender and Payment. At the Effective Time the stock transfer books
of Sagebrush shall be closed, and no transfer of any shares of Sagebrush Common
Stock theretofore outstanding shall thereafter be made. As soon as practicable
after the Effective Time, each holder of Sagebrush Common Stock converted
pursuant to Section 2.5(b), upon surrender, for cancellation, to an exchange
agent designated by WSMP, subject to the approval of Sagebrush (such approval
not to be withheld or delayed unreasonably), prior to the Merger (the "Exchange
Agent"), of one or more certificates previously representing Sagebrush Common
Stock, will be entitled to receive (i) certificates representing Merger
Consideration, as provided in Section 2.5(c), and (ii) a check for the
applicable cash amount, if any, as provided in Section 2.6, in each case in
respect of the aggregate number of shares of Sagebrush Common Stock previously
represented by the certificate or certificates surrendered and promptly canceled
after receipt thereof by the Exchange Agent. As promptly as practicable after
the Closing Date, WSMP shall cause the Exchange Agent to deliver or mail to each
shareholder of Sagebrush a letter of transmittal and instructions for use in
surrendering, in exchange for Merger Consideration, the certificates that
immediately prior to the Effective Time represented shares of Sagebrush Common
Stock. Upon the surrender of such certificates, together with such letter of
transmittal and such other documents as may reasonably be requested, WSMP shall
promptly cause the Merger Consideration to be issued and delivered to the
persons entitled thereto. No dividend or other distribution payable following
the Closing with respect to shares of WSMP Common Stock to be received as Merger
Consideration shall be paid, and there shall be no right to vote such shares of
WSMP Common Stock, until the Sagebrush shareholder has tendered the certificate
or certificates representing shares of Sagebrush Common Stock to be exchanged
for Merger Consideration, it being understood, however, that such tender when
made shall relate back to the Effective Time for the purposes of any rights to
receive dividends and other distributions with respect to WSMP Common Stock
distributable to holders of record after the Effective Time. No interest will be
paid or accrued on the Merger Consideration upon the surrender of the
certificate or certificates representing shares of Sagebrush Common Stock or on
dividends or other distributions deferred as described in the immediately
preceding sentence. With respect to any certificate for Sagebrush Common
A-5
<PAGE> 145
Stock that has been lost or destroyed, WSMP shall cause the Merger Consideration
attributable to such certificate to be paid upon receipt of evidence and
indemnity reasonably satisfactory to it of the shares represented thereby.
2.8 Conversion of Sagebrush Options. (a) At the Effective Time each
Sagebrush Option then outstanding, whether or not then exercisable, shall be
converted into and shall become a right to purchase WSMP Common Stock, and WSMP
shall assume each Sagebrush Option in accordance with the terms of the Sagebrush
Option Plan and the terms of the agreement by which the Sagebrush Option is
evidenced, except that from and after the Effective Time: (i) WSMP and the
Compensation Committee of its Board of Directors shall be substituted for
Sagebrush and the committee of its Board of Directors (including, if applicable,
the entire Board of Directors of Sagebrush) administering the Sagebrush Option
Plan and the Sagebrush Options; (ii) each Sagebrush Option assumed by WSMP may
be exercised solely for shares of WSMP Common Stock; (iii) the number of shares
of WSMP Common Stock subject to each such Sagebrush Option shall be the number
of whole shares of WSMP Common Stock (omitting any fractional share) determined
by multiplying the number of shares of Sagebrush Common Stock subject to such
Sagebrush Option immediately prior to the Effective Time (without regard to any
limitations imposed by vesting schedules) by the Exchange Ratio, and (iv) the
per share exercise price under each such Sagebrush Option shall be adjusted by
dividing such exercise price by the Exchange Ratio and rounding up to the
nearest cent. In addition, and notwithstanding clauses (iii) and (iv) of the
first sentence of this subsection (a), each Sagebrush Option that is an
"incentive stock option" shall be adjusted as required by Section 424 of the
Code so as not to constitute a modification, extension or renewal of the option
within the meaning of Section 424(h) of the Code. Sagebrush and WSMP agree to
take all necessary steps to effectuate the foregoing provisions of this
subsection (a).
(b) As soon as practicable after the Effective Time, WSMP shall deliver to
the holders of Sagebrush Options an appropriate notice setting forth their
rights pursuant thereto, and the grants pursuant to the Sagebrush Option Plan
shall continue in effect on the same terms and conditions (subject to the
adjustments required by Section 2.8(a) after giving effect to the Merger), and
WSMP shall comply with the terms of Sagebrush Option Plan to ensure, to the
extent required by, and subject to the provisions of, the Sagebrush Option Plan,
that Sagebrush Options that qualified as incentive stock options prior to the
Effective Time continue to qualify as incentive stock options after the
Effective Time. At or prior to the Effective Time, WSMP shall take all corporate
action necessary to reserve for issuance sufficient shares of WSMP Common Stock
for delivery upon exercise of the Sagebrush Options assumed by it in accordance
with this Section 2.8.
(c) As soon as practicable after the Closing Date, WSMP shall file with the
SEC a registration statement on Form S-8 (or any successor or other appropriate
form) covering the shares of WSMP Common Stock issuable upon exercise of the
Sagebrush Options and shall use its best efforts to maintain the effectiveness
of such registration statement (and to maintain compliance of the prospectus or
prospectuses contained therein with subsections (a) and (c) of Section 10 of the
Securities Act) for so long as any Sagebrush Options remain outstanding. With
respect to any individuals who become subject to the reporting requirements of
Section 16(a) of the Exchange Act by virtue of the Merger, WSMP shall administer
the Sagebrush Option Plan assumed pursuant to this Section 2.8 in a manner that
complies with Rule 16b-3 promulgated under the Exchange Act. The obligations in
this Section 2.8 of WSMP to file a registration statement and to maintain its
effectiveness shall inure to the benefit of all those persons who hold Sagebrush
Options on the Closing Date and, thereafter, shall be enforceable directly by
them.
2.9 Dissenting Shares. Any Sagebrush shareholder who shall have lawfully
dissented from the Merger in accordance with the NCBCA and who shall have
properly exercised such holder's rights to demand payment of the value of the
holder's shares (the "Dissenting Shares") as provided in the NCBCA (a
"Dissenting Shareholder") shall thereafter have only such rights as are provided
to a Dissenting Shareholder by the NCBCA and shall have no rights under Section
2.5 of this Agreement; provided, however, that, if a Dissenting Shareholder
shall withdraw (in accordance with the NCBCA) such holder's demand for such
appraisal or shall become ineligible for such appraisal, then such holder's
Dissenting Shares shall thereupon cease to be Dissenting Shares and shall be
converted into and shall represent only the right to receive Merger
A-6
<PAGE> 146
Consideration provided for in Section 2.5, without interest thereon, upon
surrender of the certificate or certificates representing the Dissenting Shares.
2.10 Tax Consequences. The parties hereto intend that the Merger shall
constitute a "reorganization" within the meaning of Section 368(a)(1)(A) of the
Code by reason of Section 368(a)(2)(E) of the Code and that this Agreement shall
constitute a "plan of reorganization" for the purposes of Section 368 of the
Code. No consideration that could constitute "other property" within the meaning
of Section 356 of the Code is being transferred by, or on behalf of, WSMP or Sub
in exchange for Sagebrush's capital stock. Each party hereto agrees and
covenants to report the Merger in accordance with such intention that it may be
taxed as a reorganization for federal income tax purposes, including filing such
returns, reports, information statements and declarations with applicable
federal, state, local and other taxing authorities and maintaining such records
as are required by applicable law in a manner consistent with such intention.
2.11 Exchange Ratio Adjustments. (a) In the event that Sagebrush (in
breach of Section 6.7(c) of this Agreement) changes the number of shares of
Sagebrush Common Stock outstanding prior to the Effective Time as a result of a
split, combination or reclassification with respect to such stock or as a result
of a dividend or other distribution on or exchange or redemption of or for such
stock, and the record or effective date therefor or thereof shall be prior to
the Effective Time, then the Exchange Ratio shall be equitably adjusted. In the
event that WSMP (in breach of Section 5.8(c) of this Agreement) changes the
number of shares of WSMP Common Stock outstanding prior to the Effective Time as
a result of a split, combination or reclassification with respect to such stock
or as a result of a dividend or other distribution on or exchange or redemption
of or for such stock, and the record or effective date therefor or thereof shall
be prior to the Effective Time, then the Exchange Ratio shall be equitably
adjusted.
(b) If the Average WSMP Closing Price (as defined below) is greater than
$23.34, then the Exchange Ratio shall be adjusted to become $7.50 divided by the
Average WSMP Closing Price, rounded upward to the nearest ten-thousandth. If the
Average WSMP Closing Price is less than $21.78, then the Exchange Ratio shall be
adjusted to become $7.00 divided by the Average WSMP Closing Price, rounded
upward to the nearest ten-thousandth. As used herein, the term "Average WSMP
Closing Price" means the simple average of the last sale prices per share of
WSMP Common Stock on NASDAQ (as reported by NASDAQ) on the ten consecutive
Trading Days next preceding the date on which the shareholders of Sagebrush
approve the Merger. A "Trading Day" is any day on which the WSMP Common Stock is
actually sold on NASDAQ (as reported by NASDAQ).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF WSMP AND SUB
WSMP and Sub hereby jointly and severally represent and warrant as follows
to Sagebrush:
3.1 Organization and Qualification. Each of WSMP and Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of North Carolina and has the requisite power and authority to carry on
its business as it is now being conducted. Each of WSMP and Sub is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned or leased by it,
or the nature of its activities, is such that qualification as a foreign
corporation in that jurisdiction is required by law, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on WSMP. WSMP has delivered to Sagebrush true and complete copies of the
charter and bylaws of WSMP and Sub.
3.2 Capitalization. The authorized capital stock of WSMP consists of
10,000,000 shares of WSMP Common Stock and 2,500,000 shares of preferred stock,
par value $.01 per share. There is no other capital stock authorized for
issuance by WSMP. At the date of this Agreement, there are validly issued and
outstanding 3,259,949 shares of WSMP Common Stock and no shares of preferred
stock. All such outstanding shares of capital stock are fully paid and
nonassessable. When issued in accordance with the terms hereof, the shares of
WSMP Common Stock to be issued as the Merger Consideration will be duly
authorized, validly
A-7
<PAGE> 147
issued, fully paid and nonassessable. No shares of WSMP capital stock are
reserved for issuance, nor are there outstanding any options, warrants,
convertible securities or other rights, agreements or commitments to issue or
acquire shares of WSMP capital stock, except that there are Preferred Stock
Purchase Rights outstanding in an amount identical to the number of shares of
WSMP Common Stock outstanding and except as disclosed in Section 3.2 of the WSMP
Disclosure Document.
3.3 Subsidiaries. WSMP has disclosed in Section 3.3 of the WSMP Disclosure
Document the identities of all of its Subsidiaries as of the date of this
Agreement. Except as specified in Section 3.3 of the WSMP Disclosure Document,
WSMP or one of its Subsidiaries owns the entire equity interest in each
Subsidiary of WSMP. No equity interest in any such Subsidiary is or may become
required to be issued by reason of any option, warrant or other right relating
to the equity of such Subsidiary, and there is no contract, arrangement or
understanding by which any Subsidiary is bound to issue any of its equity or any
option, warrant or other right relating thereto or by which WSMP is or may be
bound to transfer any part of the equity interest in any of its Subsidiaries.
There is no contract, arrangement or understanding relating to the right of WSMP
to vote or dispose of any of the equity interest in any of its Subsidiaries. The
equity interest in each Subsidiary of WSMP that has been issued has been duly
authorized and is validly issued, fully paid and nonassessable under the
applicable law of the jurisdiction in which such Subsidiary is organized and is
owned by WSMP free and clear of any Lien. Each Subsidiary of WSMP has been duly
organized and is validly existing and in good standing under the laws of the
jurisdiction in which it was organized and has the power and authority necessary
for it to own, lease and operate its properties and assets and to carry on its
business as now conducted. Each Subsidiary of WSMP is duly qualified or licensed
to transact business as a foreign corporation in good standing in the states of
the United States where the character of its assets or the nature or conduct of
its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on WSMP.
3.4 Authority Relative to this Agreement. This Agreement has been duly and
validly executed and delivered by each of WSMP and Sub and constitutes a legal,
valid and binding agreement of each of WSMP and Sub, enforceable against each of
WSMP and Sub in accordance with its terms. Each of WSMP and Sub has all
requisite corporate power and authority to enter into this Agreement, and Sub
has all requisite corporate power and authority to carry out the Merger
contemplated hereby. The Board of Directors of Sub has, subject to the terms and
conditions set forth herein: (a) determined that this Agreement and the
transactions contemplated hereby, including the Merger, are fair to, and in the
best interests of, the sole shareholder of Sub; (b) adopted and approved this
Agreement and the transactions contemplated hereby, including the Merger, in all
respects; and (c) recommended that WSMP, as the sole shareholder of Sub, approve
this Agreement and the Merger. The Board of Directors of WSMP, at a meeting duly
called and held, has, subject to the terms and conditions set forth herein; (d)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are fair to, and in the best interests of, WSMP and its
shareholders; (e) on behalf of WSMP as the sole shareholder of Sub, approved
this Agreement and the transactions contemplated hereby, including the Merger
and the issuance of the Merger Consideration therein, in all respects; and (f)
recommended that the shareholders of WSMP approve the issuance of the Merger
Consideration in the Merger, provided, however, that such recommendation may be
withdrawn, modified or changed to the extent that the Board of Directors of
WSMP, upon making a WSMP Board Determination (as defined in Section 5.9(c) of
this Agreement, determines that it must do so.
3.5 Absence of Breach; No Consents. The execution and delivery of this
Agreement by WSMP and Sub do not, and the performance by WSMP and Sub of their
obligations hereunder will not, assuming the Required WSMP Consents are
obtained, (a) result in a breach of any of the provisions of the charter or
bylaws of WSMP or any of its Subsidiaries; (b) violate any law, rule or
regulation of any State or the United States (except for compliance with
regulatory or licensing laws all of which, to the extent applicable to WSMP and
Sub (and to the extent within the control of WSMP and Sub), will be satisfied in
all material respects prior to the Closing), or of any applicable foreign
jurisdiction, or any order, writ, judgment, injunction, decree, determination or
award of any court or other authority having jurisdiction over WSMP or any of
its Subsidiaries or any of its or their material properties, or cause the
suspension or revocation of any
A-8
<PAGE> 148
authorization, consent, approval or license presently in effect that affects or
binds WSMP or any of its Subsidiaries or any of its or their material
properties, except, with respect to all matters described in this subsection
(b), where such violation will not have a Material Adverse Effect on WSMP; (c)
result in a material breach of or default under any material indenture or loan
or credit agreement or other material agreement or instrument to which WSMP or
any of its Subsidiaries is a party or by which it or they or any of its or their
material properties may be affected or bound; (d) require the authorization,
consent, approval or license of any Person of such a nature that the failure to
obtain the same would have a Material Adverse Effect on WSMP; or (e) constitute
grounds for the loss or suspension of any material permit, license or other
authorization used in the business of WSMP.
3.6 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with this Agreement
or the Merger or any related transaction based upon any agreement, written or
oral, made by or on behalf of WSMP or any of its Subsidiaries, except that the
Financial Advisor to WSMP is entitled to certain payments under its agreement
with WSMP dated as of June 18, 1997.
3.7 Delivered Documents. WSMP has heretofore delivered to Sagebrush each
of the following:
(a) Annual Report of WSMP to its shareholders for its fiscal year
ended the date of the WSMP Balance Sheet;
(b) Annual Report of WSMP on Form 10-K as filed with the SEC for
WSMP's fiscal year ended the date of the WSMP Balance Sheet;
(c) proxy statement of WSMP relating to its most recent annual meeting
of shareholders; and
(d) Quarterly Reports of WSMP on Form 10-Q as filed with the SEC for
each of the first three fiscal quarters of WSMP of the current fiscal year,
and all other reports of WSMP filed with the SEC, to the extent that such
reports have been filed with the SEC after the filing of the report
referred to in clause (b) above and prior to the date hereof.
Each such document did not, at the time it was filed with the SEC, and all
such documents taken together do not, contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made or are
made, respectively, not misleading. All of the financial statements contained in
the foregoing documents were prepared from the books and records of WSMP and its
Subsidiaries. The Audited Financial Statements were prepared in accordance with
GAAP and fairly and accurately reflect the financial condition of WSMP as at the
dates and for the periods indicated. The financial statements of WSMP included
in the reports referred to in clause (d) above were prepared in a manner not
inconsistent with the basis of presentation used in the Audited Financial
Statements and fairly present the financial condition of WSMP as at and for the
periods indicated, subject to normal year-end adjustments that are not material
in amount or effect.
3.8 Joint Proxy Statement, Registration Statement and Prospectus. When the
Joint Proxy Statement, as the same may be amended or supplemented, shall be
mailed to holders of the WSMP Common Stock and the Sagebrush Common Stock, as
applicable, and at all times subsequent to such mailing through the time of
approval of this Agreement and the Merger by the shareholders of WSMP and
Sagebrush, the Joint Proxy Statement, as then amended or supplemented, will
comply in all material respects with the applicable provisions of the Exchange
Act and the rules and regulations of the SEC thereunder. When the Registration
Statement is declared effective under the Securities Act, and at all times
subsequent to such effectiveness through the time of approval of this Agreement
and the Merger by the shareholders of Sagebrush, the Registration Statement and
the Prospectus, as the same may then be amended and supplemented, will comply as
to form in all material respects with all applicable provisions of the
Securities Act and the rules and regulations of the SEC thereunder. At all times
material to a shareholder of WSMP or of Sagebrush: (a) the information supplied
by WSMP for use in the Joint Proxy Statement, as the same may be amended or
supplemented, will not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made, in
the light of circumstances under which they are being made, not misleading; (b)
the Registration Statement, as the same may be amended, will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to
A-9
<PAGE> 149
make the statements therein not misleading; and (c) the Prospectus, as the same
may be supplemented, will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
Notwithstanding any other provision of this Agreement, WSMP makes no
representation or warranty concerning, and shall have no responsibility for, the
accuracy or completeness of any information incorporated into the Joint Proxy
Statement, the Registration Statement or the Prospectus from any Sagebrush SEC
Report or supplied to WSMP by Sagebrush pursuant to Section 4.8 or 6.2 hereof or
otherwise, for use in the Joint Proxy Statement, the Registration Statement, the
Prospectus or any other document filed with the SEC or otherwise disseminated to
the public or to shareholders of WSMP or Sagebrush.
3.9 Merger Consideration Validly Issued. At the Effective Time, the Merger
Consideration will have been duly authorized and, when issued in connection with
the Merger pursuant to the terms hereof, will have been validly issued and will
be fully paid and nonassessable, and no shareholder of WSMP will have any
preemptive rights of subscription or purchase in respect thereof.
3.10 WSMP Shareholder Rights Plan. To the best knowledge of WSMP and Sub
and assuming the accuracy of Section 9.4, there exists no "Acquiring Person" (as
such term is defined in the Rights Agreement). Assuming the accuracy of Section
9.4, neither the execution of this Agreement nor the consummation of the Merger
will cause any person to become an "Acquiring Person" (as so defined).
3.11 State Takeover Laws. No action is necessary on the part of WSMP or
any of its Subsidiaries to exempt any of the transactions contemplated by this
Agreement from any applicable Takeover Laws.
3.12 Absence of Material Differences From WSMP SEC Reports and WSMP
Disclosure Document. Except as disclosed in the WSMP SEC Reports or in the WSMP
Disclosure Document:
(a) No Material Adverse Change. Since the date of the WSMP Balance
Sheet, other than as contemplated or caused by this Agreement, there has
been no Material Adverse Change in WSMP.
(b) Taxes. WSMP has properly filed or caused to be filed all federal,
state, local and foreign income and other tax returns, reports and
declarations that are required by applicable law to be filed by it (except
where the failure to file is not reasonably likely to have a Material
Adverse Effect on WSMP) and has paid, or made full and adequate provision
for the payment of, all federal, state, local and foreign income and other
taxes properly due for the periods covered by such returns, reports and
declarations, except such taxes the nonpayment of which is not reasonably
likely to have a Material Adverse Effect on WSMP. WSMP has not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any tax due that is currently in effect.
(c) Employees. WSMP is not, and following the Closing will not be,
except as contemplated by Sections 7.2(e) and 7.2(f), bound by any express
or implied contract or agreement to employ, directly or as a consultant or
otherwise, any person for any specific period of time or until any specific
age.
(d) Employee Benefit Plans. WSMP has disclosed in Section 3.12(d) of
the WSMP Disclosure Document and has delivered or made available to
Sagebrush prior to the execution of this Agreement correct and complete
copies, in each case, of all pension, retirement, profit-sharing, deferred
compensation, stock option, employee stock ownership, severance pay,
vacation, bonus and other incentive plans, all other written employee
programs, arrangements and agreements, all medical, vision, dental and
other health plans, all life insurance plans and all other employee benefit
plans and fringe benefit plans, including, without limitation, "employee
benefit plans" as that term is defined in Section 3(3) of ERISA, currently
adopted, maintained by, sponsored in whole or in part by or contributed to
by WSMP or an Affiliate thereof for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors and other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors and other beneficiaries are eligible to
participate (collectively, the "WSMP Benefit Plans"). Except as disclosed
in Section 3.12(d) of the WSMP Disclosure Document, neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (i) result in any payment (including, without
limitation, severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director or any employee of WSMP from WSMP
or
A-10
<PAGE> 150
any WSMP Benefit Plan or otherwise, (ii) increase any benefits otherwise
payable under any WSMP Benefit Plan or (iii) result in any acceleration in
the time of payment or vesting of any such benefit. WSMP has made no oral
or written representation with respect to any WSMP Benefit Plan to any
employee of WSMP prior to the date hereof that is not in accordance with
the written or otherwise pre-existing terms and conditions of such plans.
(e) Facilities. The WSMP Facilities are (as to physical plant and
structure) structurally sound, and none of the WSMP Facilities, nor any of
the vehicles or other equipment used by WSMP in connection with its
business, has any defects, and all of them are in good operating condition
and repair and are adequate for the uses to which they are being put, in
each case with such exceptions as are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on WSMP; and
none of the WSMP Facilities, vehicles or other equipment is in need of
maintenance or repairs, except for ordinary, routine maintenance and other
repairs that are not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on WSMP. WSMP is not in breach,
violation or default of any lease with respect to or as a result of which
the other party (whether lessor, lessee, sublessor or sublessee) thereto
has the right to terminate the same, and WSMP has not received notice of
any claim or assertion that it is or may be in any such breach, violation
or default, except, in each such case, for such breaches, violations and
defaults as would not reasonably be expected to have a Material Adverse
Effect on WSMP.
3.13 Federal Income Tax Representations. (a) WSMP is not an "investment
company" as defined in Section 368(a)(2)(F) of the Code.
(b) WSMP owns 100% of the outstanding shares of capital stock and otherwise
is in control of Sub within the meaning of Section 368(c) of the Code.
(c) Sub has been formed solely for the purpose of consummating the Merger.
Sub has not conducted and will not conduct any business activities or other
operations of any kind other than the issuance of its stock to WSMP prior to the
Merger. Sub will have no liabilities assumed by Sagebrush and will not transfer
to Sagebrush any assets subject to liabilities in the Merger.
(d) WSMP has no plan, arrangement or intention to cause Sagebrush on or
after the Effective Time to issue additional shares of its capital stock that
would cause WSMP to lose control, or otherwise result in WSMP losing control (in
both cases within the meaning of Section 368(c) of the Code), of Sagebrush.
(e) Neither WSMP nor Sub has any current plan, arrangement or intention to
liquidate Sagebrush; to merge Sagebrush with or into another corporation; to
sell or otherwise dispose of the stock of Sagebrush; or to sell or otherwise
dispose (or cause to be sold or otherwise disposed) of any of Sagebrush's
assets, including the assets of Sub acquired in the Merger, except for
dispositions made in the ordinary course of business or transfers described in
Section 368(a)(2)(C) of the Code.
(f) WSMP has no plan, arrangement or intention to directly or indirectly
reacquire any of the WSMP Common Stock issued in the Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SAGEBRUSH
Sagebrush represents and warrants as follows to WSMP and Sub:
4.1 Organization and Qualification. Sagebrush is a corporation duly
organized, validly existing and in good standing under the laws of North
Carolina and has the requisite power and authority to carry on its business as
it is now being conducted. Sagebrush is duly qualified as a foreign corporation
to do business, and is in good standing, in each jurisdiction where the
character of the properties owned or leased by it, or the nature of its
activities, is such that qualification as a foreign corporation in that
jurisdiction is required by law, except for such jurisdictions in which the
failure to be so qualified or licensed is not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Sagebrush.
Sagebrush has delivered to WSMP true and complete copies of the charter and
bylaws of Sagebrush.
A-11
<PAGE> 151
4.2 Capitalization. The authorized capital stock of Sagebrush consists of
50,000,000 shares of Sagebrush Common Stock and 10,000,000 shares of preferred
stock. There is no other capital stock authorized for issuance by Sagebrush. At
the date of this Agreement, there are validly issued and outstanding 5,925,000
shares of Sagebrush Common Stock and no shares of preferred stock. All such
outstanding shares of capital stock are fully paid and nonassessable. No shares
of Sagebrush capital stock are reserved for issuance, nor are there outstanding
any options, warrants, convertible securities or other rights, agreements or
commitments to issue or acquire shares of Sagebrush capital stock, except as
disclosed in Section 4.2 of the Sagebrush Disclosure Document.
4.3 Subsidiaries. Sagebrush has disclosed in Section 4.3 of the Sagebrush
Disclosure Document the identities of all of its Subsidiaries as of the date of
this Agreement. Sagebrush or one of its Subsidiaries owns all of the equity
interests in each Subsidiary of Sagebrush. No equity interest in any such
Subsidiary is or may become required to be issued by reason of any option,
warrant or other right relating to the equity of such Subsidiary, and there is
no contract, arrangement or understanding by which any Subsidiary is bound to
issue any of its equity or any option, warrant or other right relating thereto
or by which Sagebrush is or may be bound to transfer any part of the equity
interest in any of its Subsidiaries. There is no contract, arrangement or
understanding relating to the right of Sagebrush to vote or dispose of any of
the equity interest in any of its Subsidiaries. The equity interest in each
Subsidiary of Sagebrush that has been issued has been duly authorized and is
validly issued, fully paid and nonassessable under the applicable law of the
jurisdiction in which such Subsidiary is organized and is owned by Sagebrush or
another Subsidiary free and clear of any Lien. Each Subsidiary of Sagebrush has
been duly organized and is validly existing and in good standing under the laws
of the jurisdiction in which it was organized and has the power and authority
necessary for it to own, lease and operate its properties and assets and to
carry on its business as now conducted. Each Subsidiary of Sagebrush is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the states of the United States where the character of its assets or
the nature or conduct of its business requires it to be so qualified or
licensed, except for such jurisdictions in which the failure to be so qualified
or licensed is not reasonably likely to have, individually or in the aggregate,
a Material Adverse Effect on Sagebrush.
4.4 Authority Relative to This Agreement. This Agreement has been duly and
validly executed and delivered by Sagebrush and the Sagebrush Shareholders and
constitutes a legal, valid and binding agreement of Sagebrush and the Sagebrush
Shareholders, enforceable against Sagebrush and the Sagebrush Shareholders in
accordance with its terms. Sagebrush has all requisite corporate power and
authority to enter into this Agreement and to carry out the Merger contemplated
hereby. The Board of Directors of Sagebrush, at a meeting duly called and held,
has, subject to the terms and conditions set forth herein: (a) determined that
this Agreement and the transactions contemplated hereby, including the Merger,
are fair to, and in the best interests of, the shareholders of Sagebrush; (b)
adopted and approved this Agreement and the transactions contemplated hereby,
including the Merger, in all respects; and (c) recommended that the shareholders
of Sagebrush approve this Agreement and the Merger, provided, however, that such
recommendation may be withdrawn, modified or changed to the extent that the
Board of Directors of Sagebrush, upon making a Sagebrush Board Determination (as
defined in Section 6.8(c) of this Agreement), determines that it must do so. The
Financial Advisor to Sagebrush has delivered to the Board of Directors of
Sagebrush its opinion letter, dated on or about the date hereof, to the effect
that the Merger is fair to the shareholders of Sagebrush from a financial point
of view. Sagebrush has been authorized by the Financial Advisor to Sagebrush to
refer to such opinion letter, and to include such opinion letter (or a
substantially similar opinion letter), in the Joint Proxy Statement.
4.5 Absence of Breach; No Consents. The execution and delivery of this
Agreement by Sagebrush and the Sagebrush Shareholders do not, and the
performance by Sagebrush and the Sagebrush Shareholders of their obligations
hereunder will not, assuming the Required Sagebrush Consents are obtained, (a)
result in a breach of any of the provisions of the charter or bylaws of
Sagebrush; (b) violate any law, rule or regulation of any State or the United
States (except for compliance with regulatory or licensing laws all of which, to
the extent applicable to Sagebrush (and to the extent within the control of
Sagebrush), will be satisfied in all material respects prior to the Closing), or
of any applicable foreign jurisdiction, or any order, writ, judgment,
injunction, decree, determination or award of any court or other authority
having jurisdiction over Sagebrush,
A-12
<PAGE> 152
or any of the Sagebrush Shareholders, or any of its or their material
properties, or cause the suspension or revocation of any authorization, consent,
approval or license presently in effect that affects or binds Sagebrush or any
of the Sagebrush Shareholders, or any of its or their material properties,
except, with respect to all matters described in this subsection (b), where such
violation will not have a Material Adverse Effect on Sagebrush; (c) result in a
material breach of or default under any material indenture or loan or credit
agreement or other material agreement or instrument to which Sagebrush or any of
the Sagebrush Shareholders is a party or by which it or they or any of its or
their material properties may be affected or bound; (d) require the
authorization, consent, approval or license of any Person of such a nature that
the failure to obtain the same would have a Material Adverse Effect on
Sagebrush; or (e) constitute grounds for the loss or suspension of any material
permit, license or other authorization used in the business of Sagebrush.
4.6 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's, or other fee or commission in connection with this
Agreement or the Merger or any related transaction based upon any agreement,
written or oral, made by or on behalf of Sagebrush, except that the Financial
Advisor to Sagebrush is entitled to certain payments under its letter agreement
with Sagebrush dated October 14, 1997.
4.7 Delivered Documents. Sagebrush has heretofore delivered to WSMP each
of the following:
(a) Annual Report of Sagebrush to its shareholders for its fiscal year
ended the date of the Sagebrush Balance Sheet;
(b) Annual Report of Sagebrush on Form 10-K as filed with the SEC for
Sagebrush's fiscal year ended the date of the Sagebrush Balance Sheet;
(c) proxy statement of Sagebrush relating to its most recent annual
meeting of shareholders; and
(d) Quarterly Reports of Sagebrush on Form 10-Q as filed with the SEC
for each of the first three fiscal quarters of Sagebrush of the current
fiscal year, and all other reports of Sagebrush filed with the SEC, to the
extent that such reports have been filed with the SEC after the filing of
the report referred to in clause (b) above and prior to the date hereof.
Each such document did not, at the time it was filed with the SEC, and all
such documents taken together do not, contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made or are
made, respectively, not misleading. All of the financial statements contained in
the foregoing documents were prepared from the books and records of Sagebrush
and its Subsidiaries. The Audited Financial Statements were prepared in
accordance with GAAP and fairly and accurately reflect the financial condition
of Sagebrush as at the dates and for the periods indicated. The financial
statements of Sagebrush included in the reports referred to in clause (d) above
were prepared in a manner not inconsistent with the basis of presentation used
in the Audited Financial Statements and fairly present the financial condition
of Sagebrush as at and for the periods indicated, subject to normal year-end
adjustments that are not material in amount or effect.
4.8 Joint Proxy Statement, Registration Statement and Prospectus. When the
Joint Proxy Statement, as the same may be amended or supplemented, shall be
mailed to holders of the Sagebrush Common Stock and the WSMP Common Stock, as
applicable, and at all times subsequent to such mailing through the time of
approval of this Agreement and the Merger by the shareholders of Sagebrush and
WSMP, the Joint Proxy Statement, as then amended or supplemented, will comply in
all material respects with the applicable provisions of the Exchange Act and the
rules and regulations of the SEC thereunder. When the Registration Statement is
declared effective under the Securities Act, and at all times subsequent to such
effectiveness through the time of approval of this Agreement and the Merger by
the shareholders of Sagebrush, the Registration Statement and the Prospectus, as
the same may then be amended and supplemented, will comply as to form in all
material respects with all applicable provisions of the Securities Act and the
rules and regulations of the SEC thereunder. At all times material to a
shareholder of Sagebrush or of WSMP: (a) the information supplied by Sagebrush
for use in the Joint Proxy Statement, as the same may be amended or
supplemented, will not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made, in
the light of circumstances under which they were made, not misleading; (b) the
information supplied to WSMP by Sagebrush for use in the Registration Statement,
A-13
<PAGE> 153
as the same may be amended, will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and (c) the information supplied
to WSMP by Sagebrush for use in the Prospectus, as the same may be supplemented,
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. Notwithstanding
any other provision of this Agreement, Sagebrush makes no representation or
warranty concerning, and shall have no responsibility for, the accuracy or
completeness of any information incorporated into the Joint Proxy Statement, the
Registration Statement or the Prospectus from any WSMP SEC Report or supplied to
Sagebrush by WSMP pursuant to Section 3.8 or 5.2 hereof or otherwise, for use in
the Joint Proxy Statement, the Registration Statement, the Prospectus or any
other document filed with the SEC or otherwise disseminated to the public or to
shareholders of WSMP or Sagebrush.
4.9 State Takeover Laws. No action is necessary on the part of Sagebrush
or any of its Subsidiaries to exempt any of the transactions contemplated by
this Agreement from any applicable Takeover Laws.
4.10 Absence of Material Differences From Sagebrush SEC Reports and
Sagebrush Disclosure Document. Except as disclosed in the Sagebrush SEC Reports
or in the Sagebrush Disclosure Document:
(a) No Material Adverse Change. Since the date of the Sagebrush
Balance Sheet, other than as contemplated or caused by this Agreement,
there has been no Material Adverse Change in Sagebrush.
(b) Taxes. Sagebrush has properly filed or caused to be filed all
federal, state, local and foreign income and other tax returns, reports and
declarations that are required by applicable law to be filed by it (except
where the failure to file is not reasonably likely to have a Material
Adverse Effect on Sagebrush) and has paid, or made full and adequate
provision for the payment of, all federal, state, local and foreign income
and other taxes properly due for the periods covered by such returns,
reports and declarations, except such taxes the nonpayment of which is not
reasonably likely to have a Material Adverse Effect on Sagebrush. Sagebrush
has not executed an extension or waiver of any statute of limitations on
the assessment or collection of any tax due that is currently in effect.
(c) Employees. Sagebrush is not, and following the Closing will not
be, bound by any express or implied contract or agreement to employ,
directly or as a consultant or otherwise, any person for any specific
period of time or until any specific age.
(d) Employee Benefit Plans. Sagebrush has disclosed in Section
4.10(d) of the Sagebrush Disclosure Document and has delivered or made
available to WSMP prior to the execution of this Agreement correct and
complete copies, in each case, of all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance
pay, vacation, bonus and other incentive plans, all other written employee
programs, arrangements and agreements, all medical, vision, dental and
other health plans, all life insurance plans and all other employee benefit
plans and fringe benefit plans, including, without limitation, "employee
benefit plans" as that term is defined in Section 3(3) of ERISA, currently
adopted, maintained by, sponsored in whole or in part by or contributed to
by Sagebrush or any Subsidiary thereof for the benefit of employees,
retirees, dependents, spouses, directors, independent contractors and other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors and other beneficiaries are eligible to
participate (collectively, the "Sagebrush Benefit Plans"). Except as
disclosed in Section 4.10(d) of the Sagebrush Disclosure Document, neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute
or otherwise) becoming due to any director or any employee of Sagebrush
from Sagebrush under any Sagebrush Benefit Plan or otherwise, (ii) increase
any benefits otherwise payable under any Sagebrush Benefit Plan or (iii)
result in any acceleration in the time of payment or vesting of any such
benefit. Sagebrush has made no oral or written representation with respect
to any aspect of any Sagebrush Benefit Plan to any employee of Sagebrush
prior to the date hereof that is not in accordance with the written or
otherwise pre-existing terms and conditions of such plans.
A-14
<PAGE> 154
(e) Facilities. The Sagebrush Facilities are (as to physical plant
and structure) structurally sound, and none of the Sagebrush Facilities,
nor any of the vehicles or other equipment used by Sagebrush in connection
with its business, has any defects, and all of them are in good operating
condition and repair and are adequate for the uses to which they are being
put, in each case with such exceptions as are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on
Sagebrush; and none of the Sagebrush Facilities, vehicles or other
equipment is in need of maintenance or repairs, except for ordinary,
routine maintenance and other repairs that are not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on
Sagebrush. Sagebrush is not in breach, violation or default of any lease
with respect to or as a result of which the other party (whether lessor,
lessee, sublessor or sublessee) thereto has the right to terminate the
same, and Sagebrush has not received notice of any claim or assertion that
it is or may be in any such breach, violation or default, except, in each
such case, for such breaches, violations and defaults as would not
reasonably be expected to have a Material Adverse Effect on Sagebrush.
4.11 Certain Tax Matters. (a) The assets of Sagebrush at the Effective
Time will constitute at least 90 percent of the fair market value of the net
assets and at least 70 percent of the fair market value of the gross assets held
by Sagebrush immediately before the Merger. For this purpose, any amounts paid
for expenses of Sagebrush related to the Merger, any distributions and
redemptions made in anticipation of the Merger and any amounts paid to
dissenting shareholders will be included as assets of Sagebrush held immediately
before the Merger.
(b) Except for any additional liabilities created pursuant to this
Agreement or otherwise incurred in respect of the Merger, the liabilities of
Sagebrush were incurred by Sagebrush in the ordinary course of its business.
(c) Sagebrush is not an "investment company" as defined in Section
368(a)(2)(F) of the Code.
ARTICLE V
COVENANTS OF WSMP
5.1 Shareholder Approval. WSMP, acting through its Board of Directors, and
in accordance with applicable law, covenants and agrees with Sagebrush that: (i)
it will duly call, give notice of, convene and hold a meeting of its
shareholders as soon as practicable for the purpose of considering and taking
action upon the issuance of the Merger Consideration in the Merger as required
by Rule 4460 of the NASD Manual; (ii) unless it shall have made a WSMP Board
Determination to the contrary, it will include in the Joint Proxy Statement its
recommendation that shareholders of WSMP vote in favor of the approval of the
issuance of the Merger Consideration in the Merger; and (iii) it will use its
best efforts (A) to obtain and furnish the information required to be included
by it in the Joint Proxy Statement (and any preliminary version thereof) and to
cause the Joint Proxy Statement to be mailed to its shareholders at the earliest
practicable time and, (B) unless it shall have made a WSMP Board Determination
to the contrary, to obtain the necessary approvals by its shareholders of
issuance of the Merger Consideration in the Merger.
5.2 Best Efforts. Subject to the terms and conditions herein provided and
except to the extent that WSMP shall have made a WSMP Board Determination to the
contrary, each of WSMP and Sub agrees to use its best efforts to take or cause
to be taken all such actions necessary, proper or advisable under applicable
laws and regulations to satisfy the conditions set forth in Article VII and to
consummate the transactions contemplated by this Agreement, including, without
limitation: (a) in the preparation and filing of the Registration Statement, the
Prospectus and the Joint Proxy Statement, and any amendments and supplements to
any thereof; and (b) the execution of any additional documents necessary to
consummate the transactions contemplated hereby. Without limiting the generality
of the foregoing, WSMP will cooperate with Sagebrush in the timely preparation
and filing with the SEC of the Registration Statement, the Prospectus and the
Joint Proxy Statement, and WSMP will use its best efforts to cause (a) the
Registration Statement to be declared effective under the Securities Act and (b)
the Joint Proxy Statement to be cleared for mailing to its shareholders by the
SEC. WSMP will promptly advise Sagebrush if, to its knowledge, at any time
before the
A-15
<PAGE> 155
Effective Time, (x) the Registration Statement, as the same may be amended,
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (y) the Prospectus, as the same may be supplemented, contains an
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading or (z) the Joint Proxy Statement, as the
same may be amended or supplemented, contains any untrue statement of a material
fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they are being
made, not misleading. WSMP will notify Sagebrush promptly of the receipt by it
of any comments of the SEC and will supply Sagebrush with copies of all
correspondence between it and its representatives and the SEC or members of its
staff with respect to the Registration Statement, the Prospectus and the Joint
Proxy Statement.
5.3 Reservation of Shares. WSMP has reserved, or will reserve prior to
Closing, for issuance, such number of shares of WSMP Common Stock as shall be
necessary to pay the Merger Consideration to shareholders of Sagebrush pursuant
to Article II hereof.
5.4 Continuing Investigation; Confidentiality. WSMP covenants and agrees
with Sagebrush that Sagebrush may, prior to the Effective Time and through its
own employees and agents, make such investigation of the business and assets of
WSMP as Sagebrush considers necessary or desirable, it being understood and
agreed that such investigation shall have no effect on any representations or
warranties hereunder. WSMP covenants and agrees to permit Sagebrush and its
representatives to have, after the date hereof, full access at all reasonable
times to the premises and to the books and records of WSMP, and the officers of
WSMP will furnish to Sagebrush and its representatives such financial and
operating data and other information with respect to the business and assets of
WSMP as Sagebrush from time to time may reasonably request. In the event of
termination of this Agreement, Sagebrush will deliver to WSMP all documents,
work papers and other material so obtained before or after the execution hereof
and will not itself use, directly or indirectly, any information so obtained or
otherwise obtained from WSMP hereunder, or in connection herewith, and will use
its best efforts to have all such information kept confidential and not used in
any way detrimental to WSMP.
5.5 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred by WSMP in connection with this Agreement and the transactions
contemplated hereby shall be paid by WSMP and Sub except as otherwise provided
herein.
5.6 Publicity. Prior to the first to occur of the termination of this
Agreement and the second business day following the Effective Time, any written
news releases by WSMP pertaining to this Agreement or the Merger shall be
submitted to Sagebrush for review and approval prior to release and shall be
released only in a form approved by Sagebrush; provided, however, that (1) such
approval shall not be unreasonably delayed or withheld, and (2) such review and
approval shall not be required of a release or releases by WSMP if in WSMP's
reasonable judgment (exercised in consultation with Counsel to WSMP) it would
prevent the dissemination of information in such time as may be necessary or
appropriate to comply with applicable law or NASDAQ rules (in which case,
however, the text of the announcement, if written, or a written summary thereof,
if oral, shall be provided promptly to Sagebrush).
5.7 Disclosure Amendments. WSMP shall notify Sagebrush of any changes,
additions or events that should, consistently with this Agreement, result in any
amendment to any WSMP SEC Report or to the WSMP Disclosure Document promptly
after the occurrence of the same and again at the closing by delivery of
appropriate amendments thereto. No notification made pursuant to this Section
shall be deemed to cure any misrepresentation or any breach of warranty made in
or in connection with this Agreement unless Sagebrush specifically agrees
thereto in writing.
5.8 Conduct of Business Pending the Closing. WSMP covenants and agrees
with Sagebrush that, prior to the Closing, unless Sagebrush shall otherwise
consent in writing, except with respect to its food
A-16
<PAGE> 156
manufacturing business (which WSMP shall continue to manage in its sole and
absolute discretion) and except as otherwise contemplated by this Agreement or
Section 5.8 of the WSMP Disclosure Document:
(a) its business and the business of its Subsidiaries will be
conducted in the ordinary and usual course, it will use reasonable efforts
to keep intact its and their business organizations and goodwill, and it
will use reasonable efforts to keep available the services of their
respective officers and employees and maintain good relationships with
suppliers, lenders, creditors, distributors, employees, customers and
others having business or financial relationships with them;
(b) it will continue properly and promptly (1) to file when due all
periodic reports and other documents required to be filed by it with the
SEC and all federal, state, local, foreign and other tax returns, reports
and declarations required to be filed by it (except where the failure to
file any such tax returns, reports and declarations would not be reasonably
likely to have a Material Adverse Effect on WSMP) and (2) to pay, or make
full and adequate provision for the payment of, all taxes and governmental
charges due from or payable by it, except for such taxes and charges the
failure to make the prompt payment of which is not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on WSMP;
(c) it will not (1) amend or restate its charter other than to change
the name of WSMP or to increase the number of authorized directors of WSMP
or (2) split, combine or reclassify any of its securities, or declare, set
aside or pay any dividend or other distribution on any of its securities,
or make or agree or commit to make any exchange for or redemption of any of
its securities payable in cash, stock or property;
(d) neither it nor any of its Subsidiaries will, in any such case, (1)
issue or agree to issue any additional shares of, or options, warrants or
other rights of any kind to acquire any shares of, its capital stock of any
class, whether by purchase or conversion or exchange of other securities,
except that WSMP may issue shares upon the exercise of options, warrants,
convertible securities and other rights, agreements and commitments
outstanding at the date hereof, or (2) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(e) neither it nor any of its Subsidiaries will create, incur, assume
or guarantee any long-term indebtedness for borrowed money or, except in
the ordinary course of business and consistent with past practice, any
short-term indebtedness for borrowed money;
(f) neither it nor any of its Subsidiaries will (1) adopt, enter into
or amend any bonus, profit sharing, compensation, stock option, warrant,
pension, retirement, deferred compensation, employment, severance,
termination, change in control or other employee benefit plan, agreement,
trust fund or arrangement for the benefit or welfare of any officer,
director, employee or consultant or (2) agree to any increase in the
compensation payable or to become payable to, or any increase in the
contractual term of employment of, any officer, director, employee or
consultant, except in the ordinary course of business and generally
consistent with past practice;
(g) neither it nor any of its Subsidiaries will sell, lease, mortgage,
encumber or otherwise dispose of or grant any interest in any of its assets
or properties, except for sales, encumbrances and other dispositions or
grants in the ordinary course of business and consistent with past practice
and except for Liens for taxes not yet due or Liens that are not material
in amount or effect and do not impair the use of the property;
(h) neither it nor any of its Subsidiaries will (1) acquire (by
merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other organization or division thereof engaged in any
business (including, in particular, restaurant operations) or any equity
interest therein; (2) enter into any contract or agreement (other than in
the ordinary course of business consistent with past practice) that would
be material to WSMP; or (3) authorize or make any capital expenditure or
expenditures individually in excess of $10,000 or in the aggregate in
excess of $50,000; and
(i) neither it nor any of its Subsidiaries will enter into any
agreement, commitment or understanding, whether in writing or otherwise,
with respect to any of the matters referred to in subsections (c) through
(h) above.
A-17
<PAGE> 157
5.9 No Solicitation. (a) WSMP, Sub, their Affiliates and their respective
officers, directors, employees, representatives and agents shall immediately
cease all existing discussions or negotiations, if any, with any Persons (other
than Sagebrush and the Sagebrush Shareholders) conducted heretofore with respect
to any WSMP Acquisition Proposal. For purposes of this Agreement, the term "WSMP
Acquisition Proposal" means any proposal that relates to (i) a possible
acquisition of all or substantially all of the assets of WSMP, whether by
merger, purchase of assets or any similar transaction, or (ii) a tender or
exchange offer for, or purchase of, all or substantially all of the capital
stock of WSMP at any time outstanding.
(b) Except as set forth in this Section 5.9, neither WSMP, Sub, any of
their Affiliates nor any of their respective officers, directors, employees,
representatives, financial advisors or agents shall, directly or indirectly,
encourage or solicit submission of any inquiries, proposals or offers by,
participate in or initiate any discussions or negotiations with, disclose any
information about WSMP or any of its Subsidiaries to, or otherwise assist,
facilitate or encourage, or enter into any agreement or understanding with, any
Person (other than Sagebrush and the Sagebrush Shareholders) in connection with
any WSMP Acquisition Proposal. WSMP shall notify Sagebrush promptly of the terms
and conditions of any written or oral WSMP Acquisition Proposal when such a WSMP
Acquisition Proposal is made and shall advise Sagebrush promptly of any material
modification in any such WSMP Acquisition Proposal.
(c) WSMP may, directly or indirectly, furnish to any Person information and
access, in response to a request for information or access made incident to a
WSMP Acquisition Proposal, provided that such request was not encouraged,
solicited or initiated by WSMP, Sub, any of their Affiliates or any of their
respective officers, directors, employees, representatives or agents, and may
participate in discussions and negotiate with such Person concerning any WSMP
Acquisition Proposal, in each case only if and to the extent that the Board of
Directors of WSMP has made a WSMP Board Determination. For purposes of this
Agreement, a "WSMP Board Determination" means that the Board of Directors of
WSMP shall have determined in good faith, after consultation with counsel to
WSMP, that the taking of action or the failure to take action (or to withdraw,
modify or change a recommendation) is necessary in execution of such directors'
duties under the NCBCA. It is agreed that, in light of the provisions hereof for
adjusting the Exchange Ratio, no such adjustment of the Exchange Ratio shall
constitute a basis for a WSMP Board Determination.
5.10 Pooling; Reorganization. WSMP will not knowingly take any actions
that would cause the transactions contemplated hereby, including the Merger, to
fail to qualify for "pooling-of-interests" accounting treatment consistent with
GAAP and the rules and regulations of the SEC or to be treated as a
"reorganization" within the meaning of Section 368(a) of the Code.
5.11 State Takeover Laws. Neither WSMP nor any of its Subsidiaries shall
take any steps to make the transactions contemplated by this Agreement subject
to any Takeover Law.
5.12 Maintenance of Records. WSMP agrees that it will maintain for at
least seven years from the Closing Date the books, records and other documents
of Sagebrush, its Subsidiaries and their respective predecessors, all as such
documents exist on the Closing Date (the "Closing Date Records"). WSMP agrees to
afford to current and former shareholders of Sagebrush and its predecessors, and
their accountants, counsel and representatives, full access (but only to the
extent that such shareholders can demonstrate a reasonable need for such
access), during normal business hours for a period of seven years from the
Closing Date, to the Closing Date Records.
5.13 Indemnification and Insurance. (a) From and after the Effective Time,
the Surviving Subsidiary, to the fullest extent permitted by applicable law,
shall indemnify, defend and hold harmless all persons who on or at any time
prior to the Effective Time serve or have served as directors or officers of
Sagebrush, any of its Subsidiaries or any of their predecessors from and against
any loss, damage, liabilities, cost or expense incurred by them in connection
with any claim, action, suit, proceeding or investigation, including, without
limitation, any proceeding brought by or on behalf of Sagebrush, any of its
Subsidiaries, any of their respective predecessors or WSMP (collectively,
"Claims"), that is based upon or arises from, in whole or in part, the actions,
conduct or omissions of such indemnified party at or prior to the Effective Time
in his or her capacity as such director or officer, or in any other capacity in
which he or she is serving or served at the request of Sagebrush, any of its
Subsidiaries or any of their predecessors (including as trustee or administrator
of any
A-18
<PAGE> 158
employee benefit plan of any of them). In connection therewith, the Surviving
Subsidiary shall pay any expenses incurred by any such indemnified party in
advance of the final disposition of any such Claim to the fullest extent
permitted by applicable law. The rights to indemnification hereunder are in
addition to, and not in limitation of, any other rights to indemnification that
any such indemnified person may have under applicable law or the Amended and
Restated Articles of Incorporation or Bylaws of Sagebrush.
(b) From and after the Effective Time, WSMP hereby guarantees the due and
timely payment and performance by the Surviving Subsidiary of its obligations
under subsection (a) of this Section. This guaranty is a guaranty of payment and
performance and not of collection. From and after the Effective Time, this
guaranty shall be absolute and unconditional and shall not be affected by any
dissolution or liquidation of the Surviving Subsidiary or any other event or
circumstance occurring thereafter. WSMP hereby waives the provisions of Sections
26-7 through 26-9 of the North Carolina General Statutes, as amended to date,
with respect to this guaranty.
(c) This Section 5.13 is intended to be for the benefit of, and shall be
enforceable by, the indemnified parties referred to in subsection (a), and their
heirs and personal representatives, and shall be binding upon WSMP and the
Surviving Subsidiary and their respective successors and assigns.
5.14 Registration of WSMP Common Stock Issuable to Certain Sagebrush
Affiliates. (a) Within 30 days after the Effective Time, WSMP shall prepare and
file with the SEC, and thereafter shall use its reasonable best efforts to cause
to be declared effective by the SEC, a registration statement providing for the
registration under the Securities Act of those shares of WSMP Common Stock
issued as Merger Consideration in the Merger to or for the benefit of each
person who, at the time of the meeting of shareholders of Sagebrush at which the
Merger is approved, is an affiliate (as defined in Rules 144 and 145(c) under
the Securities Act) of Sagebrush and who acquires beneficial ownership in the
Merger of a number of shares of WSMP Common Stock in excess of one percent of
the total number of shares of WSMP Common Stock outstanding after giving effect
to the Merger, to permit the public resale of such shares (the "Registrable
Shares") by each such person, the direct owners of any such shares beneficially
held by such person or such person's Approved Transferees (as defined below).
Such persons, the direct owners of any such shares beneficially held by such
persons and their respective Approved Transferees are referred to herein as
"Qualified Holders." The term "Approved Transferee" shall mean the estate of a
Qualified Holder, the beneficiary of any Qualified Holder's estate and any
person to whom any Qualified Holder makes a bona fide gift of any of such
Qualified Holder's Registrable Shares, provided that such Approved Transferee
first agrees in writing to be bound by the provisions of this Section 5.14 as a
Qualified Holder.
(b) The plan of distribution of the Registrable Shares that will be
described in such registration statement (the "Plan of Distribution") shall be
sales by or for the account of such Qualified Holders in the over-the-counter
market, on any exchange on which the Registrable Shares may then be listed or
otherwise, at prices and on terms then prevailing or at prices related to the
then current market price, at fixed prices that may be changed or in negotiated
transactions at negotiated prices. The Plan of Distribution shall provide that
the method of any such sales may include any one or more of the following
methods: (i) a block trade (that may involve crosses) in which the broker or
dealer so engaged will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(ii) purchases by a broker or dealer as principal and resale by such broker or
dealer for its own account pursuant to the prospectus constituting a part of the
registration statement filed pursuant to this Section 5.14; (iii) exchange
distributions and/or secondary distributions in accordance with the rules of the
applicable exchange; (iv) ordinary brokerage transactions and transactions in
which the broker solicits purchasers; and (v) privately negotiated transactions.
Additionally, with respect to Qualified Holders requesting it or agreeing to
participate in it, the Plan of Distribution may be such other or additional plan
of distribution (including a firm commitment underwriting) as may be approved by
the Board of Directors of WSMP in its sole and absolute discretion. The
registration statement filed pursuant to this Section 5.14 may also cover other
shares of WSMP Common Stock to be sold by WSMP or other shareholders of WSMP.
WSMP shall use its reasonable best efforts to keep such registration statement
current and effective until the earliest of (A) three years from the Effective
Time, (B) such time as all of the Registrable Shares registered thereunder shall
have been sold in the offering or (C) such time as all of the Registrable Shares
registered thereunder may be publicly resold by the
A-19
<PAGE> 159
Qualified Holders thereof without registration under the Securities Act and
without a volume limitation or other condition (except a condition that has then
been met) and the Qualified Holders shall have received an opinion letter to
that effect issued by Counsel to WSMP, after which earliest time WSMP in its
discretion may withdraw such registration statement as it relates to any
Registrable Shares not already sold by the Qualified Holders and shall notify
the Qualified Holders of such withdrawal. Upon receiving such notice of
withdrawal, the Qualified Holders shall terminate and shall cause all third
parties to terminate any further offer or sale of Registrable Shares pursuant to
such registration statement.
(c) Whenever WSMP registers Registrable Shares pursuant to this Section
5.14, WSMP agrees that it shall do the following:
(1) Prepare for filing and file with the SEC such amendments and
supplements to the registration statement and the prospectus used in
connection therewith, and such reports and other filings under the Exchange
Act, as may be necessary to keep said registration statement effective and
to comply with the prospectus delivery requirements of the Securities Act
with respect to the sale of securities covered by said registration
statement until such time as it is permitted to withdraw such registration
statement;
(2) Furnish to each Qualified Holder such copies of each preliminary
and final prospectus and such other documents as such Qualified Holder may
reasonably request to facilitate the public offering of such Qualified
Holder's Registrable Shares;
(3) Use its best efforts to register or qualify the Registration
Shares under the state securities or "blue sky" laws of such U.S.
jurisdictions as any Qualified Holder may reasonably request; provided,
however, that, in connection therewith, WSMP shall not be required to
qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction; and
(4) Furnish to each Qualified Holder an opinion letter of Counsel to
WSMP to the effect that (i) the registration statement covering such
Registrable Shares has become effective under the Securities Act and, to
the best knowledge of such counsel, no stop order suspending or purporting
to suspend the effectiveness of the registration statement or suspending or
preventing the use of the prospectus has been issued, and no proceedings
for that purpose have been instituted or are pending before or threatened
by the SEC; and (ii) on the basis of such counsel's review of the
registration statement, conferences with the officers of WSMP and
examination of the documents referred to in the registration statement and
in the prospectus, (A) the registration statement and the prospectus
(except for the financial statements and other financial or statistical
data, as to which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Securities Act and
the rules and regulations thereunder; and (B) nothing has come to their
attention that would lead them to believe that, as of the date it shall
have become effective, the registration statement contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading or that, when the registration statement became effective and at
the date of such opinion letter, the prospectus, as the same may then be
supplemented, contained an untrue statement of a material fact or omitted
to state a material fact necessary to in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (except with respect to the financial statements and other
financial or statistical data, or any statements or omissions made by WSMP
in reliance upon information furnished in writing to WSMP or to Counsel to
WSMP by or on behalf of any Qualified Holder in connection with the
registration statement or the prospectus, as to which no opinion need be
expressed).
(d) In connection with any registration statement filed pursuant to this
Section 5.14, WSMP shall indemnify and hold harmless any underwriter with
respect to the Registrable Shares, each Qualified Holder who has had Registrable
Shares so registered and each person controlling such underwriter or Qualified
Holder (collectively, "Indemnified Persons") against all claims, losses, damages
and liabilities, including legal and other expenses incurred in investigating or
defending the same (collectively, "Losses"), arising out of any untrue statement
or alleged untrue statement of a material fact in such registration statement,
or in the prospectus, any preliminary prospectus or any supplement to the
prospectus contained therein or any omission or alleged omission to state a
material fact necessary in order to make the statements made therein, in the
light
A-20
<PAGE> 160
of the circumstances under which they were made, not misleading, or arising out
of any violation or alleged violation by WSMP of the Securities Act, any state
securities or "blue sky" laws or any rule or regulation thereunder in connection
with such registration, except insofar as the same may have been caused (i) by
an untrue statement of a material fact or a material omission in information
furnished in writing to WSMP by such Qualified Holder or such underwriter, as
the case may be, expressly for use therein or (ii) by any Qualified Holder's or
any such underwriter's failure to send or give a purchaser of any such
Registrable Shares, at or prior to the written confirmation of the sale, a copy
of the applicable prospectus, as then supplemented. If the indemnification
provided for above is unavailable or insufficient to indemnify and hold harmless
an Indemnified Person as therein provided, then WSMP shall contribute to the
amount paid or payable by such Indemnified Person with respect to the Losses
otherwise indemnifiable by WSMP above in such proportion as is appropriate to
reflect the relative fault of WSMP, on the one hand, and of such Indemnified
Person, on the other hand, in connection with the statements or omissions that
resulted in such Losses as well as other equitable considerations. Relative
fault shall be determined by reference to, among other things, whether the
untrue statement or alleged untrue statement relates to information provided by
WSMP or the Indemnified Person and such parties' relative intent, knowledge,
access to information and opportunity to correct such untrue statement or
omission. WSMP acknowledges that it would not be just and equitable if
contribution were determined by any method of allocation that does not take into
account the equitable considerations referred to above.
(e) Anything in this Section 5.14 to the contrary notwithstanding, it shall
be a condition to WSMP's obligation to include Registrable Shares of a Qualified
Holder in or file a registration statement pursuant to this Section 5.14 that
such Qualified Holder (i) furnish WSMP in writing all information with respect
to (A) such Qualified Holder and (B) the intended methods of disposition or
distribution of such Registrable Shares (which methods shall be in accordance
with the Plan of Distribution), (ii) agree in writing to indemnify and hold
harmless WSMP, each director of WSMP, each officer of WSMP signing such
registration statement, any other person having securities covered by such
registration statement, each participating underwriter and each person, if any,
controlling (within the meaning of the Securities Act) WSMP, such underwriters
or such other person from and against any and all loss, damage, liability and
expense arising out of any misstatement in or omission from information
furnished to WSMP by such Qualified Holder pursuant to clause (i) of this
Section 5.14(e) resulting in a material misstatement in or material omission
from such registration statement and each preliminary prospectus, prospectus,
post-effective amendment, supplement or similar document forming a part thereof,
(iii) agree in writing that, in the event that they are notified by WSMP that in
its judgment the registration statement or prospectus should be amended or
supplemented in order to avoid any material misstatements or omissions, they
will suspend further offers and sales of the Registrable Shares until such time
as such amendment or supplement has been prepared and become effective (which
WSMP will use its best efforts to accomplish as soon as practicable after giving
such notice) and (iv) agree in writing that they will offer and sell, and cause
any and all Persons acting on behalf of any such Qualified Holder to offer and
sell, Registrable Shares only in accordance with the Plan of Distribution.
(f) WSMP agrees to bear and to pay all reasonable expenses of registration
of the Registrable Shares pursuant to this Section 5.14 other than any
underwriting or selling discounts or commissions associated with the offer and
sale thereof and any legal fees and expenses of any counsel separately engaged
by the Qualified Holders.
(g) The provisions of this Section 5.14 shall apply, mutatis mutandis, to
any shares or other securities of WSMP resulting from any stock split or reverse
split, stock dividend, reclassification of the capital stock of WSMP that may be
received by any of the Qualified Holders by virtue of their ownership of the
Registrable Shares.
(h) The provisions of this Section 5.14 shall inure to the benefit of the
Qualified Holders, who shall be third-party beneficiaries entitled to enforce
the provisions hereof.
5.15 Financial Results of Combined Operations. WSMP covenants and agrees
that it will, within 30 days after the conclusion of WSMP's first 28-day
accounting period following the Effective Time, file with
A-21
<PAGE> 161
the SEC or publish (within the meaning of SEC Accounting Series Release No. 130,
as amended) in a report filed with the SEC or in a quarterly earnings report,
press release or other public issuance financial results covering at least 30
days (or 28 days if, in the judgment of the Auditors, that will preserve
"pooling-of-interests" accounting treatment of the Merger) of combined
operations of WSMP and Sagebrush.
5.16 Continuation of Sagebrush Employee Benefits. (a) WSMP shall cause the
Surviving Subsidiary to maintain for its employees immediately following the
Merger either (i) the Sagebrush Benefit Plans or (ii) benefit plans, programs
and arrangements of WSMP providing benefits substantially equivalent in total to
the benefits provided by the Sagebrush Benefit Plans ("Successor Plans"). WSMP
agrees to endeavor to continue in effect for employees of the Surviving
Subsidiary such Sagebrush Benefit Plans or such Successor Plans, subject to the
right to amend or terminate any such plans, programs or arrangements if the
Board of Directors of the Surviving Subsidiary shall deem any such action to be
desirable and in the best interests of the Surviving Subsidiary.
(b) To the extent that employees of the Surviving Subsidiary are provided
with employee benefits under Successor Plans, the following provisions shall
apply:
(i) For purposes of (A) eligibility for participation in Successor
Plans, (B) vesting in benefits under the Successor Plans and (C) all other
terms of Successor Plans that are based on time of service with WSMP,
employees of the Surviving Subsidiary will be given credit for time of
service as employees of Sagebrush.
(ii) No additional waiting periods, deductibles, exclusions or benefit
limitations for pre-existing conditions shall be imposed or assessed
against such employees (or their dependents) under Successor Plans that are
"employee welfare benefit plans" as that term is defined in Section 3(1) of
ERISA (other than as would have been applicable to such employees or their
dependents under the Sagebrush Benefit Plans as in effect on the date
hereof).
(iii) Successor Plans that are medical benefit plans shall recognize
any expenses paid by employees of the Surviving Subsidiary (or their
dependents) that were applied to meet deductible and out-of-pocket limits
under Sagebrush Benefit Plans for the calendar year in which the Closing
occurs as if such expenses had been paid under such Successor Plans for the
purpose of applying such Successor Plans' deductible and out-of-pocket
limits for such calendar year.
5.17 Tax Covenants. (a) As of the Effective Time and thereafter, WSMP will
cause Sagebrush to continue the historic business of Sagebrush or use a
significant portion of the historic business assets of Sagebrush in a manner
that satisfies the continuity of business enterprise requirement described in
Section 1.368-1(d) of the regulations under the Code.
(b) WSMP shall timely file, or cause Sagebrush to timely file, as the case
may be, with the IRS and any other applicable governmental or taxing authority,
complete and accurate statements and documents, and shall maintain, or cause to
be maintained, as the case may be, such reports, records, information and
documents, with respect to WSMP, Sub and Sagebrush, as required by Section
1.368-3(a) and 1.368-3(c) of the regulations under the Code or other applicable
law relative to the Merger and the qualification of the Merger as a tax-free
reorganization for federal income tax purposes.
ARTICLE VI
COVENANTS OF SAGEBRUSH
6.1 Shareholder Approval. Sagebrush, acting through its Board of
Directors, and in accordance with applicable law, covenants and agrees with WSMP
that: (i) it will duly call, give notice of, convene and hold a meeting of its
shareholders as soon as practicable for the purpose of considering and taking
action upon this Agreement and the Merger as required by the NCBCA; (ii) unless
it shall have made a Sagebrush Board Determination to the contrary, it will
include in the Joint Proxy Statement its recommendation that shareholders of
Sagebrush vote in favor of this Agreement and the Merger; and (iii) it will use
its best efforts (A) to obtain and furnish the information required to be
included by it in the Joint Proxy Statement (and any
A-22
<PAGE> 162
preliminary version thereof) and to cause the Joint Proxy Statement to be mailed
to its shareholders at the earliest practicable time and, (B) unless it shall
have made a Sagebrush Board Determination to the contrary, to obtain the
necessary approvals by its shareholders of this Agreement and the transactions
contemplated hereby, including the Merger. Each Sagebrush Shareholder, severally
and not jointly, represents and warrants to WSMP and to Sub that such Person and
his family and controlled corporations own the shares of Sagebrush Common Stock
set forth opposite their names on the signature page of this Agreement (it being
understood that the number set forth opposite Connor's name includes certain
shares of Sagebrush Common Stock owned by his spouse and other members of his
family and a corporation of which he is the majority shareholder). The Sagebrush
Shareholders severally covenant and agree with WSMP to cause all such shares of
Sagebrush Common Stock to be voted in favor of approving this Agreement and the
Merger at the meeting referred to in clause (i) of this Section 6.1.
6.2 Best Efforts. Subject to the terms and conditions herein provided and
except to the extent that Sagebrush shall have made a Sagebrush Board
Determination to the contrary, Sagebrush and the Sagebrush Shareholders agree to
use their best efforts to take or cause to be taken all such actions necessary,
proper or advisable under applicable laws and regulations to satisfy the
conditions set forth in Article VII and to consummate the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, Sagebrush will cooperate with WSMP in the timely preparation and
filing with the SEC of the Registration Statement, the Prospectus and the Joint
Proxy Statement, and Sagebrush will use its best efforts to cause (a) the
Registration Statement to be declared effective under the Securities Act and (b)
the Joint Proxy Statement to be cleared for mailing to its shareholders by the
SEC. Sagebrush will promptly advise WSMP if, to its knowledge, at any time
before the Effective Time, (x) the Registration Statement, as the same may be
amended, contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (y) the Prospectus, as the same may be supplemented,
contains an untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading or (z) the Joint Proxy
Statement, as the same may be amended or supplemented, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they are being made, not misleading. Sagebrush will notify WSMP promptly
of the receipt by it of any comments of the SEC and will supply WSMP with copies
of all correspondence between it and its representatives and the SEC or members
of its staff with respect to the Registration Statement, the Prospectus and the
Joint Proxy Statement.
6.3 Continuing Investigation; Confidentiality. Sagebrush covenants and
agrees with WSMP that WSMP may, prior to the Effective Time and through its own
employees and agents, make such investigation of the business and assets of
Sagebrush as WSMP considers necessary or desirable, it being understood and
agreed that such investigation shall have no effect on any representations or
warranties hereunder. Sagebrush covenants and agrees to permit WSMP and its
representatives to have, after the date hereof, full access at all reasonable
times to the premises and to the books and records of Sagebrush, and the
officers of Sagebrush will furnish to WSMP and its representatives such
financial and operating data and other information with respect to the business
and assets of Sagebrush as WSMP from time to time may reasonably request. In the
event of termination of this Agreement, WSMP will deliver to Sagebrush all
documents, work papers and other material so obtained before or after the
execution hereof and will not itself use, directly or indirectly, any
information so obtained or otherwise obtained from Sagebrush hereunder, or in
connection herewith, and will use its best efforts to have all such information
kept confidential and not used in any way detrimental to Sagebrush.
6.4 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred by Sagebrush and the Sagebrush Shareholders in connection with
this Agreement and the transactions contemplated hereby shall be paid by
Sagebrush and the Sagebrush Shareholders, respectively, except as otherwise
provided herein.
6.5 Publicity. Prior to the first to occur of the termination of this
Agreement and the second business day following the Effective Time, any written
news releases by Sagebrush pertaining to this Agreement or the Merger shall be
submitted to WSMP for review and approval prior to release and shall be released
only in a
A-23
<PAGE> 163
form approved by WSMP; provided, however, that (1) such approval shall not be
unreasonably delayed or withheld, and (2) such review and approval shall not be
required of a release or releases by Sagebrush if in Sagebrush's reasonable
judgment (exercised in consultation with Counsel to Sagebrush) it would prevent
the dissemination of information in such time as may be necessary or appropriate
to comply with applicable law or NASDAQ rules (in which case, however, the text
of the announcement, if written, or a written summary thereof, if oral, shall be
provided promptly to WSMP).
6.6 Disclosure Amendments. Sagebrush shall notify WSMP of any changes,
additions or events that should, consistently with this Agreement, result in any
amendment to any Sagebrush SEC Report or to the Sagebrush Disclosure Document
promptly after the occurrence of the same and again at the Closing by delivery
of appropriate amendments thereto. No notification made pursuant to this Section
shall be deemed to cure any misrepresentation of any breach of warranty made in
or in connection with this Agreement unless WSMP specifically agrees thereto in
writing.
6.7 Conduct of Business Pending the Closing. Sagebrush covenants and
agrees with WSMP that, prior to the Closing, unless WSMP shall otherwise consent
in writing and except as otherwise contemplated by this Agreement or Section 6.7
of the Sagebrush Disclosure Document:
(a) its business and the business of its Subsidiaries will be
conducted in the ordinary and usual course, it shall use reasonable efforts
to keep intact its and their business organizations and goodwill, and it
shall use reasonable efforts to keep available the services of their
respective officers and employees and maintain good relationships with
suppliers, lenders, creditors, distributors, employees, customers and
others having business or financial relationships with them;
(b) it will continue properly and promptly (1) to file when due all
periodic reports and other documents required to be filed by it with the
SEC and all federal, state, local, foreign and other tax returns, reports
and declarations required to be filed by it (except where the failure to
file any such tax returns, reports or declarations would not be reasonably
likely to have a Material Adverse Effect on Sagebrush) and (2) to pay, or
make full and adequate provision for the payment of, all taxes and
governmental charges due from or payable by it, except for such taxes and
charges the failure to make prompt payment of which is not reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect
on Sagebrush;
(c) it will not (1) amend or restate its charter or bylaws or (2)
split, combine or reclassify any of its securities, or declare, set aside
or pay any dividend or other distribution on any of its securities, or make
or agree or commit to make any exchange for or redemption of any of its
securities payable in cash, stock or property;
(d) neither it nor any of its Subsidiaries will, in any such case, (1)
issue or agree to issue any additional shares of, or options, warrants or
other rights of any kind to acquire any shares of, its capital stock of any
class, whether by purchase or conversion or exchange of other securities,
except that Sagebrush may issue shares upon the exercise of options,
warrants, convertible securities and other rights, agreements and
commitments outstanding at the date hereof, or (2) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
(e) neither it nor any of its Subsidiaries will create, incur, assume
or guarantee any long-term indebtedness for borrowed money or, except in
the ordinary course of business and consistent with past practice, any
short-term indebtedness for borrowed money;
(f) neither it nor any of its Subsidiaries will (1) adopt, enter into
or amend any bonus, profit sharing, compensation, stock option, warrant,
pension, retirement, deferred compensation, employment, severance,
termination, change in control or other employee benefit plan, agreement,
trust fund or arrangement for the benefit or welfare of any officer,
director, employee or consultant or (2) agree to any increase in the
compensation payable or to become payable to, or any increase in the
contractual term of employment of, any officer, director, employee or
consultant, except in the ordinary course of business and generally
consistent with past practice;
A-24
<PAGE> 164
(g) neither it nor any of its Subsidiaries will sell, lease, mortgage,
encumber or otherwise dispose of or grant any interest in any of its assets
or properties, except for sales, encumbrances and other dispositions or
grants in the ordinary course of business and consistent with past practice
and except for Liens for taxes not yet due or Liens that are not material
in amount or effect and do not impair the use of the property;
(h) neither it nor any of its Subsidiaries will (1) acquire (by
merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other organization or division thereof engaged in any
business (including, in particular, restaurant operations) or any equity
interest therein; (2) enter into any contract or agreement (other than in
the ordinary course of business consistent with past practice) that would
be material to WSMP; or (3) authorize or make any capital expenditure or
expenditures individually in excess of $10,000 or in the aggregate in
excess of $50,000; and
(i) neither it nor any of its Subsidiaries will enter into any
agreement, commitment or understanding, whether in writing or otherwise,
with respect to any of the matters referred to in subsections (c) through
(h) above.
6.8 No Solicitation. (a) Sagebrush, the Sagebrush Shareholders, their
Affiliates and their respective officers, directors, employees, representatives
and agents shall immediately cease all existing discussions or negotiations, if
any, with any Persons (other than WSMP and Sub) conducted heretofore with
respect to any Sagebrush Acquisition Proposal. For purposes of this Agreement,
the term "Sagebrush Acquisition Proposal" means any proposal that relates to (i)
a possible acquisition of Sagebrush or any substantial part of its assets,
whether by merger, purchase of assets or any similar transaction, or (ii) a
tender or exchange offer for, or purchase of, any substantial amount of capital
stock (or securities convertible into or exercisable or exchangeable for capital
stock) of Sagebrush.
(b) Except as set forth in this Section 6.8, neither Sagebrush, any of the
Sagebrush Shareholders, any of their Affiliates nor any of their respective
officers, directors, employees, representatives, financial advisors or agents
shall, directly or indirectly, encourage or solicit submission of any inquiries,
proposals or offers by, participate in or initiate any discussions or
negotiations with, disclose any information about Sagebrush or any of its
Subsidiaries to, or otherwise assist, facilitate or encourage, or enter into any
agreement or understanding with, any Person (other than WSMP) in connection with
any Sagebrush Acquisition Proposal. Sagebrush shall notify WSMP promptly of the
terms and conditions of any written or oral Sagebrush Acquisition Proposal when
such a Sagebrush Acquisition Proposal is made and shall advise WSMP promptly of
any material modification in any such Sagebrush Acquisition Proposal.
(c) Sagebrush may, directly or indirectly, furnish to any Person
information and access, in response to a request for information or access made
incident to a Sagebrush Acquisition Proposal, provided that such request was not
encouraged, solicited or initiated by Sagebrush, the Sagebrush Shareholders, any
of their Affiliates or any of their respective officers, directors, employees,
representatives or agents, and may participate in discussions and negotiate with
such Person concerning any Sagebrush Acquisition Proposal, in each case only if
and to the extent that the Board of Directors of Sagebrush has made a Sagebrush
Board Determination. For purposes of this Agreement, a "Sagebrush Board
Determination" means that the Board of Directors of Sagebrush shall have
determined in good faith, after consultation with counsel to Sagebrush, that the
taking of action or the failure to take action (or to withdraw, modify or change
a recommendation) is necessary or appropriate in execution of such directors'
duties under the NCBCA. It is agreed that, in light of the provisions hereof for
adjusting the Exchange Ratio, no such adjustment of the Exchange Ratio shall
constitute a basis for a Sagebrush Board Determination.
6.9 Pooling; Reorganization. Sagebrush will not knowingly take any actions
that would cause the transactions contemplated hereby, including the Merger, to
fail to qualify for "pooling-of-interests" accounting treatment consistent with
GAAP and the rules and regulations of the SEC or to be treated as a
"reorganization" within the meaning of Section 368(a) of the Code.
6.10 State Takeover Laws. Neither Sagebrush nor any of its Subsidiaries
shall take any steps to make the transactions contemplated by this Agreement
subject to any Takeover Law.
A-25
<PAGE> 165
6.11 Affiliate Agreements. Sagebrush has disclosed in Section 6.11 of the
Sagebrush Disclosure Document the identity of each Person, in addition to the
Sagebrush Shareholders, that it reasonably believes to be an "affiliate" of
Sagebrush within the meaning of Rules 144 and 145(c) of the SEC promulgated
under the Securities Act. Sagebrush will cause each such Person, including the
Sagebrush Shareholders, to execute and deliver to WSMP, not later than thirty
days prior to the Effective Time, an Affiliate Agreement.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1 Conditions to Obligations of WSMP, Sub and Sagebrush. The obligations
of WSMP, Sub and Sagebrush to effect the Merger shall be subject to satisfaction
or waiver of the following conditions at or prior to the Effective Time:
(a) Such parties shall have received a copy, certified by the
Secretary of Sagebrush, of resolutions duly adopted (and not subsequently
modified or rescinded) by the Board of Directors of Sagebrush by the terms
of which resolutions such Board of Directors shall have adopted and
approved this Agreement, recommended the Merger to the shareholders of
Sagebrush and directed the submission of this Agreement and the Merger to a
vote of such shareholders.
(b) Such parties shall have received a copy, certified by the
Secretary of Sagebrush, of resolutions duly adopted (and not subsequently
modified or rescinded) by a majority of the shares of Sagebrush Common
Stock present in person or represented by proxy at a meeting of the
shareholders of Sagebrush, a quorum being present throughout such meeting,
by the terms of which resolutions such shareholders shall have approved
this Agreement and authorized the Merger.
(c) Such parties shall have received a copy, certified by the
Secretary of Sub, of resolutions duly adopted (and not subsequently
modified or rescinded) by the Board of Directors of Sub by the terms of
which resolutions such Board of Directors shall have adopted and approved
this Agreement, recommended the Merger to WSMP, as the sole shareholder of
Sub, and directed the submission of this Agreement and the Merger to a vote
of such shareholder.
(d) Such parties shall have received a copy, certified by the
Secretary of WSMP, of resolutions duly adopted (and not subsequently
modified or rescinded) by WSMP, as the sole shareholder of Sub, by the
terms of which resolutions such sole shareholder shall have approved this
Agreement and authorized the Merger.
(e) Such parties shall have received a copy, certified by the
Secretary of WSMP, of resolutions duly adopted (and not subsequently
modified or rescinded) by the Board of Directors of WSMP by the terms of
which resolutions such Board of Directors shall have adopted and approved
this Agreement, recommended the Merger and the issuance of the Merger
Consideration to the shareholders of WSMP and directed the submission of
this Agreement, the Merger and the issuance of the Merger Consideration to
a vote of such shareholders.
(f) Such parties shall have received a copy, certified by the
Secretary of WSMP, of resolutions duly adopted (and not subsequently
modified or rescinded) by a majority of the shares of WSMP Common Stock
present in person or represented by proxy at a meeting of the shareholders
of WSMP, a quorum being present throughout such meeting, by the terms of
which resolutions such shareholders shall have approved the issuance of the
Merger Consideration hereunder; the Registration Statement shall have been
declared effective by the SEC under the Securities Act; the Registration
Statement shall remain effective thereunder; no "stop order" proceedings
with respect to the Registration Statement shall be pending or threatened
by the SEC; and the shares of WSMP Common Stock issuable as Merger
Consideration shall have been approved for listing on the NASDAQ National
Market.
(g) There shall not be in effect any preliminary or permanent
injunction or other order by any federal or state authority prohibiting the
consummation of the Merger.
A-26
<PAGE> 166
(h) There shall have been obtained all Required Sagebrush Consents and
Required WSMP Consents that, in the reasonable judgment of each of WSMP,
Sub and Sagebrush, are necessary or desirable in connection with the
consummation of the transactions contemplated hereby such that, were they
not obtained, it would be inadvisable to proceed with the Merger.
(i) Such parties shall have received an opinion letter from Counsel to
Sagebrush, dated as of the Effective Time, in form and substance reasonably
satisfactory to each of them, to the effect that (1) the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Code, (2) the exchange in the Merger of Sagebrush Common Stock for WSMP
Common Stock will not give rise to gain or loss for federal income tax
purposes to the shareholders of Sagebrush with respect to such exchange
(except that a shareholder who receives cash hereunder (as a result of the
exercise of dissenter's rights or in lieu of a fractional share) will
recognize a taxable gain or loss with respect to the shares of stock that
such shareholder exchanges or is deemed to exchange for such cash
consideration, and (3) no gain or loss for federal income tax purposes will
be recognized by Sagebrush, WSMP or Sub in the transactions effecting the
Merger, it being understood that no opinion will be given as to the federal
income tax consequences to those shareholders of Sagebrush, if any, subject
to special treatment under the Code.
7.2 Conditions to Obligations of WSMP and Sub. The obligations of WSMP and
Sub to effect the Merger shall be subject to satisfaction or waiver of the
following additional conditions at or prior to the Effective Time:
(a) The representations and warranties of Sagebrush and the Sagebrush
Shareholders set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and, without
consideration of any further disclosures made pursuant to Section 6.6 of
this Agreement and except in such respects as would have no Material
Adverse Effect on Sagebrush, as of the Effective Time (as if made at such
time).
(b) Sagebrush and the Sagebrush Shareholders shall have performed in
all material respects the covenants and agreements required by this
Agreement to be performed by them at or prior to the Closing.
(c) WSMP shall have received from Sagebrush an officers' certificate,
executed by the Chief Executive Officer and the Chief Financial Officer of
Sagebrush (in their capacities as such) and dated the Closing Date,
confirming satisfaction of the conditions stated in paragraphs (a) and (b)
above insofar as such conditions refer to Sagebrush.
(d) WSMP shall have received from the Sagebrush Shareholders a
certificate, executed by each of them and dated the Closing Date,
confirming satisfaction of the conditions stated in paragraphs (a) and (b)
above insofar as such conditions refer to the Sagebrush Shareholders.
(e) Miller shall have executed and delivered to WSMP the Employment
and Noncompete Agreement.
(f) Connor shall have executed and delivered to WSMP the Consulting
and Noncompete Agreement.
(g) WSMP shall have received: (1) an opinion letter of Counsel to
Sagebrush, dated the Closing , in form and substance reasonably
satisfactory to WSMP, conforming to the provisions of Sections 4.1, 4.2,
4.3, 4.4, 4.5, 4.8, 4.9 and 4.11(c) of this Agreement insofar as such
provisions relate to matters of law as distinguished from matters of fact;
(2) a "cold comfort" letter from the Auditors, dated the Closing Date, in
form and substance reasonably satisfactory to WSMP, covering financial
information included in the Joint Proxy Statement, Registration Statement
and Prospectus; and (3) such other documents as WSMP may reasonably
request, in each case reasonably satisfactory in form and substance to
WSMP.
(h) The holders of not more than 3% of the outstanding shares of
Sagebrush Common Stock shall have perfected their dissenters' appraisal
rights pursuant to Article 13 of the NCBCA by having given written notice
of their intent to demand payment for their shares and not voting for the
Merger.
A-27
<PAGE> 167
(i) WSMP shall have received Affiliate Agreements executed by each of
the Sagebrush Shareholders, each of the other Persons (if any) referred to
in Section 6.11 of this Agreement and such other Persons (if any) as
Counsel to WSMP might reasonably consider to be "affiliates" of Sagebrush
within the meaning of Rules 144 and 145(c) of the SEC promulgated under the
Securities Act.
(j) WSMP shall have received a letter from the Auditors, dated as of
the Effective Time, in form and substance reasonably satisfactory to WSMP,
to the effect that the transactions contemplated hereby, including the
Merger, will qualify for "pooling-of-interests" accounting treatment
consistent with GAAP and the rules and regulations of the SEC if
consummated in accordance with this Agreement.
(k) The individuals whose resignations are contemplated by Section 2.4
of this Agreement shall have resigned from their positions as of the
Effective Time.
7.3 Conditions to Obligation of Sagebrush. The obligation of Sagebrush to
effect the Merger shall be subject to satisfaction or waiver of the following
additional conditions at or prior to the Effective Time:
(a) The representations and warranties of WSMP and Sub set forth in
this Agreement shall be true and correct in all material respects as of the
date of this Agreement and, without consideration of any further
disclosures made pursuant to Section 5.7 of this Agreement and except in
such respects as would have no Material Adverse Effect on WSMP, as of the
Effective Time (as if made at such time).
(b) WSMP and Sub shall have performed in all material respects the
covenants and agreements required by this Agreement to be performed by them
at or prior to the Closing.
(c) Sagebrush shall have received from WSMP an officers' certificate,
executed by the President and the Chief Financial Officer of WSMP (in their
capacities as such) and dated the Closing Date, confirming satisfaction of
the conditions stated in paragraphs (a) and (b) above.
(d) WSMP shall have executed and delivered to Miller the Employment
and Noncompete Agreement.
(e) WSMP shall have executed and delivered to Connor the Consulting
and Noncompete Agreement.
(f) Sagebrush shall have received: (1) an opinion letter of Counsel to
WSMP, dated the Closing Date, in form and substance reasonably satisfactory
to Sagebrush, conforming to the provisions of Sections 3.1, 3.2, 3.3, 3.4,
3.5, 3.8 and 3.9 of this Agreement insofar as such provisions relate to
matters of law as distinguished from matters of fact; (2) a "cold comfort"
letter from the Auditors, dated the Closing Date, in form and substance
reasonably satisfactory to Sagebrush, covering financial information
included in the Joint Proxy Statement, Registration Statement and
Prospectus; (3) an opinion letter of the Financial Advisor to Sagebrush,
dated the Closing Date, in form reasonably satisfactory to Sagebrush,
confirming the opinion of such firm delivered on or about the date of this
Agreement, to the effect that the Merger is fair to the shareholders of
Sagebrush from a financial point of view; and (4) such other documents as
Sagebrush may reasonably request, in each case reasonably satisfactory in
form and substance to Sagebrush.
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER
8.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, notwithstanding any other
provision of this Agreement and, with respect to any of subsections (a) through
(e) and (g) and (h) below, notwithstanding approval thereof by the shareholders
of WSMP and the shareholders of Sagebrush:
(a) by written consent of WSMP and Sagebrush;
(b) by either WSMP or Sagebrush in the event of a material
misrepresentation or material breach of warranty of the other party
contained in this Agreement (which breach has not been cured, in the case
A-28
<PAGE> 168
of a breach of warranty, within thirty days following receipt of written
notice thereof by the breaching party);
(c) by either WSMP or Sagebrush in the event of a material breach of
any covenant or agreement by the other party contained in this Agreement
(which breach has not been cured within thirty days following receipt of
written notice thereof by the breaching party);
(d) by either WSMP or Sagebrush in the event that the Merger shall not
have been consummated by 11:59 P.M., Eastern time, on April 30, 1998 (or,
if earlier, by such time on the fifth day following the date on which the
shareholders of Sagebrush shall have approved the Merger), provided that
failure to consummate the Merger by such time is not caused by a material
breach of this Agreement by the terminating party;
(e) by either WSMP or Sagebrush in the event that any of the
conditions precedent to the obligations of such party to consummate the
Merger cannot be satisfied or fulfilled by the time specified in subsection
(d) of this Section, provided that the terminating party is not then guilty
of a material misrepresentation or of a material, uncured breach of a
warranty, covenant or agreement as contemplated by subsections (b) and (c)
of this Section;
(f) by either WSMP or Sagebrush in the event that less than all of the
shareholder approvals contemplated by Section 6.1 to be sought by Sagebrush
or by Section 5.1 to be sought by WSMP, respectively, are obtained at the
first meeting of shareholders convened for the purpose of obtaining such
approvals;
(g) by WSMP or Sagebrush if the Board of Directors of Sagebrush, after
having made a Sagebrush Board Determination, fails to make or withdraws,
modifies or changes its recommendation to the shareholders of Sagebrush
that they approve this Agreement and the Merger; or
(h) by Sagebrush or WSMP if the Board of Directors of WSMP, after
having made a WSMP Board Determination, fails to make or withdraws,
modifies or changes its recommendation to the shareholders of WSMP that
they approve this Agreement and the Merger.
8.2 Consequences of Termination. In the event of the termination of this
Agreement and the abandonment of the Merger pursuant to Section 8.1, this
Agreement shall immediately become void and of no effect, without any liability
on the part of any party hereto or its Affiliates, directors, officers or
shareholders, other than pursuant to the provisions of this Article and of
Sections 3.6, 4.6, 5.4, 5.5, 6.3 and 6.4, which shall survive such termination
and abandonment. In the event of the termination of this Agreement and the
abandonment of the Merger pursuant to subsection (g) of Section 8.1, not later
than ten days following delivery of notice of such termination and abandonment
by or to Sagebrush, Sagebrush will pay to WSMP, as liquidated damages (and not
as a penalty), $1,500,000 plus the aggregate amount of its documented legal,
investment banking, accounting and other out-of-pocket expenses incurred in
pursuant of the Merger and other transactions contemplated by this Agreement
(whether incurred before or after the date hereof). In the event of termination
of this Agreement and the abandonment of the Merger pursuant to subsection (h)
of Section 8.1, not later than ten days following the delivery of notice of such
termination and abandonment by or to WSMP, WSMP will pay to Sagebrush, as
liquidated damages (and not as a penalty), $1,500,000 plus the aggregate amount
of its documented legal, investment banking, accounting and other out-of-pocket
expenses incurred in pursuit of the Merger and other transactions contemplated
by this Agreement (whether incurred before or after the date hereof). Any such
payment of liquidated damages shall be made by wire transfer of immediately
available funds to an account designated for such purpose by the terminating
party in its notice of termination and abandonment. Nothing contained in this
Section 8.2 shall relieve any party from liability for any breach of this
Agreement, except insofar as the liquidated damages provision of this Section
shall relieve Sagebrush from liability for termination and abandonment pursuant
solely to subsection (g) of Section 8.1 and except insofar as such liquidated
damages provisions shall relieve WSMP from liability for termination and
abandonment pursuant solely to subsection (h) of Section 8.1.
8.3 Amendments; Action by the Sagebrush Shareholders. This Agreement may
not be amended except by an instrument in writing signed on behalf of the
parties hereto; provided however, that no amendment
A-29
<PAGE> 169
executed after approval of the Merger and this Agreement by the shareholders of
Sagebrush shall reduce either the number of shares of WSMP Common Stock into
which each share of Sagebrush Common Stock shall be converted in the Merger or
the payment terms for fractional interests.
8.4 Waivers. To the extent permitted by applicable law and consistent with
the proviso to the first sentence of Section 8.3, WSMP and Sub, on the one hand,
or Sagebrush and the Sagebrush Shareholders, on the other hand, may at any time
(a) extend the time for the performance of any of the obligations or other acts
of the other, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto or (c) waive
compliance with any of the agreements, covenants or conditions contained herein.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Survival. The representations, warranties, covenants, indemnities and
other agreements of the parties made in and pursuant to this Agreement shall not
survive the Closing, except for covenants and agreements that, by their terms,
are to be performed after the Closing Date.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed sufficiently given if delivered personally or sent
by facsimile transmission or by registered or certified mail (postage prepaid),
addressed as follows (or to such other address for a party as shall be specified
by like notice given at least five days prior thereto):
if to WSMP, then to:
Mr. David R. Clark
President
WSMP, Inc.
1 WSMP Drive
Claremont, North Carolina 28610
Fax: (704) 459-3148
if to Sagebrush or the Sagebrush Shareholders, or any of them, then to:
Mr. L. Dent Miller
President
Sagebrush, Inc.
3238 West Main Street
Claremont, NC 28616
Fax: (704) 459-0732
All such notices and communications shall be deemed to have been duly given at
the time delivered by hand, if delivered personally; when receipt confirmed, if
sent by facsimile; and the next business day after timely delivery to the
courier, if sent by an overnight air courier service guaranteeing next-day
delivery.
9.3 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.4 WSMP Shareholder Rights Plan. Each of the Sagebrush Shareholders
represents and warrants to WSMP and Sub that neither of them is an "Acquiring
Person" (as such term is defined in the Rights Agreement) and that neither the
execution of this Agreement nor the consummation of the Merger will cause either
of them to become an "Acquiring Person" (as so defined).
A-30
<PAGE> 170
9.5 Miscellaneous. This Agreement (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
between and among the parties, or any of them, with respect to the subject
matter hereof, except as specifically provided otherwise or referred to herein,
so that no such external or separate agreements relating to the subject matter
of this Agreement shall have any effect or be binding, unless the same is
referred to specifically in this Agreement or is executed by the parties after
the date hereof; (b) except for Article II and Sections 5.13, 5.14, 5.15 and
5.16, is not intended to confer upon any other person any rights or remedies
hereunder; (c) shall not be assigned by operation of law or otherwise, except
for assignment of all of the rights and obligations of Sub hereunder, which may
be assigned without the consent of any other party so long as the assignee is a
wholly-owned subsidiary of WSMP; and (d) shall be governed by and construed in
accordance with the laws of the State of North Carolina. This Agreement may be
executed in any number of counterparts, each of which shall constitute an
original but all of which together shall constitute one agreement.
[SIGNATURES APPEAR ON NEXT PAGE]
A-31
<PAGE> 171
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed and delivered as of the date first written above.
WSMP, INC.
By: /s/ JAMES C. RICHARDSON, JR.
----------------------------------
Name: James C. Richardson, Jr.
Title: President and Chief
Executive Officer
SAGEBRUSH, INC.
By: /s/ L. DENT MILLER
----------------------------------
Name: L. Dent Miller
Title: President and Chief
Executive Officer
WSMP ACQUISITION, INC.
By: /s/ JAMES C. RICHARDSON, JR.
----------------------------------
Name: James C. Richardson, Jr.
Title: President and Chief
Executive Officer
<TABLE>
<S> <C>
The Sagebrush Shareholders: Sagebrush Common Stock:
/s/ L. DENT MILLER 1,362,140 shares
- ---------------------------------------------
L. Dent Miller
/s/ CHARLES F. CONNOR, JR. 1,703,617 shares
- ---------------------------------------------
Charles F. Connor, Jr.
</TABLE>
A-32
<PAGE> 172
EXHIBIT 1.2
AFFILIATE AGREEMENT
WSMP, Inc.
1 WSMP Drive
P.O. Box 399
Claremont, NC 28610
Attention: Mr. David R. Clark
Ladies and Gentlemen:
This letter is being delivered to you as contemplated by Section 6.11 of
that certain Agreement and Plan of Merger among WSMP, Inc. ("WSMP"), Sagebrush,
Inc. ("Sagebrush"), WSMP Acquisition, Inc. ("Sub") and Messrs. L. Dent Miller
and Charles F. Connor, Jr. (the "Merger Agreement"). The undersigned is a
shareholder of Sagebrush and will acquire shares of common stock, no par value,
of WSMP ("WSMP Stock") in the merger contemplated by the Agreement (the
"Merger"). Subject to the terms and conditions of the Merger Agreement, each
shareholder of Sagebrush will receive in the Merger 0.3214 shares of WSMP Stock
(subject to adjustment as provided in the Merger Agreement) for each share of
issued and outstanding common stock, no par value, of Sagebrush ("Sagebrush
Stock"). This Affiliate Agreement evidences certain rights and obligations of
the undersigned and of WSMP relative to the WSMP Stock to be received by the
undersigned in the Merger (the "WSMP Shares").
In consideration of the Merger and of the mutual covenants contained
herein, the undersigned and WSMP hereby agree as follows:
1. Affiliate Status. The undersigned understands and agrees that he may be
deemed to be an "affiliate" of Sagebrush within the meaning of Rule 144(a)(1),
and an "underwriter" within the meaning of Rule 145(c), promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act"); and the undersigned anticipates that he will
be such an "affiliate" at the time of the Merger.
2. Certain Restrictions. The undersigned represents and warrants to, and
covenants with, WSMP as follows:
(a) Because the distribution by the undersigned of the WSMP Shares has
not been registered under the Securities Act, the undersigned will not
sell, exchange, pledge, hypothecate or otherwise transfer or dispose of, in
whole or in part ("Transfer"), the WSMP Shares except as permitted by the
terms and conditions of this Affiliate Agreement. Without limiting the
generality of the foregoing, the undersigned will not Transfer WSMP Shares
except in compliance with the legend placed on the certificate(s)
representing such shares pursuant to subparagraph (a) of paragraph 3 of
this Affiliate Agreement.
(b) The undersigned is aware that WSMP intends to treat the Merger as
a tax-free reorganization under Section 368 of the Internal Revenue Code
(the "Code") for federal income tax purposes, and the undersigned agrees to
treat the transaction in the same manner. The undersigned acknowledges that
Section 1.368-1(b) of the regulations under the Code requires "continuity
of interest" in order for the Merger to be treated as tax-free under
Section 368 of the Code and that this requirement will be satisfied if,
taking into account all those Sagebrush shareholders who receive cash in
exchange for their stock, who receive cash in lieu of fractional shares and
who dissent from the Merger, there is no plan or intention on the part of
the Sagebrush shareholders to Transfer the WSMP Stock to be received in the
Merger that will reduce such shareholders' ownership to a number of shares
having, in the aggregate, a value at the time of the Merger of less than
50% of the total fair market value of the Sagebrush Stock outstanding
immediately prior to the Merger. The undersigned has no prearrangement,
plan or intention to Transfer a number of WSMP Shares that would cause the
foregoing requirement not to be satisfied.
(c) The undersigned will not Transfer or otherwise reduce his risk
relative to the WSMP Shares until such time after the consummation of the
Merger as financial results covering at least 30 days (or
A-33
<PAGE> 173
28 days if, in the judgment of Deloitte & Touche LLP, that will preserve
"pooling-of-interest" accounting treatment of the Merger) of the combined
operations of WSMP and Sagebrush have been (within the meaning of SEC
Accounting Series Release No. 130, as amended) filed by WSMP with the SEC
or published by WSMP in an Annual Report on Form 10-K, a Quarterly Report
on Form 10-Q, a Current Report on Form 8-K, a quarterly earnings report, a
press release or other public issuance that includes combined sales and
income of WSMP and Sagebrush. WSMP will make such filing or publication
within 30 days following the conclusion of WSMP's first 28-day accounting
period following the effective time and will notify the undersigned of the
same promptly thereafter. The undersigned will not, during the 30-day
period prior to the consummation of the Merger, Transfer or otherwise
reduce the undersigned's risk relative to the WSMP Shares.
(d) The undersigned has read the Merger Agreement and this Affiliate
Agreement with care and has discussed the requirements of such documents
and their impact upon his ability to Transfer the WSMP Shares, to the
extent that he believes necessary, with legal counsel of his choosing.
3. Certain Transfer Procedures. (a) WSMP will issue a "stop transfer"
order with respect to the WSMP Shares to the transfer agent for the WSMP Stock
and will cause the following legend to be placed on the certificate(s)
representing the WSMP Shares at the original issuance of such shares (and on any
substitute(s) therefor issued thereafter):
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES.
SUCH SHARES MAY BE SOLD, EXCHANGED, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED OR DISPOSED OF ("TRANSFERRED") ONLY IN ACCORDANCE WITH THE
TERMS AND CONDITIONS OF A CERTAIN AFFILIATE AGREEMENT BETWEEN THE
REGISTERED HOLDER HEREOF AND THIS CORPORATION, A COPY OF WHICH IS
AVAILABLE UPON WRITTEN REQUEST BY THE RECORD HOLDER DIRECTED TO THE
CHIEF FINANCIAL OFFICER OF THE CORPORATION. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, THE SHARES REPRESENTED BY THIS CERTIFICATE
MAY BE TRANSFERRED ONLY IF AND TO THE EXTENT THAT (1) THEY ARE
REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER
APPLICABLE STATE SECURITIES LAWS OR (2) THE CORPORATION HAS RECEIVED A
WRITTEN LEGAL OPINION OF ITS COUNSEL OR OTHER ASSURANCE ACCEPTABLE TO
THE CORPORATION IN ITS SOLE DISCRETION TO THE EFFECT THAT THE PROPOSED
TRANSFER DOES NOT REQUIRE REGISTRATION UNDER SUCH ACT OR UNDER
APPLICABLE STATE SECURITIES LAWS.
(b) Upon request by the undersigned, WSMP will cause the legend set forth
in subparagraph (a) above to be removed by delivery of substitute certificates
not bearing such legend and will rescind the "stop transfer" order referred to
in subparagraph (a) if (i) one year shall have elapsed from the date that the
undersigned became the beneficial owner of the WSMP Shares and the provisions of
Rule 145(d)(2) are then applicable to the undersigned or (ii) two years shall
have elapsed from the date that the undersigned became the beneficial owner of
the WSMP Shares and the provisions of Rule 145(d)(3) are then applicable to the
undersigned.
4. Miscellaneous. All notices and other communications hereunder shall be
in writing and shall be deemed sufficiently given if delivered personally or
sent by facsimile transmission or by registered or certified mail (postage
prepaid), addressed, if to WSMP, then to its Chief Financial Officer at its
executive offices, and, if to the undersigned, then to the address last
specified by the undersigned to WSMP. This Affiliate Agreement (a) is the
complete agreement between WSMP and the undersigned concerning the subject
matter hereof, except insofar as the Merger Agreement speaks to the registration
of the WSMP Shares, (b) shall be governed by, and construed in accordance with,
the laws of the State of North Carolina (without giving effect to principles of
conflict of laws) and (c) may be executed in any number of counterparts, each of
which shall constitute an original but all of which taken together shall
constitute one and the same agreement.
A-34
<PAGE> 174
This Affiliate Agreement is executed as of , 1999.
Very truly yours,
--------------------------------------
Name:
Agreed:
WSMP, INC.
By:
----------------------------------
Name:
Title:
A-35
<PAGE> 175
EXHIBIT 1.9
CONSULTING AND NONCOMPETITION AGREEMENT
THIS CONSULTING AND NONCOMPETITION AGREEMENT (the "Agreement") is made as
of the day of October, 1997 between WSMP, INC., a North Carolina
corporation (the "Company"), and CHARLES F. CONNOR, Jr., a North Carolina
resident ("Consultant");
WITNESSETH:
WHEREAS, the Company desires to engage Consultant and Consultant desires to
be engaged as a consultant upon the terms and conditions provided herein; and
WHEREAS, as a condition precedent to the Company's obligation to consummate
the transactions (the "Closing") contemplated by that certain Agreement and Plan
of Merger dated as of November 14, 1997 (the "Merger Agreement") among the
Company, Sagebrush, Inc. ("Sagebrush"), WSMP Acquisition, Inc., L. Dent Miller
and Consultant, Consultant is required to execute and deliver this Agreement;
NOW, THEREFORE, in consideration of the covenants contained herein,
together with other valuable consideration, the receipt and legal sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. Consulting Services. The Company agrees to engage Consultant as a
consultant and Consultant hereby accepts such engagement upon the term and
conditions set forth in this Agreement. Consultant shall report to the Chief
Operating Officer of the Company (or, if none exists, then the Chief Executive
Officer of the Company) and shall perform such duties as the Chief Operating
Officer or the Chief Executive Officer, as the case may be (the "Superior
Officer"), may reasonably require.
2. Duties. Consultant shall, to the extent requested by the Superior
Officer, and at such times and places as the parties may mutually agree, (a)
consult with and advise the Company on management and operation of the Company's
restaurant franchising and restaurant operations business and (b) market and
promote the Company's restaurant franchising and restaurant operations business
(collectively, "Consulting Services").
3. Independent Contractor. The Company and Consultant hereby agree that
Consultant is an independent contractor, solely responsible for the manner and
form in which he performs Consulting Services. Nothing contained herein shall be
construed as creating an employer/employee, master/servant, principal/agent,
partnership, joint venture or other similar kind of relationship. Consultant
agrees that he will not take any action on behalf of the Company without
specific instructions from, and the prior approval of, the Superior Officer, and
that he does not have any right or power in any manner to bind or commit the
Company to any contract or other obligation with any Person (as defined below)
except upon the specific prior written approval of the Superior Officer. To the
extent permitted by law, the Company shall not be liable for withholding and
remitting to state, federal or local agencies any income tax withholding, FICA
tax withholding or similar amount from the consulting fee paid to Consultant or
for paying any other similar costs, fees, taxes or contributions associated with
the relationship between the Company and Consultant. Consultant shall not take
any position on any tax return or in any litigation or administrative hearing or
proceeding or in any other context that is inconsistent with this Section 3.
4. Term. This Agreement shall terminate two years from the date of the
Closing, unless it is terminated earlier in accordance with other provisions
hereof.
5. Compensation. Consultant shall be entitled to receive an annual
consulting fee of $175,000 during the term of this Agreement, payable in equal
bi-monthly installments.
6. Fringe Benefits. uring the term of this Agreement, Connor shall be
entitled to participate in all such health or accident insurance plans, life
insurance plans, major medical plans and other similar plans and arrangements of
the Company as from time to time may be in effect for the benefit of the
Company's, officers
A-36
<PAGE> 176
and employees generally, consistent with Section 3 hereof. The parties
acknowledge that Consultant presently has group life coverage at the level of
$450,000 face amount, and that Company's present plan does not provide for such
level of coverage. The Company will use its reasonable efforts to obtain
additional term coverage on Consultant, without replacing its standard plan, and
subject to the Consultant's insurability.
Except as heretofore provided, Consultant shall not be entitled to receive
any fringe benefits while serving the Company during the term of this Agreement;
and his only compensation from the Company, whether in cash or in kind, shall be
the annual consulting fee provided for in Section 5 above.
Following the conclusion of the Term, Consultant may continue at
Consultant's own expense to participate in any such plan, as long as such
participation, in the Company's reasonable opinion, does not constitute a
violation of the terms of such plan, or Company's contract with any third-party
provider of such plan benefits or services.
7. Termination of this Agreement. (a) The Company may, by written notice
to Consultant, terminate this Agreement at any time for Cause (as defined
below), it being understood that no termination of this Agreement shall affect
(1) Consultant's obligations under Sections 9 and 10 of this Agreement, which
shall remain in full force and effect, or (2) the Company's obligation under
Section 5 to pay Consultant his annual consulting fee for the remainder of the
two-year term of this Agreement, except as provided in subsection (iii) hereof.
The term "Cause" shall mean:
(i) commission of a wrongful act by Consultant that has had or will
have a material adverse effect on the business, operations or financial
condition of the Company;
(ii) willful and material failure by Consultant to perform any one or
more of the duties assigned to him pursuant to this Agreement;
(iii) engaging in any outside activity prohibited by Section 8 hereof
or failing to comply with any provision of Section 9 or 10 hereof, it being
understood and agreed by the parties that such activities by Consultant
terminate the Company's obligation to continue paying the Consultant under
Section 5;
(iv) conviction of a criminal offense by Consultant; or
(v) the taking of any act, or the omission to take any act, the
reasonably foreseeable result of which act or omission is to adversely
affect the operations, goodwill, reputation or image of the Company.
(b) This Agreement shall terminate upon the death or the Company-approved
of Consultant. Neither Consultant nor his estate shall be entitled to receive
any severance pay in either such event.
8. Outside Activities. During the term of this Agreement, Consultant shall
serve the Company faithfully and to the best of his ability and shall devote
such of his working time and energies to the furtherance of the Company's
business as the Company and the Consultant may agree; provided, however, that
Consultant may continue to operate and manage any restaurant in which
Consultant, but not Sagebrush, owns an equity interest disclosed on the form
attached hereto as Exhibit 8 and may expand and develop such restaurants and
concepts; and provided further that, while engaged hereunder, Consultant shall
not engage in any activity that is detrimental to the Company or that interferes
with the performance of his duties hereunder.
9. Covenant Not to Disclose Confidential Information. During the term of
this Agreement, Consultant will be placed in a position by the Company to become
acquainted with confidential and privileged information of the Company and its
affiliates and successors, including, but not limited to, customer files,
customer lists, special customer matters, sales methods and techniques,
merchandising concepts and plans, business plans, sources of supply and vendors,
special business relationships with vendors, agents and brokers, promotional
materials and information, financial matters, mergers, acquisitions, selective
personnel matters and confidential processes, designs, formulas, ideas, plans,
devices or materials, and other similar matters which are confidential (any and
all such information being referred to herein as "Confidential Information").
The use of Confidential Information against the Company would seriously damage
the Company's business. Accordingly, Consultant agrees that during the term of
this Agreement and at all times thereafter with respect
A-37
<PAGE> 177
to financial matters and information, and during the Restrictive Period (as
defined below) with respect to all other Confidential Information:
(a) He shall not, directly or indirectly, use, divulge, publish or
otherwise reveal or allow to be revealed any aspect of the Confidential
Information to any Person except by the Company's prior, express and
written consent or as required by law;
(b) He shall refrain from any action or conduct which might reasonably
or foreseeably be expected to compromise the confidentiality or proprietary
nature of the Confidential Information; and
(c) He has no right to apply for or to obtain any patent, copyright or
other form of intellectual property protection with regard to the
Confidential Information.
The term "Person" shall mean any person, firm, partnership, trust,
corporation or other association (whether governmental or private). The
disclosure by Consultant of Confidential Information in the bona fide conduct of
his duties under Section 1 of this Agreement shall not constitute a breach of
this Agreement. In further consideration of the compensation paid to him by the
Company, Consultant agrees that he will promptly communicate, disclose and
deliver to the Company any and all inventions, discoveries, marketing concepts
and ideas, promotional ideas, trade names, trademarks and other improvements
relating to devices, methods, formulas, sales and distribution concepts or
processes of any nature whatsoever that are used in the business of the Company
and created or developed by Consultant while engaged by the Company. The Company
shall have the right, at its expense, to apply for U.S. and foreign patents and
trademarks on any inventions, discoveries, trade names, trademarks and other
improvements in the name of Consultant. Consultant, upon request, shall at once
execute any and all documents relating to the application for and assignment to
the Company of all such applications without further compensation for such
assignment.
10. Covenant Not to Compete. (a) Covenant. Consultant hereby stipulates,
covenants and agrees that, during the Restrictive Period (as defined below), he
shall not, directly or indirectly, other than on behalf of the Company, without
the Company's prior, express and written consent:
(i) Engage in Competition (as defined below) with the Company or any
of its successors or assigns; or
(ii) Employ or solicit the employment of any individual who is, or has
been, at any time during the Restrictive Period or during the twelve
complete calendar months immediately preceding the date of this Agreement,
an employee of the Company.
(b) Definitions. As used in this Section, the following terms shall have
the following meanings:
(i) "Business" shall mean the business conducted by the Company at the
date of this Agreement, including the business of restaurant franchising,
restaurant operations and food processing; excluding, however, the
operation and management of any restaurant in which Consultant, but not
Sagebrush, owns an equity interest disclosed on the form attached hereto as
Exhibit 8.
(ii) "Competition" shall mean:
(1) Engaging in a business substantially similar to the Business
within the Territory;
(2) Assisting any Person (whether in a financial, managerial,
employment, advisory or other material capacity) to engage in a business
substantially similar to the Business within the Territory provided,
however, that nothing herein shall preclude Consultant as a bona fide
lessor from leasing restaurant property to a tenant; or
(3) Owning any interest in or organizing a corporation, partnership
or other business or organization which engages in a business
substantially similar to the Business within the Territory; provided,
however, that nothing herein shall preclude Consultant from holding not
more than one percent of the outstanding shares of common stock of any
company whose shares of common stock are listed on a national securities
exchange or authorized for quotation by NASDAQ.
(iii) "Restrictive Period" shall mean the term of this Agreement.
A-38
<PAGE> 178
(iv) "Territory" shall mean: the 25-mile radius from (A) any
restaurant owned or franchised directly or indirectly by the Company, (B)
any food processing facility of the Company or (c) any other sites used
directly or indirectly by the Company, in any such case at which Consultant
assisted in the operation of the Business; and the 25-mile radius from (X)
any restaurant owned or franchised directly or indirectly by Sagebrush or
(Y) any other situs at which Sagebrush conducted business directly or
indirectly from the date of organization of Sagebrush through the date of
termination of this Agreement.
(c) Reasonable Exception. Should Consultant desire to invest or operate a
restaurant which would constitute engaging in competition, Consultant may
request the Company's consent to such investment or operation. If the proposed
restaurant is of a type similar to a Sagebrush, Prime Sirloin, Western Steer, or
Bennetts' restaurant concept, or any concept that the Company at the time is
engaged in or has announced plans at the time to engage in, the Company may
withhold its consent for any reason. If the proposed restaurant is not of one of
the aforenamed concepts, then such consent shall not be unreasonably withheld.
The parties agree that proximity to an existing Company restaurant
constitutes a reasonable basis for withholding consent.
11. Enforcement. In the event of any breach of the provisions of this
Agreement, the Company, its successors and assigns, in addition to any other
remedies that they may have in law or in equity, shall be entitled to any and
all of the following remedies:
(a) It is stipulated that a breach or anticipatory breach by
Consultant of Section 8, 9 or 10 of this Agreement will cause irreparable
damage to the Company and that, accordingly, the Company shall be entitled
to an injunction restraining Consultant from attempting to violate,
violating or continuing a violation of Sections 8, 9 and 10 of this
Agreement. The existence of any claim or cause of action on the part of
Consultant against the Company, its successors or assigns, whether arising
from this Agreement or otherwise, shall in no way constitute a defense to
the enforcement of these provisions.
(b) The Restrictive Period shall be extended by any time period during
which Consultant is in violation of any of the provisions of this
Agreement.
12. Acknowledgement of Adequate Consideration. The parties stipulate and
agree that the employment of Consultant by the Company under this Agreement and
the performance of the Company's obligations hereunder constitute sufficient
consideration to support enforcement of the covenants of this Agreement.
13. Acknowledgement of Reasonableness. Consultant has carefully read and
considered the provisions of this Agreement in consultation with attorneys of
his choice and agrees that the restrictions set forth herein are fair and
reasonably required for the Company's protection. In the event that any
provision relating to the Restrictive Period and/or the Territory shall be
declared by a court of competent jurisdiction to exceed the maximum time period
or geographical area such court deems reasonable and enforceable under
applicable law, the time period and/or area of restriction considered reasonable
and enforceable by the court shall thereafter be the applicable Restrictive
Period and/or Territory under this Agreement.
14. Surrender of Books and Records. Consultant agrees that all files,
documents, records, customer lists, vendor and supplier records, books,
products, calculations, drawings, descriptions, designs and other materials that
come into Consultant's use or possession during the term of this Agreement and
that are in any way related to the Company's business shall at all times remain
the property of the Company and that, upon the termination of this Agreement for
any reason, Consultant shall immediately surrender to the Company all such
materials.
15. Attorneys' Fees. Should it become necessary for the Company to
institute legal proceedings as a result of a breach of any terms or covenants
contained in this Agreement, the Company shall, if it is the prevailing party in
such litigation, be entitled to have and recover from the non-prevailing party
reasonable attorneys' fees plus court costs in addition to any and all relief
otherwise available to it, either at law or in equity. Should it become
necessary for Consultant to institute legal proceedings as a result of a breach
of any terms or covenants contained in this Agreement, Consultant shall, if he
is the prevailing party in such
A-39
<PAGE> 179
litigation, be entitled to have and recover from the non-prevailing party
reasonable attorneys' fees plus court costs in addition to any and all relief
otherwise available to him, either at law or in equity.
16. Severability. The illegality, unenforceability or invalidity of any
one or more covenants, phrases, clauses, sentences or paragraphs of this
Agreement, as determined by a court of competent jurisdiction, shall not effect
the remaining portions of this Agreement, or any part thereof; and, in case of
any such illegality, unenforceability or invalidity, this Agreement shall be
construed as if such covenants, phrases, clauses, sentences or paragraphs, to
the extent and only to the extent determined to be illegal, unenforceable or
invalid, had not been inserted.
17. Waiver of Breach. The waiver by either party of any breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach of any provision of this Agreement.
18. Entire Agreement. This Agreement sets forth the entire understanding
between the parties relating to the subject matter hereof and supersedes all
previous and contemporaneous understandings or agreements, written and oral.
This Agreement may be modified only by an agreement in writing, signed by all
parties, purporting to modify it.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina without regard to the
principles of conflict of laws thereof.
20. Notices. Any notice that may be given hereunder shall be in writing
and shall be deemed to have been given on the earlier to occur of (a) actual
receipt or (b) the second business day after the same shall have been mailed by
certified mail, postage prepaid, return receipt requested, to the parties at the
addresses listed below:
If to the Company: WSMP, Inc.
1 WSMP Drive
Claremont, NC 28610
Attention: David R. Clark
If to Consultant: Charles F. Connor, Jr.
----------------------------------
----------------------------------
21. Successors, Heirs and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties hereto, their successors, heirs and
assigns.
22. Survival. The provisions of Sections 8, 9, 10, 11, 12 and 13 hereof
shall survive the termination of this Agreement for any reason and shall remain
in full force and effect.
A-40
<PAGE> 180
23. Counterparts. This Agreement may be executed in counterparts, each of
which shall constitute an original and all of which, taken together, shall
constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
THE COMPANY:
WSMP, INC.
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
CONSULTANT:
Charles F. Connor, Jr.
--------------------------------------
(SEAL)
A-41
<PAGE> 181
EXHIBIT 8
Untouchables Pizza
J & W Cafeteria
Flapjack's
Mel's Diner
Bethlehem Fish & Steak
Mom's
A-42
<PAGE> 182
EXHIBIT 1.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the day of
, 1997 between WSMP, INC., a North Carolina corporation
("Employer"), and L. DENT MILLER, a North Carolina resident ("Employee");
WITNESSETH:
WHEREAS, Employer desires to employ Employee and Employee desires to be so
employed upon the terms and conditions provided herein; and
WHEREAS, as a condition precedent to Employer's obligation to consummate
the transactions (the "Closing") contemplated by that certain Agreement and Plan
of Merger dated as of November 14, 1997 (the "Merger Agreement") among Employer,
Sagebrush, Inc. ("Sagebrush"), WSMP Acquisition, Inc., Charles F. Connor, Jr.
and Employee, Employee is required to execute and deliver this Agreement; and
WHEREAS, Employer anticipates restructuring its restaurant operations into
a single wholly-owned subsidiary ("Restaurant Sub");
NOW, THEREFORE, in consideration of the covenants contained herein,
together with other valuable consideration, the receipt and legal sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. Employment. Employer agrees to employ Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in this
Agreement. Employee shall report to the Chief Operating Officer of Employer (or,
if none exists, then the Chief Executive Officer of Employer) and shall perform
such duties as the Chief Operating Officer or the Chief Executive Officer, as
the case may be (the "Superior Officer") may reasonably require. Employee shall
become the President of Restaurant Sub upon the organization thereof and shall
remain in such office unless and until his employment is terminated hereunder.
Employee shall not be required to locate outside of the Claremont -- Statesville
area.
2. Term. This Agreement shall terminate two years from the date of the
Closing, unless it is terminated earlier in accordance with other provisions
hereof.
3. Compensation. While employed by Employer under this Agreement:
(a) Employee shall be entitled to receive an annual base salary of
$200,000, payable in equal bi-monthly installments. Any increases in
Employee's base salary shall be in the discretion of the Superior Officer,
subject to ratification by the Compensation Committee of the Board of
Directors of Employer or, if no such Compensation Committee exists, then by
the entire Board of Directors of Employer (in either case, the
"Directors").
(b) Employee shall be entitled to receive such bonuses and stock
option grants as the Superior Officer shall determine from time to time in
his discretion, subject to ratification by the Directors.
4. Fringe Benefits. While employed by Employer under this Agreement:
(a) Employee shall be reimbursed for all reasonable and necessary
business expenses incurred by him on behalf of Employer, provided that he
shall submit substantiation of such expenses in form acceptable to the
Internal Revenue Service.
(b) Employee shall be entitled to four weeks of vacation per year.
(c) Employee shall be entitled to participate in all such health or
accident insurance plans, life insurance plans, major medical plans and
other similar plans and arrangements of Employer as may from time to time
be in effect for the benefit of Employer's officers and employees
generally. The parties acknowledge that Employee presently has group life
coverage at the level of $450,000 face amount, and that Employer's present
plan does not provide for such level of coverage. The Employer will use its
A-43
<PAGE> 183
reasonable efforts to obtain additional term coverage on Employee, without
replacing the Employer's standard insurance plan, and subject to the
Employee's insurability. Employee shall be entitled to receive such other
and additional fringe benefits as may be agreed upon in writing with
Employer.
(d) Employee shall be entitled to the use of a vehicle of similar
make, model and year as is presently provided to Employee by Sagebrush,
Inc.
5. Termination. (a) Employer may, by written notice to Employee, terminate
this Agreement at any time for Cause (as defined below), it being understood
that no termination of this Agreement shall affect (1) Employee's obligations
under Sections 7 and 8 of this Agreement, which shall remain in full force and
effect, or (2) Employer's obligation under Section 3(a) to pay Employee his
annual base salary for the remainder of the two-year term of this Agreement,
except as provided in subsection (iii) hereof. The term "Cause" shall mean:
(i) commission of a wrongful act by Employee that has had or will have
a material adverse effect on the business, operations or financial
condition of Employer;
(ii) willful and material failure by Employee to perform any one or
more of the duties assigned to him in or pursuant to this Agreement;
(iii) engaging in any outside activity prohibited by Section 6 hereof,
or failing to comply with any provision of Section 7 or 8 hereof, it being
understood and agreed by the parties that such activities by the Employee
terminate the Employer's obligation to continue paying the Employee under
Section 3(a);
(iv) conviction of a criminal offense; or
(v) the taking of any act, or the omission to take any act, the
reasonably foreseeable result of which act or omission is to adversely
affect the operations, goodwill, reputation or image of Employer.
(b) This Agreement shall terminate upon the death of Employee if prior to
the end of the term. Neither Employee nor his estate shall be entitled to
receive any severance pay in either such event.
(c) If Employee shall become subject to any Disability (as defined below),
then Employer may terminate this Agreement by giving Employee written notice of
termination. After such termination, Employee shall continue to receive his
annual base salary for the remainder of the two-year term of this Agreement.
During any period in which Employee is subject to any Disability, any
compensation and bonus payments due to Employee under this Agreement shall be
reduced by any payments made to Employee during such period under the terms of
any disability insurance policy provided or paid for by Employer. The term
"Disability" shall have the same meaning herein as in any disability insurance
policy maintained by Employer on Employee's behalf; in the event that no such
policy is maintained, it shall mean mental or physical impairment or incapacity
rendering Employee unable to perform his essential duties under and pursuant to
this Agreement with or without reasonable accommodations for a period of 120
days or more out of any 360-day period during the term of this Agreement, as
determined by a licensed physician experienced in the particular area wherein
the disability may be claimed and selected by the Superior Officer of Employer
in his discretion and upon his initiative or upon the request of Employee or a
person acting on his behalf.
6. Outside Activities. During the term of this Agreement, Employee shall
serve Employer faithfully and to the best of his ability and shall devote all of
his working time and energies to the furtherance of Employer's business;
provided, however, that Employee may continue to operate and manage any
restaurant in which Employee, but not Sagebrush, owns an equity interest
disclosed on the form attached hereto as Exhibit 6; and provided further that
Employee, while employed hereunder, shall not engage in any activity detrimental
to Employer or which interferes with the performance of his duties hereunder.
7. Covenant Not to Disclose Confidential Information. During the term of
this Agreement, Employee will be placed in a position by Employer to become
acquainted with confidential and privileged information of Employer and its
affiliates and successors, including, but not limited to, customer files,
customer lists, special customer matters, sales methods and techniques,
merchandising concepts and plans, business plans, sources of supply and vendors,
special business relationships with vendors, agents and brokers, promotional
materials and
A-44
<PAGE> 184
information, financial matters, mergers, acquisitions, selective personnel
matters and confidential processes, designs, formulas, ideas, plans, devices or
materials, and other similar matters which are confidential (any and all such
information being referred to herein as "Confidential Information"). The use of
Confidential Information against Employer would seriously damage Employer's
business. Accordingly, Employee agrees that during the term of this Agreement
and at all times thereafter with respect to financial matters and information,
and during the Restrictive Period (as defined below) with respect to all other
Confidential Information:
(a) He shall not, directly or indirectly, use, divulge, publish or
otherwise reveal or allow to be revealed any aspect of the Confidential
Information to any Person (as defined below) except by Employer's prior,
express and written consent or as required by law;
(b) He shall refrain from any action or conduct which might reasonably
or foreseeably be expected to compromise the confidentiality or proprietary
nature of the Confidential Information; and
(c) He has no right to apply for or to obtain any patent, copyright,
or other form of intellectual property protection with regard to the
Confidential Information.
The term "Person" shall mean any person, firm, partnership, trust,
corporation or other association (whether governmental or private). The
disclosure by Employee of Confidential Information in the bona fide conduct of
his duties under Section 1 of this Agreement shall not constitute a breach of
this Agreement. In further consideration of the salary paid to him by Employer,
Employee agrees that he will promptly communicate, disclose and deliver to
Employer any and all inventions, discoveries, marketing concepts and ideas,
promotional ideas, trade names, trademarks and other improvements relating to
devices, methods, formulas, sales and distribution concepts or processes of any
nature whatsoever that are used in the business of Employer and created or
developed by Employee while in the employ of Employer. Employer shall have the
right, at its expense, to apply for U.S. and foreign patents and trademarks on
any inventions, discoveries, trade names, trademarks and other improvements in
the name of Employee. Employee, upon request, shall at once execute any and all
documents relating to the application for and assignment to Employer of all such
applications without further compensation for such assignment.
8. Covenant Not to Compete. (a) Covenant. Employee hereby stipulates,
covenants and agrees that, during the Restrictive Period (as defined below), he
shall not, directly or indirectly, other than on behalf of Employer, without
Employer's prior, express and written consent:
(i) Engage in Competition (as defined below) with Employer or any of
its successors or assigns; or
(ii) Employ or solicit the employment of any individual who is, or has
been, at any time during the Restrictive Period or during the twelve
complete calendar months immediately preceding the date of this Agreement,
an employee of Employer.
(b) Definitions. As used in this Section, the following terms shall have
the following meanings:
(i) "Business" shall mean the business conducted by Employer at the
date of this Agreement, including the business of restaurant franchising,
restaurant operations and food processing; excluding, however, the
operation and management of any restaurant in which Employee, but not
Sagebrush, owns an equity interest disclosed on the form attached hereto as
Exhibit 6.
(ii) "Competition" shall mean:
(1) Engaging in a business substantially similar to the Business
within the Territory;
(2) Assisting any Person (whether in a financial, managerial,
employment, advisory or other material capacity) to engage in a business
substantially similar to the Business within the Territory; provided,
however, that nothing herein shall preclude Employee as a bona fide
lessor from leasing restaurant property to a tenant; or
(3) Owning any interest in or organizing a corporation,
partnership, or other business or organization which engages in a
business substantially similar to the Business within the Territory;
A-45
<PAGE> 185
provided, however, that nothing herein shall preclude Employee from
holding not more than one percent of the outstanding shares of common
stock of any company whose shares of common stock are listed on a
national securities exchange or authorized for quotation by NASDAQ.
(iii) "Restrictive Period" shall mean the period from the date of this
Agreement through the date that is exactly two years after the date of
termination of this Agreement.
(iv) "Territory" shall mean: the 25-mile radius from (A) any
restaurant owned or franchised directly or indirectly by the Company, (B)
any food processing facility of the Company or (c) any other situs used
directly or indirectly by the Company, in any such case at which Employee
assisted in the operation of the Business; and the 25-mile radius from (X)
any restaurant owned or franchised directly or indirectly by Sagebrush or
(Y) any other situs at which Sagebrush conducted business directly or
indirectly from the date of organization of Sagebrush through the date of
termination of this Agreement.
(c) Reasonable Exception. Should Employee desire to invest or operate a
restaurant which would constitute engaging in competition, Employee may request
the Employer's consent to such investment or operation. If the proposed
restaurant is of a type similar to a Sagebrush, Prime Sirloin, Western Steer, or
Bennetts' restaurant concept, or any concept that the Employer at the time is
engaged in or has announced plans at the time to engage in, the Employer may
withhold its consent for any reason. If the proposed restaurant is not of one of
the aforenamed concepts, then such consent shall not be unreasonably withheld.
The parties agree that proximity to an existing Employer restaurant
constitutes a reasonable basis for withholding consent.
9. Enforcement. In the event of any breach of the provisions of this
Agreement, Employer, its successors and assigns, in addition to any other
remedies that they may have in law or in equity, shall be entitled to any and
all of the following remedies:
(a) It is stipulated that a breach or anticipatory breach by Employee
of Section 6, 7 or 8 of this Agreement will cause irreparable damage to
Employer and that, accordingly, Employer shall be entitled to an injunction
restraining Employee from attempting to violate, violating or continuing a
violation of Sections 6, 7 and 8 of this Agreement. The existence of any
claim or cause of action on the part of Employee against Employer, its
successors or assigns, whether arising from this Agreement or otherwise,
shall in no way constitute a defense to the enforcement of these
provisions.
(b) The Restrictive Period shall be extended by any time period during
which Employee is in violation of any of the provisions of this Agreement.
10. Acknowledgement of Adequate Consideration. The parties stipulate and
agree that the employment of Employee by Employer under this Agreement and the
performance of Employer's obligations hereunder constitute sufficient
consideration to support enforcement of the covenants of this Agreement.
11. Acknowledgement of Reasonableness. Employee has carefully read and
considered the provisions of this Agreement in consultation with attorneys of
his choice and agrees that the restrictions set forth herein are fair and
reasonably required for Employer's protection. In the event that any provision
relating to the Restrictive Period and/or the Territory shall be declared by a
court of competent jurisdiction to exceed the maximum time period or
geographical area such court deems reasonable and enforceable under applicable
law, the time period and/or area of restriction considered reasonable and
enforceable by the court shall thereafter be the applicable Restrictive Period
and/or Territory under this Agreement.
12. Surrender of Books and Records. Employee agrees that all files,
documents, records, customer lists, vendor and supplier records, books,
products, calculations, drawings, descriptions, designs and other materials
which come into Employee's use or possession during the term of this Agreement
and that are in any way related to Employer's business shall at all times remain
the property of Employer and that, upon the termination of this Agreement for
any reason, Employee shall immediately surrender to Employer all such materials.
A-46
<PAGE> 186
13. Attorneys' Fees. Should it become necessary for Employer to institute
legal proceedings as a result of the breach of any terms or covenants contained
in this Agreement, Employer shall, if it is the prevailing party in such
litigation, be entitled to have and recover from the non-prevailing party
reasonable attorneys' fees plus court costs in addition to any and all relief
otherwise available to the prevailing party, either at law or in equity. Should
it become necessary for Employee to institute legal proceedings as a result of
the breach of any terms or covenants contained in this Agreement, Employee
shall, if he is the prevailing party in such litigation, be entitled to have and
recover from the non-prevailing party reasonable attorneys' fees plus court
costs in addition to any and all relief otherwise available to the prevailing
party, either at law or in equity.
14. Severability. The illegality, unenforceability or invalidity of any
one or more covenants, phrases, clauses, sentences or paragraphs of this
Agreement, as determined by a court of competent jurisdiction, shall not effect
the remaining portions of this Agreement, or any part thereof; and, in case of
any such illegality, unenforceability or invalidity, this Agreement shall be
construed as if such covenants, phrases, clauses, sentences or paragraphs, to
the extent and only to the extent determined to be illegal, unenforceable or
invalid, had not been inserted.
15. Waiver of Breach. The waiver by either party of any breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach of any provision of this Agreement.
16. Entire Agreement. This Agreement sets forth the entire understanding
between the parties relating to the subject matter hereof and supersedes all
previous and contemporaneous understandings or agreements, written and oral.
This Agreement may be modified only by an agreement in writing, signed by all
parties, purporting to modify it.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina without regard to the
principles of conflict of laws thereof.
18. Notices. Any notice that may be given hereunder shall be in writing
and shall be deemed to have given on the earlier to occur of (a) actual receipt
or (b) the second business day after the same shall have been mailed by
certified mail, postage prepaid, return receipt requested, to the parties at the
addresses listed below:
If to Employer: WSMP, Inc.
1 WSMP Drive
Claremont, NC 28610
Attention: David R. Clark
If to Employee: L. Dent Miller
---------------------------------------------------
---------------------------------------------------
19. Successors, Heirs and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties hereto, their successors, heirs and
assigns.
20. Survival. The provisions of Sections 6, 7, 8, 9, 10 and 11 hereof
shall survive the termination of this Agreement for any reason and shall remain
in full force and effect.
21. Counterparts. This Agreement may be executed in counterparts, each of
which shall constitute an original and all of which, taken together, shall
constitute one and the same Agreement.
A-47
<PAGE> 187
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EMPLOYER:
WSMP, INC.
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
EMPLOYEE:
L. Dent Miller
--------------------------------------
(SEAL)
A-48
<PAGE> 188
EXHIBIT 6
Untouchables Pizza
J & W Cafeteria
Flapjack's
Mel's Diner
Bethlehem Fish & Steak
Mom's
A-49
<PAGE> 189
EXHIBIT 2.1
ARTICLES OF MERGER
OF
WSMP ACQUISITION, INC.
WITH AND INTO
SAGEBRUSH, INC.
Sagebrush, Inc., a North Carolina corporation ("Sagebrush"), hereby
executes these Articles of Merger for the purpose of merging WSMP Acquisition,
Inc., a North Carolina corporation ("Sub"), with and into Sagebrush (the
"Merger").
1. Approval of Plan of Merger. With respect to both Sagebrush and Sub,
shareholder approval was required for the Merger, and the following Plan of
Merger was approved by their respective shareholders as required by Chapter 55
of the North Carolina General Statutes:
PLAN OF MERGER
A. Parties to the Merger. Sub shall be merged with and into Sagebrush, and
Sagebrush shall be the surviving corporation of the Merger (the "Surviving
Corporation"). The Merger shall become effective upon the filing of Articles of
Merger with the Secretary of State of the State of North Carolina (the
"Effective Time").
B. Name of Surviving Corporation. After the Merger, the name of the
Surviving Corporation shall be "Sagebrush, Inc."
C. The Merger. Upon the Merger becoming effective, the corporate existence
of Sub shall cease, and the corporate existence of Sagebrush shall continue. All
of the purposes, objects, rights, privileges, powers and franchises of Sagebrush
shall continue unaffected and unimpaired by the Merger.
D. Conversion and Exchange of Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any share of
Sagebrush common stock or the holder of any share of Sub common stock:
(1) Each issued and outstanding share of Sagebrush common stock (other
than any share as to which dissenter's appraisal rights have been
perfected) shall be converted into* share of common stock, no par value, of
WSMP, Inc., a North Carolina corporation ("WSMP"), plus cash in lieu of any
additional shares in an amount equal to such fraction multiplied by
$ * per share. Each share of WSMP common stock issued in the Merger
shall be issued together with one preferred stock purchase right in
accordance with the terms and conditions of the Rights Agreement dated
September 2, 1997 between WSMP and the American Stock Transfer & Trust
Company, as amended to the date hereof.
(2) Each issued and outstanding share of Sub common stock shall be
converted into one share of common stock of the Surviving Corporation,
which shall constitute the only issued and outstanding shares of capital
stock of the Surviving Corporation.
(3) Each holder of a certificate representing shares to be converted
or exchanged in the Merger shall promptly surrender such certificate after
the Effective Time.
E. Charter Documents, Directors and Officers. At the Effective Time:
(1) Article 2 of the Amended and Restated Articles of Incorporation of
Sagebrush shall be amended to read in full as follows: "ARTICLE 2: The
total number of shares of stock that the Corporation shall be authorized to
issue is 1,000 shares of Common Stock of no par value." The Amended and
Restated Articles of Incorporation of Sagebrush, as in effect immediately
prior to the
- ---------------
* To be completed to reflect the applicable amounts determined pursuant to the
Agreement and Plan of Merger to which this Exhibit 2.1 is attached.
A-50
<PAGE> 190
Effective Time, amended as provided in the preceding sentence, shall be the
Articles of Incorporation of the Surviving Corporation unless and until
amended in the manner provided by law and by such Amended and Restated
Articles of Incorporation.
(2) The Bylaws of Sagebrush, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation unless and
until amended or repealed in the manner provided by law, by the Articles of
Incorporation of the Surviving Corporation and by such Bylaws.
(3) At and after the Effective Time, the directors of WSMP at the
Effective Time shall be the directors of the Surviving Corporation.
(4) At and after the Effective Time, the officers of the Surviving
Corporation shall be as follows: L. Dent Miller, President; James C.
Richardson, Jr., Vice President and Assistant Secretary; David R. Clark,
Vice President and Assistant Secretary; and Matthew V. Hollifield,
Treasurer and Secretary.
2. Effective Date of Merger. The Merger shall become effective upon the
filing of these Articles of Merger with the Secretary of State of the State of
North Carolina.
These Articles of Merger executed as of , 1997.
SAGEBRUSH, INC.
By:
------------------------------------
L. Dent Miller
President
A-51
<PAGE> 191
APPENDIX B
Interstate Tower
P.O. Box 1012
Charlotte, North Carolina 28201-1012
Interstate/Johnson Lane Telephone: (704) 379-9000
- --------------------------------------------------------------------------------
January 13, 1998
Board of Directors
Sagebrush, Inc.
3238 W. Main Street
Claremont, NC 28610
Members of the Board:
You have requested our opinion (the "Opinion") expressed below, on behalf
of the shareholders of Sagebrush, Inc. (the "Company"), as to whether the
consideration to be received by the shareholders of the Company pursuant to the
Agreement and Plan of Merger (the "Agreement") dated November 14, 1997 between
WSMP, Inc. ("WSMP") and the Company is fair from a financial point of view.
Pursuant to the Agreement and upon the effectiveness of the merger (the
"Merger"), the Company will be merged with and into WSMP and each of the issued
and outstanding shares of the Company will be converted into the right to
receive .3214 shares of common stock of WSMP (the "Exchange Ratio"), subject to
adjustment if the average closing price of WSMP is greater than $23.34 or less
than $21.78 for the ten consecutive trading days ending on the day prior to the
day on which the Company's shareholders approve the merger.
Interstate/Johnson Lane Corporation is one of the largest independent
investment banking firms headquartered in the Southeast. As part of its regular
investment banking business, Interstate/Johnson Lane Corporation evaluates
securities in connection with negotiated underwritings, leveraged buyouts,
secondary distributions, private placements, estate and gift valuations, mergers
and acquisitions, employee stock ownership plan purchases and other activities.
We have developed our Opinion on the basis of the findings and conclusions
arising from our conduct of due diligence with respect to the Company and WSMP.
In arriving at our Opinion, we have, among other things:
(1) reviewed the terms and conditions of the Agreement;
(2) analyzed certain historical business, financial and securities
information relating to WSMP and the Company;
B-1
<PAGE> 192
(3) reviewed the historical market prices and trading volumes of the
common stocks of both the Company and WSMP;
(4) conducted discussions with members of the senior management of the
Company and WSMP with respect to the business and prospects of the Company
and WSMP and the strategic objectives of the Merger;
(5) reviewed financial and market information as to certain other
publicly traded companies believed by us to be reasonably comparable to the
Company;
(6) considered the financial terms of selected mergers and acquisition
transactions in the restaurant industry believed by us to be reasonably
comparable to the proposed Merger;
(7) performed a pro forma dilution analysis using financial
projections for WSMP and the Company in calendar and fiscal years 1997,
1998 and 1999, including therein potential cost savings, merger costs and
synergies, to estimate the impact to the shareholders of the Company and
the relative contributions of WSMP and the Company to the projected net
income of the combined companies; and
(8) conducted such other financial studies, analyses and
investigations as appropriate and relevant as the basis for the conclusions
set forth in this Opinion.
We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information furnished to us
by WSMP and the Company including, without limitation, all financial projections
of WSMP and the Company. Accordingly, we do not make any warranties, nor do we
express any opinion regarding the accuracy of such projections. We have also
relied upon the assurances of management of WSMP and the Company that they are
unaware of any facts that would make the information provided to us incomplete
or misleading.
Based upon and subject to the foregoing and such other matters as we
considered relevant, it is our opinion that as of the date hereof, the
consideration to be received by the shareholders of the Company as represented
by the Exchange Ratio, is fair, from a financial point of view, to the
shareholders of the Company.
Our fees for rendering our Opinion are not contingent upon the Opinion
expressed herein, and neither Interstate/Johnson Lane Corporation nor any of its
affiliates or employees has a present or intended material financial interest in
the Company. Further, Interstate/Johnson Lane Corporation is independent of all
parties participating in the proposed Merger.
B-2
<PAGE> 193
This Opinion, which is furnished to the Board of Directors of the Company
pursuant to our engagement letter dated October 14, 1997, is a summary
discussion of our underlying analyses and may be included in communications to
the shareholders of the Company provided that Interstate/Johnson Lane
Corporation approves of such disclosures prior to publication.
Very truly yours,
/s/ INTERSTATE/JOHNSON LANE CORPORATION
-----------------------------------------------------
INTERSTATE/JOHNSON LANE CORPORATION
B-3
<PAGE> 194
APPENDIX C
PROVISIONS OF THE NORTH CAROLINA BUSINESS CORPORATION ACT
RELATING TO DISSENTERS' APPRAISAL RIGHTS
ARTICLE 13
DISSENTERS' RIGHTS
Part 1. Right to Dissent and Obtain Payment for Shares.
SEC. 55-13-01. -- DEFINITIONS.
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and
in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances, giving due consideration to the rate currently
paid by the corporation on its principal bank loans, if any, but not less
than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SEC. 55-13-02. -- RIGHT TO DISSENT.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other
than a parent corporation in a merger under G.S. 55-11-04) is a party
unless (i) approval by the shareholders of that corporation is not required
under G.S. 55-11-03(g) or (ii) such shares are then redeemable by the
corporation at a price not greater than the cash to be received in exchange
for such shares;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, unless such
shares are then redeemable by the corporation at a price not greater than
the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than as permitted by G.S.
55-12-01, including a sale in dissolution, but not including a sale
pursuant to court order or a sale pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed in
cash to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares;
C-1
<PAGE> 195
(ii) creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares; (iii) alters or abolishes a preemptive right of
the holder of the shares to acquire shares or other securities; (iv)
excludes or limits the right of the shares to vote on any matter, or to
cumulate votes; (v) reduces the number of shares owned by the shareholder
to a fraction of a share if the fractional share so created is to be
acquired for cash under G.S. 55-6-04; or (vi) changes the corporation into
a nonprofit corporation or cooperative organization;
(5) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in exchange
for cash or other property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of dissent in favor of holders of shares of any class or series which, at
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share exchange or
the sale or exchange of property is to be acted on, were (i) listed on a
national securities exchange or (ii) held by at least 2,000 record shareholders,
unless in either case:
(1) The articles of incorporation of the corporation issuing the
shares provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange
to accept for the shares anything except:
(a) Cash;
(b) Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which,
at the record date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting at which the plan of merger or
share exchange is to be acted on, were either listed subject to notice
of issuance on a national securities exchange or held of record by at
least 2,000 record shareholders; or
(c) A combination of cash and shares as set forth in
sub-subdivisions (a) and (b) of this subdivision.
SEC. 55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenter's rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the name of different shareholders.
(b) A beneficial shareholder may assert dissenter's rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder.
C-2
<PAGE> 196
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.
SEC. 55-13-20. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no later than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section,
such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S.
55-13-02 unless he voted for such corporate action.
SEC. 55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this Article.
SEC. 55-13-22. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified mail, return receipt requested, a written dissenters'
notice to all shareholders who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after the
approval of the board of directors, of the corporate action creating dissenters'
rights under G.S. 55-13-02 was taken, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the
date the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
SEC. 55-13-23. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the terms
of the notice.
C-3
<PAGE> 197
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
SEC. 55-13-24. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
SEC. 55-13-25. PAYMENT.
(a) As soon as the proposed corporate action is taken, or within 30 days of
receipt of a payment demand, the corporation shall offer to pay each dissenter
who complied with G.S. 55-13-23 the amount the corporation estimates to be the
fair value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the
end of a fiscal year ending not more than 16 months before the date of
payment, an income statement for that year, a statement of cash flows for
that year, and the latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
SEC. 55-13-26. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificated and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
SEC. 55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S PAYMENT
OR FAILURE TO PERFORM.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of the amount in excess of the payment by the corporation under G.S. 55-13-25
for the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
C-4
<PAGE> 198
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(1) within 30 days after the corporation made payment for his
shares or (ii) under subdivisions (a)(2) and (a) (3) within 30 days after the
corporation has failed to perform timely. A dissenter who fails to notify the
corporation of his demand under subsection (a) within such 30-day period shall
be deemed to have withdrawn his dissent and demand for payment.
PART 3. JUDICIAL APPRAISAL OF SHARES.
SEC. 55-13-30. COURT ACTION.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of (i) the
date payment is made under G.S. 55-13-25 or (ii) the date of the dissenter's
payment demand under G.S. 55-13-28 and petition the court to determine the fair
value of the shares and accrued interest. A dissenter who takes no action within
the 60-day period shall be deemed to have withdrawn his dissent and demand for
payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or
not residents of this State) whose demands remain unsettled parties to the
proceedings as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publications as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The parties are entitled to the same discovery
rights as parties in other civil proceedings. However, in a proceeding by a
dissenter in a public corporation, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
SEC. 55-13-31. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall assess
the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either
or any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
C-5
<PAGE> 199
SAGEBRUSH, INC.
3238 WEST MAIN STREET
CLAREMONT, NORTH CAROLINA 28610
THIS PROXY IS SOLICITED ON BEHALF OF SAGEBRUSH'S BOARD OF DIRECTORS FOR THE
SPECIAL
MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 27, 1998 AT 10:00 A.M.
The undersigned hereby appoints L. Dent Miller, Charles F. Connor, Jr. and
Noland M. Mewborn, and each or any of them, proxies for the undersigned, with
full power of substitution, to represent the undersigned and to vote all shares
of Sagebrush Common Stock that the undersigned may be entitled to vote at the
Sagebrush Special Meeting of Shareholders to be held in Hickory, North Carolina,
January 27, 1998, at 10:00 a.m., or at any adjournment or postponement thereof.
The undersigned further authorizes such proxies to vote in their discretion upon
such matters as may properly come before such Special Meeting or any adjournment
or postponement thereof. Receipt of Notice of the Special Meeting of
Shareholders and of the Joint Proxy Statement-Prospectus is hereby acknowledged.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE PROPOSAL SET FORTH BELOW. THE SAGEBRUSH BOARD OF DIRECTORS
RECOMMENDS VOTING "FOR" SUCH PROPOSAL.
1. A proposal to approve the Agreement and the Plan of Merger as defined
and described in the Joint Proxy Statement-Prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
CONTINUED AND TO BE SIGNED ON REVERSE
Dated:
------------------------------------------------------------------------------,
1998
-------------------------------
-------------------------------
Signature of Shareholder(s)
Important: Please sign exactly
as your name(s) appear hereon.
Where shares are held jointly,
both holders should sign. When
signing as attorney, executor,
administrator, trustee or
guardian, please give your full
title as such. If the holder is
a corporation, execute in full
corporate name by authorized
officer.
PLEASE SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
