<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997
REGISTRATION NO. 333-37387
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
BROUGHTON FOODS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
2020
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
31-4135-025
(IRS EMPLOYER
IDENTIFICATION NUMBER)
BROUGHTON FOODS COMPANY
210 NORTH SEVENTH STREET
MARIETTA, OHIO 45750
(740) 373-4121
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PHILIP E. CLINE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BROUGHTON FOODS COMPANY
210 NORTH SEVENTH STREET
MARIETTA, OHIO 45750
(740) 373-4121
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
Please send copies of communications to:
<TABLE>
<S> <C>
STEVEN KAPLAN, ESQ. CHRISTOPHER T. JENSEN, ESQ.
ARNOLD & PORTER MORGAN, LEWIS & BOCKIUS LLP
555 TWELFTH STREET, N.W. 101 PARK AVENUE
WASHINGTON, D.C. 20004-1202 NEW YORK, NY 10178-0060
(202) 942-5998 (212) 309-6000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as possible after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 26, 1997
1,200,000 SHARES
------------------------
BROUGHTON LOGO
BROUGHTON FOODS COMPANY
------------------------
COMMON STOCK
------------------------
All 1,200,000 shares of Common Stock, par value $1.00 per share (the
"Common Stock"), are being offered by Broughton Foods Company, an Ohio
corporation (the "Company" or "Broughton").
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is anticipated that the initial public offering price
per share will be between $13.00 and $15.00. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "MILK."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
COMMON STOCK.
------------------------
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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................... $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
</TABLE>
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company estimated
at $784,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 180,000
additional shares of Common Stock from the Company at the Price to Public
less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The Common Stock is being offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to reject orders in whole or in part and to withdraw, cancel or modify
this Offering without notice. It is expected that delivery of the certificates
representing the shares of Common Stock will be made on or about ,
1997 at the offices of Advest, Inc. in New York, New York.
------------------------
ADVEST, INC. FERRIS, BAKER WATTS
Incorporated
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3
[MAPS SHOWING DISTRIBUTION AND PRODUCTION FACILITIES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION,
STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY
BIDS. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
THE COMPANY OWNS OR OTHERWISE HAS RIGHTS TO TRADEMARKS OR TRADE NAMES THAT
IT USES IN CONJUNCTION WITH THE SALE OR LICENSING OF ITS PRODUCTS THAT ARE
REGISTERED OR OTHERWISE PROTECTED UNDER THE LAWS OF VARIOUS JURISDICTIONS. THE
COMPANY'S CORPORATE LOGO, BROUGHTON B KITCHEN GUILD (PLUS LOGO)(R), DAIRYLANE,
KITCHEN GUILD(R), REAL CREAM, KEEPWELL(R) AND SOKREEM(R) TRADEMARKS MENTIONED IN
THIS PROSPECTUS ARE OWNED BY THE COMPANY. ALL OTHER TRADEMARKS OR TRADE NAMES
REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Unless
otherwise indicated, all information contained in this Prospectus (i) assumes
that the over-allotment option granted by the Company to the Underwriters will
not be exercised; and (ii) reflects a 30-for-1 split of each outstanding share
of the Common Stock of the Company effected in the form of a stock dividend
distributed on September 10, 1997 to shareholders of record at the close of
business on September 9, 1997.
THE COMPANY
Broughton Foods Company is a leading manufacturer and distributor of fresh
milk and dairy products in Ohio, West Virginia, Kentucky and parts of the
eastern United States. The Company operates through two divisions -- the Dairy
Division and the Foods Division. The Dairy Division, with its raw milk
processing plant based in Marietta, Ohio, manufactures and distributes a full
line of fresh milk and related products and also distributes brand name dairy
and non-dairy foods. The Dairy Division processes whole milk, low-fat milk, skim
milk, and manufactures buttermilk, cottage cheese, chocolate milk, eggnog, iced
tea, orange juice, ice cream mix, fruit drink, yogurt mix and ice cream under
its own Broughton or Dairylane label and under various private labels. The Foods
Division, with an ultra high temperature ("UHT") plant based in Charleston, West
Virginia, processes a variety of extended life products, including
half-and-half, sour cream, dips, dressings, aerosol toppings, whipped cream,
coffee cream, table cream, non-dairy creamers and whipped toppings. The Foods
Division also distributes various lines of branded refrigerated food products
manufactured by third parties.
Strategically located between the cities of Pittsburgh, Pennsylvania;
Cleveland, Columbus and Cincinnati, Ohio; and Lexington, Kentucky, each of the
Company's divisions is a strong regional competitor with an established
reputation for customer service and product quality. The Dairy Division markets
and distributes its products through an extensive network to a variety of
customers, including supermarkets, convenience stores, minimarkets, local
grocery stores, restaurants and institutional customers. The Foods Division
serves independent dairies, food service distributors, brokers, grocery
warehouses and commissaries.
The Company's strategic objective is to continue to expand and strengthen
its market share in the regions in which it currently operates and to become a
leading national provider of dairy and related products. The key elements of the
Company's strategy include:
- Expanding its operations through consolidating acquisitions within
the markets it currently serves and through strategic acquisitions of
regional dairy and related businesses in new geographic markets;
- Extending its product lines and securing distribution rights for
additional branded product lines;
- Expanding the Company's revenue base by generating increased demand
for new product lines from existing customers and increasing its customer
base in markets in which it operates; and
- Achieving cost efficiencies by combining innovative and traditional
production and distribution methods, hiring and training skilled employees,
rationalizing raw materials usage and implementing improved process
controls and other productivity improvements.
RECENT DEVELOPMENTS
On September 29, 1997, the Company executed a merger agreement with
Southern Belle Dairy Company ("Southern Belle") whereby Southern Belle will be
merged with and into the Company, with the Company being the surviving
corporation (the "Southern Belle Acquisition"). The Company has agreed to pay
the stockholders of Southern Belle an aggregate consideration of $5.0 million,
consisting of a combination of cash and Common Stock, and the assumption of
certain liabilities. Southern Belle is a producer and distributor of fresh milk
and other dairy products primarily to grocery stores, convenience stores,
restaurants
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<PAGE> 5
and school systems located in central and eastern Kentucky and Tennessee.
Southern Belle's major product is fluid milk (including buttermilk), which
represented over 80% of its total production volume for the year ended May 31,
1997. The Southern Belle Acquisition is conditioned on, among other things, the
concurrent consummation of this Offering and standard closing conditions. For
the year ended May 31, 1997, Southern Belle had total revenues of approximately
$63.9 million compared to total revenues of $53.9 million for the year ended
June 1, 1996. After the consummation of the Southern Belle Acquisition, the
Company intends to maintain the operations of Southern Belle as a separate
division of the Company.
The closing of this Offering is conditioned on the concurrent consummation
of the Southern Belle Acquisition.
Management considers the acquisition of Southern Belle to be consistent
with the Company's growth strategy and believes that the acquisition will result
in several benefits, including:
- Producing various cost savings, synergies and economies of scale,
including providing the Company with a dependable source of butterfat for
certain of its products;
- Allowing the Company to expand into and serve geographic market
areas contiguous to its current market area;
- Providing the Company with the opportunity to increase its net sales
and profits through the offering of its products to Southern Belle's
customers; and
- Positioning the Company to compete more effectively in the rapidly
consolidating dairy industry.
A number of factors will be important in the Company's goal of successfully
integrating Southern Belle into the Company, including increasing manufacturing
capacity and sales, streamlining operations and reducing inefficiencies. There
can be no assurance regarding the ultimate impact of the Southern Belle
Acquisition on the Company and its future business and operations. See "Risk
Factors -- Risks Related to Integration of Southern Belle and Subsequently
Acquired Businesses."
After giving effect to the Southern Belle Acquisition, the Company's pro
forma combined net sales for the year ended December 31, 1996 and the nine
months ended September 30, 1997 were $144.0 million and $107.7 million,
respectively. After the completion of this Offering and the Southern Belle
Acquisition, 5,490,517 shares (5,670,517 if the Underwriters exercise their
over-allotment option in full) of the Common Stock will be outstanding. Of such
shares, former Southern Belle shareholders will own 167,857 shares, or
approximately 3.1% of the Common Stock outstanding (167,857 shares, or
approximately 3.0% of the Common Stock outstanding, if the Underwriters exercise
their over-allotment option in full), assuming an initial public offering price
of $14.00 per share (the midpoint of the price range set forth on the cover page
of this Prospectus). The Company's executive officers and directors and Martin
P. Shearer, currently the President and Chief Executive Officer of Southern
Belle, will beneficially own an aggregate of 46.9% of the Common Stock
outstanding after this Offering and the Southern Belle Acquisition (45.5% if the
Underwriters exercise their over-allotment option in full).
4
<PAGE> 6
THE OFFERING
Common Stock offered by the
Company............................. 1,200,000 shares
Common Stock to be outstanding after
this Offering and the Southern Belle
Acquisition....................... 5,490,517 shares
Use of proceeds..................... To fund the cash portion of the
consideration for the Southern Belle
Acquisition; to finance facilities
expansion and other capital
expenditures; to repay certain
indebtedness; and for general corporate
purposes, including working capital and
future acquisitions. See "Use of
Proceeds."
Nasdaq National Market symbol....... "MILK"
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SUMMARY FINANCIAL DATA
The following table sets forth summary financial data of the Company as of
and for the three years ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997. Such data as of and for the three years ended
December 31, 1996 are derived from the Company's financial statements, which
have been audited by Coopers & Lybrand L.L.P., independent public accountants.
The historical financial data as of and for the nine months ended September 30,
1996 and 1997 are derived from the Company's unaudited financial statements. It
is management's opinion that the historical financial data as of and for the
nine months ended September 30, 1996 and 1997 contain all adjustments,
consisting solely of normal recurring adjustments, which management considers
necessary to fairly present the financial data set forth herein. The results for
the nine months ended September 30, 1996 and 1997 are not necessarily indicative
of the results to be expected for future periods.
The pro forma statement of operations data for the year ended December 31,
1996 and the nine months ended September 30, 1997 present results for the
Company as if the acquisition of Southern Belle had occurred as of January 1,
1996. Pro forma as adjusted amounts also give effect to this Offering (at an
assumed initial public offering price of $14.00 per share of Common Stock) and
the application of the net proceeds therefrom. The summary historical financial
data and the pro forma financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements of the Company and the related Notes
thereto and the Unaudited Pro Forma Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------- ------------------------------------
1996 1997
PRO FORMA PRO FORMA
1994 1995 1996 AS ADJUSTED(1) 1996 1997 AS ADJUSTED(1)
------- ------- ------- -------------- ------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $73,552 $72,253 $83,919 $143,962 $61,283 $61,964 $107,677
Costs and expenses(2)............. 72,241 72,602 83,186 143,899 60,492 60,366 105,436
Operating income (loss)........... 1,311 (349) 733 63 791 1,598 2,241
Other income (expense), net(3).... (123) (107) 3,027 3,001 (122) 27 73
Net income (loss)................. $ 744 $ (307) $ 2,329 $ 1,837 $ 420 $ 987 $ 1,395
Net income (loss) per share(4).... $ 0.17 $ (0.07) $ 0.56 $ 0.33 $ 0.10 $ 0.24 $ 0.25
Weighted average common shares
outstanding(4).................. 4,453 4,283 4,123 5,491 4,123 4,123 5,491
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------------
1997
PRO FORMA
1997 AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................................... $ 5,555 $ 13,415
Total assets.................................................................................. 18,589 41,954
Total debt.................................................................................... 1,454 1,586
Total shareholders' equity.................................................................... 11,121 28,181
</TABLE>
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(1) The pro forma statements of operations do not reflect any cost savings
associated with the consolidation and integration of facilities. Pro forma
as adjusted amounts also give effect to the repayment of approximately $5.1
million of indebtedness, as if such events had occurred as of January 1,
1996 (see "Use of Proceeds"). As adjusted amounts do not give effect to any
interest income earned on the proceeds of this Offering pending application.
See the "Unaudited Pro Forma Financial Statements" for a discussion of pro
forma statement of operations adjustments. The Southern Belle financial
information is for the year ended November 30, 1996 and for the nine months
ended August 30, 1997.
(2) Costs and expenses consist of raw product costs; operating, general and
administrative expenses; and depreciation and amortization. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a broader description of the Company's costs and expenses.
(3) Other income (expense), net for both the historical and pro forma year ended
December 31, 1996 includes a $3.0 million pre-tax gain on the sale of an
investment.
(4) On August 27, 1997, the Company's Board of Directors approved a 30-for-1
stock split in the form of a stock dividend. Retroactive restatement has
been made to all share amounts to reflect the stock split.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
RISKS RELATED TO INTEGRATION OF SOUTHERN BELLE AND SUBSEQUENTLY ACQUIRED
BUSINESSES INTO THE COMPANY
The Company has recently executed the Southern Belle Acquisition Agreement.
Following the consummation of the Southern Belle Acquisition, the Company plans
to consolidate the operations of Southern Belle, which markets products
substantially identical to some of those of the Company through similar channels
of distribution. There can be no assurance that the Company will be able to
complete effectively the integration of Southern Belle with the Company's
operations, to manage effectively the operations of the businesses, to achieve
the Company's operating and growth strategies with respect to these businesses,
to obtain increased revenue opportunities as a result of the anticipated
synergies created by expanded product offerings and additional distribution
channels or to reduce the overall selling, general and administrative expenses
associated with the acquired operations. The integration of the management,
operations and facilities of Southern Belle and any other businesses the Company
may acquire in the future could involve unforeseen difficulties, which could
have a material adverse effect on the Company's business, financial condition
and results of operations and on the market price of the Common Stock. See
"Business -- Southern Belle Acquisition."
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY
The Company's ability to increase the net sales of its existing operations
and any subsequently acquired businesses will be affected by various factors,
including demand for its products, the cost of expanding and upgrading its
facilities, the Company's ability to expand the range of products offered to
customers, its success in implementing strategies necessary to attract new
customers and attract and retain necessary personnel and its ability to obtain
necessary financing. Many of these factors are beyond the Company's control, and
there can be no assurance that the Company's operating and internal growth
strategies will be successful or that the Company will be able to generate cash
flow adequate for its operations and to support internal growth. See
"Business -- Business Strategy."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY; MANAGEMENT OF GROWTH
The Company intends to acquire businesses complementary to the Company's
operations. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate
acquired businesses into the Company without substantial costs, delays or other
operational or financial problems. In addition, increased competition for
acquisition candidates may develop, in which event there may be fewer
acquisition opportunities available to the Company as well as higher acquisition
prices. Further, acquisitions involve a number of special risks, including
possible adverse effects on the Company's operating results, diversion of
management's attention, risks related to having adequate corporate and financial
controls and procedures to manage and monitor the Company's operations as they
expand, risks associated with unanticipated events or liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly in the fiscal quarters immediately following
the consummation of such transactions. Customer dissatisfaction or performance
problems at a single acquired company could also have an adverse effect on the
reputation of the Company. There also can be no assurance that businesses
acquired in the future will achieve anticipated revenues and earnings. See
"Business -- Business Strategy."
In addition, any future growth also will impose significant added
responsibilities on members of senior management, including the need to
identify, recruit and integrate new senior level managers and executives. There
can be no assurance that such additional management will be identified and
retained by the Company. To the extent that the Company is unable to manage its
growth efficiently and effectively, or is unable to attract and retain
additional qualified management, the Company's business, financial condition and
results of
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operations and the market price of the Common Stock could be materially
adversely affected. See "Business -- Business Strategy."
RISKS RELATED TO ACQUISITION AND OTHER FINANCING
The timing, size and success of the Company's acquisition efforts and the
associated capital commitments cannot be readily predicted. The Company
currently intends to finance acquisitions by using shares of its Common Stock
for all or a significant portion of the consideration to be paid. If the Common
Stock does not maintain a sufficient market value, or if potential acquisition
candidates are otherwise unwilling to accept Common Stock as part of the
consideration for the sale of their businesses, the Company may be required to
utilize more of its cash resources, if available, in order to initiate and
maintain its acquisition program. The Company anticipates using a portion of the
net proceeds of this Offering for future acquisitions and working capital. If
the Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or other equity
financings. While the Company has had discussions with certain potential
lenders, it currently has only informal commitments for additional financing for
working capital and acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
In the future, the Company may require significant amounts of additional
capital to fund the internal expansion of its operations, the acquisition by it
of businesses and its working capital. The exact amount of the Company's future
capital requirements, however, will depend upon many factors, including the
cost, timing and extent of any upgrade or expansion of its operations, the
Company's ability to penetrate new markets, regulatory changes, the status of
competing businesses, the magnitude of potential acquisitions and the Company's
results of operations. Individually or collectively, variances in these and
other factors could cause material changes in the Company's actual capital
requirements.
New sources of capital may include subsequent public and private equity and
debt financings by the Company. The incurrence of additional indebtedness could
subject the Company to expanded or more restrictive financial covenants. There
can be no assurance that additional financing will be available on acceptable
terms or at all. To the extent unplanned expenditures arise or the Company's
estimates of its capital requirements prove to be inaccurate, the Company may
require such additional financing sooner than anticipated and in amounts greater
than current expectations. If such funds are not available or are available on
terms that the Company views as unfavorable, the Company may be required to
limit or abandon certain of its expansion strategies. The delay or abandonment
of some or all of the Company's development and expansion plans or the
incurrence by the Company of additional debt could have a material adverse
effect on the business, financial condition and results of operations of the
Company and on the market price of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RISKS ASSOCIATED WITH PERISHABLE FOOD PRODUCTION
The food manufacturing and distribution industry is subject to varying
degrees of risk. In particular, dairy products are highly perishable and must be
transported timely and efficiently at a precise temperature range. As a result,
the Company is always subject to risk of spoilage or contamination of its dairy
products. In addition, food producers, such as the Company, may be subject to
claims for damages if contaminated food causes injury to consumers. See
"-- Product Liability Risks."
The food products sold by the Company include dairy products and other
perishable goods with a limited shelf life. Because it is not practicable to
hold excess inventory of perishable products, the Company's results of
operations are partly dependent on its ability to accurately forecast its
near-term sales in order to adjust its supply of perishable items accordingly.
Historically, forecasting product demand has been difficult and the Company
expects it to be an ongoing challenge. Failure to accurately forecast product
demand could result in the Company either being unable to meet higher than
anticipated demand or producing excess inventory that cannot be profitably sold.
In addition, certain of the Company's trade customers have the right to return
any products that are not sold by their expiration date. The inability of the
Company to meet higher than anticipated demand, excess production or significant
amounts of product returns could have a material adverse
8
<PAGE> 10
effect on the Company's business, financial condition and results of operations
and on the market price of the Common Stock.
PRODUCT LIABILITY RISKS
The Company may be subject to significant liability should the consumption
of any of its products cause injury, illness or death. There can be no assurance
that product liability claims will not be asserted against the Company or that
the Company will not be obligated to recall its products. The Company has an
umbrella insurance policy and carries product liability insurance and product
withdrawal expense insurance. The Company's umbrella insurance policy
supplements the underlying general liability and product liability and
withdrawal expense insurance. There can be no assurance that this insurance will
be adequate to protect the Company against product liability claims, or that
such insurance will continue to be available to the Company on reasonable terms.
A product recall or a product liability judgment against the Company (regardless
of whether covered by insurance) could have a material adverse effect on the
Company's business, financial condition and results of operations and on the
market price of the Common Stock.
GOVERNMENT REGULATION; REGULATORY UNCERTAINTY
The manufacture, processing, packaging, storage, distribution, licensing
and labeling of food products are subject to extensive federal, state and local
regulations. The Company's business is subject to regulation through inspection
by the Food and Drug Administration (the "FDA") and the United States Department
of Agriculture and local and state health agencies. This comprehensive
regulatory program establishes, among other things, the manufacturing,
composition and ingredients (the "standards of identity"), labeling, packaging
and safety of food and pricing of certain raw materials. For example, the FDA
regulates manufacturing practices for foods through its "current good
manufacturing practices" regulations, and specifies the standards of identity
for certain foods. In addition, the Nutrition Labeling and Education Act of
1990, as amended, prescribes the format and content of certain nutrient
information required to appear on the labels of and in health claims regarding
food products. The FDA has proposed rules to amend the regulations that govern
the standards of identity and the labeling of certain products eventually
manufactured by the Company. No assurance can be made that such proposed FDA
rules, in the form adopted, would not impose additional costs on the production
of the Company's products which could have a material adverse effect on the
Company's business, financial condition and results of operations and on the
market price of the Common Stock.
Enforcement actions for violations of federal, state and local regulations
may include condemnation of violative products following product seizures, cease
and desist orders, injunctions precluding the manufacture and shipment of
products and/or monetary penalties and criminal sanctions. Noncompliance in
manufacturing processes can result in warning letters from regulatory agencies
and requests that the Company voluntarily recall violative products. In
addition, federal and other regulators may issue adverse publicity or other
product advisories against consumption of the Company's products if they believe
that public health risks exist. Any of these regulatory actions could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the market price of the Common Stock. There can be
no assurance that the Company's facilities and practices are sufficient to
maintain compliance with applicable government regulations. See
"Business -- Government Regulation -- Public Health."
Like many other businesses, the Company is subject to a full range of
federal, state and local laws and regulations pertaining to the environment,
including the discharge of materials into the environment and the handling and
disposal of wastes (including solid and hazardous wastes). No assurance can be
made that the Company is in compliance with all applicable environmental laws
and regulations governing its business or that the Company's costs of compliance
with, or any liability under, such environmental laws and regulations would not
have a material adverse effect on its business, financial condition and results
of operations and on the market price of the Common Stock. See
"Business -- Government Regulation -- Environmental Regulations."
9
<PAGE> 11
DEPENDENCE ON CERTAIN CUSTOMERS
Direct sales of products to the Company's 10 largest customers represented
approximately 28% of the Company's total revenues in 1996. Net sales from
IGA-Fleming Foods, a supermarket chain and the Company's largest customer,
accounted for approximately 5.7% of the Company's revenues in 1996. Food Lion, a
supermarket chain, accounted for approximately 21% of the net sales of Southern
Belle in 1996 (approximately 8% of the Company's 1996 combined net sales on a
pro forma basis). A loss of any of these customers or any significant reduction
in sales to them could adversely affect the Company's business, financial
condition and results of operations and the market price of the Common Stock.
A number of the Company's customers, such as public schools and
penitentiaries, are acquired pursuant to government bid contracts. Net sales
attributable to government bid contracts accounted for approximately 3.1% of the
Company's revenues in 1996. Such public sector customers have considerable
ability to force the renegotiation of the terms of a contract upon the Company
and frequently are significantly slower in paying outstanding accounts than are
private sector entities. Termination or forced renegotiation of contracts with
the Company's public sector customers or delays in payments from public sector
entities could have a material adverse effect on the Company's business,
financial condition and results of operations and on the market price of the
Common Stock. See "Business -- Sales and Distribution."
RISKS OF GOVERNMENTAL BID CONTRACTS
The Company faces the risks associated with governmental bid contracting,
which include substantial civil and criminal fines and penalties for, among
other matters, failure to follow procurement integrity and bidding rules,
employing improper billing practices or otherwise failing to follow cost
accounting standards, receiving or paying kickbacks or filing false claims.
Government contracting requirements are complex, highly technical and subject to
varying interpretation. As a result of its government contracting business, the
Company has been, is and expects in the future to be the subject of audits and
investigations by government agencies. In addition to potential damage to the
Company's business reputation, the failure to comply with the terms of one or
more of its government contracts could also result in the Company's suspension
or debarment from future governmental contract bids for a significant period of
time. The fines and penalties which could result from noncompliance with
appropriate standards and regulations, or the Company's suspension or debarment,
could have a material adverse effect on the Company's business, financial
condition and results of operations and on the market price of the Common Stock.
RISKS RELATING TO ANTITRUST LAWS
The dairy industry is subject to various federal and state antitrust laws
which prohibit anticompetitive conduct, including price fixing, concerted
refusals to deal and divisions of markets. The dairy industry has been in the
past, and may be in the future, subject to government investigation and/or
enforcement action with respect to such antitrust laws.
In a civil action brought by the Federal government in 1990, Southern Belle
and several other dairies in Kentucky and Tennessee were found to have violated
Federal antitrust statutes relating to the submission of offers to supply milk
to school districts. This action was settled through the imposition of a fine of
$375,000, which has been fully paid by Southern Belle. Following this civil
action and the settlement thereof, Southern Belle entered into an Agreement in
Lieu of Debarment with the U.S. Department of Agriculture (the "USDA"), pursuant
to which Southern Belle has agreed to implement certain ethics programs and to
submit to periodic reporting and monitoring procedures of the USDA. The extent
to which the conditions and obligations of the Agreement in Lieu of Debarment
will, in like form, apply to the Company following the consummation of the
acquisition of Southern Belle cannot be predicted, and the application of any
such conditions and obligations to the Company could have a material adverse
effect on the Company's business, financial condition and results of operations
and on the market price of the Common Stock.
The Company and certain other dairy companies were the subject of civil
litigation initiated by the State of Ohio relating to the pricing of contracts
to supply milk. On September 12, 1997, the civil litigation initiated
10
<PAGE> 12
by the State of Ohio was settled for approximately $30,000 of the Company's
product and a cash distribution of approximately $20,000.
DEPENDENCE ON CERTAIN SUPPLIERS
Raw milk is the primary raw material of the Company and Southern Belle. The
Company does not purchase its raw milk from dairy cooperatives but buys raw
milk, on a noncontractual, non-exclusive basis, from over 170 local dairy farms
throughout Ohio and West Virginia. Substantially all of Southern Belle's raw
milk is supplied, on a contractual, exclusive basis, by Southeastern Graded Milk
Producers Association ("SEGMPA"), a milk farm cooperative based in Somerset,
Kentucky. If for any reason SEGMPA was unable or unwilling to continue supplying
the operations of Southern Belle, the Company could incur substantial costs and
delays in the growth and expansion of its business. See "Business -- Raw
Materials and Supply."
POSSIBLE VOLATILITY OF RAW MATERIAL AND TRANSPORTATION COSTS
U.S. dairy policy since the mid-1980s has focused on gradually reducing
federal government involvement in the dairy industry and moving the industry in
a more market oriented direction. In order to accomplish these goals, the
federal government has targeted the federal milk marketing order system and the
milk price support program for reform. These reforms have resulted in the
potential for greater price volatility relative to past periods, as prices are
more responsive to the fundamental supply and demand of the market.
The 1996 farm bill directed the USDA to reform the federal milk marketing
order system and consolidate the number of milk marketing orders from 32
regional milk marketing orders into between 10 to 14 by 1999. The Federal milk
marketing order system imposes minimum pricing requirements on purchases of milk
by handlers. The federal order system was established about 60 years ago to
stabilize market conditions and provide consumers with adequate milk supplies
while assuring dairy farmers of a minimum set price for their milk. As a
consequence of this regulation, milk prices in the United States move only
within a certain range, and volatility is somewhat managed.
Under the price support program, the Commodity Credit Corporation ("CCC")
stands ready to buy any surplus milk at the government established support
price. The CCC would buy surplus in times when supply exceeds demand, then store
the surplus until demand exceeds supplies. The 1996 farm bill directed the USDA
to reduce the price support level for milk produced in the United States until
the end of 1999, when the price support program will be eliminated.
These changes in U.S. dairy policy could increase the risk for price
volatility in the dairy industry. There can be no assurance that a material
volatility in milk prices will not occur or that any such volatility would not
have a material adverse effect on the Company's business, financial condition
and results of operations and on the market price of the Common Stock. See
"Business -- Raw Materials and Supply."
The Company's earnings are especially sensitive to transportation costs, an
important component of which is the cost of diesel fuel. Petroleum product
prices continue to be subject to unpredictable economic, political and market
factors. Accordingly, the price and availability of diesel fuel continue to be
unpredictable. Increases in the price of diesel fuel translate into increases in
the Company's annual transportation costs. Because transportation costs
constitute a major expenditure for the Company, significant increases in diesel
fuel costs could have a material adverse effect on the Company's business,
financial condition and results of operations and on the market price of the
Common Stock.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company's business operations is dependent in
part on the efforts and skills of certain key members of management, including
Marshall T. Reynolds, Chairman of the Company's Board of Directors, Philip E.
Cline, President and Chief Executive Officer, George W. Broughton, Executive
Vice President, and Martin P. Shearer, currently the President and Chief
Executive Officer of Southern Belle. The loss of any of its key members of
management could have an adverse effect on the Company. Except with
11
<PAGE> 13
respect to Mr. Shearer, the Company does not (i) have any written employment
agreements or (ii) maintain key man life insurance with any key member of
management. See "Management."
COMPETITION
The Company's dairy operations are subject to significant competition from
regional dairy operations and large national food service distributors that
operate in the Company's markets. Competition in the dairy processing, fruit
drink and food distribution businesses is based primarily on service, price,
brand recognition, quality and breadth of product line. Many of the Company's
competitors are larger, better capitalized and have available to them greater
financial, operational and marketing resources than the Company.
The dairy industry has excess capacity and has been in the process of
consolidation for many years. Consolidation has resulted from the development of
more efficient manufacturing techniques, the establishment of captive dairy
manufacturing operations by large grocery retailers and relatively little growth
in the demand for fresh milk products. The larger companies formed by such
consolidations and the increased use of captive dairy manufacturing operations
by the Company's customers could have an adverse effect on the Company's
business, financial condition and results of operations and on the market price
of the Common Stock.
The dairy foods business is also highly competitive. The Company faces a
number of competitors in the dairy foods business, including smaller independent
dairy foods manufacturers and grocery and other retailers that manufacture and
package dairy foods at store locations. Competition exists primarily on a
regional basis, with service, price and quality as the principal competitive
factors. A significant increase in on-site manufacturing by operators of large
and small retail chains served by the Company could have an adverse effect on
the Company's business, financial condition and results of operations and on the
market price of the Common Stock. See "Business -- Competition."
RISKS RELATED TO CHANGING INDUSTRY ENVIRONMENT
The dairy industry is undergoing accelerated change and consolidation as
producers, manufacturers, distributors and retailers seek to lower costs and
increase services in an increasingly competitive environment of relatively
static overall demand. The Company believes that these changes have led to
reduced sales, reduced margins and lower profitability throughout the industry.
Failure to develop a successful response to such changed market conditions,
including relatively little growth in demand over the long term and reduced
profitability, could have a material adverse effect on the Company's business,
financial condition and results of operations and on the market price of the
Common Stock. See "Business -- Industry Overview."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results have been subject to quarterly fluctuations caused
primarily by the seasonal variations in demand for its milk and dairy products.
For example, the Company experiences a decrease in sales to schools during
months when schools close for vacation during the third quarter of each fiscal
year. In addition, the Company traditionally experiences peak demand for its ice
cream products during the summer months. Because the Company's results of
operations from its ice cream business depend significantly on sales generated
during its peak season, adverse weather during this season (such as an unusually
mild or rainy period) could have a disproportionate impact on the Company's
results of operations for the full year. Unexpected variations in quarterly
results could, nevertheless, have a material adverse effect on the Company's
business, financial condition and results of operations and on the market price
of the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."
RISKS RELATED TO LABOR DISPUTES
The Company and Southern Belle are each a party to various collective
bargaining agreements with local unions representing a significant amount of
their respective employees. Typical agreements are three to five years in
duration, and as such agreements expire, the Company and Southern Belle expect
to negotiate with the unions and to enter into new collective bargaining
agreements. There can be no assurance, however, that agreements will be reached
without work stoppages or other labor disputes. A prolonged work stoppage or
12
<PAGE> 14
other labor dispute could have a material adverse effect on the Company's
business, results of operations and financial condition and on the market price
of the Common Stock. See "Business -- Employees."
CONTROL BY PRINCIPAL SHAREHOLDERS
The Company's executive officers and directors and Martin P. Shearer will
beneficially own an aggregate of 46.9% of the Company's outstanding shares of
Common Stock after this Offering and the Southern Belle Acquisition (45.5% if
the Underwriters exercise their over-allotment option in full). Such
shareholders, if voting together, would likely have sufficient voting power to
elect a majority of the Board of Directors, exercise control over the business,
policies and affairs of the Company and, in general, determine the outcome of
any corporate transaction or other matter submitted to the shareholders for
approval, such as (i) any amendment to the Company's Articles of Incorporation,
(ii) any merger, consolidation, sale of all or substantially all of the assets
of the Company and (iii) any "going private" transaction, and, in general,
prevent or cause a change of control of the Company, all of which may adversely
affect the Company and its shareholders. See "Principal Shareholders."
POSSIBLE ADVERSE IMPACT ON STOCK PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
After the completion of this Offering and the Southern Belle Acquisition,
5,490,517 shares (5,670,517 if the Underwriters exercise their over-allotment
option in full) of Common Stock will be outstanding. Of such shares, only the
1,200,000 shares (1,380,000 if the Underwriters exercise their over-allotment
option in full) sold pursuant to this Offering will be tradable without
restriction by persons other than "affiliates" of the Company. The remaining
4,290,517 shares of Common Stock outstanding after this Offering will be
"restricted securities" within the meaning of Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), and may not be
publicly resold, except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption from registration, including that
provided by Rule 144. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock.
The Company, its directors and executive officers and certain of the
shareholders of the Company and of Southern Belle prior to this Offering have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of Advest, Inc., offer, sell,
contract to sell or otherwise dispose of any Common Stock or any securities
convertible, exercisable or exchangeable for any Common Stock or grant any
options or warrants to purchase any Common Stock, subject to certain limited
exceptions. See "Shares Eligible for Future Sale."
SUBSTANTIAL DILUTION
The initial public offering price of the Common Stock will be substantially
in excess of the net tangible book value per share, which will result in a
benefit to all existing shareholders of the Company (the "Existing
Shareholders"). As a result, purchasers of Common Stock in this Offering will
experience immediate and substantial dilution of $9.16 per share (at an assumed
initial public offering price of $14.00 per share) of the Common Stock from the
public offering price. In addition, the 4,122,660 shares of Common Stock
outstanding and owned by the Existing Shareholders prior to this Offering were
originally acquired for an average price of approximately $2.50 per share, as
compared to new investors who will pay an assumed initial public offering price
of $14.00 per share, for the 1,200,000 shares of Common Stock offered by the
Company hereby. Based on the foregoing, the Existing Shareholders will benefit
from an unrealized appreciation of $9.16 per share of Common Stock ($38.0
million in the aggregate) in the value of their shares of Common Stock as a
result of this Offering and the Southern Belle Acquisition. See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock. Although application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market, there can be
13
<PAGE> 15
no assurance that an active trading market will develop or be sustained
following this Offering. There can be no assurance that market prices for the
Common Stock after this Offering will equal or exceed the initial public
offering price per share set forth on the cover page of this Prospectus. The
initial public offering price of the Common Stock will be determined by
negotiation among the Company and the Underwriters and may not be indicative of
the market price for the Common Stock following this Offering. The market price
of the Common Stock could be subject to significant fluctuations in response to
various factors and events, including the liquidity of the market for shares of
Common Stock, differences between the Company's actual financial or operating
results and those expected by investors and analysts, pricing and competition in
the dairy and related industries and general economic conditions. See
"Underwriting."
LIMITATIONS ON PAYMENT OF DIVIDENDS
Although the Company has in the past declared cash dividends on its Common
Stock, no assurance can be made that the Company will declare cash dividends on
its Common Stock in the future. Any future decisions as to the payment of
dividends will be at the discretion of the Company's Board of Directors, subject
to applicable law and any restrictions set forth in any credit agreements that
may be entered into in the future by the Company. See "Dividend Policy."
14
<PAGE> 16
THE COMPANY
BROUGHTON FOODS COMPANY
Broughton was founded in 1910 as "Broughton Farm Dairy" by the Broughton
family when George Broughton began selling milk, cream and butter to neighbors
and in 1914 expanded delivery of milk to local hotels. Over the years, expansion
continued with the addition of distribution routes, investment in facilities and
equipment and the acquisition of other local dairies. The Company was
incorporated in Ohio in 1933 as Broughton's Farm Dairy. In 1960, Broughton
expanded its operations to include another manufacturing facility in
Parkersburg, West Virginia. This operation was moved in 1969 to Charleston, West
Virginia. From this plant, UHT products, along with sour cream, dips, dressings
and aerosol toppings, are made and distributed throughout the eastern United
States. In line with its diversification program, the Company officially became
the Broughton Foods Company in 1969.
Today, the Company consists of two divisions: the Dairy Division, located
in Marietta, Ohio; and the Foods Division, located in Charleston, West Virginia.
In November 1996, substantially all of the outstanding capital stock of the
Company was purchased by Marshall T. Reynolds, who currently serves as Chairman
of the Company's Board of Directors. Prior to this Offering, Mr. Reynolds,
certain of his family members and certain companies controlled by Mr. Reynolds
directly owned approximately 31.7% of the outstanding Common Stock of the
Company. See "Principal Shareholders."
The Company's executive offices are located at 210 North Seventh Street,
Marietta, Ohio 45750, and the Company's telephone number is (740) 373-4121.
SOUTHERN BELLE DAIRY COMPANY
Southern Belle was established in July 1951 by Ralph M. Shearer, father of
Southern Belle's current President and Chief Executive Officer, Martin P.
Shearer, as a family-owned dairy based in Somerset, Kentucky. Southern Belle was
incorporated under the laws of Kentucky in 1951. In its first year of
operations, Southern Belle produced approximately 150 gallons of milk per day.
Today, Southern Belle produces approximately 100,000 gallons of milk daily. Over
the years, Southern Belle has continued to perform all production operations at
its Somerset facility but has expanded to include distribution centers in
Lexington, Morehead, Danville, Russell Springs, London and Louisville, Kentucky
and Cookeville, Nashville, Knoxville and Johnson City, Tennessee.
Southern Belle's major product is fluid milk (including buttermilk), which
represents over 80% of its total production volume. Southern Belle distributes
its products primarily to grocery stores, convenience stores, restaurants and
school systems in central and eastern Kentucky and Tennessee and western North
Carolina. For its fiscal year ended May 31, 1997, Southern Belle generated net
sales of approximately $63.9 million compared to $53.9 million for its fiscal
year ended June 1, 1996.
On September 29, 1997, the Company entered into a definitive agreement to
acquire Southern Belle for $5.0 million in cash and shares of Common Stock and
the assumption of certain liabilities. Following consummation of the Southern
Belle Acquisition, the Company intends to maintain the operations of Southern
Belle as a separate division of the Company.
Southern Belle's executive offices are located at 607 East Bourne Avenue,
Somerset, Kentucky 42502, and Southern Belle's telephone number is (606)
679-1131.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from this Offering, assuming an initial
public offering price of $14.00 per share, are estimated to be approximately
$14.8 million ($17.2 million if the Underwriters' over-allotment option is
exercised in full). Of such net proceeds, approximately $2.7 million will be
used to finance the cash portion of the consideration for the Southern Belle
Acquisition. The remainder of the net proceeds will be used to repay up to
approximately $5.1 million in indebtedness (with a weighted average interest
rate of 9.0% and scheduled maturities ranging from 47 days to 173 months as of
August 30, 1997); and for capital expenditures, working capital and general
corporate purposes. In addition, a portion of the net proceeds may also be used
for strategic acquisitions of businesses, products or technologies complementary
to the Company's business. The Company does not have any signed contracts,
letters of intent or agreements in principle to make any such material
acquisition other than Southern Belle. Pending such uses, the net proceeds of
this Offering will be invested in investment grade, short-term debt instruments.
DIVIDEND POLICY
The Company has in the past declared cash dividends on its Common Stock.
Although the Board of Directors presently anticipates continuing this policy,
the declaration of cash dividends will be at the discretion of the Board of
Directors based on the Company's earnings, financial condition, capital
requirements and other relevant factors, including applicable law and any
restrictions set forth in credit facilities entered into by the Company.
16
<PAGE> 18
DILUTION
At September 30, 1997, the net tangible book value of the Company was
approximately $11.0 million, or $2.67 per share. Net tangible book value per
share of Common Stock is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) by the number of
shares of Common Stock outstanding. After giving effect to the Southern Belle
Acquisition and to this Offering at an assumed initial public offering price of
$14.00 per share and the application of the net proceeds therefrom as set forth
in "Use of Proceeds," the pro forma net tangible book value at such date would
have been $26.6 million, or $4.84 per share, representing an immediate increase
in pro forma net tangible book value of $2.17 per share. Accordingly, purchasers
of the Common Stock in this Offering would sustain an immediate dilution of
$9.16 per share.
The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................................ $14.00
Net tangible book value as of September 30, 1997........................ $2.67
Increase in pro forma net tangible book value attributable to the
Southern Belle Acquisition and this Offering........................... 2.17
-----
Pro forma net tangible book value after the Southern Belle Acquisition and
this Offering.............................................................. 4.84
------
Dilution to new investors in this Offering................................... $ 9.16
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
September 30, 1997, the difference between (i) the number of shares of Common
Stock which the Existing Shareholders acquired since the Company's inception,
(ii) the number of shares of Common Stock purchased from the Company by new
investors in this Offering, (iii) the total cash consideration paid by Existing
Shareholders and to be paid by the new investors and (iv) the average purchase
price per share paid by Existing Shareholders and to be paid by the new
investors (before deducting underwriting discounts and commissions and estimated
expenses of this Offering and excluding 167,857 shares of Common Stock
comprising part of the consideration to be paid in the Southern Belle
Acquisition):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVG. PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing Shareholders....................... 4,122,660 77.5% $10,306,650 38.0% $ 2.50
New investors............................... 1,200,000 22.5 16,800,000 62.0 14.00
--------- ----- ----------- -----
Total............................. 5,322,660 100.0% $27,106,650 100.0%
========= ===== =========== =====
</TABLE>
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 on a pro forma basis to reflect the pending acquisition of
Southern Belle under purchase accounting; and as adjusted to give effect to this
Offering (assuming an initial public offering price of $14.00 per share) and the
application of the net proceeds therefrom. See "Use of Proceeds." On August 27,
1997, the Company's Board of Directors approved a 30-for-1 stock split in the
form of a stock dividend. Retroactive restatement has been made under
shareholders' equity to reflect this stock split. This table should be read in
conjunction with the Unaudited Pro Forma Financial Statements of the Company and
the related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------------
(IN THOUSANDS)
PRO FORMA PRO FORMA,
ACTUAL FOR ACQUISITION AS ADJUSTED
------- --------------- -----------
<S> <C> <C> <C>
Long-term obligations...................................... $ 795 $ 4,792 $ 841
Shareholders' equity
Common Stock, $1.00 par value 10,000,000 shares
authorized:
4,662,900 shares issued;
4,830,757 pro forma for acquisition shares issued;
6,030,757 pro forma as adjusted shares issued....... 4,663 4,831 6,031
Additional paid-in capital............................ 170 2,352 15,992
Retained earnings..................................... 6,796 6,796 6,666
Treasury stock........................................ (508) (508) (508)
------- ------- -------
Total shareholders' equity....................... 11,121 13,471 28,181
------- ------- -------
Total capitalization........................ $11,916 $18,263 $29,022
======= ======= =======
</TABLE>
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for the five years ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997. Such data as of and for the five years ended
December 31, 1996 are derived from the Company's financial statements, which
have been audited by Coopers & Lybrand L.L.P., independent public accountants.
The historical financial data as of and for the nine months ended September 30,
1996 and 1997 are derived from the Company's unaudited financial statements. It
is management's opinion that the historical financial data as of and for the
nine months ended September 30, 1996 and 1997 contain all adjustments,
consisting solely of normal recurring adjustments, which management considers
necessary to fairly present the financial data set forth herein.
The results for the nine months ended September 30, 1996 and 1997 are not
necessarily indicative of the results to be expected for future periods. The
selected historical financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and the related Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $65,929 $68,087 $73,552 $72,253 $83,919 $61,283 $61,964
Costs of sales...................... 54,098 54,517 59,238 58,992 68,669 50,011 49,030
------- ------- ------- ------- ------- ------- -------
Gross profit........................ 11,831 13,570 14,314 13,261 15,250 11,272 12,934
------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Selling and distribution.......... 9,263 10,194 10,675 11,316 12,064 8,808 9,852
General and administrative........ 1,776 1,957 2,328 2,294 2,453 1,673 1,484
------- ------- ------- ------- ------- ------- -------
Operating income (loss)............. 792 1,419 1,311 (349) 733 791 1,598
------- ------- ------- ------- ------- ------- -------
Other income (expenses):
Other income, net(1)........... 116 144 72 132 3,244 55 144
Interest income (expense)...... (196) (230) (195) (239) (217) (177) (117)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes... 712 1,333 1,188 (456) 3,760 669 1,625
Income tax expense (benefit)........ 291 543 444 (149) 1,431 249 638
------- ------- ------- ------- ------- ------- -------
Net income (loss)................... $ 421 $ 790 $ 744 $ (307) $ 2,329 $ 420 $ 987
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share(2)...... $ 0.09 $ 0.17 $ 0.17 $ (0.07) $ 0.56 $ 0.10 $ 0.24
======= ======= ======= ======= ======= ======= =======
Cash dividends per common
share(2).......................... $ .0267 $ .0067 $ .0267 $ .0267 $ .0267 $ .0200 $ .0633
======= ======= ======= ======= ======= ======= =======
Weighted average common shares
outstanding(2).................... 4,563 4,599 4,453 4,283 4,123 4,123 4,123
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AS OF SEPTEMBER 30,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 968 $ 596 $ 957 $ 161 $ 2,308 $ 136 $ 854
Working capital..................... 3,398 4,844 5,561 4,281 7,315 4,709 5,555
Total assets........................ 15,641 16,375 16,319 17,454 18,538 17,929 18,589
Total debt.......................... 1,329 2,114 1,782 2,151 1,856 1,925 1,454
Shareholders' equity................ 7,528 8,186 8,692 7,881 10,428 8,198 11,121
</TABLE>
- ------------
(1) Other income (expense) for the year ended December 31, 1996 includes a $3.0
million pre-tax gain on sale of an investment.
(2) On August 27, 1997, the Company's Board of Directors approved a 30-for-1
stock split in the form of a stock dividend. Retroactive restatement has
been made to all share amounts to reflect the stock split.
19
<PAGE> 21
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements as of and
for the nine months ended September 30, 1997 and for the year ended December 31,
1996 give effect to the acquisition of Southern Belle. The pro forma combined
balance sheet presents the Company's financial position as if the acquisition of
Southern Belle had occurred on September 30, 1997. The pro forma combined
statements of operations present results for the Company as if the acquisition
of Southern Belle had occurred on January 1, 1996. The pro forma balance sheet
as of September 30, 1997 is based upon the Company's historical balance sheet as
of September 30, 1997 and the historical balance sheet of Southern Belle as of
August 30, 1997. The pro forma combined statement of operations for the nine
months ended September 30, 1997 is based upon the historical statement of
operations of the Company for the nine months ended September 30, 1997 and the
historical statement of operations of Southern Belle for the nine months ended
August 30, 1997. The pro forma combined statement of operations for the year
ended December 31, 1996 is based on the historical statement of operations of
the Company for the year ended December 31, 1996 and the historical statement of
operations of Southern Belle for the year ended November 30, 1996.
The pro forma combined financial statements include, in management's
opinion, all material adjustments necessary to reflect the acquisition of
Southern Belle. The pro forma combined financial statements do not represent the
Company's actual results of operations, including the acquisition, nor do they
purport to predict or indicate the Company's financial position or results of
operations at any future date or for any future period. The pro forma combined
financial statements should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Company's
Financial Statements and the related Notes thereto and Southern Belle's
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus.
20
<PAGE> 22
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACTUAL
------------------------------
SEPTEMBER 30, AUGUST 30, PRO FORMA PRO FORMA
1997 1997 PRO FORMA FOR OFFERING AS
THE COMPANY SOUTHERN BELLE ADJUSTMENTS ACQUISITION ADJUSTMENTS ADJUSTED
------------- -------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 854 $ 74 $(2,650)(1) $ (1,722) $ 8,281(4) $ 6,559
Marketable securities
available for sale...... 401 401 401
Accounts receivable, less
allowance for doubtful
accounts................ 7,362 4,781 12,143 12,143
Inventories............... 2,470 1,109 231(1) 3,810 3,810
Other..................... 743 494 (271)(1) 966 966
------------- -------------- ----------- ----------- ----------- ---------
Total current
assets............. 11,429 6,859 (2,690) 15,598 8,281 23,879
Property, plant, equipment and
land........................ 17,525 17,852 (8,690) 26,687 26,687
Less accumulated
depreciation and
amortization............ (11,426) (12,260) 12,260 (11,426) (11,426)
------------- -------------- ----------- ----------- ----------- ---------
6,099 5,592 3,570(1) 15,261 15,261
Other assets.................. 1,061 587 1,482(1) 3,030 (216)(5) 2,814
(100)(1)
------------- -------------- ----------- ----------- ----------- ---------
Total assets.................. $ 18,589 $ 13,038 $ 2,262 $ 33,889 $ 8,065 $ 41,954
============ ============= =========== ========== =========== ==========
CURRENT LIABILITIES:
Overdraft................. $ 1,489 $ 1,489 $(1,489)(4)
Line of credit............ 171 171 (171)(4)
Accounts payable.......... $ 4,194 3,536 7,730 $ 7,730
Accrued expenses.......... 1,021 968 1,989 1,989
Current installments on
term debt............... 659 1,034 1,693 (948)(4) 745
Income taxes payable...... 0 0
------------- -------------- ----------- ----------- ----------- ---------
Total current
liabilities........ 5,874 7,198 13,072 (2,608) 10,464
Term debt, net of current
installments................ 795 3,997 4,792 (3,951)(4) 841
Deferred income taxes......... 799 235 $ 1,520(1) 2,554 (86)(5) 2,468
------------- -------------- ----------- ----------- ----------- ---------
Total liabilities.... 7,468 11,430 1,520 20,418 (6,645) 13,773
SHAREHOLDERS' EQUITY:
Preferred stock............... 596 (596)(2)
Common stock.................. 4,663 1,503 168(1) 4,831 1,200(3) 6,031
(1,503)(2)
Additional paid-in capital.... 170 2,182(1) 2,352 13,640(3) 15,992
Retained earnings............. 6,796 247 (247)(2) 6,796 (130)(5) 6,666
------------- -------------- ----------- ----------- ----------- ---------
11,629 2,346 4 13,979 14,710 28,689
Treasury stock....... (508) (738) 738(2) (508) (508)
------------- -------------- ----------- ----------- ----------- ---------
Total shareholders' equity.... 11,121 1,608 742 13,471 14,710 28,181
------------- -------------- ----------- ----------- ----------- ---------
Total liabilities and
shareholders' equity........ $ 18,589 $ 13,038 $ 2,262 $ 33,889 $ 8,065 $ 41,954
============ ============= =========== ========== =========== ==========
</TABLE>
21
<PAGE> 23
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
-------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, PRO FORMA PRO FORMA
1996 1996 PRO FORMA FOR OFFERING AS
THE COMPANY SOUTHERN BELLE ADJUSTMENTS ACQUISITION ADJUSTMENTS ADJUSTED
------------- -------------- ----------- ----------- ----------- ---------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $83,919 $ 60,043 $ 143,962 $ 143,962
Cost of sales.................. 68,669 48,775 $ 186(6) 117,630 117,630
------- -------- ----- --------- ----- ---------
Gross profit................... 15,250 11,268 (186) 26,332 26,332
Operating costs and expenses:
Selling and distribution... 12,064 9,011 7(6) 21,082 21,082
General and
administrative.......... 2,453 2,797 (63)(7) 5,187 5,187
------- -------- ----- --------- ----- ---------
Operating (loss) income........ 733 (540) (130) 63 63
Other income (expenses):
Gain on sale of investment
in stock................ 2,976 2,976 2,976
Other income, net.......... 268 13 281 281
Interest expense........... (217) (387) (604) $ 348(9) (256)
------- -------- ----- --------- ----- ---------
Income (loss) before income
taxes........................ 3,760 (914) (130) 2,716 348 3,064
Income tax expense (benefit)... 1,431 (291) (52)(8) 1,088 139(8) 1,227
------- -------- ----- --------- ----- ---------
Net income (loss).............. $ 2,329 $ (623) $ (78) $ 1,628 $ 209 $ 1,837
======= ======== ===== ========= ===== =========
Net income per share........... $ 0.56 $ 0.38 $ 0.33
======= ========= =========
Weighted average shares
outstanding.................. 4,123 4,291 5,491
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
-------------------------------
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, AUGUST 30, PRO FORMA PRO FORMA
1997 1997 PRO FORMA FOR OFFERING AS
THE COMPANY SOUTHERN BELLE ADJUSTMENTS ACQUISITION ADJUSTMENTS ADJUSTED
------------- -------------- ----------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $61,964 $ 45,713 $ 107,677 $ 107,677
Cost of sales.................. 49,030 35,759 $ 155(6) 84,944 84,944
------- -------- ----- --------- ----- ---------
Gross profit................... 12,934 9,954 (155) 22,733 22,733
Operating costs and expenses:
Selling and distribution... 9,852 6,838 5(6) 16,695 16,695
General and
administrative.......... 1,484 2,338 (25)(7) 3,797 3,797
------- -------- ----- --------- ----- ---------
Operating (loss) income........ 1,598 778 (135) 2,241 2,241
Other income (expenses):
Other income, net.......... 144 56 200 200
Interest expense........... (117) (293) (410) $ 283(9) (127)
------- -------- ----- --------- ----- ---------
Income before income taxes..... 1,625 541 (135) 2,031 283 2,314
Income tax expense............. 638 222 (54)(8) 806 113(8) 919
------- -------- ----- --------- ----- ---------
Net income..................... $ 987 $ 319 $ (81) $ 1,225 $ 170 $ 1,395
======= ======== ===== ========= ===== =========
Net income per share........... $ 0.24 $ 0.29 $ 0.25
======= ========= =========
Weighted average shares
outstanding.................. 4,123 4,291 5,491
</TABLE>
22
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) The Company will acquire substantially all the net assets of Southern Belle
for a purchase price of $5.0 million consisting of $2,650,000 in cash and
the remainder in the Company's Common Stock. The acquisition results in an
excess of the purchase price over the historical net assets acquired, which
was allocated to the net assets acquired as follows:
<TABLE>
<S> <C>
Purchase price:
Cash.............................................................. $ 2,650,000
Issuance of 167,857 shares of Common Stock:
Common Stock................................................. 168,000
Additional paid-in capital................................... 2,182,000
-----------
5,000,000
Historical carrying value of net assets:
Total net assets.................................................. 1,608,000
Less net assets not assumed:
Certain capitalized costs.................................... (100,000)
Deferred tax asset........................................... (271,000)
-----------
Historical carrying value of net assets acquired.................. 1,237,000
Excess of net purchase price over net assets acquired.................. $ 3,763,000
===========
Allocation of excess purchase price:
Excess fair value of property, plant and equipment................ $ 3,570,000
Excess fair value of inventory.................................... 231,000
Deferred income tax liability..................................... (1,520,000)
Goodwill.......................................................... 1,482,000
-----------
$ 3,763,000
===========
</TABLE>
(2) To eliminate the historical net book value of Southern Belle:
<TABLE>
<S> <C>
Preferred Stock........................................................ $ (596,000)
Common Stock........................................................... (1,503,000)
Retained earnings...................................................... (247,000)
Treasury stock......................................................... 738,000
-----------
$(1,608,000)
===========
</TABLE>
(3) To reflect the par value and additional paid-in capital as a result of this
Offering:
<TABLE>
<S> <C>
Common Stock, par value $1.00; 1,200,000 shares........................ $ 1,200,000
Additional paid-in capital (net proceeds of $14,840,000 less $1,200,000
par value)........................................................... 13,640,000
-----------
$14,840,000
===========
</TABLE>
(4) To reflect the application of the net proceeds from this Offering as
follows:
<TABLE>
<S> <C>
Repayment of Southern Belle's cash overdraft........................... $ 1,489,000
Repayment of Southern Belle's line of credit........................... 171,000
Repayment of current term debt......................................... 948,000
Repayment of term debt................................................. 3,951,000
Increase in cash and cash equivalents.................................. 8,281,000
-----------
$14,840,000
===========
</TABLE>
23
<PAGE> 25
(5) To reflect the write off of deferred loan fees associated with term debt
paid off in note (4) above:
<TABLE>
<S> <C>
Write off of deferred loan costs....................................... $ 216,000
The reduction of the deferred tax liability associated with the write
off of the deferred loan costs....................................... 86,000
Interest expense, net of taxes due to write off of deferred loan costs
(i.e., retained earnings)............................................ 130,000
</TABLE>
(6) To reflect additional depreciation due to write up in fair value of
property, plant, equipment and land and fair value adjustment to Southern
Belle's inventory in cost of goods sold as follows:
<TABLE>
<CAPTION>
DEPRECIATION
--------------------------
FAIR VALUE LIFE FOR THE FOR THE NINE
ADJUSTMENT (YEARS) YEAR ENDED MONTHS ENDED
---------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Land....................................... $ 371,000
Land improvements.......................... 51,000 15 $ 4,000 $ 3,000
Building and improvements.................. 729,000 5 -20 36,000 27,000
Processing equipment....................... 2,419,000 3 -15 173,000 130,000
---------- --------- --------
$3,570,000 213,000 160,000
==========
Adjustment for inventory (20,000) 0
--------- --------
$ 193,000 $160,000
========= ========
Recorded as:
Cost of goods sold $ 186,000 $155,000
Selling and distribution 7,000 5,000
--------- --------
$ 193,000 $160,000
========= ========
</TABLE>
(7) To reflect the Pro forma adjustments as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE NINE
YEAR ENDED MONTHS ENDED
---------- ------------
<S> <C> <C>
Reduction of management salary based on new contact with
management.................................................. $ 100,000 $ 53,000
Amortization (over a period of 40 years) of goodwill
established in the acquisition.............................. (37,000) (28,000)
--------- --------
$ 63,000 $ 25,000
========= ========
</TABLE>
(8) To reflect the income tax provision based on applying the pro forma
estimated effective income tax rate of the combined companies.
24
<PAGE> 26
(9) The Offering adjustments reflect the use of proceeds to pay off existing
debt:
<TABLE>
<CAPTION>
INTEREST EXPENSE
REDUCTION
HISTORICAL PRO FORMA -------------------------
PRINCIPAL OFFERING PRINCIPAL FOR THE FOR THE NINE
AMOUNT ADJUSTMENTS AMOUNT YEAR ENDED MONTHS ENDED
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
The Company:
Note payable, due in monthly
interest payments based on
the outstanding balance
through June 30, 1998, at
which time the principal
balance of $565,000 is due,
including interest at the
highest prime rate
published in The Wall
Street Journal............. $ 535,000 $ 535,000
Note payable, due in monthly
installments of $10,600
through 1998, at which time
the remaining principal
balance of approximately
$570,000 is due, including
principal and interest at
the lender's prime rate
plus 1%.................... 593,000 593,000
Note payable, due in monthly
installments of $6,500
through 2005, with interest
at the lender's commercial
loan base rate............. 326,000 326,000
Southern Belle
Line of credit............... 171,000 $ (171,000) $ 101,000 $ 47,000
Trans Financial Bank, N.A.... 1,350,000 (1,350,000) 133,000 83,000
Trans Financial Bank, N.A.... 1,843,000 (1,843,000) 9,000
Trans Financial Bank, N.A.... 1,146,000 (1,146,000) 4,000 79,000
Trans Financial Bank, N.A.... 290,000 (290,000) 29,000 21,000
Litigation settlement
payable.................... 65,000 65,000
Debentures................... 270,000 (270,000) 56,000 25,000
Capital Lease Obligation..... 67,000 67,000
---------- ----------- ---------- --------- --------
Total Debt
Outstanding...... $6,656,000 $(5,070,000) $1,586,000 323,000 $264,000
========== =========== ==========
Write-off of
deferred loan
costs associated
with debt paid
off with proceeds 25,000 19,000
--------- --------
Total reduction of
interest expense $ 348,000 $283,000
========= ========
Offering adjustments consist
of:
Line of credit $ 171,000
Current installments of
term debt 948,000
Term debt, net of
current installments 3,951,000
-----------
$ 5,070,000
===========
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading manufacturer and distributor of fresh milk and
related dairy products in Ohio, West Virginia, Kentucky and parts of the eastern
United States. The Company has grown primarily through internal growth and
strategic acquisitions. Through such growth, the Company has realized regional
economies of scale and operational efficiencies. The Company operates through
two major divisions -- the Dairy Division based in Marietta, Ohio and the Foods
Division based in Charleston, West Virginia.
Following the consummation of the Southern Belle Acquisition, the Company
expects to take a number of actions intended to integrate the operations of
Southern Belle with the Company's existing operations and to reduce overall
selling, general and administrative expenses. These actions include reducing
executive salaries, realizing savings through the consolidation of benefits,
eliminating duplicative functions and integrating the management information
systems of Southern Belle with those of the Company. In addition, Southern Belle
currently purchases certain products from outside suppliers, including UHT
products, cottage cheese, sour cream and ice cream, each of which can be
supplied by the Company to Southern Belle at an anticipated cost savings. The
acquisition of Southern Belle is expected to provide the Company with an ample
source of butterfat, a raw material required in the production of many items
within the Foods Division, including heavy whipping cream, table cream, aerosol
whipped toppings and half-and-half. Southern Belle does not manufacture
non-fluid dairy products and, therefore, does not utilize butterfat, a
by-product of its fluid milk manufacturing processes and an integral raw
material required in the production of non-fluid dairy products. Accordingly, as
a result of the Southern Belle Acquisition, management expects to achieve cost
savings from the elimination of the Company's dependence on the "spot" market
for its butterfat requirements. There can be no assurance that the Company will
be successful in integrating the operations of Southern Belle and realizing the
anticipated cost savings.
Approximately $1.5 million of the purchase price for the Southern Belle
Acquisition will be recorded by the Company as goodwill. Goodwill will be
amortized as a non-cash charge to the income statement over a period of 40
years. The pro forma impact of this amortization expense is approximately
$37,500 per year.
The Company's net sales consist primarily of sales of products derived from
raw milk, including fluid milk, frozen desserts, cultured products and UHT
products. Revenues are recognized by the Company when the Company's products are
received by the customer. The Company's revenues are subject to quarterly
fluctuations caused by seasonal variations in the demand for milk and dairy
products.
The Company's cost of sales consists primarily of raw materials, including
milk and items procured from outside parties, such as packaging material, and
manufacturing costs, including direct labor and overhead. Significant factors
affecting the Company's cost of sales include the costs of raw materials and
labor and benefit rates.
The Company's operating costs consist of selling, distribution, general and
administrative components. These costs include salaries for sales and marketing
personnel, certain administrative personnel and executive salaries as well as
salary and related costs for transportation and distribution.
26
<PAGE> 28
RESULTS OF OPERATIONS
The following table presents certain information concerning the Company's
results of operations, including certain information presented as a percentage
of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------- ------------------------------------
1994 1995 1996 1996 1997
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $73,552 100.0% $72,253 100.0% $83,919 100.0% $61,283 100.0% $61,964 100.0%
Cost of sales................. 59,238 80.5 58,992 81.6 68,669 81.8 50,011 81.6 49,030 79.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit.................. 14,314 19.5 13,261 18.4 15,250 18.2 11,272 18.4 12,934 20.9
Operating costs and
expenses.................... 13,003 17.7 13,610 18.8 14,517 17.3 10,481 17.1 11,336 18.3
Operating income (loss)....... 1,311 1.8 (349) (0.5) 733 0.9 791 1.3 1,598 2.6
Other income (expense), net... (122) (0.2) (108) (0.1) 3,027 3.6 (122) (0.2) 27 0.0
Net income (loss)............. $ 744 1.0% $ (307) (0.4)% $ 2,329 2.8% $ 420 0.7% $ 987 1.6%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Net income (loss) per share... $ 0.17 $ (0.07) $ 0.56 $ 0.10 $ 0.24
======= ======= ======= ======= =======
Weighted average shares
outstanding................. 4,453 4,283 4,123 4,123 4,123
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Net Sales
Net sales for the nine months ended September 30, 1997 increased $682,000,
or 1.1%, to $62.0 million from $61.3 million for the nine months ended September
30, 1996. The increase in net sales was primarily due to (i) favorable market
conditions, (ii) the Company's pricing strategies with its current customers and
(iii) a sales expansion into the northeast. The increase in net sales for the
first nine months of 1997 compared to the corresponding period in 1996 would
have been greater except for a one-time net sales increase in 1996 resulting
from the Company entering into a co-packing arrangement with another dairy for
the production of a nationally known brand product and the Company receiving
certain one-time net sales from another dairy which had ceased operations due to
a labor related work stoppage in the third quarter of 1996.
Cost of Sales
Cost of sales for the nine months ended September 30, 1997 decreased
$981,000, or 2.0%, to $49.0 million from $50.0 million for the nine months ended
September 30, 1996. Cost of sales as a percentage of net sales decreased to
79.1% for the nine months ended September 30, 1997 from 81.6% for the nine
months ended September 30, 1996 primarily as a result of (i) reductions in raw
material prices and changes in customer mix for certain sales in 1996 related to
the Company entering into a co-packing arrangement with another dairy for the
production of a nationally known brand product and (ii) the Company receiving
certain one-time sales from another dairy which had ceased operations due to a
labor related work stoppage in the third quarter of 1996, which sales had a
higher cost basis as a percentage of net sales.
Operating Expenses
Operating expenses for the nine months ended September 30, 1997 increased
$856,000, or 8.2%, to $11.3 million from $10.5 million for the nine months ended
September 30, 1996. Operating expenses as a percentage of net sales were 18.3%
for the nine months ended September 30, 1997 compared to 17.1% for the nine
months ended September 30, 1996. Operating expenses as a percentage of net sales
increased primarily due to a shift in customer mix during the third quarter of
1997 from customers who utilized the Company's dock pickup program in 1996 to
customers requiring additional delivery costs.
Other Income (Expense)
Other income (expense), net for the nine months ended September 30, 1997
was $27,000 compared to an expense of $122,000 for the nine months ended
September 30, 1996. The increase in other income (expense), net was primarily a
result of the increase in interest income during the nine months ended September
30, 1997
27
<PAGE> 29
and a decrease in interest expense in the same period. The increased interest
income was earned on excess cash received on the sale of the Company's
investment in the stock of a privately held company during the fourth quarter of
1996. The higher interest expense paid during the nine months ended September
30, 1996 was the result of increased borrowings under the Company's revolving
credit facility.
Net Income
For the reasons set forth above, net income for the nine months ended
September 30, 1997 increased $567,000 to $987,000, or $0.24 per share, from
$420,000, or $0.10 per share, for the nine months ended September 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales
Net sales for 1996 increased $11.7 million, or 16.1%, to $83.9 million from
$72.3 million for 1995. Net sales increased primarily due to (i) the Company
changing its distribution strategy in a certain market by selling its products
directly to customers of a former distributor through the Company's own
distribution centers and (ii) a one-time net sales increase in 1996 resulting
from the Company entering into a co-packing arrangement with another dairy for
the production of a nationally known brand product.
Cost of Sales
Cost of sales for 1996 increased $9.7 million, or 16.4%, to $68.7 million
from $59.0 million in 1995. Cost of sales as a percentage of net sales was 81.8%
in 1996 compared to 81.6% in 1995. This increase in cost of sales was primarily
due to (i) increased volume in 1996, which led to an expanded base for overhead
absorption, and (ii) certain lower raw material prices in 1995.
Operating Expenses
Operating expenses for 1996 increased $908,000, or 6.7%, to $14.5 million
from $13.6 million in 1995. Operating expenses as a percentage of net sales
decreased to 17.3% in 1996 from 18.8% in 1995. This percentage decrease was
primarily due to lower distribution expenses associated with the Company's co-
packing arrangement discussed above.
Other Income (Expense)
Other income (expense), net for 1996 increased $3.1 million to $3.0 million
from an expense of $108,000 in 1995. The increase in other income was due
primarily to a gain of $3.0 million on the sale of the Company's investment in
the stock of a privately held entity. The increase also reflected additional
income earned on investments of the proceeds received from the private stock
investment and life insurance proceeds upon the death of the former Chairman.
Net Income (Loss)
For reasons set forth above, net income for 1996 increased $2.6 million to
$2.3 million, or $0.56 per share, from a net loss of $307,000 for 1995, or $0.07
per share.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales
Net sales for 1995 decreased $1.3 million, or 1.8%, to $72.3 million from
$73.6 million in 1994. The decrease was primarily the result of the loss of a
distributor for certain of the Company's products during 1995, the effect of
which was partially offset by additional sales to new and existing customers.
Cost of Sales
Cost of sales during 1995 decreased $245,000 to $59.0 million from $59.2
million in 1994. Cost of sales as a percentage of net sales was 81.6% in 1995
compared to 80.5% in 1994. The increase in cost of sales as a percentage of net
sales was primarily attributable to higher raw product costs related to certain
of the
28
<PAGE> 30
Company's products which could not be passed on to the Company's customer base
on a short term basis due to competitive pressures.
Operating Costs and Expenses
Operating expenses for 1995 increased $606,000, or 4.7%, to $13.6 million
from $13.0 million in 1994. Operating expenses as a percentage of net sales for
1995 increased to 18.8% compared to 17.7% for 1994. This percentage increase was
primarily due to increased distribution expenses associated with the loss of a
distributor for certain of the Company's products that distributed such products
at the distributor's expense.
Other Income (Expenses)
Other income (expense), net for 1995 decreased to ($108,000) from
($122,000) for 1994. This decrease in expense primarily reflected interest
income and capital gains earned during 1995, partially offset by an increase in
borrowings under the Company's revolving credit facility.
Net Income (Loss)
For the reasons set forth above, net income for 1995 decreased $1.1 million
to a net loss of $307,000, or $0.07 per share, from a net income of $744,000, or
$0.17 per share, for 1994.
PRO FORMA RESULTS OF OPERATIONS
After the inclusion of Southern Belle and the application of the net
proceeds from this Offering, pro forma net income for the first nine months of
1997 was $1.4 million, or $0.25 per share, compared to the Company's actual
results of $987,000, or $0.24 per share for the same period. The pro forma
results of operations do not take into consideration efficiencies expected to
result from the Southern Belle Acquisition, including consolidation and
integration of certain operations to eliminate duplicative functions.
Pro forma net income for the year ended December 31, 1996 was $1.8 million,
or $0.33 per share, compared to the Company's actual net income of $2.3 million,
or $0.56 per share. The difference in pro forma and actual net income was
primarily due to a net loss of approximately $623,000 incurred by Southern
Belle, partially offset by additional net income of $209,000 resulting from
certain adjustments relating to this Offering.
The results of operations on a pro forma basis include the amortization of
goodwill that would result from the net difference between the purchase price of
Southern Belle and the fair value of Southern Belle on the date of acquisition.
See "Unaudited Pro Forma Financial Statements."
QUARTERLY RESULTS OF OPERATIONS
Selected information from the Company's results of operations on a
quarterly basis is presented below. The quarterly information is obtained from
unaudited financial statements not otherwise contained herein. The Company
believes that all necessary adjustments have been made to present fairly the
quarterly information when read in conjunction with the Financial Statements and
related Notes thereto included elsewhere in this Prospectus. The operating
results for the quarters presented below are not necessarily
29
<PAGE> 31
indicative of the results of a full year of operations or of any future quarters
and do not include the results of operations of Southern Belle.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales......................................... $17,678 $18,160 $18,106 $18,309
Gross profit...................................... 3,411 3,557 3,413 2,879
Operating income (loss)........................... 96 178 (142) (481)
Net income (loss)................................. $ 49 $ 106 $ (101) $ (361)
Net income (loss) per share....................... $ 0.01 $ 0.02 $ (0.02) $ (0.09)
Weighted average shares outstanding............... 4,435 4,424 4,138 4,135
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales......................................... $18,363 $20,265 $22,655 $22,636
Gross profit...................................... 3,537 3,682 4,053 3,979
Operating income (loss)........................... 77 258 457 (59)
Net income........................................ $ 16 $ 139 $ 265 $ 1,909
Net income per share.............................. $ 0.00 $ 0.03 $ 0.07 $ 0.46
Weighted average shares outstanding............... 4,123 4,123 4,123 4,123
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales......................................... $19,826 $21,205 $20,933
Gross profit...................................... 4,072 4,698 4,164
Operating income (loss)........................... 569 951 78
Net income........................................ $ 345 $ 585 $ 57
Net income per share.............................. $ 0.08 $ 0.14 $ 0.01
Weighted average shares outstanding............... 4,123 4,123 4,123
</TABLE>
The Company makes sales to schools and colleges, most of which are closed
during the summer months, and therefore the Company has traditionally
experienced a decrease in sales from its school customers between June and
August. During these summer months, the Company has traditionally experienced an
increase in sales of its ice cream products, which generally has offset the
decrease in school sales over the same period. Higher labor costs are generally
associated with the Company's ice cream products, and therefore the Company may
experience fluctuations in quarterly results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its capital expenditures and working
capital requirements through cash generated from operating activities. The
Company's working capital position increased to $7.3 million at December 31,
1996 from $4.3 million at December 31, 1995. The increase of $3.0 million was
primarily attributable to the sale by the Company of an investment in the stock
of a privately held company during the fourth quarter of 1996.
Cash Flows Provided by (Used in) Operating Activities.
Cash flows provided by (used in) operating activities for fiscal years
1994, 1995 and 1996 were $1.7 million, ($216,000) and $126,000, respectively.
Cash Flows Provided by (Used in) Investing Activities.
Cash flows provided by (used in) investing activities for fiscal years
1994, 1995 and 1996 were ($470,000), ($1.4 million) and $3.0 million,
respectively.
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<PAGE> 32
Cash flows from investing activities have historically consisted of capital
expenditures. The Company's capital expenditures for 1996 were $500,000,
compared to $1.4 million for 1995. The Company anticipates, however, that its
capital expenditures in future periods will significantly exceed historical
levels. The Company is currently considering a number of alternatives to upgrade
and expand existing plant and facilities and/or to construct new facilities (the
"Expansion Plans"). The Company intends to seek financing for the Expansion
Plans through a combination of grants or loans from state development agencies,
bank borrowings or excess cash flow from operations. In addition, if such
financing is not available or is on terms that the Company does not view as
favorable, the Company may be required to limit or curtail the scope of the
Expansion Plans.
Although no specific decisions have been made, management is currently
evaluating improvements to existing manufacturing capacity, including upgrading
existing facilities and production equipment, constructing new facilities, using
facilities gained in acquisition transactions, or any combination of such
measures. Management expects the net proceeds of this Offering and any
additional borrowings would provide the Company with adequate resources to
pursue the foregoing strategies and does not anticipate any material disruption
to the Company's operations would result from the implementation of such plans.
In September 1997, the Company agreed to pay to the stockholders of
Southern Belle an aggregate consideration of $5.0 million, consisting of a
combination of cash and Common Stock, and the assumption of certain liabilities.
Southern Belle is a producer and distributor of fresh milk and other dairy
products to grocery stores, convenience stores, restaurants and school systems
located in central and eastern Kentucky and Tennessee and western North
Carolina. The Company plans to use $2.7 million of the net proceeds of this
Offering to pay the cash portion of the consideration for the Southern Belle
Acquisition. The closing of this Offering is conditioned on the concurrent
consummation of the Southern Belle Acquisition.
In May 1997, the Company acquired substantially all of the operating assets
of Johnson's All-Star Dairy ("Johnson") for approximately $565,000 in cash.
Johnson sells dairy products in West Virginia, eastern Kentucky and southeastern
Ohio.
In November 1996, the Company received approximately $3.1 million from the
sale of an investment of stock of a privately held company. The Company recorded
a gain on the sale of such stock in the amount of $3.0 million.
Cash Flows Provided by (Used in) Financing Activities.
Cash flows provided by (used in) financing activities for fiscal years
1994, 1995 and 1996, were ($820,000), $777,000 and ($989,000), respectively.
To finance the acquisition of Johnson, in June 1997 the Company entered
into an unsecured promissory note (the "Johnson Note") in the principal amount
of $565,000 with The People's Banking & Trust Company. The Johnson Note bears
interest at the prime rate, payable monthly, and matures with one principal
payment due on June 30, 1998. At September 30, 1997, the Company's interest rate
under the Johnson Note was 8.5%.
In September 1995, the Company entered into a $500,000 unsecured term debt
agreement with The People's Banking & Trust Company (the "Note Agreement"). The
Note Agreement bears interest at a rate equal to the prime rate plus 1%. At
September 30, 1997, the Company's interest rate under the Note Agreement was
9.5%.
In August 1993, the Company entered into a $845,000 secured term debt
agreement (the "Term Debt Agreement") with Bank One West Virginia, N.A. The Term
Debt Agreement bears interest at a rate equal to the bank's prime rate plus 1%.
At September 30, 1997, the Company's interest rate under the Term Debt Agreement
was 9.5%. The Term Debt Agreement contains certain provisions that, among other
things, requires the Company to adhere to certain restrictive financial
covenants, including maintenance of a certain principal and interest coverage
ratio, a certain debt to net worth ratio and a certain level of tangible net
worth. As of the date of this Prospectus, the Company was in compliance with all
of the financial covenants set forth in the Term Debt Agreement. The Term Debt
Agreement is secured by the property, plant and other improvements located at
the Company's Charleston, West Virginia facility.
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<PAGE> 33
In December 1991, the Company entered into a $1.4 million unsecured
revolving credit agreement (the "Line of Credit Agreement") with The People's
Banking & Trust Company. The Line of Credit Agreement bears interest at a rate
equal to the bank's commercial loan base rate. For 1996, the average weighted
interest rate under the Line of Credit Agreement was 9.3%. At September 30,
1997, there were no amounts outstanding under the Line of Credit Agreement.
The Company believes that the proceeds from this Offering, expected cash
flows from operating activities and cash flows from financing activities will be
sufficient to fund the Company's capital requirements for at least the next 12
months. To the extent that the Company is successful in consummating
acquisitions and/or implementing its Expansion Plans, it may be necessary to
finance such acquisitions and/or Expansion Plans through the issuance of
additional equity securities, incurrence of indebtedness or both.
INFLATION
The impact of inflation on the Company's business has been insignificant to
date and the Company believes that it will continue to be insignificant for the
foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share".
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and supersedes APB Opinion No. 15, Earnings Per Share (Opinion
15). SFAS No. 128 eliminates the presentation of primary EPS and requires the
dual presentation of basic and diluted EPS on the income statement. It will also
require a reconciliation of the numerator and the denominator used in
calculating both basic and diluted EPS. SFAS No. 128 will be adopted for the
year ended December 31, 1997 and the Company does not expect this adoption to
have a material impact on EPS.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 will be
adopted for the year ended December 31, 1998 and the Company does not expect
this adoption to have material impact on EPS.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is encouraged. Under the terms of the new standard, the Company will
continue to report as a single segment unless the restaurant operation becomes
material.
32
<PAGE> 34
BUSINESS
GENERAL
The Company is a leading manufacturer and distributor of fresh milk and
dairy products in Ohio, West Virginia, Kentucky and parts of the eastern United
States. The Company operates through two divisions -- the Dairy Division and the
Foods Division. The Dairy Division, with its raw milk processing plant based in
Marietta, Ohio, manufactures and distributes a full line of fresh milk and
related products and also distributes brand name dairy and non-dairy foods. The
Dairy Division processes whole milk, low-fat milk, skim milk and manufactures
buttermilk, cottage cheese, chocolate milk, eggnog, iced tea, orange juice, ice
cream mix, fruit drink, yogurt mix and ice cream under its own Broughton or
Dairylane label and under various private labels. The Foods Division, with a UHT
plant based in Charleston, West Virginia, manufactures a variety of extended
life products, including half-and-half, sour cream, dips, dressings, aerosol
toppings, whipped cream, coffee cream, table cream, non-dairy creamers and
whipped toppings. The Foods Division also distributes various lines of branded
refrigerated food products manufactured by third parties.
Strategically located between the cities of Pittsburgh, Pennsylvania;
Cleveland, Columbus and Cincinnati, Ohio; and Lexington, Kentucky, each of the
Company's divisions is a strong regional competitor with an established
reputation for customer service and product quality. The Dairy Division markets
and distributes its products through an extensive network to a variety of
customers, including supermarkets, convenience stores, minimarkets, local
grocery stores, restaurants and institutional customers. The Foods Division
serves independent dairies, food service distributors, brokers, grocery
warehouses and commissaries.
SOUTHERN BELLE ACQUISITION
On September 29, 1997, the Company executed a merger agreement with
Southern Belle, whereby Southern Belle will be merged with and into the Company,
with the Company being the surviving corporation. The Company has agreed to pay
the stockholders of Southern Belle an aggregate consideration of $5.0 million,
consisting of a combination of cash and Common Stock, and the assumption of
certain liabilities. Southern Belle is a producer and distributor of fresh milk
and other dairy products primarily to grocery stores, convenience stores,
restaurants and school systems located in central and eastern Kentucky and
Tennessee. Southern Belle's major product is fluid milk (including buttermilk),
which represented over 80% of its total production volume for the year ended May
31, 1997. The Southern Belle Acquisition is conditioned on, among other things,
the concurrent consummation of this Offering and standard closing conditions.
For the year ended May 31, 1997, Southern Belle had total revenues of
approximately $63.9 million compared to total revenues of $53.9 million for the
year ended June 1, 1996.
After giving effect to the Southern Belle Acquisition, the Company's pro
forma combined net sales for the year ended December 31, 1996 and the nine
months ended September 30, 1997 were $144.0 million and $107.7 million,
respectively. After the completion of this Offering and the Southern Belle
Acquisition, 5,490,517 shares (5,670,517 if the Underwriters exercise their
over-allotment option in full) of the Common Stock will be outstanding. Of such
shares, former Southern Belle shareholders will own 167,857 shares, or
approximately 3.1% of the Common Stock outstanding (167,857 shares, or
approximately 3.0% of the Common Stock outstanding, if the Underwriters exercise
their over-allotment option in full) assuming an initial public offering price
of $14.00 per share (the midpoint of the price range set forth on the cover page
of this Prospectus). The Company's executive officers and directors and Martin
P. Shearer, currently the President and Chief Executive Officer of Southern
Belle, will beneficially own an aggregate of 46.9% of the Common Stock
outstanding after this Offering and the Southern Belle Acquisition (45.5% if the
Underwriters exercise their over-allotment option in full). After the
consummation of the Southern Belle Acquisition, the Company intends to maintain
the operations of Southern Belle as a separate division of the Company.
The closing of this Offering is conditioned on the concurrent consummation
of the Southern Belle Acquisition.
The Company's management considers the acquisition of Southern Belle to be
consistent with the Company's growth strategy and believes that the acquisition
will result in the benefits set forth below.
33
<PAGE> 35
Producing various cost savings, synergies and economies of scale. The
Company expects significant consolidating cost savings to result from the
consummation of the Southern Belle Acquisition. For example, the Company
produces several products which Southern Belle is currently purchasing from
outside sources, including cottage cheese, sour cream, ice cream, resale mixes
and UHT products. The acquisition of Southern Belle should also provide the
Company with a dependable source of butterfat, an integral raw material required
in the production of certain of the Company's non-fluid dairy products,
including heavy whipping cream, table cream, aerosol whipped toppings and
half-and-half. Southern Belle does not manufacture non-fluid dairy products and,
therefore, does not utilize butterfat, a by-product of its fluid milk
manufacturing processes. In addition, the Company purchases some of the plastic
bottles required for the packaging of its milk and juice products from
third-party sources. Management expects the operations acquired from Southern
Belle, which include the manufacturing of such containers, to satisfy the
Company's internal gallon and half-gallon plastic bottle requirements. Finally,
the Company expects the Southern Belle Acquisition to generate product cost and
overhead expense reductions through the elimination of duplicative operations;
centralization of accounting and management information systems; creation of
economies of scale from combined utilization of equipment and production lines;
reduction of outside professional and labor management fees; integration of
benefit plans and expanded self-insurance opportunities; and increase in
bargaining power with respect to raw material purchases, private label licensing
and terms of indebtedness.
Allowing the Company to expand into and serve geographic markets contiguous
to its current market area. The Company distributes its products in Ohio, West
Virginia, Kentucky and parts of the eastern United States and Southern Belle
distributes its products primarily in central and eastern Kentucky and
Tennessee. The Southern Belle Acquisition is, therefore, consistent with the
Company's strategy to expand its operations through, among other things,
selectively entering new markets in regions surrounding its existing markets.
Providing the Company with the opportunity to increase its revenues and
profits through the offering of its products to Southern Belle's customers. The
Company expects the Southern Belle Acquisition to result in cross-selling
opportunities through the marketing and sale of those products of the Company
not produced by Southern Belle to customers of Southern Belle. For example, the
Company produces cottage cheese, sour cream and UHT products that are not
produced by Southern Belle. The Company believes these products can be marketed
and sold by the Company to Southern Belle's customers.
Positioning the Company to compete more effectively in the consolidating
dairy industry. The dairy industry is highly fragmented and has been in the
process of consolidation for many years. Such consolidating trends have produced
a number of large, diversified and well-capitalized companies within the dairy
industry. See "-- Competition." Management believes that the integration of the
operations of the Company and Southern Belle will provide the Company with the
greater financial, operational and marketing resources necessary to enable the
Company to better compete in the consolidating dairy industry.
INDUSTRY OVERVIEW
Management believes that the dairy industry has matured, has excess
capacity, is highly fragmented and has been in the process of consolidation for
many years. Consolidation has resulted from the development of more efficient
manufacturing techniques, new and modern packaging machinery and equipment, the
establishment of captive dairy manufacturing operations by large grocery
retailers and relatively little growth in the demand for fresh milk products.
According to published industry statistics, approximately $22.8 billion of fluid
milk products were sold in 1995 at the wholesale level in the United States
compared to $20.6 billion sold in 1987. As the industry has consolidated, many
smaller dairy processors have been eliminated and several large regional dairy
processors have emerged. According to published industry statistics, in 1996 the
number of U.S. fluid milk companies was estimated to be 441, down 4.8% from
1995. Meanwhile, the number of fluid milk plants declined 17% to 622 from the
749 plants operating in 1992. The number of plants with 20 or more manufacturing
employees declined from 507 to 447 over the same period. Management believes
that this consolidation trend will continue for the foreseeable future.
The ice cream industry also has excess capacity and has been in the process
of consolidation for many years. Consolidation has resulted from the development
of more efficient manufacturing techniques, high-
34
<PAGE> 36
speed freezing, filling and hardening equipment. The ice cream industry
traditionally has experienced slow and steady growth. As the industry has grown,
many smaller ice cream manufacturers have been eliminated and several large,
regional ice cream manufacturers have emerged, producing a mix of regional and
national brands and a proliferation of ice cream and related frozen products.
According to published statistics, there are 473 ice cream manufacturing
facilities in the United States, compared to 483 in 1994. Management believes
that this consolidation trend will continue for the foreseeable future.
BUSINESS STRATEGY
The Company's business strategy is to continue to expand primarily through
consolidating acquisitions within the markets it currently serves and through
strategic acquisitions of regional dairies and related businesses in new
geographic markets. The Company's objective is to become a leading national
provider of dairy and related products. In addition, the Company will seek to
expand its existing operations by adding new customers, extending its product
lines and securing distribution rights for additional branded product lines.
Consolidating and Strategic Acquisitions. The Company's objective is to
continue to expand through a combination of consolidating acquisitions in its
existing markets as well as strategic acquisitions in new markets. The focus of
the Company's acquisition program at present is to capitalize on opportunities
within its existing operating regions that will create synergies and
efficiencies, as well as to selectively enter new markets in surrounding
regions. The Company may also selectively consider acquisition or consolidation
opportunities involving public companies or large privately-held companies.
In addition to the Southern Belle Acquisition, the Company has recently
implemented its consolidation strategy by acquiring and integrating Johnson into
the Company and a distributorship for Hagan-Crowley Ice Cream ("Hagan Ice
Cream"). Johnson, which was acquired by the Company in May 1997 for
approximately $500,000, sells dairy products in West Virginia, eastern Kentucky
and southeastern Ohio. Since the acquisition of Johnson, the Company has
consolidated all of Johnson's production into existing facilities, has reduced
costs associated with Johnson's former manufacturing facility and has eliminated
duplicative delivery and administrative expenses.
The Company also intends to pursue strategic acquisitions of dairy and
related businesses in new geographic markets. As discussed above, in September
1997, the Company entered into a definitive agreement to acquire Southern Belle.
Southern Belle operates one production facility in Somerset, Kentucky and has 10
distribution points located throughout southern Kentucky and Tennessee. Southern
Belle had sales of approximately $63.9 million for its fiscal year ended May 31,
1997. The Company expects consolidating cost savings to result from the
consummation of the Southern Belle Acquisition. See "Business -- Southern Belle
Acquisition."
The Company intends to continue to seek to acquire regional dairy and ice
cream operations that have significant market share and long-standing customer
relationships. After entering new geographic markets through strategic
acquisitions, the Company also plans to pursue consolidating acquisitions where
such opportunities exist.
Internal Growth. The Company's strategy for improving internal growth
includes consolidating and integrating operations, improving operating
efficiencies, providing high levels of customer service, marketing to new
customers and maintaining strict cost controls. The Company intends to continue
its efforts to add new customers, increase market share and extend its own
branded product lines, such as Broughton Premium ice cream, milk and dairy
products. With respect to its dairy and food distribution business, the Company
will seek to secure distribution rights for additional branded product lines and
will continue its efforts to increase distribution of Broughton products in
conjunction with strategies to expand its customer base.
Expand Customer Base and Brand Recognition. The Company plans to increase
its business by taking advantage of demand for new and additional products from
existing customers, by increasing its customer base in each of the markets in
which it operates and by expanding its business nationally.
As part of its strategy to continue to develop and sell new and additional
products to existing customers and to expand the number of customers in each of
the markets in which the Company operates, the Company
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<PAGE> 37
tailors its sales and marketing techniques to each of its local markets. These
techniques are designed to develop local brand loyalty by promoting the
Company's reputation for competitively priced, premium products. The Company's
promotional techniques target the retail trade to induce the trade to display
and carry the Company's products, and target the consumer to promote purchases
and further increase local brand name loyalty and recognition. Such promotional
techniques may utilize local broadcast media and employ or integrate portions of
the image created through the Company's general advertising campaigns, but will
typically be more "directed" to the point of purchase, employing techniques such
as couponing, sampling, incentives, private labeling, merchandising and
licensing and similar efforts.
An example of the implementation of this objective is the Company's current
"Cool-Ones" campaign. This campaign involves an innovative form of packaging of
the Company's fluid milk and juice products consisting of attractively labeled,
plastic, resealable bottles in single-serve, one-pint sizes, which will be
promoted through demonstrations and product samplings at local retail outlets.
Primarily, this campaign has been designed to expand the Company's product lines
through a more convenient and portable package that is lightweight and
non-breakable. To introduce this new product, the Company has developed a
marketing package that includes materials to help the local retailer advertise
and promote the product. Special display racks are placed at local retail
outlets to attract customers, along with point-of-purchase promotional
materials. The packaged products will be offered for sampling at trade shows and
in-store demonstrations within the Company's regional service areas.
The Company's strategy of establishing and expanding its share of the
national market for dairy products and building its brand name recognition
nationally is a long-term objective and is tied to the Company's acquisition
strategy discussed above. The Company believes that as it expands into new
markets, its growing national presence and brand name recognition will enhance
its ability to attract larger customers. In addition, the Company eventually
plans to promote its products on an Internet website, television, radio, print
and other forms of communication designed to generate national brand recognition
and product awareness among consumers.
The Company believes its corporate profile is also enhanced by it
membership in Master Dairies Inc., a purchasing organization with 18
independent, non-competitive member dairies in the United States and Canada. In
addition, Master Dairies stresses member education and information sharing
through annual member conferences.
Improve Production and Distribution Efficiency. The Company also has
implemented a plan to lease, rather than own, the fleet of trucks and trailers
used to distribute its products. This initiative is intended to improve
efficiency by reducing the maintenance and other costs associated with these
ancillary operations.
Cost savings are also expected to be achieved through the implementation by
the Company of a "backhauling" program. The Company enters into backhaul
contracts to transport third party freight from points close to the delivery
destination of the Company's products to points along the return route to the
Company's plant or distribution center. Backhauling has enabled the Company to
eliminate the deadweight loss associated with its trucks returning from delivery
trips without a load.
Future plans to improve the efficiency of the Company's operations include
the use of a network of handheld computers at points of delivery to record the
sale of the Company's products and to generate customer invoices. The Company
also plans to upgrade its inventory control and management information systems.
PRODUCTION PROCESS OVERVIEW
Broughton receives approximately 70,000 gallons of raw Grade A milk daily
from over 170 dairy farms in Ohio and West Virginia. The Company's contract
haulers check the quality of the raw milk, transport the milk from the farms to
the Dairy Division plant in Marietta, Ohio seven days a week, including
holidays. Before unloading, the milk is checked for antibiotics, temperature and
bacteria to assure it meets FDA requirements. In order to constantly monitor
product quality, the Company maintains its own dairy laboratory which
36
<PAGE> 38
operates 24 hours a day. This laboratory is staffed by trained Company
technicians who are certified by the Ohio Department of Health.
At the plant, the milk is filtered and pumped into sanitized, refrigerated
silos, where it is stored for processing. As required, the milk is withdrawn
from storage for processing. In the next stage of the process, the milk is
pasteurized, which kills microorganisms and allows the milk to be separated into
its constituent elements of milk solids and butterfat, and homogenized, which
processes the milkfat constituent of the milk into a more uniform consistency to
enhance "mouth-feel." The Company's plant can pasteurize milk at a rate of up to
4,000 gallons per hour. The milk is then pumped to a pasteurized surge tank
where it is held until bottling. After pasteurization, the milk may be further
processed into a wide variety of products, based principally on butterfat
content. For example, raw milk has approximately 3.7% butterfat, and the Company
processes it into products, ranging from heavy cream (at 40%), to skim milk
(less than one half of 1%). Some of the butterfat extracted from such processes
is delivered to the Foods Division to produce UHT products such as dairy and
non-dairy coffee creamers, whipping creams, sour creams, dressings and dips. See
"-- Products."
The Foods Division receives truckloads of pasteurized product from both the
Dairy Division and outside sources. Once received, product is ultra-pasteurized
through a direct steam injection process that allows for 60-day shelf life while
preserving the flavors of the product.
Numerous quality control steps during the entire manufacturing and filling
process are taken to help preclude the possibility of contamination. Additional
steps include the measuring of butterfat and milk solids so as to control
product standardization and cost.
Once the product is processed it is ready to be packaged in the various
filling lines. Various products, including half-and-half, heavy whipping cream
and UHT fluid milk, are produced on these lines. Once filled, the cartons are
packaged and placed in cold storage.
Southern Belle receives approximately 66,000 gallons of raw milk daily,
principally from SEGMPA. Southern Belle's fluid milk production process is
substantially similar to that of the Company.
PRODUCTS
General
The following table shows the Company's breakdown by product, as an
approximate percentage of revenues, for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Milk............................................... 49.3% 52.6% 48.6%
UHT (non-milk)..................................... 22.1 21.9 23.0
Cultured........................................... 13.2 11.5 12.4
Frozen Desserts.................................... 7.4 6.9 8.8
Other.............................................. 8.0 7.1 7.2
----- ----- -----
Total......................................... 100.0% 100.0% 100.0%
===== ===== ======
</TABLE>
The Company's dairy stores have historically functioned as retail outlets
and test markets for ice cream and have contributed only a small percentage to
the Company's net sales. The Company currently operates only one dairy store,
which is managed by the Dairy Division. The Company's cultured products include
cottage cheese, sour cream, imitation sour cream and non-dairy dips.
Southern Belle's current product lines produced at its Somerset facility
include milk (including buttermilk and flavored milks), which accounts for over
80% of its production volume, orange juice and
37
<PAGE> 39
flavored fruit drinks. These products are manufactured by Southern Belle under
its brand name and other private labels.
Southern Belle currently purchases all of its dairy foods products,
including sour cream, chip dip, yogurt and ice cream products from third-party
sources. These products include brand names, such as Hershey's(R), Dove Bar(R),
Eskimo Pie(R) and Klondike(R).
Dairy Division
Broughton's Dairy Division processes, manufactures and distributes a full
line of fresh milk and related products, and also distributes brand name
refrigerated and frozen foods. The Dairy Division processes whole milk, low-fat
milk, skim milk, and manufactures cottage cheese, buttermilk, chocolate milk,
eggnog, iced tea, orange juice, ice cream mix, fruit drink, yogurt mix and ice
cream under the Broughton label. Broughton manufactures and distributes whole
milk, 2.0% low-fat milk, skim milk and ice cream under the Dairylane label. The
Dairylane label has been formulated to appeal to the price-conscious consumer
and represents a value-priced, family product. Broughton also processes,
manufactures and distributes whole milk, low-fat milk, skim milk, buttermilk and
chocolate milk under the IGA, Johnson's All-Star Dairy, Foodland and various
other store-brand labels. Cottage cheese in various size packages is
manufactured by the Company under the following labels: Broughton, Dairylane,
IGA, Shurfresh and many other private, regional or supermarket labels.
The Company's Dairy Division also manufactures a variety of frozen
desserts, including, ice cream sherbet and frozen yogurt. In addition, it
manufactures shake and soft-serve mixes for institutional food service
customers, including Dairy Queen(R) and soft-serve operations. The Dairy
Division manufactures over 20 flavors of ice cream under the Broughton Premium
label and 12 flavors under the Broughton Homestyle label. The Broughton Premium
label has been formulated to appeal to the quality-conscious consumer and
presents an upscale image in comparison to many competing national brands. The
Dairy Division also offers a selection of bulk ice creams to institutional food
service customers, restaurants and ice cream parlors. In addition to the
Broughton Premium and Broughton Dairylane labels, the Dairy Division also
manufactures ice cream for Oberlin Farms Dairymen in Cleveland. The Dairy
Division also distributes a large variety of frozen novelties and national brand
ice cream, including Hagan(R), Crowley(R), Mars(R), Snickers(R), Eskimo Pie(R),
Milky Way(R), Nestle(R) Crunch, Butterfinger(R), Klondike(R), Welch's(R),
Healthy Choice(R), Breyer's(R), Ben & Jerry's(R) and Good Humor(R).
The Company began distributing Hagan Ice Cream and assorted national brand
novelties for Kemp-Crowley of Dunbar, West Virginia ("Kemp-Crowley") in June
1997. The Company now purchases Hagan Ice Cream and various novelty products
from Kemp-Crowley, stores them in a leased warehouse in Dunbar, West Virginia
and distributes and sells them through its distribution branches to grocery
stores, convenience stores, supermarkets, institutions and other customers.
Foods Division
The Company's Foods Division was one of the first businesses in the United
States to install UHT processing. The Company has developed UHT techniques which
are designed to promote purity and extended shelf-life. UHT pasteurization
involves heating the milk to 250 to 307 degrees Fahrenheit for a period of up to
three seconds and then rapidly cooling it. Unlike pasteurization (162 degrees
for 15 seconds), UHT processing kills virtually all the microorganisms in the
milk. The milk is then carefully stored in refrigerated, aseptic tanks
maintained at 35-40 degrees, for further processing. The milk can then be
stored, unopened, in aseptic (germ-free) packages at 35-40 degrees for shelf
life periods of up to 60 days.
Broughton is a leading producer of half-and-half coffee creamers. Each
year, the Foods Division produces over half a billion dairy and non-dairy coffee
creamers, which are delivered to supermarkets, nationally known fast-food
restaurants, fine hotels and other restaurants. These creamers are packaged
under the Broughton label as well as under private label for approximately 40
customers.
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The Foods Division manufactures and distributes a variety of other dairy
food products, including sour cream, dips, dressings, aerosol toppings, whipped
cream, half-and-half, coffee cream and table cream, under the Broughton,
Dairylane and Real Cream labels and private label packaging. Broughton also
distributes various lines of branded refrigerated food products manufactured by
third parties, including Lactaid(R), Nestle(R) Quik, Hershey's(R) milk and Yoo
Hoo(R).
Other UHT products manufactured by the Company include non-dairy whipped
topping and dessert toppings, party dips, sour cream and Sokreem(R) -- a
non-dairy sour cream substitute. Broughton also packages these products under
private label, supplying multiple customers with a variety of products.
SALES AND DISTRIBUTION
Dairy Division
The Company markets and sells its dairy products to food retailing outlets
in West Virginia, southeastern Ohio and eastern Kentucky, including major
supermarket chains, convenience stores, minimarkets, local grocery stores and
schools. Southern Belle distributes its products primarily to grocery stores,
convenience stores, restaurants and school systems in central and eastern
Kentucky and Tennessee. Food Lion, a supermarket chain, accounted for
approximately 20% of Southern Belle's net sales for its fiscal year ended May
31, 1997. Management believes that because of the diverse nature of the
Company's business and customer base, the loss of any one Dairy Division
customer would not have a material adverse effect on the business, financial
condition or results of operations of the Company.
Management believes that the Dairy Division's existing distribution network
helps the Company to introduce new products on a cost-effective and competitive
basis. The Dairy Division has an extensive distribution network, with
approximately 84 routes, which allows it to provide the frequent delivery
service and broad product line its customers demand. The Dairy Division serves
over 780 retail outlets from its Marietta manufacturing facilities and eight
distribution centers and provides services to over 425 customers, consisting of
nursing homes, restaurants, hospitals, nutritional programs and Dairy Queens(R).
The Dairy Division's delivery fleet currently consists of approximately 169
trailers, 90 of which are owned and 79 of which are leased. See
"-- Strategy -- Improve Production and Distribution Efficiency." Southern
Belle's products are distributed primarily to customers in Kentucky and
Tennessee, with minor distributions to additional customers in Alabama, Indiana,
Georgia, North Carolina and West Virginia. The Company's and Southern Belle's
product distribution is accomplished through the following methods: "dock
pickup" (where customers pick up the product themselves from the manufacturing
plant); "drop shipment" (where truck fleets deliver the product directly to
customers); and "direct store delivery" (where route drivers make deliveries
from a distribution point).
During the nine months ended September 30, 1997, the Dairy Division sold
approximately 30% of its products under formula-based pricing arrangements
primarily with dairy products distributors, schools and institutions, whose
contracts are awarded after annual and semi-annual competitive bidding
processes. Under formula-based pricing, increases and decreases in milk costs
are passed along to the customer. Pricing on the remaining portion of the Dairy
Division's sales volume is market-based.
Foods Division
Broughton's Foods Division serves over 150 independent dairies,
distributors, brokers, grocery warehouses, food service distributors and
commissaries and manufactures private label products for over 40 dairies,
warehouses and grocery chains. Private label sales accounted for approximately
58% of the third quarter net sales of the Foods Division. The Foods Division
delivers UHT products to distributors and other dairies in refrigerated
transports throughout the eastern and southeastern United States. Management
believes that because of the diverse nature of Broughton's business and customer
base, the loss of any one Foods Division customer would not have a material
adverse effect on the business, financial condition or results of operations of
the Company.
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<PAGE> 41
An extensive distribution network, with approximately 22 transport drivers
delivering approximately 40 loads per week, allows the Foods Division to provide
the frequent delivery service and branded product line its customers demand. The
Foods Division delivery fleet consists of 28 vehicles, three of which are owned
and 25 of which are leased.
During the nine months ended September 30, 1997, approximately 70% of the
products sold by the Foods Division consists of UHT and other products sold at
prices based upon market conditions. The remaining 30% is based on formula
pricing. Under "formula" pricing, increases and decreases in Broughton's milk
costs are passed along to the customer because prices are allowed to change as
the cost of milk fluctuates.
RAW MATERIALS AND SUPPLY
Dairy Division
To ensure a constant supply of milk produced to Broughton standards, a
full-time field department is maintained. Inspectors visit each dairy farm and
work with the producers on product quality assurance. Over 170 farmers in Ohio
and West Virginia produce Grade A milk exclusively for the Dairy Division.
Contract haulers check the quality of raw milk and transport the milk from the
farms to the plant. Fresh, raw milk is received every day of the year. In order
to monitor product quality, the Company maintains its own laboratory. The
laboratory is staffed by trained technicians who are certified by the Ohio
Department of Health.
The supply of milk in the United States is influenced by many factors,
including seasonality and government regulation, and is therefore variable. See
"-- Government Regulation." During the nine months ended September 30, 1997,
approximately 89% of the raw milk processed by the Company was obtained from
local dairy farmers. The remaining 11% was obtained through farm cooperatives.
Certain raw materials, including milk powder, cocoa powder, sugar,
flavorings, fruits, nuts and packaging supplies, are generally available from
numerous third party sources. The Dairy Division is not dependent upon any
single supplier for these materials, and management believes that any supplier
could be replaced in the ordinary course of business. The acquisition of
Southern Belle is expected to provide the Company with a stable source of
butterfat, a raw material required in the production of ice cream and Foods
Division products. Southern Belle does not manufacture non-fluid dairy products
and, therefore, does not utilize butterfat, a by-product of its fluid milk
manufacturing processes and an integral raw material required in the production
of non-fluid dairy products. Accordingly, as a result of the Southern Belle
acquisition, management expects to achieve cost savings from the elimination of
the Company's dependence on the "spot" market for its butterfat requirements.
The spot market is extremely volatile and has, in recent months, been marked by
rising prices.
The Dairy Division manufactures the majority of its one-gallon plastic
bottle requirements at its own manufacturing facility and obtains plastic resin
used in the manufacturing process from a single supplier under an exclusive
supply agreement. Notwithstanding such an exclusive supply arrangement, plastic
resin is generally available from numerous suppliers capable of meeting
Broughton's requirements. Approximately 70.5% of the total gallons produced by
the Dairy Division is packaged in gallon plastic containers. An additional 8.8%
of the total gallons produced is packaged in half-gallon plastic containers.
After the acquisition of Southern Belle, management expects the operations
acquired from Southern Belle, which include plastic bottle manufacturing, to
satisfy the Company's internal gallon and half-gallon plastic bottle
requirements.
The Dairy Division also purchases finished products for distribution from
several suppliers and has numerous alternative available sources.
Substantially all of Southern Belle's raw milk is supplied by SEGMPA, a
milk farm cooperative based in Somerset, Kentucky, on a contractual, exclusive
basis. Southern Belle also obtains a portion of its raw milk supply on an "as
needed" basis from other dairy cooperatives in Strongsville, Ohio and
Springfield, Missouri. Southern Belle's paper packaging products and labels and
its supply of bottle caps and resin are purchased from various sources.
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Foods Division
The Foods Division receives some of its supply of raw milk and butterfat
from the Company's Dairy Division. Additional cream is purchased from numerous
other suppliers. As noted above, the acquisition of Southern Belle is expected
to provide the Company with a stable source of butterfat, a by-product of
Southern Belle's fluid milk manufacturing processes and an integral raw material
required in the production of the Foods Division's products.
Raw materials used in the Foods Division's production processes, including
sugar, flavorings, seasonings and packaging supplies, are generally available
from various third party sources. The Foods Division is not dependent upon any
single supplier for these materials and management believes that any supplier
could be replaced in the ordinary course of business.
COMPETITION
The Company's business is highly competitive. The Company has a number of
competitors in each of its major product, service and geographic markets, and
many of these competitors are larger, more established and better capitalized
than the Company.
Dairy Division
Due to the perishability concerns and costs associated with transporting
fresh milk, competition in the fluid dairy business tends to be regional rather
than national, with strong brand identity, flexibility of service, price,
breadth of product line and quality as the primary competitive factors. The
Company competes primarily on the basis of quality, service, brand recognition,
breadth of product line and price. Because of its size, the quality of its
manufacturing facilities, the efficiency of its work force, the strength of its
distribution network and the strength of its brand name, management believes the
Company can continue to compete effectively within the regions currently served
by the Company's dairy business.
The Dairy Division's competitors include other large, independent dairy
processing companies and dairy processors owned by grocery chains, many of which
are larger and better capitalized than the Company. The Dairy Division's other
principal competitors include Dean Foods Company, a producer of dairy products
based in Illinois; Smith Dairy, Inc., which operates principally in Central
Ohio; Goshen Dairy, Inc., which operates principally in north and central Ohio;
Hillside Dairy Products, a diversified dairy company operating principally in
northern Ohio; Superior Dairy Inc., with operations principally in Ohio, West
Virginia and Kentucky; United Dairy, Inc., which principally operates in Ohio,
West Virginia and Kentucky; and Louis Trauth Dairy, Inc., which operates
principally in central Ohio. Suiza Foods Corporation, a national, diversified
food products company, recently announced it has entered into a definitive
agreement to acquire Country Fresh, Inc., a Michigan-based processor of fluid
milk and ice-cream, with distribution centers in Ohio, Tennessee and elsewhere
and to merge with Morningstar Group Inc., a manufacturer, distributor and
marketer of refrigerated shelf-stable and frozen food products.
The primary competitor of Southern Belle is Flav-O-Rich, which is owned by
Land O' Sun Dairy, which also markets under the PET name. Southern Belle
competes with Flav-O-Rich throughout eastern Kentucky and Tennessee for both
milk and ice cream sales. Other primary competitors of Southern Belle include:
Dean Foods, with plants in Louisville, Kentucky and Athens, Tennessee; Purity
Dairies, which competes for institutional customers in the Nashville area; The
Kroger Co., which has dairy operations and also functions as a competitor by
being a significant factor in the erosion of independent retailers from the
market; and Prairie Farms, a joint venture with Mid-America Dairymen with a
distribution system in the Louisville, Kentucky area.
In the manufacturing and distribution of ice cream, the Company competes
with large integrated dairy and ice cream manufacturing companies and
independent distributors of national ice cream brands. Because the Company
offers brands manufactured by third parties as well as its own brand of ice
cream products, it is able to compete effectively in this market by offering
convenience stores and other small retailers a broad line of ice cream products
and frozen novelties. The addition of the Hagan Ice Cream distributorship allows
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Broughton to offer an extensive line of popular national and other ice cream
brands, generating sales volume from retail sites that single line or other more
limited distributors may find uneconomical to service.
Foods Division
Although a pioneer in UHT processing, Broughton now competes against
larger, integrated dairies and UHT manufacturing companies which are better
capitalized. Consequently, Broughton only has a small percentage of the market
share in the eastern United States. Management believes that there is great
potential for growth in this sector. Because of the strength of its brand name,
Broughton's size, the efficiency of its work force and the strength of its
distribution network, management believes the Company can compete effectively in
the UHT dairy business.
MARKET SHARE
Management estimates that as of December 31, 1996, the Company's
approximate market share in its core geographic segments are as follows:
Fluid Milk
Broughton has approximately 28% of the market share for white fluid milk in
the Parkersburg/Marietta, Ohio area, second to generic "store brand" fluid milk,
which accounts for approximately 34% of sales in such market. In the Huntington,
West Virginia market, the Company is third in market share (approximately 8%)
compared to the white fluid milk market share of United/Valley Bell and store
brands (approximately 15% and 44%, respectively). In the Charleston, West
Virginia area, the Company has approximately 14% of the white fluid milk market
share, in second place behind the "Kroger" brand (approximately 28%).
Broughton is the market leader in chocolate milk sales in the
Parkersburg/Marietta, Ohio area with an approximate 50% market share. The
Charleston, West Virginia chocolate milk market is divided between Broughton,
Kroger and United/Valley (approximately 28%, 28% and 25%, respectively). The
Company's chocolate milk is second (with a market share of around 17%) to store
brand chocolate milk (with approximately a 41% market share) in the Huntington,
West Virginia area.
Ice Cream
Most of the market for ice cream is dominated by store brands. The
Company's share of the ice cream market is, however, stronger in the
Parkersburg/Marietta, Ohio market (approximately 19%) than in Charleston
(approximately 8%) and Huntington (approximately 9%).
Cottage Cheese
With an approximate 49% market share, the Company is the market leader in
cottage cheese sales in the Parkersburg/Marietta, Ohio, area. The Company's
cottage cheese market shares of approximately 18% and 14% in Charleston and
Huntington, West Virginia, respectively, are second in those markets only to
store brands.
Sour Cream
The Company is also the market leader (with an approximate 30% share) in
sales of sour cream in the Parkersburg/Marietta, Ohio area. The Company shares
second place (behind store brands) in the Charleston, West Virginia sour cream
market with United/Valley Bell (each with an approximately 13% share). The
Company is also second behind store brands in Huntington, West Virginia, with
around 11% of sour cream sales.
FACILITIES
The Company's executive offices are located in leased premises at 210 North
Seventh Street, Marietta, Ohio. The Company has manufacturing facilities in
Marietta, Ohio and Charleston, West Virginia. There are
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eight distribution centers: two in Marietta and one in each of (i) Johnstown and
Old Washington, Ohio; (ii) Ashland, Kentucky; and (iii) Charleston, Ripley and
Clarksburg, West Virginia. In addition, the Hagan Ice Cream distributorship is
located in Dunbar, West Virginia. Southern Belle operates one production
facility based in Somerset, Kentucky and has 10 distribution points located in
(i) Danville, Lexington, London, Morehead, Louisville and Russell Springs,
Kentucky and (ii) Cookeville, Nashville, Knoxville and Johnson City, Tennessee.
Management believes that the facilities for the production of its products
are suitable and adequate for the business conducted therein, that they are
being appropriately utilized in line with past experience and that they have
sufficient production capacity for their current and anticipated future
operations. The extent of utilization of such facilities varies based upon the
seasonal demand for the Company's products. While it is not possible to measure
with any degree of certainty or uniformity the productive capacity and extent of
utilization of these facilities, management believes that additional production
can be obtained at the existing facilities by the addition of personnel and
capital equipment and, in some facilities, the addition of shifts of personnel
or the expansion of such facilities. The Company continuously reviews its
anticipated requirements for facilities and, on the basis of that review, may
from time to time acquire additional facilities and/or dispose of existing
facilities. Facilities and equipment are repaired and maintained to assure their
adequacy, productive capacity and utilization. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Dairy Division
The Dairy Division conducts its manufacturing and distribution operations
from its Marietta, Ohio, plant and from eight distribution centers, one of which
is owned and seven of which are leased. Management believes that the Company's
dairy manufacturing and distribution facilities are adequate for current
requirements and, upon completion of expansion projects currently underway, will
be adequate for foreseeable requirements, including the integration into the
Company of Southern Belle and possible future acquisitions.
The area surrounding the Marietta, Ohio manufacturing facilities is
suitable for any expansion of the Company's facilities that management may
consider necessary.
Foods Division
The Foods Division conducts its manufacturing and distribution operations
from its Charleston, West Virginia plant, which is owned. Management believes
that although the manufacturing and distribution facilities at the Foods
Division are aging and currently operating near the limits of their capacity,
such facilities are adequate for current requirements and, upon completion of
planned Company-wide expansion projects, will be adequate for foreseeable
requirements.
TRADEMARKS
The Company currently holds four registered trademarks, the Company's
corporate logo, Broughton B Kitchen Guild (plus logo)(R), Kitchen Guild(R),
Keepwell(R) and Sokreem(R), and also uses other trademarks that have been
licensed or sublicensed from Marbo, Inc., a food company. Other than the
Broughton trademark, management does not believe the loss of any of Broughton
Foods Company's trademarks or trademark licenses would have a material adverse
effect on its business, financial condition or results of operations. Southern
Belle has applications pending for the following three trademarks: Southern
Belle(TM), Ultra Skim(TM) and Southern Belle's corporate logo and a registered
trademark for SBD Good For You! (and design)(R).
GOVERNMENT REGULATION
The Company is extensively regulated under both federal and state law. The
following information summarizes certain aspects of that regulation applicable
to the Company and is qualified in its entirety by reference to all particular
statutory or regulatory provisions.
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Regulation at the federal, state and local levels is subject to change. To
date, compliance with governmental regulations has not had a material impact on
the Company's level of capital expenditures, earnings or competitive position,
but, because of the evolving nature of such regulations, management is unable to
predict the impact such regulation may have in the foreseeable future.
Public Health
As a manufacturer and distributor of food products, the Company is subject
to the Federal Food, Drug and Cosmetic Act and regulations promulgated
thereunder by the FDA. This comprehensive regulatory scheme governs the
manufacture (including composition and ingredients), labeling, packaging and
safety of food. The FDA regulates manufacturing practices, including quality
assurance programs, for foods through its current good manufacturing practices
regulations, specifies the standards of identity for certain foods, including
many of the products sold by the Company, prescribes the format and content of
certain nutrition information required to appear on food product labels and
approves and regulates claims of health benefits of food products.
In addition, the FDA enforces the Public Health Service Act and regulations
issued thereunder, which authorize regulatory activity necessary to prevent the
introduction, transmission or spread of communicable diseases. These regulations
require, for example, pasteurization of milk and milk products. The Company and
its products are also subject to state and local regulation through such
measures as the licensing of dairy manufacturing facilities, enforcement by
state and local health agencies of state standards for the Company's products,
inspection of the Company's facilities and regulation of the Company's trade
practices in connection with the sale of dairy products.
The Company maintains quality control laboratories at each of its dairy
manufacturing facilities to test milk, other ingredients and finished products.
Product quality and freshness are essential to the successful retail
distribution of dairy and refrigerated dairy products. To monitor product
quality at its facilities, the Company maintains quality control programs to
test products during various processing and packaging stages. Each dairy
manufacturing facility has its own staff of technicians who monitor products to
maintain high quality formulations and to protect against contamination.
Employee Safety Regulations
The Company is subject to certain health and safety regulations, including
regulations issued pursuant to the Occupational Safety and Health Act. These
regulations require the Company to comply with certain manufacturing, health and
safety standards.
Environmental Regulations
The Company is subject to certain federal, state and local environmental
regulations. These laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended; the
Resource Conservation and Recovery Act, as amended; the Federal Water Pollution
Control Act, as amended; the Toxic Substances Control Act; the Clean Air Act;
the Safe Drinking Water Act; the Oil Pollution Act of 1990; the Occupational
Safety and Health Act of 1970, as amended; and their state and local
counterparts and equivalents.
The Company's facilities discharge biodegradable wastewater into municipal
waste treatment facilities at levels that require the Company to pay monthly
wastewater surcharges to municipal water treatment authorities. These
authorities may, however, require the Company to limit the level of discharges
and construct pre-treatment facilities or take other action to reduce effluent
discharge in the future.
The Company maintains above-ground or underground petroleum storage tanks
at several of its facilities. These tanks are periodically inspected to
determine compliance with applicable regulations. The Company may be required to
make expenditures from time to time in order to remain in compliance with such
regulations.
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U.S. Dairy Support Program
The minimum price paid to producers for Grade-A milk in the United States
is established by federal milk marketing orders promulgated under the
Agriculture Marketing and Agreement Act of 1937. In federal milk marketing
orders, a Marketing Administrator regulates minimum prices for milk based on how
it is used. Each month the Market Administrator reviews the books of all
processors and ensures that farmers receive minimum prices. In reality, fluid
processors often pay more than the minimum price. Dairy cooperatives have
antitrust immunity under the Capper Volstead Act of 1922 to organize and bargain
for higher prices. Further, the prices paid for milk by processors are higher
than these minimums due to handling charges or other administrative fees charged
by suppliers and shippers. Congress has recently passed legislation designed to
phase out support prices over a specified period.
EMPLOYEES
As of September 30, 1997, the Company had 388 full-time employees and 45
part-time employees. Of this number, 319 were employed by the Dairy Division and
its distribution branches and 114 worked in the Foods Division as of such date.
Broughton also employs additional employees during its peak summer season and
has not experienced difficulty in meeting its seasonal employment needs.
Management believes that the Company's relations with its employees are good.
The Company is party to several collective bargaining agreements with
approximately 224 of its employees. Details of collective bargaining agreements
to which the Company is a party are as follows:
<TABLE>
<CAPTION>
LOCATION OF FACILITY NAME OF UNION EXPIRATION DATE
- ------------------------------ ------------------------------------------- ------------------
<S> <C> <C>
Manufacturing plant, Marietta, Retail, Wholesale, Department of Store January 29, 1999
Ohio Union, Local #379
Manufacturing plant, Chauffeurs, Teamsters & Helpers, Local March 1, 1998
Charleston, West Virginia Union #175
Parkersburg, West Virginia Chauffeurs, Teamsters & Helpers, Local September 1, 1998
Union #175
Old Washington, Ohio Retail, Wholesale, Department Store Union, September 1, 1999
Local #379
Charleston, West Virginia International Brotherhood of Teamsters, October 5, 1999
Local Union #789
</TABLE>
Southern Belle employed 256 workers as of September 30, 1997, of which 77
were production workers and office personnel. A total of 104 employees were
covered by collective bargaining agreements as of such date. Production workers
and office personnel are covered under the collective bargaining agreement
between Southern Belle and the United Food and Commercial Workers Union Local
#227, located at the manufacturing facility in Somerset, Kentucky. This
agreement expires in January 2000. Transport drivers are covered under a
collective bargaining agreement between Southern Belle and the Chauffeurs,
Teamsters & Helpers, Local #783, located at the manufacturing plant in Somerset,
Kentucky. This agreement expires in November 1999. Southern Belle's management
believes that relations with its employees are good.
LEGAL PROCEEDINGS
The Company is involved in or subject to various litigation and legal
proceedings incidental to the normal conduct of the Company's business,
including with respect to regulatory matters. The Company is currently not
involved in any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- --- ------------------------------------------------
<S> <C> <C>
Marshall T. Reynolds.............. 60 Chairman of the Board of Directors
Philip E. Cline................... 64 President and Chief Executive Officer, Director
George W. Broughton............... 40 Executive Vice President, Sales and Marketing,
Director
Ronald V. Arthur II............... 38 Vice President, General Manager, Foods Division,
Director
Todd R. Fry....................... 32 Treasurer and Chief Financial Officer
Robert E. Evans................... 57 Director
Charles R. Hooten, Jr. ........... 70 Director
Neil W. Scaggs.................... 61 Director
Philip Todd Shell................. 28 Director
Kirby J. Taylor................... 52 Director
Paul T. Theisen................... 66 Director
Thomas W. Wright.................. 46 Director
</TABLE>
Marshall T. Reynolds has served as Chairman of the Board of the Company
since November 1996. Mr. Reynolds has served as President, Chief Executive
Officer and Chairman of the Board of Directors of Champion Industries, Inc. (a
commercial printer, business form manufacturer and supplier of office products
and furniture) from 1992 to the present (and sole shareholder from 1972 to
1993); President and General Manager of The Harrah & Reynolds Corporation, from
1994; Chairman of the Board of the Radisson Hotel in Huntington, West Virginia
and Chairman of McCorkle Machine and Engineering Company in Huntington, West
Virginia. Mr. Reynolds also serves as a director of the Abigail Adams National
Bancorp, Inc. in Washington, D.C.; Chairman of the Board of First Guaranty Bank
in Hammond, Louisiana; and Chairman of the Board of Premier Financial Bancorp in
Georgetown, Kentucky.
Philip E. Cline has served as the Company's President, Chief Executive
Officer and a member of the Board of Directors since November 1996. Prior to
joining the Company, Mr. Cline was a management consultant from January 1996 to
November 1996. From 1968 to July 1995, Mr. Cline held various senior management
positions at J.H. Fletcher & Co., including Executive Vice President from
January 1995 to July 1995 and Vice President and Treasurer from 1968 to 1995,
and has agreed to provide certain consulting services until March 1998. Mr.
Cline is also a director of McCorkle Machine and Engineering Company, Banc One
West Virginia Corporation, Champion Industries, Inc. and Logan Corporation.
George W. Broughton has held various senior management positions at the
Company since 1981, including (i) Executive Vice President, Director of Sales
and Marketing since 1994, (ii) Chief Executive Officer and Chairman of the Board
of Directors from July 1996 to November 1996, (iii) Executive Vice President
from 1989 to 1994, (iv) Director of Marketing from 1987 to 1989, and (v)
Director of Ice Cream Marketing from 1982 to 1987. Mr. Broughton has also served
as a member of the Company's Board of Directors since 1994. Mr. Broughton is a
director of SBR, Inc., Peoples Banking & Trust Company and Peoples Bancorp.,
Inc. Mr. Broughton has served three terms as President of the West Virginia
Dairy Products Association.
Ronald V. Arthur II has held various senior management positions at the
Company since 1985, including (i) Vice President and General Manager of the
Foods Division since July 1992 and (ii) Sales Manager and Acting General Manager
from October 1991 to July 1992. Mr. Arthur has also served as a member of the
Company's Board of Directors since March 1997. Mr. Arthur is a director of the
West Virginia Dairy Products Association.
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Todd R. Fry has served as the Company's Chief Financial Officer since
September 1997. Prior to joining the Company, Mr. Fry was employed by Coopers &
Lybrand L.L.P. from 1991 to September 1997. Mr. Fry is a member of the American
Institute of Certified Public Accountants and Ohio Society of Certified Public
Accountants.
Robert E. Evans has served as a member of the Company's Board of Directors
since 1971. Mr. Evans has been the (i) President, Chief Executive Officer and a
member of the Board of Directors of Peoples Bancorp Inc. since April 1980 and
(ii) President, Chief Executive Officer and a member of the Board of Directors
of The Peoples Banking and Trust Company since January 1987. Mr. Evans is also
(i) a director of the First National Bank of Southeastern Ohio, Federal Home
Loan Bank of Cincinnati Ohio, Marmac Corporation and Ohio Banks Association and
(ii) the Chairman of the Board of Directors of Russell Federal Savings Bank.
Charles R. Hooten, Jr. has served as a member of the Company's Board of
Directors since January 1997. Since 1948, Mr. Hooten has held various senior
management positions at the Hooten Equipment Company, including that of
President since 1976. Mr. Hooten is also a director of Banc One West Virginia
Corporation and Banc One Charleston.
Paul T. Theisen has served as a member of the Company's Board of Directors
since April 1971. Since 1983, Mr. Theisen has served as the President and a
director of the law firm Theisen, Brock, Frye, Erb & Leeper Co., L.P.A. Mr.
Theisen is also a director of Peoples Bancorp Inc., The Peoples Banking and
Trust Company and First National Bank of Southeastern Ohio.
Neal W. Scaggs has served as a member of the Company's Board of Directors
since January 1997. Since 1961, Mr. Scaggs has served as the President of
Baisden Brothers, Inc. Mr. Scaggs is also a director of Banc One West Virginia
Corporation, Champion Industries, Inc. and Logan Corporation.
Kirby J. Taylor has served as a member of the Company's Board of Directors
since January 1997. Mr. Taylor has been the (i) President and Chief Executive
Officer of Nexquest, Inc. since January 1996, (ii) President and Chief Executive
Officer of Mid-America Spring Air, Inc. since 1976, (iii) President and Chief
Executive Officer of Addington Resources, Inc. from July 1994 through January
1996, (iv) Vice President and Chief Financial Officer of Outboard Marine Corp.
from April 1993 to July 1994, and (v) Vice President, Finance of Tenneco
Automotive from August 1990 to April 1993. Mr. Taylor is also a director of
Thomas Bradford Shirt Company.
Thomas W. Wright has served as a member of the Company's Board of Directors
since January 1997. Mr. Wright is also the Chairman of the Board of Directors of
each of the Thomas Bradford Shirt Company, Nexquest, Inc. and Mid-America Spring
Air, Inc.
Philip Todd Shell has served as a member of the Company's Board of
Directors since January 1997. Mr. Shell has been the (i) Vice President, Chief
Financial Officer and Secretary of Caspian Holdings since July 1997 and its
Chief Investment Officer from December 1996 to July 1997 and (ii) Chief
Investment Analyst of Guyan International since January 1991.
The Company's Code of Regulations provide that the number of directors
shall be fixed from time to time by the Company's shareholders. All directors
are elected at each annual meeting of the Company's shareholders and hold office
until the next annual meeting of shareholders or until their successors have
been elected and qualified, or until their earlier resignation or removal. The
Board of Directors elects the Company's officers, who hold office until their
successors have been elected and qualified or until their earlier resignation or
removal.
Effective upon the completion of this Offering, the Board of Directors will
establish an Audit Committee. The Audit Committee, to be composed of a majority
of non-employee directors, will oversee the engagement of the Company's
independent auditors and, together with the Company's independent auditors, will
review the Company's accounting practices, internal accounting controls and
financial results.
47
<PAGE> 49
DIRECTORS' COMPENSATION
Members of the Board of Directors are paid $500 for each meeting of the
Board of Directors that they attend. All directors are reimbursed for their
expenses in attending meetings of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued to each
person who served as the Company's chief executive officer (the "Named Executive
Officers") during the fiscal year ended December 31, 1996. No other executive
officer of the Company received a total annual salary and bonus in excess of
$100,000 with respect to that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1)
- ------------------------------------------------------------- ---- ------------ ------------
<S> <C> <C> <C>
Rodney M. Collier............................................ 1996 $110,777 $249,950
President and Chief Operating Officer(2)
Philip E. Cline.............................................. 1996 0 0
President and Chief Executive Officer(3)
</TABLE>
- ---------------
(1) Amounts shown for Mr. Collier represent $1,662 in matching contributions
made by the Company to the Company's 401(k) plan, $246,182 in connection
with the Company's termination of a supplemental executive retirement plan
and $2,106 in life insurance premiums paid on a policy for the benefit of
Mr. Collier.
(2) Mr. Collier retired as President and Chief Operating Officer effective as of
November 18, 1996.
(3) Mr. Cline began serving as President and Chief Executive Officer of the
Company as of November 18, 1996.
As of September 1, 1997, the general managers of the Dairy Division and the
Foods Division will be thereafter entitled to an annual bonus of 4% of the net
pre-tax profits of their respective divisions. Upon the consummation of the
Southern Belle Acquisition, Martin P. Shearer, currently President and Chief
Executive Officer of Southern Belle, is expected to enter into an employment
agreement with the Company, which agreement would be terminable at the will of
either party after 30 days' written notice. Mr. Shearer would be subject to
certain customary non-compete conditions for a period of two years after a
termination of his employment with the Company. Under the terms of such
employment agreement, Mr. Shearer will be entitled to an annual base salary of
approximately $80,000, an annual bonus of 4% of the net pre-tax profits of what
will be the Southern Belle division of the Company and certain customary
benefits.
No stock options were granted to the Named Executive Officers during the
fiscal year ended December 31, 1996 and no stock options were held by Named
Executive Officers at December 31, 1996. The following table summarizes certain
information regarding option exercises by the Named Executive Officers during
the fiscal year ended December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
SHARES ACQUIRED
NAME ON EXERCISE(#) VALUE REALIZED($)(1)
- ------------------------------------------------------------ --------------- --------------------
<S> <C> <C>
Rodney M. Collier........................................... 60,000 $102,000
</TABLE>
- ---------------
(1) Value realized is calculated based on the difference between the exercise
price of the option at $0.80 and $2.50, the price per share paid in
connection with the purchase of substantially all of the Common Stock of the
Company.
48
<PAGE> 50
PENSION PLAN
The Company maintains a defined benefit plan ("Pension Plan") for all
non-management hourly employees not subject to a collective bargaining agreement
and substantially all salaried employees. Employees who have one year of service
and who have reached the age of 21 are eligible to participate in the Pension
Plan. Employees generally are vested after five years of service. Employees are
entitled to a normal retirement benefit at age 65 equal to (i) .90% multiplied
by years of benefit service (up to 25 years) multiplied by average monthly
compensation (as defined) plus (ii) .65% multiplied by average monthly
compensation in excess of Social Security covered compensation or an actuarially
determined formula multiplied by years of benefit service (up to 25 years).
Average monthly compensation is calculated based on average pay over the highest
five consecutive years of the last 10 years preceding the normal retirement
date. The Pension Plan also provides for early retirement, disability and death
benefits. Contributions are determined on an actuarial basis, and the Company
makes all contributions to the Pension Plan. Benefits received pursuant to the
Pension Plan are subject to a Social Security offset formula.
The following table illustrates the maximum annual pension benefits at age
65 under the Pension Plan, assuming no offset reduction through either a Social
Security or an actuarially determined formula, at various levels of compensation
and years of service, assuming 100% vesting of benefits. Mr. Collier had 15
years of credited service under the Pension Plan before his retirement,
effective December 31, 1996. Mr. Cline is ineligible to participate in the
Pension Plan. The Company believes that the illustration of benefits below
overstates the benefits to which participants will be entitled.
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------
REMUNERATION 15 20 25 30 35
--------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 50,000............................... $11,625 $15,500 $19,375 $19,375 $19,375
$ 60,000............................... 13,950 18,600 23,250 23,250 23,250
$ 70,000............................... 16,275 21,700 27,125 27,125 27,125
$ 80,000............................... 18,600 24,800 31,000 31,000 31,000
$ 90,000............................... 20,925 27,900 34,875 34,875 34,875
$100,000............................... 23,250 31,000 38,750 38,750 38,750
</TABLE>
401(k) DEFERRED SAVINGS PLAN
The Company maintains a deferred savings plan for salaried, non-union and
certain union hourly employees. Under this plan, the Company is required to make
contributions, based on a percentage of the employee's payroll contributed, up
to a maximum of 1.5% of the employee's total compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Evans, Reynolds, Scaggs and Theisen currently serve as the members
of the compensation committee of the Board of Directors (the "Compensation
Committee"). The Compensation Committee establishes salaries, incentives and
other forms of compensation for the Company's directors and officers and
recommends policies relating to the Company's benefit plans.
Paul T. Theisen, Attorney at Law, has been a member of the Board of
Directors of the Company since April 1971. From time to time, Mr. Theisen and
his firm provide corporate legal services to the Company.
49
<PAGE> 51
PRINCIPAL SHAREHOLDERS
The following table and the accompanying notes set forth certain
information concerning the beneficial ownership of the Common Stock as of
September 30, 1997 by (i) each director, (ii) the Named Executive Officers and
(iii) all directors and executive officers as a group. As of September 30, 1997,
no other person owned of record, or was known to the Company to own
beneficially, more than 5% of the Common Stock. Except as otherwise indicated,
each person listed in the table has informed the Company that such person has
sole voting and investment power with respect to such person's shares of Common
Stock. All persons listed have an address in care of the Company's principal
executive offices.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
PRIOR TO THE
OFFERING(1) PERCENT OF SHARES
--------------------- BENEFICIALLY OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT AFTER THE OFFERING(1)
- ------------------------------------------------------ --------- ------- ---------------------
<S> <C> <C> <C>
Marshall T. Reynolds(2)............................. 1,304,910 31.7% 23.8%
Philip E. Cline(3).................................. 234,000 5.7 4.3
Rodney M. Collier................................... 6,000 * *
George W. Broughton(4).............................. 131,250 3.2 2.4
Ronald V. Arthur.................................... 3,000 * *
Robert E. Evans..................................... 3,000 * *
Charles R. Hooten, Jr.(5)........................... 240,000 5.8 4.4
Neil W. Scaggs(6)................................... 240,000 5.8 4.4
Philip Todd Shell................................... 9,000 * *
Kirby J. Taylor(7).................................. 33,990 * *
Paul T. Theisen..................................... 3,000 * *
Thomas W. Wright(8)................................. 308,010 7.5 5.6
All directors and executive officers as a group (12
persons)......................................... 2,516,610 61.0% 45.8%
</TABLE>
- ---------------
* Indicates beneficial ownership of less than 1% of the issued and outstanding
shares of Common Stock.
(1) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under Rule 13d-3(d), shares not
outstanding which are subject to options, warrants, rights or conversion
privileges exercisable within 60 days are deemed outstanding for the purpose
of calculating the number and percentage owned by such person, but not
deemed outstanding for the purpose of calculating the percentage owned by
each other person listed. As of September 30, 1997, the Company had
4,122,660 shares of Common Stock issued and outstanding.
(2) Includes 30,000 shares held by Shirley T. Reynolds, 315,000 shares held by
Douglas V. Reynolds, 90,000 shares held by Jack M. Reynolds, 4,050 shares
held by ADJ Corporation (an entity controlled by certain immediate family
members of Mr. Marshall Reynolds), 6,150 shares held by Champion Leasing
Corporation (an entity which holds shares over which Mr. Marshall Reynolds
effectively exercises sole voting and investment power) and 88,440 shares
held by Harrah & Reynolds Corporation (an entity which holds shares over
which Mr. Marshall Reynolds effectively exercises sole voting and investment
power).
(3) Includes 24,000 shares held by Mr. Cline's family members and 12,000 shares
held in trust over which shares Mr. Cline effectively exercises sole voting
and investment power.
(4) Includes 29,250 shares held by Mr. Broughton's spouse and other family
members.
(5) Includes 12,000 shares held by Mr. Hooten's spouse and other family members
and 12,000 shares held in trust or in other forms of indirect ownership over
which shares Mr. Hooten effectively exercises sole voting and investment
power.
(6) Includes 33,000 shares held by Mr. Scaggs' family members and 12,000 shares
held in trust over which shares Mr. Scaggs effectively exercises sole voting
and investment power.
(7) Includes 450 shares held by Mr. Taylor's spouse and other family members.
50
<PAGE> 52
(8) Includes 300,000 shares held in trust over which shares Mr. Wright
effectively exercises sole voting and investment power and 8,010 held by Mr.
Wright's family members.
CERTAIN TRANSACTIONS
The Company has entered into indemnification agreements with each of its
directors and executive officers that provide the maximum indemnity available to
directors and executive officers under Section 1701.13(E)(3) of the Ohio Revised
Code (the Ohio General Corporation Law, hereinafter, "OGCL"), and the Company's
Code of Regulations, as well as certain additional procedural protections. Such
indemnity agreements provide generally that the Company will advance expenses
incurred by directors and executive officers in any action or proceeding as to
which they may be indemnified, and require the Company to indemnify such
individuals to the fullest extent permitted by law.
In 1994, the Company incurred an aggregate rental expense of $62,300 for
facilities leased from trusts established by members of the Broughton family.
These rental payments were made pursuant to four separate and unrelated leases,
two of which (with total lease payments of $29,850) were not renewed upon their
expiration in early 1995.
The Company's distribution center in Ashland, Kentucky is leased from the
ADJ Corporation for $9,350 a month, subject to adjustment after April 1, 2002
based on a specified consumer price index. The lease expires on April 30, 2007.
The ADJ Corporation is controlled by certain immediate family members of Mr.
Marshall T. Reynolds, Chairman of the Company's Board of Directors.
DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of the Company's Articles of Incorporation and Code of Regulations,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part. See "Available Information."
Upon completion of this Offering, the authorized capital stock of the
Company will consist of 10,000,000 shares of Common Stock, par value $1.00 per
share. As of September 30, 1997, there were 4,122,660 shares of Common Stock
outstanding held by 152 holders of record.
VOTING RIGHTS
The Company's Articles of Incorporation provides that holders of Common
Stock are entitled to one vote per share held of record on all matters submitted
to a vote of shareholders. The shareholders are entitled to vote cumulatively
for the election of directors.
DIVIDENDS
Each holder of Common Stock on the applicable record date is entitled to
receive dividends if, as and when declared by the Board of Directors. See
"Dividend Policy."
OTHER RIGHTS
Shareholders of the Company have no preemptive or other rights to subscribe
for additional shares. All holders of Common Stock are entitled to share equally
on a share-for-share basis in any assets available for distribution to
shareholders on liquidation, dissolution or winding up of the Company. No shares
of Common Stock are subject to conversion, redemption or a sinking fund. All
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of this Offering will be, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Wachovia Bank of
North Carolina, N.A.
51
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and the Southern Belle Acquisition, the
Company will have outstanding 5,490,517 shares of Common Stock (5,670,517 shares
if the Underwriters' over-allotment option is exercised in full). Of these
shares, the shares sold in this Offering will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased or acquired by an "affiliate" of the Company (as that term is
defined under the rules and regulations of the Securities Act), which shares
will be subject to the resale limitations of Rule 144 under the Securities Act.
The remaining 4,290,517 outstanding shares of Common Stock owned by the Existing
Shareholders and certain shareholders of Southern Belle are "restricted
securities," as that term is defined in Rule 144, that may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares of Common Stock
from the Company or an affiliate of the Company, a person (or persons whose
shares are aggregated) may sell, within any three-month period commencing 90
days after the effective date of the Registration Statement of which this
Prospectus forms a part, a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock of the Company (54,905
shares immediately after this Offering) or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the date on
which a notice of sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are subject to certain other restrictions
relating to the manner of sale, notice and the availability of current public
information about the Company. If a period of two years has elapsed since the
later of the date of the acquisition of restricted shares of Common Stock from
the Company or from any affiliate of the Company, a person (or persons whose
shares are aggregated) who is not at any time during the 90 days preceding a
sale an "affiliate" is entitled to sell such shares under Rule 144 without
regard to the volume and other limitations of Rule 144 described above.
Each of the Company, its executive officers and directors and certain of
the existing shareholders of the Company and of Southern Belle has agreed that,
without the prior written consent of Advest, Inc., it will not directly or
indirectly offer, sell, announce an intention to sell, contract to sell or
otherwise dispose of, or, with respect to the Company, file with the Commission
a registration statement under the Securities Act with respect to, any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for any shares of Common Stock. See "Underwriting."
Prior to this Offering, there has been no public market for the Common
Stock of the Company and no prediction can be made as to the effect, if any,
that the sale or availability for sale of shares of Common Stock will have on
the market price of the Common Stock. Nevertheless, sales of significant amounts
of such shares in the public market, or the perception that such sales may
occur, could adversely affect the market price of Common Stock and could impair
the Company's future ability to raise capital through an offering of its equity
securities.
52
<PAGE> 54
UNDERWRITING
Under the terms and subject to the conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Company and Advest, Inc. and
Ferris, Baker Watts, Incorporated (the "Underwriters"), each of the Underwriters
has severally agreed to purchase, and the Company has agreed to sell to each of
the Underwriters, the respective number of shares of Common Stock set forth
opposite the name of each of the Underwriters below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Advest, Inc. ............................................................
Ferris, Baker Watts, Incorporated........................................
---------
Total............................................................... 1,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain matters by their counsel and to
various other conditions precedent. The Underwriters are committed to purchase
and pay for all of the shares of Common Stock offered hereby, if any are
purchased.
The Underwriters have advised the Company that they propose to offer the
shares of the Common Stock initially to the public at the offering price set
forth on the cover page of this Prospectus and to certain selected dealers at
such price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the public offering of the shares, the
public offering price, concession and reallowance to dealers may be changed by
the Underwriters. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period beginning on the date of this Prospectus, to purchase up to
180,000 additional shares of Common Stock (the "Option Shares"), solely to cover
over-allotments, if any, at the public offering price less the underwriting
discounts set forth on the cover page of this Prospectus. If this option is
exercised in part, the number of Option Shares to be delivered by the Company
will be determined by Advest, Inc. after consultation with the Company. To the
extent that this option to purchase is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of Option Shares as the number set forth next to such Underwriter's
name in the preceding table bears to the sum of the total number of shares of
Common Stock in such table.
The Company, the executive officers and directors of the Company and
certain of the existing shareholders of the Company and of Southern Belle have
agreed that for a period of 180 days after the date of this Prospectus, subject
to certain exceptions, they will not directly or indirectly offer, sell,
announce an intention to sell, contract to sell or otherwise dispose of, or,
with respect to the Company, file with the Commission a registration statement
under the Securities Act relating to, any shares of Common Stock or securities
convertible into or exchangeable or exercisable for any shares of Common Stock
without the prior written consent of Advest, Inc. See "Shares Eligible for
Future Sale."
Subject to certain limitations, the Company has agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act.
The Underwriters have advised the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
Certain of the Underwriters and their affiliates have been engaged from
time to time in the ordinary course of business, and may in the future be
engaged, to perform investment banking and other advisory-related services to
the Company, its affiliates and certain shareholders of the Company. The Company
has agreed to pay Advest, Inc. a one-time financial advisory fee in the amount
of $100,000 for general financial advisory services rendered by Advest, Inc. to
the Company.
53
<PAGE> 55
The Underwriters have advised the Company that, pursuant to Regulation M
promulgated under the Exchange Act, certain persons participating in this
Offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of
the Underwriters for the purpose of fixing or maintaining the price of the
Common Stock. A "syndicate covering transaction" is the bid for or the purchase
of the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with this Offering. A "penalty bid"
is an arrangement permitting the Underwriters to reclaim the selling concession
otherwise accruing to a selling group member in connection with this Offering if
the Common Stock originally sold by such selling group member is purchased by
the Underwriters in a syndicate covering transaction and has therefore not been
effectively placed by such selling group member. The Underwriters have advised
the Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation between the Company and the Underwriters. In determining such
price, consideration will be given to various factors, including market
conditions for initial public offerings, the history of and the prospects for
the Company's business, the Company's past and present operations, its past and
present earnings and current financial position, an assessment of the Company's
management, the market for securities of companies in businesses similar to
those of the Company, the general condition of the securities markets and other
relevant factors. There can be no assurance that the initial public offering
price will correspond to the price at which the Common Stock will trade in the
public market subsequent to this Offering or that an active trading market for
Common Stock will develop and continue after this Offering.
LEGAL MATTERS
Certain matters with respect to the legality of the Common Stock offered
hereby will be passed upon for the Company by Kegler, Brown, Hill & Ritter Co.,
L.P.A., Columbus, Ohio. Certain legal matters relating to this Offering will be
passed upon for the Company by Arnold & Porter, Washington, D.C. and for the
Underwriters by Morgan, Lewis & Bockius LLP, New York, New York. Each of Arnold
& Porter and Morgan, Lewis & Bockius LLP will rely, as to certain matters
regarding the laws of the State of Ohio, on the opinion of Kegler, Brown, Hill &
Ritter Co., L.P.A.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996
and for each of the years in the three-year period ended December 31, 1996, and
the financial statements of Southern Belle as of May 31, 1997 and for the year
ended May, 31, 1997, have been included herein in reliance upon the reports of
Coopers & Lybrand L.L.P., independent public accountants, and upon the authority
of said firm as experts in accounting and auditing in giving said reports. The
financial statements of Southern Belle as of June 1, 1996 and for each of the
years in the two-year period ended June 1, 1996 have been included herein in
reliance upon the reports of Baird, Kurtz & Dobson, independent public
accountants, and upon the authority of that firm as experts in accounting and
auditing in giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act and the rules promulgated thereunder, with respect
to the Common Stock. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and financial schedules thereto. For further
information concerning the Company and the Common Stock, reference is made to
the Registration Statement and the exhibits and schedules filed
54
<PAGE> 56
therewith, which may be examined without charge at, or copies obtained upon
payment of prescribed fees from, the Commission and its regional offices at the
locations listed below. Any statements contained herein concerning the
provisions of any document are not necessarily complete, and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
Information filed by the Company may be examined without charge at, or
copies obtained upon payment of prescribed fees from, the Public Reference
Section of the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549 and are also available for inspection and copying at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding reporting companies.
As a result of this Offering, the Company will be subject to the
information requirements of the Exchange Act. So long as the Company is subject
to the periodic reporting requirements of the Exchange Act, it will continue to
furnish the reports and other information required thereby to the Commission.
The Company will furnish to its shareholders annual reports containing financial
statements audited by its independent auditors and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
55
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BROUGHTON FOODS COMPANY
Report of Independent Accountants.................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and as of September 30, 1997
(Unaudited)........................................................................ F-3
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and the
Nine Months Ended September 30, 1996 and 1997 (Unaudited).......................... F-4
Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1995 and
1996 and the Nine Months Ended September 30, 1997 (Unaudited)...................... F-5
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and the
Nine Months Ended September 30, 1996 and 1997 (Unaudited).......................... F-6
Notes to Financial Statements........................................................ F-7
SOUTHERN BELLE DAIRY COMPANY
Report of Independent Accountants.................................................... F-16
Independent Accountants' Report...................................................... F-17
Consolidated Balance Sheets as of June 1, 1996 and May 31, 1997 and as of August 30,
1997 (Unaudited)................................................................... F-18
Consolidated Statements of Income for the Years Ended June 3, 1995, June 1, 1996 and
May 31, 1997 and the Three Months Ended August 31, 1996 and August 30, 1997
(Unaudited)........................................................................ F-19
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June
3, 1995, June 1, 1996 and May 31, 1997 and the Three Months Ended August 30, 1997
(Unaudited)........................................................................ F-20
Consolidated Statements of Cash Flows for the Years Ended June 3, 1995, June 1, 1996
and May 31, 1997 and the Three Months Ended August 31, 1996 and August 30, 1997
(Unaudited)........................................................................ F-21
Notes to Consolidated Financial Statements........................................... F-22
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors
Broughton Foods Company
We have audited the accompanying balance sheets of Broughton Foods Company
as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Broughton Foods Company as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
February 28, 1997;
except for Notes 10 and 11,
dated September 12, 1997
F-2
<PAGE> 59
BROUGHTON FOODS COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
-------------------------- 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 161,190 $ 2,307,815 $ 853,649
Accounts receivable, less allowance for doubtful accounts of $140,000,
$243,000 and $211,000 at December 31, 1995 and 1996 and September 30,
1997, respectively................................................... 7,630,710 7,666,497 7,362,411
Inventories........................................................... 2,340,130 2,122,822 2,470,089
Prepaid expenses...................................................... 421,360 378,086 476,934
Refundable income taxes............................................... 274,800 168,651
Deferred income taxes................................................. 169,700 266,604 266,604
----------- ----------- -----------
Total current assets............................................. 10,997,890 12,910,475 11,429,687
----------- ----------- -----------
Property, plant and equipment, at cost:
Buildings............................................................. 2,699,791 2,661,384 2,661,384
Machinery and equipment............................................... 11,701,514 12,107,264 13,440,955
Leasehold improvements................................................ 523,550 459,944 464,156
Assets under construction............................................. 609,545
----------- ----------- -----------
15,534,400 15,228,592 16,566,495
Less accumulated depreciation and amortization................... 10,756,620 10,915,391 11,425,849
----------- ----------- -----------
4,777,780 4,313,201 5,140,646
Land.................................................................. 1,013,050 958,052 958,052
----------- ----------- -----------
5,790,830 5,271,253 6,098,698
----------- ----------- -----------
Cash surrender value of officer's life insurance, net of policy loans of
$445,100 at December 31, 1995........................................... 76,230
Other assets.............................................................. 191,075 91,967 732,755
Prepaid pension costs..................................................... 398,000 264,601 328,181
----------- ----------- -----------
665,305 356,568 1,060,936
----------- ----------- -----------
Total assets..................................................... $17,454,025 $18,538,296 $18,589,321
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit........................................................ $ 911,650
Accounts payable...................................................... 4,458,875 $ 4,090,610 $ 4,194,457
Accrued expenses, principally salaries and wages...................... 560,210 595,574 573,919
Accrued taxes, other than income taxes................................ 498,180 469,656 447,544
Current installments on term debt..................................... 287,990 203,408 658,623
Income taxes payable.................................................. 236,608
----------- ----------- -----------
Total current liabilities........................................ 6,716,905 5,595,856 5,874,543
----------- ----------- -----------
Term debt, net of current installments.................................... 1,862,540 1,652,142 795,081
Deferred income taxes..................................................... 832,637 861,845 798,879
Accrued pension costs..................................................... 160,800
Commitments and contingencies (Note 10)
Shareholders' equity:
6% cumulative preferred stock, $100 par value (redeemable at $110 per
share); 4,000 shares authorized; 331 shares, 310 shares and 0 shares
issued and outstanding at December 31, 1995 and 1996 and September
30, 1997, respectively............................................... 33,100 31,000
Common stock, $1 par value; 10,000,000 shares authorized; 4,662,900
shares issued........................................................ 4,662,900 4,662,900 4,662,900
Additional paid in capital............................................ 167,524 169,718
Retained earnings..................................................... 3,888,243 6,077,153 6,795,924
----------- ----------- -----------
8,584,243 10,938,577 11,628,542
Less 757,740, 543,240 and 540,240 shares at December 31, 1995 and
1996 and September 30, 1997, respectively, of common stock in
treasury, at cost.............................................. 703,100 510,124 507,724
----------- ----------- -----------
Total shareholders' equity....................................... 7,881,143 10,428,453 11,120,818
----------- ----------- -----------
Total liabilities and shareholders' equity....................... $17,454,025 $18,538,296 $18,589,321
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 60
BROUGHTON FOODS COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $73,551,700 $72,252,740 $83,918,822 $61,282,729 $61,964,349
Cost of sales................. 59,237,267 58,992,170 68,668,621 50,011,050 49,030,082
----------- ----------- ----------- ----------- -----------
Gross profit................ 14,314,433 13,260,570 15,250,201 11,271,679 12,934,267
Operating costs and expenses:
Selling and distribution.... 10,675,142 11,315,988 12,064,418 8,807,913 9,852,016
General and administrative
expenses................. 2,328,291 2,293,582 2,453,106 1,672,368 1,483,773
----------- ----------- ----------- ----------- -----------
13,003,433 13,609,570 14,517,524 10,480,281 11,335,789
----------- ----------- ----------- ----------- -----------
Income from operations........ 1,311,000 (349,000) 732,677 791,398 1,598,478
Other income (expenses):
Gain on sale of investment
in stock................. 2,976,453
Other income, net........... 72,600 131,800 267,685 54,660 144,199
Interest expense............ (194,900) (239,400) (216,749) (176,702) (116,984)
----------- ----------- ----------- ----------- -----------
(122,300) (107,600) 3,027,389 (122,042) 27,215
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes....................... 1,188,700 (456,600) 3,760,066 669,356 1,625,693
Total income tax expense
(benefit)................... 444,465 (149,450) 1,430,807 249,445 638,347
----------- ----------- ----------- ----------- -----------
Net income (loss)............. 744,235 (307,150) 2,329,259 419,911 987,346
Preferred dividends........... 2,010 1,990 1,986 1,490
----------- ----------- ----------- ----------- -----------
Net income (loss) available to
common shareholders......... $ 742,225 $ (309,140) $ 2,327,273 $ 418,421 $ 987,346
=========== =========== =========== =========== ===========
Net income (loss) per share of
common stock................ $ .17 $ (.07) $ .56 $ 0.10 $ 0.24
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding................. 4,452,690 4,282,500 4,122,660 4,122,660 4,122,660
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 61
BROUGHTON FOODS COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF PREFERRED NUMBER OF COMMON PAID-IN RETAINED TREASURY
SHARES STOCK SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
--------- --------- --------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994.... 340 $ 34,000 4,662,900 $4,662,900 $ 0 $3,675,638 $(186,800) $ 8,185,738
Net income................. 744,235 744,235
Cash dividends:
Preferred stock, $6 per
share.................. (2,010) (2,010)
Common stock, $.0267 per
share.................. (112,470) (112,470)
Cost of 153,540 shares of
treasury stock
purchased................ (122,840) (122,840)
Cost of 9 shares of
preferred stock purchased
and retired.............. (9) (900) (900)
---- ------- --------- ---------- -------- ---------- --------- -----------
Balances, December 31,
1994....................... 331 33,100 4,662,900 4,662,900 0 4,305,393 (309,640) 8,691,753
Net loss................... (307,150) (307,150)
Cash dividends:
Preferred stock, $6 per
share.................. (1,990) (1,990)
Common stock, $.0267 per
share.................. (108,010) (108,010)
Cost of 297,120 shares of
treasury stock
purchased................ (393,460) (393,460)
---- ------- --------- ---------- -------- ---------- --------- -----------
Balances, December 31,
1995....................... 331 33,100 4,662,900 4,662,900 0 3,888,243 (703,100) 7,881,143
Net income................. 2,329,259 2,329,259
Cash dividends:
Preferred stock, $6 per
share.................. (1,986) (1,986)
Common stock, $.0267 per
share.................. (105,268) (105,268)
Proceeds from sale of
229,500 shares of
treasury stock under an
incentive stock option
plan, including tax
benefits................. 167,524 (33,095) 212,976 347,405
Cost of 15,000 shares of
treasury stock
purchased................ (20,000) (20,000)
Cost of 21 shares of
preferred stock purchased
and retired.............. (21) (2,100) (2,100)
---- ------- --------- ---------- -------- ---------- --------- -----------
Balances, December 31,
1996....................... 310 31,000 4,662,900 4,662,900 167,524 6,077,153 (510,124) 10,428,453
Net income (unaudited)..... 987,346 987,346
Common stock cash
dividends, $.0633 per
share (unaudited)........ (262,505) (262,505)
Proceeds from sale of 3,000
shares of treasury stock
under an incentive stock
option plan, including
tax benefits
(unaudited).............. 2,194 2,400 4,594
Cost of 310 shares of
preferred stock purchased
and retired
(unaudited).............. (310) (31,000) (6,070) (37,070)
---- ------- --------- ---------- -------- ---------- --------- -----------
Balances, September 30, 1997
(unaudited)................ 0 $ 0 4,662,900 $4,662,900 $169,718 $6,795,924 $(507,724) $11,120,818
==== ======= ========= ========== ======== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 62
BROUGHTON FOODS COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ 744,235 $ (307,150) $ 2,329,259 $ 419,911 $ 987,346
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 933,700 883,710 890,482 643,819 686,605
Bad debt expense.................................... 193,500 188,900 402,105 9,721 32,000
Gain on sale of investment in stock................. (2,976,453)
Gain on disposal of property, plant and equipment... (14,700) (42,080) (170,591) (8,924) (4,419)
Gain on life insurance proceeds..................... (76,868) (76,868)
Deferred income taxes............................... 9,265 (45,150) (67,696) 80,500 (62,966)
Change in assets and liabilities:
Accounts receivable............................... (46,550) (802,810) (437,892) (1,126,224) 272,086
Inventories....................................... (175,520) (7,710) 217,308 (342,249) (347,267)
Prepaid expenses.................................. 47,140 (82,960) 43,274 (4,895) (98,848)
Refundable income taxes........................... (274,800) 106,149 274,800 168,651
Other assets...................................... (26,780) (24,680) 19,365 18,060 (652,238)
Prepaid and accrued pension costs................. (38,318) (42,821) (27,401) 102,133 (63,580)
Accounts payable.................................. 204,440 420,055 (368,265) 1,531,651 103,847
Accrued expenses.................................. (18,967) (32,154) 35,364 77,245 (21,655)
Accrued taxes..................................... 37,930 14,270 (28,524) (76,185) (22,112)
Income taxes payable.............................. (199,280) (60,780) 236,608 13,196 (236,608)
---------- ----------- ----------- ---------- ----------
Total adjustments.............................. 905,860 90,990 (2,203,035) 1,115,780 (246,504)
---------- ----------- ----------- ---------- ----------
Net cash provided by (used in) operating activities... 1,650,095 (216,160) 126,224 1,535,691 740,842
---------- ----------- ----------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of investment in stock............. 3,056,196
Proceeds from disposal of property, plant and
equipment........................................... 57,130 64,550 299,835 11,350 10,364
Purchases of property, plant and equipment............ (511,110) (1,419,840) (500,149) (484,238) (1,508,544)
Proceeds from officer's life insurance................ 598,239 153,098
Payment of policy loans on officer's life insurance... (445,141)
Increase in cash surrender value of officer's life
insurance........................................... (15,860) (1,100)
---------- ----------- ----------- ---------- ----------
Net cash (used in) provided by investing activities... (469,840) (1,356,390) 3,008,980 (319,790) (1,498,180)
---------- ----------- ----------- ---------- ----------
Cash flows from financing activities:
Line of credit, net................................... 911,650 (911,650) (911,650)
Payments on term debt................................. (582,150) (346,995) (294,980) (225,840) (966,847)
Proceeds from term debt............................... 716,000 565,000
Purchase of treasury stock............................ (123,740) (393,460) (20,000) (20,000)
Issuance of treasury stock, including tax benefits.... 347,405 4,594
Purchases of preferred stock.......................... (2,100) (37,070)
Dividends paid........................................ (114,480) (110,000) (107,254) (83,509) (262,505)
---------- ----------- ----------- ---------- ----------
Net cash (used in) provided by financing
activities........................................ (820,370) 777,195 (988,579) (1,240,999) (696,828)
---------- ----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... 359,885 (795,355) 2,146,625 (25,098) (1,454,166)
Cash and cash equivalents, beginning of year............ 596,660 956,545 161,190 161,190 2,307,815
---------- ----------- ----------- ---------- ----------
Cash and cash equivalents, end of period............ $ 956,545 $ 161,190 $ 2,307,815 $ 136,092 $ 853,649
========== =========== =========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................ $ 195,817 $ 233,847 $ 206,319
========== =========== ===========
Income taxes........................................ $ 666,681 $ 231,280 $ 1,349,231
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 63
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(INFORMATION RELATED TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997 IS UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES:
a. BUSINESS: Broughton Foods Company (the "Company") was organized in
April 1933 under the laws of the state of Ohio. The Company is engaged
primarily in the business of producing dairy and dairy-related food
products for wholesale and retail distribution throughout the eastern
coast of the United States. The Company also operates one limited
service restaurant under the name "Broughton's."
b. QUARTERLY FINANCIAL INFORMATION (UNAUDITED): The financial data as of
September 30, 1997 and for the nine months ended September 30, 1996 and
1997 are derived from the Company's unaudited financial statements. It
is management's opinion that the financial data as of September 30, 1997
and for the nine months ended September 30, 1996 and 1997 contain all
adjustments, consisting solely of normal recurring adjustments, which
management considers necessary to fairly present the financial data.
c. INVENTORIES: In connection with the Company's initial public offering,
a new method for accounting for cost was adopted to make the Company's
inventory values comparable to the predominate method used by public
companies in their industry. Inventories are valued at the lower of cost
or market with cost determined on the first-in, first-out ("FIFO")
method. The financial statements of all prior years have been restated
to apply the new method retroactively. Before January 1, 1997, inventory
had been valued with cost determined on the last-in, last-out method.
For income tax purposes, the FIFO method has been adopted as of January
1, 1997.
The major components of inventory at December 31, 1995 and 1996 and
September 30, 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Raw products................................ $1,139,658 $1,134,288 $1,356,153
Ingredients................................. 374,067 292,195 340,991
Warehouse and packaging supplies............ 826,405 696,339 772,945
---------- ---------- ----------
$2,340,130 $2,122,822 $2,470,089
========== ========== ==========
</TABLE>
d. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated
at cost. The Company provides for depreciation and amortization
principally on the straight-line method in amounts adequate to amortize
costs over the estimated useful lives of the assets. Useful lives for
major classes of property, plant and equipment are as follows:
<TABLE>
<S> <C>
Buildings..................... 5 to 20 years
Machinery & Equipment......... 3 to 15 years
Leasehold Improvements........ 15 to 20 years
</TABLE>
Upon sale or retirement, the Company removes the asset cost and related
accumulated depreciation from the appropriate accounts and reflects any
gain or loss in current operations. Depreciation expense was
approximately $934,000 in 1994, $884,000 in 1995 and $890,000 in 1996,
and has been recorded in the statements of operations.
e. NET INCOME (LOSS) PER SHARE OF COMMON STOCK: Net income (loss) per
share of common stock is computed based upon the average number of
common shares outstanding and net income (loss) adjusted for preferred
share dividend requirements.
F-7
<PAGE> 64
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED)
f. CASH AND CASH EQUIVALENTS: For purposes of the statements of cash
flows, the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. The Company maintains its cash balances primarily with one
financial institution.
g. REVENUE RECOGNITION: The Company recognizes revenue when products are
received by the customer.
h. INCOME TAXES: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting
for Income Taxes, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of the assets
and liabilities using enacted tax rates.
i. USE OF ESTIMATES: The preparation of the 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 reported period. Actual
results could differ from those estimates.
j. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of long-term debt is
based on the interest rate available to the Company on similar debt
agreements. As the interest rates on the Company's long-term debt
obligations are variable rates, fair value approximates the carrying
value.
k. RECLASSIFICATION: Certain prior-year amounts have been reclassified to
conform to the current-year financial statement presentation.
2. NOTE PAYABLE -- BANK:
The Company has a $1,400,000 uncollateralized line of credit with a bank with an
outstanding balance of $911,650 at December 31, 1995. No amounts were
outstanding at December 31, 1996 or September 30, 1997. Interest on this line of
credit is at the lender's commercial loan base rate, which was 9.75% at December
31, 1994, 9.50% at December 31, 1995, 9.25% at December 31, 1996 and 9.50% at
September 30, 1997. The weighted average interest rate on this line of credit
was 9.00% at December 31, 1994, 9.79% at December 31, 1995 and 9.28% at December
31, 1996.
F-8
<PAGE> 65
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3. TERM DEBT:
Term debt as of December 31, 1995 and 1996 and September 30,
1997 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, due in monthly interest payments
based on the outstanding balance through June
30, 1998, at which time the principal balance
of $565,000 is due, including interest at the
highest prime rate published in The Wall Street
Journal, 8.50% at September 30, 1997........... $ 535,000
Note payable, due in monthly installments of
$10,600 through 1998, at which time the
remaining principal balance of approximately
$570,000 is due, including principal and
interest at the lender's prime rate plus 1%,
9.25% at December 31, 1996, collaterized by
land........................................... $ 706,560 $ 643,505 592,665
Note payable, due in monthly installments of
$6,500 through 2005, with interest at the
lender's commercial loan base rate, 9.25% at
December 31, 1996.............................. 492,480 458,440 326,039
Note payable, due in monthly installments of
$5,200 through 1997, with interest at the
lender's commercial loan base rate, 9.25% at
December 31, 1996, collateralized by
trailers....................................... 267,730 228,826
Note payable, due in monthly installments of
$4,400 through 2003, with interest at the
lender's commercial loan base rate, 9.25% at
December 31, 1996, collateralized by
trailers....................................... 255,780 224,941
Note payable, due in monthly installments of
$2,300 through 2010, with interest at the
lender's commercial loan base rate, 9.25% at
December 31, 1996, collateralized by land...... 210,390 203,123
Note payable, due in monthly installments of
$1,600 through 2002, with interest at the
lender's commercial loan base rate, 9.25% at
December 31, 1996, collateralized by land...... 106,250 96,715
Note payable, due in monthly installments of
$10,600 including principal and interest at 10%
through 1996................................... 111,340
---------- ---------- -----------
2,150,530 1,855,550 1,453,704
Less current installments................... (287,990) (203,408) (658,623)
---------- ---------- -----------
$1,862,540 $1,652,142 $ 795,081
========== ========== ===========
</TABLE>
The loan agreement associated with the note payable in the amount of $643,505 at
December 31, 1996 places certain restrictive covenants on the Company, including
the maintenance of a certain principal and interest
F-9
<PAGE> 66
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3. TERM DEBT: (CONTINUED)
coverage ratio, a certain debt to net worth ratio and a certain level of
tangible net worth. Maturities of term debt during the years subsequent to
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997.................................................................... $ 203,408
1998.................................................................... 716,989
1999.................................................................... 151,862
2000.................................................................... 170,628
2001.................................................................... 161,666
Thereafter.............................................................. 450,997
----------
$1,855,550
==========
</TABLE>
4. LEASE COMMITMENTS:
The Company leases certain property, plant and equipment (primarily delivery
vehicles) under noncancelable operating lease agreements expiring through 1998.
Certain of the leases include renewal options at terms similar to the initial
lease terms. Minimum annual rentals in connection with these leases are as
follows:
<TABLE>
<CAPTION>
REAL
YEAR ENDING DECEMBER 31, TOTAL EQUIPMENT ESTATE
------------------------ ---------- ---------- --------
<S> <C> <C> <C>
1997............................................... $1,581,400 $1,477,475 $103,925
1998............................................... 1,238,371 1,147,771 90,600
1999............................................... 73,940 10,340 63,600
2000............................................... 29,845 9,845 20,000
2001............................................... 4,922 4,922
---------- ---------- --------
$2,928,478 $2,650,353 $278,125
========== ========== ========
</TABLE>
Total rental expense for cancelable and noncancelable lease agreements
approximated $1,902,600 in 1994, $2,057,200 in 1995 and $2,238,600 in 1996, of
which $557,000 in 1994, $343,000 in 1995 and $393,000 in 1996 were contingent
rentals. Contingent rentals are based on mileage. Rental expense includes
$62,300 in 1994, $32,500 in 1995 and $36,100 in 1996 for rental of facilities
owned by shareholders.
5. PENSION PLAN:
The Company has a noncontributory pension plan for all nonmanagement hourly
employees not subject to a collective bargaining agreement and substantially all
salaried employees. Benefits under the plan are based upon a social security
offset formula. Total pension expense was $63,100 in 1994, $56,900 in 1995, and
$132,600 in 1996. The Company funds contributions based upon normal cost under
the projected unit credit method subject to Internal Revenue Service minimum and
maximum limitations. The following table sets
F-10
<PAGE> 67
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. PENSION PLAN: (CONTINUED)
forth the plan's funded status and amounts included in the Company's financial
statements at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $3,720,790 and $3,764,540, respectively............ $(3,976,780) $(4,018,630)
Benefit obligation due to assumptions about future
compensation levels................................... (458,420) (348,770)
----------- -----------
Projected benefit obligation............................. (4,435,200) (4,367,400)
Plan assets at fair value................................ 4,331,500 4,559,501
----------- -----------
Plan assets in excess (deficiency) of projected
benefit obligation.................................. (103,700) 192,101
----------- -----------
Unrecognized transition asset at January 1, 1995 and 1996,
being recognized over 16 years........................... (58,100) (52,500)
Unrecognized prior service cost............................ 347,200 324,000
Unrecognized net (gain) loss from past experience.......... 212,600 (199,000)
----------- -----------
501,700 72,500
----------- -----------
Net pension asset..................................... $ 398,000 $ 264,601
=========== ===========
</TABLE>
Plan assets include investments in stock and bond common trust funds and U.S.
Government and corporate bonds.
Net periodic pension expense for the Company for 1994, 1995 and 1996 included
the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost, benefits earned during the year...... $ 115,000 $ 81,000 $ 129,000
Interest cost on projected benefit obligations..... 268,500 284,500 322,200
Actual return on plan assets....................... 29,600 (547,100) (485,200)
Net amortization and deferral of unrecognized
transition asset at January 1, 1994, 1995, and
1996, and the adjustment for unexpected asset
gain for expected return on plan assets.......... (350,000) 238,500 166,600
--------- --------- ---------
Net pension expense.............................. $ 63,100 $ 56,900 $ 132,600
========= ========= =========
</TABLE>
The following assumptions were used in the calculation of the actuarial present
value of benefit obligations at December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Settlement rate.............................................. 8.50% 7.50% 7.50%
Rate of compensation increase................................ 5.00% 4.50% 4.50%
Long-term rate of return on plan assets...................... 8.00% 8.00% 8.00%
</TABLE>
In addition, the Company participates in two multiemployer plans that provide
defined benefits to substantially all the Company's unionized employees. Amounts
charged to pension expense and contributed to the plans were $329,600 in 1994,
$309,600 in 1995, and $339,128 in 1996.
F-11
<PAGE> 68
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
6. DEFERRED SAVINGS PLAN:
Salaried, nonunion, and certain union hourly employees are eligible to
participate in a deferred savings plan and trust (401(k) plan). Under the plan,
the Company is required to make contributions based on a percentage of the
employee's payroll contributed, limited to a maximum of 1.5% of the employee's
total compensation. The Company contributed $40,500 in 1994, $39,700 in 1995,
and $43,600 in 1996.
7. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN:
The Company had a nonqualified benefit plan for certain key management
employees. The plan provided for 50% of annual pay reduced for years of service
less than 15 years, less benefits paid under the Company's qualified pension
plan and social security. The Supplemental Executive Retirement Plan ("SERP")
was terminated on December 31, 1996, at which time the assets of the plan were
distributed. The Company recognized a termination cost of approximately $232,700
associated with this transaction.
At December 31, 1996, the SERP had no obligations and all the assets of the plan
had been distributed.
The following details the net pension expense under SFAS No. 87 and SFAS No. 88
recorded in 1994, 1995, and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Service cost, benefits earned during the year........... $ 1,900 $ 900 $ 2,700
Interest cost........................................... 20,600 17,300 32,000
Net amortization and deferral of unrecognized transition
obligation............................................ 20,700 15,000 35,100
------- ------- --------
Net periodic pension cost............................. 43,200 33,200 69,800
Termination cost........................................ 232,700
------- ------- --------
Net pension expense................................... $43,200 $33,200 $302,500
======= ======= ========
</TABLE>
The following table sets forth the SERP's funded status of the plan and amounts
included in the Company's financial statements at December 31, 1995:
<TABLE>
<S> <C>
Actuarial present values of benefit obligations:
Accumulated benefit obligation (all vested)............................ $(361,300)
Benefit obligation due to assumptions about future compensation
levels.............................................................. (64,700)
---------
Projected benefit obligation........................................ (426,000)
Unrecognized transition obligation....................................... 85,200
Unrecognized prior service cost.......................................... 129,100
Unrecognized net loss.................................................... 50,900
---------
Net pension liability............................................... $(160,800)
=========
</TABLE>
The following assumptions were used in the calculation of the actuarial present
value of benefit obligations at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Settlement rate...................................................... 8.50% 7.50%
Rate of compensation increase........................................ 5.00% 5.40%
IRC Section 415 rate of increase..................................... 3.00% 3.00%
</TABLE>
F-12
<PAGE> 69
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS:
Certain shares of common stock were reserved for sale to certain officers and
employees under an incentive stock option plan. All the options were exercisable
at December 31, 1996 and expire in 2003.
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- -------------------
NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning................. 247,500 $.80 247,500 $.80 247,500 $.80
Exercised.............................. (229,500) $.80
Forfeited.............................. (15,000) $.80
-------- -------- --------
Outstanding at end of year............... 247,500 $.80 247,500 $.80 3,000 $.80
======== ======== ========
Exercisable at end of year............... 247,500 $.80 247,500 $.80 3,000 $.80
======== ======== ========
</TABLE>
9. INCOME TAXES:
The effective income tax rate is above the statutory rate due to the following:
<TABLE>
<CAPTION>
1994 1995 1996
----- ------ -----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34.00% (34.00)% 34.00%
Increase (reduction) in tax rate resulting from:
State income taxes, net of federal income tax benefit..... 5.38 4.44
Permanent differences:
Non-deductible meals and entertainment................. 2.12 4.80 0.49
Other.................................................. 0.38 1.74
Fuel credit............................................... (1.31) (2.62)
Effect of reversal of temporary differences at different
tax rate............................................... (1.83) (2.10)
Other..................................................... (1.35) (0.55) (0.88)
----- ------ -----
Actual tax rate............................................. 37.39% (32.73)% 38.05%
===== ====== =====
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ----------
<S> <C> <C> <C>
Taxes currently payable............................ $435,200 $(104,300) $1,498,503
Deferred taxes..................................... 9,265 (45,150) (67,696)
-------- --------- ----------
Total provision for income taxes................... $444,465 $(149,450) $1,430,807
======== ========= ==========
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between the
amounts of the assets and liabilities for financial reporting purposes and such
amounts as determined by tax regulations. These temporary differences are
determined in accordance with SFAS No. 109.
F-13
<PAGE> 70
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: (CONTINUED)
The components of the net deferred tax liability at December 31, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance............................... $ 56,000 $ 97,200
Vacation accrual............................................ 88,300 75,896
Bonus accrual............................................... 16,400
Design cost amortization.................................... 4,500 6,571
Inventory capitalization.................................... 700 736
State taxes................................................. 8,300 92,772
--------- ---------
Gross deferred tax assets................................ 174,200 273,175
--------- ---------
Deferred tax liabilities:
Depreciation................................................ 411,500 375,476
Pension..................................................... 94,900 162,584
Change in inventory costing method.......................... 330,737 330,356
--------- ---------
Gross deferred tax liabilities........................... 837,137 868,416
--------- ---------
Net deferred tax liability............................... $(662,937) $(595,241)
========= =========
Reflected on balance sheet as follows:
Current deferred income taxes............................... $ 169,700 $ 266,604
Noncurrent deferred income taxes............................ (832,637) (861,845)
--------- ---------
Net deferred tax liability............................... $(662,937) $(595,241)
========= =========
</TABLE>
The difference between expected income taxes based on the statutory federal rate
and the effective rate is primarily attributable to state income taxes and
nondeductible business meals and entertainment expenses.
10. COMMITMENTS AND CONTINGENCIES:
The Company is involved in various legal proceedings that are incidental to the
conduct of its business and was the subject of civil litigation initiated by the
state of Ohio relating to the pricing of contracts to supply milk. On September
12, 1997, the civil litigation initiated by the State of Ohio was settled for
approximately $30,000 of the Company's product and a cash distribution of
approximately $20,000.
11. SUBSEQUENT EVENTS AFFECTING SHAREHOLDERS' EQUITY:
The Company was authorized to issue two classes of common stock, designated
nonvoting Class A and voting Class B common stock. In February 1997, the
shareholders elected to convert all nonvoting common stock to one class of
voting common stock. In August 1997, the Company increased the number of
authorized shares of common stock to 10,000,000 shares and amended the Company's
articles of incorporation to eliminate and delete all reference to and cease to
authorize a class of cumulative preferred stock.
On August 27, 1997, the Company's Board of Directors authorized a
thirty-share-for-one-share common stock split in the form of a common stock
dividend payable to shareholders of record on September 9, 1997. The effects of
the above changes in the common stock of the Company have been retroactively
applied to all periods presented.
The Company had 331 shares of 6% cumulative preferred stock outstanding at
December 31, 1996. These shares were subject to redemption by the Company at
$110 per share. On May 28, 1997, the Company's Board
F-14
<PAGE> 71
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS AFFECTING SHAREHOLDERS' EQUITY: (CONTINUED)
of Directors authorized these shares to be redeemed at $110 per share plus
accumulated dividends. All shares were redeemed by June 30, 1997.
12. ACQUISITIONS (UNAUDITED):
In May 1997, the Company purchased substantially all of the operating assets of
Johnson Dairy for $565,000. Johnson Dairy had sales of approximately $5,200,000
for the year ended December 31, 1996.
13. PENDING ACQUISITIONS (UNAUDITED):
On September 29, 1997, the Company entered into an agreement to purchase
Southern Belle Dairy for approximately $5,000,000, of which $2,650,000 will be
paid in cash and $2,350,000 in shares of restricted common stock.
F-15
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Southern Belle Dairy Company
We have audited the accompanying consolidated balance sheet of Southern
Belle Dairy Company as of May 31, 1997 and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Belle Dairy Company as of May 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Lexington, Kentucky
October 31, 1997
F-16
<PAGE> 73
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Southern Belle Dairy Company
Somerset, Kentucky
We have audited the accompanying consolidated balance sheet of SOUTHERN
BELLE DAIRY COMPANY as of June 1, 1996 and the related consolidated statements
of income, changes in stockholders' equity and cash flows for each of the two
years in the period ended June 1, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SOUTHERN
BELLE DAIRY COMPANY as of June 1, 1996 and the results of its operations and its
cash flows for each of the two years in the period ended June 1, 1996 in
conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Bowling Green, Kentucky
July 25, 1996
F-17
<PAGE> 74
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 1, MAY 31, AUGUST 30,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................................... $ 74,210 $ 69,303 $ 74,094
Marketable securities available for sale................................ -- 392,942 400,895
Accounts receivable, less allowance for doubtful accounts; June 1,
1996 -- $377,749, May 31, 1997 -- $220,000, August 30,
1997 -- $236,596...................................................... 4,326,608 5,120,656 4,780,637
Inventories............................................................. 1,024,391 1,010,673 1,109,054
Refundable income taxes................................................. 9,301 77,454 --
Prepaid expenses and other.............................................. 153,877 152,195 222,918
Deferred income taxes................................................... 510,000 221,000 271,000
----------- ----------- -----------
Total Current Assets............................................. 6,098,387 7,044,223 6,858,598
----------- ----------- -----------
Investments:
Cash value of life insurance, less policy loans of: June 1,
1996 -- $2,920, May 31, 1997 -- $2,920, August 30, 1997 -- $2,920..... 172,013 197,775 197,775
Held-to-maturity securities............................................. 367,614 -- --
----------- ----------- -----------
539,627 197,775 197,775
----------- ----------- -----------
Property and Equipment, at cost:
Land and improvements................................................... 438,919 588,166 613,166
Building and improvements............................................... 2,790,486 3,015,261 3,391,350
Plant and processing equipment.......................................... 7,942,415 8,245,687 8,556,030
Sales and delivery equipment............................................ 3,497,919 3,529,111 3,534,920
Office equipment........................................................ 1,034,981 1,043,433 1,043,433
Construction in progress................................................ 140,241 1,315,776 713,961
----------- ----------- -----------
15,844,961 17,737,434 17,852,860
Less accumulated depreciation........................................... 11,199,448 12,063,837 12,260,411
----------- ----------- -----------
4,645,513 5,673,597 5,592,449
----------- ----------- -----------
Other Assets.............................................................. 362,594 436,979 389,364
----------- ----------- -----------
$11,646,121 $13,352,574 $13,038,186
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks outstanding in excess of bank balance............................ $ 1,717,155 $ 1,697,663 $ 1,489,192
Notes payable, related party............................................ 130,000 -- --
Note payable, bank...................................................... 1,000,000 378,722 171,057
Current maturities of long-term debt.................................... 570,369 1,209,216 1,034,350
Accounts payable:
Trade................................................................. 2,010,175 2,424,477 2,486,011
Producer.............................................................. 1,422,112 1,425,536 1,049,996
Accrued expenses........................................................ 794,074 906,706 967,472
----------- ----------- -----------
Total Current Liabilities........................................ 7,643,885 8,042,320 7,198,078
----------- ----------- -----------
Long-Term Debt............................................................ 2,996,796 3,836,346 3,997,246
----------- ----------- -----------
Deferred Income Taxes..................................................... 380,000 156,000 235,000
----------- ----------- -----------
Stockholders' Equity:
Preferred stock:
8% A Series........................................................... -- 258,525 258,525
10% B Series.......................................................... -- 130,000 130,000
9% C Series........................................................... -- 207,500 207,500
Common stock............................................................ 1,502,868 1,502,868 1,502,868
Retained earnings (deficit)............................................. (139,690) (43,247) 246,707
----------- ----------- -----------
1,363,178 2,055,646 2,345,600
Treasury common stock................................................... (737,738) (737,738) (737,738)
----------- ----------- -----------
625,440 1,317,908 1,607,862
----------- ----------- -----------
$11,646,121 $13,352,574 $13,038,186
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-18
<PAGE> 75
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
----------------------------------------- --------------------------
JUNE 3, JUNE 1, MAY 31, AUGUST 31, AUGUST 30,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales.............................. $54,876,722 $53,866,689 $63,897,633 $15,341,491 $14,346,353
----------- ----------- ----------- ----------- -----------
Cost of Goods Sold:
Raw materials........................ 37,612,792 37,863,277 45,141,084 10,854,529 9,486,866
Other manufacturing costs............ 5,346,829 5,599,241 5,821,300 1,382,923 1,464,546
----------- ----------- ----------- ----------- -----------
42,959,621 43,462,518 50,962,384 12,237,452 10,951,412
----------- ----------- ----------- ----------- -----------
Gross Profit........................... 11,917,101 10,404,171 12,935,249 3,104,039 3,394,941
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Selling.............................. 8,574,149 8,857,279 9,209,566 2,252,886 2,204,959
General and administrative........... 2,490,127 2,320,964 3,168,902 734,273 639,560
----------- ----------- ----------- ----------- -----------
11,064,276 11,178,243 12,378,468 2,987,159 2,844,519
----------- ----------- ----------- ----------- -----------
Income (Loss) From Operations.......... 852,825 (774,072) 556,781 116,880 550,422
----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense..................... (415,041) (404,081) (373,942) (100,902) (108,821)
Miscellaneous income................. 75,204 25,853 11,078 2,989 46,438
----------- ----------- ----------- ----------- -----------
(339,837) (378,228) (362,864) (97,913) (62,383)
----------- ----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes...... 512,988 (1,152,300) 193,917 18,967 488,039
Provision (Credit) for Income Taxes.... 348,000 (411,000) 64,000 6,259 185,000
----------- ----------- ----------- ----------- -----------
Net Income (Loss)...................... 164,988 (741,300) 129,917 12,708 303,039
Dividends paid on preferred stock...... -- -- (33,474) (255) (13,085)
----------- ----------- ----------- ----------- -----------
Net income (loss) available to common
shareholders......................... $ 164,988 $ (741,300) $ 96,443 $ 12,453 $ 289,954
=========== =========== =========== =========== ===========
Earnings (Loss) Per Common Share....... $ 3.94 $ (17.71) $ 2.30 $ 0.30 $ 6.93
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-19
<PAGE> 76
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 3, 1995, JUNE 1, 1996 AND MAY 31, 1997 AND THE THREE MONTHS
ENDED AUGUST 30, 1997
<TABLE>
<CAPTION>
RETAINED
COMMON PREFERRED EARNINGS TREASURY
STOCK STOCK (DEFICIT) STOCK TOTAL
---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, May 28, 1994.......................... $1,502,868 $ -- $ 436,622 $(737,738) $1,201,752
Net Income..................................... -- -- 164,988 -- 164,988
---------- --------- --------- --------- ----------
Balance, June 3, 1995.......................... 1,502,868 -- 601,610 (737,738) 1,366,740
Net Loss....................................... -- -- (741,300) -- (741,300)
---------- --------- --------- --------- ----------
Balance, June 1, 1996.......................... 1,502,868 -- (139,690) (737,738) 625,440
Net Income..................................... -- -- 129,917 -- 129,917
Issuance of 23,841 Shares of Preferred Stock... -- 596,025 -- -- 596,025
Dividends Paid on Preferred Stock.............. -- -- (33,474) -- (33,474)
---------- --------- --------- --------- ----------
Balance, May 31, 1997.......................... 1,502,868 596,025 (43,247) (737,738) 1,317,908
Net Income (unaudited)......................... -- -- 303,039 -- 303,039
Dividends Paid on Preferred Stock
(unaudited).................................. -- -- (13,085) -- (13,085)
---------- --------- --------- --------- ----------
Balance, August 30, 1997 (unaudited)........... $1,502,868 $ 596,025 $ 246,707 $(737,738) $1,607,862
========= ======== ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-20
<PAGE> 77
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED ----------------------
--------------------------------------- AUGUST AUGUST
JUNE 3, JUNE 1, MAY 31, 31, 30,
1995 1996 1997 1996 1997
----------- --------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss)............... $ 164,988 $(741,300) $ 129,917 $ 12,708 $ 303,039
Items not requiring (providing)
cash:
Depreciation and
amortization............... 916,746 928,223 935,197 229,162 222,042
Bad debt expense............. 72,000 72,000 587,897 146,975 18,000
Gain on sale of property and
equipment.................. (13,123) (45,433) (3,128) (10) (39,013)
Deferred income taxes........ 228,000 (409,000) 65,000 6,259 29,000
Changes in:
Accounts receivable.......... 49,939 (179,403) (1,381,945) (535,933) 322,019
Inventories.................. (92,538) (12,860) 13,718 (126,817) (98,381)
Refundable income taxes...... (71,516) 83,878 (68,153) 7,303 77,454
Prepaid expenses and other... (98,004) (33,021) 1,682 (83,583) (70,723)
Due from insurance company... 1,750,000 -- -- -- --
Other assets................. 62,380 (40,749) 22,429 27,956 1,720
Accounts payable and accrued
expenses................... (920,789) 216,583 402,298 665,401 (253,240)
Income taxes payable......... 2,479 (50,000) -- -- --
----------- --------- ----------- --------- ----------
Net cash provided by (used
in) operating
activities.............. 2,050,562 (211,082) 704,912 349,421 511,917
----------- --------- ----------- --------- ----------
Cash Flows from Investing
Activities:
Purchase of property and
equipment.................... (551,258) (636,334) (1,611,286) (89,657) (113,939)
Proceeds from sale of property
and equipment................ 14,628 167,292 9,045 3,445 50,000
Increase in cash value of life
insurance.................... (28,287) (15,728) (25,762) (6,440) --
----------- --------- ----------- --------- ----------
Net cash used in investing
activities................. (564,917) (484,770) (1,628,003) (92,652) (63,939)
----------- --------- ----------- --------- ----------
Cash Flows from Financing
Activities:
Net increase (decrease) in
checks outstanding in excess
of bank balance.............. 768,994 406,122 (19,492) 127,705 (208,471)
Net borrowings (payments) under
line-of-credit agreement..... (1,015,400) 815,400 (621,278) (252,978) (207,665)
Principal payments on debt...... (1,275,882) (525,848) (1,544,554) (121,278) (331,094)
Proceeds from issuance of
debt......................... -- -- 3,281,476 -- 317,128
Dividends paid.................. -- -- (33,474) -- (13,085)
Loan fees paid.................. -- -- (144,494) -- --
----------- --------- ----------- --------- ----------
Net cash provided by (used
in) financing activities... (1,522,288) 695,674 918,184 (246,551) (443,187)
----------- --------- ----------- --------- ----------
Increase (Decrease) in Cash....... (36,643) (178) (4,907) 10,218 4,791
Cash, Beginning of Year........... 111,031 74,388 74,210 74,210 69,303
----------- --------- ----------- --------- ----------
Cash, End of Year................. $ 74,388 $ 74,210 $ 69,303 $ 84,428 $ 74,094
=========== ========= =========== ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-21
<PAGE> 78
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 3, 1995, JUNE 1, 1996 AND MAY 31, 1997
(INFORMATION RELATED TO AUGUST 30, 1997 AND THE
THREE MONTHS ENDED AUGUST 31, 1996 AND AUGUST 30, 1997 IS UNAUDITED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company's revenues are predominately earned from the processing and
sale of fluid milk. Other sales are derived from items purchased for resale
including ice cream. Products are sold primarily to grocery store chains in
central and eastern Kentucky and Tennessee. Products are also sold to school
districts and restaurants. Trade credit is normally extended to customers on an
unsecured basis.
Quarterly Financial Information (Unaudited)
The consolidated financial statements as of August 30, 1997, and for the
three months ended August 31, 1996, and August 30, 1997, have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is management's opinion that the financial data as of
August 30, 1997 and for the three months ended August 31, 1996 and August 30,
1997 contain all adjustments, consisting solely of normal recurring adjustments,
which management considers necessary to fairly present the financial data.
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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Americool Refrigeration and Fixtures, Inc.
(99.55% owned) and Somerset Computer Services, Inc. (wholly owned). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to May 31. The years
ended June 3, 1995, June 1, 1996 and May 31, 1997 each consisted of 52 weeks.
Inventory Pricing
Most inventories are stated at the lower of cost (last-in, first-out
method) or market. Certain supplies inventories are stated at the lower of cost
(first-in, first-out method) or market.
Marketable Securities
Debt securities which may be sold in the future are classified as
available-for-sale and carried at fair value.
F-22
<PAGE> 79
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Property and Equipment
Property and equipment are depreciated over the estimated useful life of
each asset. Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful lives of the improvements. Annual depreciation is
primarily computed using the straight-line method. Useful lives for major
classes of property and equipment are as follows:
<TABLE>
<S> <C>
Land improvements............................................ 5 to 30 years
Building and improvements.................................... 10 to 52 years
Plant and processing equipment............................... 5 to 10 years
Sales and delivery equipment................................. 2 to 10 years
Office equipment............................................. 3 to 10 years
</TABLE>
The Company capitalizes interest costs as a component of construction in
progress, based on the weighted average rates paid for long-term borrowing.
Total interest incurred each year was:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Interest costs capitalized............................ $ -- $ -- $ 54,682
Interest costs charged to expense..................... 415,041 404,081 373,942
-------- -------- --------
Total interest incurred.......................... $415,041 $404,081 $428,624
======== ======== ========
</TABLE>
Other Assets
Other assets consist of loan costs, which are being amortized on a
straight-line basis over the terms of the loans to which they relate, and
deposits. Also included in other assets are equipment repair parts inventories
totaling $242,242 and $153,658 (net of allowance for obsolescence of $71,226) at
June 1, 1996 and May 31, 1997, respectively, which are not expected to be used
in the Company's operations within one year.
Earnings Per Share
Earnings per share amounts are based on the 41,868 shares of common stock
outstanding for all periods presented.
Income Taxes
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
F-23
<PAGE> 80
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2: INVENTORIES
Inventories at June 1, 1996, May 31, 1997 and August 30, 1997 consisted of
the following:
<TABLE>
<CAPTION>
JUNE 1, MAY 31, AUGUST 30,
1996 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Finished goods................................... $ 637,487 $ 627,053 $ 667,784
Raw materials.................................... 162,801 125,134 179,499
Supplies and equipment........................... 455,702 482,468 493,133
---------- ---------- ----------
1,255,990 1,234,655 1,340,416
Excess of current cost over LIFO................. (231,599) (223,982) (231,362)
---------- ---------- ----------
$1,024,391 $1,010,673 $1,109,054
========== ========== ==========
</TABLE>
NOTE 3: INVESTMENT SECURITIES
As a result of previously settled antitrust violations (see Note 13), the
Company owns U.S. Treasury "strips" which have a maturity date of November 2002
and a carrying value of $367,614 and $392,942 at June 1, 1996 and May 31, 1997,
respectively. During 1997 the Company determined it would liquidate the U.S.
Treasury "strips" to pay off debt which became due October 16, 1997, and is
collateralized by the "strips." Accordingly, the "strips" are reclassified from
held-to-maturity in the prior fiscal year to available-for-sale in the current
year. The carrying value approximates the fair value of marketable securities
classified as available-for-sale. No unrealized holding gains or losses have
been recognized as such amounts are immaterial.
NOTE 4: NOTE PAYABLE, BANK
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Trans Financial Bank, N.A..................................... $1,000,000 $378,722
========== ========
</TABLE>
Note consists of outstanding draws under a $1,000,000 line-of-credit
agreement due April 30, 1998; interest payable monthly at prime plus 2.75%
(11.25% at May 31, 1997); collateralized by real estate, accounts receivable and
inventories.
NOTE 5: LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Trans Financial Bank, N.A.(A)................................ $1,789,912 $1,440,943
Trans Financial Bank, N.A.................................... 542,391 --
Trans Financial Bank, N.A.(B)................................ -- 1,531,478
Trans Financial Bank, N.A.(C)................................ -- 1,178,864
Trans Financial Bank, N.A.(D)................................ 289,872 289,872
Litigation settlement payable (Note 13)...................... 130,000 65,000
Debentures (Note 6).......................................... 726,325 467,800
Capital lease obligation(E).................................. 88,665 71,605
---------- ----------
3,567,165 5,045,562
Less current maturities...................................... 570,369 1,209,216
---------- ----------
$2,996,796 $3,836,346
========== ==========
</TABLE>
F-24
<PAGE> 81
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: LONG-TERM DEBT -- (CONTINUED)
Aggregate annual maturities of long-term debt at May 31, 1997 were:
<TABLE>
<S> <C>
1998.................................................... $1,209,216
1999.................................................... 651,104
2000.................................................... 910,215
2001.................................................... 491,748
2002.................................................... 295,250
Thereafter.............................................. 1,488,029
----------
$5,045,562
==========
</TABLE>
- ---------------
(A) Note payable; 85% guaranteed by the Farmers Home Administration; due October
1, 2002; payable in monthly installments of $39,092, including interest at
7.25%; collateralized by real estate and equipment.
(B) Note payable; 80% guaranteed by the USDA Rural Economic and Community
Development Agency; due February 1, 2012; interest only due monthly through
August 1, 1997; beginning September 1, 1997, payable in 174 monthly
installments of $20,900 including interest at prime plus 1.00% (9.50% at May
31, 1997); collateralized by real estate, equipment, accounts receivable and
inventories.
(C) Note payable; 80% guaranteed by the USDA Rural Economic and Community
Development Agency; due November 15, 2003; payable in 84 monthly
installments of $20,300 including interest at prime plus 1.00% (9.50% at May
31, 1997); collateralized by real estate, equipment, accounts receivable and
inventories.
The above loans are also collateralized by the personal guarantees and
pledge of Company stock of the chairman of the board and the president and
assignment of life insurance policies on certain officers and directors.
The loan agreements with Trans Financial Bank, N.A. require the Company
to comply with certain covenants principally relating to financial ratios,
capital expenditures, payments to owners and officers and provision of
financial information. At May 31, 1997, the Company was in noncompliance
with covenants regarding submission of compiled quarterly and audited annual
financial statements within specified time periods, minimum current ratio,
minimum equity to total assets ratio, minimum tangible equity to minimum
tangible business assets ratio, maximum total liabilities to tangible net
worth ratio, maximum amount of capital expenditures and distributions to
owners. The bank has formally approved noncompliance with these requirements
through September 1, 1998.
(D) Notes payable; due October 16, 1997; interest at prime plus 1.00% (9.50% at
May 31, 1997) is payable quarterly; collateralized by original cost of U. S.
Treasury "strips" (see Notes 3 and 13).
(E) Capital lease for data processing equipment expiring May 8, 2000; payable in
monthly installments of $2,312.
NOTE 6: DEBENTURES PAYABLE AND TREASURY STOCK
The debentures, issued to purchase treasury stock, are general obligations
of the Company. In 1997, the Company extended offers to the debentureholders to
extend the maturity date of the debentures from June 1, 1997 to December 1,
1999. In exchange, the debentureholders will earn a fixed rate of 10% per annum
on the outstanding debentures in lieu of the variable rate of interest, 8% to
10%, provided for in the original indenture agreement. Subsequent to this offer,
debentureholders with $203,050 of obligations agreed to extend the maturity date
to December 1, 1999. The remaining principal of $264,750 was due on June 1,
1997. Interest is payable quarterly, and the interest rate on the debentures was
8% at June 1, 1996 and May 31, 1997.
F-25
<PAGE> 82
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: CAPITAL STOCK
Capital stock of the Company at June 1, 1996 and May 31, 1997 was as
follows:
Preferred Stock
All preferred stock is $25 par value, nonparticipating and nonvoting with
dividends payable at specified rates on cumulative quarterly basis. A total of
100,000 shares of preferred stock is authorized but not all authorized shares
have been allocated to individual series. Details of the individual series of
preferred stock are as follows:
- 8% A Series -- 30,000 shares authorized, 0 and 10,341 shares issued and
outstanding at June 1, 1996 and May 31, 1997, respectively.
- 10% B Series -- 10,000 shares authorized, 0 and 5,200 shares issued and
outstanding at June 1, 1996 and May 31, 1997, respectively.
- 9% C Series -- 10,000 shares authorized, 0 and 8,300 shares issued and
outstanding at June 1, 1996 and May 31, 1997, respectively.
The preferred stock described above is redeemable at any time at the
Company's option at a price equal to par value plus any accrued but unpaid
dividends. Additionally, the 10% B Series and the 9% C Series stock are
convertible, at the Company's option, to variable rate debentures due ten years
from the date of conversion in an aggregate principal amount equal to the par
value of the shares converted.
Common Stock
All common stock is no par value. A total of 100,000 shares is authorized
with 71,715 shares issued and 41,868 shares outstanding.
Treasury Stock
A total of 29,847 shares of common stock is held in treasury and is
recorded at cost.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit-sharing plan covering
substantially all employees, except for those covered by a collective bargaining
agreement which requires the Company to contribute to a multiemployer pension
retirement fund. The plan allows eligible employees to contribute up to 15% of
their compensation. The Company contributes 25% of the amount of each
participant's contribution for the plan year, up to 1% of the participant's
salary. For the years ended June 3, 1995, June 1, 1996 and May 31, 1997,
$18,000, $24,500 and $30,600, respectively, have been recorded as pension
expense under this defined contribution profit-sharing plan. Contributions to
the multiemployer pension retirement fund were $31,200, $31,200 and $46,800,
respectively, for the years ended June 3, 1995, June 1, 1996 and May 31, 1997.
NOTE 9: INCOME TAXES
The provision (credit) for income taxes includes these components:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- -------
<S> <C> <C> <C>
Taxes currently payable (refundable).................. $120,000 $ (2,000) $(1,000)
Deferred income taxes................................. 228,000 (409,000) 65,000
-------- --------- -------
$348,000 $(411,000) $64,000
======== ========= =======
</TABLE>
F-26
<PAGE> 83
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loss on stockholder receivable............. $ 87,000 $ 87,000
Accrued compensated absences............................. 46,000 57,000
Allowance for doubtful accounts.......................... 152,000 89,000
Net operating loss carryforwards......................... 306,000 120,000
Alternative minimum tax credits.......................... 152,000 152,000
Other.................................................... 81,000 72,000
--------- ---------
824,000 577,000
Deferred tax liabilities:
Accumulated depreciation................................. (544,000) (425,000)
--------- ---------
Net deferred tax asset before valuation allowance............. 280,000 152,000
--------- ---------
Valuation allowance:
Beginning balance........................................ (110,000) (150,000)
Decrease (increase) during the year...................... (40,000) 63,000
--------- ---------
Ending balance........................................... (150,000) (87,000)
--------- ---------
Net deferred tax asset........................................ $ 130,000 $ 65,000
========= =========
</TABLE>
The above net deferred tax asset is presented on the balance sheets as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax asset -- current................................. $ 510,000 $ 221,000
Deferred tax liability -- long term........................... (380,000) (156,000)
--------- ---------
Net deferred tax asset................................... $ 130,000 $ 65,000
========= =========
</TABLE>
A reconciliation of income tax expense (credit) at the statutory rate to
income tax expense (credit) at the Company's effective rate is shown below:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Tax expense at statutory rate (34%).................. $174,000 $(392,000) $ 66,000
Increase (decrease) resulting from:
State income taxes, net of federal tax
benefit....................................... 27,000 (64,000) 16,000
Nondeductible life insurance and travel costs... 14,000 19,000 19,000
Change in deferred tax asset valuation
allowance..................................... 95,000 40,000 (63,000)
Adjustment applicable to prior returns.......... 50,000 -- --
Other........................................... (12,000) (14,000) 26,000
-------- --------- --------
Actual tax provision (credit)........................ $348,000 $(411,000) $ 64,000
======== ========= ========
</TABLE>
As of May 31, 1997, the Company had approximately $152,000 of alternative
minimum tax credits available to offset future federal income taxes. The credits
have no expiration date. The Company also has unused federal operating loss
carryforwards of approximately $163,000 which expire in 2011 and unused state
operating loss carryforwards of approximately $1,033,000 which expire between
2005 and 2011.
F-27
<PAGE> 84
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: OPERATING LEASES
The Company leases vehicles, office equipment and distribution centers
under noncancellable operating leases expiring in various years through 2007.
The distribution center leases generally contain renewal options for periods
ranging from five to 15 years and require the Company to pay all executory costs
(property taxes, maintenance and insurance). Rental payments for vehicles
include minimum rentals plus contingent rentals based on mileage.
Future minimum lease payments at May 31, 1997 were:
<TABLE>
<S> <C>
1998.................................................... $ 915,925
1999.................................................... 819,172
2000.................................................... 763,014
2001.................................................... 674,792
2002.................................................... 443,790
Later years............................................. 408,308
----------
Future minimum lease payments........................... $4,025,001
==========
</TABLE>
Rental expense for all operating leases consisted of:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals.................................. $ 906,767 $ 890,983 $1,074,364
Contingent rentals............................... 620,243 789,873 801,361
---------- ---------- ----------
$1,527,010 $1,680,856 $1,875,725
========== ========== ==========
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
The Company had variable rate debentures (see Note 6) totaling $187,000
outstanding to a director of the Company at June 1, 1996. On August 29, 1996,
these debentures were exchanged for 7,480 shares of 8% A Series Preferred Stock
(see Note 7).
This same director was also the holder of $130,000 of demand notes payable
by the Company at June 1, 1996. On August 29, 1996, these notes were exchanged
for 5,200 shares of 10% B Series Preferred Stock (see Note 7).
Additionally, concurrently with the above transactions, this same director
transferred to the Company a building with a fair value of $207,500, which was
being leased by the Company for $25,500 annually, in exchange for 8,300 shares
of 9% C Series Preferred Stock (see Note 7).
The Company had variable rate debentures (see Note 6) totaling $71,525
outstanding to former stockholders of the Company at June 1, 1996. On January 1,
1997, these debentures were exchanged for 2,861 shares of 8% A Series Preferred
Stock (see Note 7).
The Company also paid $32,991 to a stockholder during each of the years
ended June 1, 1996 and May 31, 1997 for consulting fees. No written agreement
exists between the Company and the stockholder for these services.
F-28
<PAGE> 85
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Debentures converted to preferred stock............... $ -- $ -- $258,525
Building and land acquired in exchange for preferred
stock............................................... $ -- $ -- $207,500
Capital lease obligation incurred for equipment....... $ -- $106,141 $ --
Demand notes payable converted to preferred stock..... $ -- $ -- $130,000
Accounts payable incurred for property and
equipment........................................... $ -- $ -- $128,060
</TABLE>
Additional Cash Payment Information
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Interest paid (net of amount capitalized)............. $423,926 $415,554 $367,387
Income taxes paid..................................... $199,677 $ 51,619 $ 80,600
</TABLE>
NOTE 13: SETTLEMENT OF LITIGATION
Federal Action
Pursuant to settlement of an antitrust action with the U. S. Department of
Justice, the Company had an outstanding obligation of $130,000 and $65,000 at
June 1, 1996 and May 31, 1997, respectively (see Note 5). The obligation is
payable $65,000 annually plus interest at 3.25%.
State Actions
- Pursuant to settlement of antitrust actions with the states of Kentucky
and Tennessee, the Company will pay, contingent upon availability of
funds as defined by written agreement, a total of $173,375 over a period
of five years to both the states of Kentucky and Tennessee. On the
settlement date, $25,000 was paid to Kentucky and Tennessee, and
contingent on the availability of funds as defined in the settlement,
$29,675 will be paid to each state annually through 1997. No such
contingent amounts are payable for 1995, 1996 or 1997.
- Pursuant to settlement of the same antitrust actions, the Company
purchased ten-year U.S. Treasury "strips" with a maturity value of
approximately $575,000 and an original cost of approximately $292,000.
The two states have collateral interests in the Treasury "strips" limited
to their market value increase above the original cost. Kentucky and
Tennessee will release their rights in the securities if full payment of
the obligations has been made by the Company prior to September 30, 1997.
On October 7, 1997, the Company sold the ten-year U.S. Treasury "strips"
for $428,890. The proceeds were used to pay off debt which became due
October 16, 1997, and was collateralized by the "strips." The remaining
proceeds were paid equally to Kentucky and Tennessee.
NOTE 14: COMMITMENTS AND CONTINGENCIES
Compliance Agreement
The Company received a Notice of Proposed Debarment dated June 1, 1994 from
the United States Department of Agriculture (USDA). The USDA proposed to debar
the Company from engaging in contracts and other transactions involving all
federal agency nonprocurement programs for up to three years as a result of
previously settled antitrust violations (see Note 13). On April 18, 1995, the
Company entered into a Compliance Agreement in Lieu of Debarment with the USDA.
The agreement is for a three-year period and
F-29
<PAGE> 86
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14: COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
requires the Company to establish and maintain a compliance program which
includes, among other things, the establishment of an Ethics Committee and
formal ethics and education training for all employees.
Letter of Credit
At May 31, 1997, the Company had a $100,000 letter-of-credit arrangement
with Trans Financial Bank, N.A. outstanding for the purpose of securing credit
terms with an equipment supplier.
Examination of Income Tax Returns
The Internal Revenue Service completed an examination of the Company's
federal income tax returns for the years ended May 30, 1992, May 29, 1993 and
May 28, 1994. Based on the terms of the agreement, the Company paid additional
taxes and related interest for the years examined of approximately $50,000
during the fiscal year ended June 1, 1996 which was accrued and charged to
expense in the June 3, 1995 financial statements.
Property and Equipment
On October 22, 1997, the Company entered into a contract to construct
$345,000 of property and equipment.
NOTE 15: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
Litigation
The Company is the defendant in a lawsuit by a former employee which
alleges unlawful termination of employment and seeks unspecified compensatory
and punitive damages. Discovery has not yet commenced in this case, and the
outcome is not determinable at this time. Management does not anticipate there
will be any material effect on the consolidated financial statements for any
adverse results from this litigation.
Self-Insurance
The Company maintains a self-insurance program for that portion of health
care, dental and vision costs not covered by insurance. The Company is liable
for claims up to $40,000 annually per employee. Self-insurance costs are accrued
based upon an estimate of the liability for reported claims and for claims
incurred but not reported. An accrual totaling $106,520 and $188,644 has been
made at June 1, 1996 and May 31, 1997, respectively. Claim payments based on
actual claims ultimately filed could differ materially from these estimates.
Allowance for Inventory Obsolescence
At May 31, 1997, the Company had quantities in its parts inventory that
were identified as incompatible for current maintenance and repair needs of its
existing machinery and equipment. Management has recorded an allowance for
inventory obsolescence of $71,226 which reduced the parts inventory to its
estimated net realizable value.
F-30
<PAGE> 87
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: SIGNIFICANT ESTIMATES AND CONCENTRATIONS -- (CONTINUED)
Major Customer
Sales to one customer were approximately 21% and 20% of total sales for the
fiscal years ended June 1, 1996 and May 31, 1997, respectively.
Collective Bargaining Agreements
Approximately 42% of the Company's employees is covered by collective
bargaining agreements, none of which expire within the next year.
Purchase Commitments
During fiscal year 1997, the Company entered into two separate agreements
obligating it to purchase 74,000,000 labels over a two-year period and
36,000,000 cartons annually over a five-year period. Minimum purchase
commitments, at current prices, are approximately $805,000 over the next two
years for labels and approximately $680,000 annually over each of the next five
years for cartons. Purchases under the contracts were $382,854 in 1997. Based on
the Company's historical production records, these quantities do not exceed
expected product requirements. Actual label and carton costs and usage could
differ materially from these estimates.
Classification of Federal Order
Effective October 1, 1997, Federal Order 11 was terminated and, as a
result, the Company qualified its raw milk producers in Federal Order 7 because
of its sales volume and location. The Company has estimated that the move to
Federal Order 7 will not have a material impact on the financial statements.
Year 2000 Compliance
The Company is currently in the process of evaluating its computer software
and databases to determine the extent to which modifications will be required to
prevent problems related to the year 2000. These problems could cause
malfunctions in certain software and databases with respect to dates on or after
January 1, 2000, unless corrected. At this time, the Company has not yet
determined the cost of evaluating its computer software and databases or of
making any modifications required to correct any "Year 2000" problems.
F-31
<PAGE> 88
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods were used to estimate the fair value of financial
instruments:
Investment Securities
Fair value is based on quoted market prices.
Notes Payable and Long-Term Debt
Fair value is estimated based on the borrowing rates currently available to
the Company for bank loans with similar terms and maturities.
<TABLE>
<CAPTION>
JUNE 1, 1996 MAY 31, 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash............................. $ 74,210 $ 74,210 $ 69,303 $ 69,303
Investment securities............ 367,614 375,300 392,942 407,160
Financial liabilities:
Notes payable.................... 1,130,000 1,130,000 378,722 378,722
Long-term debt................... 3,478,500 3,418,420 4,973,957 4,879,022
</TABLE>
NOTE 17: PENDING MERGER
On September 29, 1997, the Company executed an agreement with Broughton
Foods Company whereby the Company will be merged into Broughton Foods Company,
which will be the surviving corporation. Broughton Foods Company has agreed to
pay the stockholders of the Company an aggregate consideration of approximately
$5.0 million of which $2,650,000 will be paid in cash and $2,350,000 in shares
of restricted common stock, and the assumption of certain liabilities. The
acquisition is conditioned on the concurrent consummation of a public offering
by Broughton Foods Company, the shareholders of the Company approving the
transaction and standard closing conditions.
F-32
<PAGE> 89
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES
OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 7
The Company.......................... 15
Use of Proceeds...................... 16
Dividend Policy...................... 16
Dilution............................. 17
Capitalization....................... 18
Selected Financial Data.............. 19
Unaudited Pro Forma Financial
Statements......................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
Business............................. 33
Management........................... 46
Principal Shareholders............... 50
Certain Transactions................. 51
Description of Capital Stock......... 51
Shares Eligible for Future Sale...... 52
Underwriting......................... 53
Legal Matters........................ 54
Experts.............................. 54
Available Information................ 54
Index to Financial Statements........ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
1,200,000 SHARES
[BROUGHTON LOGO]
BROUGHTON FOODS
COMPANY
COMMON STOCK
------------------------
PROSPECTUS
------------------------
ADVEST, INC.
FERRIS, BAKER WATTS
Incorporated
, 1997
======================================================
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
compensation) expected to be incurred by the Company in connection with this
Offering. All of such amounts (other than the SEC Registration Fee and NASD
filing fee) are estimated.
<TABLE>
<S> <C>
Registration Fee.................................................................. $ 6,273
NASD Filing Fee................................................................... 2,570
Nasdaq National Market Listing Fee................................................ 31,226
Legal Services.................................................................... 175,000
Printing and Engraving............................................................ 150,000
Accounting Fees................................................................... 180,000
Blue Sky Fees and Expenses........................................................ 5,000
Miscellaneous..................................................................... 233,931
--------
Total........................................................................ $784,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
OGCL Section 1701.13(E)(1) provides that a corporation may indemnify a
person made or threatened to be made a party to any proceeding, other than a
proceeding by or in the right of the corporation, by reason of such person's
official capacity as an officer, director, employee or agent of the corporation,
or if such person is or was serving at the request of the corporation as a
director, trustee, officer, employee, member, manager or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited liability
company, or a partnership, joint venture, trust or other enterprise, against
judgments, fines, expenses, including attorney's fees, and disbursements paid in
settlement incurred by such person in connection with the proceeding, if such
person (a) acted in good faith and in a manner such person reasonably believed
to be in, or not opposed to, the best interests of the corporation; and (b) in
the case of a criminal proceeding, had no reasonable cause to believe such
person's conduct was unlawful.
Section 1701.13(E)(2) of the OGCL further provides that a corporation may
indemnify a person made or threatened to be made a party to any proceeding by or
in the right of the corporation to procure a judgment in its favor, by reason of
such person's official capacity as an officer, director, employee or agent of
the corporation or if such person is or was serving at the request of the
corporation as a director, trustee, officer, employee, member, manager or agent
of another corporation, domestic or foreign, nonprofit or for profit, a limited
liability company, or a partnership, joint venture, trust or other enterprise,
against expenses, including attorney's fees, actually and reasonably incurred by
such person in connection with the proceeding, if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of the corporation, except that the corporation may not
indemnify such person for (a) any proceeding as to which such person is adjudged
to be liable for negligence or misconduct in the performance of such person's
duty to the corporation, unless the court in which such proceeding is brought
determines that, despite the adjudication of liability, such person is entitled
to indemnity for such expenses as the court shall deem proper; and (b) any
proceeding in which the only liability asserted against a director is pursuant
to Section 1701.95 of the Ohio Revised Code.
Section 1701.13(E)(3) of the OGCL further provides that to the extent a
director, trustee, officer, employee, member, manager or agent is successful on
the merits or otherwise in defense of any proceeding brought under Sections
1701.13(E)(1) and 1701.13(E)(2) of the OGCL, a corporation shall indemnify such
person against expenses, including attorney's fees, actually and reasonably
incurred by such person in connection with the proceeding.
II-1
<PAGE> 91
In addition, Section 1701.13(E)(5)(a) of the OGCL provides that, unless
otherwise provided by a corporation's Articles of Incorporation or code of
regulations at the time of a director's act or omission, and unless the only
liability asserted against a director in a proceeding is pursuant to Section
1701.95 of the Ohio Revised Code, if a director is made or threatened to be made
a party to a proceeding brought under Sections 1701.13(E)(1) and 1701.13(E)(2)
of the OGCL, such person is entitled to payment or reimbursement by a
corporation of expenses, including attorney's fees, incurred by such person in
advance of the final disposition of the proceeding, upon receipt of an
undertaking by or on behalf of such person agreeing to (a) repay all amounts
paid or reimbursed by the corporation if it is ultimately determined that such
person's act or omission was undertaken with deliberate intent to cause injury
to the corporation or undertaken with reckless disregard for the best interests
of the corporation; and (b) reasonably cooperate with the corporation concerning
the proceeding. Expenses, including attorney's fees, incurred by a corporation's
director, trustee, officer, employee or agent in a proceeding brought under
Sections 1701.13(E)(1) and 1701.13(E)(2) of the OGCL may be paid by the
corporation as they are incurred in advance of the final disposition of the
proceeding, as authorized by the Board of Directors in the specific case, upon
the receipt of an undertaking from such person to repay all amounts paid or
reimbursed by the corporation if it is ultimately determined that such person is
not entitled to be indemnified by the corporation.
Finally, Section 1701.13(E)(6) of the OGCL provides that a corporation's
articles of incorporation or code of regulations may extend further
indemnification rights in addition to those provided by Section 1701.13 of the
OGCL.
Article IV of the Company's Code of Regulations provides that the Company
shall indemnify its officers and directors to the fullest extent permitted by
Ohio law. In addition, the Company intends to purchase and maintain insurance on
behalf of its directors and executive officers insuring them against any
liability asserted against them in their capacities as directors or executive
officers or arising out of such status.
The Underwriting Agreement (the Form of which is included as Exhibit 1 to
this Registration Statement) provides for the indemnification under certain
circumstances of the Company, its directors and certain of its officers by the
Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Simultaneously with the completion of this Offering, the Company will issue
156,667 shares of Common Stock in connection with the Southern Belle
Acquisition. The transaction described in this Item 15 will be effected without
registration of the Common Stock under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act and/or Regulation D
thereunder for transactions not involving a public offering.
II-2
<PAGE> 92
ITEM 16. EXHIBITS
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ------- --------------------------------------------------------------------------- --------
<C> <S> <C>
1. Form of Underwriting Agreement.............................................
2.+ Agreement and Plan of Merger, dated as of September 29, 1997, among the
Company and Southern Belle, the Directors and certain stockholders
thereof....................................................................
3.1. Articles of Incorporation..................................................
3.2. Code of Regulations........................................................
5. Opinion of Kegler, Brown, Hill & Ritter Co., L.P.A.........................
10. Form of Employment Agreement between the Company and Martin P. Shearer.....
23.1. Consent of Kegler, Brown, Hill & Ritter Co., L.P.A. (contained in Exhibit
5).........................................................................
23.2. Consent of Coopers & Lybrand L.L.P. .......................................
23.3. Consent of Coopers & Lybrand L.L.P. .......................................
23.4. Consent of Baird, Kurtz & Dobson...........................................
24.+ Powers of Attorney.........................................................
27. Financial Data Schedule....................................................
</TABLE>
- ---------------
+ Previously filed.
(b) Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Commission are omitted
because they are not applicable, or the information is included in the financial
statements included herein or the information is not material.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance on Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it is declared effective.
(3) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities a that time shall be the initial bona fide
offering thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 93
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN MARIETTA, OHIO, ON
NOVEMBER 26, 1997.
BROUGHTON FOODS COMPANY
By: /s/ PHILIP E. CLINE
------------------------------------
PHILIP E. CLINE
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE OR DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------- ------------------
<C> <S> <C>
* Chairman of the Board of November 26, 1997
- ------------------------------------------ Directors
MARSHALL T. REYNOLDS
/s/ PHILIP E. CLINE President, Chief Executive November 26, 1997
- ------------------------------------------ Officer and Director
PHILIP E. CLINE (Principal Executive
Officer)
* Treasurer and Chief November 26, 1997
- ------------------------------------------ Financial Officer
TODD R. FRY (Principal Financial and
Accounting Officer)
* Director November 26, 1997
- ------------------------------------------
RONALD V. ARTHUR II
* Director November 26, 1997
- ------------------------------------------
GEORGE W. BROUGHTON
* Director November 26, 1997
- ------------------------------------------
CHARLES R. HOOTEN, JR.
* Director November 26, 1997
- ------------------------------------------
NEAL W. SCAGGS
* Director November 26, 1997
- ------------------------------------------
PHILIP TODD SHELL
* Director November 26, 1997
- ------------------------------------------
KIRBY J. TAYLOR
* Director November 26, 1997
- ------------------------------------------
PAUL T. THEISEN
* Director November 26, 1997
- ------------------------------------------
THOMAS W. WRIGHT
*By: /s/ PHILIP E. CLINE
--------------------------------------
PHILIP E. CLINE
ATTORNEY IN FACT
</TABLE>
II-4
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ------- --------------------------------------------------------------------------- --------
<C> <S> <C>
1. Form of Underwriting Agreement.............................................
2.+ Agreement and Plan of Merger, dated as of September 29, 1997, among the
Company and Southern Belle, the Directors and certain stockholders
thereof....................................................................
3.1. Articles of Incorporation..................................................
3.2. Code of Regulations........................................................
5. Opinion of Kegler, Brown, Hill & Ritter Co., L.P.A.........................
10. Form of Employment Agreement between the Company and Martin P. Shearer.....
23.1. Consent of Kegler, Brown, Hill & Ritter Co., L.P.A. (contained in Exhibit
5).........................................................................
23.2. Consent of Coopers & Lybrand L.L.P. .......................................
23.3. Consent of Coopers & Lybrand L.L.P. .......................................
23.4. Consent of Baird, Kurtz & Dobson...........................................
24.+ Powers of Attorney.........................................................
27. Financial Data Schedule....................................................
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 1
1,200,000 SHARES
(PLUS 180,000 SHARES TO COVER OVER-ALLOTMENTS)
BROUGHTON FOODS COMPANY
COMMON STOCK, PAR VALUE $1.00 PER SHARE
UNDERWRITING AGREEMENT
________ , 1997
ADVEST, INC.
FERRIS, BAKER WATTS, INCORPORATED
c/o Advest, Inc.
One Rockefeller Plaza, 20th Floor
New York, New York 10020
Ladies and Gentlemen:
BROUGHTON FOODS COMPANY, an Ohio corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to sell to the
Underwriters named in Schedule I hereto (the "Underwriters"), an aggregate of
1,200,000 shares (the "Firm Shares") of the Company's common stock, par value
$1.00 per share (the "Common Stock").
In addition, in order to cover over-allotments in the sale of
the Firm Shares, the Underwriters may, at the Underwriters' election and
subject to the terms and conditions stated herein, purchase ratably in
proportion to the amounts set forth opposite their respective names in Schedule
I hereto, up to 180,000 additional shares of Common Stock from the Company
(such additional shares of Common Stock, the "Option Shares"). The Firm Shares
and the Option Shares are referred to collectively as the "Shares."
Concurrently with or prior to the consummation of the
transactions contemplated by this Agreement, Southern Belle Dairy Company,
Inc., a Kentucky corporation ("Southern Belle"), will merge with and into the
Company (the "Southern Belle Acquisition"), with the Company being the
surviving entity, pursuant to an agreement and plan of merger, dated September
29, 1997 (the "Southern Belle Acquisition Agreement"), and Southern Belle
thereafter will no longer have a separate corporate existence and will operate
as a division of the Company.
The Company, intending to be legally bound, hereby confirms
its agreement with the Underwriters as follows:
<PAGE> 2
1. Registration Statement and Prospectus.
A registration statement on Form S-1 (File No. 333-37387) with respect
to the Shares, including a prospectus subject to completion, has been filed by
the Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has become
effective under the Act and information has been omitted therefrom in
accordance with Rule 430A under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement) with such
changes or insertions as are required by Rule 430A or permitted by Rule 424(b)
under the Act and as have been provided to and approved by the Underwriters, or
(ii) if such registration statement, as it may have been amended, has not
become effective under the Act, an amendment to such registration statement,
including a form of prospectus, a copy of which amendment has been provided to
and approved by the Underwriters prior to the execution of this Agreement. As
used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective and as thereafter amended by post-effective amendment, including (A)
all financial statements, schedules and exhibits thereto, (B) all documents (or
portions thereof) incorporated by reference therein, and (C) any registration
statement and any amendments thereto filed pursuant to Rule 462(b) of the Act
relating to the offering covered by the initial registration statement (the
"Rule 462(b) Registration Statement"). The term "Preliminary Prospectus" means
each prospectus subject to completion included in the Registration Statement at
the time of the initial filing of the Registration Statement with the
Commission, and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus (as hereinafter defined), including all
financial statements, schedules and exhibits thereto. The term "Prospectus"
means the prospectus in the form included in the Registration Statement or, if
the prospectus included in the Registration Statement omits information in
reliance on Rule 430A under the Act and such information is included in a
prospectus filed pursuant to Rule 424(b) under the Act, the term "Prospectus"
as used in this Agreement shall mean the prospectus in the form included in the
Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). All references in this Agreement to the Registration Statement,
the Rule 462(b) Registration Statement, the Preliminary Prospectus and the
Prospectus, or any amendments or supplements to any of the foregoing, shall
include any copy
2
<PAGE> 3
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
2. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, each of the Underwriters
that:
2.1 No order preventing or suspending
the use of any Preliminary Prospectus has been issued and no proceeding for
that purpose has been instituted or threatened by the Commission or the
securities authority of any state or other jurisdiction. If the Registration
Statement has become effective under the Act, no stop order suspending the
effectiveness of the Registration Statement or any part thereof has been issued
and no proceeding for that purpose has been instituted or threatened or, to the
knowledge of the Company, contemplated by the Commission or the securities
authority of any state or other jurisdiction.
2.2 When any Preliminary Prospectus was
filed with the Commission it contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder. When the Registration Statement or any amendment thereto was or is
declared effective, and at each Time of Delivery (as hereinafter defined), it
(i) contained and will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not and will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any amendment or
supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if
the Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and at
each Time of Delivery, the Prospectus, as amended or supplemented at any such
time, (i) contained and will contain all statements required to be stated
therein in accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not and will not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. There are no agreements, contracts,
indentures, leases or other instruments that are required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that are not described or filed as required by the
Act. Each Preliminary Prospectus and Prospectus filed pursuant to the
requirements of Regulation S-T under the Act via EDGAR was identical (other
than for formatting and page
3
<PAGE> 4
numbering differences) to the copy thereof delivered to the Underwriters for
use in connection with the offer and sale of the Common Stock. The foregoing
provisions of this Section do not apply to statements or omissions made in the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you
specifically for use therein. It is understood that the statements set forth
in the Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto (X) in the last paragraph of the cover page of
the Prospectus, (Y) on the inside cover page with respect to stabilization and
passive market making, and (Z) in the third and ninth paragraphs and the list
of Underwriters under the section in the Registration Statement entitled
"Underwriting," constitute the only written information furnished to the
Company by or on behalf of any Underwriter through you specifically for use in
the Registration Statement or any amendment thereto or the Prospectus and any
amendment or supplement thereto, as the case may be.
2.3 The Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has full power and authority
(corporate and other) to own or lease its properties and conduct its business
as described in the Prospectus. The Company has full power and authority
(corporate and other) to enter into this Agreement and to perform its
obligations hereunder. The Company is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any business,
so as to require such qualification, except where the failure to so qualify
could not have a material adverse effect on the financial condition, business
or results of operations (a "Material Adverse Effect") of the Company.
2.4 The Company's authorized, issued and
outstanding capital stock is as disclosed in the Prospectus. All of the issued
shares of capital stock of the Company, have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the descriptions of the
Common Stock contained in the Prospectus. None of the issued shares of capital
stock of the Company has been issued or is owned or held in violation of any
statutory (or to the knowledge of the Company, any other) preemptive rights of
shareholders, and no person or entity (including any holder of outstanding
shares of capital stock of the Company) has any statutory (or to the knowledge
of the Company, any other) preemptive or other rights to subscribe for any of
the Shares. None of the capital stock of the Company has been issued in
violation of applicable federal or state securities laws.
2.5 Other than the subsidiaries, if any,
listed on Exhibit 21 to the Registration Statement and on Exhibit A hereto
4
<PAGE> 5
and the equity securities held in the investment portfolios of the Company and
such subsidiaries (the composition of which is not materially different than
the disclosures in the Prospectus as of specific dates), the Company does not
own, directly or indirectly, any capital stock or other equity securities of
any other corporation or any ownership interest in any partnership, joint
venture or other association.
2.6 Except as disclosed in the
Prospectus, there are no outstanding (i) securities or obligations of the
Company convertible into or exchangeable for any capital stock of the Company,
(ii) warrants, rights or options to subscribe for or purchase from the Company
any such capital stock or any such convertible or exchangeable securities or
obligations or (iii) obligations of the Company to issue any shares of capital
stock, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
2.7 Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
(i) the Company has not incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, not in the ordinary course of
business, that are material to the Company, (ii) the Company has not purchased
any of its outstanding capital stock or declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock, (iii) there has not
been any change in the capital stock, long-term debt or short-term debt of the
Company, and (iv) there has not been any material adverse change, or any
development involving a prospective material adverse change, in or affecting
the financial condition, business or results of operations of the Company,
other than as disclosed in or contemplated by the Prospectus.
2.8 There are no contracts, agreements
or understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned by such
person or, requiring the Company to include such securities in the securities
registered pursuant to the Registration Statement (or any such right has been
effectively waived) or requiring the registration of any securities pursuant to
any other registration statement filed by the Company under the Act. Neither
the filing of the Registration Statement nor the offering or sale of Shares as
contemplated by this Agreement gives any security holder of the Company any
rights for or relating to the registration of any shares of Common Stock or any
other capital stock of the Company, except such as have been satisfied or
waived.
2.9 The Company is not in (i) violation
of its certificate or articles of incorporation, by-laws or regulations or
other organizational documents, (ii) violation of any law,
5
<PAGE> 6
ordinance, administrative or governmental rule or regulation applicable to the
Company or of any decree of any court or governmental agency or body having
jurisdiction over the Company, or (iii) default in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or
any other evidence of indebtedness or in any material agreement, indenture,
lease or other instrument to which the Company is a party or by which any of
its properties may be bound, and no condition or state of facts exists, which
with the passage of time or the giving of notice or both, would constitute such
a default, except in the case of (ii) and (iii), for such violations or
defaults which would not have a Material Adverse Effect on the Company.
2.10 The Company has good and marketable
title in fee simple to all real property and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except such
as are disclosed in the Prospectus or such as could not have a Material Adverse
Effect on the Company, and do not interfere, in any material respect, with the
use made or proposed to be made of such property by the Company; and any real
property and buildings held under lease by the Company are held under valid,
subsisting and enforceable leases, with such exceptions as are disclosed in the
Prospectus or are not material and do not interfere, in any material respect,
with the use made or proposed to be made of such property and buildings by the
Company.
2.11 Neither the offer, issuance, sale
and delivery of the Shares or the execution of this Agreement by the Company
nor the consummation by the Company of the transactions contemplated herein (i)
requires any consent, approval, authorization or other order of or registration
or filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except the registration of the Shares
under the Act and of the Common Stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which have been or will be effected
prior to the date of this Agreement, and such as may be required by the
National Association of Securities Dealers, Inc. (the "NASD") or under state
securities or blue sky laws in connection with the offer, sale and distribution
of the Shares by the Underwriters), (ii) conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the certificate
or articles of incorporation, bylaws or regulations or other organizational
documents of the Company, (iii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company is a party or by which its
properties may be bound, (iv) violates or will violate any statute, law,
regulation or filing or judgment, injunction, order or decree applicable to the
Company or any of its properties, or (v) will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
6
<PAGE> 7
the Company pursuant to the terms of any agreement or instrument to which it is
a party or by which it may be bound or to which any of its properties or assets
or any of them is subject, except for any missing consent, approval,
authorization, order, registration or filing, or any conflict, breach, lien,
charge or encumbrance, which would not have a Material Adverse Effect on the
Company.
2.12 Other than as disclosed in the
Prospectus, there is no litigation, arbitration, claim, proceeding (formal or
informal) or investigation (including, without limitation, any Food and Drug
Administration regulatory proceeding) pending or, to the Company's knowledge,
threatened in which the Company is a party or of which any of its properties or
assets are the subject which, if determined adversely to the Company, could
have a Material Adverse Effect on the Company.
2.13 Coopers & Lybrand LLP, which have
certified certain financial statements of the Company included in the
Registration Statement and the Prospectus, are independent public accountants
to the Company as required by the Act, the Exchange Act and the respective
rules and regulations of the Commission thereunder.
2.14 (i) The financial statements and
schedules (including the related notes) of the Company included in the
Registration Statement, the Prospectus and/or any Preliminary Prospectus were
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved and fairly present the
financial position and results of operations of each of the Company and of
Southern Belle and its subsidiaries, on a consolidated basis, at the dates and
for the periods presented. The selected financial data set forth under the
captions "Summary Financial Data," "Selected Financial Data," "Unaudited Pro
Forma Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Prospectus fairly
present, on the basis stated in the Prospectus, the information included
therein, and have been compiled on a basis consistent with that of the audited
financial statements included in the Registration Statement; (ii) the unaudited
interim financial statements included in the Registration Statement comply as
to form in all material respects with the applicable accounting requirements of
Rule 10-01 of Regulation S-X under the Act; (iii) the Company's pro forma
financial statements, together with the related notes included in the
Registration Statement and Prospectus (and any amendment or supplement thereto)
have been prepared in good faith on the basis of the assumptions described in
the Registration Statement and the Prospectus and such assumptions are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein and such pro forma
financial statements otherwise comply in all material respects with the
requirements of Article 11 of Regulation S-X
7
<PAGE> 8
under the Act; and (iv) the other historical and pro forma, financial and
statistical information and data set forth in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) are accurately
presented and prepared on a basis consistent with the books and records of the
Company.
2.15 This Agreement has been duly
authorized, executed and delivered by the Company and, assuming due execution
by the Underwriters, constitutes the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, subject,
as to enforcement, to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles and except as
the enforceability of rights to indemnity and contribution under this Agreement
may be limited under applicable securities laws or the public policy underlying
such laws.
2.16 When the Shares to be sold by the
Company hereunder have been duly delivered against payment therefor as
contemplated by this Agreement, the Shares will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights, and the holders
thereof will not be subject to personal liability solely by reason of being
such holders. The certificates representing the Shares are in proper legal
form under, and conform in all respects to the requirements of, the Ohio
Revised Code and the requirements of the Nasdaq National Market.
2.17 The Company has not distributed and
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, a Preliminary
Prospectus, the Prospectus and other material, if any, permitted by the Act.
2.18 Neither the Company nor any of its
officers, directors or affiliates has (i) taken, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased or paid anyone any compensation for soliciting purchases of, the
Shares or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
2.19 The Company owns or has the right to
use all patents, patent applications, trademarks, trademark applications, trade
names, service marks, copyrights, franchises, trade secrets, proprietary or
other confidential information and intangible properties and assets
(collectively, "Intangibles"),
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the loss of any of which could have a Material Adverse Effect on the Company;
and, to the best knowledge of the Company, the Company has not infringed or is
infringing, and the Company has not received notice of infringement with
respect to, asserted Intangibles of others.
2.20 The Company makes and keeps accurate
books and records reflecting its assets and maintains internal accounting
controls which provide reasonable assurance that (i) transactions are executed
in accordance with management's authorization, (ii) transactions are recorded
as necessary to permit preparation of the Company's financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for the assets of the Company, (iii) access to the assets of the
Company is permitted only in accordance with management's authorization and
(iv) the recorded accountability for assets of the Company is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2.21 The Company has filed all foreign,
federal, state and local tax returns that are required to be filed by it and
has paid all taxes shown as due on such returns as well as all other taxes,
assessments and governmental charges that are due and payable except for taxes
being contested in good faith; and no material deficiency with respect to any
such return has been assessed or proposed.
2.22 Each of the Company's employee
benefit plans, profit sharing plans, employee pension benefit plans, employee
welfare benefit plans, equity-based plan or deferred compensation plans or
arrangements (collectively, the "Plans") that is subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
and regulations thereunder ("ERISA") is in compliance in all material respects
with all applicable laws, including but not limited to ERISA and the Internal
Revenue Code of 1986, as amended (the "Code"), and has been operated and
administered in all material respects in accordance with their terms.
2.23 No material labor dispute exists
with the Company's employees, and no such labor dispute is threatened. The
Company has no knowledge of any existing or threatened labor disturbance by the
employees of any of its principal agents, suppliers, contractors or customers
that could have a Material Adverse Effect on the Company.
2.24 The Company has received all
permits, licenses, franchises, authorizations, registrations, qualifications
and approvals (collectively, "Permits") of governmental or regulatory
authorities (including, without limitation, state and/or other food and drug
regulatory authorities) as may be required of it to own its properties and
conduct its business in the manner
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<PAGE> 10
described in the Prospectus, subject to such qualifications as may be set forth
in the Prospectus; and the Company has fulfilled and performed all of its
material obligations with respect to such Permits, and no event has occurred
which allows or, after notice or lapse of time or both, would allow revocation
or termination thereof or result in any other material impairment of the rights
of the holder of any such Permit, subject in each case to such qualification as
may be set forth in the Prospectus; and, except as described in the Prospectus,
such Permits contain no restrictions that materially affect the ability of the
Company to conduct its business and no food and drug regulatory agency or body
has issued any order or decree impairing, restricting or prohibiting the
payment of dividends by the Company.
2.25 The Company is not an "investment
company" or a company "controlled" by an investment company as such terms are
defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company
Act of 1940, as amended (the "Investment Company Act"), and, the Company
conducts its business as set forth in the Registration Statement and the
Prospectus, will not become an "investment company" and will not be required to
register under the Investment Company Act.
2.26 The Company has entered into the
Southern Belle Acquisition Agreement and has taken all actions as are necessary
and appropriate to cause the transactions contemplated by the Southern Belle
Acquisition Agreement to occur concurrently with or prior to the consummation
of the transactions contemplated by this Agreement. The Company has no reason
to believe that the transactions contemplated by the Southern Belle Acquisition
Agreement will not be consummated or, if consummated, will be consummated on
terms different than those set forth in the Registration Statement.
3. Representations and Warranties of Southern Belle.
Southern Belle represents and warrants to, and agrees with, each of the
Underwriters that:
3.1 Notwithstanding any limitations
contained in the Southern Belle Acquisition Agreement, Southern Belle expressly
acknowledges and agrees that each of the Underwriters may rely upon each of the
representations and warranties rendered by Southern Belle to the Company
pursuant to Section 4 of the Southern Belle Acquisition Agreement as if each
such representation and warranty is set forth in this Section 3 in full and
rendered to the Underwriters by Southern Belle in connection with this
Agreement.
3.2 This Agreement has been duly
authorized, executed and delivered by Southern Belle and, assuming due
execution by the Underwriters, constitutes the valid and binding agreement of
Southern Belle, enforceable against Southern Belle in accordance with its
terms, subject, as to enforcement, to applicable
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<PAGE> 11
bankruptcy, insolvency, reorganization and moratorium laws and other laws
relating to or affecting the enforcement of creditors' rights generally and to
general equitable principles and except as the enforceability of rights to
indemnity and contribution under this Agreement may be limited under applicable
securities laws or the public policy underlying such laws.
3.3 The execution of this Agreement by
Southern Belle does not, and will not, (i) conflict with or constitute a breach
of, or a default under, any agreement, indenture, lease or other instrument to
which Southern Belle is a party or by which its properties may be bound, (ii)
violate any statute, law, regulation or filing or judgment, injunction, order
or decree applicable to Southern Belle or any of its properties, or (iii)
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of Southern Belle pursuant to the terms of any agreement
or instrument to which it is a party or by which it may be bound or to which
any of its properties or assets or any of them is subject, except for any
missing consent, approval, authorization, order, registration or filing, or any
conflict, breach, lien, charge or encumbrance, which would not have a Material
Adverse Effect on Southern Belle.
3.4 Baird, Kurtz & Dobson , which
have certified certain financial statements of Southern Belle and its
subsidiaries included in the Registration Statement and the Prospectus, are
independent public accountants to Southern Belle as required by the Act, the
Exchange Act and the respective rules and regulations of the Commission
thereunder.
4. Purchase and Sale of Shares.
4.1 Subject to the terms and conditions
herein set forth, the Company, agrees to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from
the Company, at a purchase price of [ ] dollars and [ ] cents ($[ ])
per share (the "Per Share Price"), the number of Firm Shares (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying the
aggregate number of Firm Shares to be sold by the Company as set forth in the
first paragraph of this Agreement by a fraction, the numerator of which is the
aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto, and the
denominator of which is the aggregate number of Firm Shares to be purchased by
the Underwriters hereunder.
4.2 The Company hereby grants to the
Underwriters the right to purchase at their election in whole or in part from
time to time up to 180,000 Option Shares, at the Per Share Price, for the sole
purpose of covering over-allotments in the sale of the Firm Shares. Any such
election to purchase Option Shares may be exercised by written notice from the
Underwriters to the Company,
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<PAGE> 12
given from time to time within a period of 30 calendar days after the date of
the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange
is open for trading) and setting forth the aggregate number of Option Shares to
be purchased and the date on which such Option Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
hereinafter defined) or, unless the Underwriters otherwise agree in writing,
earlier than two or later than ten business days after the date of such notice.
In the event the Underwriters elect to purchase all or a portion of the Option
Shares, the Company agrees to furnish or cause to be furnished to the
Underwriters all of the certificates, letters and opinions, and to satisfy all
of the other conditions set forth in Section 9 hereof at each Subsequent Time
of Delivery (as hereinafter defined).
4.3 In making this Agreement, each
Underwriter is contracting severally, and not jointly, and the agreement of
each Underwriter is to purchase only that number of shares specified with
respect to that Underwriter in Schedule I hereto. No Underwriter shall be
under any obligation to purchase any Option Shares prior to an exercise of the
option with respect to such Shares granted pursuant to Section 3.2 hereof.
5. Offering by the Underwriters. Upon the release of
the Shares, the Underwriters propose to offer the Shares for sale upon the
terms and conditions disclosed in the Prospectus.
6. Delivery of Shares; Closing. Certificates in
definitive form for the Shares to be purchased by each Underwriter hereunder,
and in such denominations and registered in such names as the Underwriters may
request upon at least 48 hours' prior notice to the Company, shall be delivered
by or on behalf of the Company to the Underwriters against payment by such
Underwriter of the purchase price therefor by wire transfer of next day funds
to an account specified by the Company at least 48 hours' in advance of the
Time of Delivery. The closing of the sale and purchase of the Shares shall be
held at the offices of Arnold & Porter, 555 12th Street, N.W., Washington, D.C.
20004, except that physical delivery of such certificates shall be made at the
office of The Depository Trust Company, 55 North Water Street, New York, New
York 10041. The time and date of such delivery and payment shall be, with
respect to the Firm Shares, at 10:00 AM, New York time, on the third (3rd) full
business day after this Agreement is executed or at such other time and date as
the Underwriters and the Company may agree upon in writing, and, with respect
to the Option Shares, at 10:00 AM, New York, New York time, on the date
specified by the Underwriters in a written notice given by them regarding their
election to purchase all or part of such Option Shares, or at such other time
and date as the Underwriters and the Company may agree upon in writing. Such
time and date for delivery of the Firm Shares is herein
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<PAGE> 13
called the "First Time of Delivery," such time and date for delivery of any
Option Shares, if not the First Time of Delivery, is herein called a
"Subsequent Time of Delivery," and each such time and date for delivery is
herein called a "Time of Delivery." The Company will make such certificates
available for checking and packaging at least 24 hours prior to each Time of
Delivery at the office of The Depository Trust Company, 55 North Water Street,
New York, New York 10041 or at such other location specified by you in writing
at least 48 hours prior to such Time of Delivery.
7. Covenants of the Company. The Company covenants and
agrees with each of the Underwriters that:
7.1 The Company will use its best
efforts to cause the Registration Statement, if not effective prior to the
execution and delivery of this Agreement, to become effective. If the
Registration Statement has been declared effective prior to the execution and
delivery of this Agreement, the Company will file the Prospectus with the
Commission pursuant to and in accordance with subparagraph (1) (or, if
applicable and if consented to by you, subparagraph (4)) of Rule 424(b) within
the time period required under Rule 424(b) under the Act. The Company will
advise you promptly of any such filing pursuant to Rule 424(b). The Company
will file timely all reports and any definitive proxy or information statements
required to be filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act.
7.2 The Company will not file with the
Commission the Prospectus or the amendment referred to in Section 1 hereof, any
amendment or supplement to the Prospectus, any amendment to the Registration
Statement or any Rule 462(b) Registration Statement unless you have received a
reasonable period of time to review any such proposed amendment or supplement
and consented to the filing thereof and will use its best efforts to cause any
such amendment to the Registration Statement to be declared effective as
promptly as possible. Upon the request of the Underwriters or counsel for the
Underwriters, the Company will promptly prepare and file with the Commission,
in accordance with the rules and regulations of the Commission, any amendments
to the Registration Statement or amendments or supplements to the Prospectus
that may be necessary or advisable in connection with the distribution of the
Shares by the Underwriters and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective as promptly as
possible. If required, the Company will file any amendment or supplement to
the Prospectus with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. The Company will advise the
Underwriters, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide
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evidence to the Underwriters of each such filing or effectiveness.
7.3 The Company will advise the
Underwriters promptly after receiving notice or obtaining knowledge of (i) when
any post-effective amendment to the Registration Statement is filed with the
Commission, (ii) the receipt of any comments from the Commission concerning the
Registration Statement, (iii) when any post-effective amendment to the
Registration Statement becomes effective, or when any supplement to the
Prospectus or any amended Prospectus has been filed, (iv) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any part thereof or any order preventing or suspending the use of
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (v) the suspension of the qualification of the Shares for offer or
sale in any jurisdiction or of the initiation or threatening of any proceeding
for any such purpose, (vi) any request made by the Commission, the Nasdaq
National Market or any securities authority of any jurisdiction for amending
the Registration Statement, for amending or supplementing the Prospectus or for
additional information or (vii) any Material Adverse Effect of the Company or
of Southern Belle that makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations
thereunder to be stated therein or necessary in order to make the statements
therein not misleading, or of the necessity to amend or supplement the
Prospectus (as then amended or supplemented) to comply with the Act or any
other law. The Company will use its best efforts to prevent the issuance of
any such stop order or suspension and, if any such stop order or suspension is
issued, to obtain the withdrawal thereof as promptly as possible.
7.4 The Company promptly from time to
time will take such action as the Underwriters may reasonably request to
qualify the Shares for offering and sale under the securities or blue sky laws
of such jurisdictions as the Underwriters may request and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Shares; provided, that, in connection therewith the Company
shall not be required to qualify in any jurisdiction as a foreign corporation
or to file a general consent to service of process in suits (other than those
arising out of the offering or sale of the Shares), in any jurisdiction where
it is not now so subject. The Company will file such statements and reports as
may be required by the laws of each jurisdiction in which the Shares have been
qualified as above provided.
7.5 The Company will promptly provide
the
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Underwriters, without charge, (i) three (3) manually executed copies of the
Registration Statement as originally filed with the Commission and of each
amendment thereto, including all financial statements, exhibits and all
documents or information incorporated by reference therein, and of any Rule
462(b) Registration Statement and any amendment thereto and (ii) such number of
conformed copies of the Registration Statement as originally filed and of each
amendment thereto, without exhibits but including all documents or information
incorporated by reference therein, and of any Rule 462(b) Registration
Statement and any amendment thereto, as any Underwriter may reasonably request.
7.6 As soon as practicable, but not
later than the Availability Date (as defined below), the Company will make
generally available to its security holders an earnings statement of the
Company and its subsidiaries, if any, covering a period of at least 12 months
beginning after the effective date of the Registration Statement (which need
not be audited) complying with Section 11(a) of the Act and the rules and
regulations thereunder. "Availability Date" means the forty-fifth (45th) day
after the end of the fourth fiscal quarter following the fiscal quarter in
which the Registration Statement went effective, except that if such fourth
fiscal quarter is the last quarter of the Company's fiscal year, "Availability
Date" means the ninetieth (90th) day after the end of such fourth fiscal
quarter.
7.7 During the period beginning from the
date hereof and continuing to and including the date 180 days after the date of
the Prospectus (the "Lock-Up Period"), the Company will not, and will cause its
officers and directors not to, without the prior written consent of Advest,
Inc., directly or indirectly (i) sell, offer to sell, solicit an offer to buy,
contract to sell, encumber, distribute, pledge, grant any option for the sale
of, or otherwise transfer or dispose of, directly or indirectly, in one or a
series of transactions, any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible or
exercisable into or exchangeable for shares of Common Stock or (ii) enter into
any swap or other agreement or any transaction that transfers, in whole or in
part, the economic consequences of ownership of shares of Common Stock whether
any such swap or other agreement is to be settled by delivery of shares of
Common Stock, other securities, cash or otherwise, except for (x) the sale of
the Shares hereunder; (y) shares issued in acquisitions; and (z) shares issued
pursuant to any Plan. Prior to the expiration of the Lock-Up Period, the
Company agrees that it will not announce or disclose any intention to do
anything after the expiration of such period which the Company is prohibited,
as provided in the preceding sentence, from doing during the Lock-Up Period.
7.8 During the period of five years
after the effective date of the Registration Statement, the Company will
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furnish to the Underwriters and, upon request, to each of the other
Underwriters, without charge, (i) copies of all reports or other communications
(financial or other) furnished to shareholders, (ii) as soon as they are
available, copies of any reports and financial statements furnished to or filed
with the Commission, the NASD, the Nasdaq Stock Market or any national
securities exchange and (iii) such other publicly available information
concerning the Company and its subsidiaries as the Underwriters may reasonably
request.
7.9 Prior to the termination of the
underwriting syndicate contemplated by this Agreement, neither the Company nor
any of its officers, directors or affiliates will (i) take, directly or
indirectly, any action designed to cause or to result in, or that might
reasonably be expected to cause or result in, the stabilization or manipulation
of the price of any security of the Company or (ii) sell, bid for, purchase or
pay anyone any compensation for soliciting purchases of, the Shares.
7.10 In case of any event, at any time
within the period during which a prospectus is required to be delivered under
the Act, as a result of which any Preliminary Prospectus or the Prospectus, as
then amended or supplemented, would contain an untrue statement of a material
fact, or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or, if it is necessary at any time to amend any Preliminary
Prospectus or the Prospectus to comply with the Act or any applicable
securities or blue sky laws, the Company promptly will notify the Underwriters
and prepare and file with the Commission (at the Company's expense), and any
applicable state securities commission, an amendment, supplement or document
that will correct such statement or omission or effect such compliance and will
furnish to the Underwriters such number of copies of such amendment(s),
supplement(s) or document(s) as the Underwriters may reasonably request. For
purposes of this Section, the Company will provide such information to the
Underwriters, the Underwriters' counsel and counsel to the Company as shall be
necessary to enable such persons to consult with the Company with respect to
the need to amend or supplement the Registration Statement, any Preliminary
Prospectus or the Prospectus or file any document, and shall furnish to the
Underwriters and the Underwriters' counsel such further information as each may
from time to time reasonably request. In the event that the Company and the
Underwriters agree that the Prospectus should be amended or supplemented, the
Company, if requested by you, will promptly issue a press release announcing or
disclosing the matters to be covered by the proposed amendment or supplement.
7.11 The Company will use its best
efforts to obtain, and thereafter maintain, the qualification or listing of the
shares of Common Stock (including, without limitation, the
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<PAGE> 17
Shares) on the Nasdaq National Market for a period of five years following the
date hereof.
7.12 On or prior to 3:00 PM, New York
City time, on the business day following the later of the execution and
delivery of this Agreement or the effective date of the Registration Statement,
and thereafter from time to time for such period as in the opinion of counsel
for the Underwriters a Prospectus is required by the Act to be delivered in
connection with sale by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
the Underwriters may reasonably request. The Company consents to the use of
the Prospectus (and of any amendment or supplement thereto) in accordance with
the provisions of the Act and with the securities or blue sky laws of the
jurisdictions in which the Shares are offered by the Underwriters and by all
dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with sales by any Underwriter
or dealer.
7.13 In addition to and not in limitation
of the terms and provisions set forth in Section 8.1 hereof, if this Agreement
shall terminate or shall be terminated after execution pursuant to any
provisions hereof or if this Agreement shall be terminated by the Underwriters
because of any failure or refusal on part of the Company to comply with the
terms or fulfill any of the conditions of this Agreement, the Company agrees to
reimburse the Underwriters for all reasonable out-of-pocket expenses (including
reasonable fees and expenses of counsel for the Underwriters) incurred by the
Underwriters in connection herewith.
7.14 The Company will apply the net
proceeds from the sale of the Shares to be sold by it hereunder in accordance
with the description set forth in the Prospectus.
7.15 The Company will furnish to the
Underwriters and counsel for the Underwriters a lock-up letter in the form of
Exhibit B hereto (the "Lock-Up Letter") executed by each of its current
officers and directors and the those shareholders of the Company beneficially
owning in the aggregate not less than 77% of the issued and outstanding shares
of capital stock of the Company immediately prior to the consummation of the
public offering of the Shares contemplated by this Agreement and after giving
effect to the Southern Belle Acquisition.
7.16 The Company shall engage and
maintain, at its sole expense, a registrar and transfer agent for the Common
Stock.
7.17 The Company will pay to Advest, Inc.
a one-time financial advisory fee in the amount of $100,000 for general
financial advisory services rendered by Advest, Inc. to the
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Company (the "Financial Advisory Fee").
8. Expenses.
The Company will pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, whether or
not the transactions contemplated hereby are consummated or this Agreement is
terminated pursuant to Section 12 hereof, including, without limitation, all
costs and expenses incident to (i) the preparation, printing and delivery
expenses (including postage, air freight charges and charges for counting and
packaging) associated with the Registration Statement, the Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto, this
Agreement, the power of attorney executed by Ferris, Baker Watts, Incorporated
in favor of Advest, Inc. in connection herewith, the Dealer Agreement and
related documents (collectively, the "Underwriting Documents") and the
preliminary Blue Sky memorandum relating to the offering prepared by Morgan,
Lewis & Bockius LLP, counsel to the Underwriters (collectively with any
supplement thereto, the "Preliminary Blue Sky Memorandum"); (ii) the fees,
disbursements and expenses of the Company's counsel (including local and
special counsel) and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation
and filing of the Registration Statement (including all amendments thereto),
any Preliminary Prospectus, the Prospectus and any amendments and supplements
thereto, the Underwriting Documents and the Preliminary Blue Sky Memorandum;
(iii) the delivery of copies of the foregoing documents to the Underwriters;
(iv) the filing fees of the Commission and the NASD relating to the Shares; (v)
the preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including transfer agent's and registrar's fees; (vi)
the qualification of the Shares for offering and sale under state securities
and blue sky laws, including filing fees and fees and disbursements of counsel
for the Underwriters (and local counsel therefor) relating thereto, such fees
of counsel not to exceed $5,000; (vii) any listing of the Shares on the Nasdaq
National Market; (viii) any expenses for travel, lodging and meals incurred by
the Company and any of its officers, directors and employees in connection with
any meetings with prospective investors in the Shares; and (ix) all other costs
and expenses reasonably incident to the performance of the Company's
obligations hereunder that are not otherwise specifically provided for in this
Section 8.
9. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder to purchase and pay for Shares at the
Time of Delivery is, in their discretion, subject to the following conditions
precedent:
9.1 If the Registration statement as
amended to date has not become effective prior to the execution of this
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Agreement, such Registration Statement shall have been declared effective not
later than 11:00 AM, New York, New York time, on the date of this Agreement or
such later date and/or time as shall have been consented to by you in writing.
If required, the Prospectus and any amendment or supplement thereto shall have
been filed with the Commission pursuant to Rule 424(b) within the applicable
time period prescribed for such filing and in accordance with Section 7.1 of
this Agreement and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction.
9.2 The Underwriters shall have received
a copy of an executed Lock-Up Letter from each of the Company's officers and
directors and those shareholders of the Company beneficially owning in the
aggregate not less than 77% of the issued and outstanding shares of capital
stock of the Company immediately prior to the consummation of the public
offering of the Shares contemplated by this Agreement and after giving effect
to the Southern Belle Acquisition.
9.3 You shall have received an opinion,
dated such Time of Delivery, of Arnold & Porter, special counsel for the
Company, in form and substance satisfactory to you and your counsel, to the
effect that:
(a) The Company is
qualified to transact business as a foreign corporation and is in good standing
in each jurisdiction set forth on a schedule to such opinion.
(b) To such
counsel's knowledge, except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (B) warrants, rights or
options to subscribe for or purchase from the Company any such capital stock or
any such convertible or exchangeable securities or obligations or (C)
obligations of the Company to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(c) To such
counsel's knowledge, there are no contracts, agreements or understandings
between the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or, requiring the
Company to include such securities in the securities registered pursuant to the
Registration Statement (or any such right has been effectively waived) or
requiring the registration of any securities pursuant to any other registration
statement filed by the Company under the Act.
(d) The sale of the
Shares being sold at such Time of Delivery and the performance of this
Agreement by the
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Company and the consummation of the transactions herein contemplated by the
Company will not conflict with or violate any provision of any applicable law,
statute, rule or regulation, or in any material respect, conflict with, or
(with or without the giving of notice or the passage of time or both) result in
(A) a breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company is a party or to which any
of its properties or assets is subject, or, conflict with or violate any order,
judgment or decree of any court or governmental agency or body known by such
counsel to have jurisdiction over the Company or any of its properties or
assets, except for any breach, violation or default that would not have a
Material Adverse Effect on the Company or (B) the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company.
(e) No consent,
approval, authorization, order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency or body is
required for the sale of the Shares or the consummation of the transactions
contemplated by this Agreement, except the registration of the Shares under the
Act, and the authorization for quotation of the Shares on the Nasdaq National
Market, all of which shall have been obtained or will be in effect by the Time
of Delivery, and except such as may be required by the NASD or under state
securities or blue sky laws in connection with the offer, sale and distribution
of the Shares by the Underwriters.
(f) To such counsel's
knowledge, other than as disclosed in the Prospectus, there is no litigation,
arbitration, claim, proceeding (formal or informal) or investigation, pending
or threatened, in which the Company is a party or of which any of its
properties or assets is the subject which, if determined adversely to the
Company, could have a Material Adverse Effect on the Company.
(g) The statements in
the Prospectus under "Business--Regulation," "Business--Legal Proceedings,"
"Certain Transactions," "Description of Capital Stock" and "Shares Eligible for
Future Sale" have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or regulations, or
legal conclusions, are correct in all material respects and fairly summarize
the matters required to be stated therein.
(h) The Company is not
an "investment company" or a company "controlled" by an investment company as
such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the
Investment Company Act.
(i) The Registration
Statement and the Prospectus (other than the financial statements, the notes
and schedules
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thereto and other financial, statistical or market data included therein, to
which such counsel need express no opinion), as of their respective effective
or issue dates, complied as to form in all material respects with the
requirements of the Act and the respective rules and regulations thereunder.
(j) To such counsel's
knowledge, there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus (or any amendment or supplement thereto) or to be filed as an
exhibit to the Registration Statement that are not described or filed as
required, as the case may be.
(k) The Registration
Statement and all post-effective amendments, if any, have become effective
under the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b).
In addition, such counsel shall also state that they have participated
in the preparation of the Registration Statement and the Prospectus and in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company, and
representatives of and counsel to the Underwriters at which the contents of the
Registration Statement, the Prospectus and related matters were discussed and,
except as otherwise indicated in their opinion, such counsel has not passed
upon or assumed any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or the Prospectus and
has not undertaken to verify independently the accuracy or completeness of the
statements in the Registration Statement or the Prospectus, nothing has come to
such counsel's attention that has caused it to believe that the Registration
Statement, or any further amendment thereto made prior to such Time of
Delivery, on its effective date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, not misleading, or that the Prospectus, or any amendment or
supplement thereto made prior to such Time of Delivery, as of its issue date
and as of such Time of Delivery, contained or contains any untrue statement of
a material fact or omitted 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 (provided that such counsel need express no
belief regarding the financial statements, the notes and schedules thereto and
other financial, statistical or market data contained in the Registration
Statement, any amendment thereto, or the Prospectus, or any amendment or
supplement
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<PAGE> 22
thereto).
9.4 You shall have received an opinion,
dated such Time of Delivery, of Kegler, Brown, Hill & Ritter Co., L.P.A,
counsel for the Company with respect to the laws of the State of Ohio, in form
and substance satisfactory to you and your counsel, to the effect that:
(a) The Company has
been duly incorporated, is validly existing as a corporation in good standing
under the laws of the State of Ohio and has the corporate power and authority
to own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and to enter into this Agreement and
perform its obligations hereunder.
(b) The Company's
authorized, issued and outstanding capital stock is as disclosed in the
Prospectus. All of the issued shares of capital stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and
conform to the description of the Common Stock contained in the Prospectus.
None of the issued shares of Common Stock of the Company has been issued or is
owned or held in violation of any statutory or, to such counsel's knowledge,
any other preemptive rights of shareholders, and no person or entity (including
any holder of outstanding shares of Common Stock of the Company) has any
statutory or, to such counsel's knowledge, any other preemptive or other rights
to subscribe for any of the Shares.
(c) Other than the equity
securities held in the investment portfolios of the Company, to such counsel's
knowledge, the Company does not own, directly or indirectly, any capital stock
or other equity securities of any other corporation or any ownership interest
in any partnership, joint venture or other association.
(d) When the Shares to be
sold by the Company have been duly delivered against payment therefor as
contemplated by this Agreement, the Shares will be duly authorized, validly
issued and fully paid and nonassessable, the holders thereof will not be
subject to personal liability solely by reason of being such holders and the
Shares will conform to the description of the Common Stock contained in the
Prospectus; the certificates evidencing the Shares will comply with all
applicable requirements of Ohio law.
(e) Upon delivery of the
Shares pursuant to this Agreement and payment therefor as contemplated therein,
the Underwriters will acquire valid and unencumbered title to the Shares.
(f) Upon the filing of the
Certificate of Merger with the Secretary of State of the State of Ohio, the
merger of
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<PAGE> 23
Southern Belle into the Company shall be effective on that date, or such later
date as stated in the Certificate of Merger, under the laws of the State of
Ohio. Upon the consummation of such merger, the stockholders of Southern Belle
will not be entitled to any rights as dissenting shareholders under the laws of
the State of Ohio.
(g) The sale of the Shares
being sold at such Time of Delivery and the performance of this Agreement and
the consummation of the transactions herein contemplated will not conflict with
or violate any provision of the articles of incorporation or Code of
Regulations of the Company, as amended to date.
(h) This Agreement has been
duly authorized, executed and delivered by the Company and, assuming due
execution by the Underwriters, constitutes the valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or affecting the
enforcement of creditors' rights generally and to general equitable principles
and except as the enforceability of rights to indemnity and contribution under
this Agreement may be limited under applicable securities laws or the public
policy underlying such laws.
(i) The sale of the Shares
being sold at such Time of Delivery and the performance of this Agreement and
the consummation of the transactions herein contemplated will not conflict with
or violate any provision of any existing law, statute, rule or regulation
applicable to the Company.
9.5 You shall have received an opinion,
dated such Time of Delivery, of Stoll, Keenon & Park, LLP, counsel for
Southern Belle, in form and substance satisfactory to you and your counsel, to
the effect that:
(a) The performance
of this Agreement by Southern Belle and the consummation of the transactions
herein contemplated by Southern Belle will not conflict with or violate any
provision of any applicable law, statute, rule or regulation, or in any
material respect, conflict with, or (with or without the giving of notice or
the passage of time or both) result in (A) a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument to which
Southern Belle is a party or to which any of its properties or assets is
subject, or, conflict with or violate any order, judgment or decree of any
court or governmental agency or body known to such counsel to have jurisdiction
over Southern Belle or any of its properties or assets, except for any breach,
violation or default that would not have a Material Adverse Effect on Southern
Belle or (B) the creation or imposition of any lien,
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<PAGE> 24
charge or encumbrance upon any property or assets of Southern Belle.
(b) To such counsel's knowledge, other
than as disclosed in the Prospectus, there is no litigation, arbitration,
claim, proceeding (formal or informal) or investigation, pending or threatened,
in which Southern Belle is a party or of which any of its properties or assets
is the subject which, if determined adversely to Southern Belle, would have a
Material Adverse Effect on Southern Belle.
(c) Southern Belle is not an "investment
company" or a company "controlled" by an investment company as such terms are
defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company
Act.
(d) Upon the filing of Certificate of
Merger with the Secretary of State of the State of Kentucky, the merger of
Southern Belle into the Company shall be effective, as of and at the effective
time specified therein, under the laws of the State of Kentucky. Upon the
consummation of such merger, the stockholders of Southern Belle will not be
entitled to any rights as dissenting shareholders under the laws of the State
of Kentucky.
(e) This Agreement has been duly
authorized, executed and delivered by Southern Belle and, assuming due
execution by the Underwriters, constitutes the valid and binding agreement of
Southern Belle, enforceable against Southern Belle in accordance with its
terms, subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or affecting the
enforcement of creditors' rights generally and to general equitable principles
and except as the enforceability of rights to indemnity and contribution under
this Agreement may be limited under applicable securities laws or the public
policy underlying such laws.
9.6 You shall have received a reliance letter,
dated such Time of Delivery, from Stoll, Keenon & Park, LLP, counsel for
Southern Belle, in form and substance satisfactory to you and your counsel, to
the effect that you and your counsel may rely upon all of the opinions Stoll,
Keenon & Park, LLP is delivering pursuant to Section 6(h) of the Southern Belle
Acquisition Agreement as if such opinions were addressed to you and your
counsel.
9.7 Morgan, Lewis & Bockius LLP, counsel for the
Underwriters, shall have furnished to you such opinion or opinions, dated such
Time of Delivery, with respect to matters agreed to by the Underwriters. Such
opinion or opinions may be rendered in reliance upon the opinion of Kegler,
Brown, Hill & Ritter as to matters governed by Ohio law.
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<PAGE> 25
9.8 The Underwriters shall have received letters
addressed to you, dated the date hereof and on any Time of Delivery, from
Coopers & Lybrand LLP, independent public accountants, in form and substance
heretofore approved by you.
9.9 The Underwriters shall have received letters
addressed to you, dated the date hereof and on any Time of Delivery, from
Baird, Kurtz & Dobson LLP, independent public accountants, in form and
substance heretofore approved by you.
9.10 Subsequent to the effective date of this
Agreement, there shall not have occurred (i) any change or development
involving a prospective change in or affect the financial condition, business
or results of operations of the Company or Southern Belle not contemplated by
the Prospectus, which in your opinion would make it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery or (ii) any event or development relating to
or involving the Company or any officer or director of the Company which makes
any statement made in the Prospectus untrue or which, in the opinion of the
Company and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending
or supplementing the Prospectus to reflect such event or development would, in
your opinion, make it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of the
date hereof.
9.11 Subsequent to the date hereof, there shall
not have occurred any of the following: (i) any domestic or international
event or act or occurrence has materially disrupted, or in your sole judgment
makes it impracticable or inadvisable to proceed with the purchase, sale and
delivery of the Shares being delivered at such Time of Delivery as contemplated
by the Registration Statement, as amended as of the date hereof; (ii) trading
in the Common Stock shall have been suspended or materially limited on the
Nasdaq National Market, or minimum or maximum prices shall have been fixed or
maximum ranges for prices shall have been required on the Nasdaq National
Market, the listing of the Common Stock on the Nasdaq National Market shall
have been terminated, or the Company shall have been notified that such
suspension or termination is being contemplated; (iii) trading on the New York
Stock Exchange, American Stock Exchange or Nasdaq National Market shall have
been suspended or materially limited, or minimum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been
required, on such exchanges by such exchanges or by order of the Commission or
any other regulatory body or governmental authority having jurisdiction; (iv) a
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<PAGE> 26
banking moratorium has been declared by a state or federal authority or if any
new restriction materially affects the distribution of the Shares at such Time
of Delivery; or (v) (A) the United States becomes engaged in hostilities or
there is an escalation of hostilities involving the United States or there is a
declaration of a national emergency or war by the United States or (B) there
shall have been material and adverse change in political, financial or economic
conditions, and the effect of any such event in (A) or (B) as in your sole
judgment makes it impracticable or inadvisable to proceed with the purchase,
sale and delivery of the Shares being delivered at such Time of Delivery as
contemplated by the Registration Statement, as amended as of the date hereof.
9.12 No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Time of Delivery.
9.13 The Company shall have furnished to you at
such Time of Delivery certificates of the chief executive and chief financial
officers of the Company, in form and substance satisfactory to you, stating
that (i) all of the representations and warranties of the Company contained in
this Agreement are true and correct on and as of the date hereof and on and as
of the Time of Delivery as if made on and as of the Time of Delivery, and (ii)
after carefully reviewing the Registration Statement and the Prospectus, in
their opinion (A) as of the effective date of the Registration Statement, the
Registration Statement and the Prospectus did not include any untrue statement
of a material fact and did not omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) since the effective date of the Registration Statement, no event has
occurred which should have been set forth in a supplement or amendment to the
Registration Statement or the Prospectus; and (iii) the Company has performed
all of its covenants and other obligations under this Agreement at or prior to
such Time of Delivery.
9.14 Southern Belle shall have furnished to you at
such Time of Delivery certificates of the chief executive of Southern Belle, in
form and substance satisfactory to you, stating that all of the representations
and warranties of Southern Belle contained in this Agreement and the Southern
Belle Acquisition Agreement are true and correct on and as of the date hereof
and on and as of the Time of Delivery as if made on and as of the Time of
Delivery.
9.15 The Underwriters shall have received a
certified copy of the Southern Belle Acquisition Agreement, together with all
schedules, deliveries and other information required to be provided by Southern
Belle to the Company pursuant to the terms
26
<PAGE> 27
of the Southern Belle Acquisition Agreement.
9.16 Each condition to the closing under the
Southern Belle Acquisition Agreement (other than the issuance of the Shares)
shall have been satisfied. At or prior to the First Time of Delivery, the
closing under the Southern Belle Acquisition Agreement shall have been
consummated on terms that conform in all material respects to the description
thereof in the Prospectus and the Registration Statement and the Underwriters
shall have received evidence satisfactory to them of the consummation thereof.
9.17 The Shares shall be authorized for quotation
on the Nasdaq National Market.
9.18 The Company shall have furnished or caused to
be furnished to you such further certificates and/or documents as you or
counsel to the Underwriters shall have reasonably requested.
9.19 The Company shall have paid to Advest, Inc.
the Financial Advisory Fee.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and counsel to the Underwriters.
Any certificate or document signed by any officer of the Company and
delivered to you, or to counsel for the Underwriters, shall be deemed a
representation and warranty by the Company to each Underwriter as to the
statements made therein.
10. Indemnification and Contribution.
10.1 The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon: (i) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Rule 462(b) Registration
Statement or any amendment thereto or (ii) the omission of or alleged omission
to state in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
any Rule 462(b) Registration Statement or any Application of a material fact
required to be stated therein or necessary to make the statements therein not
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<PAGE> 28
misleading; and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that (i) any such
loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through you expressly for use
therein (which information is solely as set forth in Section 2.2 hereof) or
(ii) such statement or omission was contained or made in any Preliminary
Prospectus and corrected in the Prospectus and (a) any such loss, claim, damage
or liability suffered or incurred by any Underwriter (or any person who
controls any Underwriter) resulted from an action, claim or suit by any person
who purchased Shares which are the subject thereof from such Underwriter in the
offering contemplated by this Agreement and (b) such Underwriter failed to
deliver or provide a copy of the Prospectus to such person at or prior to the
confirmation of the sale of such Shares in any case where such delivery is
required by the Act, unless such failure was due to the failure by the Company
to provide copies of the Prospectus (as so amended) to the Underwriters as
required by this Agreement. The Company will not, without the prior written
consent of the Underwriters, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding (or
related cause of action or portion thereof) in respect of which indemnification
may be sought hereunder (whether or not any Underwriter is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of each Underwriter from all
liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
10.2 Each Underwriter, severally but not
jointly, agrees to indemnify and hold harmless the Company against any losses,
claims, damages or liabilities to which the Company may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto, or any Application or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue
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statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein (which information is solely
as set forth in Section 2.2 hereof); and will reimburse the Company for any
legal or other expenses reasonably incurred by the Company in connection with
investigating or defending any such loss, claim, damage, liability or action.
10.3 Promptly after receipt by an indemnified
party under Section 10.1 or 10.2 of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such Section, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may have to any indemnified party, except to the extent that the
indemnifying parties shall have been prejudiced thereby. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party); provided, however, that the indemnified party shall have
the right to employ not more than one separate counsel (including local
counsel) for all indemnified parties, whose fees, costs, disbursements and
other expenses shall be the responsibility of the indemnifying party if (i) the
indemnifying parties have agreed in writing to pay such fees, costs,
disbursements and other expenses, (ii) the indemnifying parties have failed to
assume the defense and employ counsel or (iii) the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it or other indemnified parties which are different
from or additional to those available to the indemnifying party. After such
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 10 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof. Nothing in this
Section 10.3 shall preclude an indemnified party from participating at its own
expense in the defense of any such action so assumed by the indemnifying party.
10.4 If the indemnification provided for in
this Section 10 is unavailable to or insufficient to hold harmless an
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<PAGE> 30
indemnified party under Section 10.1 or 10.2 in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law or if the indemnified party failed to give the
notice required under Section 10.3 above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company on the one hand and the Underwriters on
the other hand in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other hand
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company on the one hand or the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this Section
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty
of
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such fraudulent misrepresentation. The Underwriters' obligations in this
Section to contribute are several in proportion to their respective
underwriting obligations and not joint.
10.5 The obligations of the Company under this
Section 10 shall be in addition to any liability which the Company may
otherwise have and shall extend, upon the same terms and conditions, to each
officer, director and employee of the Underwriters and to each person, if any,
who controls any Underwriter within the meaning of the Act or the Exchange Act;
and the obligations of the Underwriters under this Section 10 shall be in
addition to any liability which the respective Underwriters may otherwise have
and shall extend, upon the same terms and conditions, to each officer, trustee
and director of the Company and to each person, if any, who controls the
Company within the meaning of the Act or the Exchange Act.
10.6 Any losses, claims, damages, liabilities
or expenses (including legal) for which an indemnified party is entitled to
indemnification or contribution under this Section 10 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 10 and the representations and warranties
of the Company set forth in this Agreement shall remain operative and in full
force and effect, regardless of (i) any investigation made by or on behalf of
any Underwriter or any person controlling any Underwriter, the Company, its
directors or officers, or any person controlling the Company, (ii) acceptance
of any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Company, its directors or officers, or to any person
controlling the Company shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 10.
11. Effective Date of this Agreement.
This Agreement shall become effective: (i) upon the execution
and delivery hereof by the parties hereto; or (ii) if, at the time this
Agreement is executed and delivered, it is necessary for the Registration
Statement or a post-effective amendment thereto to be declared effective before
the offering of the Shares may commence, when notification of the effectiveness
of the Registration Statement or such post-effective amendment has been
received by the Company and the Underwriters. Until such time as this
Agreement shall become effective, it may be terminated by the Company, by
notifying you, or by you, by notifying the Company.
12. Termination.
This Agreement may be terminated in the sole discretion
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of the Underwriters by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that
(i) any condition to the obligations of the Underwriters set forth in Section 9
hereof has not been satisfied, or (ii) the Company shall have failed, refused
or been unable to deliver the Shares or the Company shall have failed, refused
or been unable to perform all obligations and satisfied all conditions on its
part to be performed or satisfied hereunder at or prior to such Time of
Delivery, in either case other than by reason of a default by any of the
Underwriters. If this Agreement is terminated pursuant to this Section 12,
then the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable counsel fees and disbursements)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Shares.
Notice of such termination may be given to the Company by telegram,
telecopy or telephone.
13. Survival. The respective indemnities, agreements,
representations, warranties and other statements of the Company and Southern
Belle, their respective officers and the Underwriters, as set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person referred to in Section 10.5 or the
Company or Southern Belle, or any officer, trustee or director or controlling
person of the Company referred to in Section 10.5, and shall survive delivery
of and payment for the Shares. The respective agreements, covenants,
indemnities and other statements set forth in Sections 8, 10 and 12 hereof
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
14. Notices. All communications hereunder shall be in
writing and, if sent to any of the Underwriters, shall be mailed, delivered or
telegraphed and confirmed in writing to you in care of Advest, Inc., One
Rockefeller Plaza, 20th Floor, New York, New York, 10020, Attention: Brett A.
Chamberlain (with a copy to Morgan, Lewis & Bockius LLP, 101 Park Avenue, New
York, New York 10178, Attention: Christopher T. Jensen, Esq.); if to the
Company shall be sufficient in all respects if mailed, delivered or telegraphed
and confirmed in writing to Broughton Foods Company, 210 Seventh Street,
Marietta, Ohio 45750, Attention: Philip E. Cline (with a copy to Arnold &
Porter, 555 Twelfth Street, N.W., Washington, D.C. 20004, Attention: Steven
Kaplan, Esq.).
15. Binding Effect. This Agreement shall be binding
upon, and inure solely to the benefit of, the Underwriters and the Company and
the officers, trustees, directors and employees and controlling persons
referred to in Section 10.5 and their
32
<PAGE> 33
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
16. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York without
giving effect to any provisions regarding conflicts of laws.
17. Counterparts. This Agreement may be executed by any
one or more of the parties hereto in any number of counterparts, each of which
shall be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and
upon the acceptance hereof by Advest, Inc., on behalf of itself and Ferris,
Baker Watts, Incorporated, this letter will constitute a binding agreement
among the Underwriters and the Company.
Very truly yours,
BROUGHTON FOODS COMPANY
By:_________________________
Name:
Title:
As to Sections 3 and 9.14 hereof only:
SOUTHERN BELLE DAIRY COMPANY
By:_________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above in
New York, New York:
ADVEST, INC.
FERRIS, BAKER WATTS, INCORPORATED
By: ADVEST, INC.
33
<PAGE> 34
By:__________________________________
Name:
Title:
<PAGE> 35
SCHEDULE I
<TABLE>
<CAPTION>
Underwriter Total Number Number of Option Shares
----------- of Firm Shares to be Purchased if Maximum
to be Purchased Option Exercised
--------------- --------------------------
<S> <C> <C>
Advest, Inc.
Ferris, Baker Watts, Incorporated
TOTAL ========= ==========
</TABLE>
<PAGE> 36
EXHIBIT A
NONE
<PAGE> 37
EXHIBIT B
BROUGHTON FOODS COMPANY
LOCK-UP AGREEMENT
_________, 1997
Advest, Inc.
Ferris, Baker Watts, Incorporated
As Representatives of the Several Underwriters
One Rockefeller Plaza
New York, New York 10020
Ladies and Gentlemen:
The undersigned understands that you, as Representatives of the
several underwriters (the "Underwriters"), propose to enter into an
underwriting agreement (the "Underwriting Agreement") with Broughton Foods
Company (the "Company") providing for the public offering (the "Public
Offering") by the Underwriters, including yourself, of common stock of the
Company (the "Common Stock") pursuant to the Company's Registration Statement
on Form S-1 (the "Registration Statement").
In consideration of the Underwriters' agreement to purchase and make
the Public Offering of the Common Stock, and for other good and valuable
consideration, receipt of which is hereby acknowledged, the undersigned hereby
agrees, for a period of 180 days after the effective date of the Registration
Statement (the "Lock-Up Period"), not to sell, offer to sell, solicit an offer
to buy, contract to sell, encumber, distribute, pledge, grant any option for
the sale of, or otherwise transfer or dispose of, directly or indirectly, in
one or a series of transactions (collectively, a "Disposition"), any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock or
any securities convertible or exercisable into or exchangeable for shares of
Common Stock (collectively, "Securities"), now owned or hereafter acquired by
the undersigned or with respect to which the undersigned has acquired or
hereafter acquires the power of disposition, without the prior written consent
of Advest, Inc. Prior to the expiration of the Lock-Up Period, the undersigned
agrees that it will not announce or disclose any intention to do anything after
the expiration of such period which the undersigned is prohibited, as provided
in the preceding sentence, from doing during the Lock-Up Period. In addition,
for the benefit of the Company and the Underwriters, the undersigned hereby (i)
waives any right it may have to cause the Company to register pursuant to the
Securities Act of 1933, as amended, shares of Common Stock now owned or
hereafter acquired or received by the undersigned as a result of the Public
Offering and (ii) during the Lock-Up Period, agrees not to exercise any such
registration rights and further agrees that the Company shall not be obligated
to register any shares in violation of the Underwriting Agreement.
The undersigned acknowledges and agrees that the restrictions above are
expressly
<PAGE> 38
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities (or the economic equivalent thereof)
during the Lock-Up Period even if such Securities would be disposed of by
someone other than the undersigned. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based marked basket or index)
that includes, relates to or derives any significant part of its value from the
Securities.
The undersigned hereby also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Securities held by the undersigned except in compliance with this Lock-Up
Agreement.
It is understood that, if the Underwriting Agreement is not executed,
or if the Underwriting Agreement shall terminate or be terminated prior to
payment for and delivery of the Common Stock the subject thereof, this Lock-Up
Agreement shall automatically terminate and be of no further force or effect.
This Lock-Up Agreement shall be governed by and construed in
accordance with the laws of the State of New York (without giving effect to its
conflict of laws provisions).
Very truly yours,
_____________________________
Name:
37
<PAGE> 1
EXHIBIT 3.1
AMENDED ARTICLES OF INCORPORATION
OF
BROUGHTON FOODS COMPANY
FIRST. The name of the Corporation is Broughton Foods Company.
SECOND. The principal office of the Corporation in the State of Ohio, is to
be located at Marietta, in Washington County.
THIRD. The purpose or purposes of the Corporation are:
1. To produce, develop, raise, manufacture, process, buy, sell,
distribute, market, and otherwise acquire, use, dispose of, and
generally deal, in every manner, in farm, dairy and food products,
solid and liquid, of every kind, nature and description whatsoever.
2. To provide food services of every description and in every manner,
including vending, catering, and the operation of concessions and
restaurants.
3. To do all things necessary or incidental to the foregoing purposes
enumerated in Paragraphs 1 and 2 hereof, including acquiring, owning,
holding, building, developing, using, operating, inventing, disposing
of and dealing, in every manner, in all real and personal property,
tangible or intangible, of every nature and description, with respect
to any interest or right therein, and, in general, to carry on any
other lawful business whatsoever related to the business of the
Corporation, or which is calculated, directly or indirectly, to
promote the interests of the Corporation or to enhance the value of
any of its properties; and to have an exercise all rights, powers and
privileges which are now or may hereafter be conferred on
corporations by the laws of Ohio; provided, however, that nothing
contained in this
<PAGE> 2
Article at any time shall be construed as authorizing the Corporation to
carry on the business of a public utility or railroad, as defined by the
public utility laws of the State of Ohio.
4. To enter into, make, perform and carry out contracts and agreements of
every kind and description which may be necessary, appropriate, convenient
or advisable in carrying out the foregoing purposes of the Corporation,
with any person, association, firm, corporation, country, state,
municipality, board of education, or any other governmental division or
subdivision, wheresoever located.
FOURTH. Section 1. The maximum number of shares which Broughton Foods Company is
authorized to have outstanding is Ten Million (10,000,000) shares of Common
Stock, par value One Dollar ($1.00) per share. Each share of Class A Common
Stock and Class B Common Stock issued and outstanding is hereby, without further
action, automatically converted into one share of Common Stock. Certificates
formerly representing shares of Class A Common Stock and Class B Common Stock
will automatically represent shares of Common Stock without necessity for
exchange of shares. As shares of stock formerly designated as Class A Common or
Class B Common Stock are, from time to time, delivered to the Company or its
transfer agent for transfer, reissue or any other reason then in such event new
shares of Common Stock shall be issued. Said new shares of Common Stock shall
make no reference as to whether the former shares were Class A Common Stock or
Class B Common Stock.
Section 2. The express terms and provisions of the Common Stock are as
follows:
(a) Holders of Common Stock shall be entitled to one vote per share
on all matters.
(b) Holders of Common Stock shall have no preemptive rights in shares
of the same class or of any other class.
Section 3. The stated capital of Broughton Foods Company shall be not less
than the aggregate par value of the total shares at the time issued and
outstanding.
FIFTH. The provisions of Section 1701.831 of the Ohio Revised Code, entitled
"Control share acquisitions; prior shareholder authorization required;
severability of section" does not apply to control share acquisitions (as
defined therein and in Section 1701.01 of the Ohio Revised Code) of shares of
this corporation.
SIXTH. These Amended Articles of Incorporation take the place of and supersede
the existing Articles of Incorporation as heretofore amended.
2
<PAGE> 1
EXHIBIT 3.2
CODE OF REGULATIONS
ARTICLE I
SHAREHOLDERS' MEETING
Section 1. Annual Meeting. The annual meeting of shareholders, for the
election of Directors and the consideration of reports to be laid before such
meeting, shall be held on a date and at a time fixed by the Board of Directors,
annually, and shall be a date not less than ninety (90) days nor more than one
hundred and twenty (120) days after the close of each fiscal year of the
Corporation; provided, however, if the Directors shall fail to fix a date for
any annual meeting on or before sixty (60) days after the close of any fiscal
year of the corporation, then the annual meeting of shareholders shall be held
at 1:30 o'clock p.m., on the fourth Friday in April. Upon due notice, there may
also be considered and acted upon at an annual meeting any matter which could
properly be considered and acted upon at a special meeting, in which case and
for which purpose the annual meeting shall also be considered as, and shall be,
a special meeting. When the annual meeting is not held or Directors are not
elected thereat, they may be elected at a special meeting called for that
purpose.
Section 2. Special Meetings. Special meetings of shareholders may be
called by the Chairman of the Board, the President, or, in case of the
President's absence, death, or disability, the Vice-President authorized to
exercise the authority of the President, or by the Directors by action at a
meeting, or by a majority of the Directors acting without a meeting, or by the
person or persons who hold not less than fifty percent of all shares
outstanding and entitled to be voted on any proposal to be submitted at
such meeting.
Upon requesting writing delivered either in person or by registered
mail to the President or Secretary by any person or persons entitled to
call a meeting of shareholders, such officer shall forthwith cause to be given,
to the shareholders entitled thereto, notice of a meeting to be held not less
than seven nor more than sixty days after the receipt of such request, as such
officer shall fix. If such notice is not given within twenty days after the
delivery or mailing of such request, the person or persons calling the meeting
may fix the time of meeting and give, or cause to be given notice in the matter
hereinafter provided.
Section 3. Place of Meeting. Any meeting of shareholders may be held
either at the principal office of the Corporation or at such other place within
or without the State of Ohio as may be designated in the notice of said
meeting. All meetings of shareholders shall be held at the principal
office of the Corporation unless a different place is designated for a
particular meeting by resolution of the Board of Directors.
Section 4. Notice of Meetings. Not more than sixty days nor less than
seven days before the date fixed for a meeting of shareholders, whether annual
or special, written or printed notice of the time, place and purposes of such
meeting shall be given by or at the direction of the President, a Vice
President, the Secretary or an Assistant Secretary. Such notice shall be given
either by personal delivery or by mail to each shareholder of record entitled
to notice of such meeting. If such notice is mailed, it shall be
addressed to the shareholders at their respective
<PAGE> 2
2
addresses as they appear on the records of the Corporation, and notice shall be
deemed to have been given on the day so mailed. Notice of adjournment of a
meeting need not be given if the time and place to which it is adjourned are
fixed and announced at such meeting.
Section 5. Shareholders Entitled to Notice and to Vote. If a record date
shall not be fixed pursuant to the statutory authority, the record date for the
determination of shareholders who are entitled to notice of, or who are entitled
to vote at, a meeting of shareholders, shall be the close of business on the
date next preceding the day on which notice is given, or the close of business
on the date next preceding the day on which the meeting is held, as the case may
be.
Section 6. Inspectors of Election. Inspectors of Election may be
appointed to act at any meeting of shareholders in accordance with statute.
Section 7. Quorum. To constitute a quorum at any meeting of
shareholders, there shall be present, in person or by proxy, shareholders of
record entitled to exercise not less than a majority of the voting power of the
Corporation in respect of any one of the purposes for which the meeting is
called.
The shareholders present, in person or by proxy, whether or not a quorum
be present, may adjourn the meeting from time to time without notice, other than
announcement at the meeting, until holders of the amount of shares required to
constitute a quorum shall be present, in person or by proxy. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 8. Voting. In all cases, except where otherwise by statute or
the Articles or the Regulations provided, a majority of the votes cast shall
control.
Section 9. Reports to Shareholders. At the annual meeting, or the
meeting held in lieu thereof, the officers of the Corporation shall lay before
the shareholders a financial statement as required by statute.
Section 10. Action Without a Meeting. Any action which may be authorized
or taken at a meeting of the shareholders may be authorized or taken without a
meeting in a writing or writings signed by all of the shareholders who would be
entitled to notice of a meeting for such purpose, which writing or writings
shall be filed with or entered upon the records of the Corporation.
ARTICLE II
DIRECTORS
Section 1. Election and Term of Office. The Directors shall be elected
at the annual meeting of shareholders, or if not so elected, at a special
meeting of shareholders called for that purpose, and each Director shall hold
office until the date fixed by these Regulations for the next
<PAGE> 3
3
succeeding annual meeting of shareholders and until his successor is elected, or
until his earlier resignation, removal from office, or death. At any meeting of
shareholders at which Directors are to be elected, only persons nominated as
candidates shall be eligible for election.
Section 2. Number of Directors. The number of Directors to be elected
shall be determined annually, at the meeting of shareholders, called for the
purpose of electing Directors at which a quorum is present, by the affirmative
vote of the holders of a majority of the shares which are represented at such
meeting, in person or by proxy, and entitled to vote on such proposal, but shall
not be less than three (3) members nor more than eleven (11) members.
Section 3. Meetings. Regular meetings of the Directors shall be held
immediately after the annual meeting of shareholders and at such other times and
places as may be fixed by the Directors, and such meetings may be held without
further notice.
Special meetings of the Directors may be called by the Chairman of the
Board, the President, or, in case of the President's absence, death, or
disability, the Vice-President authorized to exercise the authority of the
President, the Secretary, or by a majority of the Directors. Notice of the time
and place of a special meeting shall be served upon or telephoned to each
Director at least twenty-four hours, or mailed, telegraphed or cabled to each
Director at least forty-eight hours prior to the time of the meeting, but such
notice need not specify the purposes of the meeting.
Section 4. Quorum. A majority of the number of Directors in office shall
be necessary to constitute a quorum for the transaction of business, but if at
any meeting of the Directors there shall be less than a quorum present, a
majority of those present may adjourn the meeting from time to time without
notice other than announcement at the meeting until a quorum shall attend.
Section 5. Action without a Meeting. Any action which may be authorized
or taken at a meeting of the Directors may be authorized or taken without a
meeting in a writing or writings signed by all the Directors, which writing or
writings shall be filed with or entered upon the records of the Corporation.
Section 6. Executive and other Committees. The Directors may elect from
their own membership an Executive Committee or any other committee of the
Directors, to consist of not less than three (3) Directors, and may authorize
the delegation to any such committee of any of the authority of the Directors,
however conferred, other than that of filling vacancies among the Directors or
in any committee of the Directors. Each such committee shall serve at the
pleasure of the Directors, and shall act only in the intervals between meetings
of the Directors, and shall be subject to the control and direction of the
Directors.
Section 7. Qualifications. If a Director is an employee of the
Corporation at the time of his election or becomes such during his term, and in
either event, prior to the expiration of his term ceases to be an employee, his
office as a Director shall become vacant forthwith, effective at
<PAGE> 4
4
the time of the actual termination of his employment or on the date of the
giving of his resignation or the giving to him of notice of discharge, whichever
occurs earlier.
ARTICLE III
OFFICERS
Section 1. Election and Term of Office. The Corporation shall have a
President, a Secretary, and a Treasurer, and may have a Chairman of the Board,
an Executive Vice President, one or more Vice Presidents, a General Manager, and
such other officers and assistant officers as the Directors may deem necessary.
The only officer who need be a Director shall be the President. The same person
may hold more than one office. Except to the extent of the creation by the
Directors of a new position as officer or assistant officer or the filling of a
vacancy in an existing position as officer or assistant officer, all of the
officers and assistant officers shall be elected by the Directors at the meeting
to be held immediately following the annual shareholders' meeting, and shall
hold office, subject to the pleasure of the Directors, until their respective
successors are elected and qualified.
Section 2. Authority and Duties of Officers. The officers of the
Corporation shall have such authority and shall perform such duties as are
customarily incident to their respective offices, or as may be specified from
time to time by the Directors regardless of whether such authority and duties
are customarily incident to such office.
ARTICLE IV
DIRECTORS AND OFFICERS
Section 1. Indemnification.
The Corporation shall indemnify each Director and officer of the
Corporation, and each person employed by the Corporation who serves at
the written request of the President of the Corporation as a Director,
trustee, officer, employee or agent of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture, trust or
other enterprise, to the full extent permitted by Ohio law. In
addition, the Corporation may indemnify assistant officers, employees,
agents and others by action of the Board of Directors to the full
extent permitted by Ohio law.
<PAGE> 5
5
ARTICLE V
SHARES
Section 1. Certificates. A certificate or certificates evidencing the
ownership of shares of the Corporation shall be issued to those entitled thereto
by transfer or otherwise. Each certificate for shares shall bear a
distinguishing number, the signature or facsimile signature of the President or
Vice-President, and of the Secretary or an Assistant Secretary, the seal of the
Corporation, and such recitals as may be required by law. The certificates for
shares shall be of such tenor and design as the Directors from time to time may
adopt.
Section 2. Transfer and Registration of Certificates. The Directors
shall have the authority to make such rules and regulations as they deem
expedient concerning the issuance, transfer and registration of certificates for
shares and the shares represented thereby and may appoint transfer agents and
registrars thereof.
Section 3. Substituted Certificates. Any person claiming a certificate
for shares to have been lost, stolen or destroyed shall make an affidavit or
affirmation of that fact, shall give the Corporation and its registrar or
registrars and its transfer agent or agents a bond of indemnity satisfactory to
the Directors or to the Executive Committee or to the President or a Vice
President and the Secretary or the Treasurer, and, if required by the Directors
or the Executive Committee or such officers, shall advertise the same in such
manner as may be required, whereupon a new certificate may be executed and
delivered of the same tenor and for the same number of shares as the one alleged
to have been lost, stolen or destroyed.
Section 4. Voting Upon Shares Held by the Corporation. Unless otherwise
ordered by the Directors, the President and the Secretary, each, in person or by
proxy or proxies appointed by him, shall have full power and authority on behalf
of the Corporation to vote, act and consent with respect to any shares issued by
other corporations which the Corporation may own, which may be held in the
Corporation's name or as to which the Corporation may otherwise have the right
to vote, act or consent.
<PAGE> 6
6
ARTICLE VI
MISCELLANEOUS
Section 1. Corporate Seal. The seal of the Corporation shall be circular
in form with the name of the Corporation stamped around the margin and the word
"Seal" stamped across the center. It or a facsimile thereof shall be affixed to
all certificates of the Corporation's shares.
Section 2. Amendments. These Regulations may be amended, or new
Regulations may be adopted, by the shareholders at a meeting held for such
purpose, by the affirmative vote of the holders of shares entitling them to
exercise a majority of the voting power of the Corporation on such proposal, or
without a meeting by the written consent of the holders of shares entitling them
to exercise two-thirds of the voting power on such proposal, provided, however,
that if an amendment is adopted, or new Regulations are adopted, by written
consent without a meeting of the shareholders, the Secretary shall mail a copy
of such amendment or such new Regulations to each shareholder of record who
would have been entitled to vote thereon and did not participate in the adoption
thereof.
<PAGE> 1
EXHIBIT 5
[KEGLER, BROWN, HILL & RITTER LETTERHEAD]
November 25, 1997
Broughton Foods Company
210 N. Seventh St.
Marietta, OH 45750
Gentlemen:
We have acted as counsel for Broughton Foods Company (the "Company") in
connection with the registration under the Securities Act of 1933, as amended,
of up to 1,380,000 common shares, par value $1.00 (the "Shares"). In this
connection, we have examined the Amended Articles of Incorporation, the Code of
Regulations and the respective amendments thereto, the directors' and
shareholders' minutes and the Registration Statement filed with the Securities
and Exchange Commission, exhibits thereto, and such other documents as we have
deemed necessary to the opinion hereinafter expressed.
We are of the opinion that the Shares are duly authorized and, upon
their sale as contemplated by the Registration Statement, will be validly
issued, fully paid, and nonassessable.
We hereby consent to the reference to Kegler, Brown, Hill & Ritter Co.,
L.P.A. appearing under the heading "Legal Matters" in the Registration
Statement and any amendments thereto and the Prospectus of the Company relating
to its public offering of the Shares.
Very truly yours,
KEGLER, BROWN, HILL & RITTER CO., L.P.A.
By:/s/ John R. Thomas
-------------------------------------
John R. Thomas, Vice President
<PAGE> 1
EXHIBIT 10
EMPLOYMENT, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
This Agreement is made this ____ day of __________, 1997, between
Martin Shearer individually (hereinafter "Employee"), and Broughton Foods
Company, an Ohio corporation (hereinafter "Broughton").
WHEREAS, Employee is the president and a key manager of Southern Belle
Dairy Company, Inc., a Kentucky corporation (the "Company") active in the
management and operations of the Company and whose efforts have been vital to
the continuing success of the Company's business; and
WHEREAS, pursuant to an Agreement of Merger dated the ____ day of
September, 1997, Company will be merged with and into Broughton Foods Company
("Broughton"), an Ohio corporation; and
WHEREAS, Employee has heretofore rendered valuable services to the
Company, and Broughton expects that Employee will continue to be active in the
operations of Broughton and wishes to assure the continued availability of
Employee's expertise and the future rendition of valuable services by Employee
to Broughton after the merger; and
WHEREAS, consummation of such merger is therefore contingent upon the
execution of this Employment, Confidentiality and Non-Competition Agreement; and
WHEREAS, as a material inducement to Broughton to enter into and
consummate the aforesaid Agreement of Merger, Employee is willing to execute and
perform this agreement and has herein
1
<PAGE> 2
further agreed to be employed by and not to compete with Broughton after
consummation of the merger.
NOW, THEREFORE, in consideration of the premises which are and shall be
construed to be an integral part hereof and not as mere recitals, for the mutual
covenants and agreements set forth in said Agreement of Merger and this
Agreement and the consideration flowing therefrom and herefrom, and for other
good and valuable consideration, the receipt and sufficiency of all of which are
hereby acknowledged, it is agreed as follows:
1. Broughton agrees to employ Employee, and Employee agrees to serve
Broughton, upon the terms and conditions hereinafter set forth. Under the terms
of this Agreement, Employee shall have the status of an employee, all of whose
compensation hereunder shall be considered wages subject to withholding for both
income tax and Social Security tax purposes.
2. Employee shall:
(a) serve Broughton faithfully and to the best of his ability under
the direction of the Board of Directors of Broughton;
(b) devote his entire time, energy and skill during regular business
hours to such employment, regular vacations excepted, and represent no other
company nor work for any other employer or engage in any joint venture unless
Broughton consents to same in writing, except further that nothing herein shall
preclude Employee from making passive investments in enterprises not requiring
his personal involvement);
(c) perform from time to time such services and act in such capacity
or office consistent with and in the course and
2
<PAGE> 3
scope of Broughton's business for Broughton as such Board of Directors shall
request without any compensation other than that for which provision is made in
this agreement;
(d) abide by all the rules and regulations of Broughton.
3. Broughton shall:
(a) pay to Employee during the term hereof a fixed salary of Six
Thousand Six Hundred Sixty-Six Dollars and Sixty-Six Cents ($6,666.66) a month
payable once each month in one installment, less all required deductions, which
installment shall be payable on "normal pay days" determined in accordance with
the general payroll practices of Broughton.
(b) for each calendar year of Broughton commencing January 1, 199_
during the term of Employee's employment under this Agreement, pay the Employee
as a bonus, four percent (4%) of the net pre-tax profits of the Company (which
for purposes of this Section 3 shall be deemed to be the business unit or
division of Broughton which constituted the Company prior to the merger) for
such fiscal year. Payment of such sum shall be made in one lump sum annually as
soon as reasonably practicable after the Company's audited financial statements
for the Company's fiscal year are available. The term "net pre-tax profits" as
used herein shall mean the book net income of the Company for the fiscal year as
reflected in financial statements of the Company and Broughton, before
subtraction of the amount of federal, state and local income tax allocated by
the Company's or Broughton's accountants as due and owing on such amount of
income. For
3
<PAGE> 4
purposes of this determination, "net pre-tax profits" shall be computed without
regard to gains or losses realized on the sale or other disposition of capital
assets, as well as "extraordinary" items of gain or loss, as that term is
defined under generally accepted accounting principles. Financial statements of
Company and Broughton, as used herein, shall mean the financial statements
prepared in accordance with generally accepted accounting principles audited
and/or reviewed by the public accountants employed by the Company and Broughton
for the fiscal year. Such accountant's reports and the final statements, as well
as the accountants' determination of "net pre-tax profits" shall be conclusive
on the Company and Employee, and shall be furnished to the Company and Employee
as soon as possible.
Broughton shall not be required to make any payments under this Section
3 to the Employee during any period while the Employee shall be in breach or
violation of any of the non-competition provisions of this Agreement after
Broughton shall have notified the Employee in writing that Broughton deems the
Employee's activity to constitute such a breach or evasion.
The Employee shall not anticipate, encumber, alienate or assign any of
his rights, claims or interests under this Agreement except upon written
authority of Broughton and except further for the assignment and set-off rights
of Broughton described above, and no payments, benefits or rights arising by
reason of this Agreement shall be in any way subject to their debts, contracts
or engagements nor to any judicial process to levy upon or tax the same for
payment thereof.
4
<PAGE> 5
(c) provide the Employee paid vacations and holidays as follows: The
Employee shall receive each year as many vacation weeks as determined in
accordance with the general vacation practice of Broughton. All vacations shall
be scheduled by Broughton, taking into consideration the requirements of the
business and the desires of the Employee. During vacation periods, the Employee
shall not be required to perform any services for Broughton but shall
nevertheless receive his regular fixed salary as provided for in Section 3(a)
above. The Employee shall be allowed time off on all holidays observed by
Broughton with respect to all of its employees, and Employee's fixed salary
provided for in Section 3(a) above shall not be reduced or affected as a result
of the observance of holidays; and
(d) Broughton will in accordance with the general practices of
Broughton reimburse the Employee for all reasonable expenses necessarily
incurred the Employee in the performance of his duties under this Agreement.
Such reimbursement will be made against vouchers containing all information
generally required by Broughton in connection with reimbursement of expenses
incurred by its employees.
4. The employment of Employee hereunder shall be effective as of
____________, 1997, and shall continue at the will of Broughton until terminated
in any one of the following ways:
(a) by Broughton giving Employee written notice of immediate
termination after he shall have been found by the Board of Directors of
Broughton to have committed an act of fraud or
5
<PAGE> 6
embezzlement or other dishonest act with regard to his employment or the
business of Broughton;
(b) by Broughton giving Employee thirty days written notice of
termination "for cause", which shall mean Employee's (i) willful misconduct in
respect of, or breach, violation or failure to perform his duties under this
Agreement; (ii) conviction of a felony; or (iii) failure to comply with
applicable laws with respect to the execution of Broughton's business
operations;
(c) by the death of Employee, or other incapacity or disability of
Employee which is sufficient to prevent Employee's full and adequate performance
of all of his obligations hereunder;
(d) by Broughton giving Employee thirty days written notice of
"termination without cause" (termination for any reason other than a reason set
forth in Section 4(a) or (b) above) which reason is not specifically prohibited
by law;
(e) by Employee giving thirty days written notice of his intention
to terminate employment.
5. Except with respect to death of Employee or termination without
cause, upon termination of Employee's employment hereunder pursuant to Section 4
or otherwise, Employee shall be paid only those monies then properly due and
owing to Employee as salary as calculated pursuant to Section 3(a), and Employee
shall forfeit all rights to vacations, fixed salary attributable to vacation
periods, bonuses, and all other benefits of employment.
In the event of termination of Employee's employment due to Employee's
death or termination without cause, Employee shall be
6
<PAGE> 7
entitled to receive the bonus provided in Section 3(b) for the fiscal year of
such event, prorated to the date of termination.
6. During and after his term of employment with Broughton, Employee
shall not furnish to any person, firm or company or retain or use any papers or
other information of any nature whatsoever concerning the customers of the
Company or Broughton, or any other confidential business information of the
Company or Broughton, and shall not engage in, or participate in, any effort or
act to induce any customer of the Company or Broughton to take any steps which
might result to the disadvantage of or be detrimental to the interests of the
Company or Broughton.
7. Employee recognizes and acknowledges that the list of the customers
of the Company and Broughton is a valuable, special and unique asset of the
business of the Company and Broughton and, therefore, during and after his term
of employment, he shall keep secret from every person, firm or company, other
than the Company or Broughton, together with all knowledge concerning the same
which he may at any time acquire during his employment with the Company or
Broughton, to include all knowledge or understanding of the Company or
Broughton, their operation, customers, plans, organization, financial condition,
billings, products, product formulae, creative ideas, and/or costs. It is
explicitly understood and agreed between the parties that divulgence of any of
the above information to any person or entity outside of the Company or
Broughton must have the written approval of Broughton's board of directors,
which approval may be withheld for any reason by Broughton's board of directors.
7
<PAGE> 8
Employee further covenants and agrees that every document, computer
disk, computer software program, notation, record, diary, memorandum,
development, investigation, or the like, and any method or manner of doing
business, of Company or Broughton (or containing any other secret or
confidential information of Company or Broughton) made or acquired by Employee
during said employment, is and shall be the sole and exclusive property of
Company and Broughton.
Employee will deliver the same (and each and every copy, disk,
abstract, summary, or reproduction of same made by or for Employee or acquired
by Employee) whenever Broughton may so require and in any event prior to or at
the termination of said employment. It is understood and agreed by Employee that
all information of the Company or Broughton developed or used by its officers,
consultants, or employees or acquired by Company or Broughton from anyone not an
officer, consultant, or employee shall be considered to be secret and
confidential to the extent and for so long as such information is not available
to the general public.
8. During the term of Employee's employment with Broughton, and for a
period of two (2) years after the termination of the employment of Employee with
Broughton, for any reason whatsoever, Employee shall not:
(a) enter into or engage directly or indirectly, or provide
assistance to any other person, firm or company, in any business competitive
with the business of the Company or Broughton, (either as an individual on his
own account or as a
8
<PAGE> 9
partner or joint venturer or as an employee, agent or salesman for any person,
firm or company or as an officer, director or stockholder of a company or
otherwise) within the Commonwealth of Kentucky; or
(b) approach, contact, solicit, sell to, or deal with any customer
of Company or Broughton, for the purpose of offering or selling products or
services to, or otherwise obtaining or receiving business or income from, or
otherwise diverting from Company or Broughton business or income from, such
customer of Company or Broughton; or
(c) directly or indirectly, solicit or induce, or attempt to solicit
or induce, any employee, current or future, of the Company or Broughton to leave
the Company or Broughton for any reason whatsoever, or hire any current or
future employee of the Company or Broughton.
without having first obtained the written consent of Broughton, which consent
may be arbitrarily withheld. The covenants and agreements of Employee which are
contained in this section shall be construed as covenants and agreements
independent of any other provision in this agreement and the existence of any
claim or cause of action of Employee, whether predicated on this agreement or
otherwise, shall not constitute a defense to the enforcement
9
<PAGE> 10
by Broughton of the aforesaid covenants and agreements. Each of the three
covenants set forth above in paragraph 8(a), 8(b) and 8(c), respectively, is and
shall be deemed to be an entirely separate and wholly independent covenant, and
the invalidity of any one or more of said four separate and independent
covenants shall have absolutely no effect whatsoever upon the validity of the
others.
9. All of the terms and conditions of Sections 6, 7 and 8 shall remain
in full force and effect for a period of two (2) years after the termination of
the employment of Employee with Broughton for any reason whatsoever, and during
the whole of such two-year period, Employee will not make or permit to be made
any public announcement or statement of any kind that he was formerly connected
with the Company or Broughton in any capacity whatsoever, except that Employee
may state on applications for future employment and resumes that he was employed
by the Company and Broughton and further Employee is permitted to describe the
duties, responsibilities and services he performed at the Company and Broughton.
10. Any breach or evasion of any term of this agreement by Employee
will cause immediate and irreparable injury to Broughton, its business and
property; therefore, in the event of any breach or evasion of any of the terms
of this agreement by Employee, Broughton shall be entitled to an immediate
injunction, without necessity of bond, to restrain the violation thereof or to
specific performance, or both, as well as to all other legal or equitable
remedies to which Broughton may be entitled
10
<PAGE> 11
hereunder or under applicable law, including, but not limited to, the recovery
of damages from Employee, as well as any person, firm or company which
participates in such breach or evasion.
11. Employee represents and admits that in the event his employment
with Broughton is terminated for any reason whatsoever, his experience and
capabilities are such that employment can be obtained by him in businesses and
areas consistent with the provisions of Section 8 of this Agreement and that the
enjoining of any breach or evasion by him of the terms and provisions of this
agreement will not prevent him from earning a comfortable livelihood.
12. Notwithstanding anything in this agreement to the contrary, if
Employee shall breach or evade any of the provisions of Sections 6, 7 or 8, the
two-year period referred to in Section 9 shall commence on the date a court of
competent jurisdiction enters a final order or decree enjoining or prohibiting
Employee from violating the terms and provisions contained in the respective
sections aforesaid.
13. Employee represents and warrants to Broughton that there is no
restriction or limitation, by reason of any agreement or otherwise, upon
Employee's right or ability to enter into and fulfill in their entirety his
duties and obligations under this Agreement. Without limiting the foregoing,
Employee further represents and warrants Broughton that his performance of all
the terms of this Agreement and as an employee of Broughton does not and will
not breach any agreement to keep in confidence proprietary information acquired
by Employee in confidence prior
11
<PAGE> 12
to his employment by Broughton, and that he has not entered into, and agrees
that he will not enter into, any agreement either written or oral in conflict
with this Agreement.
Employee agrees that he shall defend, indemnify and hold Broughton
harmless from and against any and all losses, claims, liabilities, damages,
costs, judgments and expenses (including attorney's fees) whatsoever arising out
of or resulting from any breach of the foregoing warranties or any
misrepresentation contained above.
14. The Employee understands the nature of and the burdens imposed by
the restrictive covenants contained in this Agreement. The Employee has had the
opportunity to and has independently consulted with his counsel and after such
consultation represents and agrees that such covenants are reasonable,
enforceable, and proper in duration, scope, and effect.
15. This agreement may not be modified or terminated orally. No
modification or termination or attempted waiver shall be valid unless in writing
signed by the party against whom the same is sought to be enforced.
16. Employee shall not anticipate, encumber, alienate or assign any of
his rights, claims, interests or obligations under this agreement except upon
the written consent of Broughton, such consent may be arbitrarily withheld and
no payments, benefits or rights arising by reason of this agreement shall be in
any way subject to Employee's debts, contracts or engagements nor to any
judicial process to levy upon or tax the same for payment thereof.
12
<PAGE> 13
17. Except as otherwise provided herein, the provisions of this
agreement shall be binding upon and inure to the benefit of Broughton, its
successors and assigns and Employee, his legal representatives, heirs at law,
distributees, devisees and legatees.
18. It is understood and agreed that the construction and
interpretation of this Agreement shall at all times and in all respects be
governed by the internal laws of the Commonwealth of Kentucky, without giving
effect to the conflict of laws provisions thereof.
19. This agreement supersedes all other oral or written agreements of
every nature whatsoever between the Company and Employee relating to the
employment of Employee by the Company and embodies the full and complete
understanding of Broughton and Employee relating thereto.
This instrument is executed as of the date first above written.
BROUGHTON FOODS COMPANY,
an Ohio corporation
By
---------------------------------------
Its President
-----------------------------------------
Martin Shearer
13
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-37387), as amended, of our report dated February 28, 1997; except for Notes
10 and 11, dated September 12, 1997, on our audits of the financial statements
of Broughton Foods Company. We also consent to the references to our firm under
the captions "Summary Financial Data," "Selected Financial Data" and "Experts."
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
November 26, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-37387), as amended, of our report dated October 31, 1997, on our audit of
the financial statements Southern Belle Dairy Company. We also consent to the
reference to our firm under the caption "Experts" included in the registration
statement.
COOPERS & LYBRAND L.L.P.
Lexington, Kentucky
November 26, 1997
<PAGE> 1
EXHIBIT 23.4
[BAIRD, KURTZ & DOBSON LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Southern Belle Dairy Company
Somerset, Kentucky
We consent to the inclusion in this amended registration statement of
Broughton Foods Company on Form S-1 of our report dated July 25, 1996, on our
audits of the financial statements of SOUTHERN BELLE DAIRY COMPANY as of June
1, 1996, and for each of the two years in the period ended June 1, 1996. We
also consent to the reference to our firm under the caption "Experts" included
in the registration statement.
/s/ BAIRD, KURTZ & DOBSON
Bowling Green, Kentucky
November 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1997 AND THE STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 854
<SECURITIES> 0
<RECEIVABLES> 7,573
<ALLOWANCES> 211
<INVENTORY> 2,470
<CURRENT-ASSETS> 11,430
<PP&E> 17,525
<DEPRECIATION> 11,426
<TOTAL-ASSETS> 18,589
<CURRENT-LIABILITIES> 5,875
<BONDS> 795
0
0
<COMMON> 4,663
<OTHER-SE> 6,966
<TOTAL-LIABILITY-AND-EQUITY> 18,589
<SALES> 61,964
<TOTAL-REVENUES> 61,964
<CGS> 49,030
<TOTAL-COSTS> 49,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> 1,626
<INCOME-TAX> 638
<INCOME-CONTINUING> 987
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 987
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
