<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1997
REGISTRATION NO. 333-37387
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
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:
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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. [ ]
CALCULATION OF REGISTRATION FEE
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=====================================================================================================
PROPOSED PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) FEE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value
per share.................. 1,495,000 $15.00 $22,425,000 $6,782(3)
=====================================================================================================
</TABLE>
(1) Includes 195,000 shares which the Underwriters have the option to purchase
to cover over-allotments. See "Underwriting."
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(3) $6,691 was previously paid in connection with the filing of the original
Registration Statement on Form S-1 on November 26, 1997. $91 is paid
herewith.
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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 DECEMBER 8, 1997
1,300,000 SHARES
------------------------
[BROUGHTON LOGO]
BROUGHTON FOODS COMPANY
------------------------
COMMON STOCK
------------------------
All 1,300,000 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.
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance, 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.
------------------------
================================================================================
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share........................... $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
</TABLE>
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(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 195,000
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, and
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 approximately
$5.0 million, consisting of a combination of cash and Common Stock. 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
3
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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 its fiscal year ended May 31, 1997, Southern Belle had total
revenues of approximately $63.9 million compared to total revenues of $53.9
million for its fiscal 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, 5,590,517 shares (5,785,517 if the Underwriters exercise their
over-allotment option in full) of the Common Stock will be outstanding. Of such
shares, former Southern Belle shareholders, as a result of the Southern Belle
Acquisition, will own 167,857 shares, or approximately 3.0% of the Common Stock
outstanding (167,857 shares, or approximately 2.9% 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 46.1% of the Common Stock outstanding after this Offering and the
Southern Belle Acquisition (44.5% if the Underwriters exercise their
over-allotment option in full).
4
<PAGE> 6
THE OFFERING
Common Stock offered by the
Company............................. 1,300,000 shares
Common Stock to be outstanding after
this Offering and the Southern Belle
Acquisition....................... 5,590,517 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>
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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 5,591 4,123 4,123 5,591
</TABLE>
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AS OF SEPTEMBER 30,
-------------------------
1997
PRO FORMA
1997 AS ADJUSTED(1)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital............................................................................... $ 5,555 $ 11,408
Total assets.................................................................................. 18,589 43,256
Total debt.................................................................................... 1,454 1,586
Total shareholders' equity.................................................................... 11,121 29,483
</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 and per 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 ultimately 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 within 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
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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 (the "USDA") 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 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 criminal actions initiated by the Federal government beginning in 1990,
Southern Belle and several other dairies in Kentucky and Tennessee were alleged
to have violated Federal antitrust statutes relating to the submission of offers
to supply milk to school districts. Southern Belle pled guilty to the
government's charges in August 1992 and consented to the imposition of a fine of
$375,000, which has been fully paid by Southern Belle. Southern Belle also
settled similar civil actions brought by the states of Kentucky and Tennessee
(see note 15 to Southern Belle's Consolidated Financial Statements). Following
these actions and the resolution thereof, Southern Belle entered into an
Agreement in Lieu of Debarment with 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 the market
price of the Common Stock.
10
<PAGE> 12
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 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 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 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
11
<PAGE> 13
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 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 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
12
<PAGE> 14
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 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 46.1% of the Company's outstanding shares of
Common Stock after this Offering and the Southern Belle Acquisition (44.5% 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,
5,590,517 shares (5,785,517 if the Underwriters exercise their over-allotment
option in full) of Common Stock will be outstanding. Of such shares, only the
1,300,000 shares (1,495,000 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 $9.01 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 1,300,000 shares of Common Stock offered by the
Company hereby. Based on the foregoing, the Existing Shareholders will benefit
from an unrealized appreciation of $9.01 per share of Common Stock ($37.1
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."
13
<PAGE> 15
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be 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."
NO ASSURANCE AS TO FUTURE 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 was renamed 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. Mr. Reynolds subsequently resold a portion
of this stock, and, 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 approximately $5.0 million in cash and shares of
Common Stock. 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
$16.1 million ($18.7 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 net tangible book value at such date would have been
$27.9 million, or $4.99 per share, representing an immediate increase in net
tangible book value of $2.32 per share. Accordingly, purchasers of the Common
Stock in this Offering would sustain an immediate dilution of $9.01 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 net tangible book value attributable to the Southern Belle
Acquisition and this Offering.......................................... 2.32
-----
Net tangible book value after the Southern Belle Acquisition and this
Offering................................................................... 4.99
------
Dilution to new investors in this Offering................................... $ 9.01
======
</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 76.0% $10,306,650 36.2% $ 2.50
New investors............................... 1,300,000 24.0 18,200,000 63.8 14.00
--------- ----- ----------- -----
Total............................. 5,422,660 100.0% $28,506,650 100.0%
========= ===== =========== =====
</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 the purchase method of 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;
6,130,757 pro forma as adjusted shares issued....... 4,663 4,831 6,131
Additional paid-in capital............................ 170 2,352 17,194
Retained earnings..................................... 6,796 6,796 6,666
Treasury stock........................................ (508) (508) (508)
--------
----
-------- -------- ----
----
Total shareholders' equity....................... 11,121 13,471 29,483
--------
----
-------- -------- ----
----
Total capitalization........................ $11,916 $18,263 $30,324
============ ============ ============
</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>
AS OF SEPTEMBER
DECEMBER 31, 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 twelve months 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 Company's
fiscal year end is December 31 and Southern Belle's fiscal year end is the
Saturday closest to May 31. The Company's third quarter for its current fiscal
year ended September 30, 1997, while Southern Belle's first quarter in its
fiscal year ended August 30, 1997. Accordingly, 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 twelve
months ended December 31, 1996 is based on the historical statement of
operations of the Company for the twelve months 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
------------- -------------- ----------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 854 $ 74 $(2,650)(1) $ (1,722) $ 9,583(4) $ 7,861
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 9,583 25,181
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 $ 9,367 $ 43,256
============ ============= =========== ========== =========== ==========
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 1,300(3) 6,131
(1,503)(2)
Additional paid-in capital.... 170 2,182(1) 2,352 14,842(3) 17,194
Retained earnings............. 6,796 247 (247)(2) 6,796 (130)(5) 6,666
------------- -------------- ----------- ----------- ----------- ---------
11,629 2,346 4 13,979 16,012 29,991
Treasury stock....... (508) (738) 738(2) (508) (508)
------------- -------------- ----------- ----------- ----------- ---------
Total shareholders' equity.... 11,121 1,608 742 13,471 16,012 29,483
------------- -------------- ----------- ----------- ----------- ---------
Total liabilities and
shareholders' equity........ $ 18,589 $ 13,038 $ 2,262 $ 33,889 $ 9,367 $ 43,256
============ ============= =========== ========== =========== ==========
</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 5,591
</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 5,591
</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 will result in
an excess of the purchase price over the historical net assets to be
acquired, which will be allocated to the net assets to be 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>
The allocation of the Southern Belle purchase price is based on preliminary
estimates of fair value of the assets and liabilities. Final determination of
the allocation of the purchase price will be completed shortly after the
Acquisition is consummated. Accordingly, final amounts could differ from those
used herein. However, the impact of such differences are not anticipated to have
a material effect on the Company's financial statements.
(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; 1,300,000 shares........................ $ 1,300,000
Additional paid-in capital (net proceeds of $16,142,000 less $1,300,000
par value)........................................................... 14,842,000
-----------
$16,142,000
==========
</TABLE>
23
<PAGE> 25
(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.................................. 9,583,000
-----------
$16,142,000
==========
</TABLE>
(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 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 pre-tax gain of $3.0 million on the sale of the Company's
investment in the nonmarketable common stock of a privately held entity which
was sold by the Company to enhance cash flow, which resulted in cash proceeds of
$3.1 million. The increase also reflected additional income earned on 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>
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.
30
<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 approximately $5.0 million,
consisting of a combination of cash and Common Stock. 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.
31
<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, and 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 approximately
$5.0 million, consisting of a combination of cash and Common Stock. 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 its fiscal 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 its fiscal
year ended May 31, 1997, Southern Belle had total revenues of approximately
$63.9 million compared to total revenues of $53.9 million for its fiscal 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, 5,590,517 shares (5,785,517 if the Underwriters exercise their
over-allotment option in full) of the Common Stock will be outstanding. Of such
shares, former Southern Belle shareholders, as a result of the Southern Belle
Acquisition, will own 167,857 shares, or approximately 3.0% of the Common Stock
outstanding (167,857 shares, or approximately 2.9% 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 46.1% of the Common Stock outstanding after this Offering and the
Southern Belle Acquisition (44.5% 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 obtaining 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 "-- 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
35
<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
The Company 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
36
<PAGE> 38
which 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
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<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% 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-Crowley 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 is unlikely to 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 the Company's business and
customer base, the loss of any one Foods Division customer is unlikely to have a
material adverse effect on the business, financial condition or results of
operations of the Company.
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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 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., a major national grocery chain 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.
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 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.
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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.
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,
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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.
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. 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 103 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
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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 1984. 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, 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. from January 1996 until December 1997, (ii) President
and Chief Executive Officer of Mid-America Spring Air, Inc. since 1996, (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.
The Company has an Audit Committee composed of a majority of non-employee
directors, which oversees the engagement of the Company's independent auditors
and, together with the Company's independent auditors, reviews 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% 23.3%
Philip E. Cline(3).................................. 234,000 5.7 4.2
Rodney M. Collier................................... 6,000 * *
George W. Broughton(4).............................. 131,250 3.2 2.3
Ronald V. Arthur.................................... 3,000 * *
Robert E. Evans..................................... 3,000 * *
Charles R. Hooten, Jr.(5)........................... 240,000 5.8 4.3
Neil W. Scaggs(6)................................... 234,000 5.7 4.2
Philip Todd Shell................................... 9,000 * *
Kirby J. Taylor(7).................................. 33,990 * *
Paul T. Theisen..................................... 3,000 * *
Thomas W. Wright(8)................................. 308,010 7.5 5.5
All directors and executive officers as a group (12
persons)......................................... 2,510,160 60.9% 44.9%
</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 over which shares
Mr. Cline effectively exercises sole voting and investment power and 12,000
shares held in trust over which Mr. Cline disclaims beneficial ownership.
(4) Includes 29,250 shares held by Mr. Broughton's children.
(5) Includes 12,000 shares held by Mr. Hooten's children 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 27,000 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 children.
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 5,590,517 shares of Common Stock (5,785,517 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 (55,905
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............................................................... 1,300,000
========
</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
195,000 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................ 598,239 598,239
Payment of policy loans on officer's life insurance... (445,141) (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. INVESTMENTS: The Company holds various nonmarketable securities which
are carried at cost. These investments are held as noncurrent assets in
other assets. During 1996, the Company sold the shares of a privately
held entity for $3,056,196. A pre-tax gain of $2,976,453 was recorded on
this sale.
F-7
<PAGE> 64
BROUGHTON FOODS COMPANY
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES: (CONTINUED)
F. 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.
G. 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.
H. REVENUE RECOGNITION: The Company recognizes revenue when products are
received by the customer.
I. 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.
J. 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.
K. 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.
L. 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 310 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 ----------------------
---------------------------------------
JUNE 3, JUNE 1, MAY 31, AUGUST 31, AUGUST 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. 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.
======================================================
======================================================
1,300,000 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
DECEMBER 8, 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 December 8, 1997
- ------------------------------------------ Directors
MARSHALL T. REYNOLDS
/s/ PHILIP E. CLINE President, Chief Executive December 8, 1997
- ------------------------------------------ Officer and Director
PHILIP E. CLINE (Principal Executive
Officer)
* Treasurer and Chief December 8, 1997
- ------------------------------------------ Financial Officer
TODD R. FRY (Principal Financial and
Accounting Officer)
* Director December 8, 1997
- ------------------------------------------
RONALD V. ARTHUR II
* Director December 8, 1997
- ------------------------------------------
GEORGE W. BROUGHTON
* Director December 8, 1997
- ------------------------------------------
CHARLES R. HOOTEN, JR.
* Director December 8, 1997
- ------------------------------------------
NEAL W. SCAGGS
* Director December 8, 1997
- ------------------------------------------
PHILIP TODD SHELL
* Director December 8, 1997
- ------------------------------------------
KIRBY J. TAYLOR
* Director December 8, 1997
- ------------------------------------------
PAUL T. THEISEN
* Director December 8, 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 2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is made and
entered into as of the 29th day of September, 1997, by and among BROUGHTON
FOODS COMPANY ("Broughton"), SOUTHERN BELLE DAIRY COMPANY, INC. (the
"Company"), the Company's directors, or a majority of them (collectively the
"Directors"), and the following shareholders of the Company: Martin P.
Shearer, Max A. Shearer and Frank M. Shearer (collectively, the
"Shareholders").
W I T N E S S E T H:
WHEREAS, Broughton is a corporation duly organized and validly
existing under the laws of the State of Ohio, with authorized capital stock
consisting of 10,000,000 common shares, $1.00 par value per share ("Broughton
Common Stock"), of which 4,122,660 shares are currently outstanding;
WHEREAS, the Company is a corporation duly organized and validly
existing under the laws of the Commonwealth of Kentucky with authorized capital
stock consisting of 100,000 common shares, of which 41,868 shares are currently
outstanding, having no par value and 100,000 nonvoting preferred shares, of
which 23,841 shares are currently outstanding (10,341 shares of 8% A Series,
5,200 shares of 10% B Series and 8,300 shares of 9% C Series), having a par
value of $25.00 per share (all such common and preferred shares being
hereinafter referred to as the "Company Stock");
WHEREAS, Broughton and the Company have agreed to the merger of the
Company with and into Broughton in accordance with the General Corporation Law
of the State of Ohio (the "OGCL"), the Kentucky Business Corporation Act (the
"KBCA") and the provisions of this Agreement;
WHEREAS, upon consummation of the Merger (as defined below),
Broughton shall be the surviving corporation and the separate corporate
existence of the Company shall cease;
WHEREAS, the Board of Directors of Broughton and the Company have
approved, adopted and declared advisable this Agreement and authorized the
execution hereof in counterparts;
WHEREAS, the Directors of the Company have directed that this
Agreement be submitted to the Company's shareholders and the Directors have
approved and recommended that the Company shareholders approve, ratify and
confirm this Agreement and the transactions contemplated hereby; and
WHEREAS, for federal income tax purposes, it is intended that the
Merger will qualify as a reorganization under the provisions of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises, which are
not mere recitals but an integral part hereof, and in consideration of the
mutual agreements hereinafter set forth, the parties hereto agree as follows:
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Merger........................................ 2
1.1. The Merger.................................. 2
1.2. Effects of the Merger....................... 2
1.3. Directors and Officers
of Surviving Company........................ 2
1.4. Offices..................................... 2
Section 2. Conversion, Exchange and
Cancellation of Shares........................ 3
2.1. General..................................... 3
2.2. Conversion Rate............................. 3
2.3. Manner of Exchange.......................... 4
2.4. Fractional Shares........................... 4
2.5. Lost Certificates........................... 5
Section 3. Representations, Warranties and
Covenants of Broughton........................ 5
3.1. Organization, Standing and
Authority................................... 5
3.2. Capital Structure........................... 5
3.3. Authority................................... 6
3.4. Broughton Financial Statements.............. 6
3.5. Accuracy of Annual Report................... 7
3.6. Absence of Undisclosed Liabilities.......... 7
3.7. Compliance with Laws........................ 7
3.8. Absence of Certain Changes
or Events................................... 8
3.9. Reports..................................... 8
3.10. Best Efforts................................ 8
3.11. Accuracy of Information
for Broughton IPO Statement................. 8
3.12. SEC Reporting............................... 8
Section 4. Representations, Warranties
and Covenants of the Company.................. 9
4.1. Organization, Standing and
Authority................................... 9
4.2. Capital Structure........................... 9
4.3. Subsidiaries, Partnerships and
Joint Ventures.............................. 9
4.4. Authority................................... 10
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.5. Company Financial Statements................ 11
4.6. Absence of Undisclosed
Liabilities................................. 12
4.7. Tax Matters................................. 12
4.8. Properties.................................. 14
4.9. Compliance with Laws........................ 15
4.10. Employee Benefit Plans...................... 15
4.11. Commitments and Contracts................... 18
4.12. Labor....................................... 19
4.13. Material Contracts Furnished................ 20
4.14. Other Material Contracts.................... 20
4.15. Material Contract Defaults.................. 21
4.16. Legal Proceedings........................... 21
4.17. Absence of Certain Changes or Events........ 21
4.18. Accounts Receivable......................... 21
4.19. Inventories................................. 22
4.20. Proprietary Rights.......................... 22
4.21. Environmental Matters....................... 22
4.22. No Broker................................... 23
4.23. Accuracy of Information for
Broughton IPO Registration
Statement................................... 24
4.24. Best Efforts................................ 24
4.25. No Third Party Consents..................... 24
4.26. Conduct of Business - Negative
Covenants of the Company.................... 24
4.27. Conduct of Business - Affirmative
Covenants of the Company.................... 26
Section 5. Indemnification and Confidentiality........... 27
5.1. Access and Information...................... 27
5.2. Furnishing Information and
Indemnification............................. 27
5.3. Confidentiality............................. 28
5.4. Updates to Information...................... 28
Section 6. Conditions Precedent.......................... 29
Section 7. Closing Date and Effective Time............... 35
7.1. Closing Date................................ 35
7.2. Effective Time.............................. 35
Section 8. Termination of Agreement...................... 35
8.1. Grounds for Termination..................... 35
8.2. Effect of Termination....................... 37
8.3. Return of Information....................... 37
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 9. Extension, Waiver and Amendment............... 37
Section 10. Meeting of Shareholders of
the Company Voting; Rights of
Dissenting Shareholders....................... 38
10.1. Meeting..................................... 38
10.2. Voting...................................... 38
10.3. Rights of Dissenting
Shareholders................................ 38
Section 11. Miscellaneous................................. 39
11.1. Public Announcements........................ 39
11.2. Brokers and Finders......................... 39
11.3. Disclosed In Writing........................ 39
11.4. Entire Agreement............................ 39
11.5. Counterparts................................ 39
11.6. Invalid Provisions.......................... 40
11.7. Notices..................................... 40
11.8. Headings.................................... 40
11.9. Expenses.................................... 40
11.10. Governing Law............................... 41
11.11. No Assignment............................... 41
11.12. Effectiveness of Agreement.................. 41
11.13. Further Acts................................ 41
11.14. Certain Representations and
Warranties Not to Survive................... 41
11.15. Individual Directors........................ 41
11.16. Shareholders Representations
and Warranties; Indemnification;
and Sophistication.......................... 42
11.17. Legend...................................... 43
Exhibit A Aggregate Merger Consideration
Exhibit B Majority Shareholders
Exhibit C Employment Agreement
Schedule 1 Company Shareholder Jurisdiction
</TABLE>
(iii)
<PAGE> 5
Section 1 Merger
1.1 The Merger. At the Effective Time (as defined in Section 7.2)
and subject to the terms and conditions hereof, the Company shall merge with
and into Broughton (the "Merger") in accordance with this Agreement, the OGCL
and the KBCA. Following the Effective Time of the Merger, Broughton shall be
(and is hereinafter called when reference is made to it at and after the
consummation of the Merger) the Surviving Company. At the Effective Time of
the Merger, the corporate existence of the Company shall, as provided in KRS
271B.11-060 of the KBCA and Section 1701.82 of the OGCL, be merged with and
into Broughton and continued in the Surviving Company and the separate
existence of the Company shall cease.
1.2 Effects of the Merger. The Merger shall have the effects set
forth in KRS 271B.11-060 of the KBCA and Section 1701.82 of the OGCL.
1.3 Directors and Officers of Surviving Company. The Articles of
Incorporation and the Code of Regulations of Broughton in effect immediately
prior to the Effective Time shall be the Articles of Incorporation and the Code
of Regulations of the Surviving Company until changed as provided therein or by
law. The directors and officers of the Surviving Company at the Effective Time
shall be those persons who are directors and officers respectively of Broughton
immediately before the Effective Time. The committees of the Board of
Directors of the Surviving Company at the Effective Time shall be the same as
and shall be composed of the same persons who are serving on committees
appointed by the Board of Directors of Broughton as they exist immediately
before the Effective Time.
1.4 Offices. From and after the Effective Time, the business and
location of the Surviving Company shall be the same as that of Broughton.
- 2 -
<PAGE> 6
Section 2 Conversion, Exchange and Cancellation of Shares
2.1 General. The manner of converting and exchanging the Company
Stock, all of which is represented by outstanding share certificates into the
merger consideration shall be as hereinafter provided in this Section 2.
2.2 Conversion Rate. At the Effective Time, by virtue of the
Merger and without any action on the part of the Company shareholders or the
Company, each of the:
(i) preferred shares of the Company Stock that shall be
issued and outstanding immediately prior to the Effective Time (which number of
shares shall not exceed 23,841) shall thereupon be converted into the right to
receive Twenty-Five Dollars ($25.00) of the Aggregate Merger Consideration (as
defined below) and such preferred shares will be cancelled;
(ii) common shares of the Company Stock that shall be issued
and outstanding immediately prior to the Effective Time (which number of shares
shall not exceed 41,868) shall thereupon be converted into the right to receive
One Hundred Five Dollars and Eighteen Cents ($105.18) of the Aggregate Merger
Consideration;
provided, however, that the maximum portion of the Aggregate Merger
Consideration that may be comprised of cash shall not exceed Two Million Six
Hundred Fifty Thousand ($2,650,000) and in no event shall the Aggregate Merger
Consideration exceed Five Million Dollars ($5,000,000).
- 3 -
<PAGE> 7
The "Aggregate Merger Consideration" to be received by the Company
shareholders in the aggregate shall be that combination of cash and shares of
Broughton Common Stock reflected in the "Total" columns on the attached Exhibit
A; provided, however, that by executing this Agreement, each of the
Shareholders listed on Exhibit B hereto (the "Majority Shareholders")
irrevocably acknowledge and agree not to amend, change or dispute that
combination of cash and shares of Broughton Common Stock reflected next to such
Majority Shareholder's name on Exhibit A. (Each individual shareholder's
merger consideration as reflected on Exhibit A is referred to as such
shareholder's "Shareholder Merger Consideration" or SMC".) Each Shareholder
receiving Broughton Common Stock understands that such Shareholder shall
receive that number of shares of Broughton Common Stock determined by taking
the total value of Broughton Common Stock being issued to such Shareholder as
part of such Shareholder's Shareholder Merger Consideration as reflected on
Exhibit A and dividing that amount by the price at which shares of Broughton
Common Stock are issued to the public ("IPO Price") in the initial public
offering ("IPO").
The number of shares of the Company Stock that shall be issued and
outstanding immediately prior to the Effective Time shall not be more than
65,709 shares. All shares of Broughton Common Stock into which the aforesaid
Company Stock is so converted shall be fully paid and nonassessable. All
shares of the Company Stock held by the Company as authorized but unissued
stock immediately prior to the Effective Time shall be cancelled and shall not
be exchanged for shares of Broughton Common Stock or any other consideration.
2.3 Manner of Exchange. After the Effective Time of the Merger,
each holder of a certificate theretofore evidencing outstanding shares of the
Company Stock, upon surrender of such certificate, accompanied by a Letter of
Transmittal to Broughton or its agent, shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of full shares
of Broughton Common Stock for which shares of the Company Stock theretofore
represented by the certificate or certificates so surrendered shall have been
exchanged as provided in this Section 2 and any cash to which such Shareholder
may be entitled as set forth on, and in accordance with, Exhibit A. Until so
surrendered, each outstanding certificate which, prior to the
- 4 -
<PAGE> 8
Effective Time of the Merger, represented the Company Stock will be deemed to
evidence the right to receive the number of full shares of Broughton Common
Stock and cash into which the shares of the Company Stock represented thereby
may be converted, and will be deemed for all corporate purposes of Broughton to
evidence ownership of the number of full shares of Broughton Common Stock and
cash into which the shares of the Company Stock represented thereby were
converted. Until such outstanding certificates formerly representing the
Company Stock are surrendered, no dividend payable to holders of record of
Broughton Common Stock for any period as of any date subsequent to the
Effective Time of the Merger shall be paid to the holder of such outstanding
certificates in respect thereof. After the Effective Time of the Merger there
shall be no further registry of transfers on the records of the Company of
shares of the Company Stock. No interest shall be payable with respect to such
dividends upon surrender of outstanding certificates.
2.4 Fractional Shares. Broughton will not issue fractional shares
or fractional share certificates, but in lieu of the issuance of fractional
shares will pay cash, without interest, to any Company Shareholder otherwise
entitled to receive such fractional shares. The amount of such cash payment
will be determined by multiplying the fractional share interest to which a
Company Shareholder would otherwise be entitled by the IPO Price of Broughton
Common Stock determined pursuant to Section 2.2. Payment for fractional shares
will be made with respect to each Shareholder at the time such Shareholder's
certificates of Company Stock are exchanged.
2.5 Lost Certificates. If a certificate evidencing outstanding
shares of Company Stock is lost, stolen or destroyed, the registered owner
thereof shall be entitled to receive the Broughton certificate and cash to
which he would otherwise be entitled on exchange of such certificate, by
notifying Broughton in writing of such lost, stolen or destroyed certificate
and giving Broughton evidence of loss and a bond sufficient to indemnify
Broughton against any claim that may be made against it on account of the
alleged lost, stolen or destroyed certificate and the issuance of the
certificate and cash.
Section 3 Representations, Warranties and Covenants of Broughton
- 5 -
<PAGE> 9
Except as disclosed in writing to the Company, Broughton hereby
represents and warrants to and covenants with the Company and the Shareholders
that:
3.1 Organization, Standing and Authority. Broughton is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Ohio. Broughton has the corporate power to execute and
deliver this Agreement and has taken all action required by law, its Articles
of Incorporation, its Code of Regulations or otherwise, to authorize such
execution and delivery, the Merger and the consummation of the transactions
contemplated hereby, and this Agreement is a valid and binding agreement of
Broughton in accordance with its terms. At the Effective Time, Broughton will
have corporate power to carry on its business as then to be conducted and will
be qualified to do business in every jurisdiction in which the character and
location of the assets to be owned by it or the nature of the business to be
transacted by it require qualification.
3.2 Capital Structure. The authorized capital stock of Broughton
consists of 10,000,000 shares of Broughton Common Stock, of which 4,122,660
shares are currently issued and outstanding. All of such shares are fully paid
and nonassessable. Broughton does not have any other shares of Broughton
Common Stock or any other capital stock issued or outstanding. Broughton does
not have any outstanding subscriptions, options or other agreements or
commitments obligating it to issue shares of its capital stock except as may be
otherwise provided herein and in Section 6(c). The holders of Broughton Common
Stock have no preemptive rights with respect to the issuance of additional
authorized shares of Broughton Common Stock. Nothing in this Agreement shall
prohibit or impair the ability and right of Broughton to increase its
authorized capital stock or issue or agree to commit to issue additional shares
of its capital stock, and any increase in authorized capital stock, or
issuance, or agreement or commitment to issue, additional shares of Broughton
Common Stock shall not alter or affect the conversion rate set forth in Section
2.2 hereof.
- 6 -
<PAGE> 10
3.3 Authority. The execution and delivery of this Agreement do
not, and the consummation of the Merger and transactions contemplated hereby
will not, violate any provision of the Articles of Incorporation or Code of
Regulations of Broughton, or any provision of, or result in the acceleration of
any obligation under, any material mortgage, deed of trust, note, lien, lease,
franchise, license, permit, agreement, instrument, order, arbitration award,
judgment, injunction or decree, or result in the termination of any material
license, franchise, lease or permit to which Broughton is a party or by which
it is bound, and will not violate or conflict with any other material
restriction of any kind or character to which Broughton is subject.
3.4 Broughton Financial Statements. Broughton has delivered to
the Company prior to the execution of this Agreement copies of the following
financial statements of Broughton (which, together with all future financial
statements to be furnished are collectively referred to herein as the
"Broughton Financial Statements"): the audited consolidated financial
statements of Broughton as of December 31, 1996 and December 31, 1995, and in
each case including the footnotes thereto and examined by and accompanied by
the report of Broughton's independent public accountants (the "Audited
Financial Statements") and the unaudited Balance Sheet and related Statement of
Operation and Retained Earnings and Statement of Cash Flow, or substantially
similar financial statements, as of June 30, 1997. The Broughton Financial
Statements (as of the dates thereof and for the periods covered thereby):
(a) Are prepared from and in accordance with the books and
records of Broughton, which are complete and correct in all material respects
that are required by generally accepted accounting principles ("GAAP") (except
as otherwise required or approved by applicable regulatory authorities or by
applicable law) and which have been maintained in accordance with good business
practices; and
(b) Present fairly the financial position and results of
operations and changes in financial position of Broughton as of the dates and
for the periods indicated, in each case in accordance with generally accepted
accounting principles
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<PAGE> 11
(except as otherwise required or approved by applicable regulatory authorities
or by applicable law), applied on a basis consistent with prior years, and do
not fail to disclose any material extraordinary or out-of-period items.
3.5 Accuracy of Annual Report. The annual report of Broughton to
its shareholders for 1996 heretofore delivered to the Company does not contain
as of the date thereof any untrue statement of material fact or omit to state
any material fact necessary to make the statements therein not misleading.
3.6 Absence of Undisclosed Liabilities. At December 31, 1996,
Broughton had no obligation or liability (contingent or otherwise) which was
material, or which when combined with all similar obligations or liabilities
would have been material, to Broughton except as disclosed in the Broughton
Financial Statements or as disclosed in writing to the Company; nor does there
exist a set of circumstances resulting from transactions effected or events
occurring on or prior to December 31, 1996, or from any action omitted to be
taken during such period that, to the knowledge of Broughton, could reasonably
be expected to result in any such material obligation or liability, except as
previously disclosed in writing to the Company, or as disclosed or provided for
in the Broughton Financial Statements. The amounts set up as liabilities for
taxes in the Broughton Financial Statements are sufficient for the payment of
all respective taxes (including, without limitation, federal, state, local and
foreign excise, franchise, property, payroll, income, capital stock and sales
and use taxes) accrued in accordance with generally accepted accounting
principles and unpaid at December 31, 1996. Since December 31, 1996, Broughton
has not incurred or paid any obligation or liability which would be material
(on a consolidated basis) to Broughton, except for obligations incurred or paid
in connection with transactions by it in the ordinary course of its business
consistent with generally accepted practices and except as disclosed herein.
3.7 Compliance with Laws. Broughton:
(a) Is in compliance with all laws, regulations, reporting
and licensing requirements and orders applicable to its business or any of its
employees (because of such employee's activities on behalf of it), the breach
or
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<PAGE> 12
violation of which could have a material adverse effect on such business; and
(b) Has received no notification (not previously disclosed in
writing to the Company) from any agency or department of federal, state or
local government or regulatory authorities asserting that it is not in
compliance with any of the statutes, regulations, rules or ordinances which
such governmental authority or regulatory authority enforces, or threatening to
revoke any license, franchise, permit or governmental authorization, and is
subject to no agreement with any regulatory authorities with respect to its
assets or business.
3.8 Absence of Certain Changes or Events. Since December 31,
1996, Broughton has not: (i) incurred any material liability, except in the
ordinary course of its business, and except as permitted pursuant to this
Agreement or as disclosed in the Broughton Financial Statements; (ii) suffered
any material adverse change in its business, operations, assets or condition
(financial or other); or (iii) failed to operate its business consistent with
generally acceptable practice.
3.9 Reports. Since December 31, 1996, Broughton has filed all
reports and statements, together with any amendments required to be made with
respect thereto, which it was required to file with any governmental agency or
regulatory authority having jurisdiction over its operations. Each of such
reports and documents, including the financial statements, exhibits and
schedules thereto, and each other document delivered to the Company by
Broughton does not contain any statement which, at the time and in the light of
the circumstances under which it was made, is false or misleading with respect
to any material fact or which omits to state any material fact necessary in
order to make the statements contained therein not false or misleading.
3.10 Best Efforts. On or prior to the Closing Date (hereinafter
defined in Section 7.1 hereof), Broughton will, to the extent permitted by
applicable laws, rules and regulations, take such actions, and execute and
deliver all such agreements, documents, certificates or amendments to this
Agreement as may
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<PAGE> 13
be necessary or desirable to effectuate the provisions and intent of this
Agreement.
3.11 Accuracy of Information for Broughton IPO Statement. The
material which refers to Broughton and which will be submitted by Broughton for
inclusion in the IPO Registration Statement (as defined below), at the time it
is filed by Broughton with the Securities and Exchange Commission ("SEC") or
becomes effective, will not contain any untrue statements of material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements contained therein not misleading; provided that the
foregoing shall not apply to the extent that any such untrue statement or a
material fact or omission to state a material fact was made by Broughton in
reliance upon and in conformity with written information concerning the Company
furnished to Broughton by the Company.
3.12 SEC Reporting. From and after the Closing Date, Broughton
shall timely file all reports required under the Securities Exchange Act of
1934, as amended, to allow the Shareholders to avail themselves of the resale
provisions of Rule 144 of the Securities and Exchange Commission under the 1933
Act (as defined in Section 5.2 herein).
Section 4 Representations, Warranties and Covenants of the Company
Except as previously disclosed in writing to Broughton, the Company
hereby represents and warrants to and covenants with Broughton that:
4.1 Organization, Standing and Authority. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the Commonwealth of Kentucky. The Company has the corporate power to
execute and deliver this Agreement, and has taken all action required by law,
its Articles of Incorporation, its By-laws or otherwise, to authorize such
execution and delivery, the Merger and the consummation of the transactions
contemplated hereby, and this Agreement is a valid and binding agreement of the
Company in accordance with its terms. At the Effective Time, the Company will
have corporate power to carry on its business as then to be
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<PAGE> 14
conducted and will be qualified to do business in every jurisdiction in which
the character and location of the assets to be owned by it or the nature of the
business to be transacted by it require qualification. The Company has
delivered to Broughton true and complete copies of its Certificate of
Incorporation and By-laws, as in effect on the date hereof.
4.2 Capital Structure. The authorized capital stock of the
Company consists of 100,000 common shares, of which 41,868 shares are currently
outstanding, having no par value and 100,000 nonvoting preferred shares, of
which 23,841 shares are currently outstanding (10,341 shares of 8% A Series,
5,200 shares of 10% B Series and 8,300 shares of 9% C Series, having a par
value of $25.00 per share. The Company does not have any subscriptions,
options, warrants, calls or other agreements or commitments, of any kind
relating to or obligating it to issue any shares of its capital stock. Further,
there are no securities outstanding which are convertible into capital stock of
the Company. None of the shares of Company Stock has been issued in violation
of any preemptive rights of shareholders. To the best knowledge of the Company,
there are no written shareholder agreements, voting trusts, proxies or other
agreements with respect to the voting of the capital stock of the Company.
4.3 Subsidiaries, Partnerships and Joint Ventures.
(a) (i) Each subsidiary of the Company ("Subsidiary") has
been previously disclosed in writing to Broughton and is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation, has all corporate or partnership
power, all material governmental licenses, authorizations, consents and
approvals required to carry on its business as now conducted. Each Subsidiary
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities make such qualification necessary,
except for those jurisdictions where the failure to be so qualified could not
reasonably be expected, individually or in the aggregate, to have a material
adverse effect.
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<PAGE> 15
(ii) All of the outstanding capital stock of, or other
ownership interests in, each Subsidiary, is owned by the Company, free and
clear of any lien or other limitation or restriction (including any restriction
on the right to vote, sell or otherwise dispose of such capital stock or other
ownership interests).
(b) Other than as disclosed in writing to Broughton, the
Company has no subsidiaries (other than the Subsidiaries as defined in this
Section 4.3(a)), and does not directly or indirectly own any capital stock of,
or equity interests in, any other corporation, partnership or limited liability
company and the Company is not a member of or participant in any partnership,
limited liability company or joint venture and is not obligated to become such
a member or participant.
4.4 Authority. The execution and delivery of this Agreement and
the filing of the Certificate of Merger with the State of Ohio and the
Certificate of Merger with the Commonwealth of Kentucky do not, and the
consummation of the Merger and transactions contemplated hereby will not, (a)
violate any provision of the Articles of Incorporation or By-laws of any
Subsidiary or the Company, (b) violate any provision of, or result in the
acceleration of any obligation under, any mortgage, deed of trust, note, lien,
lease, franchise, license, permit, contract, agreement, instrument, order,
arbitration award, judgment, injunction or decree, or result in the termination
of any material license, franchise, lease or permit to which any Subsidiary or
the Company is a party or by which it is bound; (c) violate or conflict with
any other material restriction of any kind or character to which any Subsidiary
or the Company is subject; and (d) require any filing with, notice to or
permits, consent or approval of any other governmental or regulatory body,
except (i) the filing of the Certificate of Merger with the appropriate
regulatory authorities; (ii) the requirement that the Company give notice to
the FCS (as defined in Section 8.1 herein) in accordance with the Compliance
Agreement (as defined in Section 8.1 herein) which the Company acknowledges and
agrees shall be done prior to the execution of this Agreement, and (iii) any
filings required by the SEC or applicable state securities statutes that are
otherwise not required to be filed prior to the execution of this Agreement;
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<PAGE> 16
provided that, excluded from the foregoing clauses (b), (c) and (d) are any
exceptions to the foregoing that, in the aggregate, would not have a material
adverse effect on the business of any Subsidiary or the Company or on the
ability of the Company or the Subsidiaries to consummate the transactions
contemplated hereby. No other corporate proceedings on the part of any
Subsidiary or the Company, other than shareholder approval hereof, are
necessary to authorize this Agreement and the transactions contemplated hereby.
The Directors of the Company have determined that the transactions contemplated
by this Agreement are in the best interest of the Company and its shareholders.
4.5 Company Financial Statements. The Company has delivered to
Broughton prior to the execution of this Agreement copies of the following
financial statements of the Company (which, together with all future financial
statements to be furnished are collectively referred to herein as the "Company
Financial Statements"): the audited consolidated financial statements of the
Company as of May 31, 1997, June 1, 1996 and June 3, 1995 and in each case
including the footnotes thereto and examined by and accompanied by the report
of the Company's independent public accountants (the "Audited Financial
Statements"). The Company Financial Statements (as of the dates thereof and
for the periods covered thereby):
(a) Are prepared from and in accordance with the books and
records of the Company, which are complete and correct in all material respects
that are required by GAAP (except as otherwise required or approved by
applicable regulatory authorities or by applicable law) and which have been
maintained in accordance with good business practice; and
(b) Present fairly the financial position and results of
operations and changes in financial position of the Company as of the dates and
for the periods indicated, in each case in accordance with generally accepted
accounting principles (except as otherwise required or approved by applicable
authorities or by applicable law), applied on a basis consistent with prior
years, and do not fail to disclose any material extraordinary or out-of-period
items.
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<PAGE> 17
The Company's Balance Sheet and the related Statement of Operations
and Retained Earnings and Statement of Cash Flows, and the notes thereto, for
each fiscal quarter after May 31, 1997 until the Effective Time, all of which
the Company shall deliver to Broughton as soon as practicable, will be prepared
in accordance with GAAP consistently applied and will fairly present the
Company's financial condition and results of operations as of such date and for
such period.
4.6 Absence of Undisclosed Liabilities. At May 31, 1997, neither
the Company nor any Subsidiary had any obligation or liability contingent or
otherwise (including liabilities as guarantor or otherwise with respect to
obligations of others or liabilities for taxes due or then accrued or to become
due) which was material, or which when combined with all similar obligations or
liabilities would have been material, to the Company or any Subsidiary, except
as disclosed in the Company Financial Statements or as disclosed in writing to
Broughton, provided that such writing discloses the nature of such liability;
nor does there exist a set of circumstances resulting from transactions
effected or events occurring on or prior to May 31, 1997, or from any action
omitted to be taken during such period that, to the knowledge of any Subsidiary
or the Company, could reasonably be expected to result in any such material
obligation or liability, except as previously disclosed in writing to
Broughton, or as disclosed or provided for in the Company Financial Statements.
The amounts set up as liabilities for taxes in the Company Financial Statements
are sufficient for the payment of all respective taxes (including, without
limitation, federal, state, local and foreign excise, franchise, property,
payroll, income, capital stock and sales and use taxes) accrued in accordance
with generally accepted accounting principles and unpaid at May 31, 1997 by the
Company and its Subsidiaries. Since May 31, 1997, neither the Company nor any
Subsidiary has incurred or paid any obligation or liability which would be
material (on a consolidated basis) to the Company or any Subsidiary, except for
obligations incurred or paid in connection with transactions by it in the
ordinary course of its business consistent with generally accepted practices
and except as disclosed herein.
4.7 Tax Matters.
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<PAGE> 18
(a) All federal, state, local and foreign tax returns,
(including, without limitation, estimated tax returns, withholding tax returns
with respect to employees, and FICA and FUTA returns) required to be filed by
or on behalf of the Company and its Subsidiaries have been timely filed or
requests for extensions have been timely filed, granted and have not expired
and all returns filed are complete and accurate in all material respects. All
taxes with respect to such returns and all taxes otherwise due have been timely
paid. As of the date hereof, and as of the Effective Time, there is and shall
be no audit examination, deficiency or refund litigation or matter in
controversy with respect to any taxes that might result in a determination
adverse to any Subsidiary or the Company, except as reserved against in the
Company Financial Statements, or as previously disclosed in writing to
Broughton. All taxes, interest, additions and penalties due with respect to
completed and settled examinations or concluded litigation have been paid.
(b) Except as previously disclosed in writing to Broughton,
neither the Company nor any Subsidiary has executed an extension or waiver of
any statute of limitations on the assessment or collection of any tax due that
is currently in effect.
(c) To the extent any federal, state, local or foreign taxes
are due from the Company or any Subsidiary for the period or periods beginning
June 1, 1997 or thereafter through and including the Effective Time, adequate
provision on an estimated basis has been or will be made for the payment of
such taxes by establishment of appropriate tax liability accounts on the last
monthly financial statements of the Company, or the applicable Subsidiary,
prepared before the Effective Time.
(d) Deferred taxes of the Company and each Subsidiary have
been provided for in accordance with generally accepted accounting principles,
including without limitation Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
(e) None of the Company, the Subsidiaries, nor any
shareholder of the Company has made with respect to the Company or any
Subsidiary, or any property held by the Company or any Subsidiary, any consent
under Section 341 of the Code.
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<PAGE> 19
No property of the Company is "tax-exempt use property" within the meaning of
Section 168(h) of the Code.
(f) None of the Company shareholders, the Company nor any
Subsidiaries has made any election under Section 13261(g)(2) of the Revenue
Reconciliation Act of 1993.
(g) Neither the Company nor any Subsidiary is subject to any
penalty or other addition to tax by reason of a violation of any tax order, tax
rule or tax regulation or a default with respect to any tax return for taxable
periods ending on or before the date hereof.
(h) There are no (1) liens with respect to taxes (except for
liens for taxes not yet delinquent) or (2) outstanding liabilities with respect
to taxes that could form the basis for liens, upon any of the properties or
assets, whether real, personal or mixed, tangible or intangible, of any
Subsidiary or the Company.
(i) Neither the Company nor any Subsidiary is a party to any
agreement providing for the allocation or sharing of, or indemnification for,
taxes.
(j) Neither the Company nor any Subsidiary is required to
include in income any adjustment in any taxable period ending after the date
hereof pursuant to Section 481(a) of the Code.
(k) Neither the Company nor any Subsidiary, shareholder, or
other person or entity has entered into any agreement with any taxing authority
that will bind Broughton or the Surviving Company after the Closing Date.
(l) There is no contract, agreement, plan or arrangement
covering any current or former employee of any Subsidiary or the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by Broughton or the Surviving Company by reason of
Section 280G of the Code.
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<PAGE> 20
(m) The Company has not participated or cooperated in any
international boycott within the meaning of Section 999(b) of the Code.
4.8 Properties. Except as previously disclosed in writing to
Broughton or disclosed in the Company Financial Statements, the Company and its
Subsidiaries have good and marketable title, free and clear of all liens,
encumbrances, charges, defaults or equities of whatever character, to all of
the respective properties and assets, tangible or intangible, whether real,
personal or mixed, reflected in the Company Financial Statements as being owned
by it at May 31, 1997 or acquired by it after May 31, 1997. All buildings, and
all fixtures, equipment and other property and assets which in the opinion of
management are material to its business held under leases or subleases by the
Company and its Subsidiaries are held under valid instruments enforceable in
accordance with their respective terms (except as previously disclosed in
writing to Broughton and except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceedings
may be brought). Other than as previously disclosed in writing to Broughton,
there is no equipment located on the premises of the Company or a Subsidiary
that is on loan from another party. The Company's and its Subsidiaries'
policies and binders for fire, theft, liability workman's compensation,
directors' and officers' vehicular and other insurance are in full force and
effect, are adequate for the business engaged in by the Company and its
Subsidiaries and provide adequate coverage against loss. Neither the Company
nor any of its Subsidiaries is in default with respect to any material
provision contained in any such policy or binder nor has the Company or any of
its Subsidiaries failed to give notice or present any claim under any such
policy or binder in due and timely fashion. There are no outstanding unpaid
claims under any such policy or binder and neither the Company or any of its
Subsidiaries has received notice of premium increase, cancelation or
non-renewal of any such policy or binder.
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<PAGE> 21
4.9 Compliance with Laws. Except as previously disclosed in
writing to Broughton, each Subsidiary and the Company:
(a) Is in compliance with all laws, regulations, reporting
and licensing requirements and orders applicable to its business or any of its
employees (because of such employee's activities on behalf of it), the breach
or violation of which could have a material adverse effect on such business;
and
(b) Has received no notification (not previously disclosed
in writing to Broughton) from any agency or department of federal, state or
local government or regulatory authorities or the staff thereof asserting that
any such entity is not in compliance with any of the statutes, regulations,
rules or ordinances which such governmental authority or regulatory authority
enforces, or threatening to revoke any license, franchise, permit or
governmental authorization, and is subject to no agreement with any regulatory
authorities with respect to its assets or business.
4.10 Employee Benefit Plans.
(a) The Company has previously provided to Broughton a true
and complete list of each bonus, deferred compensation, incentive compensation,
stock purchase, stock option, severance pay, medical, life or other insurance,
profit-sharing, or pension plan, program, agreement or arrangement, and each
other employee benefit plan, program, agreement or arrangement, sponsored,
maintained or contributed to or required to be contributed to by the Company
and its Subsidiaries or by any trade or business, whether or not incorporated,
that together with the Company would be deemed a "single employer" under
section 414 of the Code (an "ERISA Affiliate") for the benefit of any employee
or director or former employee or former director of the Company or any ERISA
Affiliate, whether formal or informal and whether legally binding or not (the
"Plans"). None of the Plans is subject to Title IV of ERISA. The Company has
no formal plan or commitment, whether legally binding or not, to create any
additional plan or modify or change any existing Plan that would
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<PAGE> 22
affect any employee or director or former employee or former director of the
Company or any ERISA Affiliate.
(b) With respect to each of the Plans, the Company has
heretofore delivered to the Company true and complete copies of each of the
following documents: (i) the Plan and related documents (including all
amendments thereto); (ii) the two most recent annual reports and financial
statements, if any; (iii) the most recent Summary Plan Description, together
with each Summary of Material Modifications, required under ERISA with respect
to such Plan, and all material employee communications relating to such Plan;
and (iv) the most recent determination letter received from the IRS with
respect to each Plan that is intended to be qualified under the Code and all
material communications to or from the IRS or any other governmental or
regulatory authority relating to each Plan.
(c) No liability under Title IV of ERISA has been incurred by
the Company or any ERISA Affiliate since the effective date of ERISA that has
not been satisfied in full, and no condition exists that presents a material
risk to the Company or any ERISA Affiliate of incurring a liability under such
Title.
(d) Neither the Company nor any ERISA Affiliate, nor any of
the Plans, nor any trust created thereunder, nor to the knowledge of the
Company any trustee or administrator thereof has engaged in a transaction in
connection with which the Company, any of the ERISA Affiliates, any of the
Plans, any such trust, or any trustee or administrator thereof, could be
subject to either a civil penalty assessed pursuant to section 409 or 502(i) of
ERISA, or a tax imposed pursuant to section 4975 or 4976 of the Code.
(e) Full payment has been made, or will be made in accordance
with section 404(a)(6) of the Code, of all amounts that the Company or any
ERISA Affiliate is required to pay under section 412 of the Code or under the
terms of the Plans, and all such amounts properly accrued through the Effective
Date will be paid on or prior to the Effective Date or will be properly
recorded on the Company Financial Statements.
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<PAGE> 23
(f) Except as previously disclosed in writing to Broughton,
none of the Plans is a "multiemployer pension plan," as such term is defined in
section 3(37) of ERISA, a "multiple employer welfare arrangement," as such term
is defined in section 3(40) of ERISA, or a single employer plan that has two or
more contributing sponsors, at least two of whom are not under common control,
within the meaning of section 4063(a) of ERISA.
(g) With respect to any Plan that is a "multiemployer pension
plan," as such term is defined in Section 3(37) of ERISA (i) neither the
Company nor any ERISA Affiliate has made or suffered a "complete withdrawal" or
a "partial withdrawal," as such terms are respectively defined in section 4203
and 4205 of ERISA, (ii) no event has occurred that presents a material risk of
a partial withdrawal, (iii) neither the Company nor any ERISA Affiliate has any
contingent liability under section 4204 of ERISA, and no circumstances exist
that present a material risk that any such plan will go into reorganization,
and (v) the aggregate withdrawal liability of the Company and the ERISA
Affiliates, computed as if a complete withdrawal by the Company and the ERISA
Affiliates had occurred under each such Plan on the date hereof, would not
exceed $0.
(h) Each of the Plans that is intended to be "qualified"
within the meaning of section 401(a) of the Code is so qualified. Each of the
Plans that is intended to satisfy the requirements of section 125 or 501(c)(9)
of the Code satisfies such requirements. Each of the Plans has been operated
and administered in all material respects in accordance with its terms and
applicable laws, including but not limited to ERISA and the Code.
(i) Except as previously disclosed in writing to Broughton,
each Plan may be amended or terminated without liability to the Company or any
ERISA Affiliate. No amounts payable under the Plans will fail to be deductible
for federal income tax purposes under section 280G of the Code.
(j) There are no actions, suits or claims pending, or, to the
knowledge of the Company threatened, or anticipated (other than routine claims
for benefits) against any Plan, the assets of any Plan or against the Company
or any ERISA
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<PAGE> 24
Affiliate with respect to any Plan. There is no judgment, decree, injunction,
rule or order of any court, governmental body, commission, agency or arbitrator
outstanding against or in favor of any Plan or any fiduciary thereof (other
than rules of general applicability). There are no pending or, to the
knowledge of the Company threatened, audits or investigations by any
governmental body, commission or agency involving any Plan.
(k) No Plan provides benefits, including without limitation
death or medical benefits (whether or not insured), with respect to current or
former employees or directors of the Company or any ERISA Affiliate after
retirement or other termination of service (other than (i) coverage mandated by
applicable law, (ii) death benefit or retirement benefits under any "employee
pension plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred
compensation benefits accrued as liabilities on the Company Financial
Statements, or (iv) benefits, the full cost of which is borne by the current or
former employee or director (or his beneficiary).
(l) Except as previously disclosed in writing to Broughton,
the consummation of the transactions contemplated by this Agreement will not
(i) entitle any current or former employee or director of the Company or any
ERISA Affiliate to severance pay, unemployment compensation or any similar
payment, or (ii) accelerate the time of payment or vesting, or increase the
amount, of any compensation due to any such current or former employee or
director, or (iii) renew or extend the term of any agreement regarding
compensation for any such current or former employee or director.
4.11 Commitments and Contracts. Except as previously disclosed in
writing to Broughton, neither the Company nor any Subsidiary is a party or
subject to any of the following (whether written or oral, express or implied):
(i) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination pay
liabilities or fringe benefits) with any present or former officer, director,
employee or consultant (other than those which are terminable at will by the
Company or the applicable Subsidiary);
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<PAGE> 25
(ii) any plan, contract or understanding providing for
bonuses, pensions, options, deferred compensation, retirement payments, profit
sharing or similar understandings with respect to any present or former
officer, director or consultant;
(iii) any contract or agreement with any labor union;
(iv) any contract not made in the ordinary course of
business containing covenants limiting the freedom of the Company or a
Subsidiary to compete in any line of business or with any person or involving
any restriction of the area in which, or method by which, the Company or a
Subsidiary will carry on its business (other than as may be required by law or
applicable authorities);
(v) any lease, agreement or other contract or series of
related contracts requiring annual rental payments or payments aggregating
$50,000 or more;
(vi) any agreement for the purchase or sale of materials,
supplies, equipment, merchandise or service that contain an escalation,
renegotiation or redetermination clause or that obligate the Company or any
Subsidiary to purchase all or substantially all of its requirements of a
particular product from a supplier, or for periodic minimum purchases of a
particular product from a supplier;
(vii) any agreement for the sale of any of the assets or
properties of the Company or any Subsidiary other than in the ordinary course
of business or for the grant to any person of any options, rights of first
refusal or preferential or similar rights to purchase any such assets or
properties;
(viii) any agreement of surety, guarantee or indemnification,
other than agreements in the ordinary course of business with respect to
obligations in an aggregate amount not in excess of $50,000;
(ix) any agreement with customers or supplier for the
sharing of fees, slotting fees, the rebating of charges or other similar
arrangements;
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<PAGE> 26
(x) any agreement relating to the acquisition by the
Company or any Subsidiary of any operating business or the capital stock of
any other person;
(xi) any agreement or note relating to or evidencing
outstanding indebtedness for borrowed money; and
(xii) any other material agreement which is not made in the
ordinary course of business.
True and complete copies of all the contracts described above and
other material agreements (and all amendments, waivers or other modifications
thereto) have been furnished to Broughton. Each of such contacts is valid,
subsisting, in full force and effect, and the Company, and the applicable
Subsidiary, if any, is not in default under any of them, nor, to the best
knowledge of the Company and its Subsidiaries is any other party to any such
contract or other agreement in default thereunder, nor does any condition exist
that with notice or lapse of time or both would constitute a default
thereunder, except, in each case, such defaults as would not, individually or
in the aggregate, have a material adverse effect on the business of the Company
or any Subsidiary.
4.12 Labor.
(a) No work stoppage involving the Company or any Subsidiary
is pending or, to the best of the Company's knowledge, threatened.
(b) Neither the Company nor any Subsidiary is involved in, or
threatened with or affected by, any labor dispute, arbitration, lawsuit or
administrative proceeding which could materially and adversely affect the
business of the Company or any Subsidiary.
(c) Except as previously disclosed in writing to Broughton,
employees of the Company and its Subsidiaries are not represented by any labor
union nor are any collective bargaining agreements otherwise in effect with
respect to such employees.
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(d) Neither the Company nor any Subsidiary is delinquent in
payments to any of its respective employees or consultants for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to
such employees. Neither the Company, its Subsidiaries, nor Broughton or the
Surviving Corporation will by reason of the Merger or anything done prior to
the Effective Time be liable to any of such employees for severance pay or any
other payments (other than accrued salary, vacation or sick pay in accordance
with the Company's normal policies). No payments to directors, officers,
employees or consultants of the Company and its Subsidiaries resulting from the
transactions contemplated hereby will cause the imposition of excise taxes
under Section 4999 of the Code or the disallowance of a deduction pursuant to
Section 280G of the Code. True and complete information as to all current
directors, officers, employees or consultants of the Company and its
Subsidiaries, including, in each case, name, current job title, base salary,
bonus potential, commissions and termination obligations has been previously
furnished to Broughton.
4.13 Material Contracts Furnished. The Company has made available
to Broughton true and complete copies of all material contracts, leases and
other agreements to which each of the Company and its Subsidiaries is a party
or by which it is bound and of all employment, pension, retirement, stock
option, profit sharing, deferred compensation, consultant, bonus, group
insurance or similar plans with respect to any of the directors, officers or
other employees of the Company and its Subsidiaries.
4.14 Other Material Contracts. Except as previously disclosed in
writing to Broughton and except as is otherwise provided in this Agreement,
neither the Company nor its Subsidiaries nor any of their respective assets,
businesses or operations is, as of the date hereof, a party to, or is bound or
affected by, or receives benefits under, (i) any material agreement,
arrangement or commitment not cancellable by it without penalty, other than
agreements, arrangements or commitments entered into in the ordinary course of
its business and negotiated on an arms-length basis, or (ii) any material
agreement, arrangement or commitment relating to the employment, election or
retention in office of any director or officer other than agreements,
arrangements or commitments entered into in the
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ordinary course of its business and negotiated on an arms-length basis.
4.15 Material Contract Defaults. Neither the Company nor any
Subsidiary is in default in any material respect under any contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which
it is a party or by which its respective assets, business or operations may be
bound or affected or under which it or its respective assets, business or
operations receive benefits, and there has not occurred any event which with
the lapse of time or the giving of notice or both would constitute such a
default, except as previously disclosed in writing to Broughton.
4.16 Legal Proceedings. Except as disclosed in writing by the
Company, (a) there are no actions, suits or proceedings instituted or pending,
or to the best knowledge of the Company threatened, (or unasserted but
considered probable of assertion and which if asserted would have at least a
reasonable probability of an unfavorable outcome), including eminent domain
proceedings, against or relating to any Subsidiary or the Company, or against
any property, asset, interest or right of the Company, that could have a
material and adverse effect on the condition (financial or other, present or
prospective), business, properties, assets, operations, liabilities or
prospects of any Subsidiary or the Company, or that threaten or would impede
the consummation of the transactions contemplated by this Agreement, and (b)
neither the Company nor any Subsidiary is a party to any agreement or
instrument or subject to any charter or other corporate restriction or any
judgment, order, writ, injunction, stay, decree, rule, regulation, code or
ordinance that threatens or might impede the consummation of the transactions
contemplated by this Agreement.
4.17 Absence of Certain Changes or Events. Except as disclosed in
writing to Broughton, since May 31, 1997, neither the Company nor any
Subsidiary has: (i) incurred any material liability, except in the ordinary
course of its business, consistent with generally acceptable practice and
except as permitted pursuant to this Agreement; (ii) suffered any material
adverse change in its business, operations, assets or condition
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(financial or other); or (iii) failed to operate its business consistent with
generally acceptable practice.
4.18 Accounts Receivable. Except as previously disclosed in writing
to Broughton, all the notes and accounts receivable of the Company and its
Subsidiaries shown on the Company Financial Statements or thereafter acquired
have been collected or are current and collectible subject to the reserves
shown on the Company's Financial Statements and to returns and allowances in
the ordinary course of business (in the case of each note in accordance with
its terms, and in the case of each account within 30 days after billing) at the
aggregate recorded amounts thereof on the books of the Company. The Company
has delivered to Broughton a schedule identifying all bank and brokerage
accounts of the Subsidiaries and the Company, whether or not such accounts are
held in the name of such Subsidiary or the Company, listing the respectively
signatories therefore and the names of all persons holding a power of attorney
from the Company and each Subsidiary and a summary of the terms thereof.
4.19 Inventories. The inventories of the Subsidiaries and Company
are of a quality and quantity usable and salable in the ordinary course of
business, except for obsolete items and items of below-standard quality, all of
which, in the aggregate, are immaterial in amount. Items included in such
inventories are carried on the books of the Company, and are valued on the
Company Balance Sheet, at the lower of cost or market and, in any event, at not
greater than their net realizable value, on an item by item basis, after
appropriate deduction for costs of completion, marketing costs, transportation
expense and allocation of overhead, and reserves reflected on the Company's
Balance Sheet.
4.20 Proprietary Rights. The Company owns or possesses adequate
licenses or other rights to use all patents, trademarks, trade names,
copyrights, inventions, formulae, methods and processes (all such items being
hereinafter referred to as "Intangible Property") currently used by the Company
and its Subsidiaries in the conduct of its business, without any known conflict
with the rights of others. No royalties, honoraria or fees are payable by the
Company or any Subsidiary to any person by reason of the ownership or use of
the Intangible Property. All items of Intangible Property are valid
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<PAGE> 30
and in good standing and are adequate and sufficient to permit the Company and
its Subsidiaries to conduct business as now operated, and no other rights of
the kinds enumerated are due or required by the Company or its Subsidiaries in
their respective operations. There are no licenses, sublicenses or agreements
relating to their use now in effect, and none of the aforesaid are being
infringed by others in any material way. No claim is pending or, to the
knowledge of the Company and its Subsidiaries, threatened or has been made
within the past five years, to the effect that operation by the Company or any
Subsidiary of their respective business or the manufacture or sale of any of
its products, or any formula, method, process, part or material it employs,
infringes or conflicts in any way upon any rights of the type enumerated above
owned or claimed by others.
4.21 Environmental Matters.
(a) The operations of the business of the
Company and its Subsidiaries and the buildings in which the operations are
conducted conform in all material respects with all applicable federal, state
and local laws, ordinances and regulations (including those relating to zoning
and environmental protection), and all buildings or operations of the Company
and its Subsidiaries and the businesses that are subject to the Occupational
Safety and Health Act of 1970, as amended, comply in all material respects with
employee working conditions as prescribed by such Act.
(b) Neither the Company nor any Subsidiary has underground
storage tanks, either empty or containing any liquid, including but without
limitation solvents, fuel or waste oil, on any premises used in its business.
(c) The Company and all its Subsidiaries have obtained all
permits, licenses and other authorizations and filed all notices which are
required to be obtained or filed for the operation of its business under
federal, state and local laws relating to pollution, protection of the
environment or waste disposal ("Environmental Laws"). The Company and its
Subsidiaries are in compliance in all material respects (i) with all terms and
conditions of all required permits, licenses and authorizations; and (ii) all
other applicable limitations,
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restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in the Environmental Laws or contained in
any law, regulation, code, plan, order, decree, judgment, notice or demand
letter issued, entered, promulgated or approved thereunder. There are no past
or present events, conditions, circumstances, activities, practices, incidents,
actions or plans which may interfere with or prevent continued compliance in
all material respects, or which may give rise to any common law or statutory
liability, or otherwise form the basis of any claim, action, suit, proceeding,
hearing or investigation, based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant, waste or hazardous or toxic material with respect to
the Company, its Subsidiaries or their businesses, properties or plants.
(d) There are no actions, suits or proceedings, or demands,
claims, notices or investigations (including, without limitation, notices,
demand letters or requests for information from any environmental agency)
instituted or pending, or to the knowledge of the Company, threatened,
relating to the liability of the Company or any Subsidiary or any of their
operations or buildings under any Environmental Law.
4.22 No Broker. Neither the Company nor any Subsidiary has incurred
any liability for finder's, agent's or brokerage fees, commissions or
compensation in connection with this Agreement or the transactions contemplated
hereby.
4.23 Accuracy of Information for Broughton IPO Registration
Statement. The material which refers to the Company and its Subsidiaries and
which will be submitted by the Company for inclusion in the IPO Registration
Statement (as defined below) to be filed by Broughton with the SEC regarding
Broughton Common Stock will not contain any untrue statements of material fact
or omit to state any material fact required to be stated therein or necessary
to be stated therein or necessary to make the statements contained therein not
misleading.
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<PAGE> 32
4.24 Best Efforts. On or prior to the Closing Date (hereinafter
defined in Section 7.1 hereof), the Company and its Subsidiaries will, to the
extent permitted by applicable laws, rules and regulations, take such actions
and execute and deliver all such agreements, documents, certificates or
amendments to this Agreement as may be necessary or desirable to effectuate the
provisions and intent of this Agreement.
4.25 No Third Party Consents.
(a) Except as previously disclosed in writing to Broughton by
the Company, there are no contractual, legal or other restrictions, consents,
approvals, authorizations or clearances of any third party that the Company or
any Subsidiary is required to obtain and that have not been obtained as of the
date hereof and that are necessary for or would prevent the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby.
(b) Neither the Company nor any Subsidiary knows any reason
why the consents, approvals, authorizations and clearances, filings,
declarations and registrations, set forth in 4.25(a), if any, shall not be
obtained in due course without unreasonable burden or expense.
4.26 Conduct of Business - Negative Covenants of the Company and its
Subsidiaries. Except as otherwise contemplated hereby, between the date hereof
and the Effective Time, or the time when this Agreement terminates as provided
herein, neither the Company nor any of its Subsidiaries, respectively, will,
without the prior written approval of the President of Broughton:
(a) Make any change in its authorized capital stock.
(b) Issue any shares of its capital stock, securities
convertible into its capital stock, or any long term debt securities.
(c) Issue or grant any options, warrants or other rights to
purchase shares of its common stock.
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<PAGE> 33
(d) Declare or pay any dividends or other distributions on
any shares of common stock.
(e) Purchase or otherwise acquire or agree to acquire for a
consideration any share of Company Stock (other than in a fiduciary capacity).
(f) Enter into or amend any employment, pension, retirement,
stock option, profit sharing, deferred compensation, consultant, bonus, group
insurance or similar plan in respect of any of its directors, officers or
other employees, or increase the current level of contributions to any such
plan now in effect.
(g) Take any action materially and adversely affecting this
Agreement or the transactions contemplated hereby or the financial condition
(present or prospective), businesses, properties or operations of the Company
or its Subsidiaries.
(h) Acquire, consolidate or merge with any other company,
corporation or association, or acquire, other than in the ordinary course of
business, any assets of any other company, corporation or association.
(i) Mortgage, pledge or subject to a lien or any other
encumbrance, any of its assets, dispose of any of its assets, incur or cancel
any debts or claims or increase the current level of compensation or benefits
payable to its officers, employees or directors except in the ordinary course
of business as heretofore conducted or take any other action not in the
ordinary course of their business as heretofore conducted or incur any other
material obligation or enter into any material contract, except in the ordinary
course of business as heretofore conducted.
(j) Amend its Articles of Incorporation, By-laws or Charter.
(k) Take any action to solicit, initiate, encourage or
authorize any person, including directors, officers and other employees, to
solicit from any third party any inquiries or proposals relating to the
disposition of the business or assets of the Company or its Subsidiaries, or
the
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<PAGE> 34
acquisition of their Company Stock, or the merger of the Company or its
Subsidiaries, with any person other than Broughton, and the Company shall
promptly notify Broughton orally of all the relevant details relating to all
inquiries and proposals which it may receive relating to any of such matters.
Nothing herein shall be construed to limit or affect the fiduciary obligation
of the Company's officers and directors to the Company shareholders.
4.27 Conduct of Business - Affirmative Covenants of the Company and
its Subsidiaries. The Company and its Subsidiaries covenant and agree that:
(a) Subsequent to the date of this Agreement and prior to the
Effective Time it will operate its business only in the normal course and
manner.
(b) From and after the execution of this Agreement, each of
the Company and its Subsidiaries will promptly advise Broughton of any material
adverse change in the financial condition, assets, business operations or key
personnel of the Company and a Subsidiary and of any material breach of any
representation or warranty made by any Subsidiary or the Company in this
Agreement.
(c) Immediately upon the execution of this Agreement, each of
the Company and its Subsidiaries will direct its accountants to give Broughton
access to all information, documents and working papers pertaining to it.
(d) Subsequent to the date of this Agreement and prior to the
Effective Time, each of the Company and its Subsidiaries shall maintain in full
force and effect adequate fire, casualty, public liability, employee fidelity
and other insurance coverage in effect on the date of this Agreement in order
to protect each of the Company and its Subsidiaries against losses for which
insurance protection can reasonably be obtained.
(e) Within ten days from the execution of this Agreement, the
Company shall furnish to Broughton a list, accurate as of the close of business
on a date not more than ten (10) days prior to the date on which such list is
furnished,
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<PAGE> 35
containing the names and addresses of all holders of Company Stock as the same
appear on the stock registration books of the Company and the number of shares
held by each. At the Effective Time, the Company shall furnish to Broughton a
list, true, correct and complete as of the close of business on the preceding
day, containing the names and addresses of all holders of Company Stock as the
same appear on the Company's stock registration books and the number of shares
held by each.
(f) Each of the Company and its Subsidiaries will use its
best efforts in good faith to take or cause to be taken all action required
under this Agreement on its part to be taken as promptly as practicable so as
to permit the consummation of the Merger and the transactions contemplated
hereby at the earliest possible date and cooperate fully with Broughton to that
end.
Section 5 Indemnification and Confidentiality
5.1 Access and Information. The Company and Broughton shall each
afford to the other, and to the other's accountants, counsel and other
representatives, full access during normal business hours throughout the period
prior to the Closing Date to all of its properties, books, contracts,
commitments and records (including but not limited to tax returns), and, during
such period, each shall furnish promptly to the other (i) a copy of each
report, schedule and other document filed or received by it pursuant to the
requirements of federal or state securities and banking laws and (ii) all other
information concerning its business, properties and personnel as such other
party may reasonably request, provided that no investigation pursuant to this
Section 5.1 shall affect any representations or warranties or the conditions to
the obligations of the parties to consummate the Merger.
5.2 Furnishing Information and Indemnification. The Company has
furnished or will furnish as soon as practicable after the date of this
Agreement, to Broughton all the information (including financial statements,
information and schedules) requested by Broughton for inclusion in:
(a) The registration statement or other statement to be
filed, in connection with an initial public
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<PAGE> 36
offering of Broughton's Common Stock, with the SEC on behalf of Broughton ("IPO
Registration Statement") under the Securities Act of 1933, as amended ("1933
Act") in connection with the registration of Broughton Common Stock, and any
documents to be filed with the SEC in connection therewith;
(b) Any filings to be made by Broughton with state securities
authorities in connection with the transactions contemplated hereunder; and
(c) Any other request, application, statement, report or
material to be made or filed by any party to or with any regulatory authority
or any governmental agency, department or instrumentality in connection with
the transactions contemplated hereunder.
The Company represents and warrants to Broughton, that all
information so furnished for such requests, statements, applications, reports
and materials shall be true and correct in all material respects without
omission of any material fact required to be stated to make the information
therein not false or misleading. The Company will indemnify and hold harmless
Broughton and its directors and officers, and each person, if any, who controls
such entities within the meaning of the 1933 Act, from and against any and all
losses, damages, expenses or liabilities to which such entity, or any such
director, officer or controlling person may become subject under applicable
laws (including the 1933 Act and the Securities Exchange Act of 1934) and rules
and regulations thereunder and will reimburse the other, and any such director,
officer or controlling person, for any legal or other expenses reasonably
incurred in connection with investigating or defending any actions, whether or
not resulting in liability, insofar as such losses, damages, expenses,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any such request,
statement, application, report or material 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 in order to make the statements therein not
misleading, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished in writing in
connection therewith by such indemnifying party for use therein.
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5.3 Confidentiality. It is hereby agreed that, except (i) as
otherwise required in the performance by the parties of their respective
obligations hereunder or under the Merger and (ii) as otherwise required by
law, any nonpublic information received from the other party during the course
of the investigation contemplated pursuant hereto shall remain and be kept as
confidential information by it and all copies thereof will be returned promptly
at the request of the party furnishing such information in the event of the
termination of this Agreement and the Merger. Each of the parties may disclose
such information to its respective employees, affiliates, counsel, accountants,
representatives, professional advisors and consultants, and shall require each
of them to agree to keep all such information confidential.
5.4 Updates to Information. At the reasonable request of any
party hereto, any other party will update by amendment or supplement any
disclosure made in writing by such party to the other party and each party
hereby represents and warrants that such written disclosures, as so amended or
supplemented, shall be true, correct and complete as of the date or dates
thereof.
Section 6 Conditions Precedent
The consummation of this Agreement and the Merger is conditioned upon
the following:
(a) Governmental Approvals and Third Party Consents. (i) The
approval of and consent to the Merger and the transactions contemplated hereby
shall have been given prior to the Effective Time by the regulatory agencies
whose approval or consent is required, including, without limitation, to the
extent provided by applicable laws, rules, regulations and compliance
agreements, the Food and Consumer Service of the United States Department of
Agriculture, the Attorney General of the United States, and all notice periods,
waiting periods, delay periods, and all periods for review, objection or appeal
of or to any of the consents, approvals or permissions required by law with
respect to the consummation of the Merger and this Agreement shall have
expired. Such approvals shall not be conditioned or restricted in a manner
which, in the judgment of the Board of Directors of Broughton, materially
adversely
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<PAGE> 38
affects the economic assumptions of the transactions contemplated hereby so as
to render inadvisable consummation of the Merger.
(ii) The Company shall have obtained all necessary consents,
approvals, authorizations or clearances of any third party to permit the
Company's consummation of the transactions contemplated by this Agreement.
(b) Shareholder Approval. The shareholders of the Company,
and if required, the Broughton shareholders, shall have ratified, confirmed
and approved this Agreement and the terms and conditions herein contained by
the affirmative vote of the shareholders, owning at least a majority of capital
stock outstanding, and final approval of this Agreement by the Company's
shareholders shall have taken place as provided in Section 10 hereof, and all
provisions of Section 10 shall have been fully complied with.
(c) Initial Public Offering. Broughton at its sole cost and
expense shall have consummated an initial underwritten public offering pursuant
to an effective IPO Registration Statement under the provisions of the 1933
Act.
(d) Company Shareholder Letters. On or prior to the Closing
Date, Broughton shall have received in such form acceptable to Broughton
written agreements executed by all of the Company shareholders receiving
Broughton Common Stock pursuant to the Merger (i) to not sell, transfer or
otherwise dispose of Broughton Common Stock received in the Merger for a period
of one year following the Effective Date or otherwise as required by the 1933
Act and state securities law; (ii) giving representations and warranties
substantially similar to those set forth in Section 11.16 (d), (e) and (f); and
(iii) acknowledging the certificates representing the Shares shall bear the
legend described in Section 11.17 hereof.
(e) No Divestiture or Adverse Condition. The consummation of
the Merger shall not have required the divestiture or cessation of any
significant part of the present operations conducted by Broughton or the
Company and shall not have imposed any other condition, which divestiture,
cessation
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<PAGE> 39
or condition Broughton deems to be materially disadvantageous or burdensome.
(f) Accuracy of Representations and Warranties; Performance
of Obligations and Covenants - Broughton. Unless waived by the Company, the
representations and warranties of Broughton contained in this Agreement shall
be correct on and as of the Closing Date and thereafter until the Effective
Time in all material respects with the same effect as though made on and as of
such Effective Time except for changes which are not in the aggregate material
and adverse to the financial condition, businesses, properties or operations
of Broughton and Broughton shall have performed in all material respects all
of its obligations and agreements hereunder theretofore to be performed by it
and the Company shall have received on the Closing Date an appropriate
certificate (in affidavit form) to the foregoing effect dated as of the Closing
Date and executed on behalf of Broughton by one or more appropriate executive
officers of Broughton.
(g) Accuracy of Representations and Warranties, Performance
of Obligations and Covenants - The Company. Unless waived by Broughton, the
representations and warranties of the Company contained in this Agreement
shall be correct on and as of the Closing Date and thereafter until the
Effective Time in all material respects with the same effect as though made on
and as of such Effective Time except for changes which are not in the
aggregate material and adverse to the financial condition, businesses,
properties or operations of the Company, and the Company shall have performed
in all material respects all of its obligations and agreements hereunder
theretofore to be performed by it and Broughton shall have received on the
Closing Date an appropriate certificate (in affidavit form) to the foregoing
effect dated as of the Closing Date and executed on behalf of the Company by
one or more appropriate executive officers of the Company.
(h) Opinion of Counsel for the Company and the Shareholders.
Broughton shall have received an opinion of counsel for the Company and the
Shareholders, dated the Closing Date, with respect to such matters as Broughton
may reasonably request and to the effect that:
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<PAGE> 40
(1) The Company and its Subsidiaries are corporations
duly organized, validly existing and in good standing under the laws of the
their respective jurisdictions of incorporation or formation and are duly
authorized to own its properties and to conduct its business as then being
conducted.
(2) The authorized capitalization of the Company and
its Subsidiaries is as set forth in such opinion and the shares of Company
Stock issued and outstanding (as of a date specified in such opinion not more
than 5 days prior to the date of such opinion) are as stated in such opinion.
Such issued and outstanding shares of stock are validly issued, fully paid and
nonassessable, and were not issued in violation of any preemptive rights of the
shareholders of the Company. As of such date, there are, to the best of such
counsel's knowledge, no options, warrants, rights, commitments or convertible
securities outstanding or authorized on behalf of the Company or its
Subsidiaries, calling for the purchase from it of shares of unissued capital
stock, except as contemplated by this Agreement.
(3) The Company had the corporate power and authority
to execute, deliver and perform its obligations under this Agreement. This
Agreement has been duly authorized, executed and delivered by the Company and
the Shareholders and constitutes the legal, valid and binding obligation of the
Company and the Shareholders, enforceable in accordance with its terms.
(4) All necessary corporate proceedings of the
Directors and the shareholders of the Company, to the extent required by law,
its Articles of Incorporation and By-laws or otherwise, to authorize the
execution and delivery of this Agreement by the Company and the Shareholders
and the consummation of the Merger by the Company pursuant to this Agreement
have been duly and validly taken. The number of shares of stock of the
Company voted for and against the Merger are as stated in such counsel's
opinion; and the shareholders' invoking their rights to dissent and appraisal
are as stated in such counsel's opinion.
(5) Such counsel has reviewed the IPO Registration
Statement filed by Broughton as described in
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Section 6(c), and with respect to all information relating to the Company
contained therein, such counsel does not know of any respect in which the IPO
Registration Statement contained any false or misleading statement of any
material fact or failed to state a material fact which was necessary to be
stated to prevent the statements made from being false or misleading in any
material respect (except as to the financial statements and related notes and
schedules and other financial data, as to which such counsel need express no
opinion).
(6) The consummation of the Merger will not violate or
result in a breach of, or constitute a default under, the Articles of
Incorporation or By-laws of the Company or constitute a breach or termination
of, or default under, any agreement or instrument of which such counsel has
knowledge and which would have a material adverse affect on the business of the
Company, and to which the Company or any Shareholder is a party or by which the
Company or any of its property is bound.
(i) Opinion of Counsel for Broughton. The Company and the
Shareholders shall have received the opinion of counsel for Broughton, dated
the Closing Date, with respect to such matters as the Company may reasonably
request and to the effect that:
(1) Broughton is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio, and is duly
authorized to own its properties and to conduct its business as then being
conducted.
(2) The authorized capitalization of Broughton is as set
forth in such opinion and the shares of Broughton Common Stock issued and
outstanding (as of a date specified in such opinion not more than 5 days prior
to the date of such opinion) are as stated in such opinion. Such issued and
outstanding shares of stock are validly issued, fully paid and nonassessable,
and were not issued in violation of any preemptive rights of the shareholders
of Broughton. As of such date, there are, to the best of such counsels
knowledge, no options, warrants, rights, commitments or convertible securities
outstanding or authorized on behalf of Broughton, calling for the purchase from
any of them of shares of unissued capital
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<PAGE> 42
stock or capital stock held as treasury shares, except as otherwise permitted
by this Agreement.
(3) All necessary corporate proceedings of the Board of
Directors and the shareholders of Broughton to the extent required by law, its
Articles of Incorporation or Code of Regulations or otherwise, to authorize the
execution and delivery of this Agreement and the consummation of the Merger
pursuant to this Agreement have been duly and validly taken. Broughton has the
corporate power and authority to execute, deliver and perform this Agreement.
This Agreement has been duly authorized, executed and delivered by Broughton
and constitutes the legal, valid and binding obligation of Broughton
enforceable in accordance with its terms.
(4) The consummation of the Merger will not violate or
result in a breach of, or constitute a default under, the Articles of
Incorporation or Code of Regulations of Broughton or constitute a breach or
termination of, or default under, any agreement or instrument of which such
counsel has knowledge and to which Broughton is a party or by which it or its
property is bound.
(5) To the best of such counsel's knowledge, all
approvals of public authorities, federal, state or local, the granting of which
is necessary for the consummation of the Merger by Broughton, have been
obtained.
(6) The shares of Broughton Common Stock into which
shares of Company Stock are to be converted upon the Effective Time will upon
the Effective Time be duly authorized, and such shares, when transferred to
holders of Company Stock pursuant to the terms of the Merger, will be validly
issued, fully paid and nonassessable shares of Broughton Common Stock.
(j) Comfort Letter - Company. Coopers & Lybrand LLP or
other certified public accountants satisfactory to the Company shall have
audited the financial statements of Broughton for the year ended December 31,
1996 and, based on such review, the Company shall have reasonably determined
that such statements are satisfactory to the Company.
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<PAGE> 43
(k) Comfort Letter - Broughton. Coopers & Lybrand LLP or
other certified public accountants satisfactory to Broughton shall have
reviewed the financial statements of the Company as of and for the year ended
May 31, 1997 and, based on such review, Broughton shall have reasonably
determined that such statements are satisfactory to Broughton.
(l) Opinion Letter. The Company shall have received an
opinion of tax counsel acceptable to it, and Broughton shall have received an
opinion of tax counsel acceptable to it, both to the effect that:
(1) The Merger should constitute and qualify as a
reorganization within the meaning of Section 368(a) of the Code and the Company
and Broughton will each qualify as "a party to a reorganization" as that term
is defined in the Code;
(2) No gain or loss should be recognized by Broughton
or the Company by reason of the Merger;
(3) A Shareholder's holding period in the Broughton
Common Stock received in the Merger should include the period that the
Shareholder held the Company Stock exchanged therefor, provided that the
Shareholder held such Company Stock as a capital asset at the Effective Time;
(4) The gain, if any, to be realized by the
shareholders should be recognized, but not in excess of the total of any cash
received;
(5) The basis of the Broughton Common Stock received by
the shareholders should be the same as the basis of the Company Stock
surrendered in exchange therefor, decreased by the total of any cash received,
and increased by the amount, if any, which is treated as a dividend plus the
amount of other gain recognized on the exchange; and
(6) Such other matters as may be reasonably requested by
Broughton, the Company or the Shareholders.
- 40 -
<PAGE> 44
In rendering the opinion described in this subsection (l), counsel
will rely on representations and facts as provided by Broughton, the Company
and the shareholders, including without limitation the standard representations
set forth in Revenue Procedure 86-42, 1986-2 C.B. 722. In addition, each of
the shareholders shall enter into an agreement dated as of the Closing Date
pursuant to which each such shareholder shall covenant not to take any action
following the Closing Date that might adversely affect the status of the Merger
as a reorganization for federal income tax purposes. Among other things, each
of the agreements referred to in the preceding sentence shall, if requested by
Broughton, place reasonable limitations on the ability of each shareholder to
sell, exchange, transfer or otherwise dispose of any Broughton Common Stock
received pursuant to the Merger.
(m) The Employment Agreement in all material respects
identical to the form attached hereto as Exhibit C shall have been executed, by
Martin Shearer and delivered to Broughton.
(n) All approvals and consents to the Merger shall have been
obtained in writing prior to, and shall be in full force and effect on the
Closing Date, from all entities whose consent is required. All such consents
shall explicitly provide that the respective agreements shall survive the
Merger in full force and effect, without amendment. Such consents shall not be
conditioned or restricted in a manner which, in the sole judgment of Broughton,
materially adversely affects the ability of Broughton to conduct the business
of the Company after the Merger.
(o) Absence of Material Adverse Changes - Broughton. Unless
waived by the Company at or before the Effective Time, there shall have been no
material adverse change in the financial condition, business or assets of
Broughton since December 31, 1996, and there shall be no suit, action or
proceeding pending or threatened against Broughton which, if successful, would
have a material adverse effect on Broughton or the Surviving Company after the
consummation of the Merger.
(p) Absence of Material Adverse Changes - The Company.
Unless waived by Broughton at or before the Effective
- 41 -
<PAGE> 45
Time, there shall have been no material adverse change in the financial
condition, business or assets of the Company since May 31, 1997, and there
shall be no suit, action or proceeding pending or threatened against the
Company which if successful would have a material adverse effect on the Company
or the Surviving Company after the consummation of the Merger.
Section 7 Closing Date and Effective Time
7.1 Closing Date. The closing shall be effected as soon as
practicable after all of the conditions contained herein shall have been
satisfied. The closing shall be held at the offices of Broughton in Marietta,
Ohio, and the closing date ("Closing Date") shall be a date specified by
Broughton, but, in no event, later than forty-five (45) days following the date
when all such conditions are satisfied.
7.2 Effective Time. Subject to the terms and upon satisfaction on
or before the Closing Date of all conditions specified in this Agreement,
certificates of merger shall be filed with, respectively, the Secretary of
State of the Commonwealth of Kentucky and the Secretary of State of the State
of Ohio in accordance with KRS 271B.11-050 and Section 1701.81 of the OGCL.
The Merger shall become effective at such time as the later of the Secretary of
State of the State of Ohio and the Secretary of State of the Commonwealth of
Kentucky accept the certificates of merger for record, or at such subsequent
date or time as Broughton and the Company shall agree, and if required by the
KBCA or the OGCL, specify in such certificates of merger (the time the Merger
becomes effective being hereinafter referred to as the "Effective Time").
Section 8 Termination of Agreement
8.1 Grounds for Termination. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Closing Date:
(a) By mutual consent in writing of the Company and
Broughton; or
(b) By the Company by giving written notice thereof to
Broughton if (i) a material adverse change shall have
- 42 -
<PAGE> 46
occurred in the financial condition, results of operations or business of
Broughton since December 31, 1996, or (ii) Broughton has in any material
respect breached any covenant, undertaking, representation or warranty
contained in this Agreement and such breach has not been cured within thirty
(30) days after the giving of such notice; or
(c) By Broughton by giving written notice thereof to the
Company if (i) a material adverse change shall have occurred in the financial
condition, results of operations or business of the Company since May 31, 1997
or (ii) the Company has in any material respect breached any covenant,
undertaking, representation or warranty contained in this Agreement and such
breach has not been cured within thirty (30) days after the giving of such
notice; or
(d) By either the Company or Broughton upon written notice to
the other if any regulatory agency whose approval of the transactions
contemplated by this Agreement is required denies such application for approval
by final order or ruling (which order or ruling shall not be considered final
until expiration or waiver of all periods for review or appeal); or
(e) By either the Company or Broughton upon written notice to
the other if any condition precedent to either party's performance hereunder is
not satisfied or fulfilled; or
(f) By either the Company or Broughton if the Merger shall
violate any nonappealable final order, decree or judgment of any court or
governmental body having competent jurisdiction; or
(g) By either the Company or Broughton upon the bankruptcy,
insolvency or assignment for the benefit of creditors of the Company or
Broughton; or
(h) By Broughton in the event Broughton determines that any
information "disclosed in writing" and delivered pursuant to Section 11.3
hereof is (i) materially inaccurate, incomplete, untrue; (ii) exposes a
material adverse change relating to the business of the Company; or
- 43 -
<PAGE> 47
(iii) otherwise breaches any material covenant, undertaking, representation or
warranty contained herein; or
(i) By the Company in the event the Company determines that
any information "disclosed in writing" and delivered pursuant to Section 11.3
hereof is (i) materially inaccurate, incomplete, untrue; (ii) exposes a
material adverse change relating to the business of Broughton; or (iii)
otherwise breaches any material covenant, undertaking, representation or
warranty contained herein; or
(j) By Broughton, in the event Broughton and the Food and
Consumer Service of the United States Department of Agriculture ("FCS") do not
agree, in a manner satisfactory to Broughton, to limit the terms and conditions
of the Compliance Agreement in Lieu of Debarment between the Company and the
FCS ("Compliance Agreement") solely to the business operations and management
of the Company following the Merger.
In any event, the obligations of the parties under this Agreement
shall terminate on December 31, 1997, if the closing provided in Section 7.1
has not occurred on or before that date, unless Broughton and the Company
otherwise agree.
8.2 Effect of Termination. In the event of termination of this
Agreement for any reason other than a breach thereof, neither party hereto
shall have any liability to the other of any nature whatsoever, including any
liability for loss, damages or expenses suffered or claimed to be suffered by
reason thereof, except as provided in Section 8.3.
8.3 Return of Information. In the event of the termination of
this Agreement for any reason, each party shall deliver to the other party, and
shall require each of its officers, agents, employees and independent advisers
(including legal, financial and accounting advisers) to deliver to the other
party all documents, work papers and other material obtained from such other
party relating to the transactions contemplated hereby, whether obtained before
or after the execution hereof, including information obtained pursuant to
Section 5 hereof. Each party agrees that notwithstanding any other provision
contained in this Agreement, the undertakings
- 44 -
<PAGE> 48
and covenants regarding confidentiality contained in Section 5 shall survive
termination of this Agreement.
Section 9 Extension, Waiver and Amendment.
At any time prior to the Effective Time, the Company and Broughton
may:
(a) Extend the time for the performance of any of the
obligations or acts of any other party;
(b) Waive any inaccuracies in the representations and
warranties of any other party contained herein or in any document delivered
pursuant hereto; or
(c) Waive compliance with any of the agreements or conditions
of any other party contained herein.
This Agreement may be amended or supplemented at any time by mutual
agreement of the parties (except that they may not be amended in any material
respect after approval by the shareholders of the parties without further
approval by such shareholders). Any waiver, amendment or supplement hereof
shall be in writing. Notwithstanding the foregoing, no failure of delivery by
the Company or Broughton in exercising any right hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right hereunder.
Any waiver by Broughton or the Company of a condition to its obligation to
perform this Agreement and the subsequent Closing hereunder shall be without
prejudice to the rights or remedies it may have arising out of any breach of
any representation, warranty, covenant or other agreement hereunder.
Section 10 Meeting of Shareholders of the Company; Voting; . . . . . Rights
of Dissenting Shareholders
10.1 Meeting. The Company shall take all steps necessary to call
and hold a meeting of its shareholders in accordance with applicable law and
the Articles of Incorporation and By-laws of Company as soon as practicable for
the purpose of submitting this Agreement to its shareholders for their
ratification, approval and confirmation.
- 45 -
<PAGE> 49
10.2 Voting. By executing this Agreement, each and every Shareholder
represents and warrants that at any shareholders' meeting held for the purpose
of approving the Merger, this Agreement and/or the transactions contemplated
hereby, or at any other meeting of the shareholders at which a vote on the
Merger, this Agreement and/or the transactions contemplated hereby, is
presented, each such Shareholder entitled to vote hereby irrevocably
acknowledges and agrees to vote all of such Shareholder's shares in the Company
(and any shares under such Shareholder's control by virtue of proxy or other
voting arrangement) in favor of approving, ratifying and confirming the Merger,
this Agreement and the transactions contemplated hereby.
10.3 Rights of Dissenting Shareholders. The procedures to be
followed and the rights of dissenting shareholders of the Company shall be
those set forth in the Kentucky Business Corporation Act, KRS 271B.13-010 et
seq. Shares of Company Stock held by any holder who shall have properly
dissented to the Merger and who shall have properly demanded payment on his
stock in accordance with and subject to the provisions of the Kentucky Business
Corporation Act shall not be converted into the right to receive Broughton
Common Stock and cash pursuant to Section 2 unless and until such time as such
holder shall have failed to perfect, or shall have effectively lost, his right
to appraisal of and payment for his shares of Company Stock, at which time such
shares shall be converted into the right to receive Broughton Common Stock and
cash as provided for in Section 2.
Section 11 Miscellaneous
11.1 Public Announcements. Prior to the Closing Date, each party
shall use its best efforts to consult with the other party with respect to any
prepared public announcement, statement or release to the press, or statement
to a competitor, customer or other third party (except to its consultants or to
the regulatory authorities in connection with applications for governmental
approvals or filings) with respect to this Agreement or the Merger or the
transactions contemplated hereby or thereby, except as may be necessary, in the
opinion of
- 46 -
<PAGE> 50
counsel, to comply with any law, governmental order or regulation.
11.2 Brokers and Finders. The Company and Broughton represent each
to the other that this Agreement and the Merger contemplated hereby are the
result of direct negotiations between them and that neither the Company nor
Broughton has incurred any liability for any broker's, finder's or similar fees
in connection with this Agreement or the Merger.
11.3 Disclosed In Writing. As used in this Agreement, the phrase
"disclosed in writing" shall mean disclosed or delivered prior to or within 20
days after, the date of this Agreement by means of a single writing describing
in reasonable detail all of the matters and information required by this
Agreement; provided that, such writing shall also reference the appropriate
sections of this Agreement to which the matters and information therein refer
and shall be delivered in accordance with Section 11.7 hereof. For purposes of
this Agreement, anything appearing, contained, disclosed or described in any
Broughton Financial Statement or Company Financial Statement (including the
notes thereto) shall be deemed to be previously disclosed in writing.
11.4 Entire Agreement. This Agreement embodies the entire agreement
among the parties and there have been no agreements, representations or
warranties among the parties other than those set forth herein or those
provided for herein.
11.5 Counterparts. This Agreement has been executed in a number of
identical counterparts, and each such counterpart shall be deemed to be an
original instrument, but in making proof of this Agreement, it shall not be
necessary to produce or account for more than one such counterpart.
11.6 Invalid Provisions. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
11.7 Notices. Any notices or other communication required or
permitted hereunder shall be sufficiently given if
- 47 -
<PAGE> 51
sent by registered or certified mail, postage prepaid, addressed as follows:
TO THE COMPANY:
Southern Belle Dairy Company, Inc.
607 East Bourne Avenue
P. 0. Box 1020
Somerset, KY 42502-1020
Attention: Martin Shearer, President
TO BROUGHTON:
Broughton Foods Company
210 7th Street
P. 0. Box 656
Marietta, OH 45750
Attention: Marshall T. Reynolds, Chairman
of the Board of Directors
with a copy to: Phil E. Cline
or such other addresses as shall be furnished in writing by either party to the
other party. Any such notice or communication shall be deemed to have been
given as of the date so mailed.
11.8 Headings. The captions contained in this Agreement are
inserted solely for convenience of reference and shall not affect the meaning
or interpretation of this Agreement.
11.9 Expenses. Each of the parties hereto will pay its own fees and
expenses incurred in connection with the transactions contemplated by this
Agreement, except as otherwise specifically provided herein.
- 48 -
<PAGE> 52
11.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio and the United
States of America.
11.11 No Assignment. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that this Agreement may not be assigned by either
party without the written consent of the other party.
11.12 Effectiveness of Agreement. This Agreement shall become
effective and binding as to Broughton and the Company when one or more
counterparts shall have been signed and delivered by Broughton and the Company.
11.13 Further Acts. Broughton and the Company each agree to execute
and deliver on or before the Closing Date such other documents, certificates,
agreements or other writings and to take such other actions as may be necessary
or desirable in order to consummate or implement expeditiously the transactions
contemplated by this Agreement.
11.14 Certain Representations and Warranties Not to Survive. The
representations and warranties contained in Sections 3, 4, 5, 8.3, 11.9, 11.15
and 11.16(a), (b), (d), (e) and (f) shall survive the Closing Date and
Effective Time. The representations and warranties by the Shareholders set
forth in Section 11.16(c) shall survive for a period of eighteen (18) months
following the Effective Time.
11.15 Individual Directors. The several Directors of the Company
who are signatories to this Agreement have joined into this Agreement to
evidence their assent hereto, and for the express purpose of binding
themselves, and each of them, to the fulfillment of each of the terms and
conditions hereof by the respective parties and to the diligent, expeditious
and good faith pursuit, and timely consummation, of the transactions herein
contemplated. Each of the Directors hereby agrees to cooperate fully with the
parties, their assistants and agents, in consummating the Merger, to vote
appropriately upon all corporate resolutions toward that end, and to take no
action inconsistent with the purposes of this Agreement or the consummation of
the Merger. Nothing in this Agreement shall be
- 49 -
<PAGE> 53
construed to limit or affect the fiduciary obligation of the Company's officers
and directors to the Company shareholders.
11.16 Shareholders Representations and Warranties; Indemnification;
and Sophistication.
(a) The Shareholders of the Company who are signatories to
this Agreement have joined into this Agreement to evidence their assent hereto,
and for the express purpose of binding themselves, and each of them, to the
fulfillment of each of the terms and conditions hereof by the respective
parties and to the diligent, expeditious and good faith pursuit, and timely
consummation, of the transactions herein contemplated.
(b) Each of the Shareholders hereby agrees to cooperate
fully with the parties, their assistants and agents, in consummating the
Merger, and agrees not to take any action inconsistent with the purposes of
this Agreement or the consummation of the Merger.
(c) Each of the Shareholders adopts and joins with the
Company in making the representations and warranties contained in Section 4
and Section 6(g) of this Agreement, and hereby expressly does so. Without
limiting any other right of indemnification or any other cause of action, the
Shareholders shall jointly and severally defend, indemnify and hold Broughton
and Surviving Company harmless from and against any and all losses,
liabilities, damages, costs, claims, judgments and expenses (including
attorney's fees) whatsoever arising out of or resulting from any breach of
warranty or misrepresentation by the Company or Shareholders contained herein,
or from any misrepresentation, omission or inaccuracy in any schedule, exhibit,
certificate, instrument or paper delivered or to be delivered by the Company or
Shareholders hereunder in connection with the transactions herein contemplated;
provided that such indemnification required to be provided by the Shareholders
pursuant hereto shall not exceed in the aggregate Five Million Dollars
($5,000,000).
(d) Each Company Shareholder represents and warrants that
such Shareholder is acquiring shares of Broughton Common Stock ("Shares")
from Broughton for such Shareholder's own account for investment only and not
with a view to making a
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<PAGE> 54
distribution thereof within the meaning of the 1933 Act. Each Company
Shareholder represents and warrants that the Shares will not be sold or
transferred by the Company Shareholder in violation of the securities laws of
the United States or any state thereof or other jurisdiction. Each Company
Shareholder is aware that the Shares have not been registered under the 1933
Act or any state or other jurisdiction's securities laws, and that the shares
must be held indefinitely unless subsequently registered or an exemption from
such registration is available. Each Company Shareholder is aware that it will
not be readily able to liquidate its investment in the Shares. Each Company
Shareholder is a bona fide resident of the jurisdiction set forth on Schedule 1
hereto and has no present intention of changing its jurisdiction of residence.
Each Company Shareholder understands and agrees that the certificate or
certificates representing the Shares will bear a legend substantially to the
effect set forth in Section 11.17 hereto and that a stop transfer order may be
placed with respect thereto. The proposed investment in the Shares is a
permissible and legal investment for a Company Shareholder under any legal
investment laws applicable to the Company Shareholder.
(e) Each Shareholder acknowledges that all documents, books
and records requested by such Shareholder and pertaining to Broughton have
been made available for inspection by such Shareholder and such Shareholder's
agents and representatives; that it and its agents and representatives have
had a reasonable opportunity to ask questions of, and receive answers from,
Broughton or officers thereof concerning the terms and conditions of the
offering of the Shares and the business and prospects of Broughton. Each
Company Shareholder and its respective agents and representatives have such
knowledge and experience in financial and business matters as to enable them
to utilize the information made available to them in connection with the
purchases contemplated hereby, to evaluate the merits and risks of an
investment in Broughton and to make an informed decision with respect thereto
and such an evaluation and informed decision has been made.
(f) Each Shareholder is the beneficial and record owner of
the respective number of shares set forth in each such Shareholder's Merger
Consideration Request Form and has good title to such shares free and clear of
all liens.
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<PAGE> 55
11.17 Legend. The certificates representing the Shares
shall bear the following legend:
The securities represented by this
Certificate have not been registered
under the Securities Act of 1933, as
amended, or applicable state securities
laws, and shall not be sold or otherwise
transferred unless so registered or, if
in the opinion of counsel to Broughton,
an exemption from registration thereunder
is applicable.
IN WITNESS WHEREOF, Broughton and the Company have caused this
Agreement to be executed by their duly authorized officers and their corporate
seals to be hereunto affixed as of the date first above written, pursuant to
resolutions adopted by the boards of directors of Broughton and the Company,
acting by a majority thereof, and WITNESS also the signatures hereto of a
majority of the board of directors of the Company, and all of the undersigned
Shareholders of the Company.
BROUGHTON FOODS COMPANY
By
------------------------------
Philip E. Cline, President and
Chief Executive Officer
ATTEST:
- --------------------------
Helen L. Hinton, Secretary
SOUTHERN BELLE DAIRY COMPANY, INC.
By
------------------------------
Martin Shearer, President
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<PAGE> 56
ATTEST:
- --------------------------
, Secretary
- ---------------
The following Directors of Southern Belle Dairy Company, Inc. do hereby join
in the foregoing Agreement to evidence their consent and agreement thereto:
- ----------------------------
Martin P. Shearer, Director
- ----------------------------
Max A. Shearer, Director
- ----------------------------
Frank M. Shearer, Director
The following Shareholders of Southern Belle Dairy Company, Inc. do hereby
join in the foregoing Agreement to evidence their consent and agreement thereto:
- ------------------------------
Martin P. Shearer, Shareholder
- ------------------------------
Max A. Shearer, Shareholder
- ------------------------------
Frank M. Shearer, Shareholder
- 53 -
<PAGE> 57
EXHIBIT A
AGGREGATE MERGER CONSIDERATION
<TABLE>
<CAPTION>
Dollar Amount of SMC to
be received in form of Amount of SMC to be
Broughton Common Stock received in form of Cash Total SMC
Shareholder Name
<S> <C> <C> <C> <C>
1. Max A. Shearer $ 890,010.0 $ 957,897.4 $1,847,907.4
2. Martin P. Shearer $ 935,625.0 $ 912,177.2 $1,847,802.2
3. Mildred Shearer $ 0 $ 435,550.4 $ 435,550.4
4. Gaynelle Baker $ 0 $ 136,734.0 $ 136,734.0
5. Sharon Kelley $ 0 $ 42,072.0 $ 42,072.0
6. Pauline Phillips $ 0 $ 31,554.0 $ 31,554.0
7. Leland Black $ 0 $ 21,036.0 $ 21,036.0
8. Eugene Whitaker $ 0 $ 21,036.0 $ 21,036.0
9. Harold Rogers $ 0 $ 10,518.0 $ 10,518.0
10. Broadway Baptist Church $ 0 $ 5,259.0 $ 5,259.0
11. Diana Buchanan $ 0 $ 841.4 $ 841.4
12. Linda Lawhorn $ 0 $ 841.4 $ 841.4
13. Anita Phelps $ 0 $ 841.4 $ 841.4
14. Clifford Sam Phelps $ 0 $ 841.4 $ 841.4
15. Sharon Smith $ 0 $ 841.4 $ 841.4
16. Frank M. Shearer $ 524,500.0 $ 0 $ 524,500.0
17. A.R. Herndon/Emily Herndon $ 0 $ 37,500.0 $ 37,500.0
18. R.B. Jasper/Lilian Tasper $ 0 $ 29,025.0 $ 29,025.0
19. Ruth McCurry $ 0 $ 5,000.0 $ 5,000.0
TOTAL $2,350,135.0 $2,649,566.0
============ ============
</TABLE>
<PAGE> 58
EXHIBIT B
MAJORITY SHAREHOLDERS
1. Martin P. Shearer
2. Max A. Shearer
3. Frank M. Shearer
<PAGE> 59
Schedule 1
COMPANY SHAREHOLDER JURISDICTION
Each Company Shareholder is a bona fide resident of the jurisdiction set
forth hereon and has no present intention of changing its jurisdiction of
residence.
Shareholder Jurisdiction
----------- ------------
Max A. Shearer
Martin P. Shearer
Mildred Shearer
Gaynelle Baker
Sharon Kelley
Pauline Phillips
Leland Black
Eugene Whitaker
Harold Rogers
Broadway Baptist Church
Diana Buchanan
Linda Lawhorn
Anita Phelps
Clifford Sam Phelps
Sharon Smith
Frank M. Shearer
A.R. Herndon/Emily Herndon
R.B. Jasper/Lilian Jasper
Ruth McCurry
<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
December 8, 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
December 8, 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
December 8, 1997
