<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
------------------------
[x] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 0-23429
BROUGHTON FOODS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-4135-025
---------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 N. Seventh Street
P.O. Box 656
Marietta, Ohio 45750
----------------------------------- -------------------
(Address of principal (Zip Code)
executive offices)
(740) 373-4121
--------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,774,335 shares of the
Company's Common Stock ($1.00 par value) were outstanding as of July 31,
1998.
<PAGE> 2
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
December 31, 1997 and June 30, 1998
Consolidated Statements of Income
Three Months Ended June 30, 1997 and 1998
Consolidated Statements of Income
Six Months Ended June 30, 1997 and 1998
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
All other schedules and compliance information called for by the instructions
to Form 10-Q have been omitted since the required information is not present
or not present in amounts sufficient to require submission.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JUNE 30,
1997 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $9,633,184 $6,241,342
Accounts receivable, less allowance for
doubtful accounts of $465,000 at
December 31, 1997 and $703,800 at
June 30, 1998 12,767,043 17,893,454
Inventories 3,551,281 6,258,833
Prepaid expenses 897,017 1,061,090
Refundable income taxes 230,775 95,000
Deferred income taxes 100,437 100,437
----------- ------------
Total current assets 27,179,737 31,650,156
----------- ------------
Property, plant and equipment, at cost:
Buildings 5,958,861 10,109,453
Machinery and equipment 18,935,308 24,256,446
Leasehold improvements 464,156 544,136
Assets under construction 798,093 2,042,469
----------- ------------
26,156,418 36,952,504
Less accumulated depreciation and
amortization (11,586,612) (11,325,600)
----------- ------------
14,569,806 25,626,904
Land 1,662,819 2,545,382
----------- ------------
16,232,625 28,172,286
----------- ------------
Cash surrender value of officer's life
insurance, net of policy loans of
$2,920 at December 31, 1997 197,775 --
Intangible assets and other 2,296,389 11,451,116
Prepaid pension costs 341,968 564,413
----------- ------------
2,836,132 12,015,529
----------- ------------
Total assets $46,248,494 $71,837,971
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE> 4
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1997 1998
----------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $8,124,356 $9,521,633
Accrued expenses and other 2,321,899 2,949,030
Current installments on debt 21,767 445,076
Income taxes payable 18,536 434,941
----------- ------------
Total current liabilities 10,486,558 13,350,680
----------- ------------
Debt, net of current installments 36,530 19,581,255
Deferred income taxes 2,423,385 2,719,386
Other 314,016 2,050,728
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 10,000,000
shares authorized, 6,314,575 shares
issued 6,314,575 6,314,575
Additional paid-in capital 20,482,702 20,482,702
Retained earnings 6,698,452 7,846,369
----------- ------------
33,495,729 34,643,646
Less 540,240 shares of common stock in
treasury, at cost 507,724 507,724
----------- ------------
Total shareholders' equity 32,988,005 34,135,922
----------- ------------
Total liabilities and shareholders' equity $46,248,494 $71,837,971
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE> 5
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1997 1998
--------------- --------------
<S> <C> <C>
Net sales $21,205,414 $42,419,251
Cost of sales 16,507,674 33,292,723
--------------- --------------
Gross profit 4,697,740 9,126,528
Operating costs and expenses:
Selling and distribution 3,237,785 6,506,709
General and administrative
expenses 508,613 1,060,614
--------------- --------------
3,746,398 7,567,323
--------------- --------------
Income from operations 951,342 1,559,205
Other income (expense):
Interest income and other, net 43,601 196,608
Interest expense (37,466) (75,336)
--------------- --------------
6,135 121,272
--------------- --------------
Income before income taxes 957,477 1,680,477
Total income tax expense 372,155 655,512
--------------- --------------
Net income $585,322 $1,024,965
=============== ==============
Earnings per common share:
Basic $0.14 $0.18
=============== ==============
Diluted $0.14 $0.18
=============== ==============
Shares used in computing earnings
per common share:
Basic 4,119,660 5,774,335
=============== ==============
Diluted 4,122,500 5,774,335
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE> 6
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1997 1998
--------------- --------------
<S> <C> <C>
Net sales $41,031,238 $77,170,370
Cost of sales 32,261,831 60,422,900
--------------- --------------
Gross profit 8,769,407 16,747,470
Operating costs and expenses:
Selling and distribution 6,294,943 12,254,189
General and administrative
expenses 953,791 1,948,509
--------------- --------------
7,248,734 14,202,698
--------------- --------------
Income from operations 1,520,673 2,544,772
Other income (expense):
Interest income and other, net 82,657 356,089
Interest expense (79,802) (76,962)
--------------- --------------
2,855 279,127
--------------- --------------
Income before income taxes 1,523,528 2,823,899
Total income tax expense 592,915 1,098,538
--------------- --------------
Net income $930,613 $1,725,361
=============== ==============
Earnings per common share:
Basic $0.23 $0.30
=============== ==============
Diluted $0.23 $0.30
=============== ==============
Shares used in computing earnings
per common share:
Basic 4,119,660 5,774,335
=============== ==============
Diluted 4,122,500 5,774,335
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
6
<PAGE> 7
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $930,613 $1,725,361
Adjustment to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 430,654 1,003,178
Bad debt expense 39,002 24,000
Gain on disposal of property, plant
and equipment --- (65,308)
Change in deferred gain on sale of
fixed assets --- (18,195)
Deferred income taxes (42,713) ---
Change in assets and liabilities:
Accounts receivable 504,062 (781,253)
Inventories (428,646) (103,079)
Prepaid expenses 45,090 198,500
Refundable income taxes 168,651 230,775
Other assets (156,890) (220,317)
Prepaid and accrued pension costs (85,753) (222,445)
Accounts payable (172,393) (3,360,273)
Accrued expenses and other (135,059) (214,520)
Income taxes payable 173,070 405,764
Other long term liabilities (34,602)
---------- ------------
Total adjustments 339,075 (3,157,775)
---------- ------------
Net cash provided by (used in) operating
activities 1,269,688 (1,432,414)
---------- ------------
Cash flows from investing activities:
Proceeds from disposal of property,
plant and equipment 517,330
Proceeds from termination of officer's
life insurance policy 197,775
Purchases of property, plant and
equipment (747,016) (2,418,297)
Business acquisitions, net of cash
acquired (18,698,280)
---------- ------------
Net cash used in investing activities (747,016) (20,401,472)
---------- ------------
Cash flows from financing activities:
Payments on term debt (805,597) (28,036)
Proceeds from debt 565,000 19,336,230
Purchases of preferred stock (37,070)
Dividends paid (56,372) (866,150)
---------- ------------
Net cash (used in) provided by financing
activities (334,039) 18,442,044
---------- ------------
Net increase (decrease) in cash and cash
equivalents 188,633 (3,391,842)
</TABLE>
CONTINUED,
7
<PAGE> 8
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1998
---------- ----------
<S> <C> <C>
Cash and cash equivalents, beginning of
period $2,307,815 $9,633,184
---------- ----------
Cash and cash equivalents, end of period $2,496,448 $6,241,342
========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $54,535 $6,723
========== ==========
Income taxes $628,264 $477,000
========== ==========
Supplemental disclosure of noncash investing
and financing activities:
The Company recorded a deferred gain
in February 1998 as a result of a sale
leaseback of certain equipment. $181,958
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE> 9
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Interim results are not necessarily indicative of results for a
full year.
A summary of the Company's significant accounting policies is presented on
pages F-7 to F-10 of its 1997 Annual Report on Form 10-K. Users of financial
information produced for interim periods are encouraged to refer to the
footnotes contained in the Annual Report on Form 10-K when reviewing interim
financial results. There has been no material change in the accounting
policies followed by the Company during 1997.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the unaudited consolidated financial
position, results of operations and cash flows of Broughton Foods Company
("the Company" or "Broughton") and subsidiaries for interim periods.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." The
adoption of this statement did not have an impact on the Company's
presentation of financial statements for the period ended June 30, 1998.
2. INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on
the first-in, first-out ("FIFO") method using standard costs which
approximate actual. The major components of inventory at December 31, 1997
and June 30, 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
--------------- ----------------
<S> <C> <C>
Raw products and finished goods $1,966,156 $3,731,921
Ingredients 450,480 725,967
Warehouse, packaging supplies and other 1,134,645 1,800,945
--------------- ----------------
$3,551,281 $6,258,833
=============== ================
</TABLE>
3. DEBT
On March 30, 1998, the Company finalized an agreement with a bank to provide
for two additional credit facilities, in addition to the Company's $4.0
million line of credit agreement with another bank that was in place at
December 31, 1997. The first facility provides for a $15.0 million line of
credit with interest at either the Bank's prime rate or LIBOR plus a margin.
The borrowings under this agreement are uncollateralized and the Company pays
a commitment fee on unused borrowings ranging from .20% to .35%. The
principal is payable in full on March 30, 2000, with monthly interest-only
payments. The second facility is a $5.0 million uncollateralized capital
expenditure line of credit at either the Bank's prime rate or LIBOR plus a
margin. The borrowings under this commitment provide for monthly
interest-only payments for one year, converting to term debt to be paid over
seven years.
9
<PAGE> 10
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The most restrictive covenants under these agreements are the maintenance of
a maximum funded debt to Earnings Before Interest Expense, Taxes,
Depreciation and Amortization (EBITDA) ratio, a minimum tangible net worth, a
minimum Earnings Before Interest and Taxes (EBIT) to interest expense ratio
and a cashflow coverage ratio.
4. COMMITMENTS AND CONTINGENCIES
The former Southern Belle Dairy received a Notice of Proposed Debarment dated
June 1, 1994, from the United States Department of Agriculture (USDA). The
USDA proposed to debar the former Southern Belle Dairy from engaging in
contracts and other transactions involving all federal agency procurement and
nonprocurement programs for up to three years as a result of previously
settled antitrust violations. On April 18, 1995, the former Southern Belle
Dairy entered into a Compliance Agreement in Lieu of Debarment with the
USDA. The agreement was for a three-year period and required the former
Southern Belle Dairy to establish and maintain a compliance program which
included, among other things, the establishment of an Ethics Committee and
formal ethics and education training for all employees.
By notice dated December 31, 1997, the USDA suspended the Southern Belle
Division from federal procurement and nonprocurement programs and proposed to
debar the Division for a period that by regulation would not exceed three
years, based on alleged breaches of the Compliance Agreement by Southern
Belle, prior to its merger with the Company. The Company has challenged the
USDA's action in an administrative proceeding. The USDA has proposed that
Southern Belle and Broughton enter into a new Compliance Agreement in Lieu of
Debarment as a means of resolving this matter and has indicated that Southern
Belle could be subject to debarment and the Company to suspension and
debarment if they fail to do so. The Company is engaged in discussions with
USDA with respect to this matter. Management is unable at this time to
evaluate all the potential outcomes of this matter, but its resolution could
lead to increased costs or decreased revenues, or both.
5. ACQUISITIONS
On May 29, 1998, the Company purchased LFD Holding Corp. and its
wholly-owned subsidiary, London's Farm Dairy, Inc. (collectively referred to
as "London's") of Port Huron, Michigan. Total preliminary acquisition costs
were $18,831,889, subject to a final working capital adjustment as provided
for in the Purchase Agreement. LFD Holding Corp. is a wholly-owned
subsidiary of the Company.
The acquisition was accounted for by the purchase method, and accordingly,
the acquisition costs have been allocated to the assets and liabilities
acquired based upon their estimated fair values at the date of acquisition.
The estimated fair values of these assets are summarized as follows:
<TABLE>
<S> <C>
Current assets $ 7,487,561
Property, plant and equipment 10,694,747
Other assets 360,195
Excess of costs over net assets 8,751,338
Current liabilities (6,165,354)
Other liabilities (1,340,757)
Debt, long-term portion (659,840)
Deferred taxes, net (296,001)
-----------
$18,831,889
===========
</TABLE>
Tradename, distribution network and workforce are being amortized over the
following estimated useful lives on a straight-line basis:
10
<PAGE> 11
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
<TABLE>
<CAPTION>
Life Amount
------- ---------------
<S> <C> <C>
Tradename 40 $5,371,915
Distribution network 40 2,637,122
Workforce 23 742,301
---------------
$8,751,338
===============
</TABLE>
The following table summarizes the unaudited consolidated pro forma results
of operations and pro forma net income per share for the six months ended
June 30, 1997 and the six months ended June 30, 1998, assuming the London's
acquisition had occurred at January 1, 1997.
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, 1997 June 30, 1998
---------------- ----------------
<S> <C> <C>
Revenues $68,566,000 $99,578,000
Net income 552,000 519,000
Diluted earnings per share $0.13 $0.09
Diluted weighted average
shares outstanding 4,122,500 5,774,335
</TABLE>
The consolidated pro forma results of operations and pro forma net income per
share do not represent the Company's actual results of operations, 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, and they
are not necessarily indicative of the results that would have been obtained
had the companies been combined during the periods indicated.
11
<PAGE> 12
ITEM 2. 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, Michigan, West Virginia, Kentucky, Tennessee
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 four major divisions -- the Dairy
Division based in Marietta, Ohio; the Foods Division based in Charleston,
West Virginia; the Southern Belle Division based in Somerset, Kentucky; and
the London's Farm Dairy Division based in Port Huron, Michigan.
The Company completed an acquisition of Southern Belle Dairy Company
("Southern Belle") of Somerset, Kentucky in December 1997. The Company has
had an increase in sales, cost of sales and operating expenses for the first
six months of 1998 compared with the first six months of 1997 due primarily
to the Southern Belle acquisition. As a result of this acquisition, the
Company has taken and expects to take a number of actions intended to
integrate the operations of Southern Belle with the Company's existing
operations and to reduce certain product costs and overall, selling, general
and administrative expenses. The Company has successfully implemented synergy
savings involving the utilization 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, the Company has received cost savings from less dependence on
the "spot" market for its butterfat requirements. The Dairy Division is
currently successfully manufacturing for the Southern Belle Division both
plastic pints and soft-serve mixes. Southern Belle previously purchased
soft-serve mixes from an outside supplier and had not initiated a plastic
pint product within its market segment. In addition to the products that have
been successfully integrated into the Company, additional cost savings are
anticipated to be achieved through the further integration of ice cream, sour
cream and cottage cheese production, all products that Southern Belle has
historically purchased from outside suppliers and which will now be supplied
by the Company. The Company's Foods Division is currently manufacturing for
the Southern Belle Division a full complement of UHT products including heavy
whipping cream, half-and-half and non-dairy creamers. The Company has been
successful in integrating many of the cost saving synergies identified in the
Southern Belle acquisition, however, there can be no assurance that the
Company will be successful in integrating the remaining operations of
Southern Belle and realizing additional cost savings in the future.
The Company completed an acquisition of London's on May 29, 1998. As a
result of the London's acquisition, the Company has had an increase in sales,
cost of sales and operating expenses for the second quarter of 1998. The
Company expects to take a number of actions intended to integrate the
operations of London's with the Company's existing operations and to reduce
overall selling, general and administrative expenses. London's previously
purchased certain products from outside suppliers, including UHT products,
cottage cheese and plastic pints, each of which can be supplied by the
Company at an anticipated savings. The acquisition is expected to provide
the Company with an additional source of butterfat for the Company's Foods
Division during certain peak periods of the year. London's operates an ice
cream plant in Burton, Michigan, and it is anticipated that additional
internal ice cream production needs will be converted to this plant for the
Company as a whole, thereby better utilizing internal equipment and
production capacity. There can be no assurance that the Company will be
successful in integrating the operations of London's and realizing the
anticipated cost savings. Among the factors that might affect the Company's
ability to integrate the operations of London's and realize anticipated cost
savings include the Company's ability to distribute London's products to
other Company divisions in a cost-effective manner, London's ability to
realize an increase in plastic pint sales and the Company's ability to
develop uniform standards for ice cream production across its plants.
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
12
<PAGE> 13
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.
As previously reported, by notice dated December 31, 1997, the USDA suspended
the Southern Belle Dairy Division from federal procurement and nonprocurement
programs and proposed to debar the Division for a period that by regulation
would not exceed three years. The Company has challenged the USDA's action
in an administrative proceeding and is engaged in discussions with the USDA
with respect to the matter. The USDA has proposed that Southern Belle and
Broughton enter into a Compliance Agreement in Lieu of Debarment as a means
of resolving this matter and has indicated that Southern Belle could be
subject to debarment and Broughton to suspension and debarment if they fail
to do so. Management is unable at this time to evaluate all the potential
outcomes of this matter, but its resolution could lead to increased costs or
decreased revenues, or both.
RESULTS OF OPERATIONS
The following tables present certain financial information concerning the
Company's results of operations, including certain information presented as a
percentage of net sales.
THREE MONTHS ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C> <C> <C>
Net sales $21,205 100.0% $42,419 100.0%
Cost of sales 16,507 77.9 33,293 78.5
Gross profit 4,698 22.2 9,127 21.5
Operating costs
and expenses 3,746 17.7 7,567 17.8
Operating income 951 4.5 1,559 3.7
Other income, net 6 --- 121 0.3
----------- ----- ---------- -----
Net income $585 2.8% $1,025 2.4%
=========== ==========
Earnings per
common share:
Basic $0.14 $0.18
=========== ==========
Diluted $0.14 $0.18
=========== ==========
Shares used in
computing earnings
per common share:
Basic 4,119,660 5,774,335
=========== ==========
Diluted 4,122,500 5,774,335
=========== ==========
</TABLE>
13
<PAGE> 14
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET SALES
Net sales for the second quarter 1998 increased $21.2 million or 100.0%, to
$42.4 million from $21.2 million for the second quarter 1997. The increase
in net sales was primarily due to the acquisition of Southern Belle in
December 1997 and London's in May 1998. Therefore, three months' sales were
reflected in the second quarter 1998 net sales amounts for Southern Belle and
33 days of net sales were reflected in the second quarter 1998 for London's.
COST OF SALES
Cost of sales for the second quarter 1998 increased $16.8 million or 102.0%,
to $33.3 million from $16.5 million in the second quarter 1997. Cost of
sales as a percentage of net sales increased to 78.5% in the second quarter
1998 from 77.9% in the second quarter 1997 primarily as a result of increased
butterfat prices in the second quarter of 1998. This increase in butterfat
prices was partially offset by (i) less dependence on the spot market for the
Company's internal butterfat requirements, (ii) the production of certain
products by the Company which were previously purchased from outside
suppliers and (iii) a change in customer mix toward customers requiring
additional delivery service with such sales typically having a lower cost
basis as a percentage of net sales.
OPERATING EXPENSES
Operating expenses for the second quarter 1998 increased $3.8 million, or
102.0%, to $7.6 million from $3.7 million in the second quarter 1997.
Operating expenses as a percentage of net sales remained relatively constant
at 17.8% for the second quarter 1998 compared to 17.7% for the second quarter
1997. As a result of the London's acquisition, the Company will incur
additional amortization expense of intangible assets resulting in an annual
charge to earnings of approximately $232,000.
OTHER INCOME
Other income for the second quarter 1998 was $121,000 compared to $6,000 for
the second quarter 1997. The increase in other income was primarily the
result of additional interest income from funds remaining in the Company's
treasury as a result of the Company's initial public offering and the gain on
sale of certain Company trailers which were replaced by a leased fleet,
partially offset by an increase in interest expense resulting from the London
acquisition.
NET INCOME
Net income for the second quarter 1998 increased $440,000 to $1,025,000, or
$0.18 per share on a diluted basis, from $585,000, or $0.14 per share on a
diluted basis, for the second quarter 1997. The increase in net income is
primarily attributed to additional sales as a result of the acquisition of
Southern Belle and London's Farm Dairy.
14
<PAGE> 15
SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C> <C> <C>
Net sales $41,031 100.0% $77,170 100.0%
Cost of sales 32,262 78.6 60,423 78.3
Gross profit 8,769 21.4 16,747 21.7
Operating costs
and expenses 7,249 17.7 14,203 18.4
Operating income 1,521 3.7 2,545 3.3
Other income, net 3 --- 279 0.4
----------- ----- ---------- -----
Net income $931 2.3% $1,725 2.2%
=========== ==========
Earnings per
common share:
Basic $0.23 $0.30
=========== ========
Diluted $0.23 $0.30
=========== =========
Shares used in
computing earnings
per common share:
Basic 4,119,660 5,774,335
=========== ==========
Diluted 4,122,500 5,774,335
=========== ==========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES
Net sales for the first six months 1998 increased $36.1 million or 88.1% to
$77.2 million from $41.0 million for the first six months 1997. The
increase in net sales was primarily due to the acquisition of Southern Belle
in December 1997. Therefore, six month's sales were reflected in the first
six months 1998 net sales amounts for Southern Belle and 33 days of net sales
were reflected in the first six months 1998 for London's.
COST OF SALES
Cost of sales for the first six months 1998 increased $28.2 million or 87.3%,
to $60.4 million from $32.3 million in the first six months 1997. Cost of
sales as a percentage of sales, however, decreased to 78.3% in the first six
months 1998 from 78.6% in the first six months 1997 primarily as a result of
(i) less dependence on the spot market for the Company's internal butterfat
requirements, (ii) the production of certain products by the Company which
were previously purchased from outside suppliers and (iii) a change in
customer mix toward customers requiring additional delivery service with such
sales typically having a lower cost basis as a percentage of net sales. The
factors representing the decrease in cost of sales were partially offset by
an overall increase in butterfat costs in the first six months 1998 compared
to the first six months 1997.
OPERATING EXPENSES
Operating expenses for the first six months 1998 increased $7.0 million, or
95.9%, to $14.2 million from $7.2 million in the first six months 1997.
Operating expenses as a percentage of net sales were 18.4% for the first six
months 1998 compared to 17.7% for the first six months 1997. Operating
expenses as a percentage of net sales increased primarily due to the Southern
Belle acquisition which resulted in an increase in the mix of customers
requiring additional delivery services compared to customers utilizing the
Company's dock pickup and drop shipment programs. As a result of the London's
acquisition, the Company will incur additional amortization expense of
intangible assets resulting in an annual charge to earnings of approximately
$232,000.
15
<PAGE> 16
OTHER INCOME
Other income for the first six months 1998 was $279,000 compared to $3,000
for the first six months 1997. The increase in other income was primarily
the result of additional interest income from funds remaining in the
Company's treasury as a result of the Company's initial public offering and
the gain on sale of certain Company trailers which were replaced by a leased
fleet.
NET INCOME
Net income for the first six months 1998 increased $795,000 to $1.7 million,
or $0.30 per share on a diluted basis, from $931,000, or $0.23 per share on
a diluted basis, for the first six months 1997. The increase in net income
is primarily attributed to additional sales as a result of the acquisitions
of Southern Belle and London's.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its capital expenditures and working
capital requirements through cash generated from operating activities. On
June 25, 1998, the Company announced a $16.4 million expansion to its
existing Marietta, Ohio, processing facility. The expansion is expected to
be financed via loans and incentives from state and local governmental
agencies of approximately $4.0 million consisting primarily of loans from
such agencies, debt financing from banks and internally generated cash. The
Company has not finalized any agreements for the financing of the proposed
plant expansion.
During the first six months of 1998, as compared to the first six months of
1997, capital expenditures increased $1.7 million to $2.4 million from
$747,000 in the first six months of 1997. The capital expenditures were
partially offset by cashflows from investing activities for the sale of
certain trailers due to the Company's conversion to primarily all leased
vehicles of $492,000 and cash received due to the Company canceling an
insurance policy on previous officers of Southern Belle in the amount of
$198,000. The Company anticipates that capital expenditures in future periods
will exceed historical levels.
On March 30, 1998, the Company finalized a loan commitment agreement with a
bank that was entered into on February 16, 1998. The agreement provides for
two additional credit facilities, in addition to the Company's $4.0 million
line of credit agreement with another bank. The first facility provides for a
$15.0 million line of credit with interest at either the bank's prime rate or
LIBOR plus a margin. The borrowings under this agreement are uncollateralized
and the Company pays a commitment fee on unused borrowings ranging from .20%
to .35%. The second facility is a $5.0 million uncollateralized capital
expenditure line of credit at either the bank's prime rate or LIBOR plus a
margin. The borrowings under this commitment are uncollateralized and provide
for monthly interest-only payments for one year, converting to term debt to
be paid over seven years. As a result of the Company's acquisition of
London's, approximately $19.3 million was drawn from the Company's available
credit facility in May 1998 to finance the acquisition.
The most restrictive covenants under these agreements are the maintenance of
a maximum funded debt to Earnings Before Interest Expense, Taxes,
Depreciation and Amortization (EBITDA) ratio, a minimum tangible net worth, a
minimum Earnings Before Interest and Taxes (EBIT) to interest expense ratio,
a cashflow coverage ratio as well as other restrictive covenants which are
included in the credit agreement dated March 30, 1998. The Company is
currently in the process of reviewing alternatives to expand its available
credit facilities.
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.
16
<PAGE> 17
YEAR 2000
The Company is continuing to take steps to provide that its information
technology and non-information technology systems are capable of processing
for the Year 2000 and beyond. As part of that process, suppliers and
vendors with a material relationship to the Company are being contacted on
the Company's behalf to verify that their systems also will be Year 2000
compliant and, if not, whether such non-compliance will have a material
impact on the operations of the Company. The Company also intends to
develop, if needed, contingency plans to facilitate a supply of product to
its customers and the receipt of products from suppliers and vendors if
problems are discovered. In addition, in connection with its evaluation of
possible acquisition candidates, the Company will continue to consider the
potential acquisition candidate's Year 2000 compliance and the impact of any
deficiencies on the Company.
To date, the Company does not believe that the costs associated with Year
2000 compliance will significantly affect the operating cash flow of the
Company. Expenditures generally have been associated with a new software
system that recently has been implemented. In addition, recent information
technology and non-information technology upgrades were made with the
understanding of Year 2000 compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q that are
not historical fact are "forward-looking" statements and involve important
risks and uncertainties. Such risks and uncertainties, which are detailed in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997, and other filings with the Securities and Exchange Commission, could
cause the Company's results to differ materially from the Company's current
expectations as expressed herein.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's Annual Report on Form 10-K for the year ended December
31, 1997 describes a pending legal proceeding involving the Company's
Southern Belle Division and the U.S. Department of Agriculture. Note 4 to
the Company's unaudited Financial Statements included herein contains
updating information and is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company completed its initial public offering pursuant to a registration
statement on Form S-1 (Registration No. 333-37387) with an effective date of
December 8, 1997 and trading commencing on December 9, 1997. The purchase
price for the London's acquisition exceeded the amount of proceeds remaining
from the Company's initial public offering.
ITEM 5. OTHER INFORMATION
If the Company does not receive notice at its principal executive
offices on or before December 4, 1998 of a shareholder proposal to change the
number of directors of the Company or February 17, 1999 of any other
shareholder proposal for consideration at the 1999 annual meeting of
shareholders, the proxies named by the Company's Board of Directors with
respect to the meeting shall have discretionary voting authority with respect
to such proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit #27 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
On May 22, 1998, the Company filed a report on Form 8-K reporting
under Item 2, disclosing the Company's announcement of the purchase
of LFD Holding Corp.
On June 10, 1998, the Company filed a report on Form 8-K
reporting under Item 2, disclosing that on May 29, 1998, the
Company had consummated a stock purchase agreement dated May 12,
1998, for the purchase of all the outstanding stock of LFD Holding
Corp.
On August 6, 1998, the Company filed a report on Form 8-K/A
reporting under Item 7, the filing of the information required by
items 7(a) and (b) of Form 8-K. As required by Item 7(a), the
following were filed: (a) Report of Independent Accountants, (b)
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
as of March 31, 1998 (unaudited), (c) Consolidated Statements of
Operations for the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1997 and 1998 (unaudited), (d)
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996 and 1997, (e) Consolidated Statements of
Cash Flows for the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1997 and 1998 (unaudited), (f) Notes
to Consolidated Financial Statements.
As required by Item 7(b), the following pro forma financial
information was filed: (a) Unaudited Pro Forma Combined Balance
sheets as of March 31, 1998, (b) Unaudited Pro Forma Combined
Statements of Operations for the year ended December 31, 1997 and
the three months ended March 31, 1998, (c) Notes to the Unaudited
Pro Forma Combined Financial Statements.
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROUGHTON FOODS COMPANY
By: /s/ Philip E. Cline
-------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1998
By: /s/ Todd R. Fry
---------------
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 13, 1998
19
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF JUNE 30, 1998 AND THE STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,241
<SECURITIES> 0
<RECEIVABLES> 18,597
<ALLOWANCES> 704
<INVENTORY> 6,259
<CURRENT-ASSETS> 31,650
<PP&E> 39,498
<DEPRECIATION> 11,326
<TOTAL-ASSETS> 71,838
<CURRENT-LIABILITIES> 13,351
<BONDS> 19,581
0
0
<COMMON> 6,315
<OTHER-SE> 28,329
<TOTAL-LIABILITY-AND-EQUITY> 71,838
<SALES> 77,170
<TOTAL-REVENUES> 77,170
<CGS> 60,423
<TOTAL-COSTS> 60,423
<OTHER-EXPENSES> 14,203
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> 2,824
<INCOME-TAX> 1,099
<INCOME-CONTINUING> 1,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,725
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
