<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of Report (date of earliest event reported) May 29, 1998.
Broughton Foods Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 0-23429 31-4135-025
- ---------------------- --------------------- ----------------------
(State or other juris- (Commission File No.) (IRS Employer Identi-
diction of corporation) fication No.)
210 N. Seventh Street
P.O. Box 656
Marietta, Ohio 45750-0656
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (740) 373-4121
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changes since last report)
<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
Item 2.Acquisition or Disposition of Assets
By Form 8-K dated June 10, 1998, filed with the Commission on June 10,
1998, Broughton Foods Company ("Broughton" or "the Company"), an Ohio
corporation, reported that effective May 29, 1998, it had consummated a Stock
Purchase Agreement dated May 12, 1998 with all the shareholders of LFD Holding
Corp., a Delaware corporation ("LFD"), pursuant to which Broughton purchased all
the issued and outstanding capital stock of LFD for a cash price of
approximately Twenty Million Dollars ($20,000,000), which amount is subject to
adjustment as provided in such agreement. In its Form 8-K, Broughton stated that
with respect to the information required by Items 7(a) and (b) of Form 8-K,
pursuant to Items 7(a)(4) and 7(b)(2) of Form 8-K, it was impracticable to
provide required financial statements or pro forma financial statements for the
acquired business at the time such report on Form 8-K was filed, and undertook
to file same not later than 60 days after the report on 8-K must have been
filed. Broughton files this Amendment to Current Report on Form 8-K/A to amend
and supplement its earlier report on Form 8-K by providing the financial
statements of the acquired business and required pro forma financial
information, as follows.
Item 7.Financial Statements and Exhibits
(a) Financial Statements
(1) The following report and consolidated financial statements
of LFD are filed as a part of this Form 8-K/A and are
attached hereto:
(a) Report of Independent Accountants
(b) Consolidated Balance Sheets as of December 31, 1996
and 1997 and as of March 31, 1998 (unaudited)
2
<PAGE> 3
(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
(b) Pro forma financial information
(1) The following pro forma financial information is filed
as a part of this Form 8-K/A and is attached hereto:
(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.
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 hereunto duly authorized.
BROUGHTON FOODS COMPANY
------------------------------------
(Registrant)
/s/ Todd R. Fry
------------------------------------
Date: August 6, 1998 Todd R. Fry, Chief Financial Officer
3
<PAGE> 4
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
Actual Actual
March 31, 1998 March 31, 1998 Pro-Forma Pro-Forma
ASSETS The Company LFD Holding, Inc. Adjustments As Adjusted
-------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $9,198 $259 $9,457
Accounts receivable, net 12,221 4,446 16,667
Inventories 3,790 2,421 6,211
Prepaid expenses and other 937 572 ($82) (3) 1,427
Deferred income taxes 100 100
---------- ---------- ---------- ----------
Total current assets 26,246 7,698 (82) 33,862
Property, plant and equipment, at cost 28,132 12,702 (1,916) 38,918
Less: accumulated depreciation and
amortization (11,382) (4,206) 4,206 (11,382)
---------- ---------- ---------- ----------
16,750 8,496 2,290 (1) 27,536
Intangibles and other assets 2,407 1,713 (1,017) (3) 10,653
7,550 (1)
Prepaid pension costs 559 559
---------- ---------- ---------- ----------
Total assets $45,962 $17,907 $8,741 $72,610
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,121 $3,941 $11,062
Accrued and other 2,278 641 2,919
Current installments on term debt 23 1,201 ($750) (1) 474
Income taxes payable 199 199
---------- ---------- ---------- ----------
Total current liabilities 9,621 5,783 (750) 14,654
Debt, net of current installments 30 8,775 (8,258) (1) 19,737
19,190 (7)
Deferred income taxes 2,423 296 2,719
Other 488 15 1,597 (1) 2,100
Redeemable preferred stock 4,362 (4,362) (2)
Shareholders' equity:
Common Stock 6,315 2 (2) (2) 6,315
Additional paid in capital 20,483 409 (409) (2) 20,483
Retained earnings/(deficit) 7,110 (1,661) 1,661 (2) 7,110
Treasury Stock (508) (24) 24 (2) (508)
Deferred compensation-restricted
performance shares not vested (50) 50 (2)
---------- ---------- ---------- ----------
Total shareholders' equity 33,400 (1,324) 1,324 33,400
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $45,962 $17,907 $8,741 $72,610
========== ========== ========== ==========
</TABLE>
4
<PAGE> 5
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Actual Actual
For the year For the year
ended ended
December 31, December 31,
1997 1997 Pro forma Pro forma
The Company LFD Holding Corp. Adjustments As Adjusted
--------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $87,170 $56,079 $143,249
Cost of Sales 69,292 43,981 $105 (4) 113,984
606 (9)
-------------- ---------------- ------------ ----------
Gross Profit 17,878 12,098 (711) 29,265
Operating costs and expenses:
Selling and distribution 13,945 7,918 (143) (6) 22,310
220 (4)
370 (9)
General and administrative 2,080 2,423 (241) (3) 5,140
23 (4)
201 (5)
654 (9)
-------------- ---------------- ------------ ----------
Operating income 1,853 1,757 (1,795) 1,815
Other income (expenses):
Other income, net 230 (1,562) 1,631 (9) 299
Interest expense (143) (880) (579) (7) (1,602)
-------------- ---------------- ------------ ----------
Income (loss) before income taxes 1,940 (685) (743) 512
Income tax expense (benefit) 761 (315) (297) (8) 149
-------------- ---------------- ------------ ----------
Net income (loss) $1,179 ($370) ($446) $363
============== ================ ============ ==========
Earnings per common share:
Basic $0.28 $0.09
============== ==========
Diluted $0.28 $0.09
============== ==========
Shares used in computing earnings
per common share:
Basic 4,206 4,206
============== ==========
Diluted 4,207 4,207
============== ==========
</TABLE>
5
<PAGE> 6
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Actual Actual
For the quarter For the quarter
ended March 31, ended March 31,
1998 1998 Pro forma Pro forma
The Company LFD Holding Corp. Adjustments As Adjusted
--------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $34,751 $13,106 $47,857
Cost of Sales 27,130 10,552 $4 (4) 37,840
154 (9)
---------------- ----------------- ------------- -------------
Gross Profit 7,621 2,554 (158) 10,017
Operating costs and expenses:
Selling and distribution 5,747 1,730 (50) (6) 7,571
55 (4)
89 (9)
General and administrative 888 603 (26) (3) 1,665
6 (4)
50 (5)
144 (9)
---------------- ----------------- ------------- -------------
Operating income (loss) 986 221 (426) 781
Other income (expenses):
Other income, net 159 (387) 387 (9) 159
Interest expense (2) (227) (133) (7) (362)
---------------- ----------------- ------------- -------------
Income (loss) before income taxes 1,143 (393) (172) 578
Income tax expense (benefit) 443 (69) (8) 374
---------------- ----------------- ------------- -------------
Net income (loss) $700 ($393) ($103) $204
================ ================= ============= =============
Earnings per common share:
Basic $0.12 $0.04
================ =============
Diluted $0.12 $0.04
================ =============
Shares used in computing earnings
per common share:
Basic 5,774 5,774
================ =============
Diluted 5,774 5,774
================ =============
</TABLE>
6
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. The Company acquired substantially all the net assets of LFD Holding Corp.
and Subsidiary (LFD) for a purchase price of approximately $19.2 million
consisting of cash. 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>
<CAPTION>
<S> <C>
Purchase price: $19,189,716
================
Historical carrying value of
net assets
Total net assets $3,037,866
Less net assets not assumed:
Other intangible assets (1,099,509)
Add net liabilities not assumed:
Certain components of debt-current 750,000
Certain components of debt-long term 8,257,956
----------------
Historical carrying value of net assets acquired 10,946,313
Excess of net purchase price over net assets acquired $8,243,403
================
Allocation of excess purchase price:
Excess fair value of property, plant and equipment $2,289,844
Unfavorable lease commitments (1,597,000)
Intangible assets 7,550,559
----------------
$8,243,403
================
</TABLE>
The purchase price on a pro forma basis as of March 31, 1998, includes a
cash payment of $19.0 million plus acquisition costs of approximately
$400,000 and a working capital adjustment of approximately $760,000 at the
pro forma date less debt assumed of $970,000. The purchase price was
financed by the Company through its revolving credit facility.
The final determination of the LFD purchase price will be based on the
contractual payment of $19.0 million, plus an amount which may be negative,
obtained from subtracting the base working capital at December 31, 1997 from
the working capital at the closing date.
2. To eliminate the historical net book value of LFD:
<TABLE>
<CAPTION>
<S> <C>
Preferred stock $4,362,000
Common stock 2,000
Additional paid in capital 409,000
Retained earnings/(deficit) (1,661,000)
Treasury Stock (24,000)
Deferred compensation-restricted performance
shares not vested (50,000)
---------------
$3,038,000
===============
</TABLE>
7
<PAGE> 8
3. To reflect the write off of goodwill, deferred loan fees and other
intangibles for LFD
<TABLE>
<CAPTION>
<S> <C> <C>
Goodwill $620,688
Deferred loan fees 383,945
Current portion of other intangibles 82,025
Other intangibles, long term 12,851
===============
$1,099,509
===============
For the For the three
year ended months ended
--------------- ---------------
Amortization expense for write off of intangibles $241,386 $26,117
=============== ===============
</TABLE>
4. To reflect additional depreciation due to write up in fair value of
property, plant, equipment and land and fair value adjustment to LFD's
inventory and cost of goods sold as follows:
<TABLE>
<CAPTION>
Depreciation Depreciation
Fair value Life for the for the
Adjustment (years) year ended three months ended
----------- ------- ------------ ------------------
<S> <C> <C> <C> <C>
Land $63,880
Building and improvements 1,045,635 10-40 $73,076 $18,269
Machinery and equipment 1,180,329 1-15 293,595 73,399
----------- ------------ ------------------
$2,289,844 366,671 91,668
===========
Adjustment for inventory (18,565) (26,780)
------------ ------------------
$348,106 $64,888
============ ==================
Recorded as:
Cost of goods sold $105,366 $4,203
Selling and distribution 219,845 54,961
General and administrative 22,895 5,724
------------ ------------------
$348,106 $64,888
============ ==================
</TABLE>
5. To reflect Pro forma adjustments for the amortization of intangible assets
<TABLE>
<CAPTION>
For the For the three
Amount Life year ended months ended
---------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Trade Name $4,634,830 40 $115,871 $28,968
Distribution network 2,275,280 40 56,882 14,221
Workforce 640,449 23 27,846 6,961
---------- ------------ ------------
$7,550,559 $200,599 $50,150
========== ============ ============
For the For the three
Year ended months ended
---------- -------------
6. To reflect Pro forma adjustment as follows:
Impact of unfavorable lease commitments $143,425 $50,450
========== ============
</TABLE>
7. The purchase adjustments reflect the pay off of substantially all of LFD's
debt and the utilization of the Company's line of credit to finance the
acquisition.
8
<PAGE> 9
<TABLE>
<CAPTION>
Interest Expense Adjustment
Historical Pro Forma Pro Forma For the For the three
Amount Adjustments As adjusted year ended months ended
------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
The Company
Revolving credit facility, with
interest at either prime or LIBOR
plus a margin. The interest rate
at March 31 1998 is 7%. --- $19,189,716 $19,189,716 $1,343,280 $335,820
Capital lease obligation $53,000 53,000
LFD
Revolving loan 4,257,956 (4,257,956) --- (369,101) (81,562)
Term Loan 4,750,000 (4,750,000) --- (395,287) (121,718)
Promissory notes payable 771,093 771,093
Zero coupon bond 197,444 197,444
============ =========== =========== ----------- -------------
Total debt $10,029,493 $10,181,760 $20,211,253
============ =========== ===========
Net increase in interest
expense $578,892 $132,540
=========== =============
</TABLE>
8. To reflect the income tax provision based on applying the pro forma
estimated effective tax rate of the combined companies.
9. Conforming adjustments to adjust the LFD Statements of Operations to the
Company's format for classification purposes.
<TABLE>
<CAPTION>
For the For the three
year ended months ended
------------- -------------
<S> <C> <C>
Cost of sales $606,341 $153,557
Selling and distribution 370,444 88,934
General and administrative 653,835 144,302
Less: Other income, net (1,630,620) (386,793)
------------- ------------
Net adjustment $0 $0
============= ============
</TABLE>
9
<PAGE> 10
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997, and as of
March 31, 1998 (unaudited)............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996
and 1997, and for the three months ended March 31, 1997 and
1998 (unaudited)......................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996 and 1997............................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1997 and for the three months ended March 31, 1997 and 1998
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements .................................. F-7
</TABLE>
F-1
<PAGE> 11
Report of Independent Auditors
Board of Directors
LFD Holding Corp. and Subsidiary
We have audited the accompanying consolidated balance sheets of LFD Holding
Corp. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years 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 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 consolidated financial position of LFD Holding Corp.
and Subsidiary at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Cleveland, Ohio ERNST & YOUNG LLP
February 27, 1998
F-2
<PAGE> 12
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 MARCH 31
1996 1997 1998
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 358,105 $ 251,648 $ 258,521
Accounts receivable, less allowance of $143,000 in 3,936,137 3,942,155 4,446,344
1996, $113,000 in 1997 and $137,000 in 1998
Inventories:
Finished product 923,518 999,386 1,188,744
Raw materials and supplies 1,047,141 1,090,617 1,232,426
-------------- -------------- --------------
1,970,659 2,090,003 2,421,170
Other current assets 855,260 778,439 572,166
-------------- -------------- --------------
Total current assets 7,120,161 7,062,245 7,698,201
Land, buildings and equipment:
Land 664,762 717,070 717,070
Buildings and improvements 4,195,070 4,336,568 4,336,568
Machinery and equipment 7,606,812 7,601,053 7,648,340
-------------- -------------- --------------
12,466,644 12,654,691 12,701,978
Accumulated depreciation (3,415,907) (3,937,681) (4,206,356)
-------------- -------------- --------------
9,050,737 8,717,010 8,495,622
Notes receivable 590,612 731,043 695,467
Goodwill and other intangible assets 953,527 1,043,601 1,017,484
-------------- -------------- --------------
TOTAL ASSETS $ 17,715,037 $ 17,553,899 $ 17,906,774
============== ============== ==============
Current liabilities:
Accounts payable and accrued expenses $ 4,922,085 $ 4,842,589 $ 4,581,818
Current portion of long-term debt 1,413,751 1,223,495 1,200,978
-------------- -------------- --------------
Total current liabilities 6,335,836 6,066,084 5,782,796
Deferred revenue 50,007 20,845 14,596
Deferred income taxes 371,000 296,000 296,000
Long-term debt 8,786,531 7,868,919 8,775,516
Redeemable preferred stock:
12% Cumulative preferred stock---par value $.01 per 2,241,612 4,264,543 4,361,505
share, authorized, issued and outstanding, 2,783
shares in 1996, 3,908 shares in 1997, and 4,034
shares in 1998 (liquidating preference $1,000 per
share)
Shareholders' equity:
Common stock -----par value $.01 per share:
Class A -----authorized -----150,000 shares; issued 356 356 356
and outstanding ------35,644 shares, including 4,961
of restricted shares
Class B Convertible----- authorized, issued and 755 1,130 1,130
outstanding -----75,490 shares in 1996 and
112,990 shares in 1997 and 1998
Class C Convertible -----authorized, issued and 125 168
outstanding -----12,500 shares in 1997 and
16,809 shares in 1998
Additional paid-in capital 2,288 376,788 409,064
Treasury stock, at cost (23,787) (23,787) (23,787)
Retained deficit (1,267,543) (1,661,009)
Deferred compensation----restricted performance shares (49,561) (49,561) (49,561)
-------------- -------------- --------------
not vested
Total shareholders' equity (69,949) (962,492) (1,323,639)
-------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,715,037 $ 17,553,899 $ 17,906,774
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 13
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH, 31 MARCH, 31
1996 1997 1997 1998
--------------- --------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 61,496,276 $ 56,078,939 $ 12,809,772 $ 13,106,043
Cost of sales 49,186,065 43,981,356 9,977,611 10,552,092
--------------- --------------- ------------- --------------
Gross profit 12,310,211 12,097,583 2,832,161 2,553,951
Selling, general, administrative and
delivery expense 9,095,641 10,340,629 2,396,853 2,333,191
--------------- --------------- ------------- --------------
Operating income 3,214,570 1,756,954 435,308 220,760
Non-operating income (expense):
Amortization (422,163) (241,386) (108,573) (26,118)
Depreciation (963,807) (1,083,058) (264,812) (268,675)
Management fees (202,148) (206,176) (50,000) (50,000)
Michigan Single Business Tax (250,000) (100,000) (51,000) (42,000)
Interest expense (932,925) (879,581) (208,140) (227,433)
Other income 6,991 68,634
--------------- --------------- ------------- --------------
(2,764,052) (2,441,567) (682,525) (614,226)
--------------- --------------- ------------- --------------
Income (loss) before income taxes 450,518 (684,613) (247,217) (393,466)
Income taxes (benefit) 236,250 (315,000)
--------------- --------------- ------------- --------------
NET INCOME (LOSS) $ 214,268 $ (369,613) $ (247,217) $ (393,466)
=============== =============== ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 14
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION> COMMON STOCK
------------------------------------------------------------------------------------
Class B Class C
Shares Class A Shares Convertible Shares Convertible
---------- --------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 36,908 $ 369 75,490 $ 755
Net income
Preferred stock dividends
Purchase of stock
Sale of treasury stock
Options canceled (1,264) (13)
Adjustment of preferred stock accrued value
---------- --------- --------- -------- --------- ----------
Balance at December 31, 1996 35,644 356 75,490 755
Net loss
Preferred stock dividends
Issuance of stock 37,500 375 12,500 $ 125
Adjustment of preferred stock accrued value
---------- --------- --------- -------- --------- ----------
BALANCE AT DECEMBER 31, 1997 35,644 $ 356 112,990 $ 1,130 12,500 $ 125
========== ========= ========= ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Additional Retained
Treasury Treasury Paid-in Earnings Deferred
Shares Stock Capital (Deficit) Compensation Total
---------- -------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (8,750) $ (88) $ 14,915 $ 0 $ (62,188) $ (46,237)
Net income 214,268 214,268
Preferred stock dividends (333,880) (333,880)
Purchase of stock (2,936) (85,144) (85,144)
Sale of treasury stock 2,119 61,445 61,445
Options canceled (12,627) 12,627 (13)
Adjustment of preferred stock accrued value 119,612 119,612
---------- -------- -------- ----------- ----------- -----------
Balance at December 31, 1996 (9,567) (23,787) 2,288 0 (49,561) (69,949)
Net loss (369,613) (369,613)
Preferred stock dividends (345,128) (345,128)
Issuance of stock 374,500 375,000
Adjustment of preferred stock accrued value
(552,802) (552,802)
BALANCE AT DECEMBER 31, 1997 ---------- --------- -------- ----------- ----------- -----------
(9,567) $ (23,787) $376,788 $ (1,267,543) $ (49,561) $ (962,492)
========== ========= ======== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 15
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
------------ ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 214,268 $ (369,613) $ (247,217) $ (393,466)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,385,970 1,324,444 373,385 294,792
Loss on disposal of equipment 17,405
Provision for deferred income taxes 73,000 (75,000)
Changes in operating assets and liabilities:
Accounts and notes receivable (724,089) (116,449) 192,269 (463,612)
Inventories (139,108) (42,415) (656,457) (331,167)
Accounts payable and accrued expenses 469,755 (79,496) 52,064 (260,771)
Other (364,416) (118,800) 88,522 195,023
------------ ----------- --------- -----------
Net cash provided by (used in) operating activities 915,380 540,076 (197,434) (959,201)
INVESTING ACTIVITIES
Expenditures for buildings and equipment (994,517) (701,736) (126,535) (47,287)
Acquisition of distributors (236,929)
------------ ----------- --------- -----------
Net cash used in investing activities (994,517) (938,665) (126,535) (47,287)
FINANCING ACTIVITIES
Proceeds from long-term debt 1,166,739 1,132,777 699,650 947,766
Payments on debt (1,416,573) (2,340,645) (305,415) (63,686)
Purchase of common and preferred stock (148,727)
Issuance of common and preferred stock 125,015 1,500,000 129,281
Dividends paid (166,940)
------------ ----------- --------- -----------
Net cash (used in) provided by financing activities (440,486) 292,132 394,235 1,013,361
------------ ----------- --------- -----------
(Decrease) increase in cash and cash equivalents (519,623) (106,457) 70,266 6,873
Cash and cash equivalents at beginning of period 877,728 358,105 358,105 251,648
------------ ----------- --------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 358,105 $ 251,648 $ 428,371 $ 258,521
============ =========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 16
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
A. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
LFD Holding Corp. and subsidiary ("the Company") is a processor of fluid milk,
ice cream and other related dairy products. The Company distributes its dairy
products principally to grocery store chains, independent supermarkets, retail
outlets and institutional accounts located in Michigan, Indiana and Ohio. The
Company records revenue when product is shipped.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair financial presentation have been
included. Past operating results are not necessarily indicative of the results
that may occur in future periods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of LFD Holding Corp.
and its wholly-owned subsidiary, London's Farm Dairy, Inc. ("LFD, Inc.").
Intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, determined on a first-in,
first-out basis.
BUILDINGS, MACHINERY AND EQUIPMENT
Buildings, machinery and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related depreciable assets.
F-7
<PAGE> 17
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
A. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS --CONTINUED
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets represent principally the excess of the
purchase price over the fair value of net assets acquired and loan organization
costs. These assets are being amortized on a straight-line basis over their
respective useful lives (five to forty years). As described in Note B, during
1996 the Company refinanced certain outstanding debt, resulting in the
accelerated amortization of previously capitalized amounts. Accumulated
amortization at December 31, 1996 and 1997 was $1,926,000 and $2,140,000,
respectively. The Company reviews the recoverability of intangibles when
circumstances indicate impairment may exist.
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 in the accompanying financial statements and notes.
Actual results could differ from those estimates.
B. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
----------------------------------------
<S> <C> <C>
Revolving loan $3,927,490 $3,310,189
Term loan 4,900,000 4,750,000
Promissory notes payable 1,166,859 833,658
Zero coupon bond 180,909 197,444
Other 25,024 1,123
----------------------------------------
10,200,282 9,092,414
Less current portion 1,413,751 1,223,495
----------------------------------------
$8,786,531 $7,868,919
========================================
</TABLE>
F-8
<PAGE> 18
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
B. LONG-TERM DEBT --CONTINUED
On December 17, 1997 the Company amended and restated its existing financing and
security agreement with a bank (the "New Agreement"). The New Agreement provides
financing through a $4,750,000 term loan facility, a revolving credit facility
with a maximum principal amount of $5,500,000 and a $500,000 to $750,000
over-advance facility. Under the New Agreement, the Company must exceed a
minimum predefined current ratio, meet certain fixed charge coverage and
tangible capital fund ratios, and limit capital expenditures to predefined
amounts.
Principal payments on the term loan facility are due in quarterly installments
of $250,000 through November 10, 2002, with the first payment due in May, 1998.
Interest payments are due on the dates coinciding with principal payments at the
prime rate plus 1/4%. The revolving credit facility is available through
February 16, 2000, extending automatically for successive periods of one year
(but in no event later than February 16, 2005) unless the lender or the Company
notifies the other no later than November 1 of any year after February 16, 2000
of its intention to terminate the revolving credit facility as of the next
February 16. Borrowings under the revolving credit facility bear interest at the
LIBOR base rate plus 250 basis points or the prime rate, as selected by the
Company. The over-advance may be used by the Company to increase the borrowing
base by $750,000 (from December 17, 1997 through April 30, 1998 and January 1 of
each year thereafter through April 30 of each such year) and $500,000 between
May 1 and June 30 of each year. Borrowings under the New Agreement are secured
by substantially all assets of LFD, Inc.
The Company has four promissory notes which aggregate $833,658 ($1,166,859 at
December 31, 1996), bear interest at rates ranging from 8% to 12% and require
various monthly payments through the maturity dates ranging from 1999 to 2003.
The Company assumed a nonnegotiable zero coupon bond due April 1, 1999 for cash
proceeds of $235,187. The bond is priced to yield 9.14% to maturity.
F-9
<PAGE> 19
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
B. LONG-TERM DEBT --CONTINUED
Aggregate principal payments applicable to long-term debt at December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 $1,223,495
1999 1,528,748
2000 1,020,545
2001 1,006,783
2002 1,002,420
Thereafter 3,310,423
------------------
$9,092,414
==================
</TABLE>
Interest paid during the years ended December 31, 1996 and 1997 was $966,000 and
$928,000, respectively.
C. OPERATING LEASES
The Company leases automotive, rolling stock, manufacturing equipment and a
warehouse facility under operating leases which expire at various dates.
Future minimum payments under noncancelable operating leases with an initial
term of one year or more consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
1998 $1,208,292
1999 1,121,656
2000 1,020,801
2001 872,539
2002 721,140
Thereafter 1,624,403
------------------
$6,568,831
==================
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $1,533,600 and
$1,593,200, respectively.
F-10
<PAGE> 20
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
D. REDEEMABLE PREFERRED STOCK AND COMMON STOCK
In December, 1997, the Company issued 1,125 non-voting shares of 12% Cumulative
Redeemable Preferred Stock ("preferred stock"), par value of $.01 per share,
with a liquidation value of $1,000 per share, for proceeds of $1,125,000. In
1992, the Company had issued 3,000 shares of preferred stock. No other stock
ranks senior to the preferred stock. Dividends are cumulative and payable
quarterly. Cash dividends cannot be paid on stock junior to the preferred stock
until dividends on the preferred stock are current. At December 31, 1996 and
1997 there were $333,880 and $679,010, respectively, of accumulated but unpaid
dividends which are included in the Redeemable Preferred Stock caption on the
balance sheet.
The Company must redeem the preferred stock at the liquidation value plus
accrued dividends on July 31, 1998 unless the shareholders agree to an extended
redemption date, and will accrete the recorded value of the preferred stock up
to the liquidation value by July 31, 1998. The preferred stock is also subject
to redemption by the Company at any time prior to July 31, 1998 at the
liquidation value plus accrued dividends.
The preferred stock places certain restrictions on the repurchase of common
stock by the Company. There also are certain restrictions on the purchasers
regarding the sale and transfer of preferred and common stock.
The holders of Class A common stock are entitled to one vote per share on all
matters to be voted on by the shareholders of the Company. The holders of Class
B and Class C common stock have no voting rights, except in matters of merger or
consolidation of the Company into another entity or entities.
Class B and Class C common stock is convertible into an equal number of shares
of Class A common stock if certain conditions are met regarding limitations of
total stock ownership. The Company is required to reserve such number of shares
of Class A common stock issuable upon the conversion of all Class B and Class C
common stock.
F-11
<PAGE> 21
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
D. REDEEMABLE PREFERRED STOCK AND COMMON STOCK --CONTINUED
On July 1, 1992, the Company entered into an agreement with a certain
shareholder whereby the shareholder has put options such that during certain
periods beginning January 1, 1998 the Company would be required to repurchase
all or any portion of the shareholder's common and/or preferred stock. The price
at which the common stock would be repurchased is based upon a formula as
defined in the Stockholder's Agreement. The preferred stock would be repurchased
at liquidation value plus accrued dividends.
E. RESTRICTED SHARES
In accordance with Stock Agreements entered into on July 1, 1992 between the
Company and certain stockholders and management, the Company issued restricted
shares of Class A common stock at a purchase price of $.01 per share. Through
December 31, 1997, vesting of these shares was dependent on the Company's
achievement of certain annual performance measures. Subsequent to December 31,
1997, vesting will only occur upon the sale of the Company, subject to certain
provisions contained in the Stock Agreements. The performance and vesting
requirements have been fulfilled on 3,862 of the outstanding shares as of
December 31, 1997, and deferred compensation expense has been recorded as a
reduction of shareholders' equity for the 4,961 outstanding restricted shares
not vested. The nonvested shares are subject to certain restrictions as to sale
and transfer.
F. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997
-----------------------------------
<S> <C> <C>
Federal:
Current $ 163,250 $(240,000)
Deferred 73,000 (75,000)
-----------------------------------
TOTAL $236,250 $(315,000)
===================================
</TABLE>
F-12
<PAGE> 22
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
F. INCOME TAXES-CONTINUED
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
------------------------------------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit
and other carry forwards $488,000 $573,000
Other 54,000 75,000
------------------------------------
542,000 648,000
Deferred tax liabilities:
Accelerated depreciation 823,000 849,000
Other 90,000 95,000
------------------------------------
913,000 944,000
------------------------------------
NET DEFERRED TAX LIABILITIES $371,000 $296,000
====================================
</TABLE>
The alternative minimum tax credit carry forwards have no expiration dates.
A reconciliation of income taxes computed at the United States statutory rate
to the effective income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997
----------------------------------
<S> <C> <C>
Income taxes at the United
States statutory rate 35.0% (35.0%)
Non-deductible intangibles 17.1 5.9
Adjustment of recorded
accruals (21.2)
Other, net 0.3 4.3
----------------------------------
52.4% 46.0%
==================================
</TABLE>
The Company paid $265,000 and $120,000 of income taxes during the years ended
December 31, 1996 and 1997, respectively.
F-13
<PAGE> 23
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
G. 401(k) SAVINGS PLAN
The Company sponsors a defined contribution plan (the "Plan") for employees who
meet certain eligibility requirements. The Company may make discretionary
contributions to the Plan at the option of the Board of Directors. In addition,
the Company may match employee contributions equal to a percentage of the
participant's contribution to the Plan. In 1997, the Company matched 100% of
employee contributions, up to a maximum of 6% of the participant's annual
compensation. The Company contributed $264,000 and $310,000 to the Plan during
the years ended December 31, 1996 and 1997, respectively.
H. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has completed a preliminary assessment of its exposure to the Year
2000 problem. The Year 2000 problem results from older computer programs being
written using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. Based on the
Company's preliminary assessment, no critical software system will be impacted
by this problem due to the implementation in 1997 of Year 2000 compliant
application software for the majority of its accounting operations and the
scheduled upgrades in 1998 to compliant versions for the remaining applications.
The costs of the remaining upgrades are not expected to have a material adverse
effect on the Company's operations.
F-14
<PAGE> 1
EXHIBIT 23
We consent to the use of our report dated February 27, 1998, with respect to the
financial statements of LFD Holding Corp. and Subsidiary included in the Current
Report on Form 8-K/A dated August 6, 1998 of Broughton Foods Company.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
August 6, 1998
