BROUGHTON FOODS CO, 10-K, 1999-03-31

BROUGHTON FOODS CO
10-K, 1999-03-31
DAIRY PRODUCTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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BROUGHTON FOODS COMPANY
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
OHIO 31-4135-025
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>

210 N. SEVENTH STREET
P. O. BOX 656
MARIETTA, OHIO
45750-0656
(Address of Principal Executive Offices) (Zip Code)

(740) 373-4121
Registrant's Telephone Number, Including Area Code

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK $1.00
PAR VALUE

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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at March 17, 1999, based on the $12.438 per
share closing price for the Company's common stock on the NASDAQ National Market
was approximately $40,652,981.

The number of shares of the Registrant's Common Stock outstanding as of March
17, 1999 was 5,774,335.

OUTLOOK AND UNCERTAINTIES

Certain information in this Annual Report may contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as "may", "will", "expects", "plans",
"anticipates", "estimates", "potential", or "continue", or the negative thereof
or other comparable terminology. Although Broughton Foods Company (the "Company"
or "Broughton") believes that the expectations reflected in its forward-looking
statements are reasonable, it can give no assurance that such expectations or
any of its forward-looking statements will prove to be correct, and actual
results could differ materially from those projected or assumed in the Company's
forward-looking statements. The Company's future financial condition and
results, as well as any forward-looking statements are subject to inherent risks
and uncertainties, including, without limitation, potential limitations on the
Company's ability to pursue its acquisition strategy and successfully integrate
acquired operations, limitations arising from the Company's indebtedness,
dependence on certain customers and suppliers, significant competition,
fluctuating raw material and transportation costs, government regulation,
seasonality and dependence on key management.
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM PAGE
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<S> <C> <C> <C>
PART I
1 Business....................................................
2 Properties..................................................
3 Legal Proceedings...........................................
4 Submission of Matters to a Vote of Stockholders.............
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters.........................................
6 Selected Financial Data.....................................
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
7A Quantitative and Qualitative Disclosures About Market
Risk........................................................
8 Financial Statements and Supplementary Data.................
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................
PART III
10 Directors and Executive Officers of the Registrant..........
11 Executive Compensation......................................
12 Security Ownership of Certain Beneficial Owners and
Management..................................................
13 Certain Relationships and Related Transactions..............
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K.........................................................
</TABLE>

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PART I

ITEM 1. BUSINESS

GENERAL

Broughton was incorporated under the laws of the State of Ohio in 1933. On
December 12, 1997, the Company completed its initial public offering (the
"Offering") of 1.3 million shares of Common Stock.

The Company is a leading manufacturer and distributor of fresh milk and
dairy products in Ohio, West Virginia, Kentucky, Tennessee, Michigan 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 (4) divisions -- the Dairy Division (based in Marietta, Ohio), the
Southern Belle Division (based in Somerset, Kentucky), the London's Farm
Division (based in Port Huron, Michigan) and the Foods Division (based in
Charleston, West Virginia). 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, reduced-fat milk, low-fat milk,
and fat-free milk and manufactures buttermilk, cottage cheese, chocolate milk,
eggnog, iced tea, ice cream mix, fruit drink, yogurt mix and ice cream under its
own Broughton or Dairylane label and under various private labels. The Southern
Belle Division is primarily a fluid milk producer with a raw milk processing
plant based in Somerset, Kentucky. Other product lines produced at the Southern
Belle Division include orange juice and flavored drinks. Products are
manufactured by the Company under the Southern Belle brand name and other
private labels. The London's Farm Division, with its raw milk processing plant
in Port Huron, Michigan, manufactures and distributes a full line of fresh milk
and other products, while its Burton, Michigan plant produces a variety of ice
cream products. 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. The Company also operates one dairy store, which
is managed by the Dairy Division.

The Company acquired Johnson's All-Star Dairy ("Johnson") in May 1997.
Johnson sold dairy products in West Virginia, eastern Kentucky and southeastern
Ohio. Since its 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.

On December 12, 1997, the Company merged with Southern Belle Dairy Company,
with the Company as the surviving entity, and paid the shareholders of Southern
Belle a combined total of $5.0 million in cash and shares of Common Stock of the
Company. The transaction was completed concurrent with the closing of the
Offering. Although not a separate corporate entity from the Company, the former
Southern Belle Dairy Company is maintained as a separate division of the Company
(collectively referred to as the "Southern Belle Division" or "Southern Belle").

The Company completed an acquisition of LFD Holding Corp. and its wholly
owned subsidiary, London's Farm Dairy, Inc. (collectively referred to as
"London's", "London's Farm Division" or "London's Farm Dairy"), on May 29, 1998,
pursuant to which LFD Holding Corp. became a subsidiary of the Company. The
London's Farm Division operates an ice cream plant in Burton, Michigan and a raw
milk processing facility in Port Huron, Michigan.

On September 11, 1998, the Company announced that it had executed an
Agreement and Plan of Merger with Suiza Foods Corporation ("Suiza") a Delaware
corporation and Suiza Foods Acquisition Corp. ("Merger Sub"), an Ohio
corporation and wholly owned subsidiary of Suiza dated September 10, 1998 (the
"Agreement"), providing for the merger of the Company with Merger Sub, with each
Company share being exchanged for the sum of Nineteen Dollars ($19.00) cash.
Consummation of the merger is conditioned upon satisfaction of all conditions
contained in the Agreement. If the merger is consummated, the Company will
become a wholly-owned subsidiary of Suiza. On September 10, 1998, 5,774,335
shares of Company common stock were issued

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and outstanding. The Agreement was approved by Company shareholders at a special
meeting held on December 4, 1998.

On January 18, 1999 the Company announced that Suiza and the Company had
executed an amendment to the Agreement.

The amended Agreement, dated January 18, 1999, extends from December 31,
1998 to April 15, 1999 the date on which either party may terminate the amended
Agreement if the merger has not been completed on such date. A related Stock
Purchase Agreement dated January 18, 1999 between Suiza, the Company and eight
shareholders of the Company provides that at completion of the merger, those
shareholders will sell Two Million (2,000,000) Company shares to Suiza, and will
receive, in lieu of the $19.00 per share cash merger consideration, the cash sum
of $10.00 per Company share, without interest, plus the right to receive up to
an additional $9.00 per share if certain earnings and performance goals are met
between the date of the merger and March 31, 2000.

Subject to satisfaction of all conditions contained in the Agreement and
Plan of Merger, as amended, and the Stock Purchase Agreement, the parties agreed
to complete the merger on March 31, 1999.

On March 18, 1999 the United States District court for the Eastern District
of Kentucky, London Division, entered a temporary restraining order enjoining
Suiza, the Company and all persons acting on their behalf from consummating,
directly or indirectly, their proposed merger, or implementing any other plan or
agreement by which Suiza and the Company, or any part of them would combine
under common ownership or control. Earlier the same day, the United States
Department of Justice Antitrust Division ("DOJ") filed a Motion for Temporary
Restraining Order ("TRO"), Motion for Preliminary Injunction and a Complaint in
seeking to enjoin the proposed acquisition of the Company by Suiza. The DOJ
alleged that competition in the production and sale of school milk in South
Central Kentucky school districts would be substantially lessened as a result of
the proposed transaction.

By terms of the Court's order, the TRO shall remain in effect until such
time as the Court addresses the DOJ's Motion for Preliminary Injunction. Suiza
and the Company independently concluded and agreed not to contest the motion for
TRO. Suiza and the Company continue to review their options for responding to
the DOJ's action.

The final outcome of the proposed merger with Suiza may impact the
Company's future plans regarding business strategy and may have a material
adverse effect on the Company's financial position and results of operations.

The complete mailing address for the Company's principal executive office
is 210 North Seventh Street, P.O. Box 656, Marietta, Ohio 45750. The Company's
telephone number is (740) 373-4121.

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 $23.2 billion of fluid
milk products were sold in 1997 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 427 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-speed freezing, filling and
hardening equipment. The ice cream industry traditionally has experienced slow
and steady

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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
were 458 ice cream manufacturing facilities in the United States in 1997,
compared to 483 in 1994. Management believes that this consolidation trend will
continue for the foreseeable future.

BUSINESS STRATEGY

The following discussion is wholly premised upon the Company not entering
into its strategic alliance with Suiza.

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
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.

The Southern Belle acquisition has provided the Company with a dependable
source of certain raw materials and manufacturing capabilities. In addition, the
acquisition has helped the Company to seek to expand its existing operations by
adding new customers, extending its product lines and securing distribution
rights for additional branded product lines.

The acquisition of London's helped expand the Company's customer base,
manufacturing capacity and geographic diversity.

In addition to the Southern Belle and London's Acquisition, the Company
implemented its consolidation strategy in 1997 by acquiring and integrating
Johnson's All-Star Dairy ("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, 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.

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 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

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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.

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.

RAW MATERIALS AND SUPPLY

Dairy, Southern Belle and London's Farm Divisions

The Company's Marietta facility receives approximately 70,000 gallons of
raw Grade A milk daily from over 170 dairy farms in Ohio and West Virginia; the
Southern Belle facility receives approximately 66,000 gallons of raw milk daily,
principally from Southeastern Graded Milk Producers Association ("SEGMPA"),
representing approximately 280 dairy farms in Kentucky; and the London's Farm
Division receives approximately 53,500 gallons of raw milk daily, principally
from Michigan Milk Producers Association.

To ensure a constant supply of raw milk meeting Company standards, a
full-time field department is maintained at the Company's Southern Belle and
Dairy Divisions. Inspectors visit each dairy farm and work with farmers on
product quality assurance. Over 450 farmers in Ohio, West Virginia and Kentucky
and the farmers of Michigan Milk Producers Association produce Grade A milk for
the Company. Contract haulers check the quality of raw milk and transport the
milk from the farms to the plant. Fresh, raw milk is received and processed
(pasteurized) every day of the year. In order to monitor product quality, the
Company maintains its own laboratories. The laboratories are staffed by trained
technicians who are certified by state authorities at the Company's Dairy and
Southern Belle Divisions. The supply of raw milk in the United States is
influenced by many factors, including seasonality and government regulation, and
is therefore variable.

Certain other raw materials used by the Company, including milk powder,
cocoa powder, sugar, flavorings, fruits, nuts and packaging supplies are
generally available from numerous third party sources. The Company's Dairy,
Southern Belle and London's Farm Divisions are not dependent upon any single
supplier for these materials, and management believes that any supplier could be
replaced in the ordinary course of business.

Foods Division

The Foods Division receives its primary supply of pasteurized milk and
butterfat from the Company's Dairy and Southern Belle Divisions, and it is
anticipated that the London's Farm Division will provide additional butterfat
during certain peak periods of the year. Additional cream is purchased from
numerous other suppliers. The Southern Belle Division provides the Company with
a stable source of butterfat, an integral raw material required in the
production of the Foods Division products.

Other 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.

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PRODUCTS

The following table shows the Company's breakdown by product, as an
approximate percentage of revenues, for the years ended December 31, 1996, 1997
and 1998:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Milk........................................................ 52.6% 50.1% 62.3%
UHT (non milk).............................................. 21.9 22.8 11.5
Cultured.................................................... 11.5 11.8 7.7
Frozen desserts............................................. 6.9 8.1 9.7
Other....................................................... 7.1 7.2 8.8
----- ----- -----
Total..................................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

The Company's cultured products include cottage cheese, sour cream,
imitation sour cream and non-dairy dips.

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, Southern Belle Division and London's Farm 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, Southern Belle and London's Farm Divisions' 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.

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
the Company 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, the Company now competes against
larger, integrated dairies and UHT manufacturing companies which are better
capitalized. Consequently, the Company only has a small percentage of the market
share in the eastern United States.

TRADEMARKS

The Company currently holds four registered trademarks, primarily used by
the Company's Dairy and Foods Divisions: 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

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company. The Company has trademarks for: Southern Belle(R), Ultra Skim(R),
Southern Belle's corporate logo and for SBD Good For You! (and design)(R). The
Company has applications pending for X.Y. Zoo's(TM), Grape Gorilla(TM), Lemon
Lion(TM), Punch A Rama(TM), Orangeopus(TM), Carablue(TM), Lemonsaur(TM) and
Chocodile(TM). The Company's London's Farm Dairy Division has the following
registered trademarks: Corporate logo, "Your Natural Choice" and "Michigan's
Natural Choice", as well as a licensing agreement to use the tradename "Ryba's
Mackinaw Island Fudge" and "Mackinaw Island Fudge".

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 Food and Drug Administration (the "FDA"). This comprehensive
regulatory scheme governs the manufacture (including composition and
ingredients), labeling, packaging and safety of food. The FDA regulates
manufacturing practices, including quality assurance programs, for foods through
its current good manufacturing practices regulations, specifies the standards of
identity for certain foods, including many of the products sold by the Company,
prescribes the format and content of certain nutrition information required to
appear on food product labels and approves and regulates claims of health
benefits of food products.

In addition, the FDA enforces the Public Health Service Act and regulations
issued thereunder, which authorize regulatory activity necessary to prevent the
introduction, transmission or spread of communicable diseases. These regulations
require, for example, pasteurization of milk and milk products. The Company and
its products are also subject to state and local regulation through such
measures as the licensing of dairy manufacturing facilities, enforcement by
state and local health agencies of state standards for the Company's products,
inspection of the Company's facilities and regulation of the Company's trade
practices in connection with the sale of dairy products.

The Company maintains quality control laboratories at each of its dairy
manufacturing facilities to test milk, other ingredients and finished products.
Product quality and freshness are essential to the successful retail
distribution of dairy and refrigerated dairy products. To monitor product
quality at its facilities, the Company maintains quality control programs to
test products during various processing and packaging stages. Each dairy
manufacturing facility has its own staff of technicians who monitor products to
maintain high quality formulations and to protect against contamination.

Employee Safety Regulations

The Company is subject to certain health and safety regulations, including
regulations issued pursuant to the Occupational Safety and Health Act. These
regulations require the Company to comply with certain manufacturing, health and
safety standards.

Environmental Regulations

The Company is subject to certain federal, state and local environmental
regulations. These laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended; the
Resource Conservation and Recovery Act, as amended; the Federal Water Pollution
Control Act, as amended; the Toxic Substances Control Act; the Clean Air Act;
the Safe Drinking Water Act; the Oil Pollution

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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 aboveground 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 audits 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. See "Risk Factors --
Government Regulations; Regulatory Uncertainty."

On January 23, 1998, the United States Department of Agriculture (the
"USDA") announced proposed changes to the federal milk marketing order program.
This was in relation to the 1996 Farm Bill which required that federal milk
marketing orders be consolidated by April 1999. The USDA proposal would reduce
the number of federal orders from 31 to 11 and implement a replacement for the
basic formula price. The USDA held hearings on these and other changes which
commenced on February 17, 1998 with the commencement of a public comment period.
The USDA has not announced a definitive effective date for the changes as
required by the 1996 Farm Bill.

In 1998, the State of West Virginia passed legislation which would allow
West Virginia dairy farmers to join the Southern Dairy Compact. This legislation
would allow the state to establish a regional over-order price for members among
other provisions and mechanisms to achieve its statement of purpose as defined
in the legislation.

The Company is unable to evaluate the impact, if any, of proposed federal
and state changes, described above, based on the information available at this
time.

EMPLOYEES

As of December 31, 1998, the Company had 832 full-time employees and 51
part-time employees. Of this number, 293 were employed by the Dairy Division and
the General Office, 108 worked in the Foods Division, 247 in the Southern Belle
Division and 235 in the London's Farm 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.

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The Company is party to several collective bargaining agreements with
approximately 331 of its employees.

<TABLE>
<CAPTION>
LOCATION OF FACILITY NAME OF UNION EXPIRATION DATE
- -------------------- ------------- ---------------
<S> <C> <C>
Manufacturing plant, Marietta, January 29, 2004
Ohio.............................. Retail, Wholesale, Department Store
Union, Local #379
Manufacturing plant and March 1, 2001
distribution, Charleston, West
Virginia.......................... Chauffeurs, Teamsters & Helpers, Local
Union #175
Parkersburg, West Virginia.......... Chauffeurs, Teamsters & Helpers, Local August 31, 2003
Union #175
Old Washington, Ohio................ Retail, Wholesale, Department Store September 1, 1999
Union, Local #379
Clarksburg, West Virginia........... International Brotherhood of Teamsters, October 5, 1999
Local Union #789
Somerset, Kentucky.................. Chauffeurs, Teamsters & Helpers, Local November 1, 1999
Union #783
Somerset, Kentucky.................. United Food & Commercial Workers, Local January 16, 2000
#227
</TABLE>

RISK FACTORS

The following risk factors are applicable to the Company's business and
operations and should be considered carefully. The applicability of certain of
these risk factors, such as Risks Related to an Acquisition Strategy; Management
of Growth, Risks Related to Acquisition and Other Financing, Dependence on
Certain Customers, Dependence on Key Personnel and Control by Principal
Shareholders are dependent upon whether or not the Company's merger with Suiza
is consummated.

Risks Related to Operating and Internal Growth

The Company's ability to increase the net sales of its existing operations
and any acquired businesses would 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 operating and internal growth would be successful or that
the Company would be able to generate cash flow adequate for its operations and
to support internal growth.

Risks Related to an Acquisition Strategy; Management of Growth

There can be no assurance that the Company would 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 a business
acquired in the future would achieve anticipated revenues and earnings.

In addition, growth also could impose significant added responsibilities on
members of senior management, resulting in the need to identify, recruit and
integrate new senior level managers and executives. There can be no
10
<PAGE> 11

assurance that such additional management could be identified and retained by
the Company. To the extent that the Company would be unable to manage its growth
efficiently and effectively, or would be unable to attract and retain additional
qualified management, the Company's business, financial condition and results of
operations and the market price of the Common Stock could be materially
adversely affected.

Risks Related to Acquisition and Other Financing

The timing, size and success of any acquisition efforts and the associated
capital commitments cannot be readily predicted. The Company would finance
future acquisitions by using shares of its Common Stock for all or a significant
portion of the consideration to be paid. If the Common Stock did not maintain a
sufficient market value, or if potential acquisition candidates would be
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company would be required to utilize more of its cash
resources, if available, in order to initiate and maintain an acquisition
program. If the Company did not have sufficient cash resources, its growth could
be limited unless it is able to obtain additional capital through debt or equity
financings.

In the future, the Company would require significant amounts of additional
capital to fund the internal expansion of its operations, the acquisition of
businesses and its working capital. The exact amount of the Company's future
capital requirements, however, would 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 could include 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 would 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 could
require such additional financing sooner than anticipated and in amounts greater
than current expectations. If such funds were not available or were available on
terms that the Company viewed as unfavorable, the Company would 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.

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.

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 effect on the Company's
business, financial condition and results of operations and on the market price
of the Common Stock.

11
<PAGE> 12

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
would 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 manufacturing, 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 FDA, 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.

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.

Dependence on Certain Customers

Direct sales of products to the ten largest customers represented
approximately 24.8% of the Company's total net sales in 1998. 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. Such public
sector customers have considerable ability to force the renegotiation of the
12
<PAGE> 13

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.

Risks of Government Contracting

The Company faces the risks associated with government contracting, which
may include substantial administrative, civil and criminal fines and penalties
for, among other matters, non-compliance with federal procurement laws and
regulations, employing improper billing practices, receiving or paying kickbacks
or filing false claims. Government contracting requirements are complex, highly
technical and subject to varying interpretation and changing government
enforcement priorities and practices. As a result of its government contracts,
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 government contracting and subcontracting
for a significant period of time. The fines and penalties that could result from
noncompliance with applicable laws and regulations, as well as 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. See "Legal Proceedings".

Risks Relating to Antitrust Laws

The dairy industry is subject to various federal and state antitrust laws
which prohibit anticompetitive conduct, including price fixing, bidrigging,
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.

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 school milk. On September 12, 1997, the Company settled the civil
litigation initiated by the State of Ohio by agreeing to supply approximately
$30,000 of the Company's product to certain school systems and paying
approximately $20,000.

The Southern Belle Division and the Company are currently the subject of
suspension and debarment proceedings proposed by the U.S. Department of
Agriculture ("USDA"). See "Legal Proceedings".

Additionally, the DOJ has filed suit in U.S. District Court for the Eastern
District of Kentucky seeking to enjoin Suiza's proposed acquisition of the
Company See "Legal Proceedings".

Dependence on Certain Suppliers

Raw milk is the primary raw material of the Company. The Dairy Division
purchases some of its raw milk from dairy cooperatives but buys substantially
all of its raw milk, on a noncontractual, non-exclusive basis, from dairy farms
throughout Ohio and West Virginia. Substantially all of the Southern Belle
Division's raw milk is supplied, on a contractual, exclusive basis, by SEGMPA, a
milk farm cooperative based in Somerset, Kentucky. Substantially all of the
London's Farm Division's raw milk is supplied by the Michigan Milk Producers
Association. If for any reason SEGMPA was unable or unwilling to continue
supplying the operations of the Southern Belle Division, or the Michigan Milk
Producers Association was unable or unwilling to continue supplying the
operations of the London's Farm Division, 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

13
<PAGE> 14

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.

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.

Independent of changes in U.S. dairy policy, the Company has experienced
increased costs in raw milk and in butterfat, a raw material required in the
production of many items by the Foods Division and in ice cream production. 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, and Philip
E. Cline, President and Chief Executive Officer. The loss of any of its key
members of management could have an adverse effect on the Company.

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.

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.

Risks Related to Labor Disputes

The Company is party to various collective bargaining agreements with local
unions representing a significant amount of its respective employees. Typical
agreements are three to five years in duration, and as such agreements expire,
the Company expects to negotiate with the unions and to enter into new
collective bargaining agreements. There can be no assurance, however, that
agreements will be reached without work stoppages or other labor disputes. A
prolonged work stoppage or other labor dispute could have a material adverse
effect on

14
<PAGE> 15

the Company's business, results of operations and financial condition and on the
market price of the Common Stock.

Control by Principal Shareholders

The Company's executive officers and directors beneficially own an
aggregate of 43.4% of the Company's outstanding shares of Common Stock. 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.

Risk Related to Failure to Complete the Merger with Suiza

Since the announcement of the proposed merger with Suiza, the Company has
devoted significant effort and resources towards completing that transaction. In
anticipation of such merger, the Company has also forgone certain planned
expenditures and operational and structural changes. Failure to complete the
transaction may adversely affect the Company's financial position and results of
operations, at least on a short-term basis.

ITEM 2. PROPERTIES

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; Charleston, West Virginia; Somerset, Kentucky; Port Huron,
Michigan and Burton, Michigan. There are twenty dairy distribution centers: two
in Marietta (in one location) and one in each of (i) Old Washington, Ohio; (ii)
Charleston, Ripley and Clarksburg, West Virginia; (iii) Coleman and Bay City,
Michigan; (iv) Ashland, Danville, Lexington, London, Morehead, Louisville and
Russell Springs, Kentucky; and (v) Cookeville, Nashville, Knoxville, Chattanooga
and Johnson City, Tennessee. In addition, the Company's Hagan Ice Cream
distributorship is located in Dunbar, West Virginia. In March 1999, the Company
consolidated its Bay City, Michigan operations into the Coleman facility.

Dairy Division

The Dairy Division conducts its manufacturing and distribution operations
from its Marietta, Ohio, plant and from seven distribution centers, two of which
are owned and five of which are leased.

Foods Division

The Foods Division conducts its manufacturing and distribution operations
from its Charleston, West Virginia plant.

Southern Belle Division

The Southern Belle Division conducts its manufacturing and distribution
operations from its Somerset, Kentucky plant and from eleven distribution
centers, three of which are owned and eight of which are leased.

London's Farm Division

The London's Farm Division conducts manufacturing and distribution
operations from its Port Huron and Burton, Michigan facilities. In addition, it
performs distribution operations at an owned facility in Coleman, Michigan and a
leased facility in Bay City, Michigan. The Division's Port Huron operation
manufactures a full line of fresh milk and other products, while its Burton
plant produces a variety of ice cream products. In March 1999, the Company
consolidated its Bay City operations into the Coleman facility.

15
<PAGE> 16

ITEM 3. LEGAL PROCEEDINGS

The former Southern Belle Dairy Company received a Notice of Proposed
Debarment dated June 1, 1994, from the USDA, in which the USDA proposed to debar
the former Southern Belle Dairy Company 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 by such entity. On April 18, 1995, the former Southern Belle Dairy
Company entered into a Compliance Agreement in Lieu of Debarment with the USDA
(the "Southern Belle Compliance Agreement"). This agreement was for a three-year
period and required the former Southern Belle Dairy Company 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. Although the Southern Belle Compliance Agreement expired on
April 18, 1998, the Southern Belle Division is still operating under its terms.

By notice dated December 31, 1997, the USDA suspended the Southern Belle
Division from federal procurement and nonprocurement programs and proposed to
debar such division for a period that by regulation would not exceed three
years, based on alleged breaches of the Southern Belle Compliance Agreement by
the former Southern Belle Dairy Company, prior to its merger with the Company in
early December 1997. The Company has challenged the USDA action in an
administrative proceeding. The USDA had proposed that the Southern Belle
Division and the Company 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 subject to suspension and
debarment if they fail to enter into such proposed agreement. The Company is
currently engaged in discussions with USDA with respect to this matter.

On September 23, 1998, the USDA agreed to the Company's request that it
separate the suspension and debarment proceedings against the Southern Belle
Division and such similar threatened proceedings against the Company, and
advised that it will pursue suspension and proposed debarment against the
Southern Belle Division and the Company's settlement of civil antitrust
litigation independent of each other. Accordingly, the USDA withdrew its offer
to the Company of the newly proposed Compliance Agreement in Lieu of Debarment.
The USDA advised that a decision on Southern Belle's suspension and debarment
would be rendered by October 15, 1998, unless good cause exists to extend the
determination period. Since that date, the USDA has extended that decision in
successive 45-day periods with the latest notification stating the USDA's
decision on Southern Belle's suspension and debarment will be rendered by April
14, 1999, unless good cause exists to extend the determination period.

Management is unable at this time to predict the outcome of this USDA
proceeding; however, if unfavorably resolved, this USDA proceeding could have a
material adverse effect on the Company's financial position and results of
operations.

On January 18, 1999 the Company announced that Suiza and the Company had
executed an amendment to the Agreement.

16
<PAGE> 17

the cash sum of $10.00 per Company share, without interest, plus the right to
receive up to an additional $9.00 per share if certain earnings and performance
goals are met between the date of the merger and March 31, 2000.

Subject to satisfaction of all conditions contained in the Agreement and
Plan of Merger, as amended, and the Stock Purchase Agreement, the parties agreed
to complete the merger on March 31, 1999.

The Company is involved in or subject to certain other legal proceedings,
including with respect to regulatory matters, which arise in the ordinary course
of the Company's business. Although the Company cannot predict the outcomes of
these legal proceedings, the Company's management does not believe that these
actions will have a material adverse effect on the Company's financial position,
results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

On December 4, 1998 the Company held a special meeting of shareholders to
vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated
September 10, 1998 among Suiza Foods Corporation, the Company and a wholly-owned
subsidiary of Suiza providing for the merger of the Company with the Suiza
subsidiary in exchange for receipt of $19.00 cash per Company share, without
interest.

At the date of the meeting, the company had outstanding 5,774,335 shares of
common stock. Each share was entitled to one vote. There were 4,968,253 votes
cast for the merger, 7,892 votes against the merger, 5,235 abstentions and
715,914 broker non-votes.

17
<PAGE> 18

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Broughton Common Stock has traded on the NASDAQ National Market System
since the Offering on December 9, 1997, under the symbol "MILK". The high and
low prices for the period of trading commencing on December 9, 1997 through the
year end of December 31, 1997 were a high of $17.50 and a low of $16.00.

The following table sets forth the high and low prices for Broughton common
stock for the period indicated. The range of high and low prices are based on
data from NASDAQ.

<TABLE>
<CAPTION>
1998
-----------------
HIGH LOW
------ -------
<S> <C> <C>
First quarter............................................... $17.25 $ 14.375
Second quarter.............................................. 17.50 14.75
Third quarter............................................... 18.25 14.50
Fourth quarter.............................................. 18.50 17.688
</TABLE>

The approximate number of holders of record of the Company's Common Stock
on March 17, 1999, was 307.

The following table sets forth the quarterly dividends per share declared
on Broughton Common Stock.

<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
First Quarter(1)............................................ $.0067 $.0500
Second Quarter(1)........................................... .0067 $.0500
Third Quarter(1)............................................ .0500 $.0500
Fourth Quarter(1)........................................... .0500 $.0000
</TABLE>

- ---------------

(1) On August 17, 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.

DIVIDEND POLICY

The Company has in the past declared cash dividends on its Common Stock.
Pursuant to the Agreement of Merger between the Company and Suiza, the Company
agreed to not pay a dividend pending consummation or termination of the
Agreement. If the alliance with Suiza is terminated, the Board of Directors
presently anticipates paying a cash dividend but 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.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data of the Company as of
and for the five years ended December 31, 1998. Such data as of and for the five
years ended December 31, 1998, are derived from the Company's financial
statements, which have been audited by PricewaterhouseCoopers LLP, independent
public accountants.

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<PAGE> 19

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.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 73,552 $ 72,253 $ 83,919 $ 87,170 $179,432
Cost of sales.......................... 59,238 58,992 68,669 69,292 142,343
-------- -------- -------- -------- --------
Gross profit........................... 14,314 13,261 15,250 17,878 37,089
-------- -------- -------- -------- --------
Operating costs and expenses:
Selling and distribution............. 10,675 11,316 12,064 13,945 28,233
General and administrative........... 2,328 2,294 2,453 2,080 5,451
-------- -------- -------- -------- --------
Operating income (loss)................ 1,311 (349) 733 1,853 3,405
-------- -------- -------- -------- --------
Other income (expenses):
Other income, net(1)................. 72 132 3,244 230 592
Interest (expense)................... (195) (239) (217) (143) (833)
Income (loss) before income taxes...... 1,188 (456) 3,760 1,940 3,164
Income tax expense (benefit)........... 444 (149) 1,431 761 1,239
-------- -------- -------- -------- --------
Net income (loss)...................... $ 744 $ (307) $ 2,329 $ 1,179 $ 1,925
======== ======== ======== ======== ========
Basic earnings (loss) per share(2)..... $ 0.18 $ (0.08) $ 0.59 $ 0.28 $ 0.33
======== ======== ======== ======== ========
Diluted earnings (loss) per share(2)... $ 0.17 $ (0.08) $ 0.57 $ 0.28 $ 0.33
======== ======== ======== ======== ========
Cash dividends per common share(2)..... $ .0267 $ .0267 $ .0267 $ .1133 $ .15
======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 957 $ 161 $ 2,308 $ 9,633 $ 4,278
Working capital............................. 5,561 4,281 7,315 16,693 16,901
Total assets................................ 16,319 17,454 18,538 46,248 75,176
Total debt.................................. 1,782 2,151 1,856 58 19,918
Shareholders' equity........................ 8,692 7,881 10,428 32,988 34,047
</TABLE>

- ---------------

(1) Other income for the year ended December 31, 1996 includes a $3.0 million
pre-tax gain on the sale of an investment. In 1998 interest income was
approximately $448,000 resulting primarily from funds invested from the
Company's initial public offering.

(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.

ITEM 7. 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, Tennessee, Michigan 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 Division based in
Port Huron, Michigan.

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<PAGE> 20

The Company completed an acquisition of Southern Belle Dairy Company of
Somerset, Kentucky in December 1997. The Company has had an increase in sales,
cost of sales and operating expenses for the year ended December 31, 1998
compared with the year ended December 31, 1997 due primarily to the Southern
Belle and London's acquisitions. As a result of the Southern Belle 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. Southern Belle is also supplying the Dairy Division with
orange juice and buttermilk, items which the Dairy Division previously
manufactured. 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 the acquisition of London's Farm Dairy on May 29,
1998. As a result of the London's acquisition, the Company had an increase in
sales, cost of sales and operating expenses for the second, third and fourth
quarters of 1998. As a result of the acquisition of London's, the Company
expected 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 began discussions with Suiza in May 1998 regarding a possible
business combination and as a result of the proposed merger with Suiza Foods,
announced on September 11, 1998, the Company has been delayed in integrating the
operations of London's and completing the integration of Southern Belle.

Approximately $1.7 million of the purchase price for the Southern Belle
acquisition has been 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 impact of this amortization will result in a charge to earnings of
approximately $43,400 annually. Approximately $11.9 million of the purchase
price of the London's acquisition has been recorded by the Company as intangible
assets to be amortized as a non-cash charge to the income statement over periods
ranging from 23 to 40 years. The impact of this amortization will result in a
charge to earnings of approximately $311,000 annually for the first 23 years of
charges.

20
<PAGE> 21

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.

21
<PAGE> 22

owned subsidiary of Suiza. On September 10, 1998, 5,774,335 shares of Company
common stock were issued and outstanding. The Agreement was approved by Company
shareholders at a special meeting held on December 4, 1998.

On January 18, 1999 the Company announced that Suiza and the Company had
executed an amendment to the Agreement.

Subject to satisfaction of all conditions contained in the Agreement and
Plan of Merger, as amended, and the Stock Purchase Agreement, the parties agreed
to complete the merger on March 31, 1999.

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>
1996 1997 1998
--------------- --------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $83,919 100.0% $87,170 100.0% $179,432 100.0%
Cost of sales.......................... 68,669 81.8 69,292 79.5 142,343 79.3
Gross profit........................... 15,250 18.2 17,878 20.5 37,089 20.7
Operating costs and expenses........... 14,517 17.3 16,025 18.4 33,684 18.8
Operating income....................... 733 0.9 1,853 2.1 3,405 1.9
Other income (expense), net............ 3,027 3.6 87 0.1 (241) (0.1)
------- ----- ------- ----- -------- ------
Net income............................. $ 2,329 2.8% $ 1,179 1.4% $ 1,925 1.1%
Earnings per common share:
Basic................................ $0.59 $0.28 $0.33
------- ------- --------
Diluted.............................. $0.57 $0.28 $0.33
======= ======= ========
Shares used in computing Earnings per
common share:
Basic................................ 3,934 4,206 5,774
------- ------- --------
Diluted.............................. 4,114 4,207 5,774
======= ======= ========
</TABLE>

22
<PAGE> 23

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Net Sales

Net sales for 1998 increased $92.3 million, or 105.8%, to $179.4 million
from $87.2 million for 1997. Net sales increased primarily due to (i) the
acquisition of Southern Belle for a full year in 1998 compared to 20 days' sales
in 1997 and (ii) the acquisition of London's in May 1998.

Cost of Sales

Cost of sales for 1998 increased $73.1 million, or 105.4%, to $142.3
million from $69.3 million in 1997. Cost of sales as a percentage of net sales
was 79.3% in 1998 compared to 79.5% in 1997. The Company's cost of sales in 1998
have been impacted by the following factors: (i) a significant change in
customer mix resulting from the Southern Belle and London's acquisitions, (ii)
less dependence on the spot market for the Company's internal butterfat
requirements, (iii) the production of certain products by the Company which were
previously purchased from outside suppliers, (iv) 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, and (v) an overall
increase in butterfat and raw milk costs and increased price competition.

Operating Expenses

Operating expenses for 1998 increased $17.7 million, or 110.2%, to $33.7
million from $16.0 million in 1997. Operating expenses as a percentage of net
sales increased to 18.8% in 1998 from 18.4% in 1997. This percentage increase
was primarily due to increased general and administrative expenses as a result
of direct merger costs associated with the proposed merger with Suiza Foods of
approximately $420,000.

Other Income (Expense)

Other income (expense), net for 1998 changed by $328,000 to an expense of
($241,000) from income of $87,000 in 1997. This was primarily due to increased
interest expense resulting from the purchase of London's.

Net Income

For reasons set forth above, net income for 1998 increased $746,000 to $1.9
million, or $0.33 per share on a diluted basis, from $1.2 million for 1997, or
$0.28 per share on a diluted basis.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Net Sales

Net sales for 1997 increased $3.3 million or 3.9%, to 87.2 million from
83.9 million for 1996. The increase in net sales was primarily due to (i)
favorable market conditions, (ii) the Company's pricing strategies with its
current customers, (iii) a sales expansion into the northeast and (iv) the
acquisition of Southern Belle for 20 days of 1997 and the acquisition of Johnson
Dairy in May 1997. The increase in net sales for 1997 compared to 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 1997 increased $624,000, or 0.9%, to $69.3 million from
$68.7 million in 1996. Cost of sales as a percentage of net sales, however,
decreased to 79.5% in 1997 from 81.8% in 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

23
<PAGE> 24

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 sales.

Operating Expenses

Operating expenses for 1997 increased $1.5 million, or 10.4%, to $16.0
million from $14.5 million in 1996. Operating expenses as a percentage of net
sales were 18.4% in 1997 compared to 17.3% in 1996. Operating expenses as a
percentage of net sales increased primarily due to a shift in customer mix from
customers who utilized the Company's dock pickup program in 1996 to customers
requiring additional delivery services.

Other Income

Other income for 1997 was $87,000 compared to $3.0 million in 1996. The
decrease 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 in 1996. The decrease was also
impacted by the additional income earned on life insurance proceeds in 1996 upon
the death of the former Chairman.

Net Income

For the reasons set forth above, net income for 1997 decreased $1.2 million
to $1.2 million, or $0.28 per share on a diluted basis, from $2.3 million, or
$0.57 per share on a diluted basis in 1996. The 1996 net income per share was
favorably impacted by a pre-tax gain of $3.0 million on the sale of an
investment in the non-marketable common stock of a privately held entity.

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 $16.9 million at December 31,
1998 from $16.7 million at December 31, 1997.

Cash Flows Provided by (Used in) Operating Activities.

Cash flows provided by (used in) operating activities for fiscal years
1996, 1997, and 1998 were $126,000; ($1,073,000) and ($129,000), respectively.

Cash Flows Provided by (Used in) Investing Activities.

Cash flows provided by (used in) investing activities for fiscal years
1996, 1997, and 1998 were $3.0 million; ($4.1) million and ($23.3) million,
respectively.

Cash flows used in investing activities have historically consisted of
capital expenditures. The Company's capital expenditures for 1998 were $5.1
million, compared to $2.0 million for 1997. The Company's capital expenditures
in 1998 consisted primarily of the addition of a water pre-treatment facility at
the Southern Belle Division, computer and software upgrades and additions for
the Company's corporate offices and Dairy Division and design, engineering,
construction and equipment costs at the Dairy Division's plant in Marietta,
Ohio.

In May 1998, the Company expended $19.0 million for the cash consideration
and related acquisition costs for the purchase of London's, net of cash
acquired.

In December 1997, the Company expended $2.2 million for the cash
consideration and related acquisition costs for the purchase of Southern Belle,
net of cash acquired.

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.

24
<PAGE> 25

In November 1996, the Company received approximately $3.1 million from the
sale of an investment in the nonmarketable common stock of a privately held
entity. The Company recorded a gain on the sale of such stock in the amount of
$3.0 million.

Cash Flows (Used in) Provided by Financing Activities.

Cash flows (used in) provided by financing activities for fiscal years
1996, 1997 and 1998 were ($989,000), $12.5 million, and $18.0 million
respectively. In 1997 as a result of an initial public offering, the Company
received net proceeds in the aggregate amount of $19.7 million. As a result of
the Offering, all debt was paid down, as of December 31, 1997 in the aggregate
amount of $7.5 million with the exception of a capital lease obligation with an
outstanding balance of $58,297 at December 31, 1997.

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 believes that current cash positions, 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.

YEAR 2000

The Year 2000 problem can affect all software programs and physical devices
with embedded computer chips or processors. The Company has been concerned with
this problem and committed to limiting its exposure. The Company and its
subsidiaries have put in place a plan to analyze all software and systems in
order to isolate where Year 2000 problems will occur. This project is divided
into two major sections; General Offices and Plants, and is being reviewed on a
divisional basis.

The analysis of the General Offices includes all systems and software,
including, but not limited to, major business software and hardware; personal
computers; telephone systems; and security systems. The Company's General
Offices review is near completion. The major business application hardware and
software for the Company's London's Farm Dairy Division, a commercial software
package, is Year 2000 compliant; however, the software vendor is continuing its
testing program. The Company's Dairy division hardware is compliant and a
compliant software version of its business applications is to be supplied by the
vendor in the second quarter of 1999. The Company's Foods division hardware is
compliant and will commence conversion to the Company's Dairy division's
commercial software package in the second quarter of 1999. The Company's
Southern Belle division hardware and software is currently non-compliant. This
division will commence conversion to the software utilized by the Company's
Dairy division in the second quarter of 1999.

The analysis of the Company Plants includes all systems and software,
including, but not limited to, process control equipment (PLC) and software;
personal computers; safety systems; telephone systems; and security systems. The
Company Plants have been contacting their vendors to ensure Year 2000
compliance. A substantial

25
<PAGE> 26

portion of this section of the project has been completed. The analysis phase
will be completed by the second quarter of 1999. All Company Plant systems are
expected to be compliant by the third quarter of 1999.

The Company is committed to remediate or replace any software or system
that has been identified as being non-Year 2000 compliant. The review of the
majority of software and systems is completed. As Year 2000 compliance issues
are identified, they have been eliminated. For the past several years, all
software and system purchases and/or upgrades were made with the understanding
of Year 2000 compliance. An ownership change in November 1996 was a primary
driver in the replacement of major business hardware and software. Although Year
2000 compliance was a consideration, it did not accelerate the conversion to the
new systems. The remaining costs associated with Year 2000 compliance are not
expected to significantly affect the operating cash flow, although such costs
have not been completely quantified at this time.

Contingency plans have been created in order for the Company to produce and
distribute products in the event of non-compliance. The impact of these
contingencies would not adversely affect the operation or financial condition of
the Company.

The Company is also concerned with the readiness of its suppliers and
vendors with a material relationship to the Company. They 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 intends to develop, if needed,
contingency plans to facilitate a supply of products to its customers and the
receipt of products from suppliers and vendors if problems are discovered.

Despite the Company's efforts in regards to this issue, there can be no
assurance that partial or total systems interruptions, or the costs necessary to
update hardware and software, would not have a material adverse effect upon the
Company. The foregoing assessments of the impact on the Year 2000 compliance
problem on the Company are based on management's best estimates at the present
time and could change substantially. The Company's readiness program is an
ongoing process and the estimated completion dates for various software and
systems described above are subject to change.

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 March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP requires that certain external costs and internal payroll
and payroll-related costs be capitalized during the application development and
implementation stages of a software development project and amortized over the
software's useful life. The SOP is effective in the first quarter of 1999 and
the Company does not anticipate that this SOP will have an adverse effect on the
Company's results of operations.

Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities",
was issued in April 1998. The SOP requires that entities expense start-up costs
and organization costs as they are incurred. The SOP is effective in the first
quarter of 1999 and the Company does not anticipate that this SOP will have an
adverse effect on the Company's results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

26
<PAGE> 27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and other information required by this item are
contained in the financial statements and footnotes thereto listed in the index
on page F-1 on this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were none.

27
<PAGE> 28

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS:

<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING THE LAST 5 YEARS DIRECTOR SINCE
- ------------ -------------------------------------------- --------------
<S> <C> <C>
Ronald V. Arthur, II, 39............. Vice President and General Manager of the March 1997
Company's Foods Division since July 1992.(1)
George W. Broughton, 41.............. Executive Vice President, Director of Sales April 1984
and Marketing since 1994; Chief Executive
Officer and Chairman of the Board of
Directors from July 1996 to November 1996;
Executive Vice-President from 1989 to
1994.(2)
Philip E. Cline, 65.................. President, Chief Executive Officer and November 1996
member of the Board of Directors of the
Company since November 1996. 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. (manufacturer of underground
mining equipment).(3)
Robert E. Evans, 58.................. Member of the Company's Board of Directors. April 1971
President, Chief Executive Officer and
member of the Board of Directors of Peoples
Bancorp Inc. since April 1980; President,
Chief Executive Officer and member of the
Board of Directors of The Peoples Banking
and Trust Company since January 1987.(4)
Charles R. Hooten, Jr., 72........... Member of the Company's Board of Directors. January 1997
President, Hooten Equipment Company since
1976 (wholesale distributor of food store,
food service and heating and air
conditioning equipment).(5)
Marshall T. Reynolds, 62............. Chairman of the Board of the Company since November 1996
November 1996. President, Chief Executive
Officer and Chairman of the Board of
Directors of Champion Industries, Inc. since
1992 (a commercial printer and supplier of
office products); President and General
Manager of The Harrah & Reynolds
Corporation, predecessor to Champion
Industries, Inc. from 1964 (and sole
shareholder from 1972) to present.(6)
Neal W. Scaggs, 63................... President of Baisden Brothers, Inc. since January 1997
1961 (retail and wholesale hardware).(7)
Martin P. Shearer, 51................ Vice-President and General Manager, Southern April 1998
Belle Division; President of Southern Belle
Dairy Company from December 1985 to December
1997.
</TABLE>

28
<PAGE> 29

<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING THE LAST 5 YEARS DIRECTOR SINCE
- ------------ -------------------------------------------- --------------
<S> <C> <C>
Philip Todd Shell, 30................ Member of the Company's Board of Directors. January 1997
Vice President, Chief Financial Officer and
Secretary of Caspian Holdings since July
1997 (coal processing equipment); and Chief
Investment Analyst of Guyan International
since January 1991 (hydraulic pumps and
motors).(8)
Kirby J. Taylor, 53.................. President and Chief Executive Officer of January 1997
Action Business Consulting from November
1997 to present (management consulting
firm); President and Chief Executive Officer
of Nexquest, Inc. January 1996 to November
1997 (holding company); President and Chief
Operating Officer Addington Resources, Inc.,
July 1994 to January 1996 (mining and waste
management company); Vice President and
Chief Financial Officer Outboard Marine
Corp., April 1993 to July 1994; Vice
President of Finance Tenneco Automotive
August 1990 to April 1993 (manufacturer of
auto parts).(9)
Paul T. Theisen, 68.................. Of Counsel, Theisen, Brock, Frye, Erb & April 1971
Leeper Co., L.P.A. since January 1998.
President and a director of the law firm
Theisen, Brock, Frye, Erb & Leeper Co.,
L.P.A. from 1983 through 1997.(10)
Thomas W. Wright, 47................. Chairman of the Board of Directors of January 1997
Nexquest, Inc. since April 1996 (holding
company); Group President Brand/Rust
Industrial September 1991 to December 1996
(industrial cleaning company).(11)
</TABLE>

- ---------------

(1) Director of the West Virginia Dairy Products Association

(2) Director of SBR, Inc., Peoples Banking & Trust Company and Peoples
Bancorp., Inc.

(3) Director of McCorkle Machine and Engineering Company, Banc One West
Virginia Corporation, Champion Industries, Inc. and Logan Corporation.

(4) Director of the First National Bank of Southeastern Ohio, Marmac
Corporation and Ohio Banks Association, and the Chairman of the Board of
Directors of Russell Federal Savings Bank.

(5) Director of Banc One West Virginia Corporation and Banc One Charleston.

(6) Chairman of the Board of the Radisson Hotel in Huntington, West Virginia,
Chairman of McCorkle Machine and Engineering Company, Director of the
Abigail Adams National Bancorp, Inc., Chairman of the Board of First
Guaranty Bank, and Chairman of the Board of Premier Financial Bancorp.

(7) Director of Banc One West Virginia Corporation, Champion Industries, Inc.
and Logan Corporation.

(8) Director, Innovative Screen Technology, Inc. and American Centrifuge, Inc.

(9) Director, Thomas Bradford Shirt Company; former Director, and executive
officer of AxisTech Warehouse, Inc., and former Chief Executive Officer of
Mid-American Spring Air, Inc. (each of which filed for protection under the
federal bankruptcy laws in February 1998 and March 1998, respectively.)

29
<PAGE> 30

(10) Director of Peoples Bancorp, Inc., The Peoples Banking and Trust Company
and First National Bank of Southeastern Ohio.

(11) Director, Thomas Bradford Shirt Company; former Chairman of the Board of
Directors, Mid-American Spring Air, Inc. (see note 9 above).

MEETINGS AND COMMITTEES OF THE BOARD

During the calendar year ended December 31, 1998, the Board of Directors
held 13 meetings. During their term, all of the then incumbent directors, were
present for at least seventy-five percent of the meetings of the Board and the
committees of the Board on which they serve.

The Compensation Committee of the Board of Directors presently consists of
Messrs. Evans, Reynolds, Scaggs and Theisen. The Compensation Committee is
responsible for the determination of the compensation for the Company's
directors and officers and recommends policies relating to the Company's
benefits plans. The compensation committee held one meeting in 1998.

The Audit Committee of the Board of Directors has certain duties relating
to the year-end audit, the Company's internal accounting controls and the
Company's relationship with its independent auditors. Messrs. Hooten, Shell and
Taylor are the current members of the Audit Committee. There was one Audit
Committee meeting held in 1998.

The Board of Directors does not have a nominating committee or committee
performing similar functions. The Board of Directors will consider stockholder
nominations for directors timely given in writing to the secretary of the
Company prior to the meeting.

COMPENSATION OF DIRECTORS

Each of the Company's directors received, during 1998, $500 for each
meeting of the Board personally attended by him. Directors of the Company are
reimbursed for their expenses in attending meetings of the Board of Directors.

EXECUTIVE OFFICERS OF THE REGISTRANT:

<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES WITH BROUGHTON
- ---- --- -----------------------------------
<S> <C> <C>
Marshall T. Reynolds................. 62 Has served as Chairman of the Board of the Company
since November 1996.
Philip E. Cline...................... 65 Has served as the Company's President, Chief Executive
Officer and a member of the Board of Directors since
November 1996.
Todd R. Fry.......................... 33 Has served as the Company's Treasurer and Chief
Financial Officer since September 1997.
David J. Broughton................... 33 Has served as the Company's Secretary since January
1998. Mr. Broughton has also served as the Company's
Assistant Treasurer since July 1997. Previously, Mr.
Broughton has served as a cost/financial analyst for
the Company from January 1994 to July 1997; Plant
Administrator from November 1987 to January 1994.
</TABLE>

30
<PAGE> 31

<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES WITH BROUGHTON
- ---- --- -----------------------------------
<S> <C> <C>
George W. Broughton.................. 41 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.
Ronald V. Arthur, II................. 39 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.
Martin P. Shearer.................... 51 Vice President and General Manager of the Southern
Belle Division of the Company since December 1997 and a
member of the Company's Board of Directors since April
1998.
</TABLE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

During 1998, to the knowledge of the Company, each of the Company's
directors, executive officers and 10% shareholders filed all reports relating to
the Common shares required under Section 16(a) of the Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information as to compensation paid for
services rendered to the Company by the President and Chief Executive Officer
for each of the three calendar years ended December 31, 1998. No other executive
officer of the Company received a total annual salary and bonus in excess of
$100,000 with respect to such, except Martin P. Shearer for services rendered in
1998.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
--------------- UNDERLYING ALL OTHER
NAME AND FISCAL SALARY BONUS OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- ------------------ ----------- ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Philip E. Cline............................ 1998 80,004 20,000 -- 5,500(2)
President and Chief 1997 80,004 -- -- 5,000(2)
Executive Officer(1) 1996
Martin P. Shearer.......................... 1998 80,000 86,801 -- 7,128(3)
Vice-President, General
Manager -- Southern
Belle Division(4)
</TABLE>

- ---------------

(1) Mr. Cline began serving as President and Chief Executive Officer of the
Company as of November 18, 1996.

(2) This represents fees paid to Mr. Cline for serving on the Company's Board
of Directors.

(3) This represents fees paid to Mr. Shearer for serving on the Company's Board
of Directors, life insurance premiums and matching contributions by the
Company to its 401(k) Plan.

31
<PAGE> 32

(4) Mr. Shearer began serving as vice-president, general manager, Southern
Belle Division in December 1997.

EMPLOYMENT AND SEVERANCE AGREEMENTS

During 1997, the Company entered into an employment agreement (the
"Employment Agreement") with Martin P. Shearer in connection with the Company's
acquisition (the "Acquisition") of the Southern Belle Dairy Company ("Southern
Belle") on December 12, 1997. Under the Employment Agreement, which is
terminable at the will of either party after 30 days' written notice, Mr.
Shearer is entitled to an annual base salary of approximately $80,000, an annual
bonus of 4% of the net pre-tax profits of the Southern Belle division of the
Company and certain customary benefits. Under the Employment Agreement, Mr.
Shearer is subject to certain customary non-compete conditions for a period of
two years after a termination of his employment with the Company.

REPORT ON COMPENSATION OF EXECUTIVE OFFICERS

Messrs. Evans, Reynolds, Scaggs and Theisen currently serve as the members
of 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.

The Company makes an effort to offer competitive compensation packages that
allow the Company to attract and retain highly qualified individuals. The
Compensation Committee believes the long-term strategic goals of the Company can
be accomplished only if the Company employs management with experience and
skills relevant to the changing nature of the Company's products, sales and
marketing efforts. A not insubstantial portion of each executive officer's total
compensation is incentive-based in order to motivate the Company's executive
officers in the performance of their duties and to encourage a continued focus
on Company profitability. For those executive officers responsible for
particular production divisions of the Company, the financial and non-financial
results of their divisions are also considered. The Compensation Committee
believes that by emphasizing performance based compensation, it will encourage
the Company's management to act in concert with the interests of the Company's
shareholders. The Company currently does not maintain any long-term incentive
plans and does not grant stock appreciation rights, stock options or restricted
stock awards, but is presently considering the implementation of an incentive
stock plan.

Compensation packages offered to the Company's senior management are
thought to be competitive within the dairy food industry. The Compensation
Committee believes the compensation packages for its senior management are
competitive with compensation packages for executives of other public domestic
dairy food companies based on the size and current structure of the organization
and are based on the discretion of the committee. The Compensation Committee
meets with the President to evaluate the performance of the other executive
officers and meets in the absence of the President to evaluate his performance.
The Compensation Committee reports its executive evaluations to the other
outside members of the Board.

Mr. Cline's $80,004 salary for fiscal 1998 was established by the
Compensation Committee to be an acceptable base salary and is not tied to any
objective standards of the Company's stock performance or earnings in fiscal
1998. Mr. Cline may also be eligible for a bonus from time to time based on
various objective and subjective standards as may be established by the
Compensation Committee. In 1998 Mr. Cline received a bonus of $20,000.

The overall compensation of each of the Company's executive officers (other
than Mr. Cline) consists of two principal elements:

Base Salary

Executive officers' base salaries are reviewed annually by the Compensation
Committee. In the case of all executive officers, their base salary is their
principal element of compensation. In an effort to ensure that the Company can
obtain the talent it needs to effectuate its long-term strategies, the base
salary of all executive officers has been set at a level that is thought to be
competitive within the group of public businesses identified as similar to the
Company and adjusted accordingly based on the current size and structure of the
Company. Factors

32
<PAGE> 33

considered in establishing base salaries include the requisite skill and
experience required in a particular position, the range of duties and
responsibilities attributable to that position, the individual's prior
experience and compensation, the compensation similarly situated individuals in
the dairy food industry and the overall past and expected future contributions
of the individual. Generally, in establishing such salaries, the greatest weight
is given to ensuring that a competitive salary level is established. Overall,
the process is subjective, with no precise, mathematical weight given to the
enumerated factors.

Annual Bonus

The Company operates an annual bonus plan. As of September 1, 1997, the
general managers of the Southern Belle Division, the Dairy Division and the
Foods Division are entitled to an annual bonus of 4% of the net pre-tax profits
of their respective divisions. The bonus element of each executive officer's
compensation is set at a level that the Compensation Committee believes is
necessary to compensate executive officers for the achievement of short-term
goals forming part of the Company's overall strategic objectives. Short-term
sales, profit and performance goals for each division and for the Company as a
whole are developed annually and in advance by the Company's management and then
reviewed by the Company's Board of Directors. Performance is monitored against
established goals throughout the year.

Performance Graph

The following graph compares the cumulative total return of the Company's
Common Stock during the period commencing December 9, 1997, to December 31,
1998, with the Standard & Poor's 500 Stock Index (the "S & P 500 Index"),
Russell 2000 Index and a peer group index (the "Peer Group Index") of United
States companies within Standard Industrial Codes 2020 to 2029 (dairy products).
The graph depicts the results of investing $100 in the Common Shares, the S & P
500 Index, the Russell 2000 Index and the Peer Group Index at closing prices on
December 31, 1998.

33
<PAGE> 34

COMPARISON OF 13 MONTH CUMULATIVE TOTAL RETURN*
AMONG BROUGHTON FOODS COMPANY, THE S & P 500 INDEX,
THE RUSSELL 2000 AND A PEER GROUP

[GRAPH]

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
SHAREHOLDER VALUE AT FISCAL YEAR END
- ------------------------------------------------------------------------
<S> <C> <C> <C>
12/9/97 12/31/97 12/31/97
- ------------------------------------------------------------------------
Broughton Foods Company 100 112 120
- ------------------------------------------------------------------------
Diary Products Stocks 100 108 85
- ------------------------------------------------------------------------
S & P 500 Index 100 102 131
- ------------------------------------------------------------------------
Russell 2000 Index 100 102 101
- ------------------------------------------------------------------------
</TABLE>

*$100 invested on 12/9/97 in stock or on 11/30/97 in index - including
reinvestment of dividends. Fiscal year ending December 31.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Set forth below is a table showing certain information with respect to
those persons known to the Company to be the beneficial owners of more than 5%
of the outstanding shares of Common Stock, the Named Executives, each director
of the Company and all executive officers and directors of the Company as a
group as of March 17, 1999.

<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF
BENEFICIAL OWNER DIRECTLY OR INDIRECTLY(1) CLASS %
- ---------------- ------------------------- ----------
<S> <C> <C>
Marshall T. Reynolds(2)..................................... 1,294,910 22.4%
Philip E. Cline(3).......................................... 184,300 3.2
George W. Broughton(4)...................................... 128,250 2.2
Ronald V. Arthur............................................ 3,000 *
Robert E. Evans............................................. 3,000 *
Charles R. Hooten, Jr.(5)................................... 240,000 4.2
Neal W. Scaggs(6)........................................... 234,000 4.1
Martin P. Shearer........................................... 62,375 1.1
Philip Todd Shell........................................... 9,600 *
Kirby J. Taylor(7).......................................... 32,450 *
Paul T. Theisen............................................. 3,000 *
Thomas W. Wright(8)......................................... 300,000 5.2%
All directors and executive officers as a group (13)........ 2,505,885 43.4%
</TABLE>

- ---------------

* Indicates beneficial ownership of less than 1% of the issued and outstanding
shares of Common Stock.

34
<PAGE> 35

(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 March 17, 1999, the Company had
5,774,335 shares of Common Stock issued and outstanding.

(2) Includes 435,000 shares held by Mr. Reynolds' wife and children, 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 78,440
shares held by Harrah & Reynolds Corporation (an entity which holds shares
over which Mr. Marshall Reynolds effectively exercises sole voting and
investment power). Mr. Reynolds' address is 2450 First Ave., Huntington,
West Virginia 25701.

(3) Does not include 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.

(8) Includes 300,000 shares held in trust over which shares Mr. Wright
effectively exercises sole voting and investment power. Mr. Wright's
address is 500 Scott Street, Hangar A, Worthington, Kentucky 41183.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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. Lease
expense for 1998 was $112,200.

The Company purchased office supplies and printing services, from certain
divisions of Champion Industries, a company controlled by Mr. Marshall T.
Reynolds, Chairman of the Company's Board of Directors. Such purchases totaled
$130,000 in 1998.

The Company purchased equipment for plant and building repairs from Hooten
Equipment. Mr. Charles R. Hooten, Jr., a member of the Company's Board of
Directors, serves as President of Hooten Equipment Company. Such purchases
totaled $108,100 in 1998.

35
<PAGE> 36

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

(1) Financial Statements

The consolidated balance sheets at December 31, 1998 and 1997, the related
consolidated statements of operations, of shareholders' equity and of cash flows
for each of the three fiscal years in the period ended December 31, 1998, and
the notes thereto, together with the report from PricewaterhouseCoopers LLP,
dated March 19, 1999, are filed in Section F-1 of this report.

(2) Schedules other than those listed on page F-1, are omitted because of the
absence of conditions under which they are required or because the information
required is included in the consolidated financial statements and notes thereto.

(3) EXHIBITS

<TABLE>
<CAPTION>
PAGE
DESCRIPTION REFERENCE NO.
- ----------- --------- ----
<S> <C> <C>
(2) Plan of acquisition, reorganization
arrangement, liquidation or
succession
2.1 Plan of Merger Agreement and Plan of Merger dated as of September
10, 1998 by and among Suiza Foods Corporation,
Suiza Foods Acquisition Corp. and Broughton Foods
Company, filed as Appendix A to Proxy Statement of
Broughton Foods Company dated October 30, 1998,
filed October 30, 1998, is incorporated herein by
reference.
2.2 Amendment to Plan of Merger Amendment No. 1 to Agreement and Plan of Merger
dated September 10, 1998 by and among Suiza Foods
Corporation, Suiza Foods Acquisition Corp. and
Broughton Foods Company, dated as of January 18,
1999, filed as Exhibit 2.2 to Form 8-K dated
January 18, 1999, filed January 19, 1999, is
incorporated herein by reference.
2.3 Stock Purchase Agreement Stock Purchase Agreement dated as of January 18,
1999 by and among Suiza Foods Corporation,
Broughton Foods Company and certain stockholders of
Broughton Foods Company, filed as Exhibit 2.3 to
Form 8-K dated January 18, 1999, is incorporated
herein by reference.
(3) 3.1 Articles of Incorporation Incorporated herein by reference from Exhibit 3.1
to Amendment No. 1 to the Registration Statement on
Form S-1, (File No. 333-37387), dated November 26,
1997.
3.2 Code of Regulations Amended and restated Code of Regulations effective
as of April 29, 1998, filed as Exhibit 4, to Form
10-Q for the period March 31, 1998, filed May 14,
1998, is incorporated herein by reference.
(10) Material Contracts
10.1 Employment Agreements Form of Employment agreement between the Company
and Martin P. Shearer. Incorporated herein by
reference to Exhibit 10 to Amendment No. 1 to the
Registration Statement on Form S-1, (File No.
333-37387), dated November 26, 1997.
</TABLE>

36
<PAGE> 37

<TABLE>
<CAPTION>
PAGE
DESCRIPTION REFERENCE NO.
- ----------- --------- ----
<S> <C> <C>
10.2 Credit Agreement Credit Agreement dated as of March 30, 1998 between
the Company and National City Bank filed as Exhibit
10 to Form 10-Q for the period March 31, 1998,
filed May 14, 1998, is incorporated herein by
reference.
(21) Subsidiaries of the registrant Filed herewith
(23) Consent of Pricewaterhouse Coopers Filed herewith
LLP
(24) Powers of Attorney Filed herewith
(27) Financial Data Schedule Filed herewith for current period
</TABLE>

(b) The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.

37
<PAGE> 38

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned.

BROUGHTON FOODS COMPANY

/s/ PHILIP E. CLINE
By:
--------------------------------------

Philip E. Cline
President and Chief Executive
Officer

March 30, 1999

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
* Chairman of the Board of Directors March 30, 1999
- ---------------------------------------------
Marshall T. Reynolds

/s/ PHILIP E. CLINE President, Chief Executive March 30, 1999
- --------------------------------------------- Officer and Director
Philip E. Cline (Principal Executive Officer)

* Treasurer and Chief Financial March 30, 1999
- --------------------------------------------- Officer (Principal Financial and
Todd R. Fry Accounting Officer)

* Director March 30, 1999
- ---------------------------------------------
Ronald V. Arthur

* Director March 30, 1999
- ---------------------------------------------
George W. Broughton

* Director March 30, 1999
- ---------------------------------------------
Robert E. Evans

* Director March 30, 1999
- ---------------------------------------------
Charles R. Hooten, Jr.

* Director March 30, 1999
- ---------------------------------------------
Neal W. Scaggs

* Director March 30, 1999
- ---------------------------------------------
Martin P. Shearer

* Director March 30, 1999
- ---------------------------------------------
Philip Todd Shell
</TABLE>

38
<PAGE> 39

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
* Director March 30, 1999
- ---------------------------------------------
Kirby J. Taylor

* Director March 30, 1999
- ---------------------------------------------
Paul T. Theisen

* Director March 30, 1999
- ---------------------------------------------
Thomas W. Wright

*By: /s/ PHILIP E. CLINE
- ---------------------------------------------
Philip E. Cline
Attorney in Fact
</TABLE>

39
<PAGE> 40

INDEX TO FINANCIAL STATEMENTS -- COMPANY

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997, and 1998......................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997, and 1998............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-9
</TABLE>

F-1
<PAGE> 41

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Broughton Foods Company and Subsidiaries

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Broughton Foods Company and Subsidiaries (the "Company") at December 31, 1997
and December 31, 1998 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

Columbus, Ohio
March 19, 1999

F-2
<PAGE> 42

BROUGHTON FOODS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,633,184 $ 4,278,208
Accounts receivable, less allowance for doubtful accounts
of $465,000 and $652,000 at December 31, 1997 and 1998,
respectively........................................... 12,767,043 18,437,190
Inventories............................................... 3,551,281 5,982,717
Prepaid expenses.......................................... 897,017 1,249,943
Refundable income taxes................................... 230,775 577,037
Deferred income taxes..................................... 100,437 240,617
----------- -----------
Total current assets................................... 27,179,737 30,765,712
----------- -----------
Property, plant and equipment, at cost:
Buildings and land improvements........................... 5,958,861 11,051,586
Machinery and equipment................................... 18,935,308 24,718,705
Leasehold improvements.................................... 464,156 198,760
Assets under construction................................. 798,093 1,986,190
----------- -----------
26,156,418 37,955,241
Less accumulated depreciation and amortization............ 11,586,612 11,477,024
----------- -----------
14,569,806 26,478,217
Land...................................................... 1,662,819 2,818,418
----------- -----------
16,232,625 29,296,635
=========== ===========
Cash surrender value of officer's life insurance, net of
policy loans of $2,920 at December 31, 1997............... 197,775
Intangible assets, net of accumulated amortization of
$39,228 and $332,770 at December 31, 1997 and 1998,
respectively.............................................. 2,034,577 13,739,121
Other assets................................................ 261,812 770,026
Prepaid pension costs....................................... 341,968 604,361
----------- -----------
2,836,132 15,113,508
----------- -----------
Total assets........................................... $46,248,494 $75,175,855
=========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE> 43
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,124,356 $10,627,996
Accrued expenses and other................................ 2,321,899 2,681,903
Current installments on term debt......................... 21,767 554,420
Income taxes payable...................................... 18,536
----------- -----------
Total current liabilities.............................. 10,486,558 13,864,319
----------- -----------
Term debt, net of current installments...................... 36,530 19,363,574
Deferred income taxes....................................... 2,423,385 5,933,973
Other....................................................... 314,016 1,967,476
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 10,000,000 shares authorized;
6,314,575 shares issued at December 31, 1997 and
1998................................................... 6,314,575 6,314,575
Additional paid-in capital................................ 20,482,702 20,482,702
Retained earnings......................................... 6,698,452 7,756,960
----------- -----------
33,495,729 34,554,237
Less 540,240 shares at December 31, 1997 and 1998, of
common stock in treasury, at cost...................... 507,724 507,724
----------- -----------
Total shareholders' equity.................................. 32,988,005 34,046,513
----------- -----------
Total liabilities and shareholders' equity.................. $46,248,494 $75,175,855
=========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE> 44

BROUGHTON FOODS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Net sales........................................ $83,918,822 $87,170,309 $179,432,029
Cost of sales.................................... 68,668,621 69,292,473 142,342,862
Gross profit................................... 15,250,201 17,877,836 37,089,167
Operating costs and expenses:
Selling and distribution....................... 12,064,418 13,945,123 28,232,809
General and administrative expenses............ 2,453,106 2,080,157 5,451,180
----------- ----------- ------------
14,517,524 16,025,280 33,683,989
----------- ----------- ------------
Income from operations........................... 732,677 1,852,556 3,405,178
Other income (expense):
Gain on sale of investment in stock............ 2,976,453
Other income, net.............................. 213,216 72,701 143,362
Interest income................................ 54,469 156,856 448,260
Interest expense............................... (216,749) (142,485) (832,533)
----------- ----------- ------------
3,027,389 87,072 (240,911)
----------- ----------- ------------
Income before income taxes....................... 3,760,066 1,939,628 3,164,267
Income tax expense............................... 1,430,807 761,037 1,239,608
----------- ----------- ------------
Net income....................................... 2,329,259 1,178,591 1,924,659
Preferred dividends.............................. 1,986
----------- ----------- ------------
Net income available to common shareholders...... $ 2,327,273 $ 1,178,591 $ 1,924,659
=========== =========== ============
Earnings per common share:
Basic.......................................... $ 0.59 $ 0.28 $ 0.33
=========== =========== ============
Diluted........................................ $ 0.57 $ 0.28 $ 0.33
=========== =========== ============
Shares used in computing earnings per common
share:
Basic.......................................... 3,934,320 4,205,536 5,774,335
=========== =========== ============
Diluted........................................ 4,113,734 4,207,193 5,774,335
=========== =========== ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE> 45

BROUGHTON FOODS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES PREFERRED SHARES COMMON ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED TREASURY
STOCK AMOUNT STOCK AMOUNT CAPITAL EARNINGS STOCK TOTAL
--------- --------- ---------- ---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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............. 1,178,591 1,178,591
Common stock cash
dividends, $.0633 per
share................ (262,505) (262,505)
Common stock cash
dividends, $.05 per
share................ (288,717) (288,717)
Proceeds from sale of
3,000 shares of
treasury stock under
an incentive stock
option plan,
including tax
benefits............. 2,194 2,400 4,594
Cost of 310 shares of
preferred stock
purchased and
retired.............. (310) (31,000) (6,070) (37,070)
Proceeds from initial
public offering of
1,495,000 shares of
common stock, net of
initial public
offering cost........ 1,495,000 1,495,000 18,119,534 19,614,534
Issuance of 156,675
shares of common
stock for an
acquisition.......... 156,675 156,675 2,193,450 2,350,125
---- ------- ---------- ---------- ----------- ----------- ---------- ------------
Balances, December 31,
1997................... 0 0 6,314,575 6,314,575 20,482,702 6,698,452 (507,724) 32,988,005
Net income............. 1,924,659 1,924,659
Common Stock cash
dividends, $.15 per
share................ (866,151) (866,151)
---- ------- ---------- ---------- ----------- ----------- ---------- ------------
Balances, December 31,
1998................... 0 $ 0 6,314,575 $6,314,575 $20,482,702 $ 7,756,960 ($ 507,724) $ 34,046,513
==== ======= ========== ========== =========== =========== ========== ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE> 46

BROUGHTON FOODS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 2,329,259 $ 1,178,591 $ 1,924,659
Adjustment to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization............... 890,482 1,030,981 2,596,764
Bad debt expense............................ 402,105 32,000 62,750
Gain on sale of investment in stock......... (2,976,453)
(Gain)/Loss on disposal of property, plant
and equipment............................. (170,591) (35,452) 15,824
Gain on life insurance proceeds............. (76,868)
Deferred gain on sale of fixed assets....... (36,387)
Deferred income taxes....................... (67,315) 197,792 373,290
Change in assets and liabilities:
Accounts receivable....................... (437,892) (1,452,784) (1,363,739)
Inventories............................... 217,308 (252,681) 173,037
Prepaid expenses.......................... 43,274 (112,720) (75,303)
Refundable income taxes................... 106,149 (62,124) (251,262)
Other assets.............................. 19,365 (363,774) (398,958)
Prepaid and accrued pension costs......... (27,401) (77,367) (262,393)
Accounts payable.......................... (368,265) (920,252) (2,266,599)
Accrued expenses and other................ 6,840 66,208 (491,958)
Income taxes payable...................... 236,608 (218,072) (29,177)
Other long-term liabilities............... (381) (83,535) (99,662)
----------- ----------- ------------
Total adjustments...................... (2,203,035) (2,251,780) (2,053,773)
----------- ----------- ------------
Net cash provided by (used in) operating
activities.................................. 126,224 (1,073,189) (129,114)
Cash flows from investing activities:
Proceeds from sale of investment in stock...... 3,056,196
Proceeds from disposal of property, plant and
equipment................................... 299,835 109,282 625,685
Purchases of property, plant and equipment..... (500,149) (1,983,663) (5,061,400)
Proceeds from termination of officer's life
insurance................................... 598,239 197,775
Increase in cash surrender value of officer's
life insurance policy....................... (445,141)
Business acquisitions, net of cash acquired.... (2,197,790) (19,032,910)
----------- ----------- ------------
Net cash provided by (used in) investing
activities.................................. 3,008,980 (4,072,171) (23,270,850)
----------- ----------- ------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-7
<PAGE> 47
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Line of credit, net............................ $ (911,650) $ 19,336,230
Payments on term debt.......................... (294,980) $(7,487,295) (136,374)
Proceeds from term debt........................ 565,000
Purchase of treasury stock..................... (20,000)
Issuance of treasury stock, including tax
benefits.................................... 347,405 4,594
Purchases of preferred stock................... (2,100) (37,070)
Dividends paid................................. (107,254) (262,505) (1,154,868)
Proceeds from initial public offering, net of
costs....................................... 19,688,005
----------- ----------- ------------
Net cash (used in) provided by financing
activities.................................. (988,579) 12,470,729 18,044,988
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................. 2,146,625 7,325,369 (5,354,976)
Cash and cash equivalents, beginning of year..... 161,190 2,307,815 9,633,184
Cash and cash equivalents, end of year......... $ 2,307,815 $ 9,633,184 $ 4,278,208
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................... $ 206,319 $ 152,825 $ 764,756
=========== =========== ============
Income taxes................................ $ 1,349,231 $ 1,025,085 $ 1,227,422
=========== =========== ============
Supplemental disclosure of noncash financing
activities:
The Company issued 156,675 shares of common
stock:...................................... $ 2,350,125
-----------
The Company declared a $.05 per share dividend
on December 19, 1997 for shareholders of
record on December 29, 1997, payable on
January 9, 1998:............................ $ 288,717
-----------
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.

F-8
<PAGE> 48

BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF ACCOUNTING POLICIES:

A. BUSINESS AND PRINCIPLES OF CONSOLIDATION: Broughton Foods Company and
its wholly owned subsidiaries (collectively referred to as 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 in Ohio, West Virginia, Kentucky,
Tennessee, Michigan and parts of the eastern United States. The Company also
operates one limited service restaurant under the name "Broughton's." The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Somerset Computer Services, which
became a subsidiary of the Company on December 12, 1997, concurrent with the
Southern Belle merger and LFD Holding Corp and its wholly-owned subsidiary,
London's Farm Dairy, Inc. All significant inter-company accounts and
transactions have been eliminated.

B. 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 its
industry. 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 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, first-out method.
For income tax purposes, the FIFO method has been adopted as of January 1, 1998.

The major components of inventory at December 31, 1997 and 1998 were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Raw products and finished goods............................. $1,966,156 $3,458,923
Ingredients................................................. 450,480 679,726
Warehouse, packaging supplies and other..................... 1,134,645 1,844,068
---------- ----------
$3,551,281 $5,982,717
========== ==========
</TABLE>

C. 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 40 years
Machinery and equipment.................................. 3 to 20 years
Leasehold improvements................................... 15 to 20 years
Land improvements........................................ 5 to 30 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 $890,000 in
1996, $1,013,000 in 1997 and $2,266,000 in 1998 and has been recorded in the
statements of operations.

D. INVESTMENTS: The Company previously held various nonmarketable
securities which were carried at cost. These investments were 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. At December 31, 1997 and 1998, the Company had no investments in
nonmarketable securities.

E. NET INCOME PER SHARE OF COMMON STOCK: Basic earnings per share were
computed by dividing net income available to common shareholders (the numerator)
by the weighted average number of

F-9
<PAGE> 49
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common shares outstanding (the denominator). Diluted earnings per share were
computed by dividing the net income available to common shareholders (the
numerator) by the sum of the weighted average number of shares outstanding and
the dilutive effect of outstanding options as determined by the application of
the treasury stock method (the denominator).

F. CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents. The
Company maintains its cash balances primarily with one financial institution.

G. REVENUE RECOGNITION: The Company recognizes revenue when products are
received by the customer.

The allowance for doubtful accounts approximated $140,000, $243,000,
$465,000, and $652,000 at December 31, 1995, 1996, 1997 and 1998, respectively.
As a result of the Southern Belle acquisition, approximately $251,000 was
recorded as an addition to the allowance for doubtful accounts in December 1997.
As a result of the London's acquisition, approximately $261,000 was recorded as
an addition to the allowance for doubtful accounts in May 1998.

H. INCOME TAXES: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of the assets and liabilities using enacted tax rates.

I. USE OF ESTIMATES: The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.

J. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of long-term debt is
based on the interest rate available to the Company on similar debt agreements.
As the interest rates on the Company's long-term debt obligations are primarily
variable rates for approximately $19.3 million of debt obligations, fair value
approximates the carrying value.

K. RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to
conform to the current-year financial statement presentation.

L. SEGMENT INFORMATION: In 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS 131
supersedes SFAS 14, Financial Reporting for Segments of a Business Enterprise,
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS 131 also requires disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS 131 did not affect results of operations or financial position but did
affect the disclosure of segment information (see "Segment Information" note).

M. PENSION PLAN: In 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures About Pensions and Other Post-Retirement Benefits", which requires
revisions of employers' disclosures about pension and other post-retirement
plans. The adoption of SFAS No. 132 did not change the measurement or
recognition of the Plan.

N. REPORTING COMPREHENSIVE INCOME: In 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 established standards for
reporting and display of comprehensive

F-10
<PAGE> 50
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The adoption of this standard did not
affect the Company's financial statements.

O. NEW ACCOUNTING PRONOUNCEMENTS: In March 1998, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP requires that certain
external costs and internal payroll and payroll-related costs be capitalized
during the application development and implementation stages of a software
development project and amortized over the software's useful life. The SOP is
effective in the first quarter of 1999 and the Company does not anticipate that
this SOP will have an adverse effect on the Company's results of operations.

Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities, was
issued in April 1998. The SOP requires that entities expense start-up costs and
organization costs as they are incurred. The SOP is effective in the first
quarter of 1999 and the Company does not anticipate that this SOP will have an
adverse effect on the Company's results of operations.

2. NOTE PAYABLE -- BANK:

The Company has an uncollateralized line of credit of $4.0 million with a
Bank. Interest on this line of credit is .25 percentage points under the highest
prime rate as published by the Wall Street Journal.

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. 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.

The Company had $19,336,230 outstanding under its revolving credit
facilities at December 31, 1998.

F-11
<PAGE> 51
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. TERM DEBT:

Term debt as of December 31, 1997 and 1998 consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- ---------
<S> <C> <C>
Capital lease obligation.................................... $ 58,297 $ 36,111
Note payable, due in monthly installments of $15,200 through
March 1, 1999 plus interest at 9%......................... 60,803
Note Payable, due in monthly installments of $575 through
March 1, 2003 plus interest at 8%......................... 27,180
Note Payable, due in annual installments of $264,321 through
April 1, 1999 including interest at 9.14%................. 242,185
Zero coupon note maturing on April 1, 1999 with a face value
of $235,187 and a yield of 9.14%.......................... 215,485
-------- ---------
58,297 581,764
Less current installments................................... (21,767) (554,420)
-------- ---------
$ 36,530 $ 27,344
======== =========
</TABLE>

4. LEASE COMMITMENTS:

The Company leases certain property, plant and equipment (primarily
delivery vehicles) under noncancellable operating lease agreements expiring
through 2007. Certain of the leases include renewal options at terms similar to
the initial lease terms. Minimum rentals in connection with these leases are as
follows:

<TABLE>
<CAPTION>
TOTAL EQUIPMENT REAL ESTATE
----------- ----------- -----------
<S> <C> <C> <C>
1999........................... $ 4,992,951 $ 4,599,115 $ 393,836
2000........................... 4,727,242 4,453,032 274,210
2001........................... 4,307,915 4,104,965 202,950
2002........................... 3,831,563 3,677,282 154,281
2003........................... 3,232,726 3,104,326 128,400
Thereafter..................... 2,490,797 2,096,547 394,250
----------- ----------- ----------
$23,583,194 $22,035,267 $1,547,927
=========== =========== ==========
</TABLE>

Total rental expense for cancelable and noncancelable lease agreements
approximated $2,238,600 in 1996, $2,800,200 in 1997 and $6,499,000 in 1998, of
which $393,000 in 1996, $546,000 in 1997, and $1,630,000 in 1998 were contingent
rentals. Contingent rentals are based primarily on mileage.

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 for two of the Company's divisions. Benefits under the plan
are based upon a social security offset formula. Total pension expense (benefit)
was $132,600 in 1996, $64,492 in 1997 and ($60,138) in 1998. 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 forth the plan's funded status and amount included in the
Company's financial statements at December 31, 1997 and 1998.

F-12
<PAGE> 52
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations, including
vested benefits of $3,920,917 and $4,315,132,
respectively.............................................. $ (4,185,584) $ (4,530,095)
Benefit obligation due to assumptions about future
compensation levels....................................... (361,243) (413,722)
------------ ------------
Projected benefit obligation................................ (4,546,827) (4,943,817)
Plan assets at fair value................................... 5,540,474 5,541,701
------------ ------------
Plan assets in excess of projected benefit obligation....... 993,647 597,884
Unrecognized transition asset at January 1, 1997 and 1998,
being recognized over 16 years............................ (46,880) (41,251)
Unrecognized prior service cost............................. 300,866 277,723
Unrecognized net gain from past experience.................. (905,665) (229,995)
------------ ------------
(651,679) 6,477
------------ ------------
Net pension asset...................................... $ 341,968 $ 604,361
============ ============
</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 1996, 1997 and 1998
included the following:

<TABLE>
<CAPTION>
1996 1997 1998
-------- ----------- ---------
<S> <C> <C> <C>
Service cost, benefits earned during the year......... $129,000 $ 134,542 $ 119,158
Interest cost on projected benefit obligations........ 322,200 317,337 328,273
Actual return on plan assets.......................... (485,200) (1,139,519) (111,667)
Net amortization and deferral of unrecognized
transition asset at January 1, 1996, 1997 and 1998,
and the adjustment for unexpected asset gain (loss)
for expected return on plan assets.................. 166,600 752,132 (395,902)
-------- ----------- ---------
Net pension expense.............................. $132,600 $ 64,492 ($ 60,138)
======== =========== =========
</TABLE>

RECONCILIATION OF PROJECTED BENEFIT OBLIGATION

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
1. Projected Benefit Obligation, previous December 31....... $4,367,361 $4,546,827
2. Actuarial (Gain)/Loss.................................... 28,035 (9,933)
3. Service Cost............................................. 134,542 119,158
4. Interest Cost............................................ 317,337 328,273
5. Benefit Payments......................................... (300,448) (312,695)
6. (Gain)/Loss due to change in Discount Rate............... 0 272,187
---------- ----------
7. December 31 Projected Benefit Obligation................. $4,546,827 $4,943,817
========== ==========
</TABLE>

F-13
<PAGE> 53
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECONCILIATION OF MARKET VALUE OF ASSETS

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
1. Market Value of Assets, previous December 31............. $4,559,544 $5,540,474
2. Expected Return on Assets................................ 404,901 500,980
3. Contributions............................................ 141,859 202,255
4. Benefit Payments......................................... (300,448) (312,695)
5. Asset Gain (Loss)........................................ 734,618 (389,313)
---------- ----------
6. Market Value of Assets as of December 31................. $5,540,474 $5,541,701
========== ==========
</TABLE>

The following assumptions were used in the calculation of the actuarial
present value of benefit obligations at December 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Settlement rate............................................. 7.50% 7.50% 7.50%
Rate of compensation increase............................... 4.50% 4.50% 4.50%
Long-term rate of return on plan assets..................... 8.00% 9.00% 9.00%
</TABLE>

In addition, the Company participates in three multi-employer plans that
provide defined benefits to substantially all the Company's unionized employees.
Amounts charged to pension expense and contributed to the plans were $387,453 in
1996, $419,365 in 1997 and $493,202 in 1998.

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) for two
divisions. Under the plan, the Company is required to make contributions based
on a percentage of the employee's payroll contribution, limited to a maximum of
1.5% of the employee's total compensation. The Company contributed $43,600 in
1996, $41,900 in 1997 and $46,175 in 1998.

The Company has a defined contribution profit-sharing plan covering
substantially all employees not covered in the plan discussed above, except for
those covered by a collective bargaining agreement which requires the Company to
contribute to a multiemployer pension retirement fund. This plan was carried
forward from the Southern Belle acquisition. 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 December 31, 1997 and 1998, $2,300 and
$26,400 has been recorded, respectively, as pension expense under this defined
contribution profit-sharing plan.

The Company sponsors a defined contribution plan for employees not covered
in the plans discussed above who meet certain eligibility requirements. This
plan was carried forward from the London's acquisition. 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 1998, the Company matched 100%
of employee contributions, up to a maximum of 6% of the participant's annual
compensation. The Company contributed $185,017 to the plan during the year ended
December 31, 1998.

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 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

F-14
<PAGE> 54
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

The following details the net pension expense under SFAS No. 87 and SFAS
No. 88 recorded in 1996. There was no pension expense in 1997 and 1998 as the
plan had been terminated.

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, 1996:

<TABLE>
<CAPTION>
1996
--------
<S> <C>
Service cost, benefits earned
During the year........................................... $ 2,700
Interest cost............................................... 32,000
Net amortization and deferral of Unrecognized transition
obligation................................................ 35,100
--------
Net periodic pension cost................................... 69,800
Termination cost............................................ 232,700
--------
Net pension expense......................................... $302,500
========
</TABLE>

8. STOCK OPTIONS:

Certain shares of common stock were reserved for sale to certain officers
and employees under an incentive stock option plan. There were no outstanding
options at December 31, 1997 and 1998.

<TABLE>
<CAPTION>
1996 1997
-------------------------------- --------------------------------
NUMBER OF SHARES OPTION PRICE NUMBER OF SHARES OPTION PRICE
---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Outstanding at Beginning of
year.......................... 247,500 $.80 3,000 $.80
Exercises..................... (229,500) $.80 (3,000) $.80
Forfeited..................... (15,000) $.80
-------- --------
Outstanding at end of year...... 3,000 $.80 0
-------- --------
Exercisable at end of year...... 3,000 $.80 0
-------- --------
</TABLE>

9. INCOME TAXES:

A reconciliation of the federal corporate income tax rate and the effective
tax rate on income taxes is summarized below for the years ended December 31,
1996, 1997 and 1998:

<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<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..... 4.44 3.61 1.94
Permanent differences:
Non-deductible meals and entertainment................. 0.49 1.18 1.41
Other.................................................. 0.50 0.59
Fuel credit............................................... (1.48) (0.86)
Adjustments of deferred tax balances...................... 1.14
Other..................................................... (0.88) 1.43 0.96
----- ----- -----
Effective tax rate.......................................... 38.05% 39.24% 39.18%
===== ===== =====
</TABLE>

F-15
<PAGE> 55
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
1996 1997 1998
---------- -------- ----------
<S> <C> <C> <C>
Taxes currently payable............................... $1,498,122 $563,245 $ 866,318
Deferred taxes........................................ (67,315) 197,792 373,290
---------- -------- ----------
Total provision for income taxes................. $1,430,807 $761,037 $1,239,608
========== ======== ==========
</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.

The components of the net deferred tax liability at December 31, 1997 and
1998 are as follows:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance............................. $ 36,874
Vacation accrual.......................................... $ 82,037 147,840
Net operating loss carryforwards.......................... 28,116 275,804
Other..................................................... 6,762 64,630
AMT credit carry forward.................................. 544,400
Contributions............................................. 29,760
State taxes............................................... 18,400 23,460
----------- -----------
Gross deferred tax assets.............................. 135,315 1,122,768
----------- -----------
Deferred tax liabilities:
Depreciation.............................................. 2,240,574 3,970,210
Pension................................................... 217,689 359,949
Amortization of intangibles............................... 2,484,296
Other..................................................... 1,669
----------- -----------
Gross deferred tax liabilities......................... 2,458,263 6,816,124
----------- -----------
Net deferred tax liability............................. $(2,322,948) $(5,693,356)
=========== ===========
Reflected on balance sheet as follows:
Current deferred income taxes............................. $ 100,437 $ 240,617
Noncurrent deferred income taxes.......................... (2,423,385) (5,933,973)
----------- -----------
Net deferred tax liability............................. $(2,322,948) $(5,693,356)
=========== ===========
</TABLE>

The Company had certain state net operating loss carryforwards of
approximately $432,000 at December 31, 1997, as a result of the Southern Belle
acquisition. These net operating losses were utilized in 1998.

The Company had certain federal net operating loss carryforwards of
approximately $811,000 at December 31, 1998 as a result of the London's
acquisition. This net operating loss expires in 2018. The alternative minimum
tax credit carryforwards have no expiration dates.

F-16
<PAGE> 56
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. EARNINGS PER SHARE OF COMMON STOCK:

The Company adopted SFAS No. 128, "Earnings per Share" in the fourth
quarter 1997. In accordance with the provisions of this statement, the following
table sets forth the computation of earnings per share and earnings per share,
assuming dilution.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Earnings:
Net income...................................... $2,329,259 $1,178,591 $1,924,659
Deduct dividends on preferred shares............ 1,986
Net income available to common shareholders.......... $2,327,273 $1,178,591 $1,924,659
---------- ---------- ----------
Denominator:
Shares computations:
Weighted average common shares
Outstanding..................................... 3,934,320 4,205,536 5,774,335
Basic earnings per share........................... $ 0.59 $ 0.28 $ 0.33
---------- ---------- ----------
Add: Dilutive effect of outstanding options, as
determined by the application of the treasury
stock method.................................... 179,414 1,657 0
---------- ---------- ----------
Weighted average common shares outstanding assuming
dilution........................................ 4,113,734 4,207,193 5,774,335
---------- ---------- ----------
Diluted earnings per share......................... $ 0.57 $ 0.28 $ 0.33
---------- ---------- ----------
</TABLE>

11. SEGMENT INFORMATION:

In 1998, the Company adopted SFAS No. 131. The accounting policies of the
segments are the same as those described in the "Summary of Accounting
Policies." Segment data includes intersegment revenues with the elimination of
intercompany profit. In addition, the Company does not allocate interest or
corporate general and administrative expenses to the specific operating segment.
Thus, the Company evaluates the performance of its segment based on an operating
profit basis prior to charges for corporate general and administrative expenses
and interest. Prior to 1998, corporate general and administrative expenses were
included in segment operating profit.

The Company is organized primarily on an operating division basis based on
historical operations, product sales and geographic location. The Company
operates through four divisions -- The Dairy Division, Foods Division, Southern
Belle Division and London's Farm Dairy Division. All of the Company's four
divisions are primarily engaged in the manufacture and distribution of dairy
based products. Therefore, the Company reports under one segment referred to as
"Dairy." (The Dairy Division is an operating division of the Dairy segment.) 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 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 Southern Belle Division with
its raw milk processing plant in Somerset, Kentucky manufactures and distributes
a full line of fresh milk and other products and also distributes dairy and
non-dairy foods. The London's Farm Dairy Division, with its raw milk processing
plant in Port Huron, Michigan manufactures and distributes a full line of fresh
milk and other products, while its Burton, Michigan plant produces a variety of
ice cream products.

F-17
<PAGE> 57
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The table below presents information about reported segments for the years
ending December 31:

1998:

<TABLE>
<CAPTION>
DAIRY
--------------
(IN THOUSANDS)
<S> <C>
Sales....................................................... $188,689
Operating profit............................................ $ 4,630
</TABLE>

1997:

<TABLE>
<CAPTION>
DAIRY
--------------
(IN THOUSANDS)
<S> <C>
Sales....................................................... $ 90,883
Operating profit............................................ $ 1,853
</TABLE>

1996:

<TABLE>
<CAPTION>
DAIRY
--------------
(IN THOUSANDS)
<S> <C>
Sales....................................................... $ 87,675
Operating profit............................................ $ 733
</TABLE>

A reconciliation of total segment sales to total consolidated sales and of
total segment operating profit to total consolidated income before income taxes,
for the years ended December 31, 1996, 1997 and 1998 is as follows:

SALES:

<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total segment sales........................................ $87,675 $90,883 $188,689
Elimination of intersegment revenue........................ (3,756) (3,713) (9,257)
------- ------- --------
Consolidated Sales......................................... $83,919 $87,170 $179,432
======= ======= ========
</TABLE>

OPERATING INCOME:

<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total operating income for reportable segments............. $ 733 $ 1,853 $ 4,630
Corporate General and administrative....................... -- -- (1,225)
Interest................................................... (217) (142) (833)
Other income............................................... 3,244 229 592
------- ------- --------
Consolidated income before income taxes.................... $ 3,760 $ 1,940 $ 3,164
======= ======= ========
</TABLE>

12. COMMITMENTS AND CONTINGENCIES:

F-18
<PAGE> 58
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to three years as a result of previously settled antitrust violations by such
entity. On April 18, 1995, the former Southern Belle Dairy Company entered into
a Compliance Agreement in Lieu of Debarment with the USDA (the "Southern Belle
Compliance Agreement"). This agreement was for a three-year period and required
the former Southern Belle Dairy Company 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. Although
the Southern Belle Compliance Agreement expired on April 18, 1998, the Southern
Belle Division is still operating under its terms.

13. SIGNIFICANT ESTIMATES AND CONCENTRATIONS:

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 ranging from $40,000 to $75,000 annually per employee or covered
participant based on the division of employment. 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 $363,900 and $475,850 has
been made at December 31, 1997 and 1998, respectively.

During 1997, the Company entered into certain agreements obligating it to
purchase labels and cartons over periods ranging from two to five years. At
December 31, 1998, the Company was relieved of its carton purchase commitment.
Based on the Company's historical production records, these quantities do not
exceed expected product requirements.

In September 1998 the Company acquired certain intangible assets of a milk
distributor. As a result of this asset purchase, the Company has agreed to a
contingent payment of $125,000 based on sales volume. The
F-19
<PAGE> 59
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contingent payments, if earned, are due in the amounts of $50,000, $50,000 and
$25,000 on May 14, 1999, January 9, 2000 and September 7, 2000, respectively.

In 1998, the Company entered into an agreement to purchase certain
refrigeration equipment at a cost of $319,500. At December 31, 1998 the Company
had remaining purchase commitments of $286,567.

14. RELATED PARTY TRANSACTIONS:

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. Lease
expense was $74,800 and $112,200 for the years ended December 31, 1997 and 1998,
respectively. There was no lease expense prior to May 2, 1997 for this property.

The Company purchased office supplies from Garrison Brewer, a division of
Champion Industries, controlled by Mr. Marshall T. Reynolds, Chairman of the
Company's Board of Directors. Such purchases totaled $50,000 and $76,900 in 1997
and 1998, respectively. There were no purchases in 1996.

The Company also purchased office supplies and printing services from
Chapman Printing Company, another division of Champion Industries. Such
purchases totaled $57,000 and $53,400 in 1997 and 1998, respectively. There were
no purchases in 1996.

The Company received legal services from Theisen, Brock, Frye, Erb & Leeper
Company. Mr. Paul Theisen, a member of the Company's Board of Directors was the
President and director of the law firm prior to January 1, 1998. Mr. Theisen
currently serves in an of counsel capacity. Such services totaled $23,000,
$45,000 and $36,200 for the years ended December 31, 1996, 1997 and 1998,
respectively.

The Company leases certain property from members of the Broughton family
and related trusts established by the Broughton family. Such rental expense
totaled $36,100, $50,200 and $51,700 for the years ended December 31, 1996, 1997
and 1998, respectively.

15. 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 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 of Directors authorized
these shares to be redeemed at $110 per share plus accumulated dividends. All
shares were redeemed by June 30, 1997.

F-20
<PAGE> 60
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. ACQUISITIONS:

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.

During the year ended December 31, 1997, the Company acquired Southern
Belle. Total acquisition costs were $5,359,524 consisting of $3,009,399 cash and
the issuance of 156,675 shares of the Company's stock valued at $2,350,125.

The acquisition was accounted for by the purchase method, and accordingly,
the purchase price has been allocated to the assets and liabilities acquired
based upon their fair values at the date of acquisition. The fair values of
these assets are summarized as follows:

<TABLE>
<S> <C>
Current assets.............................................. $ 6,146,828
Property, plant and equipment............................... 10,064,205
Other assets................................................ 319,936
Excess of cost over net assets.............................. 1,736,805
Current liabilities......................................... (6,959,126)
Debt, long-term portion..................................... (4,088,853)
Deferred taxes, net......................................... (1,860,271)
-----------
$ 5,359,524
===========
</TABLE>

The Company is amortizing goodwill from the Southern Belle acquisition over
a period of 40 years.

The purchase price includes $5,000,000 of cash and stock paid to former
Southern Belle shareholders and $359,524 of related acquisition costs.

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 acquisition costs were $19,166,519.
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.............................................. $ 7,479,863
Property, plant and equipment............................... 10,694,747
Other assets................................................ 279,891
Excess of costs over net assets............................. 11,898,086
Current liabilities......................................... (6,343,142)
Other liabilities........................................... (1,607,551)
Debt, long-term portion..................................... (238,257)
Deferred taxes, net......................................... (2,997,118)
-----------
$19,166,519
===========
</TABLE>

F-21
<PAGE> 61
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Tradename, distribution network, workforce and goodwill are being amortized
over the following estimated useful lives on a straight-line basis:

<TABLE>
<CAPTION>
LIFE AMOUNT
---- -----------
<S> <C> <C>
Tradename................................................... 40 $ 5,500,000
Distribution network........................................ 40 2,700,000
Workforce................................................... 23 760,000
Goodwill.................................................... 40 2,938,086
-----------
$11,898,086
===========
</TABLE>

The following table summarizes the unaudited consolidated pro forma results
of operations and pro forma earnings per share for the years ended December 31,
1997 and 1998 assuming the Southern Belle and London's acquisition had occurred
at January 1, 1997.

<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $203,471 $201,840
Net income.................................................. 995 694
Diluted earnings per share.................................. $ 0.23 $ 0.12
Diluted weighted average shares outstanding................. 4,364 5,774
</TABLE>

The consolidated pro forma results of operations and pro forma earnings 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.

17. PROPOSED MERGER WITH SUIZA FOODS CORPORATION:

On January 18, 1999 the Company announced that Suiza and the Company had
executed an amendment to the Agreement.

Subject to satisfaction of all conditions contained in the Agreement and
Plan of Merger, as amended, and the Stock Purchase Agreement, the parties agreed
to complete the merger on March 31, 1999.

F-22
<PAGE> 62
BROUGHTON FOODS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F-23

<PAGE> 1
SUBSIDIARIES OF THE REGISTRANT

The Registrant, Broughton Foods Company, an Ohio Corporation, does
business under the corporate trade name "Southern Belle", and under it's
corporate name. Its wholly owned subsidiaries are:

(1) Somerset Computer Services, a Kentucky corporation.
(2) LFD Holding Corp. and its wholly owned subsidiary, London's
Farm Dairy, Inc., Delaware Corporations.

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statement of
Broughton Foods Company and Subsidiaries on Form S-1 (File No. 31-4135-025) of
our reports dated March 19, 1999, on our audits of the consolidated financial
statements and financial statement schedule of Broughton Foods Company and
Subsidiaries as of December 31, 1997 and 1998 and for the years ended December
31, 1996, 1997 and 1998, which reports are included in this Annual Report on
Form 10-K.

PricewaterhouseCoopers LLP

Columbus, Ohio
March 29, 1999

<PAGE> 1

EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below (each, a "Signatory" constitutes and appoints Philip E. Cline,
Todd R. Fry, Thomas J. Murray and Dan Konrad (each, an "Agent", and
collectively, "Agents") or any of them, his true and lawful attorney-in-fact and
agent for and in his name, place and stead, in any and all capacities, to sign
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
and to file the same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange Commission. Each
Signatory further grants to the Agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary, in the judgment of such Agent, to be done in connection with any such
signing and filing, as full to all intents and purposes as he might or could do
in person, and hereby ratifies and confirms all that said Agents, or any of
them, may lawfully do or cause to be done by virtue hereof.

This Power of Attorney may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
constitute but one and the same instrument.

Signature Date

/S/ MARSHALL T. REYNOLDS
_________________________________________ March 30, 1999
Marshall T. Reynolds

/S/ PHILIP E. CLINE
_________________________________________ March 29, 1999
Philip E. Cline

/S/ TODD B. FRY
_________________________________________ March 29, 1999
Todd R. Fry

/S/ RONALD V. ARTHUR, II
________________________________________ March 29, 1999
Ronald V. Arthur, II

/S/ GEORGE W. BROUGHTON
_________________________________________ March 29, 1999
George W. Broughton

/S/ ROBERT E. EVANS
_________________________________________ March 29, 1999
Robert E. Evans

/S/ CHARLES R. HOOTEN, JR.
________________________________________ March 29, 1999
Charles R. Hooten, Jr.

/S/ NEAL W. SCAGGS
_________________________________________ March 30, 1999
Neal W. Scaggs

/S/ MARTIN P. SHEARER
_________________________________________ March 30, 1999
Martin P. Shearer

/S/ PHILIP TODD SHELL
_________________________________________ March 29, 1999
Philip Todd Shell

/S/ KIRBY J. TAYLOR
_________________________________________ March 29, 1999
Kirby J. Taylor

/S/ PAUL T. THEISEN
_________________________________________ March 30, 1999
Paul T. Theisen

/S/ THOMAS W. WRIGHT
_________________________________________ March 29, 1999
Thomas W. Wright

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1998 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,278
<SECURITIES> 0
<RECEIVABLES> 19,089
<ALLOWANCES> 652
<INVENTORY> 5,983
<CURRENT-ASSETS> 30,766
<PP&E> 37,955
<DEPRECIATION> 11,477
<TOTAL-ASSETS> 75,176
<CURRENT-LIABILITIES> 13,864
<BONDS> 19,364
<COMMON> 6,315
0
0
<OTHER-SE> 28,239
<TOTAL-LIABILITY-AND-EQUITY> 75,176
<SALES> 179,432
<TOTAL-REVENUES> 179,432
<CGS> 142,343
<TOTAL-COSTS> 142,343
<OTHER-EXPENSES> 33,684
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 833
<INCOME-PRETAX> 3,164
<INCOME-TAX> 1,240
<INCOME-CONTINUING> 1,925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,925
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33

</TABLE>