<PAGE> 1
SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
BROUGHTON FOODS COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
common stock, par value $1.00 per share
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
5,774,335
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$16.50, per specified cash purchase price in agreement of merger with
respect to 3,774,335 shares; and $12.50 with respect to 2,000,000 shares
per stock purchase agreement.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$87,276,527
- --------------------------------------------------------------------------------
(5) Total fee paid:
$17,455
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
$17,455
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
Schedule 14A
- --------------------------------------------------------------------------------
(3) Filing party:
Broughton Foods Company
- --------------------------------------------------------------------------------
(4) Date filed:
May 7, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
BROUGHTON FOODS COMPANY
210 NORTH SEVENTH STREET
MARIETTA, OHIO 45750
Dear Fellow Shareholders:
You are cordially invited to attend a second special meeting (the "Special
Meeting") of Shareholders of Broughton Foods Company (the "Company") on June 10,
1999 at 10:00 a.m. local time, at the Lafayette Hotel, located at 101 Front
Street, Marietta, Ohio 45750.
At the Special Meeting, shareholders will be asked to vote upon a proposal
whereby the Company will be merged with and into Suiza Foods Acquisition Corp.,
an Ohio corporation ("Merger Sub"). Merger Sub is a wholly owned subsidiary of
Suiza Foods Corporation, a Delaware corporation ("Suiza"). If the merger is
approved by the Company's shareholders, at the effective time (the "Effective
Time") of the merger: (i) Merger Sub will be merged with and into the Company
(the "Merger") and the Company will become a wholly owned subsidiary of Suiza
and (ii) each share (a "Share") of common stock of the Company (the "Common
Stock") (the holders of the Shares being hereinafter referred to as
"Shareholders") that is issued and outstanding immediately prior to the
Effective Time will be converted into the right to receive $16.50 in cash,
without interest thereon (the "Merger Consideration"), except that with respect
to 2,000,000 Shares of Common Stock held by 8 shareholders, all of whom are
either Company directors or their related parties (the "Inside Shareholders"),
each of those 2,000,000 Shares will be purchased by Suiza for $11.25 in cash,
without interest thereon, plus the contingent right to receive an additional
$1.25 per Share if certain conditions are satisfied, and except further that
those Shares owned by shareholders, if any, who properly exercise their
dissenters' rights will not be so converted.
In the material accompanying this letter, you will find a formal Notice of
Special Meeting of Shareholders, a Proxy Statement relating to the actions to be
taken by shareholders at the Special Meeting and a proxy card. The Proxy
Statement more fully describes the Agreement and Plan of Merger dated as of
September 10, 1998 among Suiza, Merger Sub and Company (the "Merger Agreement")
as well as Amendment No. 1 and Amendment No. 2 to the Agreement and Plan of
Merger (the "Amended Merger Agreement"), the proposed Merger and includes
information about the Company, Suiza and the reasons for the Merger.
The Amended Merger Agreement amends the Merger Agreement to provide, among
other things, (i) that the Merger Consideration to be received by all
shareholders other than Inside Shareholders be reduced from $19.00 cash, as
provided in the Merger Agreement, to $16.50 cash; (ii) that no change in the
financial operating performance of Company from June 30, 1998 to March 31, 1999
shall constitute a basis for Suiza and Merger Sub to terminate the Amended
Merger Agreement so long as the Company's average monthly operating income for
any calendar month after March 31, 1999 is not less than the average monthly
operating income for the 3 months ended March 31, 1999; (iii) that a stipulation
and order and proposed final judgment in a lawsuit filed by the United States
Department of Justice Antitrust Division ("DOJ") seeking to enjoin the Merger
must have been filed with the court prior to the closing of the Merger (the
stipulation and order and proposed final judgment were filed with the court on
April 29, 1999); and (iv) the Amended Merger Agreement may be terminated by
either party if the Merger is not consummated by June 30, 1999. The Merger
Agreement was approved by Company shareholders at a special meeting held
December 4, 1998. On April 28, 1999 the DOJ, Suiza and Company announced that
they had reached an agreement to settle the lawsuit brought by DOJ to enjoin the
Merger. The Merger Agreement and state law require that the amendments effected
by the Amended Merger Agreement be submitted to Company shareholders for their
consideration and approval.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS APPROVED THE
AMENDED MERGER AGREEMENT AND THE MERGER BY A UNANIMOUS VOTE OF THE DIRECTORS AND
HAS CONCLUDED THAT THE TERMS OF THE AMENDED MERGER
<PAGE> 3
AGREEMENT AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE
SHAREHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE AMENDED MERGER AGREEMENT AND THE MERGER.
Your Board of Directors has retained as financial advisor Chaffe &
Associates, Inc. ("Chaffe"), which has delivered to the Board of Directors its
written opinion, dated April 29, 1999, to the effect that the Merger
Consideration is fair from a financial point of view to holders of the Company's
Common Stock other than the Inside Shareholders. A copy of the Chaffe opinion
letter, which sets forth, among other things, the assumptions made, general
procedures followed, matters considered and the scope of review undertaken in
connection therewith, is attached as Appendix B-2 to the accompanying Proxy
Statement and should be read carefully in its entirety.
Your vote is important, regardless of the number of shares you own.
Approval and adoption of the Amended Merger Agreement and the Merger requires an
affirmative vote of holders of two thirds of the outstanding Shares of Company
Common Stock. The directors and certain officers of the Company, who
beneficially own 2,521,612 Shares, constituting 43.67 percent of the outstanding
Common Stock of the Company, have executed an Inducement Agreement and an
amendment thereto with Suiza, granting Suiza an irrevocable proxy to vote their
Shares with respect to and in favor of the Amended Merger Agreement and the
Merger. Accordingly, another 23.03 percent of Company Shares must be voted in
favor of the Amended Merger Agreement and the Merger to attain the required
two-thirds vote. Under Ohio law, the shareholders are entitled to appraisal
rights with respect to the Merger. See "THE SPECIAL MEETING -- Dissenting
Shareholders' Rights".
I RESPECTFULLY URGE YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY
CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. Executed but
unmarked proxies will be voted in favor of the Amended Merger Agreement and the
Merger. Signing and returning a proxy card will not prevent you from attending
the Special Meeting or voting in person, but will assure that your vote is
counted if you are unable to attend the Special Meeting. You may revoke your
proxy at any time before it is voted by submitting to the Company a written
notice of revocation or a new proxy with a later date or by voting your shares
in person at the Special Meeting. See "THE SPECIAL MEETING -- Vote Required;
Revocability of Proxies."
If your Shares of Company Common Stock are held of record by a broker,
bank, or other nominee and you wish to attend and to vote your Shares at the
Special Meeting, you must obtain from the record holder a proxy issued in your
name.
If you have any questions or require additional information with respect to
the proposed transaction, please contact Philip E. Cline at (740-373-4121)
On behalf of your Board of Directors, I thank you for your support and urge
you to vote FOR approval of the Amended Merger Agreement and the Merger.
Sincerely,
/s/ MARSHALL T. REYNOLDS
MARSHALL T. REYNOLDS
Chairman of the Board of Directors
<PAGE> 4
BROUGHTON FOODS COMPANY
210 NORTH SEVENTH STREET
MARIETTA, OHIO 45750
NOTICE OF SPECIAL MEETING AND PROXY STATEMENT
To All Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting (the "Special Meeting") of
Shareholders of Broughton Foods Company will be held on June 10, 1999 at 10:00
a.m. local time, at the Lafayette Hotel, located at 101 Front Street, Marietta,
Ohio 45750, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of September 10, 1998, among Suiza
Foods Corporation, a Delaware corporation ("Suiza"), Suiza Foods
Acquisition Corp., an Ohio corporation ("Merger Sub"), and Broughton Foods
Company, an Ohio corporation ("Broughton" or the "Company"), as amended by
Amendment No. 2 to Agreement and Plan of Merger dated as of April 28, 1999,
among Suiza, Merger Sub and the Company (the "Amended Merger Agreement"). A
copy of the Amended Merger Agreement is attached to the accompanying Proxy
Statement as Appendix A. If the Amended Merger Agreement is approved and
adopted by the Company's shareholders, at the effective time (the
"Effective Time") of the merger contemplated thereby: (i) Merger Sub will
be merged with and into the Company (the "Merger") and the Company will
become a wholly owned subsidiary of Suiza and (ii) each share (a "Share")
of common stock, $1.00 par value, of the Company (the "Common Stock") (the
holders of the Shares being hereinafter referred to as "shareholders") that
is issued and outstanding immediately prior to the Effective Time will be
converted into the right to receive $16.50 in cash (without interest
thereon), except that with respect to 2,000,000 Shares of Common Stock held
by 8 shareholders, all of whom are either Company directors or their
related parties (the "Inside Shareholders"), each of those 2,000,000 Shares
will be purchased by Suiza for $11.25 in cash, without interest thereon,
plus the contingent right to receive an additional $1.25 per Share if
certain conditions are satisfied, and except further that those Shares
owned by shareholders, if any, who properly exercise their dissenters'
rights will not be so converted.
2. To transact such other business as may properly come before the
Special Meeting and any and all adjournments or postponements thereof.
The close of business on April 29, 1999 has been fixed as the record date
for the determination of the shareholders entitled to receive notice of, and to
vote at, the Special Meeting and at any adjournments or postponements thereof.
The affirmative vote of two-thirds of the outstanding Shares of Company
Common Stock is required to approve and adopt the Amended Merger Agreement and
the transactions contemplated thereby. Holders of Company Common Stock have
rights of appraisal in connection with the Merger. See "THE SPECIAL
MEETING -- Dissenting Shareholders' Rights."
Shareholders are invited to attend the Special Meeting. Whether or not you
expect to attend, WE URGE YOU TO SIGN, DATE, AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. Executed but unmarked proxies
will be voted in favor of the Merger. Signing and returning a proxy card will
not prevent you from attending the Special Meeting or voting in person, but will
ensure that your vote is counted if you are unable to attend the Special
Meeting. You may revoke your proxy at any time before it is voted by submitting
to the Company a written notice of revocation or a new proxy with a later date
or by voting your Shares in person at the Special Meeting. See "THE SPECIAL
MEETING -- Vote Required; Revocability of Proxies."
<PAGE> 5
If your Shares of Company Common Stock are held of record by a broker,
bank, or other nominee and you wish to attend and to vote your Shares at the
Special Meeting, you must obtain from the record holder a proxy issued in your
name.
For the Board of Directors
/s/ MARSHALL T. REYNOLDS
MARSHALL T. REYNOLDS
Chairman of the Board of Directors
May 20, 1999
PLEASE SIGN THE ENCLOSED PROXY AND PROMPTLY RETURN IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING.
<PAGE> 6
BROUGHTON FOODS COMPANY
210 NORTH SEVENTH STREET
MARIETTA, OHIO 45750
MAY 20, 1999
PROXY STATEMENT
GENERAL MATTERS
The accompanying proxy is solicited by the Board of Directors of the
Company for the Special Meeting of shareholders of the Company to be held at the
Lafayette Hotel, located at 101 Front Street, Marietta, Ohio 45750 on June 10,
1999 at 10:00 a.m. local time and at any adjournments or postponements thereof.
This proxy statement and the enclosed form of proxy were first mailed, sent or
given to shareholders on or about May 20, 1999.
The cost of soliciting proxies will be borne by the Company. Solicitation
of proxies other than by mail may be made by officers or by regular employees of
the Company for no additional compensation. The Company has engaged the services
of Wachovia Shareholder Services, for the purpose of assisting in the
solicitation of proxies, at a cost of $1,300, plus the reimbursement of certain
expenses. Proxies may be solicited personally, by telephone, by telegram or
other electronic means.
Only shareholders of record at the close of business on April 29, 1999,
will be entitled to notice of and to vote at the Special Meeting and at all
adjournments thereof (the "Record Date"). At the close of business on the Record
Date, the Company had outstanding 5,774,335 Shares, held by approximately 309
shareholders of record. Each Share will be entitled to one vote on the Merger
and on any other matter presented to shareholders at the Special Meeting.
The affirmative vote of two-thirds of the outstanding Shares of Company
Common Stock is required to approve and adopt the Amended Merger Agreement and
the transactions contemplated thereby. Holders of Company Common Stock have
rights of appraisal in connection with the Merger. See "THE SPECIAL
MEETING -- Dissenting Shareholders' Rights."
Abstentions will be deemed to be present for the purpose of determining a
quorum for the meeting, but will be deemed not voting on issues or matters as to
which the abstention is applicable. Shares held by brokers that are not voted,
although present for the purpose of determining a quorum for the meeting, will
not be counted for any other purposes. Because the affirmative vote of
two-thirds of the outstanding Shares is required to approve and adopt the
Amended Merger Agreement and the Merger, abstentions and broker non-votes will
have the same effect as a vote against the Amended Merger Agreement and the
Merger.
The persons named in the proxy will vote all Shares in accordance with the
instructions given by the shareholders in their respective proxies, returned,
duly executed and received by the Company on or prior to 10:00 a.m. on June 10,
1999. Any shareholder giving a proxy has the right to revoke it any time before
it is voted by giving notice to the Company in writing or at the Special
Meeting.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF PROXY STATEMENT.................................. 1
THE SPECIAL MEETING......................................... 9
Introduction........................................... 9
Matters to be Considered at the Special Meeting........ 9
Record Date and Voting................................. 9
Vote Required; Revocability of Proxies................. 10
Dissenting Shareholders' Rights........................ 11
PARTIES TO THE MERGER....................................... 13
CERTAIN INFORMATION CONCERNING THE COMPANY.................. 13
Business............................................... 13
General................................................ 13
Raw Materials and Supply............................... 15
Competition............................................ 16
Risk Factors........................................... 16
Employees.............................................. 21
Properties............................................. 21
Legal Proceedings...................................... 22
CERTAIN INFORMATION CONCERNING SUIZA AND MERGER SUB......... 24
Suiza.................................................. 24
Merger Sub............................................. 24
THE MERGER.................................................. 25
Background of and Reasons for the Merger............... 25
Opinion of Financial Advisor........................... 28
Accounting Treatment of the Merger..................... 33
Regulatory Requirements Applicable to the Merger....... 33
Interests of Certain Persons in the Merger............. 34
THE AMENDED MERGER AGREEMENT................................ 34
The Merger............................................. 34
Effective Time......................................... 35
Directors and Officers................................. 35
Exchange Procedures.................................... 35
Representations and Warranties......................... 35
Conduct of Business by the Company Pending the
Merger................................................ 36
Employee Matters....................................... 37
Indemnification........................................ 37
No Solicitation........................................ 38
Investigation; Confidentiality......................... 39
Conditions Precedent................................... 39
Termination............................................ 40
Termination Fee........................................ 40
Fees and Expenses...................................... 41
Amendment, Extension and Waiver........................ 41
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER....... 41
SELECTED FINANCIAL DATA..................................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (ANNUAL)........................ 43
</TABLE>
i
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (QUARTERLY)..................... 51
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS....... 54
PRICE RANGE OF THE SHARES................................... 57
DIVIDENDS................................................... 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 58
INDEPENDENT AUDITORS........................................ 59
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING............... 59
OTHER MATTERS............................................... 59
ADDITIONAL INFORMATION...................................... 59
FINANCIAL STATEMENTS
Audited Year End Consolidated Financial
Statements -- Company................................. F-1
Quarterly Consolidated Financial
Statements -- Company................................. F-21
Consolidated Financial Statements -- LFD............... F-31
Consolidated Financial Statements -- Southern Belle.... F-41
</TABLE>
APPENDICES
I. Appendix A Agreement and Plan of Merger Dated as of September 10, 1998
among Suiza, Merger Sub and Company, as amended by Amendment No. 2 dated as
of April 28, 1999
II. Appendix B-1 Opinion of Chaffe & Associates, Inc. Dated September 9, 1998
III. Appendix B-2 Opinion of Chaffe & Associates, Inc. Dated April 29, 1999
IV. Appendix C Sections 1701.84 and 1701.85 of the Ohio General Corporation Law
V. Appendix D Stock Purchase Agreement Dated as of January 18, 1999, as amended
by Amendment to Stock Purchase Agreement dated as of April 28, 1999
ii
<PAGE> 9
SUMMARY OF PROXY STATEMENT
The following is a summary of certain information contained elsewhere in
this Proxy Statement. It is not, and is not intended to be, complete in itself.
Reference is made to, and this summary is qualified in its entirety by, the more
detailed information contained elsewhere in this Proxy Statement, including the
Appendices hereto, which are a part of this Proxy Statement. Shareholders are
encouraged to read carefully all of the information contained in this Proxy
Statement, including the Appendices hereto, and the documents incorporated by
reference herein in their entirety.
THE COMPANY
Broughton Foods Company 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
was organized in 1933 as an Ohio corporation. The
principal executive offices of the Company are
located at 210 North Seventh Street, Marietta, Ohio
45750 and its telephone number is (740) 373-4121.
See "PARTIES TO THE MERGER -- Certain Information
Concerning the Company."
Market Price Data The Shares are listed and traded on the Nasdaq
Stock Market National Market System ("NASDAQ")
under the symbol "MILK." The closing price of the
Shares on September 10, 1998, the last day on which
trading in the Shares occurred prior to the initial
public announcement of the execution of the initial
Merger Agreement, as reported by NASDAQ, was $17.25
per share.
The closing price of the Shares on April 27, 1999,
the last day on which trading in the shares
occurred prior to the public announcement of the
resolution of the DOJ's lawsuit seeking to enjoin
the Merger and the execution of the Amended Merger
Agreement, as reported by NASDAQ, was $13.875 per
share. See "PRICE RANGE OF THE SHARES."
THE SPECIAL MEETING
Time, Date and Place The Special Meeting will be held on June 10, 1999,
at 10:00 a.m., local time, at the Lafayette Hotel,
located at 101 Front Street, Marietta, Ohio 45750.
Purpose The purpose of the Special Meeting is for holders
of Shares to: (i) consider and vote upon a proposal
to approve and adopt the Amended Merger Agreement
among Suiza, Merger Sub and the Company, the form
of which is attached hereto as Appendix A, and the
transactions contemplated thereby, which agreement
provides, among other things, that each Share
issued and outstanding immediately prior to the
Effective Time will be converted into the right to
receive $16.50 in cash (without interest thereon),
except that pursuant to a Stock Purchase Agreement
dated January 18, 1999 and an Amendment to Stock
Purchase Agreement dated April 28, 1999
(collectively the "Amended Stock Purchase
Agreement") with respect to 2,000,000 Shares of
Common Stock held by 8 shareholders, all of whom
are either Company directors or their related
parties (the "Inside Shareholders"), each of those
2,000,000 Shares will be purchased by Suiza for
$11.25 in cash, without interest thereon, plus the
contingent right to receive an additional $1.25 per
Share if certain conditions are satisfied, and
except
1
<PAGE> 10
further that Shares owned by the Company and by a
subsidiary of the Company, and those Shares owned
by shareholders, if any, who properly exercise
their dissenters' rights will not be so converted;
and (ii) transact such other business as may
properly come before the Special Meeting and at any
and all adjournments and postponements thereof. See
"THE SPECIAL MEETING -- Matters to be Considered at
the Meeting."
Record Date Only shareholders of record of Common Stock at the
close of business on April 29, 1999 are entitled to
notice of and to vote at the Special Meeting. On
such date, there were outstanding 5,774,335 Shares
held by approximately 309 holders of record. See
"THE SPECIAL MEETING -- Record Date and Voting."
Voting Rights Each Share is entitled to one vote with respect to
the Amended Merger Agreement and the transactions
contemplated thereby.
Quorum; Votes Required The presence, in person or by proxy, at the Special
Meeting of the holders of a majority of the
aggregate number of Shares outstanding as of the
Record Date will be necessary to constitute a
quorum. The affirmative vote of the holders of
two-thirds of the outstanding Shares will be
required to approve and adopt the Amended Merger
Agreement and the transactions contemplated
thereby. The directors and certain officers of the
Company, who beneficially own 2,521,612 Shares,
constituting 43.67 percent of the outstanding
Common Stock of the Company, have executed an
Inducement Agreement with Suiza, granting Suiza an
irrevocable proxy to vote their Shares with respect
to and in favor of the Amended Merger Agreement and
the Merger. Accordingly, another 23.03 percent of
the outstanding Shares of Common Stock must be
voted in favor of the Amended Merger Agreement and
the Merger to attain the required two-thirds vote.
See "THE SPECIAL MEETING -- Vote Required;
Revocability of Proxies."
Revocability of Proxy Any shareholder who executes and returns a proxy
may revoke such proxy at any time before it is
voted by (i) notifying in writing or in person the
Corporate Secretary of the Company at the principal
executive offices of the Company, (ii) granting a
subsequent proxy, or (iii) appearing in person and
voting at the Special Meeting. Attendance at the
Special Meeting will not in and of itself
constitute revocation of a proxy. A holder of
Shares will find enclosed a form of proxy for such
Shares and should sign and return such proxy. See
"THE SPECIAL MEETING -- Vote Required; Revocability
of Proxies."
Dissenters' Rights Shareholders who do not vote to approve and adopt
the Amended Merger Agreement and who exercise their
dissenters' rights afforded by Section 1701.84 of
the Ohio General Corporation Law (the "OGCL") in
accordance with the procedures set forth in Section
1701.85 of the OGCL, a copy of which sections are
attached hereto as Appendix C, will be entitled to
receive fair value, as determined pursuant to such
statutory procedures, for their Shares in lieu of
the merger consideration of $16.50 per Share. See
"THE SPECIAL MEETING -- Dissenting Shareholders'
Rights."
2
<PAGE> 11
SUIZA
Description of Suiza and
Merger Sub Suiza is a leading manufacturer and distributor of
fresh milk and related dairy products, shelf-stable
and plastic packaging in the United States. Suiza
also manufactures, distributes and markets
refrigerated, shelf-stable and frozen food
products. Each of Suiza's operating subsidiaries is
a strong competitor with an established reputation
for customer service and product quality. Suiza's
dairy subsidiaries market their products through
extensive distribution networks to a diverse group
of customers, including convenience stores, grocery
stores, schools and institutional food service
customers. Suiza's customers in the plastic
packaging business include regional dairy
manufacturers, bottled water processors, other
beverage manufacturers and consumer and industrial
products companies. Suiza has grown primarily
through a successful acquisition strategy. As a
result of this strategy, Suiza increased net sales
from $579.3 million in 1993 to $3,321 million in
1998.
Merger Sub is a newly formed Ohio corporation and a
wholly owned subsidiary of Suiza. Merger Sub was
organized for the purpose of effecting the Merger
pursuant to the Merger Agreement. Merger Sub has no
material assets and has not engaged in any
activities except in connection with the Merger and
pursuant to the Merger Agreement.
The principal executive offices of Suiza and Merger
Sub are located at 2515 McKinney Ave., Suite 1200,
Dallas, Texas 75201, telephone number: (214)
303-3400. See "PARTIES TO THE MERGER -- Certain
Information Concerning Suiza and Merger Sub."
THE MERGER
Merger Consideration $16.50 cash per Share (without interest thereon)
(the "Merger Consideration") to be received by all
shareholders except the Inside Shareholders, who
shall receive $11.25 cash per Share (without
interest thereon) plus the contingent right to
receive an additional $1.25 per Share if certain
conditions are satisfied.
Opinion of Financial
Advisor; Recommendation of
the Board of Directors The Company's Board of Directors has reviewed the
Amended Merger Agreement and the transactions
contemplated thereby, and Chaffe & Associates, Inc.
("Chaffe"), financial advisor to the Company, has
delivered its written opinion (the "Opinion") dated
April 29, 1999 to the Board of Directors to the
effect that, based upon and subject to the certain
matters stated therein, as of the date of such
Opinion, the Merger Consideration is fair, from a
financial point of view, to the holders of the
Shares, other than the Inside Shareholders. The
full text of the Opinion, which sets forth, among
other things, the assumptions made, general
procedures followed, matters considered and
limitations on the review undertaken by Chaffe, is
attached to this Proxy Statement as Appendix B-2
and should be read carefully in its entirety. The
Board of Directors has reviewed the terms and
conditions of the Amended Merger Agreement and
considered a range of factors, including the
Opinion of Chaffe. After consideration of these
factors, the Board of Directors unanimously
concluded that the Amended Merger Agreement and the
3
<PAGE> 12
Merger are fair to and in the best interests of the
shareholders and unanimously approved the Amended
Merger Agreement and the transactions contemplated
thereby. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE IN FAVOR OF
THE APPROVAL AND ADOPTION OF THE AMENDED MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY. See "THE MERGER -- Background of and
Reasons for the Merger."
Conditions to Consummation
of the Merger The obligations of the Company, Suiza and Merger
Sub to effect the Merger are subject, among other
things, to the satisfaction or, where permissible,
waiver of certain conditions, including, but not
limited to, the following: (a) approval and
adoption of the Amended Merger Agreement and
transactions contemplated thereby by the requisite
vote of the Company shareholders; (b) the filing of
a stipulation and order and proposed final judgment
in the lawsuit brought by the United States
Department of Justice Antitrust Division (the
"DOJ") seeking to prevent the Merger, (which were
filed April 29, 1999, and will require Suiza's
divestiture of the Company's Southern Belle
Division after the Effective Time of the Merger);
(c) there not having been issued or in effect any
injunction or order of a court or governmental
agency preventing consummation of the Merger; (d)
each of the parties having performed all of their
respective agreements under the Amended Merger
Agreement and their representations and warranties
thereunder being true and correct; (e) there not
being or having been any material adverse change in
the Company's business, assets, operations or
financial condition (Suiza has agreed that no
change in the financial operating performance of
the Company from June 30, 1998 to March 31, 1999
shall constitute a material adverse effect so long
as the Company's average monthly operating income
for any calendar month after March 31, 1999 is not
less than the average monthly operating income for
the 3 months ended March 31, 1999); (f) the Company
not having taken any action or agreed to any
resolution of the currently pending suspension,
proposed debarment and related proceedings before
the United States Department of Agriculture (the
"USDA") without Suiza's prior written consent, and
there being no other similar proceedings pending
against the Company or any of its subsidiaries; (g)
there being not more than 5% of the outstanding
Shares which have dissented from the Merger and
preserved their appraisal rights in accordance with
the OGCL; and (h) Suiza's review of surveys and
title commitments having revealed nothing that may
adversely affect the value or use of the real
estate of the Company or any of its subsidiaries.
See "THE AMENDED MERGER AGREEMENT -- Conditions
Precedent;" see "CERTAIN INFORMATION CONCERNING THE
COMPANY -- Legal Proceedings."
No Solicitation The Company has agreed in the Amended Merger
Agreement that it will not initiate, solicit or
encourage any inquiries or proposals for the
acquisition of the Company other than the Merger,
except under certain circumstances in which the
Board of Directors, in its good faith judgment,
believes that an unsolicited alternative proposal
is more favorable to the Company's shareholders and
is reasonably likely to be consummated, and,
following consultation with its legal advisors,
determines
4
<PAGE> 13
that failure to pursue such alternative transaction
would constitute a breach of its fiduciary duties
under law. See "THE AMENDED MERGER AGREEMENT -- No
Solicitation."
Termination of the Amended
Merger Agreement The Amended Merger Agreement may be terminated
under certain circumstances including, but not
limited to: (a) by the mutual consent of the
Company and Suiza, before or after Company
shareholder approval; (b) by the Company or Suiza
if (i) the Effective Time of the Merger has not
occurred by June 30, 1999, (ii) Company
shareholders do not approve and adopt the Amended
Merger Agreement, or (iii) a court or government
agency has issued an order preventing the Merger;
(c) by Suiza if the Company's Board of Directors
withdraws its recommendation of the Amended Merger
Agreement and the Merger or recommends an
alternative proposal to Company shareholders; or
(d) by the Company, if the Board of Directors, in
compliance with the Amended Merger Agreement,
withdraws its recommendation of the Amended Merger
Agreement and the Merger or recommends an
alternative proposal to Company shareholders. See
"THE AMENDED MERGER AGREEMENT -- Termination."
Termination Fee The Company has agreed to: (a) pay Suiza a
termination fee of $1 million payable in
immediately available funds and (b) reimburse Suiza
for its costs and expenses in connection with the
Merger, up to an aggregate of $400,000, in the
event that either Suiza or the Company terminates
the Amended Merger Agreement due to the Company's
Board of Directors withdrawal or modification of
its recommendation in favor of the Amended Merger
Agreement and the Merger or its recommendation of
another person's tender or exchange offer. See "THE
AMENDED MERGER AGREEMENT -- Termination Fee."
Regulatory Requirements On April 28, 1999, DOJ, Company and Suiza announced
that they had reached an agreement to settle the
civil antitrust lawsuit brought by DOJ against
Suiza and Company in March 1999 to enjoin the
Merger. The proposed settlement, which is subject
to court approval, will allow Suiza to complete the
Merger, conditioned upon Suiza's agreement to later
sell the business conducted at Company's Southern
Belle Dairy based in Pulaski County, Kentucky. The
proposed settlement is subject to approval by the
U.S. District Judge for the Eastern District of
Kentucky London Division where the DOJ's antitrust
lawsuit is currently pending. Before the settlement
is approved by the court, it must be submitted for
public comment for a period of 60 days, but the
parties may close the Merger prior to final
approval of the settlement. Pursuant to the
proposed settlement, Suiza will agree to sell the
Southern Belle Dairy to a buyer acceptable to the
DOJ within six months after the settlement
agreement is filed with the court, or five days
after entry by the court of the final judgment,
whichever is later. See "THE MERGER -- Regulatory
Requirements Applicable to the Merger."
Certain Federal Income Tax
Consequences of the
Merger Receipt of cash by a holder of Shares pursuant to
the terms of the Amended Merger Agreement, or by a
dissenting Company shareholder who exercises
appraisal rights pursuant to the OGCL, is a taxable
transaction and will result in the recognition of
gain or loss for federal income tax purposes to the
extent that the amount received is greater or
5
<PAGE> 14
less than the shareholder's basis in his stock.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM
OF THE MERGER. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER."
Effective Time of the
Merger The Merger shall become effective at the time a
properly executed certificate of merger is filed
with the Secretary of State of the State of Ohio
(the "Effective Time"). The Certificate of Merger
will be filed as soon as practicable following the
fulfillment of the conditions set forth in the
Amended Merger Agreement. See "THE AMENDED MERGER
AGREEMENT -- Effective Time."
Effect of the Merger on the
Company's Current
Shareholders As a result of the Merger, the Company will become
a wholly owned subsidiary of Suiza, and the current
shareholders of the Company will have no ownership
interest in either the Company or Suiza.
Events Since the
Announcement of the Merger
Agreement On September 11, 1998, the Company announced that
it had executed the Merger Agreement with Suiza and
Merger Sub dated September 10, 1998 (the "Merger
Agreement"), providing for the merger of the
Company with Merger Sub, with each Company Share
being exchanged for the sum of $19.00 cash. The
Merger 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 No.
1 to the Merger Agreement.
That Amendment No. 1 to the Merger Agreement, dated
January 18, 1999, extended from December 31, 1998
to April 15, 1999 the date on which either party
could terminate the Merger Agreement (as amended)
if the Merger had not been completed on such date.
A related Stock Purchase Agreement dated January
18, 1999 between Suiza, the Company and the Inside
Shareholders provided that at completion of the
Merger, those Inside Shareholders would sell Two
Million (2,000,000) Company Shares to Suiza, and
would receive, in lieu of the $19.00 per Share cash
merger consideration, the cash sum of $10.00 per
Share, without interest, plus the right to receive
up to an additional $9.00 per share if certain
earnings and performance goals were met between the
date of the Merger and March 31, 2000. The Inside
Shareholders, all of whom are either Company
directors or related parties, proposed this
arrangement in response to Suiza's concern with
Broughton's financial performance since the
September 11, 1998 announcement of the proposed
Merger, in an effort to ensure performance and
consummation of the Merger Agreement by Suiza.
Subject to satisfaction of all conditions contained
in the Merger Agreement, as amended, and the Stock
Purchase Agreement, the parties agreed to complete
the Merger on March 31, 1999.
On March 18, 1999 the DOJ filed a Motion for
Temporary Restraining Order ("TRO"), Motion for
Preliminary Injunction and a Complaint in the
United States District Court for the Eastern
District of Kentucky, London Division, seeking to
enjoin the proposed acquisition of the
6
<PAGE> 15
Company by Suiza. The DOJ alleged that competition
in the production and sale of school milk in
certain South Central Kentucky school districts
would be substantially lessened as a result of the
proposed transaction. On March 18, 1999 the court
entered a TRO enjoining Suiza, the Company and all
persons acting on their behalf from consummating,
directly or indirectly, the 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.
Suiza and the Company independently concluded and
agreed not to contest the motion for TRO.
On April 7, 1999, the United States Department of
Agriculture ("USDA") advised that it had debarred
the Southern Belle Division of the Company from
federal procurement and non-procurement programs
for a period of three years, effective from
December 31, 1997. During the period of debarment,
Southern Belle is excluded generally from engaging
in contracts and other transactions involving
federal procurement and federal non-procurement
programs governmentwide, unless an agency head or
other authorized designee grants an exception with
respect to a particular transaction.
The USDA also notified the Company on April 7,
1999, by notice dated and effective March 31, 1999,
that the USDA had suspended the Company, and is
proposing to debar the Company from engaging in
contracts and other transactions involving federal
non-procurement transactions, with the effect that
the Company is excluded generally from engaging in
contracts and other transactions involving both
federal non-procurement and federal procurement
programs governmentwide during the period of the
suspension. The proposed debarment of the Company,
if ordered, would remain in effect for a period
commensurate with the USDA's determination of the
seriousness of the alleged cause, generally by
regulation not to exceed three years. The
suspension and proposed debarment is based upon the
Company's delivery to several schools of half-pint
containers of fluid milk which allegedly failed to
contain the minimum required quantities of fluid
milk, and the alleged failure of such containers of
milk to meet net content labeling or contract
requirements.
The Company intends to oppose the suspension and
proposed debarment of the Company through the
administrative process. The Company's management is
unable at this time to predict the outcome of the
USDA proceedings or their effect on the Company's
financial position and results of operations.
However, neither the Southern Belle Division
debarment nor the Company suspension preclude the
performance of contracts existing at the time of
debarment or suspension. Further, under existing
USDA regulations, neither debarment nor suspension
preclude the Southern Belle Division or the Company
from obtaining and performing contracts awarded
under federal non-procurement programs administered
by the USDA Food and Nutrition Service and valued
under $100,000.
On April 28, 1999, Suiza, Broughton and DOJ entered
into a stipulation and a proposed consent decree
that resolves DOJ's lawsuit seeking to prevent the
Merger, which requires Suiza's divestiture of the
Company's
7
<PAGE> 16
Southern Belle Division within six months of the
filing of the proposed decree or five days after
entry by the court of the Final Judgment, whichever
is later.
Suiza and the Company negotiated and executed the
Amended Merger Agreement and Amended Stock Purchase
Agreement in light of the changed circumstances
resulting from (i) the resolution of the DOJ
lawsuit enjoining the Merger, (ii) the USDA's
debarment of the Southern Belle Division and
suspension and proposed debarment of the Company,
and (iii) the Company's financial performance since
the September 11, 1998 announcement of the proposed
Merger. The revised Merger Consideration reflects
(i) the divestiture by Suiza of the Southern Belle
Division required to resolve the DOJ lawsuit, thus
depriving Suiza of anticipated revenues from that
unit and anticipated economies of scale projected
from incorporating the Southern Belle Division into
its operations, (ii) the anticipated expense of
contesting the USDA proceedings and loss of revenue
resulting from the suspension and proposed
debarment of Company, and (iii) the financial
performance of the Company since the September 11,
1998 announcement of the Merger Agreement.
CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Proxy Statement contains forward-looking statements within the meaning
of the federal securities laws. As a general matter, forward-looking statements
are statements focused upon future plans, objectives or performance as opposed
to historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters not historical in nature. Such
forward-looking statements are subject to risks and uncertainties that are
difficult to predict and could cause actual results of the Company to differ
materially from those matters expressed or implied by such forward-looking
statements. Among the key risk factors that may have a direct bearing on whether
the Company's forward-looking statements materialize are (i) risks associated
with the Company's ability to satisfy closing conditions contained in the
Amended Merger Agreement, including approval of the Amended Merger Agreement by
Company stockholders; (ii) risks relating to approval of the proposed settlement
with DOJ by the court. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those set forth in the applicable forward-looking
statement. Any forward-looking statements made or incorporated by reference
herein speak only as of the date of this Proxy Statement. The parties expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any such statements to reflect any change in expectations with
regard thereto or any changes in the events, conditions, or circumstances on
which any such statement is based. (See "CERTAIN INFORMATION CONCERNING THE
COMPANY -- RISK FACTORS")
8
<PAGE> 17
THE SPECIAL MEETING
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of the Company,
an Ohio corporation, in connection with the Special Meeting to be held on June
10, 1999 at 10:00 a.m. at the Lafayette Hotel, located at 101 Front Street,
Marietta, Ohio 45750.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Each copy of this Proxy Statement mailed, sent or given to shareholders is
accompanied by a proxy card furnished in connection with the solicitation of
proxies by the Board of Directors of the Company for use at the Special Meeting.
At the Special Meeting, shareholders will consider and vote on:
1. A proposal to approve and adopt the Amended Merger Agreement among
Suiza, Merger Sub and the Company and the transactions contemplated
thereby. A copy of the Amended Merger Agreement is attached to this Proxy
Statement as Appendix A. If the Amended Merger Agreement is approved and
adopted by the Company's shareholders, at the Effective Time: (i) Merger
Sub will be merged with and into the Company and the Company will become a
wholly owned subsidiary of Suiza and (ii) each Share that is issued and
outstanding immediately prior to the Effective Time will be converted into
the right to receive $16.50 in cash (without interest thereon), except that
pursuant to an Amended Stock Purchase Agreement with respect to 2,000,000
Shares of Common Stock held by the Inside Shareholders, all of whom are
either Company directors or their related parties, each of those 2,000,000
Shares will be purchased by Suiza for $11.25 in cash, without interest
thereon, plus the contingent right to receive an additional $1.25 per Share
if certain conditions are satisfied, and except further that those Shares
owned by shareholders, if any, who properly exercise their dissenters'
rights will not be so converted.
2. Such other business as may properly come before the Special Meeting
and at any and all adjournments or postponements thereof.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AMENDED MERGER AGREEMENT
AND THE MERGER, AND HAS DETERMINED THAT THE AMENDED MERGER AGREEMENT AND THE
MERGER ARE ADVISABLE AND FAIR TO AND IN THE BEST INTERESTS OF THE SHAREHOLDERS,
AND RECOMMENDS THAT THE SHAREHOLDERS VOTE THEIR SHARES "FOR" AN APPROVAL AND
ADOPTION OF THE AMENDED MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING
PROXY CARD PROMPTLY IN THE ENCLOSED POSTAGE PAID ENVELOPE. FAILURE TO RETURN THE
PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL HAVE THE
SAME EFFECT AS A VOTE "AGAINST" THE AMENDED MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
RECORD DATE AND VOTING
The Board of Directors has fixed the close of business on April 29, 1999 as
the Record Date for the determination of the shareholders entitled to notice of
and to vote at the Special Meeting and at all adjournments and postponements
thereof. Only shareholders of record at the close of business on that date will
be entitled to vote at the Special Meeting and at all adjournments and
postponements thereof. At the close of business on the Record Date, there were
5,774,335 Shares outstanding and entitled to vote at the Special Meeting, held
by approximately 309 shareholders of record.
Each shareholder on the Record Date will be entitled to one vote for each
Share held of record. The presence, in person or by proxy, of a majority of the
outstanding Shares is necessary to constitute a quorum at the Special Meeting.
Shares represented by "broker non-votes" (i.e., shares held by brokers or
nominees which are represented at the Special Meeting but with respect to which
the broker or nominee is not empowered to vote) will be counted for purposes of
determining whether there is a quorum at the Special
9
<PAGE> 18
Meeting. Abstentions will also be included in the calculation of the number of
votes represented at the Special Meeting for purposes of determining whether a
quorum has been achieved.
In accordance with NASDAQ rules, brokers and nominees are precluded from
exercising their voting discretion with respect to the approval and adoption of
the Amended Merger Agreement and thus, absent specific instructions from the
beneficial owner of such Shares, are not empowered to vote such Shares with
respect to approval and adoption of the Amended Merger Agreement. Because the
affirmative vote of holders of two-thirds of the outstanding Shares is required
to approve and adopt the Amended Merger Agreement, an abstention, a "broker
non-vote" or the failure to be present in person or by proxy at the Special
Meeting will have the same effect as a vote AGAINST approval and adoption of the
Amended Merger Agreement and the transactions contemplated thereby. If a
Shareholder was a record holder of Shares as of the close of business on the
Record Date, such Shareholder may elect to grant a proxy in favor of or against
or abstain with respect to the Amended Merger Agreement proposal by marking the
"FOR," "AGAINST" or "ABSTAIN" box, as applicable, underneath such Amended Merger
Agreement proposal on the accompanying proxy card and signing, dating and
returning it promptly in the enclosed post-paid envelope.
If the enclosed proxy card is properly executed and received by the Company
in time to be voted at the Special Meeting, the Shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed proxies
with no instructions indicated thereon will be voted "FOR" approval and adoption
of the Amended Merger Agreement.
The cost of soliciting proxies will be borne by the Company. Solicitation
of proxies other than by mail may be made by officers or by regular employees of
the Company for no additional compensation. The Company has engaged the services
of Wachovia Shareholder Services, for the purpose of assisting in the
solicitation of proxies, at a cost of $1,300, plus the reimbursement of certain
expenses. Proxies may be solicited personally, by telephone, by telegram or
other electronic means.
The Board of Directors is not aware of any matters other than those set
forth in the Notice of Special Meeting of shareholders (which has been mailed to
shareholders along with this Proxy Statement) that may be brought before the
Special Meeting. If any other matters properly come before the Special Meeting,
the persons named in the accompanying proxy will vote the Shares represented by
all properly executed proxies on such matters, in their discretion, except that
Shares represented by proxies which have been voted "AGAINST" the Amended Merger
Agreement will not be used to vote "FOR" postponement or adjournment of the
Special Meeting for the purposes of allowing additional time for soliciting
additional votes "FOR" the Amended Merger Agreement. See " -- Vote Required;
Revocability of Proxies."
Shareholders should not forward any certificates for Shares with their
proxy cards. If the Merger is consummated, certificates for Shares should be
delivered in accordance with instructions set forth in a letter of transmittal,
which will be sent to shareholders as soon as reasonably practicable after the
Effective Time by Wachovia Shareholder Services, in its capacity as the exchange
agent and paying agent in connection with the Merger (the "Exchange Agent").
VOTE REQUIRED; REVOCABILITY OF PROXIES
The affirmative vote of holders of two-thirds of the outstanding Shares is
required to approve and adopt the Amended Merger Agreement. Each Share entitles
the record holder thereof as of the Record Date to one vote on the Amended
Merger Agreement. Because the vote of shareholders required to approve and adopt
the Amended Merger Agreement is based upon the total number of outstanding
Shares, the failure to submit a proxy card (or to vote in person at the Special
Meeting) or the abstention from voting by a shareholder (including broker
non-votes) will have the same effect as a vote cast "AGAINST" the approval and
adoption of the Amended Merger Agreement and the transactions contemplated
thereby.
The directors and certain officers of the Company, who beneficially own
2,521,612 Shares, constituting 43.67 percent of the outstanding Common Stock of
the Company, have executed an Inducement Agreement with Suiza, granting Suiza an
irrevocable proxy to vote their Shares with respect to and in favor of the
Merger Agreement and the transactions contemplated thereby. Accordingly, another
23.03 percent of Company
10
<PAGE> 19
Shares must be voted in favor of the Merger Agreement and the transactions
contemplated thereby to attain the required two-thirds vote.
A shareholder may vote his or her Shares at the Special Meeting in person
or by proxy. A shareholder may appoint a proxy to vote or otherwise act for him
or her by signing and dating a proxy appointment form, either personally or by
his or her attorney-in-fact. An appointment of proxy is effective when received
by the Corporate Secretary. The appointment of a proxy under the OGCL is valid
for eleven months, unless a longer period is expressly provided in the
appointment form.
The presence of a shareholder at the Special Meeting will not automatically
revoke such shareholder's proxy. However, a shareholder may revoke a proxy at
any time prior to its exercise by (i) delivering to the Corporate Secretary of
the Company a written notice of revocation prior to the Special Meeting, (ii)
delivering prior to the Special Meeting a duly executed proxy bearing a later
date or (iii) attending the Special Meeting and voting in person.
DISSENTING SHAREHOLDERS' RIGHTS
Section 1701.84 of the OGCL provides that all Company shareholders entitled
to vote on the Amended Merger Agreement and the transactions contemplated
thereby may exercise dissenters' rights with respect to the Amended Merger
Agreement and the transactions contemplated thereby. The following is a summary
of the principal steps that a Company shareholder must take in accordance with
Section 1701.85 of the OGCL in order to perfect his or her dissenters' rights.
This summary does not purport to be complete and is qualified in its entirety by
reference to Section 1701.85 of the OGCL, a copy of which is attached as
Appendix C to this Proxy Statement. Any Company shareholder contemplating the
exercise of dissenters' rights is urged to review carefully such provisions and
to consult an attorney, since dissenters' rights will be lost if strict
compliance with the procedural requirements set forth in Section 1701.85 of the
OGCL is not achieved. To perfect dissenters' rights, a Company shareholder must
satisfy each of the following conditions:
(i) No Vote in Favor of the Merger Proposal. Shares of Company Common
Stock held by a dissenting shareholder (a "Dissenting Company shareholder")
must not be voted at the Special Meeting in favor of the Merger. See "THE
SPECIAL MEETING -- Matters to be Considered at the Special Meeting." This
requirement will be satisfied if a proxy is signed and returned with
instructions to vote against approval and adoption of the Amended Merger
Agreement or to abstain from such vote, if no proxy is returned and no vote
is cast at the Special Meeting in favor of the Amended Merger Agreement,
or, if the Dissenting Company shareholder revokes a proxy, and thereafter
abstains from voting with respect to the Amended Merger Agreement or votes
against the Amended Merger Agreement at the Special Meeting. A vote in
favor of the Amended Merger Agreement at the Special Meeting constitutes a
waiver of dissenters' rights. A proxy that is returned signed but on which
no voting preference is indicated will be voted in favor of approval and
adoption of the Amended Merger Agreement and will constitute a waiver of
dissenters' rights. A Dissenting Company shareholder may revoke his or her
proxy at any time before its exercise by filing with the Company an
instrument revoking it or a duly executed proxy bearing a later date, or by
attending and giving notice of the revocation of the proxy in open meeting
(although attendance at the Special Meeting will not in and of itself
constitute revocation of a proxy). See "The Special Meeting -- Vote
Required; Revocability of Proxies."
(ii) Filing Written Demand. Not later than ten days after the taking
of the vote on the Merger, a Dissenting Company shareholder must deliver to
the Company a written demand (the "Company Demand") for payment of the fair
cash value of such shareholder's dissenting Shares. The Company Demand
should be delivered to the Company at 210 North Seventh Street, Marietta,
Ohio 45750, Attention: Corporate Secretary. It is recommended, although not
required, that the Company Demand be sent by registered or certified mail,
return receipt requested. Voting against the Amended Merger Agreement will
not itself constitute a Company Demand. The Company will not send any
further notice to Company shareholders as to the date on which such ten-day
period expires.
The Company Demand must identify the name and address of the holder of
record of the dissenting Shares covered thereby, the number of dissenting
Shares covered thereby and the amount claimed as the
11
<PAGE> 20
fair cash value thereof. A beneficial owner of dissenting Shares must, in
all cases, have the record holder submit the Company Demand in respect of
such owner's dissenting Shares. The Company Demand must be signed by the
shareholder of record (or by the duly authorized representative of the
shareholder) exactly as the shareholder's name appears on the shareholder
records of the Company. A Company Demand with respect to dissenting Shares
owned jointly by more than one person must identify and be signed by all of
the shareholders of record. Any person signing a Company Demand on behalf
of a partnership or corporation or in any other representative capacity
(such as attorney-in-fact, executor, administrator, trustee, or guardian)
must indicate the nature of the representative capacity and, if requested,
must furnish written proof of this capacity and such person's authority to
sign the demand.
Because only Company shareholders of record on the Record Date may
exercise dissenters' rights, any person who beneficially owns shares that
are held of record by a broker, fiduciary, nominee or other holder and who
wishes to exercise dissenters' rights must instruct the record holder of
the dissenting Shares to satisfy the conditions outlined above. If a record
holder does not satisfy, in a timely manner, all of the conditions outlined
in this section, "Dissenting Shareholders' Rights," the statutory
dissenters' rights attributable to all of the Shares held by that
shareholder will be lost.
From the time the Company Demand is given until either the termination
of the rights and obligations arising from such Company Demand or the
purchase of the dissenting Shares related thereto by Company, all rights
accruing to the holder of the dissenting Shares, including voting and
dividend or distribution rights, will be suspended. If any dividend or
distribution is paid in money on Shares of Company Common Stock during the
suspension, an amount equal to the dividend or distribution which would
have been payable on dissenting Shares, but for such suspension, shall be
paid to the holder of record of the dissenting Shares as a credit upon the
fair cash value thereof. If the statutory right to receive the fair cash
value is terminated otherwise than by the purchase of the dissenting Shares
by Company, all rights will be restored to the Dissenting Company
shareholder and any distribution that would have been made to the holder of
record of the dissenting Shares, but for the suspension, will be made at
the time of the termination.
(iii) Petitions to Be Filed in Court. Within three months after the
service of the Company Demand, if the Company and the Dissenting Company
shareholder do not reach an agreement on the fair cash value of such
shareholder's dissenting Shares, the Dissenting Company shareholder or the
Company may file a complaint in the Court of Common Pleas of Washington
County, Ohio (the "Common Pleas Court"), or join or be joined in an action
similarly brought by another Dissenting Company shareholder, for a judicial
determination of the fair cash value (as defined herein) of such
shareholder's dissenting Shares. The Company does not intend to file any
complaint for a judicial determination of the fair cash value of any
dissenting Shares.
Upon motion of the complainant, the Common Pleas Court will hold a hearing
to determine whether the Dissenting Company shareholder is entitled to be paid
the fair cash value of such shareholder's dissenting Shares. If the Common Pleas
Court finds that the Dissenting Company shareholder is so entitled, it may
appoint one or more appraisers to receive evidence by which to recommend a
decision on the amount of such value. The Common Pleas Court is required to make
a finding as to the fair cash value of the dissenting Shares and to render a
judgment against the Company for the payment thereof, with interest at such rate
and from such date as the Common Pleas Court considers equitable. Costs of the
proceedings, including reasonable compensation to the appraiser or appraisers to
be fixed by the Common Pleas Court, are to be apportioned or assessed as the
Common Pleas Court considers equitable. Payment of the fair cash value of the
dissenting Shares that is agreed upon by the Company and the Dissenting Company
shareholder or that is determined by the Common Pleas Court, as the case may be,
is required to be made within 30 days after the date of final determination of
such value or the Effective Date, whichever is later, but in any event only upon
surrender to Company of the certificates representing the dissenting Shares for
which payment is made.
"Fair cash value" is the amount which a willing seller, under no compulsion
to sell, would be willing to accept, and which a willing buyer, under no
compulsion to purchase, would be willing to pay, but in no event may the fair
cash value exceed the amount specified in the Company Demand. The fair cash
value is to be
12
<PAGE> 21
determined as of the date prior to the day of the vote on the Merger Agreement.
In computing this value, any appreciation or depreciation in the market value of
the dissenting Shares resulting from the Merger is excluded.
The dissenters' rights of any Dissenting Company shareholder will terminate
if, among other things, (i) such Dissenting Company shareholder has not strictly
complied with Section 1701.85 of the OGCL (unless the Board of Directors waives
compliance), (ii) the Amended Merger Agreement is terminated or the Merger is
not consummated, (iii) such Dissenting Company shareholder withdraws his or her
Company Demand with the consent of the Board of Directors, or (iv) no agreement
has been reached between Company and the Dissenting Company shareholder with
respect to the fair cash value of such shareholder's dissenting Shares, and the
Dissenting Company shareholder fails to timely file a complaint in the Common
Pleas Court.
Under the terms of the Amended Merger Agreement, it is a condition to the
obligation of Suiza and Merger Sub to consummate the Merger that dissenters'
appraisal rights not be perfected with respect to more than five percent of the
outstanding Shares of Common Stock. See "THE MERGER AGREEMENT -- Conditions
Precedent."
PARTIES TO THE MERGER
CERTAIN INFORMATION CONCERNING THE COMPANY
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.
13
<PAGE> 22
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 the
Merger 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 was conditioned upon satisfaction of all
conditions contained in the Agreement. On September 10, 1998, 5,774,335 Shares
of Company common stock were issued and outstanding. The Merger 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 No. 1 to the Merger Agreement.
Amendment No. 1 to the Merger Agreement extended from December 31, 1998 to
April 15, 1999 the date on which either party could terminate the Merger
Agreement (as amended) if the Merger had not been completed on such date. A
related Stock Purchase Agreement dated January 18, 1999 between Suiza, the
Company and the Inside Shareholders provided that at completion of the Merger,
those Inside Shareholders would sell Two Million (2,000,000) Company Shares to
Suiza, and would receive, in lieu of the $19.00 per Share cash merger
consideration, the cash sum of $10.00 per Share, without interest, plus the
right to receive up to an additional $9.00 per Share if certain earnings and
performance goals were met between the date of the Merger and March 31, 2000.
The Inside Shareholders, all of whom are either Company directors or related
parties, proposed this arrangement in response to Suiza's concern with
Broughton's financial performance since the September 11, 1998 announcement of
the proposed Merger, in an effort to ensure performance and consummation of the
Merger Agreement by Suiza.
Subject to satisfaction of all conditions contained in the Merger
Agreement, 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 Department of Justice Antitrust
Division ("DOJ") filed a Motion for Temporary Restraining Order ("TRO"), Motion
for Preliminary Injunction and a Complaint in the United States District Court
for the Eastern District of Kentucky, London Division, 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 certain South Central Kentucky
school districts would be substantially lessened as a result of the proposed
transaction. Suiza and the Company independently concluded and agreed not to
contest the motion for TRO. On March 18, 1999 the court entered a TRO enjoining
Suiza, the Company and all persons acting on their behalf from consummating,
directly or indirectly, the 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. By terms of the Court's order, the TRO
remained in effect until such time as the Court addresses the DOJ's Motion for
Preliminary Injunction.
On April 28, 1999, Suiza, Broughton and DOJ entered into a stipulation and
a proposed consent decree, subject to court approval, that resolves DOJ's
lawsuit seeking to prevent the Merger, which lifts the TRO and permits
consummation of the Merger, but requires Suiza's divestiture of the Company's
Southern Belle Division within six months of the filing of the proposed decree
or five days after entry by the court of the Final Judgment, whichever is later.
14
<PAGE> 23
Suiza and the Company negotiated and executed the Amended Merger Agreement
in light of the changed circumstances resulting from (i) the DOJ lawsuit
enjoining the Merger, (ii) the USDA's debarment of the Southern Belle Division
and suspension and proposed debarment of the Company, and (iii) the Company's
financial performance since the September 11, 1998 announcement of the proposed
Merger. The revised Merger Consideration (from $19 per Share to $16.50 per Share
for all shareholders other than Inside Shareholders), and the $11.25 per Share
revised purchase price plus $1.25 per Share contingent price to Inside
Shareholders, reflects (i) the divestiture by Suiza of the Southern Belle
Division required to resolve the DOJ lawsuit, thus depriving Suiza of
anticipated revenues from that unit and anticipated economies of scale projected
from incorporating the Southern Belle Division into its operations, (ii) the
anticipated expense of contesting the USDA proceedings and loss of revenue
resulting from the suspension and proposed debarment of the Company, and (iii)
the financial performance of the Company since the September 11, 1998
announcement of the Merger Agreement.
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.
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.
15
<PAGE> 24
COMPETITION
The Company's business is highly competitive. The Company has a number of
competitors in each of its major products, services and geographic areas, 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.
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.
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
16
<PAGE> 25
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 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
17
<PAGE> 26
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.
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
18
<PAGE> 27
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
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 filed suit in U.S. District Court for the Eastern
District of Kentucky seeking to enjoin Suiza's proposed acquisition of the
Company. DOJ, Company and Suiza have now entered into a proposed settlement of
that suit. The final order effecting the proposed settlement is subject to
approval by the court. See "Legal Proceedings"; "THE MERGER -- Regulatory
Requirements Applicable to the Merger."
19
<PAGE> 28
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 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 butterfat, a raw material required in the production of many
items by the Foods Division and in ice cream production during 1998 and
increases in raw milk costs in 1998 and the first quarter of 1999. 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.
20
<PAGE> 29
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 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 43.67% 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.
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. The Company also employs
additional employees during its peak summer season and has not experienced
difficulty in meeting its seasonal employment needs. Management believes that
the Company's relations with its employees are good.
The Company is party to several collective bargaining agreements with
approximately 331 of its employees.
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,
21
<PAGE> 30
Kentucky; Port Huron, Michigan and Burton, Michigan. There are twenty-one dairy
distribution centers: two in Marietta (in one location) and one in each of (i)
Johnstown and 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 has an ice cream distribution branch in Dunbar, West
Virginia. In March of 1999 the Company was advised of a change in ownership and
the termination of its lease agreement for a warehousing and distribution
facility in Charleston, West Virginia used by the Company's Foods Division. In
March 1999 the Company consolidated its Bay City, Michigan operations into the
Coleman facility.
Prior to execution of the Merger Agreement, the Company had announced a
proposed expansion of its Marietta, Ohio facility. The Merger Agreement and
Amended Merger Agreement provide that the Company shall immediately cease work
on that expansion and not enter into any additional commitments with respect to
such expansion. Management of the Company has been advised that Suiza will
undertake its own review of any expansion if the Merger is consummated. The
Company has accordingly ceased such expansion pending the consummation of the
Merger or termination of the Amended Merger Agreement. See "THE AMENDED MERGER
AGREEMENT -- Conduct of Business by the Company Pending the Merger."
Dairy Division
The Dairy Division conducts its manufacturing and distribution operations
from its Marietta, Ohio, plant and from eight distribution centers, one of which
is owned and seven of which are leased.
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.
LEGAL PROCEEDINGS
USDA
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 continued to operate under its terms
until the debarment notification described below.
22
<PAGE> 31
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 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 had indicated that Southern Belle could be subject to
debarment and the Company subject to suspension and debarment if they failed to
enter into such proposed agreement.
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 would pursue suspension and proposed debarment against the
Southern Belle Division and the Company based on 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
extended that decision in successive 45-day periods.
On April 7, 1999, the United States Department of Agriculture ("USDA")
advised that it had debarred the Southern Belle Division of the Company from
federal procurement and non-procurement programs for a period of three years,
effective from December 31, 1997. During the period of debarment, Southern Belle
is excluded generally from engaging in contracts and other transactions
involving federal procurement and federal non-procurement programs
governmentwide, unless an agency head or other authorized designee grants an
exception with respect to a particular transaction.
The USDA also notified the Company on April 7, 1999, by notice dated and
effective March 31, 1999, that the USDA had suspended the Company, and is
proposing to debar the Company from engaging in contracts and other transactions
involving federal non-procurement transactions, with the effect that the Company
is excluded generally from engaging in contracts and other transactions
involving both federal non-procurement and federal procurement programs
governmentwide during the period of the suspension. The proposed debarment of
the Company, if ordered, would remain in effect for a period commensurate with
the USDA's determination of the seriousness of the alleged cause, generally by
regulation not to exceed three years. The suspension and proposed debarment is
based upon the Company's delivery to several schools of half-pint containers of
fluid milk which allegedly failed to contain the minimum required quantities of
fluid milk, and the alleged failure of such containers of milk to meet net
content labeling or content requirements.
The Company intends to oppose the suspension and proposed debarment of the
Company through the administrative process. The Company's management is unable
at this time to predict the outcome of the USDA proceedings or their effect on
the Company's financial position and results of operations. However, neither the
Southern Belle Division debarment nor the Company suspension preclude the
performance of contracts existing at the time of debarment or suspension.
Further, under existing USDA regulations, neither debarment nor suspension
preclude the Southern Belle Division or the Company from obtaining and
performing contracts awarded under federal non-procurement programs administered
by the USDA Food and Nutrition Service and valued under $100,000.
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.
DOJ
On March 18, 1999 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 the United States District Court
for the Eastern District of Kentucky, London Division, seeking to enjoin the
proposed acquisition of the Company by Suiza. The DOJ alleged that competition
in the production and sale
23
<PAGE> 32
of school milk in certain South Central Kentucky school districts would be
substantially lessened as a result of the proposed transaction. Suiza and the
Company independently concluded and agreed not to contest the motion for TRO. On
March 18, 1999 the court entered a TRO enjoining Suiza, the Company and all
persons acting on their behalf from consummating, directly or indirectly, the
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. By terms of the Court's order, the TRO remained in effect until such
time as the Court addresses the DOJ's Motion for Preliminary Injunction.
On April 28, 1999, DOJ, the Company and Suiza announced that they had
reached an agreement, subject to court approval, to settle the civil antitrust
lawsuit brought by DOJ against Suiza and the Company in March 1999 to enjoin the
Merger. The proposed settlement will allow Suiza to complete the Merger,
conditioned upon Suiza's agreement to later sell the business conducted at the
Company's Southern Belle Dairy based in Pulaski County, Kentucky. The proposed
settlement is subject to approval by the U.S. District Judge for the Eastern
District of Kentucky London Division where the DOJ's antitrust lawsuit is
currently pending. Before the settlement is approved by the court, it must be
submitted for public comment for a period of 60 days, but the parties may close
the Merger prior to final approval of the settlement. Pursuant to the proposed
settlement, Suiza will agree to sell the Southern Belle Dairy to a buyer
acceptable to the DOJ within six months of the filing of the proposed decree or
five days after entry by the court of the Final Judgment, whichever is later.
Other
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.
CERTAIN INFORMATION CONCERNING SUIZA AND MERGER SUB
SUIZA
Suiza is a leading manufacturer and distributor of fresh milk and related
dairy products, shelf-stable and plastic packaging in the United States. Suiza
also manufactures, distributes and markets refrigerated, shelf-stable and frozen
food products. Each of Suiza's operating subsidiaries is a strong competitor in
its market, with an established reputation for customer service and product
quality. Suiza's dairy subsidiaries market their products through extensive
distribution networks to a diverse group of customers, including convenience
stores, grocery stores, schools and institutional food service customers.
Suiza's customers in the plastic packaging business include regional dairy
manufacturers, bottled water processors, other beverage manufacturers and
consumer and industrial products companies. Suiza has grown primarily through a
successful acquisition strategy. As a result of this strategy, Suiza increased
net sales from $579.3 million in 1993 to $3,321 million in 1998.
MERGER SUB
Merger Sub is a wholly owned subsidiary of Suiza, incorporated in Ohio, on
September 8, 1998 for the purpose of effectuating the Merger and the other
transactions contemplated by the Merger Agreement. Prior to the consummation of
the Merger Sub, Merger Sub will not engage in any activity other than activities
related to the transactions contemplated by the Merger Agreement.
24
<PAGE> 33
THE MERGER
BACKGROUND OF AND REASONS FOR THE MERGER
In May 1998, at the invitation of Suiza, Marshall T. Reynolds, the Chairman
of the Board of Directors of the Company, met with Gregg L. Engles, Chairman of
the Board and Chief Executive Officer of Suiza, G. Irwin Gordon, President of
Suiza, and Tracy L. Noll, Executive Vice President -- Corporate Development of
Suiza, to discuss the possibility of a business transaction between Suiza and
the Company. On May 28, 1998, the Company and Suiza executed a confidentiality
agreement, providing for the confidentiality and nondisclosure of any nonpublic,
confidential and proprietary information of the Company given to Suiza and its
representatives in order to assist Suiza in evaluating the relative merits of a
business transaction with the Company.
On June 14, 1998, Mr. Noll met with Mr. Reynolds in Louisville, Kentucky to
conduct discussions about the business and operations of the Company and that of
its subsidiaries. On June 30, 1998, Mr. Noll met with Mr. Reynolds, Kirby J.
Taylor, a Company director and Todd R. Fry, Chief Financial Officer of the
Company, during which meeting Mssrs. Reynolds, Taylor and Fry gave a detailed
presentation about the business and operations of the Company and that of its
subsidiaries. On August 1, 1998, Mr. Noll again met with Mssrs. Reynolds and
Taylor to conduct further business due diligence with respect to the Company and
its subsidiaries.
After extensive discussions regarding pricing of the potential business
transaction, on July 22, 1998, Suiza advised the Company that it was prepared to
offer $19.00 cash per share of Broughton Common Stock, subject to satisfactory
due diligence. The Company agreed to continue discussions with respect to a
potential business transaction with Suiza on that basis. On August 10, 1998, the
Company engaged Chaffe to provide to the Company's Board of Directors its
opinion as to whether or not the consideration of $19.00 cash per share of
Broughton Common Stock would be fair from a financial point of view to the
Company's shareholders.
From mid-June 1998 to September 9, 1998, the Company provided Suiza, its
representatives and advisors with certain business and financial information.
During such time, Suiza and its representatives continued their business due
diligence. From August 7 to August 9, 1998 Mr. Noll and another representative
of Suiza met with Philip E. Cline, President of the Company, and toured the
Company's plants in Burton and Port Huron, Michigan, Marietta, Ohio, Charleston,
West Virginia, and Somerset, Kentucky. From August 1, 1998 to September 9, 1998,
Suiza's advisors conducted accounting and legal due diligence.
Suiza and the Company commenced negotiations on the Merger Agreement in
early August 1998. The terms of the Merger Agreement were finalized on September
10, 1998, subject to approval by the respective boards of directors of Suiza and
the Company. At a meeting of the Company's Board of Directors held on September
10, 1998, the Company's legal advisors reviewed key provisions of the Merger
Agreement. Following discussions with respect to the Merger Agreement and after
receiving Chaffe's fairness opinion, the Company's Board of Directors
unanimously voted to approve the Merger and the Merger Agreement. On September
10, 1998, Suiza's board of directors also met and approved the Merger and the
Merger Agreement. Later that evening, the parties executed the Merger Agreement,
which was publicly announced on the morning of September 11, 1998 by a press
release issued by each of the Company and Suiza before the opening of trading on
NASDAQ and the New York Stock Exchange.
The Merger 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 No. 1 to the Merger Agreement.
Amendment No. 1 to the Merger Agreement, dated January 18, 1999, extended
from December 31, 1998 to April 15, 1999 the date on which either party could
terminate the Merger Agreement (as amended) if the Merger had not been completed
on such date. A related Stock Purchase Agreement dated January 18, 1999 between
Suiza, the Company and the Inside Shareholders provided that at completion of
the Merger, those Inside Shareholders would sell Two Million (2,000,000) Company
Shares to Suiza, and would receive, in lieu
25
<PAGE> 34
of the $19.00 per Share cash merger consideration, the cash sum of $10.00 per
Share, without interest, plus the right to receive up to an additional $9.00 per
Share if certain earnings and performance goals were met between the date of the
Merger and March 31, 2000. The Inside Shareholders, all of whom are either
Company directors or related parties, proposed this arrangement in response to
Suiza's concern with Broughton's financial performance since the September 11,
1998 announcement of the proposed Merger, in an effort to ensure performance and
consummation of the Merger Agreement by Suiza.
On March 18, 1999 the DOJ filed a Motion for TRO, Motion for Preliminary
Injunction and a Complaint in the United States District Court for the Eastern
District of Kentucky, London Division, 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 certain South Central Kentucky school
districts would be substantially lessened as a result of the proposed
transaction. Suiza and the Company independently concluded and agreed not to
contest the motion for TRO. On March 18, 1999 the court entered a TRO enjoining
Suiza, the Company and all persons acting on their behalf from consummating,
directly or indirectly, the 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. By terms of the Court's order, the TRO
remained in effect until such time as the Court addresses the DOJ's Motion for
Preliminary Injunction.
On April 6, 1999, Mr. Engles and Mr. Noll met with Mr. Reynolds and Mr.
Taylor in Huntington, West Virginia to discuss options available to Suiza and
the Company in light of (i) the DOJ's lawsuit seeking to prevent the Merger; and
(ii) Suiza's concern with the Company's financial performance since the
September 11, 1998 announcement of the proposed Merger.
On April 7, 1999, the Company received notice of the USDA's debarment of
the Southern Belle Division and suspension and proposed debarment of the
Company. See "PARTIES TO THE MERGER -- Certain Information Concerning the
Company -- Legal Proceedings".
On April 13, 1999, Mr. Engles and Mr. Noll again met with Mr. Reynolds and
Mr. Taylor in Huntington, West Virginia to discuss options available to Suiza
and the Company in light of (i) the DOJ's lawsuit seeking to prevent the Merger;
(ii) the USDA's debarment of the Company's Southern Belle Division and
suspension and proposed debarment of the Company; and (iii) Suiza's concern with
the Company's financial performance since the September 11, 1998 announcement of
the proposed Merger.
Suiza and Broughton management each unilaterally determined that in view of
the projected expense of contesting the DOJ's Motion for Preliminary Injunction
and Complaint, the reasonably anticipated duration of such legal proceedings and
the uncertainty as to the outcome of legal proceedings, the options available to
Suiza and Broughton were to either terminate the Merger Agreement and abandon
the Merger or to amend the Merger Agreement in such a manner as to permit
consummation of the Merger. DOJ had indicated to both Suiza's and the Company's
legal counsel that divestiture and sale of the Southern Belle Division would
likely resolve the DOJ litigation. However, failure to obtain the Southern Belle
Division in the Merger would deprive Suiza of the revenues it had anticipated
from that unit, as well as the anticipated economies and synergies it had
projected in incorporating the Southern Belle Division into its operations, both
factors having been considered in establishing the $19.00 per Share Merger
Consideration provided in the Merger Agreement.
The anticipated expense to Suiza of contesting the USDA proceedings
following the Merger, and the loss of revenue resulting from the suspension and
proposed debarment of the Company as well as the financial performance of the
Company since September 11, 1998 were also factors which had not existed in
establishing the $19.00 Merger Consideration in the Merger Agreement.
The required divestiture of the Southern Belle Division would likewise
remove that entity from the contingent price earnout provisions of the Stock
Purchase Agreement and invalidate the economic assumptions underlying the terms
thereof.
Accordingly, Mssrs. Engles, Noll, Reynolds and Taylor agreed at their April
13, 1999 meeting: (i) to negotiate with DOJ to effect a divestiture and sale of
the Southern Belle Division on terms which would permit consummation of the
Merger; (ii) to propose to the Broughton Board of Director's an adjustment of
26
<PAGE> 35
the Merger Consideration from $19.00 per Share to $16.50 per Share for all
Company shareholders except the Inside Shareholders; (iii) to propose to the
Inside Shareholders an adjustment of the consideration to be received by the
Inside Shareholders from the $10 cash per Share plus $9.00 per Share contingent
on earnings and performance goals as provided for in the Stock Purchase
Agreement to $11.25 per Share, plus the contingent right to receive an
additional $1.25 per share if certain conditions are satisfied.
Both Suiza and the Company directed their legal counsel to commence
negotiations with DOJ towards a mutually agreeable consent decree and to prepare
an Amended Merger Agreement. On April 13, 1999, the Company advised Chaffe of
the background of events since the December 4, 1998 special meeting of Company
shareholders and of the terms of the proposed Amended Merger Agreement, and
engaged Chaffe to provide to the Company's Board of Directors its opinion as to
whether or not the Merger Consideration of $16.50 would be fair from a financial
point of view to the Company's Shareholders (other than the Inside
Shareholders).
The terms of the Amended Merger Agreement and Amended Stock Purchase
Agreement were finalized on April 27, 1999, subject to approval by the
respective boards of directors of Suiza and the Company. At a meeting of the
Company's Board of Directors held on April 28, 1999, the Company's legal
advisors reviewed key provisions of the Amended Merger Agreement. The Company's
Board of Directors unanimously approved the Amended Merger Agreement.
Following discussions with respect to the Amended Merger Agreement and
after receiving Chaffe's fairness opinion, the Company's Board of Directors
unanimously voted to approve the Merger and the Amended Merger Agreement.
In making its decision and concluding to recommend to holders of Company
Common Stock that they vote their Shares in favor of the Amended Merger
Agreement, the Board of Directors considered a number of factors, including,
among others, the following material considerations:
(a) the directors' familiarity with and review of the business,
financial condition and results of operations of the Company and the
Company's competitive position in its business, as well as other
financial information and general economic conditions including but
not limited to the DOJ institution of a lawsuit to enjoin the
Merger, the significant uncertainties of the financial impact of the
USDA's debarment of the Southern Belle Division and the USDA's
suspension and proposed debarment of the Company;
(b) the possible alternatives to the Merger including, among others,
continuing to operate the Company as an independent entity and the
risks associated therewith given the Company's net operating losses
in the fourth quarter of 1998 and first quarter of 1999 and the
uncertainties associated with the USDA's actions;
(c) the market price of the Company's Common Stock, management's
valuation of the Company's Common Stock relative to the value
represented by the Merger Consideration to be received and the fact
that the Merger Consideration to be received represented a premium
over the market price of the Company's Common Stock since the
announcement of the DOJ's lawsuit seeking to enjoin the Merger;
(d) the anticipated costs associated with contesting the DOJ's lawsuit
and the USDA proceedings;
(e) the directors' belief that the Merger Consideration offered by Suiza
represented the highest price per share that could be negotiated
with Suiza given the required divestiture of Southern Belle by
Suiza; the financial performance of the Company in the fourth
quarter of 1998 and first quarter of 1999 and the suspension and
debarment proceedings brought by the USDA;
(f) the presentations by directors Marshall T. Reynolds and Kirby J.
Taylor;
(g) the presentation by Chaffe, including the Opinion of Chaffe to the
effect that Merger Consideration is fair, from a financial point of
view, to the holders of Company Common Stock (other than the Inside
Shareholders); and
27
<PAGE> 36
(h) the terms and conditions of the Amended Merger Agreement, including,
among others, the right of the Board of Directors (A) in connection
with the discharge of its fiduciary duties to the Company and the
shareholders, to, in certain circumstances, withdraw, modify or
amend its recommendation to the shareholders to accept the Merger
and pursue a competing transaction with another party and (B) in
certain circumstances to terminate the Amended Merger Agreement, and
the financial consequences of such termination.
The Board of Directors did not assign relative weights to the foregoing
factors or determine that any factor was of specific importance as compared to
any other factor. Rather, the Board of Directors viewed its position and
recommendation as being based on the totality of the information presented to it
and considered by it.
THE BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE AMENDED MERGER AGREEMENT
ARE ADVISABLE AND FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS
SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL AND ADOPTION
OF THE AMENDED MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
The Board of Directors of the Company retained Chaffe on August 10, 1998 as
its financial advisor to advise it as to the fairness, from a financial point of
view, of the Merger Agreement's Merger Consideration to the Company
shareholders.
At the September 10, 1998 meeting of the Company's Board of Directors,
Chaffe rendered its written Opinion dated September 9, 1998 that as of the date
of such Opinion, the Merger Agreement's Merger Consideration was fair, from a
financial point of view, to the holders of Shares of Company Common Stock.
THE FULL TEXT OF CHAFFE'S SEPTEMBER 9, 1998 OPINION, WHICH SETS FORTH,
AMONG OTHER THINGS, THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY CHAFFE, IS ATTACHED TO
THIS PROXY STATEMENT AS APPENDIX B-1 AND SHOULD BE READ CAREFULLY IN ITS
ENTIRETY.
Chaffe's September 9, 1998 Opinion was directed to the Company's Board of
Directors, and did not constitute a recommendation as to how any holder of
Shares of Company Common Stock should vote on the Merger.
Chaffe April 1999 Engagement and Opinion
The Board of Directors of the Company retained Chaffe on April 20, 1999 as
its financial advisor to advise it as to the fairness, from a financial point of
view, of the Amended Merger Agreement's Merger Consideration to the Company
shareholders other than the Inside Shareholders.
At the April 28, 1999 meeting of the Company's Board of Directors, Chaffe
rendered its oral opinion, and followed with its written opinion dated April 29,
1999 (the "April 29, 1999 Opinion"), that, as of such date, the Amended Merger
Agreement's Merger Consideration was fair, from a financial point of view, to
the holders of 3,774,335 shares of Company Stock subject to a cash price of
$16.50 per share (the "Public Shares").
THE FULL TEXT OF CHAFFE'S APRIL 29, 1999 OPINION, WHICH SETS FORTH, AMONG
OTHER THINGS, THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY CHAFFE, IS ATTACHED TO
THIS PROXY STATEMENT AS APPENDIX B-2 AND SHOULD BE READ CAREFULLY IN ITS
ENTIRETY. THE SUMMARY OF THE OPINION SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
28
<PAGE> 37
CHAFFE'S APRIL 29, 1999 OPINION IS DIRECTED TO THE COMPANY'S BOARD OF
DIRECTORS, AND DOES NOT CONSTITUTE A RECOMMENDATION AS TO HOW ANY HOLDER OF
SHARES OF COMPANY COMMON STOCK SHOULD VOTE ON THE MERGER.
The following discussion is a summary of the analysis underlying the
conclusion expressed in the April 29, 1999 Opinion.
In connection with its opinion, Chaffe reviewed, among other things, (i)
the Agreement and Plan of the Merger, dated September 10, 1998; (ii) a draft of
Amendment No. 2 to the Agreement and Plan of Merger; (iii) the Company's Annual
Reports to Stockholders for the five years ended December 31, 1997; (iv) the
Company's Annual Report on Form 10-K for the year ended December 31, 1998; (v)
the initial public offering Prospectus of the Company; (vi) certain Company
interim reports to stockholders and Quarterly Reports on Form 10-Q; (vii)
certain publicly-available industry and company financial information; (viii)
certain internal financial analyses and forecasts for the Company that were
prepared by its management. Chaffe held discussions with members of the senior
management of the Company regarding the strategic rationale for, and the
potential benefits of, the transaction contemplated by the Merger Agreement and
the past and current business operations, financial condition, and future
prospects of the Company. In addition, Chaffe reviewed the reported price and
trading activity for the Company's Common Stock, compared certain financial and
stock market information for the Company with similar information for certain
other companies, the securities of which are publicly-traded, reviewed the
financial terms of certain recent business combinations in the dairy industry
specifically and in other industries generally and performed such other studies
and analyses as it considered appropriate. Chaffe relied upon the accuracy and
completeness of all of the financial and other information reviewed by it and
Chaffe assumed such accuracy and completeness for purposes of rendering its
opinion. In addition, Chaffe did not make any independent evaluation or
appraisal of the assets and liabilities of the Company and Chaffe was not
furnished with any such evaluation or appraisal. Chaffe's opinion was provided
for the information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the Merger
Agreement, and such opinion does not constitute a recommendation as to how any
holder of shares of Company Common Stock should vote with respect to such
transaction.
The following is a summary of certain of the financial analyses used by
Chaffe in connection with providing its opinion to the Company Board of
Directors.
Terms of the Offer
Chaffe reviewed the terms of the revised Suiza offer as set forth in the
Amended Merger Agreement. Chaffe notes that the agreement calls for the Public
Shares to be exchanged for $16.50 cash. The remaining 2,000,000 shares, held by
five Company Directors and certain of their affiliates (the "Insider Shares"),
are to be exchanged for $11.25 cash, plus the right to receive an additional
$1.25 per share, contingent upon certain conditions being satisfied. Based on
the total 5,774,335 shares of Company common stock outstanding, the aggregate
merger consideration will be $84,776,528 to the holders of the Company Common
Stock. The terms of the offer have been amended from the original offer of
$19.00 per share for 5,774,335 shares, or an aggregate value of $109,712,365.
Historical Stock Trading Analysis
Chaffe reviewed the historical daily price and trading volume for the
Company Common Stock (NASDAQ: MILK) for the period from December 9, 1997, the
date of its initial public offering, to April 22, 1999. Chaffe notes that the
closing price on December 9, 1997 was $16.63 per share and the closing price on
April 22, 1999 was $13.19 per share. The high closing price during this period
was $18.50 per share and the low was $9.50.
Chaffe also reviewed the weighted average of the closing prices of the
Company Common Stock for the three month period through April 22, 1999 (the "3
Month Average") and the period from December 9, 1997 through August 22, 1999
(the "Total Average"). Chaffe notes that the 3 Month Average and the Total
Average were, respectively, $12.75 and $16.14 per share.
29
<PAGE> 38
Additionally, Chaffe reviewed the trading volume of the Company Common
Stock as compared to a peer group of food companies comprised of Dean Foods
Company ("DF"), Suiza, Dreyer's Grand Ice Cream, Inc. ("DRYR"), Michael Foods,
Inc. ("MIKL") and Suprema Specialties, Inc. ("CHEZ") (collectively, the "Peer
Group"). Chaffe compared the average daily volume, from December 9, 1997 through
April 22, 1999, as a percentage of shares outstanding and notes that the Peer
Group ranged from 0.30% to 1.02%, with a median of 0.48%, while the Company's
number was 0.38%.
Selected Companies Analysis
Chaffe reviewed and compared certain financial information and ratios
relating to the Company to corresponding financial information and ratios for
the Peer Group. Chaffe reviewed the following: return on last 12 months ("LTM")
sales; asset turnover (LTM sales divided by average assets); adjusted (by
after-tax interest expense) net margin; adjusted return on assets ("AROA");
adjusted return on equity ("AROE"); leverage ratio (debt divided by debt plus
equity); and current ratio (current assets divided by current liabilities).
Chaffe analyses indicated the following median Peer Group ratios, compared
to those of the Company: return on LTM sales of 2.75% compared to 1.07%; asset
turnover of 2.05 compared to 2.96; adjusted net margin of 3.89% compared to
1.35%; AROA of 7.80% compared to 4.00%; AROE of 17.01% compared to 5.74%;
leverage ratio of 52.31% compared to 36.91%; and current ratio of 1.53 compared
to 2.22.
Chaffe also reviewed certain market pricing multiples of the Peer Group,
which multiples were calculated using the respective closing price per share, on
April 22, 1999. Chaffe reviewed the following: (i) enterprise value as a
multiple of LTM revenues and earnings before interest, taxes, depreciation and
amortization ("EBITDA"); (ii) price-to-estimated earnings multiples based on FYE
1998 and 1999 Zack's earnings estimates; and (iii) price as a multiple of LTM
revenues, earnings, cash flow after tax ("CFAT") and equity.
Chaffe analyses indicated the following median peer group multiples: (a)
enterprise value as a multiple of LTM revenues of 0.62x; (b) enterprise value as
a multiple of LTM EBITDA of 6.34x; (c) price-to-estimated 1998 and 1999 earnings
multiples of 11.48x and 11.61x, respectively; (d) price-to-LTM earnings of
10.23x; (e) price-to-LTM revenues of 0.36x; (f) price-to-LTM CFAT of 6.70x; and
(g) price as a multiple of equity of 1.92x.
Adjustments to Financials
In performing its analysis, Chaffe made adjustments to the Company's
financial statements for the year ended December 31, 1998 and the LTM through
February 28, 1999, to account for non-recurring merger-related expenses, the
mid-year acquisition by the Company of London's Farm Dairy ("LFD"), and the
extraordinary increase in the cost of butterfat and raw milk.
Merger-related expenses, including legal and consulting costs, totaled
$493,000 for the twelve months through February 28, 1999. Chaffe increased the
Company's earnings before interest and taxes ("EBIT") by this amount in
performing its analysis.
In May 1998, the Company acquired LFD. The acquisition was accounted for as
a purchase; therefore, Company financial statements for the year ended December
31, 1998 included the operations of LFD only from the time of purchase. In
adjusting the financial statements, Chaffe included revenues, gross profit and
EBIT of LFD prior to the acquisition. Additionally, Chaffe considered the
increased level of interest expense on long-term debt used to fund the
acquisition.
In the third and fourth quarters of 1998, butterfat and raw milk prices
increased substantially. The effect on the Company was a reduction in gross
profit, which led to several months of net losses. In adjusting the financials
to normalize earnings, Chaffe determined an applicable gross margin of 21% and
an EBIT margin of
30
<PAGE> 39
3.6%, which are consistent with the Company's historical performance and
management's expectations of future costs. The adjusted figures, which are used
in the valuation models, are shown below.
<TABLE>
<CAPTION>
ITEM ACTUAL 12/98 ADJUSTED
---- ------------ ------------
<S> <C> <C>
Revenue..................................................... $179,432,029 $200,794,000
Net Income.................................................. $ 1,925,093 $ 3,572,743
EBIT........................................................ $ 3,997,000 $ 7,228,584
EBITDA...................................................... $ 6,594,267 $ 10,380,167
</TABLE>
Discounted Cash Flow Analysis
Chaffe performed discounted cash flow ("DCF") analyses based on projected
free cash flow to the firm ("FCFF") of the Company and various growth rate
assumptions. Chaffe based these assumptions on, among other factors, discussions
with Company management, internal Company projections and industry analysts'
reports.
Chaffe calculated the FCFF, based on the Company's adjusted EBIT of
$7,228,584, its tax rate of 39.16% and its depreciation expense of $3,151,583,
to be $5,049,346. In this calculation, Chaffe assumes capital expenditures to be
$2.5 million and no increase in the Company's net working capital. Chaffe
discounted the FCFF at a weighted-average cost of capital ("WACC") of 13.67%.
This rate is based on the firm's market value of common equity of $76.1 million
at April 22, 1999, its market value of long-term of $19.9 million, the cost of
equity of 16.11% (the median rate for the Dairy Product industry from Ibbotson
Associates Cost of Capital Quarterly 1998 Yearbook) and the Company's after-tax
cost of debt of 4.14%.
In the two-stage model, Chaffe applied a four-year growth rate of 19% to
the Company's projected FCFF, followed by a rate of 4% in perpetuity after the
fourth year. This assumes the Company will initially continue to grow through
acquisitions, and is based on industry analysts' projections. Chaffe discounted
this cash flow at a rate of 13.67% and applied a control premium of 24.05%
(Houlihan Howard Lokey & Zukin 1998 Control Premium Study), which results in a
control value of $15.44 per share. Chaffe then performed an analysis of the
sensitivity of the value indication to changes in the initial growth rate
assumptions, and determined that initial four year growth ranging from 14% to
24% results in a range of control value between $12.73 and $18.49 per share.
In the single-stage DCF scenario, Chaffe calculated the Company's
sustainable growth rate to be 8.05%, based on its adjusted ROE and dividend
payout rate. Chaffe applied this growth rate to the Company's projected FCFF in
perpetuity, and discounted the result at a rate of 13.67%, resulting in a
control value of $17.41 per share. Chaffe again performed a sensitivity analysis
by applying perpetual growth rates ranging from 6.05% to 10.05% to the FCFF,
which resulted in a range of control values between $11.65 and $29.54 per share.
Merger Analysis
Chaffe analyzed certain information relating to a group 16 selected
transactions in the dairy industry (the "Dairy Merger Group") announced since
1992, and another group of 23 transactions in the food products industry (the
"Food Merger Group") announced since 1997. Chaffe performed an analysis of the
transactions to determine the following multiples: price-to-earnings,
price-to-revenue, price-to-equity, total invested capital ("TIC")-to-EBIT,
TIC-to-EBITDA, and TIC-to-revenue. The analyses, with certain data points not
being
31
<PAGE> 40
publicly available, indicate the following median pricing multiples, and the
indicated value per share as applied to the Company:
<TABLE>
<CAPTION>
DAIRY MERGER GROUP FOOD MERGER GROUP
-------------------- --------------------
MULTIPLE PER SHARE MULTIPLE PER SHARE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Price/Earnings.......................................... 17.68 $10.94 19.98 $12.36
Price/Revenue........................................... 0.48 $16.69 0.48 $16.69
Price/Equity............................................ 6.31 $37.21 2.25 $13.27
TIC/EBIT................................................ 16.44 $17.13 15.13 $15.49
TIC/EBITDA.............................................. 15.14 $23.77 10.57 $15.55
TIC/Revenue............................................. 0.36 $ 9.07 0.64 $18.81
</TABLE>
Control Premium Analysis
The extent or size of a control premium (consideration paid over the
target's market value) is based upon relationships that exist in the public
marketplace, as evidenced by price movements and price relationships before
control bids are made (or known to be imminent) and the final prices at which
control is secured by subsequent bids or tender offers made to the public
shareholders. According to the Houlihan Lokey Howard & Zukin 1998 Control
Premium Study, the prices after control or takeover bids were tendered for the
food products industry, including the dairy industry, for transactions for the
18 months through December 31, 1998 represented premiums to the target's
unaffected market value ranging from 6.50% to 87.20%, with a median of 24.05%.
For comparison purposes, Chaffe calculated the control premium of the
offer. Based on the Suiza offer for the Public Shares of $16.50 as compared to
the current market price of the Company as of April 22, 1999 of $13.19 per
share, the offer represents a 25.09% premium. Chaffe also determined the
unaffected market price of the Company to be $10.50, on April 19, 1999. The
Suiza offer for the Public Shares represents a premium of 57.14% over this
unaffected market price. The control premiums calculated for the offer are in
line with those cited in the study mentioned above.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Chaffe's opinion. In arriving at its fairness determination, Chaffe
considered the results of all such analyses. No company or transaction used in
the above analyses as a comparison is directly comparable to the Company or the
contemplated transaction. The analyses were prepared solely for purposes of
Chaffe providing its opinion to the Company's Board of Directors as to the
fairness of the Merger Consideration pursuant to the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, Chaffe does not assume responsibility if future results are materially
different from those forecast.
Through its experience in the securities industry, in investment analysis
and appraisal, and in related corporate finance and investment banking
activities, Chaffe & Associates, Inc. states that it is competent to perform a
fair market value of this transaction. Neither Chaffe nor any of its officers or
employees has any interest in any securities of the Company or Suiza. Chaffe
has, however, undertaken several assignments for entities in which Mr. Marshall
T. Reynolds, Chairman of the Board of Directors of the Company, has an interest,
and has been an intermediary in transactions to which Mr. Reynolds was a party.
Further, Chaffe currently is acting as the financial advisor in the merger of
another institution in which Mr. Reynolds has a significant interest.
Pursuant to a letter agreement dated August 10, 1998 (the "1998 Engagement
Letter"), the Company engaged Chaffe to act as its financial advisor in
connection with the Merger. Pursuant to the terms of the 1998 Engagement Letter,
the Company paid Chaffe a fee of $25,000, plus $1,159 out-of-pocket expenses,
for its
32
<PAGE> 41
services in connection with the September 9, 1998 Opinion. Further, the Company
has paid Chaffe for certain other services, on an hourly basis, pertaining both
to the Merger in general and the Opinion in particular. The fees received by
Chaffe in connection with its services to the Company are not dependent or
contingent upon the occurrence or lack thereof of any transaction, including the
Merger.
Pursuant to a letter agreement dated April 20, 1999 (the "1999 Engagement
Letter"), the Company engaged Chaffe to act as its financial advisor in
connection with the Amended Merger Agreement. Pursuant to the terms of the 1999
Engagement Letter, the Company has agreed to pay Chaffe a fee of $30,000, plus
out-of-pocket expenses, for the April 29, 1999 Opinion. Further, the Company has
agreed to pay Chaffe on an hourly basis (the "Advisory Services and Additional
Services") for its work pertaining both to the Merger in general and the April
29, 1999 Opinion in particular. The fees received by Chaffe in connection with
its services to the Company were not dependent or contingent upon the occurrence
or lack thereof of any transaction, including the Merger.
The Company has agreed to indemnify and hold harmless Chaffe, its
subsidiaries and affiliates, and its officers, directors, stockholders,
employees, attorneys, agents and representatives, and the successors and assigns
of each of the foregoing parties from and against any person claiming to have
relied on Chaffe's advice or services, or the performance or nonperformance
thereof, or claiming to have been entitled to some benefit therefrom, or
claiming that such services were not adequately performed, and all related
damage, claim, demand, expense or cost of any kind or nature, including
reasonable attorney fees and expenses, arising directly or indirectly, from or
in any way related to, the opinions or any other services performed by Chaffe,
provided that Chaffe has not been grossly negligent or guilty of reckless or
willful misconduct in connection with the opinions, or any other services.
In summary, based on the Amended Merger Agreement's Merger Consideration of
$16.50 per share for the Public Shares and the above analysis, it is Chaffe's
opinion that the proposed transaction is fair, from a financial point of view,
to the holders of the Public Shares of the Company's common stock as of the date
of the opinion.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for by the Company using the purchase method
of accounting in accordance with generally accepted accounting principles
("GAAP"). In the application of the purchase method of accounting, all assets
and liabilities of the Company will be recorded at their fair value at the
Effective Time, with a resulting adjustment to shareholders' equity in an amount
equal to the difference between the price paid by Suiza and the fair value of
the Company's assets minus its liabilities.
REGULATORY REQUIREMENTS APPLICABLE TO THE MERGER
On April 28, 1999, Suiza, Broughton and DOJ entered into a stipulation and
proposed consent decree to settle the action brought by DOJ to prevent
consummation of the Merger. As soon as the stipulation is filed with and entered
by the district court, Suiza and Broughton may consummate the Merger, assuming
all other conditions to consummation are satisfied. The stipulation was entered
by the district court on May 3, 1999. Pursuant to the stipulation, Suiza and
Broughton have agreed to abide by the terms of the proposed consent decree until
such time as that decree, in the form of a final judgment, shall be approved by
the district court. Under the Antitrust Procedures and Penalties Act of 1974
(also known as the "Tunney Act"), 15 U.S.C. sec.16, the district court is
required to undertake a careful review of the proposed consent decree to ensure
that it is in the public interest. The statute requires that the proposed
consent decree be placed on the public record for comment for a period of 60
days following its filing with the court, and that DOJ provide a "Competitive
Impact Statement" explaining the proposed decree. Suiza and Broughton are
required to make certain procedural filings during this period. At the
conclusion of the comment period, the court shall review the proposed decree,
along with the public comments, if any, and determine whether to enter the
proposed decree as a final judgment. Suiza and Broughton have every expectation
that the district court will enter the proposed decree at some time after the
public comment period has expired.
33
<PAGE> 42
The stipulation and proposed decree requires Suiza to divest the Southern
Belle Dairy and its associated assets to a buyer acceptable to DOJ within six
months of the filing of the proposed consent decree or five days after the entry
of the final judgment by the district court, whichever is later. After
consummation of the Merger, but pending divestiture, Suiza is required to hold
the Southern Belle Dairy separate from its other businesses and to take steps to
insure that the Southern Belle Diary's business is maintained. Suiza is required
to file certain reports with DOJ pending divestiture reporting on the steps it
has taken to comply with these requirements.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors with respect to
the Merger, the shareholders should be aware that certain officers and directors
of the Company have the following interests in the Merger, separate from and in
addition to their interests as shareholders of the Company generally. The Board
of Directors was aware of these interests and took them into account in
approving the Merger, the Merger Agreement, the Amended Merger Agreement and the
transactions contemplated thereby.
Pursuant to the Amended Merger Agreement, the Surviving Corporation and
Suiza have agreed that they will indemnify, defend and hold harmless officers,
directors and employees of the Company and its subsidiaries who were such at any
time prior to the Effective Time from and against all losses, expenses, claims,
damages or liabilities arising out of the transactions contemplated by the
Amended Merger Agreement to the fullest extent permitted or required under
applicable law, and advance expenses to such indemnified parties subject to a
customary reimbursement agreement. All indemnification rights of such officers,
directors and employees existing prior to the Effective Time under the Company's
Articles of Incorporation or Regulations shall survive the Merger and continue
thereafter. The Surviving Corporation will maintain in effect, for not less than
one year after the Effective Time, the current policies of directors' and
officers' liability insurance with respect to matters occurring on or prior to
the Effective Time; provided, however, that the Surviving Corporation or Suiza
may substitute therefor policies of at least the same coverage (with carriers
comparable to the Company's existing carriers) containing terms and conditions
which are not materially less advantageous to the indemnified parties; and
provided further, that the Surviving Corporation (or Suiza, if it shall
substitute policies) will not be required in order to maintain or procure such
coverage to pay an annual premium in excess of 150% of the current annual
premium paid by the Company for its existing coverage.
THE AMENDED MERGER AGREEMENT
On September 10, 1998, the Company, Suiza and Merger Sub entered into the
Merger Agreement. On January 18, 1999, the Company, Suiza and Merger Sub entered
into Amendment No. 1 to the Merger Agreement and Suiza and the Inside
Shareholders entered into the Stock Purchase Agreement. On April 28, 1999, the
Company, Suiza and Merger Sub entered into Amendment No. 2 to the Merger
Agreement, which amends the Merger Agreement and supersedes Amendment No. 1 to
the Merger Agreement. Suiza and the Inside Shareholders executed Amendment No. 1
to the Stock Purchase Agreement concurrently with execution of the Amended
Merger Agreement. The following is a summary of the material provisions of the
Amended Merger Agreement and the Amended Stock Purchase Agreement, a copy of the
Amended Merger Agreement is attached hereto as Appendix A and a copy of the
Amended Stock Purchase Agreement is attached hereto as Appendix D. Such summary
is qualified in its entirety by reference to the Amended Merger Agreement and
Amended Stock Purchase Agreement.
THE MERGER. The Amended Merger Agreement provides that, at the Effective
Time of the Merger, in accordance with the Amended Merger Agreement and the
OGCL, Merger Sub shall be merged with and into the Company, the separate
corporate existence of Merger Sub shall cease and the Company shall continue as
the surviving corporation ("Surviving Corporation"). As a consequence, the
Company will become a wholly owned subsidiary of Suiza. At the Effective Time,
by virtue of the Merger and without any action on the part of the Company,
Suiza, the Merger Sub or the holder of any Shares, each Share issued and
outstanding (other than treasury shares, dissenting shares and Shares owned by
any subsidiary of the Company) immediately prior to the Effective Time shall be
converted into and become the right to receive $16.50 per Share, except
34
<PAGE> 43
that pursuant to the Amended Stock Purchase Agreement, with respect to 2,000,000
Shares of Common Stock held by the "Inside Shareholders", each of those
2,000,000 Shares will be purchased by Suiza for $11.25 in cash, without interest
thereon, plus the contingent right to receive an additional $1.25 per Share if
certain conditions are satisfied. All of the issued and outstanding shares of
the common stock of Merger Sub issued and outstanding immediately prior to the
Effective Time shall after the Merger be converted into and become 1,000 fully
paid and nonassessable shares of the capital stock of the Surviving Corporation.
EFFECTIVE TIME. Subject to the terms and conditions of the Amended Merger
Agreement, the Merger shall become effective at the time a properly executed
certificate of merger is filed with the Secretary of State of Ohio. The
certificate of merger will be filed as soon as practicable following fulfillment
of the conditions precedent of the Amended Merger Agreement. See "THE MERGER
AGREEMENT -- Conditions Precedent."
DIRECTORS AND OFFICERS. The persons appointed by Suiza in its sole
discretion, to be the directors and officers of the Merger Sub shall be the
directors and officers, respectively, of the Surviving Corporation until their
successors shall have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Surviving
Corporation's Articles of Incorporation and Regulations.
EXCHANGE PROCEDURES. As soon as reasonably practicable after the Effective
Time of the Merger, the Surviving Corporation shall cause Wachovia Shareholder
Services, (the "Exchange Agent") to mail to each holder of record of a
certificate or certificates (the "Certificates") representing Shares that, in
accordance with the Amended Merger Agreement, have been converted into the right
to receive $16.50 in cash, without interest thereon (the "Merger
Consideration"), (i) a letter of transmittal (which shall specify that delivery
will be effected, and risk of loss and title to the Certificates will pass, only
upon proper delivery of the Certificates to the Exchange Agent and (ii)
instructions for use in effecting the surrender of the Certificates pursuant to
such letter of transmittal. As soon as practicable after the Effective Time, an
amount in immediately available funds equal to the aggregate Merger
Consideration will be deposited in trust with the Exchange Agent. Upon surrender
of a Certificate to the Exchange Agent for cancellation, together with such
letter of transmittal, duly completed and validly executed in accordance with
its terms, the holder of such Certificate will be entitled to receive in
exchange therefor the Merger Consideration per Share multiplied by the number of
Shares represented by such Certificate. Any Certificate so surrendered shall
forthwith be canceled. In no event will the holder of any Certificate be
entitled to receive interest on any funds to be received by reason of the
Merger. If payment of the Merger Consideration is to be made to a person other
than the person in whose name the surrendered Certificate is registered on the
stock transfer books of the Company, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or be otherwise in proper
form for transfer and that the person requesting such payment shall have paid
all transfer and other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation or the Exchange Agent that such taxes have been paid or are not
applicable. Until surrendered as contemplated herein, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the applicable Merger Consideration.
COMPANY SHAREHOLDERS SHOULD NOT SEND ANY OF THEIR SHARE CERTIFICATES
REPRESENTING COMPANY SHARES TO THE COMPANY OR TO THE EXCHANGE AGENT UNTIL THEY
ARE FORMALLY NOTIFIED THAT THE MERGER HAS BEEN CONSUMMATED AND THEY RECEIVE A
LETTER OF TRANSMITTAL FORM. ANY CERTIFICATES SUBMITTED BEFORE THAT TIME WILL BE
RETURNED TO THE SHAREHOLDER.
Shareholders whose certificates have been lost, stolen or destroyed will be
entitled to receive the applicable Merger Consideration in exchange therefor
upon presentation of a satisfactory affidavit reciting such a loss, theft or
destruction, and, if required by the Surviving Corporation, the posting by such
person of a bond in such reasonable amount as the Surviving Corporation may
direct.
REPRESENTATIONS AND WARRANTIES. In the Amended Merger Agreement, the
Company has made customary representations and warranties to Suiza and Merger
Sub. The representations and warranties of the Company relate, among other
things, to the following: (i) the incorporation, existence, good standing and
35
<PAGE> 44
qualification to do business of the Company and its subsidiaries; (ii) the
capitalization of the Company and its subsidiaries; (iii) its authorization,
execution, delivery and performance and the enforceability of the Amended Merger
Agreement and related matters; (iv) the absence of conflicts, violations and
defaults under its Articles of Incorporation and Regulations and certain other
agreements and documents; (v) the documents and reports filed by the Company
with the Securities and Exchange Commission (the "SEC") and the accuracy and
completeness of the information contained therein; (vi) the absence of certain
changes or events since June 30, 1998; (vii) pending or threatened litigation;
(viii) employee benefits matters; (ix) vote required; (x) the Company's receipt
of Chaffe's Opinion; (xi) compliance by the Company and its subsidiaries with
applicable laws; (xii) tax matters; (xiii) certain material contracts of the
Company and its subsidiaries; (xiv) labor relations; (xv) relationships with
customers and suppliers; (xvi) intellectual property; (xvii) environmental
matters; (xviii) insurance; (xix) real property leased or owned by the Company
or its subsidiaries; (xx) Year 2000 compliance; (xxi) commitments with respect
to the announced expansion of the Company's Marietta, Ohio facility; and (xxii)
inapplicability of any takeover statute under the OGCL.
Suiza and Merger Sub have also made customary representations and
warranties to the Company. Representations and warranties of Suiza and Merger
Sub relate, among other things, to: (i) their incorporation, existence, good
standing and qualification to do business; (ii) their authorization, execution,
delivery and performance and the enforceability of the Merger Agreement and
related matters. Suiza has made an additional representation and warranty with
respect to its ability to have available sufficient funds to pay the aggregate
Merger Consideration.
CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. The Company has
agreed that, prior to the Effective Time, unless Suiza otherwise agrees in
writing or except as otherwise required by the Amended Merger Agreement: (i) the
Company shall, and shall cause its subsidiaries to, carry on their respective
businesses in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, and shall, and shall cause its subsidiaries to,
use their reasonable efforts to preserve intact their present business
organizations and preserve their relationships with customers, suppliers and
others having business dealings with them to the end that their goodwill and
on-going businesses shall be unimpaired at the Effective Time; (ii) the Company
shall, and shall cause its subsidiaries to, (A) maintain insurance coverages and
their books, accounts and records in the usual manner consistent with past
practice; (B) comply in all material respects with all laws (including "social
laws"), ordinances and regulations of governmental entities applicable to the
Company and its subsidiaries; (C) maintain and keep their material properties
and equipment in good repair, working order and condition, ordinary wear and
tear excepted; and (D) perform in all material respects their obligations under
all material contracts and commitments to which any of them is a party or by
which any of them is bound; (iii) the Company shall not and shall not propose or
agree to (A) sell or pledge or agree to sell or pledge any of its capital stock
or any capital stock owned by it in any of its subsidiaries or owned by any of
its subsidiaries, (B) amend its Articles of Incorporation or Regulations, (C)
split, combine or reclassify its outstanding stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of stock of the Company, or declare, set aside,
authorize or pay any dividend or other distribution payable in cash, stock or
property, or (D) directly or indirectly redeem, purchase or otherwise acquire or
agree to redeem, purchase or otherwise acquire any shares of Common Stock; (iv)
the Company shall not, nor shall it permit any of its subsidiaries to, (A)
issue, deliver or sell or agree to issue, deliver or sell any additional shares
of, or rights of any kind to acquire any shares of, its respective stock of any
class, any indebtedness having the right to vote on any matter on which the
Company's shareholders may vote or any option, rights or warrants to acquire, or
securities convertible into, exercisable for or exchangeable for, shares of
stock; (B) other than finalization of the expansion of the hardening room at the
Company's Marietta facility, incur additional indebtedness or encumber or grant
a security interest in any asset or enter into any other material transaction
other than in each case in the ordinary course of business, it being understood,
without limitation, that the Company and its subsidiaries shall immediately
cease work on the proposed expansion of the Marietta facility and shall not
enter into any additional commitments, understandings or agreements with respect
to such expansion; (C) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof; (D) incur any additional material transaction
fees, costs or expenses; or (E) enter into any contract, agreement, commitment
or arrangement
36
<PAGE> 45
with respect to any of the foregoing; (v) the Company shall not, nor shall it
permit any of its subsidiaries to, except as required to comply with applicable
law and except as expressly provided in the Amended Merger Agreement, enter into
any new (or amend any existing) Company employee benefit plan or any new (or
amend any existing) employment, severance or consulting agreement, grant any
general increase in the compensation of current or former directors, officers or
employees (including any such increase pursuant to any bonus, pension,
profit-sharing or other plan or commitment) or grant any increase in the
compensation payable or to become payable to any director, officer or employee,
except in any of the foregoing cases in accordance with pre-existing contractual
provisions or in the ordinary course of business consistent with past practice;
(vi) settle or compromise any suit or claim or threatened suit or claim material
to the transactions contemplated hereby or material to the Company and its
subsidiaries, individually or in the aggregate; (vii) the Company shall not, nor
shall it permit any of its subsidiaries to, amend, modify, terminate, waive or
permit to lapse any material right of first refusal, preferential right, right
of first offer or any other material right of the Company or any of its
subsidiaries, except in the ordinary course of business; (viii) the Company
shall not, nor shall it permit any of its subsidiaries to, (A) create or permit
any lien or other encumbrance affecting real property owned or leased by the
Company or any of its subsidiaries (the "Real Estate"); (B) commit any waste or
nuisance upon the Real Estate; (C) impose any easements, covenants, conditions
or restrictions on the Real Estate; (D) institute or participate in any
annexation, zoning, platting, or other governmental action regarding the Real
Estate; or (E) enter into or modify any contract or other agreement that in any
way affects the Real Estate and that will survive the Effective Time, unless
such contract or agreement is cancelable, without cost, with thirty days prior
written notice; (ix) the Company shall not, nor shall it permit any of its
subsidiaries to, without the prior written consent of Parent, enter into any
lease for the use or occupancy of the Real Estate with a term in excess of 12
months or amend, renew, modify or terminate any of the leases relating to Real
Estate; (x) the Company shall cause at or prior to the Effective Time the
release of all liens against the Real Estate; and (xi) the Company shall, and
shall cause its subsidiaries to, perform all of the Company's (or its
subsidiaries', as the case may be) obligations under any contracts pertaining to
the Real Estate (including all leases) and promptly notify Suiza of any defaults
thereunder.
EMPLOYEE MATTERS. The Amended Merger Agreement provides that as of the
Effective Time, the employees of the Company and each of its subsidiaries will
continue employment with the Surviving Corporation and its subsidiaries,
respectively, in the same positions and at the same level of wages and/or salary
and without having incurred a termination of employment or separation from
service; provided, however, except as may be specifically required by applicable
law or any contract, the Surviving Corporation and its subsidiaries will not be
obligated to continue any employment relationship with any employee for any
specific period of time. The Surviving Corporation will be the sponsor of the
employee benefit plans sponsored by the Company immediately prior to the
Effective Time, and Suiza will cause the Surviving Corporation and its
subsidiaries to satisfy all existing obligations and liabilities under such
employee benefit plans; provided, however, that except as contemplated by the
Amended Merger Agreement, nothing contained in the Amended Merger Agreement will
limit or restrict the Surviving Corporation's right on or after the Effective
Time to amend, modify or terminate any of such employee benefit plans.
INDEMNIFICATION. All rights to indemnification existing in favor of the
directors, officers or employees of the Company as provided in the Company's
Articles of Incorporation or Regulations, as in effect on the date of the
Amended Merger Agreement, with respect to matters occurring through the
Effective Time, will survive the Merger and will continue in full force and
effect thereafter. The Surviving Corporation will maintain in effect for not
less than one year after the Effective Time the current policies of directors'
and officers' liability insurance maintained by the Company with respect to
matters occurring on or prior to the Effective Time. The Amended Merger
Agreement further provides that the Surviving Corporation or Suiza may
substitute therefor policies of at least the same coverage (with carriers
comparable to the Company's existing carriers) containing terms and conditions
which are not materially less advantageous to the indemnified parties, provided
that the Surviving Corporation (or Suiza, if it shall substitute policies) will
not be required in order to maintain or procure such coverage to pay an annual
premium in excess of 150% of the current annual premium paid by the Company for
its existing coverage.
37
<PAGE> 46
In the event that any action, suit, proceeding or investigation relating to
the Amended Merger Agreement or to the transactions contemplated thereby is
commenced, whether before or after the Effective Time, the Company, Suiza and
Merger Sub will cooperate and use their respective reasonable efforts to
vigorously defend against and respond to the same.
NO SOLICITATION. The Company has agreed (i) that neither it nor any of its
subsidiaries will, and each of them will direct and use their best efforts to
cause their officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its subsidiaries) not to, initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its shareholders) with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities of, the Company or any of its
subsidiaries (any such proposal or offer being hereinafter referred to as an
"Alternative Proposal"), or engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person relating to an Alternative Proposal, or release any third party from any
obligations under any existing standstill agreement or arrangement, or enter
into any agreement with respect to an Alternative Proposal; (ii) that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing; and (iii) that it will notify Suiza immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, the Company or any of its subsidiaries and will disclose to
Suiza the material substance thereof.
Notwithstanding the foregoing, the Amended Merger Agreement provides that
if the Company receives a written proposal which the Board of Directors, in the
exercise of its reasonable judgment, believes is likely to result in an
Alternative Proposal, and such written proposal was not solicited by the
Company, then the Company may directly or indirectly furnish information and
access to, and may participate in discussions and negotiate with, the person or
entity that has submitted such Alternative Proposal, but only if (i) the Board
of Directors of the Company reasonably concludes that (A) all shareholders would
receive Superior Consideration (meaning consideration consisting of cash and/or
securities for all the shares of Common Stock then outstanding or for all or
substantially all the assets of the Company that the Board of Directors
determines in its good faith judgment (having received the advice of an
unaffiliated reputable financial advisor) to be materially more favorable to
shareholders than the Merger) if the Alternative Proposal is accepted and
consummated, and (B) the proposed acquiror has the legal ability (including,
without limitation, under antitrust laws) to complete such acquisition on a
timely basis, and (C) such Alternative Proposal is not subject to a financing
contingency, and (ii) the Board of Directors, following consultation with and
considering the advice of its independent legal counsel relating thereto,
determines in its good faith judgment that failing to take such action would
constitute a breach of such Board of Directors' fiduciary duties to the
Company's shareholders.
Neither the Board of Directors nor any committee thereof may (i) withdraw
or modify, or propose to withdraw or modify, in a manner adverse to Suiza, its
approval or recommendation of the Amended Merger Agreement or the Merger or (ii)
approve or recommend, or propose to approve or recommend, any Alternative
Proposal, unless (x) the Alternative Proposal meets the requirements of the
preceding paragraph, and the Board of Directors believes, in its good faith
judgment, that such Alternative Proposal is more favorable to the Company's
shareholders than the Merger and (y) the Board of Directors, following
consultation with and considering the advice of its independent legal counsel
relating thereto, determines in its good faith judgment that failing to take
such action would constitute a breach of its fiduciary duties to the Company's
shareholders imposed by law; and (z) the Company has given Suiza two business
days' prior notice of such action specifying the material terms of such
Alternative Proposal.
The Amended Merger Agreement provides that nothing in the Merger Agreement
will prevent the Board of Directors from taking, and disclosing to its
shareholders, a position contemplated by Rule 14e-2(a) promulgated under the
Securities Exchange Act of 1934, provided that such Board of Directors does not
recommend that its shareholders tender their shares in connection with any such
tender offer unless such recommendation is permitted as described above.
38
<PAGE> 47
INVESTIGATION; CONFIDENTIALITY. Pursuant to the Amended Merger Agreement,
the Company has agreed to (i) provide Suiza and its representatives with full
access, upon reasonable prior notice and during normal business hours, to all
officers, employees, agents and accountants of the Company and its assets,
properties, books and records, and (ii) furnish promptly to such persons (A) a
copy of each report, statement, schedule, and other document filed or received
by the Company pursuant to the requirements of federal or state securities laws
or filed with any other governmental or regulatory authority, and (B) all other
information and data (including, without limitation, copies of contracts,
Company benefit plans and other books and records) concerning the business and
operations of the Company as Suiza or any of such other persons reasonably may
request.
Suiza will hold, and will use its best efforts to cause its representatives
to hold, in strict confidence, all such information pursuant to a Non-Disclosure
Agreement dated May 27, 1998, between Suiza and the Company.
CONDITIONS PRECEDENT. The Amended Merger Agreement provides that the
respective obligations of the Company, Suiza and Merger Sub to effect the Merger
are subject, among other things, to the fulfillment, or, where permissible,
waiver of certain conditions, including, without limitation:
(i) the approval of the Merger, the Amended Merger Agreement and the
transactions contemplated thereby by the requisite vote of the
shareholders;
(ii) entry of a stipulation and filing of a proposed consent decree
terminating the DOJ action on terms mutually agreeable to Suiza and the
Company; and
(iii) there has not been issued and in effect any preliminary or
permanent injunction or other order by any federal or state court of
competent jurisdiction or other governmental entity which prevents the
consummation of the Merger.
The obligation of the Company to effect the Merger is also subject to the
fulfillment of certain additional conditions, including:
(i) the performance in all material respects of the agreements of
Suiza and Merger Sub under the Amended Merger Agreement;
(ii) the accuracy of the representations and warranties of Suiza and
Merger Sub when made and on and as of the Effective Time, except as
expressly contemplated or permitted by the Amended Merger Agreement; and
(iii) the receipt of a certificate of the Chief Executive Officer,
President or a Vice President of each of Suiza and Merger Sub to such
effect.
The obligations of Suiza and Merger Sub to effect the Merger are also
subject to the fulfillment of certain additional conditions, including:
(i) the performance in all material respects of the agreements of the
Company under the Amended Merger Agreement;
(ii) the accuracy of the representations and warranties of the Company
when made and on and as of the Effective Time, except as expressly
contemplated or permitted by the Amended Merger Agreement;
(iii) the receipt of a certificate of the Chief Executive Officer,
President or Vice President of the Company to such effect;
(iv) Since June 30, 1998, there shall have been no change, occurrence
or circumstance having or reasonably likely to have, individually or in the
aggregate, a material adverse effect on the business, properties, assets,
operations, condition (financial or otherwise), customer relations,
supplier relations, business prospects, liabilities or results of
operations (a "Company Material Adverse Effect"), and Suiza shall have
received a certificate signed by the Chief Executive Officer, President or
a Vice President of the Company to that effect ; however the Amended Merger
Agreement further provides that Parent and Merger Sub agree to waive any
right they may have under Section 9.3(b) of the Amended Merger
39
<PAGE> 48
Agreement to terminate the Amended Merger Agreement based on the financial
operating performance of the Company between June 30, 1998 and March 31,
1999, so long as the Company's average monthly operating income for any
calendar month after March 31, 1999 is not less than the average monthly
operating income for the 3 months ended March 31, 1999, provided that such
waiver shall not affect any right of Parent and Merger Sub to terminate
such Agreement based on the failure of any other condition to their
performance set forth therein;
(v) The Company and its subsidiaries will take no action or agree to
any resolution regarding the currently pending suspension, proposed
debarment and related proceedings with the USDA without Suiza's prior
written consent, and there will be no other suspension, debarment or
similar proceedings pending or threatened against the Company or any of its
subsidiaries;
(vi) Holders of no more than 5% of the outstanding Shares of Company
Common Stock shall have dissented and preserved their rights to seek
appraisal in accordance with the OGCL; and
(vii) Suiza's review of surveys, title commitments and responses to
requests for verification of compliance with applicable laws will have
revealed no facts or circumstances that may materially and adversely affect
the value or use by Suiza or any of its subsidiaries of any of the Real
Estate located at (i) Burton, Michigan, (ii) Port Huron, Michigan, (iii)
Marietta, Ohio, (iv) Charleston, West Virginia, and (v) Somerset, Kentucky;
provided that Suiza may not rely on such condition to terminate the Merger
Agreement unless Suiza provides the Company reasonable notice of any such
facts or circumstances that may materially and adversely affect the value
or use by Suiza or any of its subsidiaries of any such Real Estate, and the
Company has failed to cure within 20 days from the date of such notice.
TERMINATION. The Amended Merger Agreement provides that it may be
terminated and the Merger abandoned at any time prior to the Effective Time,
before or after approval by shareholders of the Company, by mutual consent of
the Company and Suiza.
The Amended Merger Agreement further provides that it may be terminated and
the Merger may be abandoned by action of the Company's Board of Directors or
Suiza's board of directors if (a) the Merger has not been consummated by June
30, 1999 (provided that the terminating party shall not have breached in any
material respect its obligations under the Amended Merger Agreement in a manner
that would have contributed to the failure to consummate the Merger), or (b) the
requisite approval of Company shareholders shall not have been obtained or (c) a
federal or state court or other governmental entity shall have issued an
injunction or other order which prevents consummation of the Merger, and such
injunction order shall have become final and non-appealable; provided that the
party seeking to terminate the Amended Merger Agreement has used all
commercially reasonable efforts to remove such injunction, order or decree.
The Amended Merger Agreement may also be terminated and the Merger
abandoned at any time prior to the Effective Time by action of the board of
directors of Suiza if the Company's Board of Directors has withdrawn or modified
in a manner adverse to Suiza its approval or recommendation of the Amended
Merger Agreement or the Merger or has recommended an Alternative Proposal to the
Company's Shareholders.
The Amended Merger Agreement may further be terminated and the Merger
abandoned at any time prior to the Effective Time by action of the Company's
Board of Directors if the Company's Board of Directors has withdrawn or modified
in a manner adverse to Suiza its approval or recommendation of the Amended
Merger Agreement or the Merger or has recommended an Alternative Proposal to the
Company's shareholders.
TERMINATION FEE. In the event that (i) Suiza terminates the Amended Merger
Agreement following withdrawal or modification in a manner adverse to Suiza by
the Company's Board of Directors of its approval or recommendation of the
Amended Merger Agreement or the Merger, or following the Company's Board of
Directors recommendation of an Alternative Proposal to the Company's
shareholders, or (ii) the Company terminates the Amended Merger Agreement for a
similar reason, then, in either such case, the Company shall, concurrently with
such termination, pay Suiza a termination fee of $1,000,000 cash, which amount
shall be payable by wire transfer of same day funds, and shall promptly
reimburse Suiza for out of pocket costs and expenses incurred by Suiza in
connection with the Merger, up to an aggregate of $400,000.
40
<PAGE> 49
FEES AND EXPENSES. Except as provided in the Amended Merger Agreement,
whether or not the Merger is consummated, all costs and expenses incurred in
connection with the Merger Agreement will be paid by the party incurring such
costs and expenses, except that regulatory filing fees, including those related
to the HSR filing, will be paid one-half by each of Suiza and Company.
AMENDMENT, EXTENSION AND WAIVER. The Amended Merger Agreement may be
amended, supplemented or modified by action taken by or on behalf or the
respective Boards of Directors of Suiza and Company at any time prior to the
Effective Time, whether prior to or after the adoption of the Amended Merger
Agreement at the Special Meeting, but after such adoption only to the extent no
further shareholder approval is required. No such amendment, supplement or
modification shall be effective unless set forth in a written instrument duly
executed by each party to the Amended Merger Agreement.
The Amended Merger Agreement further provides that at any time prior to the
Effective Time, the parties thereto, by action taken by or on behalf of their
respective Boards of Directors, may (i) extend the time for the performance of
any of the obligations or other acts of the other parties, (ii) waive any
inaccuracies in the representations and warranties of the other parties
contained in the Amended Merger Agreement or in any document delivered pursuant
to the Amended Merger Agreement or (iii) waive compliance with any of the
agreements or conditions of the other parties contained in the Amended Merger
Agreement. No such extension or waiver shall be effective unless set forth in a
written instrument duly executed by or on behalf of the party extending the time
of performance or waiving any such inaccuracy or non-compliance. No waiver by
any party of any term or condition of the Amended Merger Agreement shall be
deemed to be or construed as a waiver of the same or any other term or condition
of the Amended Merger Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a general discussion of the material United States federal
income tax consequences of the Merger. The discussion below with respect to the
Company's shareholders does not deal with special classes of investors, such as
holders who may be subject to the alternative minimum tax, individuals who are
not citizens or residents of the United States, foreign corporations, insurance
companies, tax-exempt organizations and regulated insurance companies. In
addition, no information is provided herein with respect to the tax consequences
of the Merger under applicable foreign, state or local laws.
A shareholder will recognize gain or loss upon receipt of the cash payable
in exchange for his Shares in an amount equal to the difference between the
aggregate amount received by him and such shareholder's aggregate tax basis in
the Shares exchanged. A shareholder exercising dissenter's rights under the OGCL
will also recognize gain or loss in an amount equal to the difference between
the cash received by such shareholder in redemption of such shareholder's Shares
and the shareholder's aggregate tax basis in such Shares. Recognized gain or
loss will be capital gain or loss, assuming the Shares are held as a capital
asset, and will be long-term capital gain or loss if such Shares are held for
more than twelve months, and short-term capital gain or loss if such Shares are
held for twelve months or less.
THE FOREGOING PRESENTS THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER, AND DOES NOT DISCUSS TAX CONSEQUENCES UNDER ANY APPLICABLE STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS. ACCORDINGLY, SHAREHOLDERS ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER AND OF ANY STATE OR LOCAL INCOME TAX CONSEQUENCES, INCLUDING WITH RESPECT
TO THE EXERCISE OF ANY DISSENTERS' RIGHTS.
41
<PAGE> 50
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for each of the five years ended December 31, 1998 and the three months
ended March 31, 1998 and 1999. Such data as of and for each of the five years
ended December 31, 1998, have been derived from the Company's audited
consolidated financial statements. Such data for the three months ended March
31, 1998 and 1999 are derived from the Company's unaudited financial statements
and, in the opinion of management, reflect all adjustments necessary (consisting
of only normal recurring adjustments) to present fairly the financial results
for such periods.
The selected historical financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the related
notes thereto contained elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- -------
UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $73,552 $72,253 $83,919 $87,170 $179,432 $34,751 $49,704
Cost of sales...................... 59,238 58,992 68,669 69,292 142,343 27,130 41,250
------- ------- ------- ------- -------- ------- -------
Gross profit....................... 14,314 13,261 15,250 17,878 37,089 7,621 8,454
------- ------- ------- ------- -------- ------- -------
Operating costs and expenses:
Selling and distribution......... 10,675 11,316 12,064 13,945 28,233 5,747 7,644
General and administrative....... 2,328 2,294 2,453 2,080 5,451 888 1,762
------- ------- ------- ------- -------- ------- -------
Operating income (loss)............ 1,311 (349) 733 1,853 3,405 986 (952)
------- ------- ------- ------- -------- ------- -------
Other income (expenses):
Other income, net (1)............ 72 132 3,244 230 592 159 93
Interest (expense), net.......... (195) (239) (217) (143) (833) (2) (365)
------- ------- ------- ------- -------- ------- -------
Income (loss) before income
taxes............................ 1,188 (456) 3,760 1,940 3,164 1,143 (1,224)
Income tax expense (benefit)....... 444 (149) 1,431 761 1,239 443 (477)
------- ------- ------- ------- -------- ------- -------
Net income (loss).................. $ 744 $ (307) $ 2,329 $ 1,179 $ 1,925 $ 700 $ (747)
======= ======= ======= ======= ======== ======= =======
Basic earnings (loss) per share
(2).............................. $ 0.18 $ (0.08) $ 0.59 $ 0.28 $ 0.33 $ 0.12 $ (0.13)
======= ======= ======= ======= ======== ======= =======
Diluted earnings (loss) per share
(2).............................. $ 0.17 $ (0.08) $ 0.57 $ 0.28 $ 0.33 $ 0.12 $ (0.13)
======= ======= ======= ======= ======== ======= =======
Cash dividends per common share
(2).............................. $0.0267 $0.0267 $0.0267 $0.1133 $ 0.15 $ 0.05 $ 0.00
======= ======= ======= ======= ======== ======= =======
Book value per common share (2).... $ 2.07 $ 2.02 $ 2.53 $ 5.71 $ 5.90 $ 5.78 $ 5.77
======= ======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 957 $ 161 $ 2,308 $ 9,633 $ 4,278 $ 9,198 $ 5,611
Working capital..................... $ 5,561 $ 4,281 $ 7,315 $16,693 $16,901 $16,624 $ 782
Total assets........................ $16,319 $17,454 $18,538 $46,248 $75,176 $45,962 $75,787
Total debt.......................... $ 1,782 $ 2,151 $ 1,856 $ 58 $19,918 $ 53 $19,863
Shareholders' equity................ $ 8,692 $ 7,881 $10,428 $32,988 $34,047 $33,400 $33,300
</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.
(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.
42
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (ANNUAL)
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.
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
43
<PAGE> 52
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.
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.
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 continued to operate under its terms
until the debarment notification described below.
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 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 had indicated that Southern Belle could be subject to
debarment and the Company subject to suspension and debarment if they failed to
enter into such proposed agreement.
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 would pursue suspension and proposed debarment against the
Southern Belle Division and the Company based on 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
44
<PAGE> 53
debarment would be rendered by October 15, 1998, unless good cause exists to
extend the determination period. Since that date, the USDA extended that
decision in successive 45-day periods.
On April 7, 1999, the United States Department of Agriculture ("USDA")
advised that it had debarred the Southern Belle Division of the Company from
federal procurement and non-procurement programs for a period of three years,
effective from December 31, 1997. During the period of debarment, Southern Belle
is excluded generally from engaging in contracts and other transactions
involving federal procurement and federal non-procurement programs
governmentwide, unless an agency head or other authorized designee grants an
exception with respect to a particular transaction.
The USDA also notified the Company on April 7, 1999, by notice dated and
effective March 31, 1999, that the USDA had suspended the Company, and is
proposing to debar the Company from engaging in contracts and other transactions
involving federal non-procurement transactions, with the effect that the Company
is excluded generally from engaging in contracts and other transactions
involving both federal non-procurement and federal procurement programs
governmentwide during the period of the suspension. The proposed debarment of
the Company, if ordered, would remain in effect for a period commensurate with
the USDA's determination of the seriousness of the alleged cause, generally by
regulation not to exceed three years. The suspension and proposed debarment is
based upon the Company's delivery to several schools of half-pint containers of
fluid milk which allegedly failed to contain the minimum required quantities of
fluid milk, and the alleged failure of such containers of milk to meet net
content labeling or contract requirements.
The Company intends to oppose the suspension and proposed debarment of the
Company through the administrative process. The Company's management is unable
at this time to predict the outcome of the USDA proceedings or their effect on
the Company's financial position and results of operations. However, neither the
Southern Belle Division debarment nor the Company suspension preclude the
performance of contracts existing at the time of debarment or suspension.
Further, under existing USDA regulations, neither debarment nor suspension
preclude the Southern Belle Division or the Company from obtaining and
performing contracts awarded under federal non-procurement programs administered
by the USDA Food and Nutrition Service and valued under $100,000.
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 September 11, 1998, the Company announced that it had executed the
Merger 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 was 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 and outstanding. The Merger 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 No. 1 to the Merger Agreement.
That Amendment No. 1 to the Merger Agreement, dated January 18, 1999,
extended from December 31, 1998 to April 15, 1999 the date on which either party
could terminate the Merger Agreement (as amended) if the Merger had not been
completed on such date. A related Stock Purchase Agreement dated January 18,
1999 between Suiza, the Company and the Inside Shareholders provided that at
completion of the Merger, those Inside Shareholders would sell Two Million
(2,000,000) Company Shares to Suiza, and would receive, in lieu of the $19.00
per Share cash merger consideration, the cash sum of $10.00 per Share, without
interest, plus the right to receive up to an additional $9.00 per share if
certain earnings and performance goals were met between the date of the Merger
and March 31, 2000. The Inside Shareholders, all of whom are either Company
directors or related parties, proposed this arrangement in response to Suiza's
concern with Broughton's financial performance since the September 11, 1998
announcement of the proposed Merger, in an effort to ensure performance and
consummation of the Merger Agreement by Suiza.
45
<PAGE> 54
Subject to satisfaction of all conditions contained in the Merger
Agreement, 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 Department of Justice Antitrust
Division ("DOJ") filed a Motion for Temporary Restraining Order ("TRO"), Motion
for Preliminary Injunction and a Complaint in the United States District Court
for the Eastern District of Kentucky, London Division, 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 certain South Central Kentucky
school districts would be substantially lessened as a result of the proposed
transaction. Suiza and the Company independently concluded and agreed not to
contest the motion for TRO. On March 18, 1999 the court entered a TRO enjoining
Suiza, the Company and all persons acting on their behalf from consummating,
directly or indirectly, the 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. By terms of the Court's order, the TRO
remained in effect until such time as the Court addresses the DOJ's Motion for
Preliminary Injunction.
On April 28, 1999, DOJ, the Company and Suiza announced that they had
reached an agreement, subject to court approval, to settle the civil antitrust
lawsuit brought by DOJ against Suiza and the Company in March 1999 to enjoin the
Merger. The proposed settlement will allow Suiza to complete the Merger,
conditioned upon Suiza's agreement to later sell the business conducted at
Company's Southern Belle Dairy based in Pulaski County, Kentucky. The proposed
settlement is subject to approval by the U.S. District Judge for the Eastern
District of Kentucky London Division where the DOJ's antitrust lawsuit is
currently pending. Before the settlement is approved by the court, it must be
submitted for public comment for a period of 60 days, but the parties may close
the Merger prior to final approval of the settlement. Pursuant to the proposed
settlement, Suiza will agree to sell the Southern Belle Dairy to a buyer
acceptable to the DOJ within six months after the settlement agreement is filed
with the court, or five days after entry by the court of the Final Judgment,
whichever is later.
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>
46
<PAGE> 55
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
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.
47
<PAGE> 56
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.
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.
48
<PAGE> 57
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 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.
49
<PAGE> 58
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.
50
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (QUARTERLY)
The following discussion is as of March 31, 1999 and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operation (Year End) and the Company's Unaudited Quarterly
Consolidated Financial Statement and the related Notes thereto included
elsewhere in this Proxy Statement.
RESULTS OF OPERATIONS
The following tables present certain financial information concerning the
Company's results of operations, including certain information presented as a
percentage of net sales.
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C> <C> <C>
Net Sales......................................... $34,751 100.0% $49,704 100.0%
Cost of sales..................................... 27,130 78.1 41,250 83.0
Gross profit...................................... 7,621 21.9 8,454 17.0
Operating costs and expenses...................... 6,635 19.1 9,406 18.9
Operating income (loss)........................... 986 2.8 (952) (1.9)
Other income (expense), net....................... 158 0.5 (272) (0.6)
Net income (loss)................................. $ 700 2.0% $ (747) (1.5)%
======= =======
Earnings (loss) per common share:
Basic........................................... $ 0.12 $ (0.13)
======= =======
Diluted......................................... $ 0.12 $ (0.13)
======= =======
Shares used in computing earnings (loss) per
common share:
Basic........................................... 5,774 5,774
======= =======
Diluted......................................... 5,774 5,774
======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales
Net sales for the first quarter 1999 increased $15.0 million or 43.0% to
$49.7 million from $34.8 million for the first quarter 1998. The increase in net
sales was primarily due to the acquisition of London's in May 1998. Therefore, a
full quarter's sales for London's were reflected in the first quarter 1999 net
sales amounts. The net sales increase is also attributable to higher raw product
costs partially offset by volume reductions at divisions reporting in 1998.
Cost of Sales
Cost of sales for the first quarter 1999 increased $14.1 million or 52.1%,
to $41.3 million from $27.1 million in the first quarter 1998. Cost of sales as
a percentage of net sales, however increased to 83.0% in the first quarter 1999
from 78.1% in the first quarter 1998 primarily as a result of an overall
increase in raw milk costs in the first quarter 1999 compared to the first
quarter 1998 and increased price competition.
Operating Expenses
Operating expenses for the first quarter 1999 increased $2.8 million, or
41.8%, to $9.4 million from $6.6 million in the first quarter 1998. Operating
expenses as a percentage of net sales were 18.9% for the first
51
<PAGE> 60
quarter 1999, compared to 19.1% for the first quarter 1998. Operating expenses
as a percentage of net sales decreased primarily due to higher net sales
resulting from record raw milk costs in January and February 1999. The Company
incurred direct merger costs associated with the proposed merger with Suiza
Foods of approximately $127,000 in the first quarter of 1999.
Other Income (Expense)
Other expense for the first quarter 1999 was ($272,000) compared to income
of $158,000 for the first quarter 1998. The change was primarily the result of
increased interest expense resulting from the purchase of London's.
Net Income (Loss)
Net income (loss) for the first quarter 1999 changed by $1,447,098, to a
loss of ($747,000) or ($0.13) per share on a diluted basis from income of
$700,000 or $0.12 per share on a diluted basis, for the first quarter 1998. The
net loss is primarily attributed to record raw milk costs for two months in
1999, decreases in volume for divisions reporting in 1998 and increased price
competition.
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 was $782,000 and $16.9 million at March 31,
1999 and December 31, 1998, respectively.
The decrease in working capital position of $16.1 million resulted from
certain components of the Company's credit facility becoming payable in full on
March 30, 2000. It is the Company's intent to review options regarding its
credit facilities which may include extensions of interest only payments or
conversion to term debt. These events will be contingent on the final outcome of
the proposed merger with Suiza.
During the first quarter 1999 as compared to the first quarter 1998,
capital expenditures decreased $519,000 to $595,000 from $1.1 million in the
first quarter 1998.
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.
On February 23, 1999 the Company amended its credit agreement regarding the
$15.0 million line of credit and $5.0 million uncollateralized capital
expenditure line of credit. As a result of this amendment, certain terms and
covenants in the credit agreement have been modified.
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 and the amended credit
agreement dated February 23, 1999.
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
52
<PAGE> 61
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 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.
53
<PAGE> 62
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
FOR THE TWELVE ACTUAL
MONTHS ENDED FOR THE PERIOD
DECEMBER 31, ENDED MAY 28,
1998 1998 PRO FORMA PRO FORMA
THE COMPANY LFD HOLDING CORP. ADJUSTMENTS AS ADJUSTED
-------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales............................... $179,432 $22,408 $201,840
Cost of Sales........................... 142,343 18,447 $ 8(2) 160,798
-------- ------- ----- --------
Gross Profit............................ 37,089 3,961 (8) 41,042
Operating costs and expenses:
Selling and distribution........... 28,233 3,155 (69)(4) 31,426
107(2)
General and administrative......... 2,160 (44)(1) 7,708
5,451 11(2)
130(3)
-------- ------- ----- --------
Operating income (loss)................. 3,405 (1,354) (143) 1,908
Other income (expenses):
Other income, net.................. 592 2 594
Interest expense................... (832) (384) (177)(5) (1,393)
-------- ------- ----- --------
Income (loss) before income taxes....... 3,165 (1,736) (320) 1,109
Income tax expense (benefit)............ 1,240 (677) (148)(6) 415
-------- ------- ----- --------
Net income (loss)....................... $ 1,925 $(1,059) $(172) $ 694
======== ======= ===== ========
Earnings per common share:
Basic.............................. $ 0.33 $ 0.12
======== ========
Diluted............................ $ 0.33 $ 0.12
======== ========
Shares used in computing earnings per
common share:
Basic.............................. 5,774 5,774
======== ========
Diluted............................ 5,774 5,774
======== ========
</TABLE>
54
<PAGE> 63
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS FOR LFD HOLDING, INC. (LFD)
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 or LFD) of Port Huron, Michigan. Total acquisition costs were
$19,166,519. LFD is a wholly-owned subsidiary of the Company.
(1) To reflect the Pro forma adjustment as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED 5/28/98
--------------
<S> <C>
Amortization expense for write off of intangibles........... $43,528
=======
</TABLE>
(2) To reflect additional depreciation due to write up in fair value of
property, plant, equipment and land and fair value adjustment to LFD's
inventory and cost of goods sold as follows:
<TABLE>
<CAPTION>
DEPRECIATION
FAIR VALUE LIFE FOR THE PERIOD
ADJUSTMENT (YEARS) ENDED 5/28
---------- ------- --------------
<S> <C> <C> <C>
Land................................................. 63,880
Building and improvements............................ 1,045,635 10-40 $ 30,448
Machinery and equipment.............................. 1,180,329 1-15 122,332
--------- ----- --------
2,289,844 152,780
Adjustment for inventory............................. (26,780)
--------
$126,000
========
Recorded as:
Cost of goods sold................................. $ 8,190
Selling and distribution........................... 107,100
General and administrative......................... 10,710
--------
$126,000
========
</TABLE>
(3) To reflect Pro forma adjustments for the amortization of goodwill and other
intangibles
<TABLE>
<CAPTION>
PERIOD ENDED
AMOUNT LIFE 5/28/98
----------- ---- ------------
<S> <C> <C> <C>
INTANGIBLES:
Trade Name............................................. $ 5,500,000 40 $ 57,293
Distribution network................................... 2,700,000 40 28,125
Workforce.............................................. 760,000 23 13,768
Goodwill............................................... 2,938,086 40 30,605
----------- --------
$11,898,086 $129,791
=========== ========
(4) To reflect Pro forma adjustments for the impact of unfavorable lease
commitments, net..................................................... $ 69,305
========
</TABLE>
55
<PAGE> 64
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) The purchase adjustments reflect the pay off of substantially all of LFD's
debt and the utilization of the Company's line of credit to finance the
acquisition.
<TABLE>
<CAPTION>
INTEREST EXPENSE
ADJUSTMENT
FOR THE PERIOD
ENDED
THE COMPANY 5/28/98
----------- ----------------
<S> <C>
Revolving credit facility, with interest at either prime or
LIBOR plus a margin. The interest rate at May 28, 1998 is
approximately 7%.......................................... $523,527
LFD
- ---
Revolving loan.............................................. (148,012)
Term loan................................................... (198,807)
--------
Total increase in interest expense................ $176,708
========
</TABLE>
(6) To reflect the income tax provision based on applying the pro forma
estimated effective tax rate of the combined companies.
56
<PAGE> 65
PRICE RANGE OF THE SHARES
Since the completion of the Company's initial public offering of Shares on
December 12, 1997, the Shares have been traded on NASDAQ under the symbol
"MILK." The following table sets forth the high and low sales prices for the
Shares for the periods indicated as reported by NASDAQ:
<TABLE>
<CAPTION>
SALE PRICE AVERAGE
----------------- DAILY
HIGH LOW VOLUME
------- ------- -------
<S> <C> <C> <C>
1997
Fourth Quarter....................................... $17.50 $16.00 49,637
1998
First Quarter........................................ $17.25 $14.375 12,680
Second Quarter....................................... $17.50 $14.75 8,266
Third Quarter........................................ $18.25 $14.50 19,017
Fourth Quarter....................................... $18.50 $17.688 31,976
1999
First Quarter........................................ $18.063 $10.25 27,190
Second Quarter (through April 29, 1999).............. $17.50 $ 9.50 68,964
</TABLE>
On September 10, 1998, the last full trading day prior to the public
announcement of the proposed Merger, the high and low sales prices of the Shares
were $18.00 and $17.125, respectively and the closing sale price was $17.25. On
April 27, 1999, the last full trading day prior to the public announcement of
the resolution of the DOJ's lawsuit seeking to enjoin the Merger and the
execution of the Amended Merger Agreement, the high and low sales prices of the
Shares were $14.625 and $13.50, respectively, and the closing sale price was
$13.875.
DIVIDENDS
The following table sets forth the quarterly dividends per share declared
on Broughton Common Stock.
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
First Quarter(1)............................................ $.0067 $.0067 $.0500
Second Quarter(1)........................................... .0067 .0067 .0500
Third Quarter(1)............................................ .0067 .0500 .0500
Fourth Quarter(1)........................................... .0067 .0500 .0000(2)
</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.
(2) In the Merger Agreement, the Company agreed that it would not declare
or pay any dividends other than the dividend payable on September 30,
1998.
57
<PAGE> 66
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, each director of the Company and all executive
officers and directors of the Company as a group as of April 30, 1999. The
address for each person listed below is c/o Broughton Foods Company, 210 North
Seventh Street, Marietta, Ohio 45750.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
BENEFICIAL OWNER DIRECTLY OR INDIRECTLY(1) PERCENT OF 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, II............................. 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)............................... 32,000 *
Paul T. Theisen.................................. 3,000 *
Thomas W. Wright(8).............................. 300,000 5.2
All directors and executive officers as a group
of 14.......................................... 2,521,612 43.67
</TABLE>
- ---------------
* Indicates beneficial ownership of less than 1% of the issued and
outstanding common Shares.
(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 April 30, 1999, the
Company had 5,774,335 common Shares 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. Reynolds), 6,150 Shares held by
Champion Leasing Corporation (an entity which holds shares over which
Mr. Reynolds effectively exercises sole voting and investment power)
and 78,440 Shares held by The Harrah and Reynolds Corporation (an
entity which holds shares over which Mr. Reynolds effectively exercises
sole voting and investment power).
(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) These 300,000 Shares are held in trust over which Shares Mr. Wright
effectively exercises sole voting and investment power.
58
<PAGE> 67
INDEPENDENT AUDITORS
The firm of PricewaterhouseCoopers LLP, independent certified public
accountants, has audited the financial statements of the Company since 1969. A
representative of PricewaterhouseCoopers LLP is expected to be present at the
Special Meeting. That representative will have the opportunity to make a
statement and will be available to respond to appropriate questions.
The audited consolidated financial statements of the Company included in
this Proxy Statement have been audited by PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report dated March 19, 1999
accompanying such financial statements.
The consolidated financial statements of LFD Holding Corp. and Subsidiary
as of December 31, 1997 and 1996 and for the years then ended, included in this
Proxy Statement, have been audited by Ernst & Young LLP, independent auditors,
as stated in their report dated February 27, 1998 appearing herein.
The audited consolidated financial statements of Southern Belle Dairy
Company have been audited by PricewaterhouseCoopers LLP and Baird, Kurtz &
Dobson, independent accountants, as set forth in their reports dated October 31,
1997 and July 25, 1996, respectively, accompanying such financial statements.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
The Company will hold a 1999 annual meeting of shareholders only if the
Merger is not consummated before the time of such meeting. In the event that
such a meeting is held any proposals of shareholders intended to be presented at
the 1999 annual meeting must have been received by the Secretary of the Company
no later than December 2, 1998 in order to be considered for inclusion in the
proxy materials relating to such meeting. Any shareholder proposal to change the
number of directors of the Company at any 1999 annual meeting must have been
received by the Company on or before December 31, 1998. In addition, any proxy
solicited by the Board of Directors for any 1999 annual meeting of shareholders
will confer discretionary authority to vote on any shareholder proposal
presented at that meeting, unless the Company was provided with notice of such
proposal no later than February 17, 1999.
OTHER MATTERS
The Board of Directors does not expect or intend to bring any business
before the Special Meeting other than pertaining to the subjects referred to in
this Proxy Statement. Only items incident to the purpose for which the Special
Meeting was called may be brought before the Special Meeting. However, in the
event that other business does properly come before the Company's shareholders
at the Special Meeting, it is intended that the persons voting such proxies will
vote thereon according to their best judgment in the interest of the Company.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the 1934 Act
and in accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). All reports,
proxy statements and other information filed by the Company with the SEC can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the regional offices of the SEC located at 7 World
Trade Center, Thirteenth Floor, New York, New York 10048 and the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may also be obtained at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
The SEC also maintains a Website (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The Company's Common Stock is authorized
for trading on NASDAQ and traded under the symbol "MILK". Reports and other
information concerning the Company can also be inspected at the offices of the
59
<PAGE> 68
Nasdaq Stock Market, 1735 K Street, N.W. Washington, D.C. 20006. Upon
consummation of the Merger, the Common Stock will cease to be authorized for
trading on NASDAQ.
By Order of the Board of Directors
/s/ DAVID J. BROUGHTON
DAVID J. BROUGHTON
Corporate Secretary
May 20, 1999
60
<PAGE> 69
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-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 70
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.
/s/ PRICEWATERHOUSE COOPERS LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
March 19, 1999
F-2
<PAGE> 71
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
=========== ===========
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-3
<PAGE> 72
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-4
<PAGE> 73
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-5
<PAGE> 74
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)
----------- ----------- ------------
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-6
<PAGE> 75
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 common
F-7
<PAGE> 76
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-8
<PAGE> 77
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 most restrictive covenants under these agreements are the maintenance
of a maximum funded debt to Earnings Before Interest Expense, Taxes,
Depreciation and Amortization (EBITDA) ratio, a minimum tangible net worth, a
minimum Earnings Before Interest and Taxes (EBIT) to interest expense ratio and
a cashflow coverage ratio.
The Company had $19,336,230 outstanding under its revolving credit
facilities at December 31, 1998.
F-9
<PAGE> 78
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
F-10
<PAGE> 79
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<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-11
<PAGE> 80
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-12
<PAGE> 81
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 OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES 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-13
<PAGE> 82
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-14
<PAGE> 83
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
F-15
<PAGE> 84
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distributes a full line of fresh milk and other products, while its Burton,
Michigan plant produces a variety of ice cream products.
The table below presents information about reported segments for the years
ending December 31:
<TABLE>
<CAPTION>
DAIRY
--------------
(IN THOUSANDS)
<S> <C>
1998:
Sales.................................................. $188,689
Operating profit....................................... $ 4,630
1997:
Sales.................................................. $ 90,883
Operating profit....................................... $ 1,853
1996:
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:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SALES:
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
======= ======= ========
OPERATING INCOME:
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:
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
F-16
<PAGE> 85
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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 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.
F-17
<PAGE> 86
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $32,000 and $108,100 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.
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.
F-18
<PAGE> 87
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-19
<PAGE> 88
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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. Suiza and the Company independently concluded
and agreed not to contest the motion for TRO. 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
certain South Central Kentucky school districts would be substantially lessened
as a result of the proposed transaction.
F-20
<PAGE> 89
INDEX TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS -- COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1999
(Unaudited)............................................... F-22
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1999 (Unaudited)................. F-23
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1999 (Unaudited)................. F-24
Notes to Consolidated Financial Statements (Unaudited)...... F-25
</TABLE>
F-21
<PAGE> 90
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,610,681
Accounts receivable, less allowance for doubtful accounts
of $721,000 at March 31, 1999.......................... 17,330,234
Inventories............................................... 6,721,399
Prepaid expenses.......................................... 980,555
Refundable income taxes................................... 731,619
Deferred income taxes..................................... 240,617
-----------
Total current assets.............................. 31,615,105
-----------
Property, plant and equipment, at cost:
Buildings and land improvements........................... 11,066,416
Machinery and equipment................................... 25,174,021
Leasehold improvements.................................... 198,760
Assets under construction................................. 2,057,487
-----------
38,496,684
Less accumulated depreciation and amortization......... 12,145,789
-----------
26,350,895
Land...................................................... 2,818,418
-----------
29,169,313
-----------
Intangible assets, net of accumulated amortization of
$439,283 at March 31, 1999................................ 13,632,608
Other assets................................................ 765,632
Prepaid pension costs....................................... 604,361
-----------
15,002,601
-----------
Total assets...................................... $75,787,019
===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $11,919,144
Accrued expenses and other................................ 2,837,815
Current installments on debt.............................. 16,075,792
-----------
Total current liabilities......................... 30,832,751
-----------
Term Debt, net of current installments...................... 3,787,317
Deferred income taxes....................................... 5,933,973
Other....................................................... 1,933,168
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 10,000,000 shares authorized,
6,314,575 shares issued at March 31, 1999.............. 6,314,575
Additional paid-in capital................................ 20,482,702
Retained earnings......................................... 7,010,257
-----------
33,807,534
Less 540,240 shares of common stock in treasury, at
cost................................................... 507,724
-----------
Total shareholders' equity.................................. 33,299,810
-----------
Total liabilities and shareholders' equity.................. $75,787,019
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE> 91
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Net sales................................................... $34,751,119 $49,704,027
Cost of sales............................................... 27,130,177 41,250,214
----------- -----------
Gross profit........................................... 7,620,942 8,453,813
Operating costs and expenses:
Selling and distribution.................................. 5,747,480 7,643,927
General and administrative expenses....................... 887,895 1,761,875
----------- -----------
6,635,375 9,405,802
----------- -----------
Income (loss) from operations............................... 985,567 (951,989)
Other income (expense):
Other income, net......................................... 13,964 14,172
Interest income........................................... 145,517 78,327
Interest expense.......................................... (1,626) (364,611)
----------- -----------
157,855 (272,112)
----------- -----------
Income (loss) before income taxes........................... 1,143,422 (1,224,101)
Total income tax expense (benefit).......................... 443,027 (477,398)
----------- -----------
Net income (loss)........................................... $ 700,395 $ (746,703)
=========== ===========
Earnings (loss) per common share:
Basic..................................................... $ 0.12 $ (0.13)
=========== ===========
Diluted................................................... $ 0.12 $ (0.13)
=========== ===========
Shares used in computing earnings (loss) per common share:
Basic..................................................... 5,774,335 5,774,335
=========== ===========
Diluted................................................... 5,774,335 5,774,335
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE> 92
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 700,395 $ (746,703)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 434,416 851,644
Bad debt expense...................................... 12,000 73,004
Gain on disposal of property, plant and equipment..... (7,500) (2,099)
Change in deferred gain on sale of fixed assets....... (9,099) (9,096)
Change in assets and liabilities:
Accounts receivable................................ 534,291 1,033,952
Inventories........................................ (238,644) (738,682)
Prepaid expenses................................... (39,909) 269,388
Refundable income taxes............................ 230,775 (154,582)
Other assets....................................... (140,938) (32,594)
Prepaid and accrued pension costs.................. (217,291) --
Accounts payable................................... (1,002,935) 1,291,148
Accrued expenses and other......................... (43,466) 155,912
Income taxes payable............................... 180,252 --
Other long-term liabilities........................ -- (25,212)
----------- ----------
Total adjustments................................ (308,048) 2,712,783
----------- ----------
Net cash provided by operating activities................... 392,347 1,966,080
----------- ----------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment... 383,500 16,686
Proceeds from termination of officer's life insurance
policy.................................................. 197,775 --
Purchases of property, plant and equipment................ (1,114,903) (595,408)
----------- ----------
Net cash used in investing activities....................... (533,628) (578,722)
----------- ----------
Cash flows from financing activities:
Payments on term debt..................................... (5,311) (54,885)
Dividends paid............................................ (288,717) --
----------- ----------
Net cash used in financing activities....................... (294,028) (54,888)
----------- ----------
Net (decrease) increase in cash and cash equivalents........ (435,309) 1,332,473
Cash and cash equivalents, beginning of period.............. 9,633,184 4,278,208
----------- ----------
Cash and cash equivalents, end of period.................. $ 9,197,875 $5,610,681
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1,643 $ 364,611
=========== ==========
Income taxes............................................ -- $ 9,831
=========== ==========
Supplemental disclosure of noncash investing and financing
activities:
The Company declared a $.05 per share dividend on February
25, 1998 to shareholders of record on March 27, 1998,
payable on April 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-24
<PAGE> 93
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Interim results are not necessarily indicative of results
for a full year.
A summary of the Company's significant accounting policies is presented on
pages F-7 to F-9. Users of financial information produced for interim periods
are encouraged to refer to the footnotes contained in the previous year audited
financial statements when reviewing interim financial results. There has been no
material change in the accounting policies followed by the Company during 1999,
except as described below.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the unaudited consolidated financial
position, results of operations and cash flows of Broughton Foods Company ("the
Company" or "Broughton") and subsidiaries for interim periods.
Effective January 1, 1999, the Company adopted 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. Additionally, the Company adopted SOP
98-5, "Reporting on the Costs of Start-up Activities." The SOP requires that
entities expense start-up costs and organization costs as they are incurred. The
adoption of these pronouncements did not have a material impact on the Company's
presentation of financial statements for the period ended March 31, 1999.
2. INVENTORIES
Inventories are valued at the lower of cost or market with cost determined
on the first-in, first-out ("FIFO") method using standard costs which
approximate actual. The major components of inventory at December 31, 1998 and
March 31, 1999 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
Raw products and finished goods............................. $3,458,923 $4,088,074
Ingredients................................................. 679,726 772,522
Warehouse, packaging supplies and other..................... 1,844,068 1,860,803
---------- ----------
$5,982,717 $6,721,399
========== ==========
</TABLE>
3. DEBT
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.
F-25
<PAGE> 94
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
On February 23, 1999, the Company amended its credit agreement regarding
the $15.0 million line of credit and $5.0 million uncollateralized expenditure
line of credit. As a result of this amendment, certain terms and covenants in
the credit agreement have been modified.
The most restrictive covenants under these agreements are the maintenance
of a maximum funded debt to Earnings Before Interest Expense, Taxes,
Depreciation and Amortization (EBITDA) ratio, a minimum tangible net worth, a
minimum Earnings Before Interest and Taxes (EBIT) to interest expense ratio and
a cashflow coverage ratio.
The Company had $19,336,230 outstanding under its revolving credit
facilities at March 31, 1999.
4. SEGMENT INFORMATION:
In 1998, the Company adopted SFAS No. 131. 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.
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.
The table below presents information about reported segments for the three
months ended March 31, 1998 and 1999, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS)
-------------------
DAIRY 1998 1999
----- -------- --------
<S> <C> <C>
Sales....................................................... $37,467 $52,134
Operating income (loss)..................................... $ 1,131 $ (578)
</TABLE>
F-26
<PAGE> 95
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
A reconciliation of total segment sales to total consolidated sales and of
total segment operating income (loss) to total consolidated income (loss) before
income taxes, for the three months ended March 31, 1998 and 1999, respectively
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
SALES:
Total segment sales.................................... $37,467 $52,134
Elimination of intersegment revenue.................... (2,716) (2,430)
------- -------
Consolidated Sales................................ $34,751 $49,704
======= =======
OPERATING INCOME (LOSS):
Total operating income (loss) from reportable
segments.............................................. $ 1,131 $ (578)
Corporate General and Administrative................... (145) (373)
Interest............................................... (2) (365)
Other Income........................................... 159 92
------- -------
Consolidated income (loss) before income taxes.... $ 1,143 $(1,224)
======= =======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
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 based on 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
F-27
<PAGE> 96
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
On April 7, 1999, the USDA advised that it had debarred the Southern Belle
Division of Broughton from federal procurement and non-procurement programs for
a period of three years, effective from December 31, 1997. During the period of
debarment, Southern Belle is excluded generally from engaging in contracts and
other transactions involving federal procurement and federal non-procurement
programs governmentwide, unless an agency head or other authorized designee
grants an exception with respect to a particular transaction.
Broughton is currently considering its options with respect to the Southern
Belle Division debarment, including whether or not to appeal the debarment
decision.
The USDA also notified Broughton on April 7, 1999, by notice dated and
effective March 31, 1999, that the USDA had suspended Broughton, and is
proposing to debar Broughton from engaging in contracts and other transactions
involving federal non-procurement transactions, with the effect that Broughton
is excluded generally from engaging in contracts and other transactions
involving both federal non-procurement and federal procurement programs
governmentwide during the period of the suspension. The proposed debarment of
Broughton, if ordered, would remain in effect for a period commensurate with the
USDA's determination of the seriousness of the alleged cause, generally by
regulation not to exceed three years. The suspension and proposed debarment is
based upon Broughton's delivery to several schools of half-pint containers of
fluid milk which allegedly failed to contain the minimum required quantities of
fluid milk, and the alleged failure of such containers of milk to meet net
content labeling or contract requirements.
Broughton intends to oppose the suspension and proposed debarment of
Broughton through the administrative process. Broughton's management is unable
at this time to predict the outcome of the USDA proceedings or their effect on
Broughton's financial position and results of operations. However, neither the
Southern Belle Division debarment nor the Broughton suspension preclude the
performance of contracts existing at the time of debarment or suspension.
Further, under existing USDA regulations, neither debarment nor suspension
preclude the Southern Belle Division or Broughton from obtaining and performing
contracts awarded under federal non-procurement programs administered by the
USDA Food and Nutrition Service and valued under $100,000 unless an exception is
granted by the agency.
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.
6. PROPOSED MERGER WITH SUIZA FOODS CORPORATION
On September 11, 1998, the Company announced that it has 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 Broughton with Merger Sub, with each
Broughton 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, Broughton will become
a wholly-owned subsidiary of Suiza. On September 10, 1998, 5,774,335 shares of
Broughton common stock were issued and outstanding. The Agreement was approved
by Broughton shareholders at a special meeting held on December 4, 1998.
On January 18, 1999 Broughton announced that Suiza and Broughton had
executed an amendment to the Agreement.
F-28
<PAGE> 97
BROUGHTON FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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, Broughton and eight
shareholders of Broughton provides that at completion of the merger, those
shareholders will sell Two Million (2,000,000) Broughton shares to Suiza, and
will receive, in lieu of the $19.00 per share cash merger consideration, the
cash sum of $10.00 per Broughton 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, Broughton 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 Broughton, or any part of them would combine under
common ownership or control. By terms of the Court's order, the TRO remained in
effect until such time as the Court addresses the DOJ's Motion for Preliminary
Injunction. Suiza and Broughton independently concluded and agreed not to
contest the motion for TRO. 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 Broughton by Suiza. The DOJ alleged that
competition in the production and sale of school milk in certain South Central
Kentucky school districts would be substantially lessened as a result of the
proposed transaction.
On April 28, 1999, Suiza, Broughton and DOJ entered into a stipulation and
proposed consent decree resolving, subject to court approval, the civil
antitrust lawsuit brought by the DOJ against the Company and Suiza. The proposed
settlement will allow Suiza to complete its proposed merger with Broughton,
conditioned upon Suiza's agreement to later sell the business conducted at
Broughton's Southern Belle Dairy based in Pulaski County, Kentucky. The proposed
settlement is subject to approval by the U.S. District Judge for the Eastern
District of Kentucky London Division where the DOJ's antitrust lawsuit is
currently pending. Before finally approving the settlement, the court must
submit the proposed settlement for public comment for a period of 60 days, but
the parties may close the merger prior to final approval of the settlement.
Pursuant to the proposed settlement, Suiza will agree to sell the Southern Belle
Dairy to a buyer acceptable to the DOJ within six months after the settlement
agreement is filed with the court or five days after entry by the court of the
final judgment, whichever is later.
As a result of the requirements of the proposed settlement agreement, Suiza
and Broughton have entered into an amendment to the September 1998 Agreement and
Plan of Merger between Suiza and Broughton. The amendment lowers the
consideration to be received by all Broughton stockholders (other than five
directors of Broughton and certain of their affiliates who are parties to a
separate stock purchase agreement with Suiza) from $19 cash per share to $16.50
cash per share. Pursuant to an amendment to the stock purchase agreement with
the five Broughton directors and certain of their affiliates, the five Broughton
directors and their affiliates will sell an aggregate of 2 million Broughton
shares to Suiza for $11.25 per share, plus the contingent right to receive $1.25
per share if certain conditions are satisfied. The amendment to the Agreement
and Plan of Merger is subject to the approval of Broughton's stockholders.
Assuming all conditions to closing are satisfied, Suiza and Broughton
anticipate closing the proposed acquisition on May 31, 1999. Either party may
terminate the amended merger agreement if the transaction is not closed by June
30, 1999.
F-29
<PAGE> 98
INDEX TO FINANCIAL STATEMENTS -- LFD
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-31
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-32
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997................................ F-33
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996 and 1997.................... F-34
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997................................ F-35
Notes to Consolidated Financial Statements.................. F-36
</TABLE>
F-30
<PAGE> 99
REPORT OF INDEPENDENT AUDITORS
Board of Directors
LFD Holding Corp. and Subsidiary
We have audited the accompanying consolidated balance sheets of LFD Holding
Corp. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LFD Holding Corp.
and subsidiary at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Cleveland, Ohio
February 27, 1998
F-31
<PAGE> 100
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 358,105 $ 251,648
Accounts receivable, less allowance of $143,000 in 1996
and $113,000 in 1997.................................... 3,936,137 3,942,155
Inventories:
Finished product........................................ 923,518 999,386
Raw materials and supplies.............................. 1,047,141 1,090,617
----------- -----------
1,970,659 2,090,003
Other current assets...................................... 855,260 778,439
----------- -----------
Total current assets........................................ 7,120,161 7,062,245
Land, buildings and equipment:
Land...................................................... 664,762 717,070
Buildings and improvements................................ 4,195,070 4,336,568
Machinery and equipment................................... 7,606,812 7,601,053
----------- -----------
12,466,644 12,654,691
Accumulated depreciation.................................. (3,415,907) (3,937,681)
----------- -----------
9,050,737 8,717,010
Notes receivable............................................ 590,612 731,043
Goodwill and other intangible assets........................ 953,527 1,043,601
----------- -----------
TOTAL ASSETS................................................ $17,715,037 $17,553,899
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... 4,922,085 4,842,589
Current portion of long-term debt......................... 1,413,751 1,223,495
----------- -----------
Total current liabilities................................... 6,335,836 6,066,084
Deferred revenue............................................ 50,007 20,845
Deferred income taxes....................................... 371,000 296,000
Long-term debt.............................................. 8,786,531 7,868,919
Redeemable preferred stock:
12% Cumulative preferred stock -- par value $.01 per
share; authorized, issued and outstanding, 2,783 shares
in 1996 and 3,908 shares in 1997 (liquidating preference
$1,000 per share)....................................... 2,241,612 4,264,543
Shareholders' equity:
Common stock -- par value $.01 per share:
Class A -- authorized -- 150,000 shares; issued and
outstanding -- 35,644 shares, including 4,961 of
restricted shares...................................... 356 356
Class B Convertible -- authorized, issued and
outstanding -- 75,490 shares in 1996 and 112,990 shares
in 1997................................................ 755 1,130
Class C Convertible -- authorized, issued and
outstanding -- 12,500 shares........................... -- 125
Additional paid-in capital................................ 2,288 376,788
Treasury stock, at cost................................... (23,787) (23,787)
Retained deficit.......................................... -- (1,267,543)
Deferred compensation -- restricted performance shares not
vested.................................................. (49,561) (49,561)
----------- -----------
Total shareholders' equity.................................. (69,949) (962,492)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $17,715,037 $17,553,899
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE> 101
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Net sales................................................... $61,496,276 $56,078,939
Cost of sales............................................... 49,186,065 43,981,356
----------- -----------
Gross profit................................................ 12,310,211 12,097,583
Selling, general, administrative and delivery expense....... 9,095,641 10,340,629
----------- -----------
Operating income............................................ 3,214,570 1,756,954
Non-operating income (expense):
Amortization.............................................. (422,163) (241,386)
Depreciation.............................................. (963,807) (1,083,058)
Management fees........................................... (202,148) (206,176)
Michigan Single Business Tax.............................. (250,000) (100,000)
Interest expense.......................................... (932,925) (879,581)
Other income.............................................. 6,991 68,634
----------- -----------
(2,764,052) (2,441,567)
----------- -----------
Income (loss) before income taxes........................... 450,518 (684,613)
Income taxes (benefit)...................................... 236,250 (315,000)
----------- -----------
NET INCOME (LOSS)........................................... $ 214,268 $ (369,613)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE> 102
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------------------
CLASS B CLASS C TREASURY TREASURY
SHARES CLASS A SHARES CONVERTIBLE SHARES CONVERTIBLE SHARES STOCK
------ ------- ------- ----------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........... 36,908 $369 75,490 $ 755 -- -- (8,750) $ (88)
Net income......................... -- -- -- -- -- -- -- --
Preferred stock dividends.......... -- -- -- -- -- -- -- --
Purchase of stock.................. -- -- -- -- -- -- (2,936) (85,144)
Sale of treasury stock............. -- -- -- -- -- -- 2,119 61,445
Options canceled................... (1,264) (13) -- -- -- -- -- --
Adjustment of preferred stock
accrued value.................... -- -- -- -- -- -- -- --
------ ---- ------- ------ ------ ---- ------ --------
Balance at December 31, 1996......... 35,644 356 75,490 755 -- -- (9,567) (23,787)
Net loss........................... -- -- -- -- -- -- -- --
Preferred stock dividends.......... -- -- -- -- -- -- -- --
Issuance of stock.................. -- -- 37,500 375 12,500 $125 -- --
Adjustment of preferred stock
accrued value.................... -- -- -- -- -- -- -- --
------ ---- ------- ------ ------ ---- ------ --------
Balance at December 31, 1997......... 35,644 $356 112,990 $1,130 12,500 $125 (9,567) $(23,787)
====== ==== ======= ====== ====== ==== ====== ========
<CAPTION>
ADDITIONAL RETAINED
PAID-IN EARNINGS DEFERRED
CAPITAL (DEFICIT) COMPENSATION TOTAL
---------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1996........... $ 14,915 $ 0 $(62,188) $ (46,237)
Net income......................... -- 214,268 -- 214,268
Preferred stock dividends.......... -- (333,880) -- (333,880)
Purchase of stock.................. -- -- -- (85,144)
Sale of treasury stock............. -- -- -- 61,445
Options canceled................... (12,627) -- 12,627 (13)
Adjustment of preferred stock
accrued value.................... -- 119,612 -- 119,612
-------- ----------- -------- ---------
Balance at December 31, 1996......... 2,288 0 (49,561) (69,949)
Net loss........................... -- (369,613) -- (369,613)
Preferred stock dividends.......... -- (345,128) -- (345,128)
Issuance of stock.................. 374,500 -- -- 375,000
Adjustment of preferred stock
accrued value.................... -- (552,802) -- (552,802)
-------- ----------- -------- ---------
Balance at December 31, 1997......... $376,788 $(1,267,543) $(49,561) $(962,492)
======== =========== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<PAGE> 103
LFD HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 214,268 $ (369,613)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 1,385,970 1,324,444
Loss on disposal of equipment............................. 17,405
Provision for deferred income taxes....................... 73,000 (75,000)
Changes in operating assets and liabilities:
Accounts and notes receivable.......................... (724,089) (116,449)
Inventories............................................ (139,108) (42,415)
Accounts payable and accrued expenses.................. 469,755 (79,496)
Other.................................................. (364,416) (118,800)
----------- -----------
Net cash provided by operating activities................... 915,380 540,076
----------- -----------
INVESTING ACTIVITIES:
Expenditures for buildings and equipment.................... (994,517) (701,736)
Acquisition of distributors................................. (236,929)
----------- -----------
Net cash used in investing activities....................... (994,517) (938,665)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt................................ 1,166,739 1,132,777
Payments on debt............................................ (1,416,573) (2,340,645)
Purchase of common and preferred stock...................... (148,727)
Issuance of common and preferred stock...................... 125,015 1,500,000
Dividends paid.............................................. (166,940)
----------- -----------
Net cash (used in) provided by financing activities......... (440,486) 292,132
----------- -----------
Decrease in cash and cash equivalents....................... (519,623) (106,457)
Cash and cash equivalents at beginning of year.............. 877,728 358,105
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 358,105 $ 251,648
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-35
<PAGE> 104
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
A. ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
LFD Holding Corp. and subsidiary ("the Company") is a processor of fluid milk,
ice cream and other related dairy products. The Company distributes its dairy
products principally to grocery store chains, independent supermarkets, retail
outlets and institutional accounts located in Michigan, Indiana and Ohio. The
Company records revenue when product is shipped.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of LFD Holding Corp.
and its wholly-owned subsidiary, London's Farm Dairy, Inc. ("LFD, Inc.").
Intercompany accounts and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, determined on a first-in,
first-out basis.
BUILDINGS, MACHINERY AND EQUIPMENT
Buildings, machinery and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related depreciable assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets represent principally the excess of the
purchase price over the fair value of net assets acquired and loan organization
costs. These assets are being amortized on a straight-line basis over their
respective useful lives (five to forty years). As described in Note B, during
1996 the Company refinanced certain outstanding debt, resulting in the
accelerated amortization of previously capitalized amounts. Accumulated
amortization at December 31, 1996 and 1997 was $1,926,000 and $2,140,000,
respectively. The Company reviews the recoverability of intangibles when
circumstances indicate impairment may exist.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the accompanying financial statements and notes.
Actual results could differ from those estimates.
F-36
<PAGE> 105
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997
----------- ----------
<S> <C> <C>
Revolving loan.............................................. $ 3,927,490 $3,310,189
Term loan................................................... 4,900,000 4,750,000
Promissory notes payable.................................... 1,166,859 833,658
Zero coupon bond............................................ 180,909 197,444
Other....................................................... 25,024 1,123
----------- ----------
10,200,282 9,092,414
Less current portion........................................ 1,413,751 1,223,495
----------- ----------
$ 8,786,531 $7,868,919
=========== ==========
</TABLE>
On December 17, 1997 the Company amended and restated its existing financing and
security agreement with a bank (the "New Agreement"). The New Agreement provides
financing through a $4,750,000 term loan facility, a revolving credit facility
with a maximum principal amount of $5,500,000 and a $500,000 to $750,000
over-advance facility. Under the New Agreement, the Company must exceed a
minimum predefined current ratio, meet certain fixed charge coverage and
tangible capital fund ratios, and limit capital expenditures to predefined
amounts.
Principal payments on the term loan facility are due in quarterly installments
of $250,000 through November 10, 2002, with the first payment due in May, 1998.
Interest payments are due on the dates coinciding with principal payments at the
prime rate plus 1/4%. The revolving credit facility is available through
February 16, 2000, extending automatically for successive periods of one year
(but in no event later than February 16, 2005) unless the lender or the Company
notifies the other no later than November 1 of any year after February 16, 2000
of its intention to terminate the revolving credit facility as of the next
February 16. Borrowings under the revolving credit facility bear interest at the
LIBOR base rate plus 250 basis points or the prime rate, as selected by the
Company. The over-advance may be used by the Company to increase the borrowing
base by $750,000 (from December 17, 1997 through April 30, 1998 and January 1 of
each year thereafter through April 30 of each such year) and $500,000 between
May 1 and June 30 of each year. Borrowings under the New Agreement are secured
by substantially all assets of LFD, Inc.
The Company has four promissory notes which aggregate $833,658 ($1,166,859 at
December 31, 1996), bear interest at rates ranging from 8% to 12% and require
various monthly payments through the maturity dates ranging from 1999 to 2003.
The Company assumed a non-negotiable zero coupon bond due April 1, 1999 for cash
proceeds of $235,187. The bond is priced to yield 9.14% to maturity.
Aggregate principal payments applicable to long-term debt at December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $1,223,495
1999........................................................ 1,528,748
2000........................................................ 1,020,545
2001........................................................ 1,006,783
2002........................................................ 1,002,420
Thereafter.................................................. 3,310,423
----------
$9,092,414
==========
</TABLE>
F-37
<PAGE> 106
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. LONG-TERM DEBT -- CONTINUED
Interest paid during the years ended December 31, 1996 and 1997 was $966,000 and
$928,000, respectively.
C. OPERATING LEASES
The Company leases automotive, rolling stock, manufacturing equipment and a
warehouse facility under operating leases which expire at various dates.
Future minimum payments under noncancelable operating leases with an initial
term of one year or more consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $1,208,292
1999........................................................ 1,121,656
2000........................................................ 1,020,801
2001........................................................ 872,539
2002........................................................ 721,140
Thereafter.................................................. 1,624,403
----------
$6,568,831
==========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $1,533,600 and
$1,593,200, respectively.
D. REDEEMABLE PREFERRED STOCK AND COMMON STOCK
In December, 1997, the Company issued 1,125 non-voting shares of 12% Cumulative
Redeemable Preferred Stock ("preferred stock"), par value of $.01 per share,
with a liquidation value of $1,000 per share, for proceeds of $1,125,000. In
1992, the Company had issued 3,000 shares of preferred stock. No other stock
ranks senior to the preferred stock. Dividends are cumulative and payable
quarterly. Cash dividends cannot be paid on stock junior to the preferred stock
until dividends on the preferred stock are current. At December 31, 1996 and
1997 there were $333,880 and $679,010, respectively, of accumulated but unpaid
dividends which are included in the Redeemable Preferred Stock caption on the
balance sheet.
The Company must redeem the preferred stock at the liquidation value plus
accrued dividends on July 31, 1998 unless the shareholders agree to an extended
redemption date, and will accrete the recorded value of the preferred stock up
to the liquidation value by July 31, 1998. The preferred stock is also subject
to redemption by the Company at any time prior to July 31, 1998 at the
liquidation value plus accrued dividends.
The preferred stock places certain restrictions on the repurchase of common
stock by the Company. There also are certain restrictions on the purchasers
regarding the sale and transfer of preferred and common stock.
The holders of Class A common stock are entitled to one vote per share on all
matters to be voted on by the shareholders of the Company. The holders of Class
B and Class C common stock have no voting rights, except in matters of merger or
consolidation of the Company into another entity or entities.
Class B and Class C common stock is convertible into an equal number of shares
of Class A common stock if certain conditions are met regarding limitations of
total stock ownership. The Company is required to reserve such number of shares
of Class A common stock issuable upon the conversion of all Class B and Class C
common stock.
On July 1, 1992, the Company entered into an agreement with a certain
shareholder whereby the shareholder has put options such that during certain
periods beginning January 1, 1998 the Company would be required to repurchase
all or any portion of the shareholder's common and/or preferred stock. The price
at which the
F-38
<PAGE> 107
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. REDEEMABLE PREFERRED STOCK AND COMMON STOCK -- CONTINUED
common stock would be repurchased is based upon a formula as defined in the
Stockholder's Agreement. The preferred stock would be repurchased at liquidation
value plus accrued dividends.
E. RESTRICTED SHARES
In accordance with Stock Agreements entered into on July 1, 1992 between the
Company and certain stockholders and management, the Company issued restricted
shares of Class A common stock at a purchase price of $.01 per share. Through
December 31, 1997, vesting of these shares was dependent on the Company's
achievement of certain annual performance measures. Subsequent to December 31,
1997, vesting will only occur upon the sale of the Company, subject to certain
provisions contained in the Stock Agreements. The performance and vesting
requirements have been fulfilled on 3,862 of the outstanding shares as of
December 31, 1997, and deferred compensation expense has been recorded as a
reduction of shareholders' equity for the 4,961 outstanding restricted shares
not vested. The non-vested shares are subject to certain restrictions as to sale
and transfer.
F. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997
--------- ----------
<S> <C> <C>
Federal:
Current................................................... $163,250 $(240,000)
Deferred.................................................. 73,000 (75,000)
-------- ---------
Total....................................................... $236,250 $(315,000)
======== =========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit and other
carryforwards........................................ $488,000 $573,000
Other.................................................. 54,000 75,000
-------- --------
542,000 648,000
Deferred tax liabilities:
Accelerated depreciation............................... 823,000 849,000
Other.................................................. 90,000 95,000
-------- --------
913,000 944,000
-------- --------
NET DEFERRED TAX LIABILITIES................................ $371,000 $296,000
======== ========
</TABLE>
The alternative minimum tax credit carryforwards have no expiration dates.
F-39
<PAGE> 108
LFD HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. INCOME TAXES -- CONTINUED
A reconciliation of income taxes computed at the United States statutory rate to
the effective income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------
1996 1997
---- -------
<S> <C> <C>
Income taxes at the United States statutory rate............ 35.0% (35.0)%
Non-deductible intangibles.................................. 17.1 5.9
Adjustment of recorded accruals............................. (21.2)
Other, net.................................................. 0.3 4.3
---- -------
52.4% (46.0)%
==== =======
</TABLE>
The Company paid $265,000 and $120,000 of income taxes during the years ended
December 31, 1996 and 1997, respectively.
G. 401(k) SAVINGS PLAN
The Company sponsors a defined contribution plan (the "Plan") for employees who
meet certain eligibility requirements. The Company may make discretionary
contributions to the Plan at the option of the Board of Directors. In addition,
the Company may match employee contributions equal to a percentage of the
participant's contribution to the Plan. In 1997, the Company matched 100% of
employee contributions, up to a maximum of 6% of the participant's annual
compensation. The Company contributed $264,000 and $310,000 to the Plan during
the years ended December 31, 1996 and 1997, respectively.
H. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has completed a preliminary assessment of its exposure to the Year
2000 problem. The Year 2000 problem results from older computer programs being
written using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. Based on the
Company's preliminary assessment, no critical software system will be impacted
by this problem due to the implementation in 1997 of Year 2000 compliant
application software for the majority of its accounting operations and the
scheduled upgrades in 1998 to compliant versions for the remaining applications.
The costs of the remaining upgrades are not expected to have a material adverse
effect on the Company's operations.
F-40
<PAGE> 109
INDEX TO FINANCIAL STATEMENTS -- SOUTHERN BELLE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-42
Independent Accountants' Report............................. F-43
Consolidated Balance Sheets as of June 1, 1996 and May 31,
1997...................................................... F-44
Consolidated Statements of Income for the years ended June
1, 1996 and May 31, 1997.................................. F-45
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 1, 1996 and May 31, 1997......... F-46
Consolidated Statements of Cash Flows for the years ended
June 1, 1996 and May 31, 1997............................. F-47
Notes to Consolidated Financial Statements.................. F-48
</TABLE>
F-41
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Southern Belle Dairy Company
We have audited the accompanying consolidated balance sheet of Southern
Belle Dairy Company as of May 31, 1997 and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
Belle Dairy Company as of May 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
COOPERS & LYBRAND L.L.P.
Lexington, Kentucky
October 31, 1997
F-42
<PAGE> 111
[BAIRD, KURTZ & DOBSON LETTERHEAD]
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Southern Belle Dairy Company
Somerset, Kentucky
We have audited the accompanying consolidated balance sheet of SOUTHERN
BELLE DAIRY COMPANY as of June 1, 1996 and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SOUTHERN
BELLE DAIRY COMPANY as of June 1, 1996 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ BAIRD, KURTZ & DOBSON
BAIRD, KURTZ & DOBSON
Bowling Green, Kentucky
July 25, 1996
F-43
<PAGE> 112
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 1, MAY 31,
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 74,210 $ 69,303
Marketable securities available for sale.................. -- 392,942
Accounts receivable, less allowance for doubtful accounts;
June 1, 1996 -- $377,749 and May 31, 1997 -- $220,000... 4,326,608 5,120,656
Inventories............................................... 1,024,391 1,010,673
Refundable income taxes................................... 9,301 77,454
Prepaid expenses and other................................ 153,877 152,195
Deferred income taxes..................................... 510,000 221,000
----------- -----------
Total Current Assets............................... 6,098,387 7,044,223
----------- -----------
Investments:
Cash value of life insurance less policy loans of: June 1,
1996 -- $2,920 and May 31, 1997 -- $2,920............... 172,013 197,775
Held-to-maturity securities............................... 367,614 --
----------- -----------
539,627 197,775
----------- -----------
Property and Equipment, at cost:
Land and improvements..................................... 438,919 588,166
Building and improvements................................. 2,790,486 3,015,261
Plant and processing equipment............................ 7,942,415 8,245,687
Sales and delivery equipment.............................. 3,497,919 3,529,111
Office equipment.......................................... 1,034,981 1,043,433
Construction in progress.................................. 140,241 1,315,776
----------- -----------
15,844,961 17,737,434
Less accumulated depreciation............................. 11,199,448 12,063,837
----------- -----------
4,645,513 5,673,597
----------- -----------
Other Assets................................................ 362,594 436,979
----------- -----------
$11,646,121 $13,352,574
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks outstanding in excess of bank balance.............. $ 1,717,155 $ 1,697,663
Notes payable, related party.............................. 130,000 --
Notes payable, bank....................................... 1,000,000 378,722
Current maturities of long-term debt...................... 570,369 1,209,216
Accounts payable:.........................................
Trade................................................... 2,010,175 2,424,477
Producer................................................ 1,422,112 1,425,536
Accrued expenses.......................................... 794,074 906,706
----------- -----------
Total Current Liabilities.......................... 7,643,885 8,042,320
----------- -----------
Long-Term Debt.............................................. 2,996,796 3,836,346
----------- -----------
Deferred Income Taxes....................................... 380,000 156,000
----------- -----------
Stockholders' Equity
Preferred stock:
8% A Series............................................. -- 258,525
10% B Series............................................ -- 130,000
9% C Series............................................. -- 207,500
Common stock.............................................. 1,502,868 1,502,868
Retained earnings (deficit)............................... (139,690) (43,247)
----------- -----------
1,363,178 2,055,646
Treasury common stock..................................... (737,738) (737,738)
----------- -----------
625,440 1,317,908
----------- -----------
$11,646,121 $13,352,574
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-44
<PAGE> 113
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------
JUNE 1, MAY 31,
1996 1997
----------- -----------
<S> <C> <C>
Net sales................................................... $53,866,689 $63,897,633
----------- -----------
Cost of goods sold:
Raw materials............................................. 37,863,277 45,141,084
Other manufacturing costs................................. 5,599,241 5,821,300
----------- -----------
43,462,518 50,962,384
----------- -----------
Gross profit................................................ 10,404,171 12,935,249
----------- -----------
Operating expenses:
Selling................................................... 8,857,279 9,209,566
General and administrative................................ 2,320,964 3,168,902
----------- -----------
11,178,243 12,378,468
----------- -----------
(Loss) Income from operations............................... (774,072) 556,781
----------- -----------
Other income (expense):
Interest expense.......................................... (404,081) (373,942)
Miscellaneous income...................................... 25,853 11,078
----------- -----------
(378,228) (362,864)
----------- -----------
(Loss) income before income taxes........................... (1,152,300) 193,917
(Credit) provision for income taxes......................... (411,000) 64,000
----------- -----------
Net (loss) income........................................... (741,300) 129,917
Dividends paid on preferred stock........................... -- (33,474)
----------- -----------
Net (loss) income available to common shareholders.......... $ (741,300) $ 96,443
=========== ===========
(Loss) earnings per common share............................ $ (17.71) $ 2.30
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-45
<PAGE> 114
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 1, 1996 AND MAY 31, 1997
<TABLE>
<CAPTION>
RETAINED
COMMON PREFERRED EARNINGS TREASURY
STOCK STOCK (DEFICIT) STOCK TOTAL
---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, June 3, 1995................ $1,502,868 $ -- $ 601,610 $(737,738) $1,366,740
Net loss............................. -- -- (741,300) -- (741,300)
---------- -------- --------- --------- ----------
Balance, June 1, 1996................ 1,502,868 -- (139,690) (737,738) 625,440
Net income........................... -- -- 129,917 -- 129,917
Issuance of 23,841 shares of
preferred stock.................... -- 596,025 -- -- 596,025
Dividends paid on preferred stock.... -- -- (33,474) -- (33,474)
---------- -------- --------- --------- ----------
Balance, May 31, 1997................ $1,502,868 $596,025 $ (43,247) $(737,738) $1,317,908
========== ======== ========= ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-46
<PAGE> 115
SOUTHERN BELLE DAIRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
JUNE 1, MAY 31,
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $(741,300) $ 129,917
Items not requiring (providing) cash:
Depreciation and amortization........................ 928,223 935,197
Bad debt expense..................................... 72,000 587,897
Gain on sale of property and equipment............... (45,433) (3,128)
Deferred income taxes................................ (409,000) 65,000
Changes in:
Accounts receivable.................................. (179,403) (1,381,945)
Inventories.......................................... (12,860) 13,718
Refundable income taxes.............................. 83,878 (68,153)
Prepaid expenses and other........................... (33,021) 1,682
Other assets......................................... (40,749) 22,429
Accounts payable and accrued expenses................ 216,583 402,298
Income taxes payable................................. (50,000) --
--------- -----------
Net cash (used in) provided by operating activities....... (211,082) 704,912
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment........................ (636,334) (1,611,286)
Proceeds from sale of property and equipment.............. 167,292 9,045
Increase in cash value of life insurance.................. (15,728) (25,762)
--------- -----------
Net cash used in investing activities................ (484,770) (1,628,003)
--------- -----------
Cash flows from financing activities:
Net increase (decrease) in checks outstanding in excess of
bank balance........................................... 406,122 (19,492)
Net borrowings (payments) under line-of-credit
agreement.............................................. 815,400 (621,278)
Principal payments on debt................................ (525,848) (1,544,554)
Proceeds from issuance of debt............................ -- 3,281,476
Dividends paid............................................ -- (33,474)
Loan fees paid............................................ -- (144,494)
--------- -----------
Net cash provided by financing activities............ 695,674 918,184
--------- -----------
Decrease in cash............................................ (178) (4,907)
Cash, beginning of year..................................... 74,388 74,210
--------- -----------
Cash, end of year........................................... $ 74,210 $ 69,303
========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-47
<PAGE> 116
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996 AND MAY 31, 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company's revenues are predominately earned from the processing and
sale of fluid milk. Other sales are derived from items purchased for resale
including ice cream. Products are sold primarily to grocery store chains in
central and eastern Kentucky and Tennessee. Products are also sold to school
districts and restaurants. Trade credit is normally extended to customers on an
unsecured basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Americool Refrigeration and Fixtures, Inc.
(99.55% owned) and Somerset Computer Services, Inc. (wholly owned). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to May 31. The years
ended June 1, 1996 and May 31, 1997 each consisted of 52 weeks.
INVENTORY PRICING
Most inventories are stated at the lower of cost (last-in, first-out
method) or market. Certain supplies inventories are stated at the lower of cost
(first-in, first-out method) or market.
MARKETABLE SECURITIES
Debt securities which may be sold in the future are classified as
available-for-sale and carried at fair value.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful life of
each asset. Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful lives of the improvements. Annual depreciation is
primarily computed using the straight-line method. Useful lives for major
classes of property and equipment are as follows:
<TABLE>
<S> <C>
Land improvements........................................... 5 to 30 years
Building and improvements................................... 10 to 52 years
Plant and processing equipment.............................. 5 to 10 years
Sales and delivery equipment................................ 2 to 10 years
Office equipment............................................ 3 to 10 years
</TABLE>
F-48
<PAGE> 117
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company capitalizes interest costs as a component of construction in
progress, based on the weighted average rates paid for long-term borrowing.
Total interest incurred each year was:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Interest costs capitalized.................................. $ -- $ 54,682
Interest costs charged to expense........................... 404,081 373,942
-------- --------
Total interest incurred........................... $404,081 $428,624
======== ========
</TABLE>
OTHER ASSETS
Other assets consist of loan costs, which are being amortized on a
straight-line basis over the terms of the loans to which they relate, and
deposits. Also included in other assets are equipment repair parts inventories
totaling $242,242 and $153,658 (net of allowance for obsolescence of $71,226) at
June 1, 1996 and May 31, 1997, respectively, which are not expected to be used
in the Company's operations within one year.
EARNINGS PER SHARE
Earnings per share amounts are based on the 41,868 shares of common stock
outstanding for all periods presented.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
NOTE 2: INVENTORIES
Inventories at June 1, 1996 and May 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
JUNE 1, MAY 31,
1996 1997
------------ ----------
<S> <C> <C>
Finished goods.............................................. $ 637,487 $ 627,053
Raw materials............................................... 162,801 125,134
Supplies and equipment...................................... 455,702 482,468
---------- ----------
1,255,990 1,234,655
Excess of current cost over LIFO............................ (231,599) (223,982)
---------- ----------
$1,024,391 $1,010,673
========== ==========
</TABLE>
NOTE 3: INVESTMENT SECURITIES
As a result of previously settled antitrust violations (see Note 13), the
Company owns U.S. Treasury "strips" which have a maturity date of November 2002
and a carrying value of $367,614 and $392,942 at June 1, 1996 and May 31, 1997,
respectively. During 1997 the Company determined it would liquidate the U.S.
Treasury "strips" to pay off debt which became due October 16, 1997, and is
collateralized by the "strips." Accordingly, the "strips" are reclassified from
held-to-maturity in the prior fiscal year to available-for-sale in the current
year. The carrying value approximates the fair value of marketable securities
classified as available-for-sale. No unrealized holding gains or losses have
been recognized as such amounts are immaterial.
F-49
<PAGE> 118
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: NOTE PAYABLE, BANK
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Trans Financial Bank, N.A................................... $1,000,000 $ 378,722
</TABLE>
Note consists of outstanding draws under a $1,000,000 line-of-credit
agreement due April 30, 1998; interest payable monthly at prime plus 2.75%
(11.25% at May 31, 1997); collateralized by real estate, accounts receivable and
inventories.
NOTE 5: LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Trans Financial Bank, N.A. (A).............................. $1,789,912 $1,440,943
Trans Financial Bank, N.A................................... 542,391 --
Trans Financial Bank, N.A.(B)............................... -- 1,531,478
Trans Financial Bank, N.A.(C)............................... -- 1,178,864
Trans Financial Bank, N.A.(D)............................... 289,872 289,872
Litigation settlement payable (Note 13)..................... 130,000 65,000
Debentures (Note 6)......................................... 726,325 467,800
Capital lease obligation (E)................................ 88,665 71,605
---------- ----------
3,567,165 5,045,562
Less current maturities..................................... 570,369 1,209,216
---------- ----------
$2,996,796 $3,836,346
========== ==========
</TABLE>
Aggregate annual maturities of long-term debt at May 31, 1997 were:
<TABLE>
<S> <C>
1998........................................................ $1,209,216
1999........................................................ 651,104
2000........................................................ 910,215
2001........................................................ 491,748
2002........................................................ 295,250
Thereafter.................................................. 1,488,029
----------
$5,045,562
==========
</TABLE>
- ---------------
(A) Note payable; 85% guaranteed by the Farmers Home Administration; due
October 1, 2002; payable in monthly installments of $39,092, including
interest at 7.25%; collateralized by real estate and equipment.
(B) Note payable; 80% guaranteed by the USDA Rural Economic and Community
Development Agency; due February 1, 2012; interest only due monthly
through August 1, 1997; beginning September 1, 1997, payable in 174
monthly installments of $20,900 including interest at prime plus 1.00%
(9.50% at May 31, 1997); collateralized by real estate, equipment,
accounts receivable and inventories.
(C) Note payable; 80% guaranteed by the USDA Rural Economic and Community
Development Agency; due November 15, 2003; payable in 84 monthly
installments of $20,300 including interest at prime plus 1.00% (9.50%
at May 31, 1997); collateralized by real estate, equipment, accounts
receivable and inventories.
F-50
<PAGE> 119
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above loans are also collateralized by the personal guarantees
and pledge of Company stock of the chairman of the board and the
president and assignment of life insurance policies on certain officers
and directors.
The loan agreements with Trans Financial Bank, N.A. require the
Company to comply with certain covenants principally relating to
financial ratios, capital expenditures, payments to owners and officers
and provision of financial information. At May 31, 1997, the Company was
in noncompliance with covenants regarding submission of compiled
quarterly and audited annual financial statements within specified time
periods, minimum current ratio, minimum equity to total assets ratio,
minimum tangible equity to minimum tangible business assets ratio,
maximum total liabilities to tangible net worth ratio, maximum amount of
capital expenditures and distributions to owners. The bank has formally
approved noncompliance with these requirements through September 1,
1998.
(D) Notes payable; due October 16, 1997; interest at prime plus 1.00%
(9.50% at May 31, 1997) is payable quarterly; collateralized by
original cost of U. S. Treasury "strips" (see Notes 3 and 13).
(E) Capital lease for data processing equipment expiring May 8, 2000;
payable in monthly installments of $2,312.
NOTE 6: DEBENTURES PAYABLE AND TREASURY STOCK
The debentures, issued to purchase treasury stock, are general obligations
of the Company. In 1997, the Company extended offers to the debenture holders to
extend the maturity date of the debentures from June 1, 1997 to December 1,
1999. In exchange, the debenture holders will earn a fixed rate of 10% per annum
on the outstanding debentures in lieu of the variable rate of interest, 8% to
10%, provided for in the original indenture agreement. Subsequent to this offer,
debenture holders with $203,050 of obligations agreed to extend the maturity
date to December 1, 1999. The remaining principal of $264,750 was due on June 1,
1997. Interest is payable quarterly, and the interest rate on the debentures was
8% at June 1, 1996 and May 31, 1997.
NOTE 7: CAPITAL STOCK
Capital stock of the Company at June 1, 1996 and May 31, 1997 was as
follows:
PREFERRED STOCK
All preferred stock is $25 par value, nonparticipating and nonvoting with
dividends payable at specified rates on cumulative quarterly basis. A total of
100,000 shares of preferred stock is authorized but not all authorized shares
have been allocated to individual series. Details of the individual series of
preferred stock are as follows:
- 8% A Series -- 30,000 shares authorized, 0 and 10,341 shares issued
and outstanding at June 1, 1996 and May 31, 1997, respectively.
- 10% B Series -- 10,000 shares authorized, 0 and 5,200 shares issued
and outstanding at June 1, 1996 and May 31, 1997, respectively.
- 9% C Series -- 10,000 shares authorized, 0 and 8,300 shares issued
and outstanding at June 1, 1996 and May 31, 1997, respectively.
The preferred stock described above is redeemable at any time at the
Company's option at a price equal to par value plus any accrued but unpaid
dividends. Additionally, the 10% B Series and the 9% C Series stock are
convertible, at the Company's option, to variable rate debentures due ten years
from the date of conversion in an aggregate principal amount equal to the par
value of the shares converted.
F-51
<PAGE> 120
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
All common stock is no par value. A total of 100,000 shares is authorized
with 71,715 shares issued and 41,868 shares outstanding.
TREASURY STOCK
A total of 29,847 shares of common stock is held in treasury and is
recorded at cost.
NOTE 8: EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit-sharing plan covering
substantially all employees, except for those covered by a collective bargaining
agreement which requires the Company to contribute to a multiemployer pension
retirement fund. The plan allows eligible employees to contribute up to 15% of
their compensation. The Company contributes 25% of the amount of each
participant's contribution for the plan year, up to 1% of the participant's
salary. For the years ended June 1, 1996 and May 31, 1997, $24,500 and $30,600,
respectively, have been recorded as pension expense under this defined
contribution profit-sharing plan. Contributions to the multiemployer pension
retirement fund were $31,200 and $46,800, respectively, for the years ended June
1, 1996 and May 31, 1997.
NOTE 9: INCOME TAXES
The provision (credit) for income taxes includes these components:
<TABLE>
<CAPTION>
1996 1997
--------- -------
<S> <C> <C>
Taxes currently payable (refundable)........................ $ (2,000) $(1,000)
Deferred income taxes....................................... (409,000) 65,000
--------- -------
$(411,000) $64,000
========= =======
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loss on stockholder receivable.............. $ 87,000 $ 87,000
Accrued compensated absences.............................. 46,000 57,000
Allowance for doubtful accounts........................... 152,000 89,000
Net operating loss carryforwards.......................... 306,000 120,000
Alternative minimum tax credits........................... 152,000 152,000
Other..................................................... 81,000 72,000
--------- ---------
824,000 577,000
DEFERRED TAX LIABILITIES:
Accumulated depreciation.................................. (544,000) (425,000)
--------- ---------
Net deferred tax asset before valuation allowance........... 280,000 152,000
--------- ---------
Valuation allowance:
Beginning balance......................................... (110,000) (150,000)
Decrease (increase) during the year....................... (40,000) 63,000
--------- ---------
Ending balance............................................ (150,000) (87,000)
--------- ---------
Net deferred tax asset...................................... $ 130,000 $ 65,000
========= =========
</TABLE>
F-52
<PAGE> 121
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above net deferred tax asset is presented on the balance sheets as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax asset -- current............................... $ 510,000 $ 221,000
Deferred tax liability -- long term......................... (380,000) (156,000)
--------- ---------
Net deferred tax asset...................................... $ 130,000 $ 65,000
========= =========
</TABLE>
A reconciliation of income tax expense (credit) at the statutory rate to
income tax expense (credit) at the Company's effective rate is shown below:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Tax expense at statutory rate (34%)......................... $(392,000) $ 66,000
Increase (decrease) resulting from:
State income taxes, net of federal tax benefit............ (64,000) 16,000
Nondeductible life insurance and travel costs............. 19,000 19,000
Change in deferred tax asset valuation allowance.......... 40,000 (63,000)
Adjustment applicable to prior returns.................... -- --
Other..................................................... (14,000) 26,000
--------- --------
Actual tax provision (credit)............................... $(411,000) $ 64,000
========= ========
</TABLE>
As of May 31, 1997, the Company had approximately $152,000 of alternative
minimum tax credits available to offset future federal income taxes. The credits
have no expiration date. The Company also has unused federal operating loss
carryforwards of approximately $163,000 which expire in 2011 and unused state
operating loss carryforwards of approximately $1,033,000 which expire between
2005 and 2011.
NOTE 10: OPERATING LEASES
The Company leases vehicles, office equipment and distribution centers
under noncancellable operating leases expiring in various years through 2007.
The distribution center leases generally contain renewal options for periods
ranging from five to 15 years and require the Company to pay all executory costs
(property taxes, maintenance and insurance). Rental payments for vehicles
include minimum rentals plus contingent rentals based on mileage.
Future minimum lease payments at May 31, 1997 were:
<TABLE>
<S> <C>
1998........................................................ $ 915,925
1999........................................................ 819,172
2000........................................................ 763,014
2001........................................................ 674,792
2002........................................................ 443,790
Later years................................................. 408,308
----------
Future minimum lease payments............................... $4,025,001
==========
</TABLE>
F-53
<PAGE> 122
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense for all operating leases consisted of:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Minimum rentals............................................. $ 890,983 $1,074,364
Contingent rentals.......................................... 789,873 801,361
---------- ----------
$1,680,856 $1,875,725
========== ==========
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
The Company had variable rate debentures (see Note 6) totaling $187,000
outstanding to a director of the Company at June 1, 1996. On August 29, 1996,
these debentures were exchanged for 7,480 shares of 8% A Series Preferred Stock
(see Note 7).
This same director was also the holder of $130,000 of demand notes payable
by the Company at June 1, 1996. On August 29, 1996, these notes were exchanged
for 5,200 shares of 10% B Series Preferred Stock (see Note 7).
Additionally, concurrently with the above transactions, this same director
transferred to the Company a building with a fair value of $207,500, which was
being leased by the Company for $25,500 annually, in exchange for 8,300 shares
of 9% C Series Preferred Stock (see Note 7).
The Company had variable rate debentures (see Note 6) totaling $71,525
outstanding to former stockholders of the Company at June 1, 1996. On January 1,
1997, these debentures were exchanged for 2,861 shares of 8% A Series Preferred
Stock (see Note 7).
The Company also paid $32,991 to a stockholder during each of the years
ended June 1, 1996 and May 31, 1997 for consulting fees. No written agreement
exists between the Company and the stockholder for these services.
NOTE 12: ADDITIONAL CASH FLOW INFORMATION
NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Debentures converted to preferred stock..................... $ -- $258,525
Building and land acquired in exchange for preferred
stock..................................................... $ -- $207,500
Capital lease obligation incurred for equipment............. $106,141 $ --
Demand notes payable converted to preferred stock........... $ -- $130,000
Accounts payable incurred for property and equipment........ $ -- $128,000
</TABLE>
ADDITIONAL CASH PAYMENT INFORMATION
<TABLE>
<S> <C> <C>
Interest paid (net of amount capitalized)................... $415,554 $367,387
Income taxes paid........................................... $ 51,619 $ 80,600
</TABLE>
NOTE 13: SETTLEMENT OF LITIGATION
FEDERAL ACTION
Pursuant to settlement of an antitrust action with the U. S. Department of
Justice, the Company had an outstanding obligation of $130,000 and $65,000 at
June 1, 1996 and May 31, 1997, respectively (see Note 5). The obligation is
payable $65,000 annually plus interest at 3.25%.
F-54
<PAGE> 123
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATE ACTIONS
- Pursuant to settlement of antitrust actions with the states of Kentucky
and Tennessee, the Company will pay, contingent upon availability of
funds as defined by written agreement, a total of $173,375 over a period
of five years to both the states of Kentucky and Tennessee. On the
settlement date, $25,000 was paid to Kentucky and Tennessee, and
contingent on the availability of funds as defined in the settlement,
$29,675 will be paid to each state annually through 1997. No such
contingent amounts are payable for 1996 or 1997.
- Pursuant to settlement of the same antitrust actions, the Company
purchased ten-year U.S. Treasury "strips" with a maturity value of
approximately $575,000 and an original cost of approximately $292,000.
The two states have collateral interests in the Treasury "strips" limited
to their market value increase above the original cost. Kentucky and
Tennessee will release their rights in the securities if full payment of
the obligations has been made by the Company prior to September 30, 1997.
On October 7, 1997, the Company sold the ten-year U.S. Treasury "strips"
for $428,890. The proceeds were used to pay off debt which became due
October 16, 1997, and was collateralized by the "strips." The remaining
proceeds were paid equally to Kentucky and Tennessee.
NOTE 14: COMMITMENTS AND CONTINGENCIES
COMPLIANCE AGREEMENT
The Company received a Notice of Proposed Debarment dated June 1, 1994 from
the United States Department of Agriculture (USDA). The USDA proposed to debar
the Company from engaging in contracts and other transactions involving all
federal agency nonprocurement programs for up to three years as a result of
previously settled antitrust violations (see Note 13). On April 18, 1995, the
Company entered into a Compliance Agreement in Lieu of Debarment with the USDA.
The agreement is for a three-year period and requires the Company to establish
and maintain a compliance program which includes, among other things, the
establishment of an Ethics Committee and formal ethics and education training
for all employees.
LETTER OF CREDIT
At May 31, 1997, the Company had a $100,000 letter-of-credit arrangement
with Trans Financial Bank, N.A. outstanding for the purpose of securing credit
terms with an equipment supplier.
EXAMINATION OF INCOME TAX RETURNS
The Internal Revenue Service completed an examination of the Company's
federal income tax returns for the years ended May 30, 1992, May 29, 1993 and
May 28, 1994. Based on the terms of the agreement, the Company paid additional
taxes and related interest for the years examined of approximately $50,000
during the fiscal year ended June 1, 1996 which was accrued and charged to
expense in the June 3, 1995 financial statements.
PROPERTY AND EQUIPMENT
On October 22, 1997, the Company entered into a contract to construct
$345,000 of property and equipment.
F-55
<PAGE> 124
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
LITIGATION
The Company is the defendant in a lawsuit by a former employee which
alleges unlawful termination of employment and seeks unspecified compensatory
and punitive damages. Discovery has not yet commenced in this case, and the
outcome is not determinable at this time. Management does not anticipate there
will be any material effect on the consolidated financial statements for any
adverse results from this litigation.
SELF-INSURANCE
The Company maintains a self-insurance program for that portion of health
care, dental and vision costs not covered by insurance. The Company is liable
for claims up to $40,000 annually per employee. Self-insurance costs are accrued
based upon an estimate of the liability for reported claims and for claims
incurred but not reported. An accrual totaling $106,520 and $188,644 has been
made at June 1, 1996 and May 31, 1997, respectively. Claim payments based on
actual claims ultimately filed could differ materially from these estimates.
ALLOWANCE FOR INVENTORY OBSOLESCENCE
At May 31, 1997, the Company had quantities in its parts inventory that
were identified as incompatible for current maintenance and repair needs of its
existing machinery and equipment. Management has recorded an allowance for
inventory obsolescence of $71,226 which reduced the parts inventory to its
estimated net realizable value.
MAJOR CUSTOMER
Sales to one customer were approximately 21% and 20% of total sales for the
fiscal years ended June 1, 1996 and May 31, 1997, respectively.
COLLECTIVE BARGAINING AGREEMENTS
Approximately 42% of the Company's employees is covered by collective
bargaining agreements, none of which expire within the next year.
PURCHASE COMMITMENTS
During fiscal year 1997, the Company entered into two separate agreements
obligating it to purchase 74,000,000 labels over a two-year period and
36,000,000 cartons annually over a five-year period. Minimum purchase
commitments, at current prices, are approximately $805,000 over the next two
years for labels and approximately $680,000 annually over each of the next five
years for cartons. Purchases under the contracts were $382,854 in 1997. Based on
the Company's historical production records, these quantities do not exceed
expected product requirements. Actual label and carton costs and usage could
differ materially from these estimates.
CLASSIFICATION OF FEDERAL ORDER
Effective October 1, 1997, Federal Order 11 was terminated and, as a
result, the Company qualified its raw milk producers in Federal Order 7 because
of its sales volume and location. The Company has estimated that the move to
Federal Order 7 will not have a material impact on the financial statements.
F-56
<PAGE> 125
SOUTHERN BELLE DAIRY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its computer software
and databases to determine the extent to which modifications will be required to
prevent problems related to the year 2000. These problems could cause
malfunctions in certain software and databases with respect to dates on or after
January 1, 2000, unless corrected. At this time, the Company has not yet
determined the cost of evaluating its computer software and databases or of
making any modifications required to correct any "Year 2000" problems.
NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods were used to estimate the fair value of financial
instruments:
INVESTMENT SECURITIES
Fair value is based on quoted market prices.
NOTES PAYABLE AND LONG-TERM DEBT
Fair value is estimated based on the borrowing rates currently available to
the Company for bank loans with similar terms and maturities.
<TABLE>
<CAPTION>
JUNE 1, 1996 MAY 31, 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash..................................... $ 74,210 $ 74,210 $ 69,303 $ 69,303
Investment Securities.................... 367,614 375,300 392,942 407,160
Financial liabilities:
Notes payable............................ 1,130,000 1,130,000 378,722 378,722
Long-term debt........................... 3,478,500 3,418,420 4,973,957 4,879,022
</TABLE>
NOTE 17: PENDING MERGER
On September 29, 1997, the Company executed an agreement with Broughton
Foods Company whereby the Company will be merged into Broughton Foods Company,
which will be the surviving corporation. Broughton Foods Company has agreed to
pay the stockholders of the Company an aggregate consideration of approximately
$5.0 million of which $2,650,000 will be paid in cash and $2,350,000 in shares
of restricted common stock. The acquisition is conditioned on the concurrent
consummation of a public offering by Broughton Foods Company, the shareholders
of the Company approving the transaction and standard closing conditions.
F-57
<PAGE> 126
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SUIZA FOODS CORPORATION,
A DELAWARE CORPORATION
SUIZA FOODS ACQUISITION CORP.
AN OHIO CORPORATION
AND
BROUGHTON FOODS COMPANY,
AN OHIO CORPORATION
DATES AS OF
SEPTEMBER 10, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 127
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I. THE MERGER
SECTION 1.1 The Merger.................................................. A-1
SECTION 1.2 Effective Time of the Merger................................ A-1
ARTICLE II. THE SURVIVING CORPORATION
SECTION 2.1 Certificate of Incorporation................................ A-1
SECTION 2.2 Code of Regulations......................................... A-1
SECTION 2.3 Board of Directors; Officers................................ A-1
SECTION 2.4 Effects of Merger........................................... A-2
ARTICLE III. CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
SECTION 3.1 Effect of the Merger on Capital Stock....................... A-2
SECTION 3.2 Cancellation of Treasury Stock.............................. A-2
SECTION 3.3 Capital Stock of Merger Sub................................. A-2
SECTION 3.4 Dissenting Shares........................................... A-2
SECTION 3.5 Exchange of Certificates.................................... A-2
SECTION 3.6 Stockholders' Meeting....................................... A-3
SECTION 3.7 Closing of the Company's Transfer Books..................... A-3
SECTION 3.8 Closing..................................................... A-4
SECTION 3.9 Transfer Taxes.............................................. A-4
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT
SECTION 4.1 Organization and Qualification.............................. A-4
SECTION 4.2 Authority Relative to this Agreement........................ A-4
SECTION 4.3 Financing................................................... A-5
SECTION 4.4 Information for Proxy Statement............................. A-5
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 5.1 Organization and Qualification.............................. A-5
SECTION 5.2 Capitalization.............................................. A-5
SECTION 5.3 Subsidiaries................................................ A-5
SECTION 5.4 Authority Relative to this Agreement........................ A-6
SECTION 5.5 Reports and Financial Statements............................ A-6
SECTION 5.6 Absence of Certain Changes or Events........................ A-7
SECTION 5.7 Litigation.................................................. A-7
SECTION 5.8 Employee Benefit Plans...................................... A-7
SECTION 5.9 Company Action; Vote Required............................... A-9
SECTION 5.10 Financial Advisors.......................................... A-10
SECTION 5.11 Compliance with Applicable Laws............................. A-10
SECTION 5.12 Taxes....................................................... A-10
SECTION 5.13 Certain Material Contracts.................................. A-11
SECTION 5.14 Labor Relations............................................. A-12
SECTION 5.15 Relationship with Customers and Suppliers................... A-12
SECTION 5.16 Intellectual Property....................................... A-12
SECTION 5.17 Environmental Matters....................................... A-12
SECTION 5.18 Insurance................................................... A-13
SECTION 5.19 Properties.................................................. A-14
SECTION 5.20 Year 2000 Compliance........................................ A-15
SECTION 5.21 No Commitments.............................................. A-15
SECTION 5.22 Takeover Statutes........................................... A-15
SECTION 5.23 Information for Proxy Statement............................. A-15
</TABLE>
<PAGE> 128
<TABLE>
<S> <C> <C>
ARTICLE VI. REPRESENTATIONS AND WARRANTIES REGARDING MERGER SUB
SECTION 6.1 Organization................................................ A-16
SECTION 6.2 Capitalization.............................................. A-16
SECTION 6.3 Authority Relative to this Agreement........................ A-16
ARTICLE VII. CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 7.1 Conduct of Business by the Company Pending the Merger....... A-16
ARTICLE VIII. ADDITIONAL AGREEMENTS
SECTION 8.1 Access and Information...................................... A-17
SECTION 8.2 Proxy Statement; Stockholders' Meeting...................... A-18
SECTION 8.3 Employee Matters............................................ A-18
SECTION 8.4 Rights to Indemnification................................... A-18
SECTION 8.5 HSR Act and Foreign Acts.................................... A-19
SECTION 8.6 Additional Agreements....................................... A-19
SECTION 8.7 No Shop..................................................... A-19
SECTION 8.8 Advice on Changes; SEC Filings.............................. A-20
SECTION 8.9 Takeover Statutes........................................... A-20
SECTION 8.10 Surveys; Title Commitments.................................. A-20
SECTION 8.11 Estoppel Certificates....................................... A-21
ARTICLE IX. CONDITIONS PRECEDENT
Conditions to Each Party's Obligation to Effect the
SECTION 9.1 Merger...................................................... A-21
Conditions to Obligation of the Company to Effect the
SECTION 9.2 Merger...................................................... A-21
Conditions to Obligations of Parent and Merger Sub to Effect
SECTION 9.3 the Merger.................................................. A-21
ARTICLE X. TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1 Termination by Mutual Consent............................... A-22
SECTION 10.2 Termination by Either Parent or the Company................. A-22
SECTION 10.3 Other Termination Rights.................................... A-22
SECTION 10.4 Effect of Termination and Abandonment....................... A-23
ARTICLE XI. MISCELLANEOUS
Non-Survival of Representations, Warranties and
SECTION 11.1 Agreements.................................................. A-23
SECTION 11.2 Notices..................................................... A-23
SECTION 11.3 Fees and Expenses........................................... A-24
SECTION 11.4 Publicity................................................... A-24
SECTION 11.5 Specific Performance........................................ A-24
SECTION 11.6 Assignment; Binding Effect.................................. A-24
SECTION 11.7 Entire Agreement............................................ A-24
SECTION 11.8 Amendment................................................... A-25
SECTION 11.9 Governing Law............................................... A-25
SECTION 11.10 Counterparts................................................ A-25
SECTION 11.11 Headings and Table of Contents.............................. A-25
SECTION 11.12 Interpretation.............................................. A-25
SECTION 11.13 Waivers..................................................... A-25
SECTION 11.14 Severability................................................ A-25
SECTION 11.15 Subsidiaries................................................ A-25
EXHIBITS.
Exhibit A Form of Inducement Agreement................................ AA-1
</TABLE>
<PAGE> 129
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of September
10, 1998, by and among Suiza Foods Corporation, a Delaware corporation
("Parent"), Suiza Foods Acquisition Corp., an Ohio corporation and subsidiary of
Parent ("Merger Sub"), and Broughton Foods Company, an Ohio corporation (the
"Company").
WITNESSETH:
WHEREAS, each of Parent and the Company has concluded that a business
combination between Parent and the Company represents a strategic combination of
their complementary businesses and operational and long term vision and is in
the best interests of the stockholders of Parent and the Company, respectively,
and accordingly, Parent and the Company desire to effect a business combination
by means of the merger of Merger Sub with and into the Company (the "Merger");
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein;
WHEREAS, in order to induce Parent and Merger Sub to enter into this
Agreement, certain stockholders of the Company have entered into an Inducement
Agreement with Parent, the form of which is attached hereto as Exhibit A,
pursuant to which, among other things, such stockholders have granted Parent an
irrevocable proxy to vote their shares of the Company's common stock in favor of
the Merger and have granted Parent certain rights in connection with certain
dispositions of such common stock, on the terms and conditions set forth
therein;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
I. THE MERGER
1.1 THE MERGER. Upon the terms and subject to the satisfaction or waiver
of the conditions hereof, at the Effective Time (as defined in Section 1.2),
Merger Sub shall be merged with and into the Company and the separate existence
of Merger Sub shall thereupon cease, and the Company, as the corporation
surviving the Merger (the "Surviving Corporation"), shall by virtue of the
Merger continue its corporate existence under the laws of the State of Ohio.
1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective at the
date and time (the "Effective Time") when a properly executed Certificate of
Merger is filed with the Secretary of State of the State of Ohio, which
Certificate shall be filed as soon as practicable following fulfillment of the
conditions set forth in Article IX hereof.
II. THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION. The Articles of Incorporation of the
Company as in effect at the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation and thereafter may be amended in
accordance with their terms and as provided by law and this Agreement.
2.2 CODE OF REGULATIONS. The Code of Regulations (the "Regulations") of
the Company as in effect at the Effective Time shall be the Regulations of the
Surviving Corporation and thereafter may be amended in accordance with their
terms and as provided by law and this Agreement.
2.3 BOARD OF DIRECTORS; OFFICERS. The directors of Merger Sub immediately
prior to the Effective Time shall be the directors of the Surviving Corporation,
and the officers of Merger Sub immediately prior to the Effective Time shall be
the officers of the Surviving Corporation, in each case until their respective
successors are duly elected and qualified.
A-1
<PAGE> 130
2.4 EFFECTS OF MERGER. The Merger shall have the effects set forth in
Section 1701.82 of the Ohio General Corporation Law (the "OGCL").
III. CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
3.1 EFFECT OF THE MERGER ON CAPITAL STOCK. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
common stock, par value $1.00 per share, of the Company (the "Company Stock"),
each share of Company Stock issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares (as defined in Section 3.4))
shall be canceled and retired and converted automatically into the right to
receive $19.00 in cash (the "Merger Consideration") payable to the holder
thereof, without interest thereon, upon surrender of the certificate formerly
representing such share of Company Stock. All such shares of Company Stock, when
so converted, shall no longer be held by the holders of certificates
representing such shares prior to the Effective Time, and each such holder shall
cease to have any rights with respect thereto other than the right to receive
the Merger Consideration.
3.2 CANCELLATION OF TREASURY STOCK. All shares of Company Stock and all
other shares of capital stock of the Company that are owned by the Company as
treasury stock or otherwise immediately prior to the Effective Time and any
shares of Company Stock and other shares of capital stock of the Company owned
by any subsidiary of the Company shall, as of the Effective Time, be canceled
and retired and shall cease to exist, and no Merger consideration or other
consideration shall be delivered or deliverable in exchange therefor.
3.3 CAPITAL STOCK OF MERGER SUB. At the Effective Time, all of the issued
and outstanding shares of stock of Merger Sub shall be converted into and
become, in the aggregate, 1,000 fully paid and nonassessable shares of capital
stock of the Surviving Corporation.
3.4 DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary but only in the circumstances and to the extent provided by the OGCL,
shares of Company Stock that are outstanding immediately prior to the Effective
Time and that are held by stockholders who have not voted in favor of the Merger
or consented thereto in writing and who have properly made a demand in writing
to obtain payment for such shares of Company Stock in accordance with Section
1701.85 of the OGCL (collectively, the "Dissenting Shares") shall not be
converted into or represent the right to receive the Merger Consideration. Such
stockholders shall be entitled to receive payment from the Company of the value
of such shares of Company Stock held by them in accordance with the provisions
of such Section 1701.85; provided, however, that Dissenting Shares held by
stockholders who shall have failed to perfect or who have effectively withdrawn
or lost their rights to appraisal under such Section 1701.85 shall be deemed to
have been converted into and become exchangeable for, as of the Effective Time,
the right to receive the Merger Consideration, without any interest thereon,
upon surrender of the certificate or certificates that formerly evidenced such
shares, in the manner provided for in Section 3.5. The Company shall give Parent
and Merger Sub (i) prompt notice received by the Company of any demands to
obtain payment pursuant to Section 1701.85 of the OGCL, withdrawals of such
demands and of any other instruments served upon the Company pursuant to the
OGCL in respect of Dissenting Shares and (ii) the opportunity to direct all
negotiations and proceedings with respect to any demands to obtain payment under
the OGCL. The Company shall not, except with the prior written consent of
Parent, make any payment with respect to any demands to obtain payment in
respect of Dissenting Shares or settle or offer to settle any such demands.
3.5. EXCHANGE OF CERTIFICATES.
(a) Exchange Agent. The Company shall designate Wachovia Bank, N.A.
or such other bank or trust company reasonably satisfactory to Parent and
Merger Sub to act as agent (the "Exchange Agent") in connection with the
Merger to hold the funds to which holders of shares of Company Stock shall
become entitled pursuant to Section 3.1. At or as soon as practicable after
the Effective Time, Parent or Merger Sub, as applicable, shall deposit in
trust with the Exchange Agent an amount in immediately available funds
equal to the product of (i) the number of shares of Company Stock
outstanding immediately prior to the Effective Time (other than Dissenting
Shares) and (ii) the Merger Consideration. The Exchange Agent shall agree
to hold such funds (together with earnings thereon, the "Exchange
A-2
<PAGE> 131
Fund") for delivery as contemplated by this Section 3.5 and upon such
additional terms as may be agreed upon by the Exchange Agent, Parent or
Merger Sub, as applicable, and the Surviving Corporation before the
Effective Time.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall cause the Exchange Agent to
mail to each person who was, at the Effective Time, a holder of record of
shares of Company Stock entitled to receive the Merger Consideration
pursuant to Section 3.1 a form of letter of transmittal (which shall
specify that delivery will be effected, and risk of loss and title to the
certificates evidencing such shares (the "Certificates") will pass, only
upon proper delivery of the Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the Certificates
pursuant to such letter of transmittal. Upon surrender to the Exchange
Agent of a Certificate, together with such letter of transmittal, duly
completed and validly executed in accordance with its instructions, and
such other documents as may be required pursuant to such instructions, the
holder of such Certificate shall be entitled to receive in exchange
therefor the Merger Consideration for each share of Company Stock formerly
evidenced by such Certificate, and such Certificate shall then be canceled.
No interest shall accrue or be paid on the Merger Consideration payable
upon the surrender of any Certificate for the benefit of the holder of such
Certificate. If payment of the Merger Consideration is to be made to a
person other than the person in whose name the surrendered Certificate is
registered on the stock transfer books of the Company, it shall be a
condition of payment that the Certificate so surrendered shall be properly
endorsed or be otherwise in proper form for transfer and that the person
requesting such payment shall have paid all transfer and other taxes
required by reason of the payment of the Merger Consideration to a person
other than the registered holder of the Certificate surrendered or shall
have established to the satisfaction of the Surviving Corporation or the
Exchange Agent that such taxes have been paid or are not applicable.
(c) Termination of Exchange Fund. At any time following the third
month after the Effective Time, the Surviving Corporation shall be entitled
to require the Exchange Agent to deliver to the Surviving Corporation any
funds made available to the Exchange Agent and not disbursed to holders of
shares of Company Stock (including, without limitation, all interest and
other income received by the Exchange Agent in respect of all funds made
available to it) and, thereafter, such holders shall be entitled to look to
the Surviving Corporation only as general creditors thereof with respect to
any Merger Consideration that may be payable upon due surrender of the
Certificates held by them. Notwithstanding the foregoing, none of Parent,
Merger Sub or the Surviving Corporation shall be liable to any holder of
shares of Company Stock for any Merger Consideration delivered in respect
of such stock to a public official pursuant to any abandoned property,
escheat or similar law.
(d) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed, and, if
required by the Surviving Corporation, the posting by such person of a bond
in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent shall disburse the applicable Merger
Consideration as provided in this Section 3.5 in exchange for such lost,
stolen or destroyed Certificate.
3.6 STOCKHOLDERS' MEETING. The Company shall take all action necessary in
accordance with applicable law, its Articles of Incorporation and its
Regulations to convene a meeting of its stockholders as promptly as practicable
to consider and vote upon the approval by the holders of at least two-thirds of
the shares of Company Stock outstanding and entitled to vote thereon of this
Agreement and the transactions contemplated hereby. The Board of Directors of
the Company shall recommend such approval, and the Company shall take all lawful
action to solicit such approval, including, without limitation, timely and
promptly mailing the Proxy Statement (as defined in Section 8.2); provided,
however, that such recommendation is subject to Section 8.7 hereof.
3.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time, the
stock transfer books of the Company shall be closed, and no transfer of shares
of Company Stock shall be made thereafter. In the event that Certificates are
presented to the Surviving Corporation, Parent or the Exchange Agent after the
Effective
A-3
<PAGE> 132
Time, they shall be canceled in return for the payment of the applicable Merger
Consideration relating thereto, as provided in this Article III, subject to
applicable law in the case of Dissenting Shares.
3.8 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Huddleston, Bolen,
Beatty, Porter & Copen, 611 Third Avenue, Huntington, West Virginia 25722-2185,
at 9:00 a.m. local time on the day which is not more than one business day after
satisfaction (or waiver) of the conditions set forth in Article IX (other than
those conditions that can be satisfied only at the Effective Time) or at such
other time and place as Parent and the Company shall agree in writing.
3.9 TRANSFER TAXES. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, applications or other
documents regarding any real property transfer, stamp, recording, documentary or
other taxes and any other fees and similar taxes which become payable in
connection with the Merger other than transfer or stamp taxes payable in respect
of transfers pursuant to the fourth sentence of Section 3.5(b) (collectively,
"Transfer Taxes"). From and after the Effective Time, the Surviving Corporation
shall pay or cause to be paid, without deduction or withholding from any amounts
payable to the holders of Company Stock, all Transfer Taxes.
IV. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows (which
representations and warranties as well as other provisions of this Agreement are
qualified by the matters identified, with references to the appropriate Section
and, if applicable, subsection, on a disclosure schedule (the "Parent Disclosure
Schedule") delivered by Parent to the Company prior to execution of this
Agreement):
4.1 ORGANIZATION AND QUALIFICATION. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary. Complete and
correct copies as of the date hereof of the Certificate of Incorporation and
Bylaws of Parent have been delivered to the Company as Section 4.1 of the Parent
Disclosure Schedule.
4.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Parent has the corporate power
to enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by Parent's Board of
Directors. This Agreement constitutes a valid and binding obligation of Parent
enforceable in accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. No other corporate
proceedings on the part of Parent are necessary to authorize this Agreement and
the transactions contemplated hereby. Except as described in Section 4.2 of the
Parent Disclosure Schedule, Parent is not subject to or obligated under (i) any
charter or bylaw provision or (ii) any contract, indenture, loan or credit
document, license, franchise, permit, order, decree, concession, lease,
instrument, judgment, statute, law, ordinance, rule or regulation applicable to
Parent or any of its subsidiaries or their respective properties or assets,
which would be breached or violated, or under which there would be a default
(with or without notice or lapse of time, or both), or under which there would
arise a right of termination, cancellation, modification or acceleration of any
obligation, or any right to payment or compensation, or the loss of a benefit,
by its executing and carrying out this Agreement, other than the laws and
regulations referred to in the next sentence. Except as required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), similar pre-acquisition notification or approval requirements applicable
to the Company's foreign operations (the "Foreign Acts"), the Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the corporation, securities or blue sky laws
or regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any court, administrative agency or
commission or other governmental authority or instrumentality,
A-4
<PAGE> 133
domestic or foreign and including foreign, national, regional, state, provincial
and municipal authorities (each, a "Governmental Entity"), is necessary for the
consummation by Parent of the Merger or the other transactions contemplated by
this Agreement.
4.3 FINANCING. Parent shall have at the Effective Time sufficient funds
available to it to consummate the transactions contemplated by this Agreement,
including the payment of the Merger Consideration.
4.4 INFORMATION FOR PROXY STATEMENT. None of the information supplied or
to be supplied by Parent or Merger Sub in writing specifically for inclusion in
the Proxy Statement will, on the date the Proxy Statement (and any amendment or
supplement thereto) is first mailed to stockholders of the Company, at the time
of the stockholders" meeting to vote on the approval of this Agreement and the
transactions contemplated hereby or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
V. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub as follows
(which representations and warranties as well as other provisions of this
Agreement are qualified by the matters identified, with references to the
appropriate Section and, if applicable, subsection, on a disclosure schedule
(the "Company Disclosure Schedule") delivered by the Company to Parent prior to
execution of this Agreement):
5.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. The Company is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary. Complete and
correct copies as of the date hereof of the Articles of Incorporation and
Regulations of the Company have been delivered to Parent as Section 5.1 of the
Company Disclosure Schedule.
5.2 CAPITALIZATION. The authorized stock of the Company consists of
10,000,000 shares of Company Stock of which, as of the date of this Agreement,
(i) 5,774,335 shares were issued and outstanding, and (ii) 540,240 shares were
held in treasury. All of the issued and outstanding and treasury shares of
Company Stock are duly authorized, validly issued, fully paid and nonassessable.
There are no bonds, debentures, notes or other indebtedness issued or
outstanding having the right to vote on any matters on which the Company's
stockholders may vote. There are no options, warrants, calls, convertible
securities or other rights, agreements or commitments presently outstanding
obligating the Company to issue, deliver or sell shares of its capital stock or
debt securities, or obligating the Company to grant, extend or enter into any
such option, warrant, call or other such right, agreement or commitment. Since
December 31, 1997, the Company has not issued any shares of its capital stock.
After the Effective Time, the Surviving Corporation will have no obligation to
issue, transfer or sell any shares of stock of the Company or the Surviving
Corporation pursuant to any Company Employee Benefit Plan (as defined in Section
5.8).
5.3 SUBSIDIARIES. Each subsidiary of the Company is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has the
corporate or similar power to carry on its business as it is now being conducted
or currently proposed to be conducted. Each subsidiary of the Company is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary. Section 5.3 of the Company
Disclosure Schedule contains, with respect to each subsidiary of the Company,
its name and jurisdiction of organization and, with respect to each subsidiary
that is not wholly owned, the number of issued and outstanding shares of capital
stock or share capital and the number of shares of capital stock or share
capital owned by the Company or subsidiary thereof. All the outstanding shares
of capital stock or share capital of each subsidiary of the Company are validly
issued, fully paid and nonassessable, and those owned by the Company or by a
subsidiary of the Company are owned free and clear of any liens, claims or
encumbrances. There are no existing options, warrants, calls, convertible
A-5
<PAGE> 134
securities or other rights, agreements or commitments of any character relating
to the issued or unissued capital stock or other securities of any of the
subsidiaries of the Company. Except as set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 or any Company SEC
Report (as defined in Section 5.5) filed subsequent to such date and prior to
the date hereof, or as set forth in Section 5.3 of the Company Disclosure
Schedule, the Company does not directly or indirectly own any interest in any
other corporation, partnership, joint venture or other business association or
entity or have any obligation, commitment or undertaking to acquire any such
interest.
5.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Company's
Board of Directors. This Agreement constitutes a valid and binding obligation of
the Company enforceable in accordance with its terms except as enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought. Except for the
approval of this Agreement and the transactions contemplated hereby by the
holders of two-thirds of the shares of Company Stock outstanding and entitled to
vote thereon as described in Section 3.6, no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement and the
transactions contemplated hereby. Except as described in Section 5.4 of the
Company Disclosure Schedule, the Company is not subject to or obligated under
(i) any charter or regulations provision or (ii) any contract, indenture, loan
or credit document, license, franchise, permit, order, decree, concession,
lease, instrument, judgment, statute, law, ordinance, rule or regulation
applicable to the Company or any of its subsidiaries or their respective
properties or assets which would be breached or violated, or under which there
would be a default (with or without notice or lapse of time, or both), or under
which there would arise a right of termination, cancellation, modification or
acceleration of any obligation, or any right to payment or compensation, or the
loss of a benefit, by its executing and carrying out this Agreement, other than
the laws and regulations referred to in the next sentence. Except as required by
the HSR Act, the Foreign Acts, the Securities Act, the Exchange Act, and the
corporation, securities or blue sky laws or regulations of the various states,
no filing or registration with, or authorization, consent or approval of, any
Governmental Entity is necessary for the consummation by the Company of the
Merger or the other transactions contemplated by this Agreement.
5.5 REPORTS AND FINANCIAL STATEMENTS. The Company has previously furnished
Parent with true and complete copies of its (i) Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, as filed with the Securities and
Exchange Commission (the "Commission"), (ii) Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1998 and June 30, 1998, as filed with the
Commission, (iii) proxy statements related to all meetings of its stockholders
(whether annual or special) since September 30, 1997 and (iv) all other reports
or registration statements filed by the Company with the Commission since
September 30, 1997, except for preliminary material in the case of clauses (iii)
and (iv) above, which are all the documents that the Company was required to
file with the Commission since September 30, 1997 (the documents in clauses (i)
through (iv) being referred to herein collectively as the "Company SEC
Reports"). As of their respective dates, the Company SEC Reports complied as to
form in all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the
Commission thereunder applicable to such Company SEC Reports. As of their
respective dates, the Company SEC Reports did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial statements of
the Company included in the Company SEC Reports comply as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto. The financial
statements included in the Company SEC Reports: (i) have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis, except as may be indicated therein or in the notes thereto and subject,
in the case of the unaudited interim financial statements, to normal year-end
adjustments and any other adjustments described therein and the fact that
certain information and notes have been condensed or omitted in accordance with
the Exchange Act and
A-6
<PAGE> 135
the rules promulgated thereunder; (ii) present fairly, in all material respects,
the financial position of the Company and its subsidiaries as at the dates
thereof and the results of their operations and cash flows for the periods then
ended; and (iii) are in all material respects in accordance with the books of
account and records of the Company and its subsidiaries. As of June 30, 1998,
there was no basis for any claim or liability of any nature against the Company
or any of its subsidiaries, whether absolute, accrued, contingent or otherwise,
which, alone or in the aggregate, has had, or would have, a Company Material
Adverse Effect, other than as reflected in the Company SEC Report filed prior to
the date of this Agreement. For the purposes of this Agreement, a "Company
Material Adverse Effect" means a material adverse effect on the business,
properties, assets, operations, condition (financial or otherwise), customer
relations, supplier relations, business prospects, liabilities or results of
operations of the Company and its subsidiaries taken as a whole, other than any
effects arising out of, resulting from or relating to changes in general
economic or financial conditions.
5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Company SEC Reports filed prior to the date of this Agreement or in Section 5.6
of the Company Disclosure Schedule, since June 30, 1998, the Company and its
subsidiaries have operated their respective businesses in the ordinary course of
business consistent with past practice and there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
which, alone or in the aggregate, has had, or would have, a Company Material
Adverse Effect; (ii) any damage, destruction or loss, whether or not covered by
insurance, which has had, or would have, a Company Material Adverse Effect;
(iii) any declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) with respect to the stock of the Company or
any of its subsidiaries (other than dividends or distributions between the
Company and its wholly owned subsidiaries and the normal and customary quarterly
dividends to the Company"s stockholders in an amount not exceeding $.05 per
share in any fiscal quarter); (iv) any material change in the Company's
accounting principles, practices or methods; (v) any repurchase or redemption
with respect to its stock; (vi) any stock split, combination or reclassification
of any of the Company's stock or the issuance or authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for, shares
of the Company's stock; (vii) any adoption of any option or similar plan to
purchase shares of stock of the Company; (viii) any granting by the Company or
any of its subsidiaries to any director, officer or employee of the Company or
any of its subsidiaries of (A) any increase in compensation (other than in the
ordinary course of business consistent with past practice in the case of
employees who are not officers or directors of the Company or a subsidiary
thereof), (B) any increase in severance or termination pay, or (C) acceleration
of compensation or benefits; (ix) any entry by the Company or any of its
subsidiaries into any employment, severance, bonus or termination agreement with
any director, officer or employee of the Company or any of its subsidiaries; or
(x) any agreement (whether or not in writing), arrangement or understanding to
do any of the foregoing.
5.7 LITIGATION. Except as disclosed in the Company SEC Reports filed prior
to the date of this Agreement or in Section 5.7 of the Company Disclosure
Schedule, there is no suit, action or proceeding pending or, to the Company's
knowledge, threatened against the Company or any of its subsidiaries which,
alone or in the aggregate, has had or would have, a Company Material Adverse
Effect, nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against the Company or any of its
subsidiaries which, alone or in the aggregate, has had, or would have, any such
Company Material Adverse Effect. In addition, the aggregate reasonable estimate
of uninsured exposures or losses under all claims and judgments pending, or, to
the best knowledge of the Company, threatened, does not exceed $125,000. For
purposes of this Agreement, the phrases "the Company's knowledge" and "knowledge
of the Company" and other phrases of like import shall mean the actual knowledge
of any officer or director of the Company or of any subsidiary of the Company.
5.8 EMPLOYEE BENEFIT PLANS.
(a) Section 5.8(a) of the Company Disclosure Schedule hereto sets
forth a list of all "employee benefit plans," as defined in Section 3(3) of
ERISA, and all other material employee benefit or compensation arrangements
or payroll practices, including, without limitation, any such arrangements
or payroll practices providing severance pay, sick leave, vacation pay,
salary continuation for disability,
A-7
<PAGE> 136
retirement benefits, deferred compensation, bonus pay, incentive pay, stock
options (including those held by directors, employees, and consultants),
hospitalization insurance, medical insurance, life insurance, scholarships
or tuition reimbursements, that are maintained by the Company, any
subsidiary of the Company or any Company ERISA Affiliate (as defined below)
or to which the Company, any subsidiary of the Company or any Company ERISA
Affiliate is obligated to contribute thereunder for current or former
directors, employees, independent contractors, consultants and leased
employees of the Company, any subsidiary of the Company or any Company
ERISA Affiliate (the "Company Employee Benefit Plans").
(b) Except as set forth in Section 5.8(b) of the Company Disclosure
Schedule, none of the Company Employee Benefit Plans is a "multiemployer
plan", as defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"),
and since December 31, 1995, neither the Company nor any Company ERISA
Affiliate has contributed or contributes, or has been or is required to
contribute, to any such plan. With respect to any Multiemployer Plan that
the Company or any Company ERISA Affiliate are required or have been
required in the past to contribute to:
(i) the Company and each Company ERISA Affiliate has or will have,
as of the date of the Closing, made all contributions to the
Multiemployer Plan required by the terms of such Multiemployer Plan or
any collective bargaining agreement;
(ii) neither the Company nor Parent would be subject to any
material withdrawal liability under Part 1 of Subtitle E of Title IV of
ERISA if, as of the date of the Closing, the Company or any Company
ERISA Affiliate were to engage in a complete withdrawal (as defined in
ERISA Section 4203) or a partial withdrawal (as defined in ERISA Section
4205) from the Multiemployer Plan; and
(iii) the Company has made available to Parent current, accurate,
and complete copies of the Multiemployer Plan and of all collective
bargaining agreements requiring contributions to be made to such
Multiemployer Plan.
(c) Except as set forth in Section 5.8(c) of the Company Disclosure
Schedule, neither the Company nor any of it subsidiaries maintains or
contributes to any plan or arrangement which provides or has any liability
to provide life insurance or medical or other employee welfare benefits to
any employee, officer or director or former employee, officer or director
upon his retirement or termination of employment, and neither the Company
nor any of its subsidiaries has ever represented, promised or contracted
(whether in oral or written form) to any employee, officer or director or
former employee, officer or director that such benefits would be provided.
(d) Except as set forth in Section 5.8(d) of the Company Disclosure
Schedule, the execution of, and performance of the transactions
contemplated in, this Agreement will not, either alone or upon the
occurrence of subsequent events, result in any payment (whether of
severance pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits or obligation to fund benefits
with respect to any employee, officer or director of the Company or any of
its subsidiaries. The only severance agreements or severance policies
applicable to the Company or its subsidiaries in the event of a change of
control of the Company are the agreements and policies specifically
referred to in Section 5.8 of the Company Disclosure Schedule.
(e) Each Company Employee Benefit Plan that is intended to qualify
under Section 401 of the Internal Revenue Code of 1986, as amended (the
"Code"), and each trust maintained pursuant thereto, has been determined to
be exempt from federal income taxation under Section 501 of the Code by the
IRS, and, to the Company's knowledge, nothing has occurred with respect to
the operation or organization of any such Company Employee Benefit Plan
that would cause the loss of such qualification or exemption or the
imposition of any liability, penalty or tax under ERISA or the Code. With
respect to any Company Employee Benefit Plan or other employee benefit plan
which is a "defined benefit plan" within the meaning of Section 3(35) of
ERISA, (i) the Company has not incurred and is not reasonably likely to
incur any liability under Title IV of ERISA (other than for the payment of
premiums, all of
A-8
<PAGE> 137
which have been paid when due), (ii) the Company has not incurred any
accumulated funding deficiency within the meaning of Section 412 of the
Code and has not applied for or obtained a waiver of any minimum funding
standard or an extension of any amortization period under Section 412 of
the Code, (iii) no "reportable event" (as such term is defined in Section
4043 of ERISA but excluding any event for which the provision for 30-day
notice to the Pension Benefit Guaranty Corporation has been waived by
regulation) has occurred or is expected to occur and (iv) since December
31, 1996, no material adverse change in the financial condition of any such
plan has occurred.
(f) (i) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under
any of the Company Employee Benefit Plans to any funds or trusts
established thereunder or in connection therewith have been made by the due
date thereof, (ii) the Company has complied in all material respects with
any notice, reporting and documentation requirements of ERISA and the Code,
(iii) there are no pending actions, claims or lawsuits which have been
asserted, instituted or, to the Company's knowledge, threatened, in
connection with the Company Employee Benefit Plans, (iv) the Company
Employee Benefit Plans have been maintained, in all material respects, in
accordance with their terms and with all provisions of ERISA and the Code
(including rules and regulations thereunder) and other applicable federal
and state laws and regulations, and (v) except as set forth in Section
5.8(f) of the Company Disclosure Statement, each Company Employee Benefit
Plan could be terminated as of the date of the Closing with no liability to
the Company, Parent or any Company ERISA Affiliate.
(g) Neither the Company nor any Company ERISA Affiliate has engaged in
any transaction in violation of Section 406(a) or (b) of ERISA or any
"prohibited transaction" (as defined in Section 4975(c)(1) of the Code),
which would subject the Company or any Company ERISA Affiliate to any
taxes, penalties or other liabilities resulting from such prohibited
transaction, and no condition exists that would subject the Company or any
Company ERISA Affiliate to any excise tax, penalty tax or fine related to
any Company Employee Benefit Plans.
(h) With respect to each Company Employee Benefit Plan, the Company
has furnished or made available to Parent true, correct and complete copies
of the following (to the extent applicable): (i) the plan documents and
summary plan descriptions; (ii) the most recent determination letter
received from the Internal Revenue Service; (iii) the annual reports to be
filed for the three most recent plan years of each such plan; (iv) all
related trust agreements, insurance contracts or other funding agreements
that implement such plans; and (v) all other documents, records or other
materials related thereto reasonably requested by Parent.
(i) Each Company Employee Benefit Plan covering any employee residing
or working outside the United States or sponsored or maintained by a
foreign subsidiary of the Company (i) complies in all material respects
with applicable law; and (ii) could be terminated on the date of the
Closing without any material liability to Parent, the Surviving Corporation
or any subsidiary of the Company.
For purposes of this Agreement, "Company ERISA Affiliate" means any
business or entity which is a member of the same "controlled group of
corporations," under "common control" or an "affiliated service group" with the
Company within the meanings of Sections 414 (b), (c) or (m) of the Code, or
required to be aggregated with the Company under Section 414(o) of the Code, or
is under "common control" with the Company, within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.
5.9 COMPANY ACTION; VOTE REQUIRED. The Board of Directors of the Company,
at a meeting duly called and held, has by the unanimous vote of all directors
present (a) determined that the Merger is advisable and fair to and in the best
interests of the Company and its stockholders, (b) approved the Merger in
accordance with the provisions of Section 1701.78 of the OGCL, and (c)
recommended the approval of this Agreement and the Merger by the holders of the
Company Stock and directed that the Merger be submitted for consideration by the
Company's stockholders at the meeting of stockholders contemplated by Section
3.6. The affirmative vote of two-thirds of the outstanding shares of Company
Stock entitled to vote at such meeting of the Company's stockholders is required
to approve the Agreement and the Merger.
A-9
<PAGE> 138
5.10 FINANCIAL ADVISORS. The Company has received the opinion of Chaffe &
Associates, Inc., financial advisor to the Company, which financial advisor is
not an affiliate (as that term is defined in the Securities Exchange Act of
1934, as amended) of the Company, to the effect that, as of the date hereof, the
Merger Consideration is fair from a financial point of view to the holders of
Company Stock, a copy of which opinion has been delivered to Parent and Merger
Sub. Except for Chaffe & Associates, Inc., no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. The Company has
previously delivered to Parent a copy of the engagement letter executed on
August 10, 1998 between the Company and Chaffe & Associates, Inc. In addition to
any such fee and commission arrangements, the Company has previously delivered
to Parent a good faith estimate of all additional fees, costs and expenses to be
incurred by the Company and its subsidiaries in connection with this Agreement.
5.11 COMPLIANCE WITH APPLICABLE LAWS. The Company and each of its
subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business (the "Company Permits"). The Company and
each of its subsidiaries is in compliance with the terms of the Company Permits,
except for any failure to comply which, alone or in the aggregate, has not had,
and would not have, a Company Material Adverse Effect. Except as disclosed in
the Company SEC Reports filed prior to the date of this Agreement, the
businesses of the Company and its subsidiaries are not being conducted in
violation of any material Law (as defined below), including, with respect to the
operations of the Company's foreign subsidiaries, any "social law" (as defined
below). Without limitation, any mandated or voluntary plant closing or product
recall due to an actual or potential violation of any health or safety law,
ordinance or regulation shall be deemed to cause a Company Material Adverse
Effect. To the Company's knowledge, during the past five years, none of the
Company's or any of its subsidiaries' directors, officers, employees or agents,
nor any other person acting on behalf of any of them or the Company or any of
its subsidiaries, has, directly or indirectly, given or agreed to give any gift
or similar benefit to any customer, supplier, governmental employee or other
person in violation of any Law, including, without limitation, the Foreign
Corrupt Practices Act. "Law" means any statute, law, ordinance, decree, order,
rule or regulation of any Governmental Entity. "Social law" means any foreign,
national, regional, state, provincial and municipal laws, regulations,
ordinances and decisions and any collective bargaining agreements agreed on any
level, affecting the employment of labor, including but not limited to social
security, wages, hours, discrimination, plant closing notices, working
conditions, health and safety in the work place, works council information and
consultation of the work force, the organization of participation by the work
force, internal regulations, maternity and sickness leave, etc.
5.12 TAXES. Except as set forth in Section 5.12 of the Company Disclosure
Schedule, (i) all returns and reports ("Tax Returns") of or with respect to any
tax that are required to be filed by or with respect to the Company and each of
its subsidiaries have been filed; (ii) neither the Company nor any of its
subsidiaries has requested or been granted an extension of time for filing any
Tax Return that has not yet been filed; (iii) the Company and each of its
subsidiaries has paid all taxes that are due from or with respect to it; (iv)
the Company and each of its subsidiaries has withheld and paid all taxes
required by all applicable laws to be withheld or paid in connection with any
amounts paid or owing to any employee, creditor, independent contractor or other
third party; (v) there are no outstanding agreements, waivers or arrangements
extending the statutory period of limitation applicable to any claim for, or the
period for the collection or assessment of, taxes due from or with respect to
the Company or any of its subsidiaries for any taxable period; (vi) no audit,
action, proceeding, investigation, dispute or claim by any court, governmental
or regulatory authority or similar person is pending or, to the Company's
knowledge, threatened in regard to any taxes due from or with respect to the
Company or any of its subsidiaries or any Tax Return filed by or with respect to
the Company or any of its subsidiaries; (vii) no claim has been made by a taxing
authority in a jurisdiction in which neither the Company nor any of its
subsidiaries files Tax Returns that the Company or any subsidiary is required to
file Tax Returns in such jurisdiction, and, to the Company's knowledge, no
taxing authority could reasonably make such a claim; (viii) no assessment of any
deficiency for taxes is proposed against the Company or any of its subsidiaries
or any of their assets; (ix) there are no liens for taxes (other than for
current taxes not yet due and payable) upon the assets of the Company; (x) the
Company has not been a member of an affiliated group
A-10
<PAGE> 139
as defined in Section 1504 of the Code (or any analogous combined, consolidated
or unitary group as defined under state, local or foreign income tax law) other
than one of which the Company was the common parent; (xi) neither the Company
nor any subsidiary has any obligation or liability for the payment of taxes of
any other person arising as a result of any obligation to indemnify another
person or as a result of the Company or any such subsidiary assuming or
succeeding to the tax liability of any other person as a successor, transferee
or otherwise; (xii) the Company will not be required to include any amount in
taxable income for any taxable period (or portion thereof) ending after the
Effective Time as a result of (A) a change in method of accounting for a taxable
period ending prior to the Effective Time, (B) any "closing agreement" as
described in Section 7121 of the Code (or any corresponding provision of state,
local or foreign income tax laws) entered into prior to the Effective Time, (C)
any sale reported on the installment method that occurred prior to the Effective
Time or (D) any prepaid amount received prior to the Effective Time; (xiii) all
taxes accrued but not yet due and all contingent liabilities for taxes are
adequately reflected in the reserves for taxes in the financial statements
contained in the Company SEC Reports; and (xiv) except as described in Section
5.12 of the Company Disclosure Schedule, there has been no "ownership change" as
described in Section 382 of the Code that has resulted in any limitation on the
Company's ability to offset pre-change losses against its taxable income.
5.13 CERTAIN MATERIAL CONTRACTS.
(a) Section 5.13(a) of the Company Disclosure Schedule lists each
agreement and arrangement (whether written or oral and including all
amendments thereto) to which the Company or any of its subsidiaries is a
party or a beneficiary or by which the Company or any of its subsidiaries
is bound that is material, directly or indirectly, to the business of the
Company (collectively, the "Material Contracts"), including without
limitation (i) any supply, distribution or other agreements or arrangements
pursuant to which third parties are or will be entitled or obligated to
purchase or use any of the assets of Company or any of its subsidiaries
with an aggregate per contract purchase price in excess of $100,000; (ii)
any warranty agreements or arrangements (including any bonds) with any
party under which the Company or any of its subsidiaries has any liability,
in any individual agreement or arrangement or in the aggregate under all
agreements or arrangements with such party, with a value in excess of
$25,000; (iii) any capital or operating leases or conditional sales
agreements relating to vehicles or equipment with a value in excess of
$100,000; (iv) any supply or manufacturing agreements or arrangements
pursuant to which the Company or any of its subsidiaries is entitled or
obligated to acquire any assets from a third party in excess of $500,000;
(v) any employment, consulting, noncompetition, separation, collective
bargaining, union or labor agreements or arrangements; (vi) any agreement
evidencing, securing or otherwise relating to any indebtedness for which
the Company or any of its subsidiaries has any liability, (vii) any
agreement with or for the benefit of any stockholder, director, officer or
employee of the Company or any of its subsidiaries, or any affiliate or
family member thereof; and (viii) any other agreement, arrangement or lease
of real or personal property pursuant to which the Company or any of its
subsidiaries could be required to make or be entitled to receive aggregate
payments in excess of $100,000 and which is not cancelable within 30 days
notice without penalty.
(b) The Company and, as applicable, each subsidiary of the Company,
has performed in all material respects all of its obligations under each
Material Contract, and there exists no breach or default (or event that
with notice or lapse of time would constitute a breach or default), whether
or not such default has been waived, under any Material Contract.
(c) On the date hereof and on the Closing Date, each Material Contract
will be valid, binding and in full force and effect and enforceable in
accordance with its respective terms. There has been no termination or, to
the Company's knowledge, threatened termination or notice of default under
any Material Contract. The Company has delivered to Parent a copy of each
written Material Contract.
(d) Except as set forth in Section 5.13(d) of the Company Disclosure
Schedule, no consent of any person is required in connection with the
transactions contemplated by this Agreement in order to preserve the rights
of the Company or any of its subsidiaries under, or to prevent any
disadvantage to the Company or any of its subsidiaries in respect of, any
Material Contract after the Effective Time.
A-11
<PAGE> 140
5.14 LABOR RELATIONS. Except as set forth in Section 5.14 of the Company
Disclosure Schedule, there is (i) no unfair labor practice, complaint, grievance
or arbitration pending or, to the knowledge of the Company, threatened against
the Company or any subsidiary of the Company, (ii) no strike, labor dispute,
slowdown or stoppage pending or, to the knowledge of the Company, threatened
against the Company or any subsidiary of the Company and (iii) to the best
knowledge of the Company, no labor union organizing campaign in progress with
respect to any employees of the Company or any subsidiary of the Company.
5.15 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS. Except as disclosed in
Section 5.15 of the Company Disclosure Schedule, in the last 12 months, none of
(i) the ten largest customers of the Company and each of its operating
subsidiaries as determined by the dollar volume of sales for the year ended
December 31, 1997 and for the six months ended June 30, 1998, and (ii) the ten
largest suppliers of the Company and each of its operating subsidiaries as
determined by the dollar volume of purchases for the year ended December 31,
1997 and for the six months ended June 30, 1997, has canceled or otherwise
terminated, or, to the Company's knowledge, threatened to cancel or otherwise
terminate, its relationship with the Company or any of its subsidiaries, and, to
the Company's knowledge, there has not been any material dispute with any such
customer or supplier. Except as described in Section 5.15 of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries, and, to
the Company's knowledge, no director or officer of the Company or any subsidiary
of the Company, owns, directly or indirectly, an interest in any entity that is
a competitor, customer or supplier of the Company or any of its subsidiaries or
that otherwise has material business dealings with the Company or any of its
subsidiaries.
5.16 INTELLECTUAL PROPERTY.
(a) The Company has made available to Parent a list of the following
(collectively, the "Company Intellectual Property"): (i) each trademark,
trade name, brand name, service mark or other trade designation owned or
licensed by or to the Company or any of its subsidiaries, each patent,
copyright and similar intellectual property owned or licensed to or by the
Company or any of its subsidiaries and each license, royalty, assignment or
other similar agreement and each registration and application relating to
the foregoing that is material to the conduct of the business of the
Company and its subsidiaries taken as a whole, which list is set forth in
Section 5.16(a) of the Company Disclosure Schedule; and (ii) each agreement
relating to Company Intellectual Property or any technology, know-how or
processes that the Company or any of its subsidiaries is licensed or
authorized to use, or which the Company or any of its subsidiaries licenses
or authorizes others to use, that is material to the conduct of the
business of the Company and its subsidiaries taken as a whole.
(b) The Company and its subsidiaries own the Company Intellectual
Property, or have the right to use the same without infringing or violating
the rights of any third parties. No consent of third parties will be
required for the use of the Company Intellectual Property after the
Effective Time. No claim has been asserted by any person against the
Company or any of its subsidiaries regarding the ownership of or the right
to use any Company Intellectual Property or challenging the rights of the
Company or any of its subsidiaries with respect to any of the Company
Intellectual Property.
(c) To the Company's knowledge, no person or entity has asserted any
claim that any product, activity or operation of the Company or any of its
subsidiaries infringes upon or involves, or has resulted in the
infringement of, any proprietary right of such person or entity. No
proceedings have been instituted, are pending or, to the Company's
knowledge, are threatened that challenge the rights of the Company or any
of its subsidiaries with respect thereto.
5.17 ENVIRONMENTAL MATTERS. Except for matters disclosed in Section 5.17
of the Company Disclosure Schedule, to the knowledge of the Company, after due
inquiry, (a) the properties, operations and activities of the Company and its
subsidiaries are in compliance in all material respects with all applicable
Environmental Laws (as hereinafter defined); (b) the Company and its
subsidiaries and the properties and operations of the Company and its
subsidiaries are not subject to any existing, pending or, to the Company's
knowledge, threatened action, suit, claim, investigation, inquiry or proceeding
by or before any Governmental Entity under any Environmental Law; (c) all
notices, permits, licenses or similar authorizations, if any, required to be
obtained or filed by the Company or any of its subsidiaries under any
Environmental Law in connection with
A-12
<PAGE> 141
any aspect of the business of the Company or any of its subsidiaries, including
without limitation, those relating to the treatment, storage, disposal or
release of a hazardous or otherwise regulated substance, have been duly obtained
or filed and will remain valid and in effect after the Merger, and the Company
and its subsidiaries are in compliance with the terms and conditions of all such
notices, permits, licenses and similar authorizations; (d) the Company and its
subsidiaries have satisfied and are currently in compliance with all financial
responsibility requirements applicable to their operations and imposed by any
Governmental Entity under any Environmental Law, and neither the Company nor any
of its subsidiaries has received any notice of noncompliance with any such
financial responsibility requirements; (e) there are no physical or
environmental conditions existing on any property of the Company or any of its
subsidiaries or resulting from the Company's or any such subsidiary's operations
or activities, past or present, at any location, that would give rise to any
material on-site or off-site remedial obligations under any Environmental Laws
or that would impact the soil, groundwater, surface water or human health; (f)
since the effective date of the relevant requirements of applicable
Environmental Laws and to the extent required by such applicable Environmental
Laws, all hazardous or otherwise regulated substances generated by the Company
or any of its subsidiaries have been transported only by carriers authorized
under Environmental Laws to transport such substances and wastes, and disposed
of only at treatment, storage, and disposal facilities authorized under
Environmental Laws to treat, store or dispose of such substances and wastes; (g)
there has been no exposure of any person or property to hazardous substances or
any pollutant or contaminant, nor has there been any release of hazardous
substances, or any pollutant or contaminant into the environment by the Company
or any of its subsidiaries or in connection with their properties or operations
that could reasonably be expected to give rise to any claim against the Company
or any of its subsidiaries for damages or compensation; and (h) the Company has
delivered to Parent all internal and external environmental audits and studies
and all correspondence on substantial environmental matters in the possession of
the Company relating to any of the current or former properties or operations of
the Company and its subsidiaries.
For purposes of this Agreement, the term "Environmental Laws" means any and
all laws, statutes, ordinances, rules, regulations, or orders of any
Governmental Entity pertaining to health or the environment currently in effect
in any and all jurisdictions in which the Company or any of its subsidiaries
owned or owns property or has conducted or conducts business, including without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act
of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986,
as amended, any state laws implementing the foregoing federal laws, and all
other environmental conservation or protection laws. For purposes of this
Agreement, the terms "hazardous substance" and "release" have the meanings
specified in CERCLA and RCRA and shall include petroleum and petroleum products,
radon and PCB's, and the term "disposal" has the meaning specified in RCRA;
provided, however, that to the extent the laws of the state in which the
property is located establish a meaning for "hazardous substance," "release," or
"disposal" that is broader than that specified in either CERCLA or RCRA, such
broader meaning shall apply.
5.18. INSURANCE. Section 5.18(a) of the Company Disclosure Schedule sets
forth a complete and accurate list of all primary, excess and umbrella policies,
bonds and other forms of insurance currently owned or held by or on behalf of
and/or providing insurance coverage to the Company, its subsidiaries and their
businesses, properties and assets (or their directors, officers, salespersons,
agents or employees). Section 5.18(a) of the Company Disclosure Schedule also
sets forth the following information with respect to each insurance policy or
bond listed therein: coverage, limits, carrier, deductibles, annual premium,
policy term, special provisions and any estimated losses. All such policies are
in full force and effect. Neither the Company nor any of its subsidiaries has
received a notice of default under any such policy or notice of any pending or
threatened termination or cancellation, coverage limitation or reduction, or
material premium increase with respect to any such policy. Section 5.18(b) of
the Company Disclosure Schedule sets forth a complete and accurate summary of
all of the self-insurance coverage provided by the Company and its subsidiaries,
and no letters of credit have been posted and no cash has been restricted to
support any reserves for insurance. The insurance policies of the Company and
its subsidiaries are issued by insurers of recognized
A-13
<PAGE> 142
responsibility and insure the Company, its subsidiaries and their businesses,
properties and assets against such losses and risks, and in such amounts, as are
customary in the case of corporations of established reputation engaged in the
same or similar businesses and similarly situated.
5.19 PROPERTIES.
(a) Section 5.19(a) of the Company Disclosure Schedule sets forth a
description (including the street address) of all real property owned or
leased by the Company or any of its subsidiaries (the "Real Estate"). No
lease agreement, letter of intent or proposal (whether written or oral) has
been entered into by the Company or any of its subsidiaries relating to the
Real Estate except as specified on Section 5.19(a) of the Company
Disclosure Schedule. No premises other than the Real Estate are used in the
business of the Company.
(b) Except for properties and assets disposed of in the ordinary
course of business consistent with past practices after June 30, 1998, the
Company and its subsidiaries have good and marketable title to, or hold by
valid and enforceable lease or license, free and clear of all liens, all
properties and assets, whether tangible or intangible, real, personal or
mixed, reflected in the Company's latest Quarterly Report on Form 10-Q for
the period ended June 30, 1998 or purported to be owned by the Company and
its subsidiaries. The equipment of the Company and its subsidiaries in
regular use has been well maintained and is in good and serviceable
condition, reasonable wear and tear excepted.
(c) The Real Estate is zoned for a classification that permits its
continued use in the manner currently used by the Company and its
subsidiaries, and the occupancy, operation and use of the Real Estate
conforms in all material respects to all applicable Laws, covenants,
conditions and restrictions applicable thereto. Improvements to the Real
Estate were constructed in compliance with, and remain in compliance with,
all applicable Laws, covenants, conditions or restrictions, and except for
current construction in process, to the extent required or applicable,
final certificates of occupancy have been issued for such improvements
permitting the existing use of such improvements. There are no actions
pending or, to the Company's knowledge, threatened that would alter the
current zoning classification of the Real Estate or alter any applicable
Laws, covenants, conditions or restrictions that would adversely affect the
use of the Real Estate in the business of the Company and its subsidiaries.
To the Company's knowledge, no insurance company or Governmental Entity has
given notice of any defects or inadequacies in the Real Estate or the
improvements thereon that would adversely affect the insurability or
usability of the Real Estate or such improvements or prevent the issuance
of new insurance policies thereon at rates not materially higher than
present rates. To the Company's knowledge, no fact or condition exists that
would result in the discontinuation of necessary utilities or services to
the Real Estate or the termination of current access to and from the Real
Estate.
(d) There is no litigation or proceeding pending or, to the Company's
knowledge, threatened against or relating to any of the Real Estate, and
there is no pending or, to the Company's knowledge, threatened or
contemplated condemnation actions or special assessments with respect to
the Real Estate. Neither the Company nor any of its subsidiaries has
received a request (written or otherwise) from any Governmental Entity with
respect to the dedication of any of the Real Estate. To the Company"s
knowledge, there is no pending or contemplated change in any regulation or
private restriction applicable to the Real Estate.
(e) None of the Real Estate is situated in a special flood hazard area
according to any of the applicable city maps or flood insurance rate maps,
or the flood hazard boundary maps issued by the Department of Housing and
Urban Development, the Federal Insurance Administration or the Federal
Emergency Management Agency.
(f) No person has, or at the Effective Time will have, any right or
option to acquire all or any portion of the Real Estate.
(g) Except for the tenants under the leases described in Section
5.19(a) of the Company Disclosure Schedule (the "Leases"), there are no
parties in possession of, or that have the right to possess, any portion of
the Real Estate as lessees, tenants at sufferance or trespassers. The
Company and each of its
A-14
<PAGE> 143
subsidiaries have performed and complied with all of their respective
obligations under the Leases as and when required, and there exists no fact
or circumstance that, with or without notice or passage of time, or both,
could constitute a default of the landlord or lessor under any of the
Leases, or entitle any tenant thereunder to any offset or defenses against
the prompt and current payment of rent or the performance of any other
obligation of tenant thereunder. As of the date of execution of this
Agreement, there are no rental or other concessions of any nature granted
to tenants under the Leases except as set forth therein. There are no
Leases or other agreements with respect to the Real Estate that give any
tenant the right to purchase the Real Estate or any part thereof. The
rentals and other sums due or to become due under the Leases have not been,
and will not be, assigned, encumbered or subjected to any liens as of the
Effective Time. To the Company's knowledge, no tenant under any of the
Leases is in default thereunder, nor is there any fact or circumstance
that, with or without notice or the passage of time, or both, would
constitute a default of any tenant under any of the Leases.
5.20 YEAR 2000 COMPLIANCE. Except as described in Section 5.20 of the
Company Disclosure Schedule, the disclosure contained in the Company's SEC
Reports with respect to the Company's "Year 2000 Compliant" (as hereinafter
defined) status is correct in all material respects. To the extent that the
hardware, software and computer systems of the Company and its subsidiaries are
not "Year 2000 Compliant", such failure has not had and would not have a Company
Material Adverse Effect. As used herein, "Year 2000 Compliant" means that the
hardware, firmware, software and computer systems of the Company and its
subsidiaries (a) will completely and accurately address, produce, store and
calculate data involving dates beginning with January 1, 2000 and will not
produce abnormally ending or incorrect results involving such dates as used in
any forward-or regression-dated based functions; and (b) will provide that all
"date"-related functionalities and data fields include the indication of century
and millennium, and will perform calculations which involve a four-digit year.
5.21. NO COMMITMENTS. Except as described in Section 5.21 of the Company
Disclosure Schedule, none of the Company or any of its subsidiaries has entered
into any commitments, understandings or agreements of any kind with respect to
the proposed expansion of the Marietta facility.
5.22 TAKEOVER STATUTES. No "fair price," "moratorium," "control share
acquisition" or other similar anti-takeover statute or regulation to which the
Company or its subsidiaries or operations is subject (a "Takeover Statute") is
applicable to the transactions contemplated by this Agreement or the Inducement
Agreement.
5.23 INFORMATION FOR PROXY STATEMENT. None of the information supplied or
to be supplied by the Company and its subsidiaries and included or incorporated
by reference in the Proxy Statement will, on the date the Proxy Statement (and
any amendment or supplement thereto) is first mailed to stockholders of the
Company, at the time of the stockholders' meeting to vote on the approval of
this Agreement and the transactions contemplated hereby or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. If at any time prior to the Effective Time any event with
respect to the Company or any of its subsidiaries, or with respect to other
information supplied by the Company or any of its subsidiaries for inclusion in
the Proxy Statement, shall occur that is required to be described in an
amendment of, or a supplement to, the Proxy Statement, such event shall be so
described, and such amendment or supplement shall be promptly filed with the
Commission and, as required by law, distributed to the stockholders of the
Company. The Proxy Statement, insofar as it relates to the Company or its
subsidiaries or other information supplied by the Company for inclusion therein,
will comply in all material respects with the provisions of the Exchange Act and
the regulations promulgated thereunder.
A-15
<PAGE> 144
VI. REPRESENTATIONS AND WARRANTIES REGARDING MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to the
Company as follows:
6.1 ORGANIZATION. Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio. Merger Sub
has not engaged in any business since it was incorporated other than in
connection with its organization and the transactions contemplated by this
Agreement.
6.2 CAPITALIZATION. The authorized capital stock of Merger Sub consists of
10,000 shares of common stock, par value $.01 per share, of which 1,000 shares
are validly issued and outstanding, fully paid and nonassessable and are owned
by Parent or by a subsidiary of Parent free and clear of all liens, claims and
encumbrances.
6.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Merger Sub has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and sole stockholder, and no other corporate proceedings on the part
of Merger Sub are necessary to authorize this Agreement and the transactions
contemplated hereby. Except as disclosed in Section 4.2 of the Parent Disclosure
Schedule or as required by the HSR Act, the Foreign Acts, the Securities Act,
the Exchange Act and the corporation, securities or blue sky laws or regulations
of the various states, no filing or registration with, or authorization, consent
or approval of, any Governmental Entity is necessary for the consummation by
Merger Sub of the Merger or the transactions contemplated by this Agreement,
other than filings, registrations, authorizations, consents or approvals the
failure to make or obtain which would not prevent the consummation of the
transactions contemplated hereby.
VII. CONDUCT OF BUSINESS PENDING THE MERGER
7.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. After the date
of this Agreement and prior to the Effective Time, unless Parent shall otherwise
agree in writing or except as otherwise required by this Agreement:
(i) the Company shall, and shall cause its subsidiaries to, carry on their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted, and shall, and shall cause its
subsidiaries to, use their reasonable efforts to preserve intact their present
business organizations and preserve their relationships with customers,
suppliers and others having business dealings with them to the end that their
goodwill and on-going businesses shall be unimpaired at the Effective Time;
(ii) the Company shall, and shall cause its subsidiaries to, (A) maintain
insurance coverages and their books, accounts and records in the usual manner
consistent with past practice; (B) comply in all material respects with all Laws
(including "social laws"), ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries; (C) maintain and keep their
material properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (D) perform in all material respects their
obligations under all material contracts and commitments to which any of them is
a party or by which any of them is bound;
(iii) the Company shall not and shall not propose or agree to (A) sell or
pledge or agree to sell or pledge any of its capital stock or any capital stock
owned by it in any of its subsidiaries or owned by any of its subsidiaries, (B)
amend its Articles of Incorporation or Regulations, (C) split, combine or
reclassify its outstanding stock or issue or authorize or propose the issuance
of any other securities in respect of, in lieu of or in substitution for shares
of stock of the Company, or declare, set aside, authorize or pay any dividend or
other distribution payable in cash, stock or property, provided that the Company
may pay that declared dividend of $0.05 per share of Company Stock payable on
September 30, 1998 to stockholders of record as of September 18, 1998, or (D)
directly or indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of Company stock;
(iv) the Company shall not, nor shall it permit any of its subsidiaries to,
(A) issue, deliver or sell or agree to issue, deliver or sell any additional
shares of, or rights of any kind to acquire any shares of, its
A-16
<PAGE> 145
respective stock of any class, any indebtedness having the right to vote on any
matter on which the Company's stockholders may vote or any option, rights or
warrants to acquire, or securities convertible into, exercisable for or
exchangeable for, shares of stock; (B) other than finalization of the expansion
of the hardening room at the Company's Marietta facility (the total cost of
which is estimated to be approximately $1.6 million less approximately $400,000
incurred for refrigeration equipment as set forth in Section 5.21(2) of the
Company Disclosure Schedule), incur additional indebtedness or encumber or grant
a security interest in any asset or enter into any other material transaction
other than in each case in the ordinary course of business, it being understood,
without limitation, that the Company and its subsidiaries shall immediately
cease work on the proposed expansion of the Marietta facility and shall not
enter into any additional commitments, understandings or agreements with respect
to such expansion; (C) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof; (D) incur any material transaction fees, costs
or expenses in addition to those disclosed or referenced pursuant to Section
5.10; or (E) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing;
(v) the Company shall not, nor shall it permit any of its subsidiaries to,
except as required to comply with applicable Law and except as provided in
Section 8.5 hereof, enter into any new (or amend any existing) Company Employee
Benefit Plan or any new (or amend any existing) employment, severance or
consulting agreement, grant any general increase in the compensation of current
or former directors, officers or employees (including any such increase pursuant
to any bonus, pension, profit-sharing or other plan or commitment) or grant any
increase in the compensation payable or to become payable to any director,
officer or employee, except in any of the foregoing cases in accordance with
pre-existing contractual provisions or in the ordinary course of business
consistent with past practice;
(vi) settle or compromise any suit or claim or threatened suit or claim
material to the transactions contemplated hereby or material to the Company and
its subsidiaries, individually or in the aggregate;
(vii) the Company shall not, nor shall it permit any of its subsidiaries
to, amend, modify, terminate, waive or permit to lapse any material right of
first refusal, preferential right, right of first offer or any other material
right of the Company or any of its subsidiaries, except in the ordinary course
of business;
(viii) the Company shall not, nor shall it permit any of its subsidiaries
to, (A) create or permit any lien or other encumbrance affecting the Real
Estate; (B) commit any waste or nuisance upon the Real Estate; (C) impose any
easements, covenants, conditions or restrictions on the Real Estate; (D)
institute or participate in any annexation, zoning, platting, or other
governmental action regarding the Real Estate; or (E) enter into or modify any
contract or other agreement that in any way affects the Real Estate and that
will survive the Effective Time, unless such contract or agreement is
cancelable, without cost, with thirty days prior written notice;
(ix) the Company shall not, nor shall it permit any of its subsidiaries to,
without the prior written consent of Parent, enter into any lease for the use or
occupancy of the Real Estate with a term in excess of 12 months or amend, renew,
modify or terminate any of the Leases;
(x) the Company shall cause at or prior to the Effective Time the release
of all liens against the Real Estate; and
(xi) the Company shall, and shall cause its subsidiaries to, perform all of
the Company's (or its subsidiaries", as the case may be) obligations under any
contracts pertaining to the Real Estate (including all leases) and promptly
notify Parent of any defaults thereunder.
VIII. ADDITIONAL AGREEMENTS
8.1 ACCESS AND INFORMATION. The Company and Parent shall afford to each
other and to each other's accountants, counsel and other representatives
reasonable access during normal business hours (and at such other times as the
parties may mutually agree) throughout the period prior to the Effective Time to
all of their
A-17
<PAGE> 146
respective properties, books, contracts, commitments, records and personnel, as
applicable, subject to existing confidentiality obligations, and, during such
period, the Company and Parent shall furnish promptly to each other (i) a copy
of each report, schedule and other document filed or received by it pursuant to
the requirements of federal or state securities laws and (ii) all other
information concerning its business, properties and personnel as the other may
reasonably request. Parent, Merger Sub, their agents and representatives shall
have the right, during normal business hours prior to the Effective Time, to
physically inspect all buildings, improvements, mechanical and other equipment
and fixtures to evaluate the operating condition thereof, and to conduct
surveys, test borings, soil tests and other tests and inspections on the Real
Estate. The Company and Parent shall hold, and shall cause their respective
employees, agents and representatives to hold, in confidence all such
information in accordance with the terms of the Non-Disclosure Agreement dated
as of May 27, 1998 between Parent and the Company (the "Non-Disclosure
Agreement").
8.2 PROXY STATEMENT; STOCKHOLDERS' MEETING. As soon as practicable
following the date of this Agreement, the Company shall prepare and file with
the Commission a proxy statement (the "Proxy Statement") relating to the merger
and this Agreement. The Company shall notify Parent promptly upon the receipt of
any comments from the Commission and of any request by the Commission for
amendments or supplements to the Proxy Statement or for additional information,
and shall supply Parent with copies of all written correspondence and details of
all oral correspondence between the Company and the Commission relating to the
Proxy Statement. Upon the occurrence of any event that is required to be
described in an amendment or supplement to the Proxy Statement, the Company
shall, upon learning of such event, promptly prepare, file and clear with the
Commission and mail to its stockholders such amendment or supplement; provided,
however, that prior to such mailing the Company shall consult with Parent with
respect to such amendment or supplement and afford Parent a reasonable
opportunity to comment thereon.
8.3 EMPLOYEE MATTERS. As of the Effective Time, the employees of the
Company and each of its subsidiaries shall continue employment with the
Surviving Corporation and such subsidiaries in the same positions and at the
same level of wages and/or salary and without having incurred a termination of
employment or separation from service; provided, however, except as may be
specifically required by applicable Law or any contract, the Surviving
Corporation and its subsidiaries shall not be obligated to continue any
employment relationship with any employee for any specific period of time. The
Surviving Corporation shall be the sponsor of the Company Employee Benefit Plans
sponsored by the Company immediately prior to the Effective Time, and Parent
shall cause the Surviving Corporation and the subsidiaries to satisfy all
existing obligations and liabilities under such Company Employee Benefit Plans;
provided, however, that except as hereafter provided in this Section 8.3 or in
the Company Disclosure Schedule, nothing contained in this Agreement shall limit
or restrict the Surviving Corporation's right on or after the Effective Time to
amend, modify or terminate any of the Company Employee Benefit Plans.
8.4 RIGHTS TO INDEMNIFICATION.
(a) All rights to indemnification existing in favor of the directors,
officers or employees of the Company as provided in the Company's Articles
of Incorporation or Regulations, as in effect as of the date hereof, with
respect to matters occurring through the Effective Time, shall survive the
Merger and shall continue in full force and effect thereafter. The
Surviving Corporation shall maintain in effect for not less than one year
after the Effective Time the current policies of directors' and officers'
liability insurance maintained by the Company with respect to matters
occurring on or prior to the Effective Time; provided, however, that the
Surviving Corporation or Parent may substitute therefor policies of at
least the same coverage (with carriers comparable to the Company's existing
carriers) containing terms and conditions which are not materially less
advantageous to the Indemnified Parties; and provided, further, that the
Surviving Corporation (or Parent, if it shall substitute policies) shall
not be required in order to maintain or procure such coverage to pay an
annual premium in excess of 150% of the current annual premium paid by the
Company for its existing coverage.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Effective Time,
A-18
<PAGE> 147
the parties hereto agree to cooperate and use their respective reasonable
efforts to vigorously defend against and respond to the same.
8.5 HSR ACT AND FOREIGN ACTS. The Company and Parent shall use their best
efforts to file as soon as practicable notifications under the HSR Act and any
applicable Foreign Acts in connection with the Merger and the transactions
contemplated hereby, and to respond as promptly as practicable to any inquiries
for additional information or documentation received from the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") or any other applicable Governmental Entities.
Notwithstanding the foregoing or any other provision of this Agreement, Parent
shall have no obligation to comply with any request or requirement imposed by
the FTC, the DOJ or any such other Governmental Entity in connection with the
HSR Act or any Foreign Act, including without limitation any request or
requirement (i) to disclose confidential information about Parent or its
affiliates; (ii) to dispose of any assets or operations of Parent or its
affiliates; or (iii) to comply with any restriction on the manner in which
Parent or its affiliates conduct their operations.
8.6 ADDITIONAL AGREEMENTS.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all commercially reasonable efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this
Agreement, including using all commercially reasonable efforts to obtain
all necessary waivers, consents and approvals, to effect all necessary
registrations and filings and to remove any injunction to the Merger (and,
in such case, to proceed with the Merger as expeditiously as possible).
(b) If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement, the
proper officers and/or directors of Parent, the Company and the Surviving
Corporation shall take all such necessary action.
8.7 NO SHOP.
(a) The Company agrees (i) that neither it nor any of its subsidiaries
shall, and each of them shall direct and use their best efforts to cause
their officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or
accountant retained by it or any of its subsidiaries) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making
or implementation of any proposal or offer (including, without limitation,
any proposal or offer to its stockholders) with respect to a merger,
acquisition, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, the Company or any of its subsidiaries (any such proposal or
offer being hereinafter referred to as an "Alternative Proposal"), or
engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating
to an Alternative Proposal, or release any third party from any obligations
under any existing standstill agreement or arrangement, or enter into any
agreement with respect to an Alternative Proposal; (ii) that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing; and (iii) that it will notify Parent
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, the Company or any of its
subsidiaries and will disclose to Parent the material substance thereof.
(b) Notwithstanding the foregoing, if the Company receives a written
proposal which the Board of Directors of the Company, in the exercise of
its reasonable judgment, believes is likely to result in an Alternative
Proposal, and such written proposal was not solicited by the Company and
did not result from a breach of this Section 8.7 (an "Unsolicited
Proposal"), the Company may directly or indirectly furnish information and
access to, and may participate in discussions and negotiate with, the
person or entity that has submitted such Unsolicited Proposal, but only if
(i) the Board of Directors of the Company reasonably concludes that (A) all
holders of Company Stock would receive Superior Consideration (as
A-19
<PAGE> 148
defined below) if the Alternative Proposal is accepted and consummated, and
(B) the proposed acquiror has the legal ability (including, without
limitation, under antitrust laws) to complete such acquisition on a timely
basis, and (C) such Alternative Proposal is not subject to a financing
contingency, and (ii) the Board of Directors of the Company, following
consultation with and considering the advice of its independent legal
counsel relating thereto, determines in its good faith judgment that
failing to take such action would constitute a breach of such Board of
Directors' fiduciary duties to the Company's stockholders imposed by law.
For purposes of this Agreement, "Superior Consideration" means
consideration consisting of cash and/or securities for all the shares of
Company Stock then outstanding or for all or substantially all the assets
of the Company that the Company's Board of Directors determines in its good
faith judgment (having received the advice of an unaffiliated reputable
financial advisor) to be materially more favorable to holders of the
Company Stock than the Merger.
(c) Neither the Board of Directors of the Company nor any committee
thereof shall (i) withdraw or modify, or propose to withdraw or modify, in
a manner adverse to Parent, the approval or recommendation by such Board of
Directors of this Agreement or the Merger or (ii) approve or recommend, or
propose to approve or recommend, any Alternative Proposal, unless (x) as a
result of actions taken in compliance with Section 8.7(b), the Company has
received an Unsolicited Proposal concerning an Alternative Proposal that
meets the requirements set forth in clauses (A), (B) and (C) of the
preceding paragraph, and (y) the Board of Directors of the Company,
following consultation with and considering the advice of its independent
legal counsel relating thereto, determines in its good faith judgment that
failing to take such action would constitute a breach of such Board of
Directors' fiduciary duties to the Company's stockholders imposed by law,
and (z) the Company has given Parent two business days' prior notice of
such action specifying the material terms of such Unsolicited Proposal.
(d) Nothing herein shall prevent the Board of Directors of the Company
from taking, and disclosing to its stockholders, a position contemplated by
Rule 14e-2(a) promulgated under the Exchange Act, provided that the Board
of Directors of the Company shall not recommend that the stockholders of
the Company tender their shares in connection with any such tender offer
unless such recommendation is permitted by Section 8.7(c).
8.8 ADVICE OF CHANGES; SEC FILINGS. The Company shall confer on a regular
basis with Parent on operational matters. Parent and the Company shall promptly
advise each other orally and in writing of any change or event that has had, or
could have, a Company Material Adverse Effect or a Parent Material Adverse
Effect, as the case may be. For the purposes of this Agreement, a "Parent
Material Adverse Effect" means any material adverse effect on the business,
properties, assets, operations, condition (financial or otherwise), customer
relations, supplier relations, business prospects, liabilities or results of
operations of Parent and its subsidiaries taken as a whole, other than any
effects arising out of, resulting from or relating to changes in general
economic or financial conditions. The Company and Parent shall promptly provide
each other (or their respective counsel) with copies of all filings made by such
party with the Commission or any other Governmental Entity in connection with
this Agreement and the transactions contemplated hereby other than any filing by
the Company pursuant to the HSR Act or any Foreign Act.
8.9 TAKEOVER STATUTES. If any Takeover Statute is or may become applicable
to the transactions contemplated hereby or by the Inducement Agreement, the
Company's Board of Directors shall grant such approvals and take such actions as
are necessary so that the transactions contemplated hereby and thereby may be
consummated as promptly as practicable on the terms contemplated hereby and
thereby and otherwise shall act to eliminate the effects of any Takeover Statute
on any of such transactions.
8.10 SURVEYS; TITLE COMMITMENTS. Within 45 days from the date of this
Agreement, the Company shall have obtained and delivered to Parent surveys and
irrevocable title commitments for standard owner's policies of title insurance
(which surveys and title commitments must be in form and substance reasonably
satisfactory to Parent) for the following Real Estate: (i) Burton, Michigan,
(ii) Port Huron, Michigan, (iii) Marietta, Ohio, (iv) Charleston, West Virginia
and (v) Somerset, Kentucky. The surveys shall (A) be current "as-built" metes
and bounds surveys of the land covered by the title commitments, including
easements which benefit such land, (B) be made in accordance with the "Minimum
Standard Detail Requirements" for
A-20
<PAGE> 149
ALTA/ACSM Land Title Surveys" jointly established and adopted by ALTA and ACSM
in 1997 and meet the accuracy requirements of an "Urban" survey as defined
therein, (C) contain Optional Survey Responsibilities and Specifications 1, 2,
3, 6, 7(a), 7(b), 8, 9, 10, 11, and 13 as specified in Table A of the Minimum
Standard Detail Requirements and (D) be certified to the title companies and
Parent.
8.11 ESTOPPEL CERTIFICATES. Within 30 days after the date of this
Agreement, the Company shall deliver to Parent a consent and estoppel
certificate, in form and substance reasonably satisfactory to Parent, from the
owner of each of the following parcels of Real Estate leased by the Company or
any of its subsidiaries: (i) Huntington, Cabell County, West Virginia, (ii)
Dunbar, Kanawha County, West Virginia, (iii) Ashland, Boyd County, Kentucky,
(iv) Charleston, West Virginia (MacCorkle Avenue); (v) Goodlettsville,
Tennessee; (vi) Marietta, Ohio (Seventh Street, Peoples Banking and Trust
Company and Elizabeth S. Broughton, lessors); (vii) Charleston, West Virginia
(Washington Street) and (viii) Bay City, Bay County, Michigan.
IX. CONDITIONS PRECEDENT
9.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved and adopted by the requisite vote of the holders of the
Company Stock.
(b) The waiting period and any other requirements applicable to the
consummation of the Merger under the HSR Act and any applicable Foreign
Acts shall have expired or been terminated.
(c) No preliminary or permanent injunction or other order by any
federal or state court of competent jurisdiction or other Governmental
Entity which prevents the consummation of the Merger shall have been issued
and remain in effect (each party agreeing to use all commercially
reasonable efforts to have any such injunction removed).
9.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the additional following
condition, unless waived by the Company:
(a) Parent and Merger Sub shall have performed in all material
respects their agreements contained in this Agreement required to be
performed on or prior to the Effective Time, and the representations and
warranties of Parent and Merger Sub contained in this Agreement shall be
true and correct when made and on and as of the Effective Time as if made
on and as of such date (except to the extent they relate to a particular
date), except as expressly contemplated or permitted by this Agreement. The
Company shall have received a certificate of the Chief Executive Officer,
President or a Vice President of each of Parent and Merger Sub to that
effect.
9.3 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB TO EFFECT THE
MERGER. The obligations of Parent and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the additional
following conditions, unless waived by Parent:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Effective Time, and the representations and warranties of the
Company contained in this Agreement shall be true in all material respects
when made and on and as of the Effective Time as if made on and as of such
date (except to the extent they relate to a particular date), except as
expressly contemplated or permitted by this Agreement. Parent and Merger
Sub shall have received a certificate of the Chief Executive Officer,
President or a Vice President of the Company to that effect.
(b) Since June 30, 1998, there shall have been no change, occurrence
or circumstance having or reasonably likely to have, individually or in the
aggregate, a Company Material Adverse Effect, and
A-21
<PAGE> 150
Parent shall have received a certificate signed by the Chief Executive
Officer, President or a Vice President of the Company to that effect.
(c) The Company and its subsidiaries shall take no action or agree to
any resolution regarding the currently pending suspension, proposed
debarment and related proceedings with the U.S. Department of Agriculture
without the prior written consent of Parent, which consent may be withheld
by Parent in its sole discretion, and there shall be no other suspension,
debarment or similar proceedings pending or threatened against the Company
or any of its subsidiaries.
(d) At the time of Closing, holders of no more than 5% of the
outstanding shares of Company Stock shall have dissented and preserved
their rights to seek appraisal in accordance with the OGCL.
(e) Parent's review of surveys, title commitments and responses to
requests for verification of compliance with applicable Laws shall have
revealed no facts or circumstances that may materially and adversely affect
the value or use by Parent or any of its subsidiaries of any of the Real
Estate located at (i) Burton, Michigan, (ii) Port Huron, Michigan, (iii)
Marietta, Ohio, (iv) Charleston, West Virginia, and (v) Somerset, Kentucky;
provided that neither Parent nor Merger Sub may rely on the condition
described in this paragraph to terminate the Agreement unless Parent shall
have provided the Company reasonable notice of any such facts or
circumstances that may materially and adversely affect the value or use by
Parent or any of its subsidiaries of any such Real Estate, and the Company
shall have failed to cure within 20 days from the date of such notice (and
any party may delay the Closing until completion of such 20-day period).
X. TERMINATION, AMENDMENT AND WAIVER
10.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after approval by the stockholders of the Company, by the mutual consent of
Parent and the Company.
10.2 TERMINATION BY EITHER PARENT OR THE COMPANY. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Parent or the Company if (a) the Merger shall not have been
consummated by December 31, 1998, or (b) the approval of the Company's
stockholders required by Section 3.6 shall not have been obtained at a meeting
duly convened therefor or at any adjournment or postponement thereof, or (c) a
federal or state court of competent jurisdiction or other Governmental Entity
shall have issued an injunction or other order which prevents consummation of
the Merger, and such injunction or order shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to clause (c) above shall have used all commercially reasonable efforts
to remove such injunction, order or decree; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under this Agreement in
any manner that shall have approximately contributed to the failure to
consummate the Merger.
10.3 OTHER TERMINATION RIGHTS.
(a) This Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, by action of the Board of
Directors of Parent, if the Board of Directors of the Company shall have
withdrawn or modified in a manner adverse to Parent its approval or
recommendation of this Agreement or the Merger or shall have recommended an
Alternative Proposal to the Company's stockholders.
(b) This Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, by action of the Board of
Directors of the Company, if, in compliance with Section 8.7(c), the Board
of Directors of the Company shall have withdrawn or modified in a manner
adverse to Parent its approval or recommendation of this Agreement or the
Merger or shall have recommended an Alternative Proposal to the Company's
stockholders.
A-22
<PAGE> 151
10.4 EFFECT OF TERMINATION AND ABANDONMENT.
(a) In the event that (i) Parent shall have terminated this Agreement
pursuant to Section 10.3(a) or (ii) the Company shall have terminated this
Agreement pursuant to Section 10.3(b), then, in either such case, the
Company shall, concurrently with such termination, pay Parent a fee of
$1,000,000 (a "Termination Fee"), which amount shall be payable by wire
transfer of same day funds, and shall promptly reimburse Parent for all
substantiated out-of-pocket costs and expenses incurred by Parent in
connection with this Agreement and the transactions contemplated hereby,
including, without limitation, costs and expenses of accountants, attorneys
and financial advisors (collectively, "Expenses"), up to an aggregate of
$400,000. The Company acknowledges that the agreements contained in this
Section 10.4(a) are an integral part of the transactions contemplated in
this Agreement, and that, without these agreements, Parent and Merger Sub
would not enter into this Agreement; accordingly, if the Company fails to
promptly pay the amount due pursuant to this Section 10.4(a), and, in order
to obtain such payment, Parent or Merger Sub commences a suit which results
in a judgment against the Company for the fee and expenses set forth in
this Section 10.4(a), the Company shall pay to Parent its costs and
expenses (including attorneys' fees) in connection with such suit.
(b) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Article X, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 10.4 and Sections 8.1, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7,
11.8, 11.9, 11.10, 11.11, 11.12, 11.13 and 11.14. Moreover, in the event of
termination of this Agreement pursuant to Section 10.2(a), nothing herein
shall prejudice the ability of the non-breaching party to pursue any remedy
at law or in equity, including an action seeking damages from any other
party for the breach of this Agreement.
XI. MISCELLANEOUS
11.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations and warranties set forth in this Agreement shall terminate at
the Effective Time. All covenants and agreements set forth in this Agreement
shall survive in accordance with their terms.
11.2 NOTICES. All notices or other communications under this Agreement
shall be in writing and shall be given by delivery (and shall be deemed to have
been duly given upon delivery) in person, by telegram, telex or telecopy, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to the Company:
Broughton Foods Company
210 North Seventh Street
P.O. Box 656
Marietta, Ohio 45750
Attention: Philip E. Cline
Telecopy No. (710) 376-9301
With a copy to:
Huddleston, Bolen, Beatty, Porter & Copen
611 Third Avenue
P.O. Box 2185
Huntington, West Virginia 25722-2185
Attention: Thomas Murray, Esq.
Telecopy No. (304) 522-4312
A-23
<PAGE> 152
If to Parent or Merger Sub:
Suiza Foods Corporation
3811 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
Attention: Gregg L. Engles
Telecopy No.: (214) 529-9929
With a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: William A. McCormack, Esq.
Telecopy No.: (214) 939-5849
or to such other address (or telecopy number) as any party may have furnished to
the other parties in writing in accordance with this Section.
11.3 FEES AND EXPENSES. Whether or not the Merger is consummated, except
as provided in Section 10.4, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated by this Agreement shall be paid
by the party incurring such expenses, whether or not the Merger is consummated;
provided, however, that the allocable share of Parent and Merger Sub on the one
hand and the Company on the other hand for regulatory filing fees (including
those related to the HSR Act and any applicable Foreign Acts) shall be one-half
each.
11.4 PUBLICITY. So long as this Agreement is in effect, Parent, Merger Sub
and the Company agree to consult with each other in issuing any press release or
otherwise making any public statement with respect to the transactions
contemplated by this Agreement, and none of them shall issue any press release
or make any public statement prior to such consultation, except as may be
required by law or by obligations pursuant to any listing agreement with the New
York Stock Exchange.
11.5 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
11.6 ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement; provided that
the third parties referenced in Sections 8.3 and 8.4 shall be third-party
beneficiaries of Parent's agreement contained in such Sections.
11.7 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Parent Disclosure
Schedule, the Company Disclosure Schedule, the Non-Disclosure Agreement and any
documents delivered by the parties in connection herewith and therewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings among the
parties with respect
A-24
<PAGE> 153
thereto. No addition to or modification of any provision of this Agreement shall
be binding upon any party hereto unless made in writing and signed by all
parties hereto.
11.8 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger to the
stockholders of the Company, but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
11.9 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to its rules
of conflict of laws.
11.10 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
11.11 HEADINGS AND TABLE OF CONTENTS. Headings of the Articles and
Sections of this Agreement and the Table of Contents are for the convenience of
the parties only, and shall be given no substantive or interpretive effect
whatsoever.
11.12 INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
11.13 WAIVERS. At any time prior to the Effective Time, the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
may (i) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any documents delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
11.14 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
11.15 SUBSIDIARIES. As used in this Agreement, the word "subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization, or any organization of which such party is a
general partner.
[Remainder of page intentionally left blank]
A-25
<PAGE> 154
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized
all as of the date first written above.
SUIZA FOODS CORPORATION
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll, Executive Vice
President-
Corporate Development
SUIZA FOODS ACQUISITION CORP.
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll, Vice President
BROUGHTON FOODS COMPANY
By: /s/ MARSHALL T. REYNOLDS
------------------------------------
Title: Chairman of the Board of
Directors
A-26
<PAGE> 155
COMPANY DISCLOSURE SCHEDULE
TO AGREEMENT AND PLAN OF MERGER
<TABLE>
<S> <C>
SECTION 5.1 Organization and Qualification
SECTION 5.3 Subsidiaries
SECTION 5.4 Authority Relative to this Agreement
SECTION 5.6 Absence of Certain Changes or Events
SECTION 5.7 Litigation
SECTION 5.8 Employee Benefit Plans
SECTION 5.10 Financial Advisors
SECTION 5.12 Taxes
SECTION 5.13 Certain Material Contracts
SECTION 5.14 Labor Relations
SECTION 5.15 Relationship with Customers and Suppliers
SECTION 5.16 Intellectual Property
SECTION 5.17 Environmental Matters
SECTION 5.18 Insurance
SECTION 5.19 Properties
SECTION 5.20 Year 2000 Compliance
SECTION 5.21 No Commitments
</TABLE>
A-27
<PAGE> 156
SUIZA DISCLOSURE SCHEDULE
TO AGREEMENT AND PLAN OF MERGER
<TABLE>
<S> <C>
SECTION 4.1 Certificate of Incorporation and Bylaws of Parent
SECTION 4.2 Authority
</TABLE>
A-28
<PAGE> 157
EXHIBIT A
INDUCEMENT AGREEMENT
This Inducement Agreement (the "Agreement"), dated as of September 10,
1998, is entered into by and among Suiza Foods Corporation, a Delaware
corporation ("Parent"), and the stockholders of Broughton Foods Company, an Ohio
corporation (the "Company"), listed on the signature page hereof (each such
stockholder being referred to herein as a "Stockholder" and, collectively with
each other Stockholder, the "Stockholders").
WITNESSETH:
WHEREAS, each Stockholder, as of the date hereof, is the owner of or has
the sole right to vote with respect to certain shares of common stock, par value
$1.00 per share (the "Common Stock"), of the Company (together with any shares
of Common Stock acquired by a Stockholder after the date hereof, the "Shares");
WHEREAS, in reliance upon the execution and delivery of this Agreement,
Parent and Suiza Foods Acquisition Corp., an Ohio corporation and a subsidiary
of Parent ("Merger Sub"), will enter into an Agreement and Plan of Merger, dated
as of the date hereof (the "Merger Agreement"), with the Company that provides,
among other things, that upon the terms and subject to the conditions thereof,
Merger Sub shall be merged (the "Merger") with and into the Company and the
Company shall become a subsidiary of Parent; and
WHEREAS, to induce Parent and Merger Sub to enter into the Merger Agreement
and to incur the obligations set forth therein, the Stockholders are entering
into this Agreement pursuant to which each Stockholder is granting an
irrevocable proxy to Parent to vote in favor of the Merger and to make certain
agreements with respect to such Stockholder's Shares, upon the terms and
conditions set forth herein;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
1. Irrevocable Proxy. Each Stockholder hereby irrevocably appoints Parent,
Gregg L. Engles and Tracy L. Noll, and each of them, the attorneys, agents and
proxies, with full power of substitution in each of them, for the undersigned
and in the name, place and stead of the undersigned, to vote all of such
Stockholder's Shares at any meeting of the Company's stockholders (whether
annual or special and whether or not an adjourned or postponed meeting), or, if
applicable, to take action by written consent (i) for adoption and approval of
the Merger Agreement and otherwise in favor of the Merger and any other
transaction contemplated by the Merger Agreement, as such Merger Agreement may
be modified or amended from time to time, and (ii) against any action, omission
or agreement which would or could impede or interfere with, or have the effect
of discouraging, the Merger. Each Stockholder acknowledges and agrees that this
proxy is coupled with an interest and constitutes, among other things, an
inducement for Parent and Merger Sub to enter into the Merger Agreement and,
accordingly, this proxy is irrevocable and shall not be terminated by operation
of law upon the occurrence of any event, including, without limitation, the
death or incapacity of such Stockholder. This proxy shall operate to revoke any
prior proxy as to the Shares heretofore granted by any Stockholder. This Proxy
has been executed in accordance with Section 1701.48 of the Ohio General
Corporation Law. Notwithstanding the foregoing, this proxy shall terminate on
the earlier of (A) the Effective Time (as defined in the Merger Agreement) or
(B) the date on which the Merger Agreement is terminated (the earlier thereof
being hereinafter referred to as the "Merger Termination Date").
2. Covenants of Stockholders. Except as set forth in Schedule 2 hereto,
each Stockholder covenants and agrees for the benefit of Parent that, until the
Merger Termination Date, such Stockholder will not:
(a) sell, transfer, pledge, hypothecate, encumber, assign, tender or
otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, hypothecation,
encumbrance, assignment, tender or other disposition of, any of such
Stockholder's Shares or any interest therein;
(b) other than as expressly contemplated by this Agreement, grant any
powers of attorney or proxies or consents in respect of any of such
Stockholder's Shares, deposit any of such Shares into a voting trust, enter
AA-1
<PAGE> 158
into a voting agreement with respect to any of such Shares or otherwise restrict
or take any action adversely affecting the ability of such Stockholder freely to
exercise all voting rights with respect thereto; or
(c) except as permitted by Section 8.7(b) of the Merger Agreement,
directly, or indirectly through his or her agents and representatives, initiate,
solicit or encourage, any inquiries or the making or implementation of any
Alternative Proposal (as defined in the Merger Agreement) or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to, an Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; and such Stockholder shall (i) immediately cease and cause to be
terminated any existing activities, including discussions or negotiations with
any parties, conducted heretofore with respect to any of the foregoing and will
take the necessary steps to inform his or her agents and representatives of the
obligations undertaken in this Section 2(c), and (ii) notify Parent immediately
if any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, him or her.
3. Covenants of Parent. Parent covenants and agrees for the benefit of the
Stockholders that, provided that the board of directors of the Company shall
have approved the Merger Agreement and the transactions contemplated thereby,
(a) immediately upon execution of this Agreement, Parent shall enter into the
Merger Agreement, and (b) until the Merger Termination Date, it shall use all
reasonable efforts to take, or cause to be taken, all action, and do, or cause
to be done, all things necessary or advisable in order to consummate and make
effective the transactions contemplated by this Agreement and the Merger
Agreement, consistent with the terms and conditions of each such agreement;
provided, however, that nothing in this Section 3, Section 12 or any other
provision of this Agreement is intended, nor shall it be construed, to limit or
in any way restrict Parent's or Merger Sub's right or ability to exercise any of
its rights under the Merger Agreement.
4. Representations and Warranties of the Stockholders. Each Stockholder
represents and warrants to Parent and Merger Sub that: (a) the execution,
delivery and performance by such Stockholder of this Agreement will not conflict
with, require a consent, waiver or approval under, or result in a breach of or
default under, any of the terms of any contract, commitment or other obligation
(written or oral) to which such Stockholder is bound; (b) such Stockholder has
full right, power and authority to execute and deliver this Agreement and to
perform such Stockholder"s obligations hereunder; (c) the proxy granted pursuant
to Section 1 does not constitute a proxy appointed for or in connection with the
stockholder authorization of a control share acquisition pursuant to section
1701.831 of the Ohio General Corporation Law, and this Agreement has been duly
executed and delivered by such Stockholder and constitutes a legal, valid and
binding obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms; (d) such Stockholder is the sole owner of or has the
right to vote with respect to such Stockholder's Shares, and such Stockholder's
Shares represent all shares of Common Stock of or with respect to which such
Stockholder is the sole owner or has the right to vote at the date hereof, and
such Stockholder does not have any right to acquire, nor is he or she the
"beneficial owner" (as such term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) of, any other shares of any class of capital
stock of the Company or any securities convertible into or exchangeable or
exercisable for any shares of any class of capital stock of the Company; and (e)
such Stockholder owns his Shares free and clear of all liens, claims, pledges,
charges, proxies, restrictions, encumbrances, proxies and voting agreements of
any nature whatsoever (each an "Encumbrance") other than as provided by this
Agreement, and good and valid title to its Shares, free and clear of any
Encumbrance, will pass to Parent upon Closing (as defined in the Merger
Agreement). The representations and warranties contained herein shall be made as
of the date hereof and as of the Closing.
5. Adjustments; Additional Shares. In the event (a) of any stock dividend,
stock split, merger (other than the Merger) recapitalization, reclassification,
combination, exchange of shares or the like of the capital stock of the Company
on, of or affecting the Common Stock or (b) that any Stockholder shall become
the owner of, or otherwise obtain the right to vote with respect to, any
additional shares of Common Stock or other securities entitling the holder
thereof to vote or give consent with respect to the matters set forth in Section
1, then the terms of this Agreement shall apply to the shares of capital stock
or other instruments or documents that the Stockholders own or have the right to
vote immediately following the effectiveness of the events described in clause
(a) or any Stockholder becoming the owner of or obtaining the right to vote with
respect to
AA-2
<PAGE> 159
any Common Stock or other securities as described in clause (b), as though, in
either case, they were Shares hereunder.
6. Specific Performance. Each Stockholder acknowledges that the agreements
contained in this Agreement are an integral part of the transactions
contemplated by the Merger Agreement, and that, without these agreements, Parent
and Merger Sub would not enter into the Merger Agreement, and acknowledges that
damages would be an inadequate remedy for any breach by him of the provisions of
this Agreement. Accordingly, the Stockholders each agree that the obligations of
the Stockholders hereunder shall be specifically enforceable and they shall not
take any action to impede Parent from seeking to enforce such right of specific
performance.
7. Notices. All notices, requests, claims, demands and other
communications hereunder shall be effective upon receipt (or refusal of
receipt), shall be in writing and shall be delivered in person, by telecopy or
telefacsimile, by telegram, by next-day courier service, or by mail (registered
or certified mail, postage prepaid, return receipt requested) to any Stockholder
at the address listed on the signature page hereof, and to Parent at 3811 Turtle
Creek Boulevard, Suite 1300, Dallas, Texas 75219, Attention: Gregg L. Engles,
telecopy number 214-528-9929, or to such other address or telecopy number as any
party may have furnished to the other in writing in accordance herewith.
8. Binding Effect; Survival. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, personal
representatives, successors and assigns.
9. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio applicable to agreements made and
to be performed entirely within such State, without giving effect to conflicts
of laws principles.
10. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
11. Effect of Headings; Gender. The Section headings herein are for
convenience of reference only and shall not affect the construction hereof. Any
references to male, female and neuter genders shall be deemed to refer to each
other gender, as applicable.
12. Additional Agreements; Further Assurance. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement. The Stockholders will
provide Parent with all documents which may reasonably be requested by Parent
and will take reasonable steps to enable Parent to obtain all rights and
benefits provided it hereunder.
13. Amendment; Waiver. No amendment or waiver of any provision of this
Agreement or consent to departure therefrom shall be effective unless in writing
and signed by Parent and all affected Stockholders, in the case of an amendment,
or by the party which is the beneficiary of any such provision, in the case of a
waiver or a consent to depart therefrom.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
SUIZA FOODS CORPORATION
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll,
Vice President -- Corporate
Development
AA-3
<PAGE> 160
STOCKHOLDERS:
/s/ MARSHALL T. REYNOLDS
- ------------------------------------------------------
Marshall T. Reynolds
/s/ PHILIP E. CLINE
- ------------------------------------------------------
Philip E. Cline
/s/ GEORGE W. BROUGHTON
- ------------------------------------------------------
George W. Broughton
/s/ DAVID J. BROUGHTON
- ------------------------------------------------------
David J. Broughton
/s/ RONALD V. ARTHUR, II
- ------------------------------------------------------
Ronald V. Arthur, II
/s/ ROBERT E. EVANS
- ------------------------------------------------------
Robert E. Evans
/s/ TODD R. FRY
- ------------------------------------------------------
Todd R. Fry
/s/ CHARLES R. HOOTEN, JR.
- ------------------------------------------------------
Charles R. Hooten, Jr.
/s/ NEAL W. SCAGGS
- ------------------------------------------------------
Neal W. Scaggs
/s/ MARTIN P. SHEARER
- ------------------------------------------------------
Martin P. Shearer
/s/ PHILIP TODD SHELL
- ------------------------------------------------------
Philip Todd Shell
/s/ KIRBY J. TAYLOR
- ------------------------------------------------------
Kirby J. Taylor
/s/ PAUL T. THEISEN
- ------------------------------------------------------
Paul T. Theisen
WRIGHT FAMILY PARTNERSHIP
By: /s/ THOMAS W. WRIGHT
-----------------------------------------------------
Thomas W. Wright, Partner
CHAMPION LEASING CORPORATION
By: /s/ MARSHALL T. REYNOLDS
-----------------------------------------------------
Marshall T. Reynolds, President
THE HARRAH AND REYNOLDS CORPORATION
By: /s/ MARSHALL T. REYNOLDS
-----------------------------------------------------
Marshall T. Reynolds, President
ADJ CORP.
By: /s/ JACK M. REYNOLDS
-----------------------------------------------------
Jack M. Reynolds
Title: Secretary/Treasurer
/s/ JACK M. REYNOLDS
- ------------------------------------------------------
Jack M. Reynolds
/s/ DOUGLAS V. REYNOLDS
- ------------------------------------------------------
Douglas V. Reynolds
/s/ SHIRLEY A. REYNOLDS
- ------------------------------------------------------
Shirley A. Reynolds
AA-5
<PAGE> 161
AMENDMENT NO. 2 TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 2 (this "Amendment No. 2"), dated as of April 28, 1999,
to the Agreement and Plan of Merger (the "Merger Agreement"), dated as of
September 10, 1998, by and among Suiza Foods Corporation, a Delaware corporation
("Parent"), Suiza Foods Acquisition Corp., an Ohio corporation and wholly owned
subsidiary of Parent ("Merger Sub"), and Broughton Foods Company, an Ohio
corporation (the "Company"), as amended by Amendment No. 1 to Agreement and Plan
of Merger ("Amendment No. 1"), dated as of January 18, 1999, by and among
Parent, Merger Sub, and the Company, is entered into by and among Parent, Merger
Sub and the Company.
WHEREAS, in order to induce Parent and Merger Sub to enter into the Merger
Agreement, certain stockholders of the Company entered into an Inducement
Agreement, dated as of September 10, 1998, with Parent;
WHEREAS, Parent, Merger Sub and the Company thereupon entered into the
Merger Agreement;
WHEREAS, in order to induce Parent and Merger Sub to enter into Amendment
No. 1, certain stockholders of the Company entered into a Stock Purchase
Agreement, dated as of January 18, 1999, with Parent and the Company;
WHEREAS, Parent, Merger Sub and the Company thereupon entered into
Amendment No. 1;
WHEREAS, in order to induce Parent and Merger Sub to enter into this
Amendment No. 2, certain stockholders of the Company are contemporaneously
herewith entering into an Amendment to Inducement Agreement, the form of which
is attached hereto as Exhibit A, and certain stockholders of the Company are
contemporaneously herewith entering into an Amendment to Stock Purchase
Agreement, the form of which is attached hereto as Exhibit B; and
WHEREAS, the parties wish to further amend the Merger Agreement;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties hereto
agree as follows:
1. Termination of Amendment No. 1. Amendment No. 1 is hereby terminated
and shall have no force and effect after the date hereof.
2. Merger Consideration. Section 3.1 of the Merger Agreement is hereby
deleted in its entirety and replaced with the following:
"3.1 Effect of the Merger on Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of
any common stock, par value $1.00 per share, of the Company (the "Company
Stock"), each share of Company Stock issued and outstanding immediately
prior to the Effective Time (other than any Dissenting Shares (as defined
in Section 3.4)) shall be canceled and retired and converted automatically
into the right to receive $16.50 in cash (the "Merger Consideration")
payable to the holder thereof, without interest thereon, upon surrender of
the certificate formerly representing such share of Company Stock. All such
shares of Company Stock, when so converted, shall no longer be held by the
holders of certificates representing such shares prior to the Effective
Time, and each such holder shall cease to have any rights with respect
thereto other than the right to receive the Merger Consideration."
3. Closing. Section 3.8 of the Merger Agreement is hereby deleted in its
entirety and replaced with the following:
"3.8 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Huddleston,
Bolen, Beatty, Porter & Copen, 611 Third Avenue, Huntington, West Virginia
25722-2185, at 9:00 a.m. local time on May 31, 1999 or at such other time
and place as Parent and the Company shall agree in writing, in either case
upon satisfaction (or waiver)
AAA-1
<PAGE> 162
of the conditions set forth in Article IX (other than those conditions that
can be satisfied only at the Effective Time.)"
4. New Disclosure Schedule. The Company Disclosure Schedule to the Merger
Agreement is hereby deleted in its entirety and replaced with the Amended
Company Disclosure Schedule attached hereto and made a part hereof.
5. Waiver of Condition. Parent, Merger Sub and the Company acknowledge
that Parent and Merger Sub believe the Company suffered certain reversals in its
business between June 30, 1998 and December 31, 1998 that may constitute a
Company Material Adverse Effect, but that the Company believes that the
reversals identified by Parent and Merger Sub may not constitute a Company
Material Adverse Effect. Parent and Merger Sub agree to waive any right they may
have under Section 9.3(b) of the Merger Agreement to terminate such Agreement
based on the financial operating performance of the Company between June 30,
1998 and March 31, 1999, provided that (i) so long as the Company"s average
monthly operating income, as determined in accordance with generally accepted
accounting principles, consistently applied, for any calendar month after March
31, 1999 is not less than the average monthly operating income, as likewise
determined, for the three months ended March 31, 1999, the financial operating
performance of the Company shall not be deemed to have suffered a Company
Material Adverse Effect, and (ii) such waiver shall not affect any right of
Parent and Merger Sub to terminate such Agreement based on the failure of any
other condition to their performance set forth therein.
6. Conditions to Obligations of Parent and Merger Sub to Effect the
Merger. Section 9.3 of the Merger Agreement is hereby amended by the addition
at the end thereof of the following:
"(f) In the lawsuit and action styled United States of America,
Plaintiff vs. Suiza Foods Corporation, d/b/a Louis Trauth Dairy, Land O'Sun
Dairy, and Flav-O-Rich Dairy, and Broughton Foods Company, d/b/a/ Southern
Belle Dairy, Defendants, Civil Action No. 99-CV-130, pending in the United
States District Court for the Eastern District of Kentucky, there shall
have been filed with the Court by attorneys for the United States a
stipulation and order and proposed final judgment containing terms and
conditions acceptable to Parent in its sole discretion and permitting the
consummation of the Merger prior to entry of the final judgment.
7. Termination of Merger Agreement by Either Parent or the
Company. Section 10.2(a) of the Merger Agreement is hereby deleted in its
entirety and replaced with the following:
". . . (a) the Merger shall not have been consummated by June 30,
1999, or . . ."
8. Authority Relative to this Amendment No. 2. The execution, delivery and
performance of the Merger Agreement, Amendment No. 1 and this Amendment No. 2
and the consummation of the transactions contemplated thereby and hereby have
been duly and effectively authorized by all necessary corporate action of the
parties except for the approval by the holders of two-thirds of the shares of
Company Stock outstanding and entitled to vote as contemplated by Section 5.9,
and the Merger Agreement, as amended by Amendment No. 1 and this Amendment No.
2, constitutes the valid and binding obligations of the parties, enforceable
against each of them in accordance with its terms, except as enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought.
9. Reference to and Effect on the Merger Agreement.
(a) Upon execution of this Amendment No. 2, each reference in the Merger
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference in any document related thereto, or executed in
connection therewith, shall mean and be a reference to the Merger Agreement as
amended by Amendment No. 1 and this Amendment No. 2, and the Merger Agreement,
Amendment No. 1 and Amendment No. 2 shall be read together and construed as one
single instrument.
(b) Except as specifically amended by Amendment No. 1 and this Amendment
No. 2, the Merger Agreement shall remain in full force and effect and is hereby
ratified and confirmed by the parties.
AAA-2
<PAGE> 163
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Amendment No. 2 to be signed by their respective officers thereunto duly
authorized all as of the date first written above.
SUIZA FOODS CORPORATION
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll, Executive
Vice President -- Corporate
Development
SUIZA FOODS ACQUISITION CORP.
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll, Vice President
BROUGHTON FOODS COMPANY
By: /s/ MARSHALL T. REYNOLDS
------------------------------------
Title: Chairman of the Board of
Directors
AAA-3
<PAGE> 164
EXHIBIT A
AMENDMENT TO
INDUCEMENT AGREEMENT
This Amendment (this "Amendment"), dated as of April 28, 1999, to the
Inducement Agreement (the "Inducement Agreement"), dated as of September 10,
1998, by and among Suiza Foods Corporation, a Delaware corporation ("Parent"),
and the stockholders of Broughton Foods Company, an Ohio corporation (the
"Company"), listed on the signature pages hereof (each such stockholder being
referred to herein as a "Stockholder" and, collectively with each other
Stockholder, the "Stockholders"), is entered into by and among Parent, the
Company and the Stockholders.
WHEREAS, in order to induce Parent and Merger Sub to enter into the
Agreement and Plan of Merger (the "Merger Agreement"), dated as of September 10,
1998, by and among Parent, Suiza Foods Acquisition Corp., an Ohio corporation
and wholly-owned subsidiary of Parent ("Merger Sub"), and the Company, the
Stockholders entered into the Inducement Agreement;
WHEREAS, Parent, Merger Sub and the Company thereupon entered into the
Merger Agreement;
WHEREAS, in order to induce Parent and Merger Sub to enter into Amendment
No. 1 to the Merger Agreement ("Amendment No. 1"), dated as of January 18, 1999,
by and among Parent, Merger Sub and the Company, certain stockholders of the
Company entered into a Stock Purchase Agreement, dated as of January 18, 1999,
with Parent and the Company;
WHEREAS, Parent, Merger Sub and the Company thereupon entered into
Amendment No. 1;
WHEREAS, in order to induce Parent and Merger Sub to enter into Amendment
No. 2 to the Merger Agreement ("Amendment No. 2"), the Stockholders are entering
into this Amendment; and
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties hereto
agree as follows:
1. Authority Relative to this Amendment. Each Stockholder represents and
warrants to Parent and Merger Sub that: (a) the execution, delivery and
performance by such Stockholder of the Inducement Agreement and this Amendment
does not conflict with, require a consent, waiver or approval under, or result
in a breach of or default under, any of the terms of any contract, commitment or
other obligation (written or oral) to which such Stockholder is bound; (b) such
Stockholder has full right, power and authority to execute and deliver the
Inducement Agreement and this Amendment and to perform such Stockholder's
obligations thereunder and hereunder; (c) the Inducement Agreement and this
Amendment have been duly executed and delivered by such Stockholder and
constitute legal, valid and binding obligations of such Stockholder, enforceable
against such Stockholder in accordance with their terms; (d) such Stockholder is
the sole owner of or has the right to vote with respect to such Stockholder's
Shares, and such Stockholder's Shares represent all shares of Common Stock of or
with respect to which such Stockholder is the sole owner or has the right to
vote at the date hereof, and such Stockholder does not have any right to
acquire, nor is it the "beneficial owner" (as such term is defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended) of, any other shares of
any class of capital stock of the Company or any securities convertible into or
exchangeable or exercisable for any shares of any class of capital stock of the
Company; and (e) such Stockholder owns its Shares free and clear of all liens,
claims, pledges, charges, proxies, restrictions, encumbrances, proxies and
voting agreements of any nature whatsoever (each an "Encumbrance") other than as
provided by the Inducement Agreement and this Amendment, and good and valid
title to its Shares, free and clear of any Encumbrance, will pass to Parent upon
Closing (as defined in the Merger Agreement). The representations and warranties
contained herein and in the Inducement Agreement shall be made as of the date
hereof and as of the Closing.
2. Reference to and Effect on the Inducement Agreement.
(a) Upon execution of this Amendment, each reference in the Inducement
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference in any document
AAAA-1
<PAGE> 165
related thereto, or executed in connection therewith, shall mean and be a
reference to the Inducement Agreement as amended by this Amendment, and the
Inducement Agreement and this Amendment shall be read together and construed as
one single instrument. In addition, each reference in the Inducement Agreement
to "the Merger Agreement," "thereunder," "thereof," "therein" or words of like
import, and each reference in any document related thereto, or executed in
connection therewith, shall mean and be a reference to the Merger Agreement as
amended by Amendment No. 1 and Amendment No. 2, and the Merger Agreement,
Amendment No. 1 and Amendment No. 2 shall be read together and construed as one
single instrument.
(b) Except as specifically amended by this Amendment, the Inducement
Agreement shall remain in full force and effect and is hereby ratified and
confirmed by the parties.
IN WITNESS WHEREOF, this Amendment has been duly executed by the parties
hereto all as of the day and year first above written.
SUIZA FOODS CORPORATION
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll,
Vice President -- Corporate
Development
AAAA-2
<PAGE> 166
STOCKHOLDERS:
/s/ MARSHALL T. REYNOLDS
- ------------------------------------------------------
Marshall T. Reynolds
/s/ PHILIP E. CLINE
- ------------------------------------------------------
Philip E. Cline
/s/ GEORGE W. BROUGHTON
- ------------------------------------------------------
George W. Broughton
/s/ DAVID J. BROUGHTON
- ------------------------------------------------------
David J. Broughton
/s/ RONALD V. ARTHUR, II
- ------------------------------------------------------
Ronald V. Arthur, II
/s/ ROBERT E. EVANS
- ------------------------------------------------------
Robert E. Evans
/s/ TODD R. FRY
- ------------------------------------------------------
Todd R. Fry
/s/ CHARLES R. HOOTEN, JR.
- ------------------------------------------------------
Charles R. Hooten, Jr.
/s/ NEAL W. SCAGGS
- ------------------------------------------------------
Neal W. Scaggs
/s/ MARTIN P. SHEARER
- ------------------------------------------------------
Martin P. Shearer
/s/ PHILIP TODD SHELL
- ------------------------------------------------------
Philip Todd Shell
/s/ KIRBY J. TAYLOR
- ------------------------------------------------------
Kirby J. Taylor
/s/ PAUL T. THEISEN
- ------------------------------------------------------
Paul T. Theisen
WRIGHT FAMILY PARTNERSHIP
By: /s/ THOMAS W. WRIGHT
-----------------------------------------------------
Thomas W. Wright, Partner
CHAMPION LEASING CORPORATION
By: /s/ MARSHALL T. REYNOLDS
-----------------------------------------------------
Marshall T. Reynolds, President
THE HARRAH AND REYNOLDS CORPORATION
By: /s/ MARSHALL T. REYNOLDS
-----------------------------------------------------
Marshall T. Reynolds, President
ADJ CORP.
By: /s/ JACK M. REYNOLDS
-----------------------------------------------------
Jack M. Reynolds
Title: Secretary/Treasurer
/s/ JACK M. REYNOLDS
- ------------------------------------------------------
Jack M. Reynolds
/s/ DOUGLAS V. REYNOLDS
- ------------------------------------------------------
Douglas V. Reynolds
/s/ SHIRLEY A. REYNOLDS
- ------------------------------------------------------
Shirley A. Reynolds
AAAA-3
<PAGE> 167
APPENDIX B-1
September 9, 1998
The Board of Directors
Broughton Foods Company
210 North Seventh Street
Marietta, OH 45750
Attention: Mr. Marshall T. Reynolds
Chairman
Gentlemen:
We understand that Broughton Foods Company ("Broughton") and Suiza Foods
Corporation ("Suiza") are contemplating entering into an Agreement and Plan of
Merger (the "Merger Agreement") which provides, among other things, for the
merger of Broughton into Suiza (the "Merger"). Pursuant to the Merger Agreement,
each share of Broughton common stock, par value $1.00 per share ("Broughton
Common Stock") shall be exchanged for $19.00 cash ("Merger Consideration").
You have asked our opinion as to whether the Merger Consideration is fair,
from a financial point of view, to the stockholders of Broughton.
Chaffe & Associates, Inc. ("Chaffe"), through its experience in the
securities industry, investment analysis and appraisal, and in related corporate
finance and investment banking activities, including mergers and acquisitions,
corporate recapitalization, and valuations for corporate and other purposes,
states that it is competent to provide the opinion as to the fairness of the
Merger Consideration. Neither Chaffe nor any of its officers or employees has an
interest in Broughton Common Stock or in Suiza. Chaffe has, however, undertaken
several assignments for entities in which Mr. Marshall T. Reynolds, Chairman of
the Board of Directors of Broughton, has an interest, and has been an
intermediary in transactions to which Mr. Reynolds was a party. Further, Chaffe
currently is acting as the financial advisor in the merger of another
institution in which Mr. Reynolds has a significant interest. The fee received
for the preparation and delivery of this opinion is not dependent or contingent
upon any transaction.
In connection with rendering its opinion, Chaffe, among other things: (i)
reviewed a draft copy of the Merger Agreement, dated September 7, 1998; (ii)
reviewed and analyzed certain publicly-available financial statements and other
information of Broughton; (iii) reviewed and analyzed certain internal financial
statements and other financial and operating data concerning Broughton, prepared
by the management of Broughton, including budget projections; (iv) discussed the
past and current operations and financial condition, and the prospects of
Broughton with senior executives of Broughton; (v) reviewed the historical
prices and trading volumes of the shares of Broughton Common Stock; (vi)
compared the financial performance of Broughton, and the prices and trading
activity of the Broughton Common Stock, with that of certain other comparable
publicly-traded companies and their securities; (vii) reviewed the financial
terms of business combinations in the dairy industry specifically and other
industries generally, which Chaffe deemed generally comparable to the proposed
transaction; (viii) considered a number of valuation methodologies, including
among others, those that incorporate capitalization of earnings; and (ix)
performed such valuations and such other studies and analyses as we deemed
appropriate to this opinion.
In its review, Chaffe relied, without independent verification, upon the
accuracy and completeness of the historical and projected financial information
and all other information reviewed by it for purposes of its opinion. Chaffe did
not make or obtain an independent review of Broughton's assets or liabilities,
nor was Chaffe furnished with any such appraisals. With respect to Broughton's
projected financial results, Chaffe has assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and
judgements of the management of Broughton of future financial performance of
Broughton. This opinion was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date hereof.
Chaffe expressed no opinion on the tax consequences of the proposed transaction
or the
B-1(i)
<PAGE> 168
The Board of Directors September 9, 1998
Broughton Foods Company Page 2
effect of any tax consequences on the value to be received by the holders of
Broughton Common Stock. Further, Chaffe is making no recommendation to
shareholders as to how they should vote on this transaction.
Based upon and subject to the foregoing and based upon such other matters
as we considered relevant, it is our opinion on the date hereof that the Merger
Consideration is fair, from a financial point of view, to the holders of
Broughton Common Stock.
Very truly yours,
/s/ CHAFFE & ASSOCIATES, INC.
CHAFFE & ASSOCIATES, INC.
B-1(ii)
<PAGE> 169
APPENDIX B-2
April 29, 1999
The Board of Directors
Broughton Foods Company
210 North Seventh Street
Marietta, OH 45750
Attention: Mr. Marshall T. Reynolds
Chairman
Gentlemen:
We understand that Broughton Foods Company (the "Company") and Suiza Foods
Corporation ("Suiza") are contemplating entering into an Agreement and Plan of
Merger (the "Merger Agreement") which provides, among other things, for the
merger of the Company into Suiza (the "Merger"). We further understand that the
Merger Agreement was revised by Amendment No. 2 to the Agreement and Plan of
Merger (the "Amendment"). Pursuant to the Amendment, 3,774,335 shares of Company
common stock, par value $1.00 per share (the "Public Shares") shall be exchanged
for $16.50 per share cash and the remaining 2,000,000 shares of Company common
stock (the "Inside Shares"), which are held by five directors and their
affiliates, shall be exchanged for $11.25 per share cash, with the right to
receive an additional $1.25 per share cash contingent upon certain conditions
being satisfied ("Merger Consideration").
You have asked our opinion as to whether the Merger Consideration is fair,
from a financial point of view, to the holders of the Public Shares.
Chaffe & Associates, Inc. ("Chaffe"), through its experience in the
securities industry, investment analysis and appraisal, and in related corporate
finance and investment banking activities, including mergers and acquisitions,
corporate recapitalization, and valuations for corporate and other purposes,
states that it is competent to provide the opinion as to the fairness of the
Merger Consideration. Neither Chaffe nor any of its officers or employees has an
interest in the Company's Common Stock or in Suiza. Chaffe has, however,
undertaken several assignments for entities in which Mr. Marshall T. Reynolds,
Chairman of the Board of Directors of the Company, has an interest, and has been
an intermediary in transactions to which Mr. Reynolds was a party. Further,
Chaffe currently is acting as the financial advisor in the merger of another
institution in which Mr. Reynolds has a significant interest. The fee received
for the preparation and delivery of this opinion is not dependent or contingent
upon any transaction.
In connection with rendering its opinion, Chaffe, among other things: (i)
reviewed the Merger Agreement, dated September 10, 1998; (ii) reviewed the
Amendment; (iii) reviewed and analyzed certain publicly-available financial
statements and other information of the Company; (iv) reviewed and analyzed
certain internal financial statements and other financial and operating data
concerning the Company, prepared by the management of the Company, including
budget projections; (v) discussed the past and current operations and financial
condition, and the prospects of the Company with senior executives of the
Company; (vi) reviewed the historical prices and trading volumes of the shares
of the Company's common stock; (vii) compared the financial performance of the
Company, and the prices and trading activity of the Company's common stock, with
that of certain other comparable publicly-traded companies and their securities;
(viii) reviewed the financial terms of business combinations in the dairy
industry specifically and other industries generally, which Chaffe deemed
generally comparable to the proposed transaction; (ix) considered a number of
valuation methodologies, including among others, those that incorporate
capitalization of earnings; and (x) performed such valuations and such other
studies and analyses as we deemed appropriate to this opinion.
In its review, Chaffe relied, without independent verification, upon the
accuracy and completeness of the historical and projected financial information
and all other information reviewed by it for purposes of its opinion. Chaffe did
not make or obtain an independent review of the Company's assets or liabilities,
nor was Chaffe furnished with any such appraisals. With respect to the Company's
projected financial results, Chaffe
B-2(i)
<PAGE> 170
The Board of Directors April 29, 1999
Broughton Foods Company Page 2
has assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of the Company of
future financial performance of the Company. This opinion was necessarily based
upon market, economic and other conditions as they existed on, and could be
evaluated as of, the date hereof. Chaffe expressed no opinion on the tax
consequences of the proposed transaction or the effect of any tax consequences
on the value to be received by the holders of the Company's common stock.
Further, Chaffe is making no recommendation to shareholders as to how they
should vote on this transaction.
Based upon and subject to the foregoing and based upon such other matters
as we considered relevant, it is our opinion on the date hereof that the Merger
Consideration is fair, from a financial point of view, to the holders of the
Public Shares of the Company.
Very truly yours,
/s/ CHAFFE & ASSOCIATES, INC.
CHAFFE & ASSOCIATES, INC.
SGB:mb
B-2(ii)
<PAGE> 171
APPENDIX C
OHIO REVISED CODE
TITLE XVII. CORPORATIONS--PARTNERSHIPS
CHAPTER 1701. GENERAL CORPORATION LAW
MERGER AND CONSOLIDATION
Section 1701.84 Dissenting shareholders entitled to relief. The following
are entitled to relief as dissenting shareholders under section 1701.85 of the
Revised Code:
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant to
section 1701.78, 1701.781, 1701.79, 1701.791, or 1701.801 of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders of
the surviving corporation who under section 1701.78 of the Revised Code are
entitled to vote on the adoption of an agreement of merger, but only as to the
shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign parent
corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the shares
so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which is being
merged one or more domestic or foreign corporations pursuant to section 1701.801
of the Revised Code.
Section 1701.85 Relief For Dissenting Shareholders; Qualification;
Procedures.
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date
fixed for the determination of shareholders entitled to notice of a meeting
of the shareholders at which the proposal is to be submitted, and such
shares shall not have been voted in favor of the proposal. Not later than
ten days after the date on which the vote on the proposal was taken at the
meeting of the shareholders, the dissenting shareholder shall deliver to
the corporation a written demand for payment to him of the fair cash value
of the shares as to which he seeks relief, which demand shall state his
address, the number and class of such shares, and the amount claimed by him
as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C)
of section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled
to relief under division (E) of section 1701.84 of the Revised Code in the
case of a merger pursuant to section 1701.801 of the Revised Code shall be
a record holder of the shares of the corporation as to which he seeks
relief as of the date on which the agreement of merger was adopted by the
directors of that corporation. Within twenty days after he has been sent
the notice provided in section 1701.80 or 1701.801 of the Revised Code, the
dissenting shareholder shall deliver to the corporation a written demand
for payment with the same information as that provided for in division
(A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or
the new entity, whether the demand is served before, on, or after the
effective date of the merger or consolidation.
C-1
<PAGE> 172
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates
representing the shares as to which he seeks relief, the dissenting
shareholder, within fifteen days from the date of the sending of such
request, shall deliver to the corporation the certificates requested so
that the corporation may forthwith endorse on them a legend to the effect
that demand for the fair cash value of such shares has been made. The
corporation promptly shall return such endorsed certificates to the
dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the
option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the
fifteen-day period, unless a court for good cause shown otherwise directs.
If shares represented by a certificate on which such a legend has been
endorsed are transferred, each new certificate issued for them shall bear a
similar legend, together with the name of the original dissenting holder of
such shares. Upon receiving a demand for payment from a dissenting
shareholder who is the record holder of uncertificated securities, the
corporation shall make an appropriate notation of the demand for payment in
its shareholder records. If uncertificated shares for which payment has
been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as
provided in this paragraph. A transferee of the shares so endorsed, or of
uncertificated securities where such notation has been made, acquires only
such rights in the corporation as the original dissenting holder of such
shares had immediately after the service of a demand for payment of the
fair cash value of the shares. A request under this paragraph, by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court there
upon shall make a finding as to the fair cash value of a share and shall render
judgment against the corporation for the payment of it, with interest at such
rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other
C-2
<PAGE> 173
action involved, whichever occurs last. Upon the occurrence of the last such
event, payment shall be made immediately to a holder of uncertificated
securities entitled to such payment. In the case of holders of shares
represented by certificates, payment shall be made only upon and simultaneously
with the surrender to the corporation of the certificates representing the
shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken, and,
in the case of a merger pursuant to section 1701.80 or 1701.801 of the Revised
Code, fair cash value as to shareholders of a constituent subsidiary corporation
shall be determined as of the day before the adoption of the agreement of merger
by the directors of the particular subsidiary corporation. The fair cash value
of a share for the purposes of this section is the amount that a willing seller
who is under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but in no
event shall the fair cash value of a share exceed the amount specified in the
demand of the particular shareholder. In computing such fair cash value, any
appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief, and the
right and obligation of the corporation to purchase such shares and to pay fair
cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption, of the action involved;
(c) The dissenting shareholder withdraws his demand, with the
consent of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to
an agreement as to the fair cash value per share, and neither the
shareholder nor the corporation filed or joined in a complaint under
division (B) of this section within the period provided in that
division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the
corporation shall be taken by the general partners of a surviving or new
partnership or the comparable representatives of any other surviving or new
entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
C-3
<PAGE> 174
APPENDIX D
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of January 18,
1999, by and among Suiza Foods Corporation, a Delaware corporation ("Parent"),
Broughton Foods Company, an Ohio corporation (the "Company"), and certain
stockholders of the Company listed on the signature pages hereto (the
"Stockholders").
WITNESSETH:
WHEREAS, on September 10, 1998, Parent, Suiza Foods Acquisition Corp., an
Ohio corporation and subsidiary of Parent ("Merger Sub"), and the Company
entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant
to which Merger Sub would be merged with and into the Company (the "Merger") and
the Company would be the surviving corporation (the "Surviving Corporation") in
the Merger;
WHEREAS, under the Merger Agreement, the obligations of Parent and Merger
Sub to effect the Merger are subject to the fulfillment at or prior to the
effective time of the Merger (the "Effective Time") of certain conditions,
including the following: (i) the waiting period and any other requirements
applicable to the consummation of the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any
applicable Foreign Acts (as defined in the Merger Agreement) shall have expired
or been terminated (Section 9.1(b) of the Merger Agreement); (ii) since June 30,
1998, there shall not have been any change, occurrence or circumstance having or
reasonably likely to have, individually or in the aggregate, a Company Material
Adverse Effect (as defined in the Merger Agreement) (Section 9.3(b)); and (iii)
the representations and warranties of the Company contained in the Merger
Agreement shall be true in all material respects when made and on and as of the
Effective Time (Section 9.3(a)).
WHEREAS, the Merger Agreement further provides that, subject to certain
conditions, it may be terminated and the Merger may be abandoned by action of
the Board of Directors of either Parent or the Company if, among other things,
the Merger shall not have been consummated by December 31, 1998 (the "Original
Termination Date");
WHEREAS, to induce Parent and Merger Sub to enter into the Merger Agreement
and to incur the obligations set forth therein, certain stockholders of the
Company (including certain of the "Stockholders" hereunder) entered into an
Inducement Agreement (the "Inducement Agreement") with Parent and the Company
pursuant to which such stockholders granted an irrevocable proxy to Parent to
vote in favor of the Merger and made certain other agreements with respect to
such stockholders' shares of the common stock, par value $1.00 per share, of the
Company (the "Company Stock");
WHEREAS, the waiting period and other requirements applicable to the
consummation of the Merger under the HSR Act had not expired or been terminated
by December 31, 1998;
WHEREAS, Parent and Merger Sub believe that the Company has suffered
certain reversals in its business since June 30, 1998 that may constitute a
Company Material Adverse Effect;
WHEREAS, the Company believes that the reversals identified by Parent and
Merger Sub may not constitute a Company Material Adverse Effect;
WHEREAS, on December 29, 1998, management of Parent advised the Company
that management was considering a recommendation to the Board of Directors of
Parent that the Board terminate the Merger Agreement and abandon the Merger
under the terms of the Merger Agreement;
WHEREAS, to induce Parent and Merger Sub not to terminate the Merger
Agreement and abandon the Merger as described, the Stockholders and the Company
are entering into this Agreement and making certain agreements with respect to
2,000,000 shares of Company Stock owned by the Stockholders (the "Shares"), and
other matters; and
D-1
<PAGE> 175
WHEREAS, concurrently herewith, Parent, Merger Sub and the Company are
entering into an amendment to the Merger Agreement (the "Amendment") to
establish a closing thereunder on March 31, 1999, to extend the Original
Termination Date to April 15, 1999 and to address the effect on the Merger
Agreement of the possible reversals in the Company"s business, subject to all
other terms and conditions set forth in the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
I. SALE AND PURCHASE OF THE SHARES
1.1 SALE AND PURCHASE. Upon the terms and subject to the satisfaction or
waiver of the conditions hereof, at the Closing (as defined in Section 1.2), the
Stockholders agree to sell, assign and deliver to Parent, and Parent agrees to
purchase and accept, the Shares, free and clear of any Encumbrance (as defined
in Section 6.1). Each of the Stockholders agrees to sell, assign and deliver to
Parent the number of Shares set forth opposite the name of such Stockholder on
Exhibit A. As consideration in full for the Shares, Parent shall pay the
Purchase Consideration (as defined in Section 2.1) to the Stockholders.
1.2 CLOSING. The closing (the "Closing") of the transactions contemplated
by this Agreement shall occur as soon as practicable following fulfillment of
the conditions set forth in Article VIII hereof and immediately prior to the
Effective Time of the Merger.
II. PURCHASE CONSIDERATION
2.1 PURCHASE CONSIDERATION. The purchase consideration (the "Purchase
Consideration") payable by Parent to the Stockholders for each of the Shares
shall be as follows:
(a) Cash Portion. Parent shall pay to the Stockholders ten dollars
($10.00) in immediately available funds for each of the Shares (the "Cash
Portion").
(b) Contingent Portion. In addition, Parent agrees to pay to the
Stockholders in immediately available funds for each of the Shares the
additional amounts, when, as and if due, determined in accordance with the
terms and conditions of Exhibit B (the "Contingent Portion").
III. CLOSING EXCHANGE PROCEDURES
3.1 DELIVERY OF CERTIFICATES.
(a) Exchange Agent. At the Closing, Parent shall deposit in trust
with Harris Trust Company of New York (the "Exchange Agent") an amount in
immediately available funds equal to the product of (i) the number of
Shares held by the Stockholders immediately prior to the Closing as set
forth on Exhibit A and (ii) the Cash Portion per share. The Exchange Agent
shall agree to hold such funds (together with earnings thereon, the
"Exchange Fund") for delivery as contemplated by this Article III and upon
such additional terms as may be agreed upon by the Exchange Agent, Parent,
the Company and the Stockholders before the Closing.
(b) Exchange Procedures. Prior to the Closing, Parent shall cause the
Exchange Agent to mail or deliver to each of the Stockholders entitled to
receive the Cash Portion pursuant to Section 2.1 a form of letter of
transmittal (which shall specify that delivery will be effected, and risk
of loss and title to the certificates evidencing such Shares (the
"Certificates") will pass, only upon proper delivery of the Certificates to
the Exchange Agent) and instructions for use in effecting the surrender of
the Certificates pursuant to such letter of transmittal. Upon surrender to
the Exchange Agent of a Certificate, together with such letter of
transmittal, duly completed and validly executed in accordance with its
instructions, and such other documents as may be required pursuant to such
instructions, the holder of such Certificate shall be entitled upon the
Closing to receive in exchange therefor the Cash Portion per share for each
of the Shares evidenced by such Certificate. No interest shall accrue or be
paid on the Cash Portion payable
D-2
<PAGE> 176
upon the surrender of any Certificate for the benefit of the holder of such
Certificate. If payment of the Cash Portion is to be made to a person other
than the person in whose name the surrendered Certificate is registered on
the stock transfer books of the Company, it shall be a condition of payment
that the Certificate so surrendered shall be properly endorsed or be
otherwise in proper form for transfer and that the person requesting such
payment shall have paid all transfer and other taxes required by reason of
the payment of the Cash Portion to a person other than the registered
holder of the Certificate surrendered or shall have established to the
satisfaction of Parent or the Exchange Agent that such taxes have been paid
or are not applicable.
(c) Termination of Exchange Fund. At any time following the third
month after the Closing, Parent shall be entitled to require the Exchange
Agent to deliver to Parent any funds representing the Cash Portion made
available to the Exchange Agent and not disbursed to the Stockholders
(including, without limitation, all interest and other income received by
the Exchange Agent in respect of all funds made available to it) and,
thereafter, such Stockholders shall be entitled to look to Parent only as
general creditors thereof with respect to any Cash Portion that may be
payable upon due surrender of the Certificates held by them.
Notwithstanding the foregoing, Parent shall not be liable to any of the
Stockholders for any Cash Portion delivered in respect of any Shares to a
public official pursuant to any abandoned property, escheat or similar law.
(d) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed, and, if
required by Parent, the posting by such person of a bond in such reasonable
amount as Parent may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent shall
disburse the applicable Cash Portion as provided in this Article III in
exchange for such lost, stolen or destroyed Certificate.
3.2 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Closing, the stock
transfer books of the Company shall be closed, and no transfer of any shares of
Company Stock shall be made thereafter. In the event that Certificates are
presented to Parent, the Company or the Exchange Agent after the Closing, they
shall be canceled in return for the payment of the applicable Purchase
Consideration relating thereto.
3.3 TIME AND PLACE OF CLOSING. The Closing shall take place at the offices
of Huddleston, Bolen, Beatty, Porter & Copen, 611 Third Avenue, Huntington, West
Virginia 25722-2185, at 9:00 a.m. local time on the day which is not more than
one business day after satisfaction (or waiver) of the conditions set forth in
Article VIII (other than those conditions that can be satisfied only at the
Closing) or at such other time and place as Parent and the Company shall agree
in writing.
IV. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Stockholders as follows (which
representations and warranties as well as other provisions of this Agreement are
qualified by the matters identified, with references to the appropriate Section
and, if applicable, subsection, on the disclosure schedule (the "Parent
Disclosure Schedule") delivered by Parent to the Stockholders prior to execution
of the Merger Agreement, as such Parent Disclosure Schedule may be amended or
supplemented by agreement of the Company, Parent and Merger Sub):
4.1 ORGANIZATION AND QUALIFICATION. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary. Complete and
correct copies as of the date hereof of the Certificate of Incorporation and
Bylaws of Parent have been delivered to the Stockholders as Section 4.1 of the
Parent Disclosure Schedule.
4.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Parent has the corporate power
to enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the
D-3
<PAGE> 177
consummation of the transactions contemplated hereby have been duly authorized.
This Agreement constitutes a valid and binding obligation of Parent enforceable
in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. No other corporate
proceedings on the part of Parent are necessary to authorize this Agreement and
the Merger Agreement and the transactions contemplated hereby and thereby.
Except as described in Section 4.2 of the Parent Disclosure Schedule, Parent is
not subject to or obligated under (i) any charter or bylaw provision or (ii) any
contract, indenture, loan or credit document, license, franchise, permit, order,
decree, concession, lease, instrument, judgment, statute, law, ordinance, rule
or regulation applicable to Parent or any of its subsidiaries or their
respective properties or assets, which would be breached or violated, or under
which there would be a default (with or without notice or lapse of time, or
both), or under which there would arise a right of termination, cancellation,
modification or acceleration of any obligation, or any right to payment or
compensation, or the loss of a benefit, by its executing and carrying out this
Agreement or the Merger Agreement, other than the laws and regulations referred
to in the next sentence. Except as required by the HSR Act, similar pre-
acquisition notification or approval requirements applicable to the Company's
foreign operations (the "Foreign Acts"), the Securities Act of 1933, as amended
(the "Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the corporation, securities or blue sky laws or regulations
of the various states, no filing or registration with, or authorization, consent
or approval of, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign and including
foreign, national, regional, state, provincial and municipal authorities (each,
a "Governmental Entity"), is necessary for the consummation by Parent of the
Merger, the other transactions contemplated by the Merger Agreement or the
transactions contemplated by this Agreement.
4.3 FINANCING. Parent shall have at the Closing sufficient funds available
to it to consummate the transactions contemplated by this Agreement, including
the payment of the Purchase Consideration.
V. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
AND THE COMPANY TO PARENT
The Stockholders and the Company jointly and severally represent and
warrant to Parent as follows (which representations and warranties as well as
other provisions of this Agreement are qualified by the matters identified, with
references to the appropriate Section and, if applicable, subsection, on the
disclosure schedule (the "Company Disclosure Schedule") delivered by the Company
to Parent prior to execution of the Merger Agreement, as such Company Disclosure
Schedule may be amended or supplemented by agreement of Parent, Merger Sub and
the Company):
5.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. The Company is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary. Complete and
correct copies as of the date hereof of the Articles of Incorporation and
Regulations of the Company have been delivered to Parent as Section 5.1 of the
Company Disclosure Schedule.
5.2 CAPITALIZATION. The authorized stock of the Company consists of
10,000,000 shares of Company Stock of which, as of the date of this Agreement,
(i) 5,774,335 shares were issued and outstanding, and (ii) 540,240 shares were
held in treasury. All of the issued and outstanding and treasury shares of
Company Stock are duly authorized, validly issued, fully paid and nonassessable.
There are no bonds, debentures, notes or other indebtedness issued or
outstanding having the right to vote on any matters on which the Company's
stockholders may vote. There are no options, warrants, calls, convertible
securities or other rights, agreements or commitments presently outstanding
obligating the Company to issue, deliver or sell shares of its capital stock or
debt securities, or obligating the Company to grant, extend or enter into any
such option, warrant, call or other such right, agreement or commitment. Since
December 31, 1997, the Company has not issued any
D-4
<PAGE> 178
shares of its capital stock. After the Closing and the Effective Time, the
Surviving Corporation will have no obligation to issue, transfer or sell any
shares of stock of the Company or the Surviving Corporation pursuant to any
Company Employee Benefit Plan (as defined in Section 5.8).
5.3 SUBSIDIARIES. Each subsidiary of the Company is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has the
corporate or similar power to carry on its business as it is now being conducted
or currently proposed to be conducted. Each subsidiary of the Company is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary. Section 5.3 of the Company
Disclosure Schedule contains, with respect to each subsidiary of the Company,
its name and jurisdiction of organization and, with respect to each subsidiary
that is not wholly owned, the number of issued and outstanding shares of capital
stock or share capital and the number of shares of capital stock or share
capital owned by the Company or subsidiary thereof. All the outstanding shares
of capital stock or share capital of each subsidiary of the Company are validly
issued, fully paid and nonassessable, and those owned by the Company or by a
subsidiary of the Company are owned free and clear of any liens, claims or
encumbrances. There are no existing options, warrants, calls, convertible
securities or other rights, agreements or commitments of any character relating
to the issued or unissued capital stock or other securities of any of the
subsidiaries of the Company. Except as set forth in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 or any Company SEC
Report (as defined in Section 5.5) filed subsequent to such date and prior to
the date hereof, or as set forth in Section 5.3 of the Company Disclosure
Schedule, the Company does not directly or indirectly own any interest in any
other corporation, partnership, joint venture or other business association or
entity or have any obligation, commitment or undertaking to acquire any such
interest.
5.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Company's
Board of Directors. This Agreement constitutes a valid and binding obligation of
the Company enforceable in accordance with its terms except as enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought. No other
corporate proceedings on the part of the Company are necessary to authorize this
Agreement and the Merger Agreement and the transactions contemplated hereby and
thereby. Except as described in Section 5.4 of the Company Disclosure Schedule,
the Company is not subject to or obligated under (i) any charter or regulations
provision or (ii) any contract, indenture, loan or credit document, license,
franchise, permit, order, decree, concession, lease, instrument, judgment,
statute, law, ordinance, rule or regulation applicable to the Company or any of
its subsidiaries or their respective properties or assets which would be
breached or violated, or under which there would be a default (with or without
notice or lapse of time, or both), or under which there would arise a right of
termination, cancellation, modification or acceleration of any obligation, or
any right to payment or compensation, or the loss of a benefit, by its executing
and carrying out this Agreement or the Merger Agreement, other than the laws and
regulations referred to in the next sentence. Except as required by the HSR Act,
the Foreign Acts, the Securities Act, the Exchange Act, and the corporation,
securities or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any Governmental
Entity is necessary for the consummation by the Company of the Merger, the other
transactions contemplated by the Merger Agreement or the transactions
contemplated by this Agreement.
5.5 REPORTS AND FINANCIAL STATEMENTS. The Company has previously furnished
Parent with true and complete copies of its (i) Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, as filed with the Securities and
Exchange Commission (the "Commission"), (ii) Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1998 and June 30, 1998, as filed with the
Commission, (iii) proxy statements related to all meetings of its stockholders
(whether annual or special) since September 30, 1997 and (iv) all other reports
or registration statements filed by the Company with the Commission since
September 30, 1997, except for preliminary material in the case of clauses (iii)
and (iv) above, which are all
D-5
<PAGE> 179
the documents that the Company was required to file with the Commission since
September 30, 1997 (the documents in clauses (i) through (iv) being referred to
herein collectively as the "Company SEC Reports"). As of their respective dates,
the Company SEC Reports complied as to form in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the Commission thereunder applicable to such
Company SEC Reports. As of their respective dates, the Company SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of the Company included in the Company SEC Reports comply as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto. The
financial statements included in the Company SEC Reports: (i) have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis, except as may be indicated therein or in the notes thereto and
subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments and any other adjustments described therein and the fact
that certain information and notes have been condensed or omitted in accordance
with the Exchange Act and the rules promulgated thereunder; (ii) present fairly,
in all material respects, the financial position of the Company and its
subsidiaries as at the dates thereof and the results of their operations and
cash flows for the periods then ended; and (iii) are in all material respects in
accordance with the books of account and records of the Company and its
subsidiaries. As of June 30, 1998, there was no basis for any claim or liability
of any nature against the Company or any of its subsidiaries, whether absolute,
accrued, contingent or otherwise, which, alone or in the aggregate, has had, or
would have, a Company Material Adverse Effect, other than as reflected in the
Company SEC Report filed prior to the date of this Agreement. For the purposes
of this Agreement, a "Company Material Adverse Effect" means a material adverse
effect on the business, properties, assets, operations, condition (financial or
otherwise), customer relations, supplier relations, business prospects,
liabilities or results of operations of the Company and its subsidiaries taken
as a whole, other than any effects arising out of, resulting from or relating to
changes in general economic or financial conditions.
5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Company SEC Reports filed prior to the date of this Agreement or in Section 5.6
of the Company Disclosure Schedule, since June 30, 1998, the Company and its
subsidiaries have operated their respective businesses in the ordinary course of
business consistent with past practice and there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
which, alone or in the aggregate, has had, or would have, a Company Material
Adverse Effect; (ii) any damage, destruction or loss, whether or not covered by
insurance, which has had, or would have, a Company Material Adverse Effect;
(iii) any declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) with respect to the stock of the Company or
any of its subsidiaries (other than dividends or distributions between the
Company and its wholly owned subsidiaries and the normal and customary quarterly
dividends to the Company"s stockholders in an amount not exceeding $.05 per
share in any fiscal quarter); (iv) any material change in the Company's
accounting principles, practices or methods; (v) any repurchase or redemption
with respect to its stock; (vi) any stock split, combination or reclassification
of any of the Company's stock or the issuance or authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for, shares
of the Company's stock; (vii) any adoption of any option or similar plan to
purchase shares of stock of the Company; (viii) any granting by the Company or
any of its subsidiaries to any director, officer or employee of the Company or
any of its subsidiaries of (A) any increase in compensation (other than in the
ordinary course of business consistent with past practice in the case of
employees who are not officers or directors of the Company or a subsidiary
thereof), (B) any increase in severance or termination pay, or (C) acceleration
of compensation or benefits; (ix) any entry by the Company or any of its
subsidiaries into any employment, severance, bonus or termination agreement with
any director, officer or employee of the Company or any of its subsidiaries; or
(x) any agreement (whether or not in writing), arrangement or understanding to
do any of the foregoing.
5.7 LITIGATION. Except as disclosed in the Company SEC Reports filed prior
to the date of this Agreement or in Section 5.7 of the Company Disclosure
Schedule, there is no suit, action or proceeding
D-6
<PAGE> 180
pending or, to the Company's knowledge, threatened against the Company or any of
its subsidiaries which, alone or in the aggregate, has had or would have, a
Company Material Adverse Effect, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against the
Company or any of its subsidiaries which, alone or in the aggregate, has had, or
would have, any such Company Material Adverse Effect. In addition, the aggregate
reasonable estimate of uninsured exposures or losses under all claims and
judgments pending, or, to the best knowledge of the Company, threatened, does
not exceed $125,000. For purposes of this Agreement, the phrases "the Company's
knowledge" and "knowledge of the Company" and other phrases of like import shall
mean the actual knowledge of any officer or director of the Company or of any
subsidiary of the Company.
5.8 EMPLOYEE BENEFIT PLANS.
(a) Section 5.8(a) of the Company Disclosure Schedule hereto sets
forth a list of all "employee benefit plans," as defined in Section 3(3) of
ERISA, and all other material employee benefit or compensation arrangements
or payroll practices, including, without limitation, any such arrangements
or payroll practices providing severance pay, sick leave, vacation pay,
salary continuation for disability, retirement benefits, deferred
compensation, bonus pay, incentive pay, stock options (including those held
by directors, employees, and consultants), hospitalization insurance,
medical insurance, life insurance, scholarships or tuition reimbursements,
that are maintained by the Company, any subsidiary of the Company or any
Company ERISA Affiliate (as defined below) or to which the Company, any
subsidiary of the Company or any Company ERISA Affiliate is obligated to
contribute thereunder for current or former directors, employees,
independent contractors, consultants and leased employees of the Company,
any subsidiary of the Company or any Company ERISA Affiliate (the "Company
Employee Benefit Plans").
(b) Except as set forth in Section 5.8(b) of the Company Disclosure
Schedule, none of the Company Employee Benefit Plans is a "multiemployer
plan," as defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"),
and since December 31, 1995, neither the Company nor any Company ERISA
Affiliate has contributed or contributes, or has been or is required to
contribute, to any such plan. With respect to any Multiemployer Plan that
the Company or any Company ERISA Affiliate are required or have been
required in the past to contribute to:
(i) the Company and each Company ERISA Affiliate has or will have,
as of the date of the Closing, made all contributions to the
Multiemployer Plan required by the terms of such Multiemployer Plan or
any collective bargaining agreement;
(ii) neither the Company nor Parent would be subject to any
material withdrawal liability under Part 1 of Subtitle E of Title IV of
ERISA if, as of the date of the Closing, the Company or any Company
ERISA Affiliate were to engage in a complete withdrawal (as defined in
ERISA Section 4203) or a partial withdrawal (as defined in ERISA Section
4205) from the Multiemployer Plan; and
(iii) the Company has made available to Parent current, accurate,
and complete copies of the Multiemployer Plan and of all collective
bargaining agreements requiring contributions to be made to such
Multiemployer Plan.
(c) Except as set forth in Section 5.8(c) of the Company Disclosure
Schedule, neither the Company nor any of it subsidiaries maintains or
contributes to any plan or arrangement which provides or has any liability
to provide life insurance or medical or other employee welfare benefits to
any employee, officer or director or former employee, officer or director
upon his retirement or termination of employment, and neither the Company
nor any of its subsidiaries has ever represented, promised or contracted
(whether in oral or written form) to any employee, officer or director or
former employee, officer or director that such benefits would be provided.
(d) Except as set forth in Section 5.8(d) of the Company Disclosure
Schedule, the execution of, and performance of the transactions
contemplated in, this Agreement will not, either alone or upon the
occurrence of subsequent events, result in any payment (whether of
severance pay or otherwise),
D-7
<PAGE> 181
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any employee,
officer or director of the Company or any of its subsidiaries. The only
severance agreements or severance policies applicable to the Company or its
subsidiaries in the event of a change of control of the Company are the
agreements and policies specifically referred to in Section 5.8 of the
Company Disclosure Schedule.
(e) Each Company Employee Benefit Plan that is intended to qualify
under Section 401 of the Internal Revenue Code of 1986, as amended (the
"Code"), and each trust maintained pursuant thereto, has been determined to
be exempt from federal income taxation under Section 501 of the Code by the
IRS, and, to the Company's knowledge, nothing has occurred with respect to
the operation or organization of any such Company Employee Benefit Plan
that would cause the loss of such qualification or exemption or the
imposition of any liability, penalty or tax under ERISA or the Code. With
respect to any Company Employee Benefit Plan or other employee benefit plan
which is a "defined benefit plan" within the meaning of Section 3(35) of
ERISA, (i) the Company has not incurred and is not reasonably likely to
incur any liability under Title IV of ERISA (other than for the payment of
premiums, all of which have been paid when due), (ii) the Company has not
incurred any accumulated funding deficiency within the meaning of Section
412 of the Code and has not applied for or obtained a waiver of any minimum
funding standard or an extension of any amortization period under Section
412 of the Code, (iii) no "reportable event" (as such term is defined in
Section 4043 of ERISA but excluding any event for which the provision for
30-day notice to the Pension Benefit Guaranty Corporation has been waived
by regulation) has occurred or is expected to occur and (iv) since December
31, 1996, no material adverse change in the financial condition of any such
plan has occurred.
(f) (i) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under
any of the Company Employee Benefit Plans to any funds or trusts
established thereunder or in connection therewith have been made by the due
date thereof, (ii) the Company has complied in all material respects with
any notice, reporting and documentation requirements of ERISA and the Code,
(iii) there are no pending actions, claims or lawsuits which have been
asserted, instituted or, to the Company's knowledge, threatened, in
connection with the Company Employee Benefit Plans, (iv) the Company
Employee Benefit Plans have been maintained, in all material respects, in
accordance with their terms and with all provisions of ERISA and the Code
(including rules and regulations thereunder) and other applicable federal
and state laws and regulations, and (v) except as set forth in Section
5.8(f) of the Company Disclosure Statement, each Company Employee Benefit
Plan could be terminated as of the date of the Closing with no liability to
the Company, Parent or any Company ERISA Affiliate.
(g) Neither the Company nor any Company ERISA Affiliate has engaged in
any transaction in violation of Section 406(a) or (b) of ERISA or any
"prohibited transaction" (as defined in Section 4975(c)(1) of the Code),
which would subject the Company or any Company ERISA Affiliate to any
taxes, penalties or other liabilities resulting from such prohibited
transaction, and no condition exists that would subject the Company or any
Company ERISA Affiliate to any excise tax, penalty tax or fine related to
any Company Employee Benefit Plans.
(h) With respect to each Company Employee Benefit Plan, the Company
has furnished or made available to Parent true, correct and complete copies
of the following (to the extent applicable): (i) the plan documents and
summary plan descriptions; (ii) the most recent determination letter
received from the Internal Revenue Service; (iii) the annual reports to be
filed for the three most recent plan years of each such plan; (iv) all
related trust agreements, insurance contracts or other funding agreements
that implement such plans; and (v) all other documents, records or other
materials related thereto reasonably requested by Parent.
(i) Each Company Employee Benefit Plan covering any employee residing
or working outside the United States or sponsored or maintained by a
foreign subsidiary of the Company (i) complies in all material respects
with applicable law; and (ii) could be terminated on the date of the
Closing without any material liability to Parent, the Surviving Corporation
or any subsidiary of the Company.
D-8
<PAGE> 182
For purposes of this Agreement, "Company ERISA Affiliate" means any
business or entity which is a member of the same "controlled group of
corporations," under "common control" or an "affiliated service group" with the
Company within the meanings of Sections 414 (b), (c) or (m) of the Code, or
required to be aggregated with the Company under Section 414(o) of the Code, or
is under "common control" with the Company, within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.
5.9 COMPANY ACTION; VOTE REQUIRED. The Board of Directors of the Company,
at meetings duly called and held, has by the unanimous vote of all directors
present (a) determined that the Merger is advisable and fair to and in the best
interests of the Company and its stockholders, (b) approved the Merger in
accordance with the provisions of Section 1701.78 of the OGCL, (c) recommended
the approval of the Merger Agreement and the Merger by the holders of the
Company Stock and directed that the Merger be submitted for consideration by the
Company's stockholders at the meeting of stockholders contemplated by the Merger
Agreement, and (d) approved this Agreement. The Company's stockholders approved
the Merger Agreement and the Merger by the affirmative vote of two-thirds of the
outstanding shares of Company Stock entitled to vote at a meeting of
stockholders duly called and held for the purpose of considering the Merger.
5.10 FINANCIAL ADVISORS. The Company has received the opinion of Chaffe &
Associates, Inc., financial advisor to the Company, which financial advisor is
not an affiliate (as that term is defined in the Securities Exchange Act of
1934, as amended) of the Company, to the effect that, the Merger Consideration
(as defined in the Merger Agreement) is fair from a financial point of view to
the holders of Company Stock, a copy of which opinion has been delivered to
Parent and Merger Sub. Except for Chaffe & Associates, Inc., no broker, finder
or investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger, the transactions contemplated by the
Merger Agreement or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company or the Stockholders. The
Company has previously delivered to Parent a copy of the engagement letter
executed on August 10, 1998 between the Company and Chaffe & Associates, Inc. In
addition to any such fee and commission arrangements, the Company has previously
delivered to Parent a good faith estimate of all additional fees, costs and
expenses to be incurred by the Company and its subsidiaries in connection with
the Merger Agreement.
5.11 COMPLIANCE WITH APPLICABLE LAWS. The Company and each of its
subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business (the "Company Permits"). The Company and
each of its subsidiaries is in compliance with the terms of the Company Permits,
except for any failure to comply which, alone or in the aggregate, has not had,
and would not have, a Company Material Adverse Effect. Except as disclosed in
the Company SEC Reports filed prior to the date of this Agreement, the
businesses of the Company and its subsidiaries are not being conducted in
violation of any material Law (as defined below), including, with respect to the
operations of the Company's foreign subsidiaries, any "social law" (as defined
below). Without limitation, any mandated or voluntary plant closing or product
recall due to an actual or potential violation of any health or safety law,
ordinance or regulation shall be deemed to cause a Company Material Adverse
Effect. To the Company's knowledge, during the past five years, none of the
Company's or any of its subsidiaries' directors, officers, employees or agents,
nor any other person acting on behalf of any of them or the Company or any of
its subsidiaries, has, directly or indirectly, given or agreed to give any gift
or similar benefit to any customer, supplier, governmental employee or other
person in violation of any Law, including, without limitation, the Foreign
Corrupt Practices Act. "Law" means any statute, law, ordinance, decree, order,
rule or regulation of any Governmental Entity. "Social law" means any foreign,
national, regional, state, provincial and municipal laws, regulations,
ordinances and decisions and any collective bargaining agreements agreed on any
level, affecting the employment of labor, including but not limited to social
security, wages, hours, discrimination, plant closing notices, working
conditions, health and safety in the work place, works council information and
consultation of the work force, the organization of participation by the work
force, internal regulations, maternity and sickness leave, etc.
5.12 TAXES. Except as set forth in Section 5.12 of the Company Disclosure
Schedule, (i) all returns and reports ("Tax Returns") of or with respect to any
tax that are required to be filed by or with respect to the
D-9
<PAGE> 183
Company and each of its subsidiaries have been filed; (ii) neither the Company
nor any of its subsidiaries has requested or been granted an extension of time
for filing any Tax Return that has not yet been filed; (iii) the Company and
each of its subsidiaries has paid all taxes that are due from or with respect to
it; (iv) the Company and each of its subsidiaries has withheld and paid all
taxes required by all applicable laws to be withheld or paid in connection with
any amounts paid or owing to any employee, creditor, independent contractor or
other third party; (v) there are no outstanding agreements, waivers or
arrangements extending the statutory period of limitation applicable to any
claim for, or the period for the collection or assessment of, taxes due from or
with respect to the Company or any of its subsidiaries for any taxable period;
(vi) no audit, action, proceeding, investigation, dispute or claim by any court,
governmental or regulatory authority or similar person is pending or, to the
Company's knowledge, threatened in regard to any taxes due from or with respect
to the Company or any of its subsidiaries or any Tax Return filed by or with
respect to the Company or any of its subsidiaries; (vii) no claim has been made
by a taxing authority in a jurisdiction in which neither the Company nor any of
its subsidiaries files Tax Returns that the Company or any subsidiary is
required to file Tax Returns in such jurisdiction, and, to the Company's
knowledge, no taxing authority could reasonably make such a claim; (viii) no
assessment of any deficiency for taxes is proposed against the Company or any of
its subsidiaries or any of their assets; (ix) there are no liens for taxes
(other than for current taxes not yet due and payable) upon the assets of the
Company; (x) the Company has not been a member of an affiliated group as defined
in Section 1504 of the Code (or any analogous combined, consolidated or unitary
group as defined under state, local or foreign income tax law) other than one of
which the Company was the common parent; (xi) neither the Company nor any
subsidiary has any obligation or liability for the payment of taxes of any other
person arising as a result of any obligation to indemnify another person or as a
result of the Company or any such subsidiary assuming or succeeding to the tax
liability of any other person as a successor, transferee or otherwise; (xii) the
Company will not be required to include any amount in taxable income for any
taxable period (or portion thereof) ending after the Effective Time as a result
of (A) a change in method of accounting for a taxable period ending prior to the
Effective Time, (B) any "closing agreement" as described in Section 7121 of the
Code (or any corresponding provision of state, local or foreign income tax laws)
entered into prior to the Effective Time, (C) any sale reported on the
installment method that occurred prior to the Effective Time or (D) any prepaid
amount received prior to the Effective Time; (xiii) all taxes accrued but not
yet due and all contingent liabilities for taxes are adequately reflected in the
reserves for taxes in the financial statements contained in the Company SEC
Reports; and (xiv) except as described in Section 5.12 of the Company Disclosure
Schedule, there has been no "ownership change" as described in Section 382 of
the Code that has resulted in any limitation on the Company's ability to offset
pre-change losses against its taxable income.
5.13 CERTAIN MATERIAL CONTRACTS.
(a) Section 5.13(a) of the Company Disclosure Schedule lists each
agreement and arrangement (whether written or oral and including all
amendments thereto) to which the Company or any of its subsidiaries is a
party or a beneficiary or by which the Company or any of its subsidiaries
is bound that is material, directly or indirectly, to the business of the
Company (collectively, the "Material Contracts"), including without
limitation (i) any supply, distribution or other agreements or arrangements
pursuant to which third parties are or will be entitled or obligated to
purchase or use any of the assets of Company or any of its subsidiaries
with an aggregate per contract purchase price in excess of $100,000; (ii)
any warranty agreements or arrangements (including any bonds) with any
party under which the Company or any of its subsidiaries has any liability,
in any individual agreement or arrangement or in the aggregate under all
agreements or arrangements with such party, with a value in excess of
$25,000; (iii) any capital or operating leases or conditional sales
agreements relating to vehicles or equipment with a value in excess of
$100,000; (iv) any supply or manufacturing agreements or arrangements
pursuant to which the Company or any of its subsidiaries is entitled or
obligated to acquire any assets from a third party in excess of $500,000;
(v) any employment, consulting, noncompetition, separation, collective
bargaining, union or labor agreements or arrangements; (vi) any agreement
evidencing, securing or otherwise relating to any indebtedness for which
the Company or any of its subsidiaries has any liability, (vii) any
agreement with or for the benefit of any stockholder, director, officer or
employee of the Company or any of its subsidiaries, or any affiliate or
family member thereof; and (viii) any other agreement, arrangement
D-10
<PAGE> 184
or lease of real or personal property pursuant to which the Company or any
of its subsidiaries could be required to make or be entitled to receive
aggregate payments in excess of $100,000 and which is not cancelable within
30 days notice without penalty.
(b) The Company and, as applicable, each subsidiary of the Company,
has performed in all material respects all of its obligations under each
Material Contract, and there exists no breach or default (or event that
with notice or lapse of time would constitute a breach or default), whether
or not such default has been waived, under any Material Contract.
(c) On the date hereof and at the Effective Time, each Material
Contract will be valid, binding and in full force and effect and
enforceable in accordance with its respective terms. There has been no
termination or, to the Company's knowledge, threatened termination or
notice of default under any Material Contract. The Company has delivered to
Parent a copy of each written Material Contract.
(d) Except as set forth in Section 5.13(d) of the Company Disclosure
Schedule, no consent of any person is required in connection with the
transactions contemplated by this Agreement in order to preserve the rights
of the Company or any of its subsidiaries under, or to prevent any
disadvantage to the Company or any of its subsidiaries in respect of, any
Material Contract after the Effective Time.
5.14 LABOR RELATIONS. Except as set forth in Section 5.14 of the Company
Disclosure Schedule, there is (i) no unfair labor practice, complaint, grievance
or arbitration pending or, to the knowledge of the Company, threatened against
the Company or any subsidiary of the Company, (ii) no strike, labor dispute,
slowdown or stoppage pending or, to the knowledge of the Company, threatened
against the Company or any subsidiary of the Company and (iii) to the best
knowledge of the Company, no labor union organizing campaign in progress with
respect to any employees of the Company or any subsidiary of the Company.
5.15 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS. Except as disclosed in
Section 5.15 of the Company Disclosure Schedule, in the last 12 months, none of
(i) the ten largest customers of the Company and each of its operating
subsidiaries as determined by the dollar volume of sales for the year ended
December 31, 1997 and for the six months ended June 30, 1998, and (ii) the ten
largest suppliers of the Company and each of its operating subsidiaries as
determined by the dollar volume of purchases for the year ended December 31,
1997 and for the six months ended June 30, 1997, has canceled or otherwise
terminated, or, to the Company's knowledge, threatened to cancel or otherwise
terminate, its relationship with the Company or any of its subsidiaries, and, to
the Company's knowledge, there has not been any material dispute with any such
customer or supplier. Except as described in Section 5.15 of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries, and, to
the Company's knowledge, no director or officer of the Company or any subsidiary
of the Company, owns, directly or indirectly, an interest in any entity that is
a competitor, customer or supplier of the Company or any of its subsidiaries or
that otherwise has material business dealings with the Company or any of its
subsidiaries.
5.16 INTELLECTUAL PROPERTY.
(a) The Company has made available to Parent a list of the following
(collectively, the "Company Intellectual Property"): (i) each trademark,
trade name, brand name, service mark or other trade designation owned or
licensed by or to the Company or any of its subsidiaries, each patent,
copyright and similar intellectual property owned or licensed to or by the
Company or any of its subsidiaries and each license, royalty, assignment or
other similar agreement and each registration and application relating to
the foregoing that is material to the conduct of the business of the
Company and its subsidiaries taken as a whole, which list is set forth in
Section 5.16(a) of the Company Disclosure Schedule; and (ii) each agreement
relating to Company Intellectual Property or any technology, know-how or
processes that the Company or any of its subsidiaries is licensed or
authorized to use, or which the Company or any of its subsidiaries licenses
or authorizes others to use, that is material to the conduct of the
business of the Company and its subsidiaries taken as a whole.
(b) The Company and its subsidiaries own the Company Intellectual
Property, or have the right to use the same without infringing or violating
the rights of any third parties. No consent of third parties will be
required for the use of the Company Intellectual Property after the
Effective Time. No claim has been
D-11
<PAGE> 185
asserted by any person against the Company or any of its subsidiaries
regarding the ownership of or the right to use any Company Intellectual
Property or challenging the rights of the Company or any of its
subsidiaries with respect to any of the Company Intellectual Property.
(c) To the Company's knowledge, no person or entity has asserted any
claim that any product, activity or operation of the Company or any of its
subsidiaries infringes upon or involves, or has resulted in the
infringement of, any proprietary right of such person or entity. No
proceedings have been instituted, are pending or, to the Company's
knowledge, are threatened that challenge the rights of the Company or any
of its subsidiaries with respect thereto.
5.17 ENVIRONMENTAL MATTERS. Except for matters disclosed in Section 5.17
of the Company Disclosure Schedule, to the knowledge of the Company, after due
inquiry, (a) the properties, operations and activities of the Company and its
subsidiaries are in compliance in all material respects with all applicable
Environmental Laws (as hereinafter defined); (b) the Company and its
subsidiaries and the properties and operations of the Company and its
subsidiaries are not subject to any existing, pending or, to the Company's
knowledge, threatened action, suit, claim, investigation, inquiry or proceeding
by or before any Governmental Entity under any Environmental Law; (c) all
notices, permits, licenses or similar authorizations, if any, required to be
obtained or filed by the Company or any of its subsidiaries under any
Environmental Law in connection with any aspect of the business of the Company
or any of its subsidiaries, including without limitation, those relating to the
treatment, storage, disposal or release of a hazardous or otherwise regulated
substance, have been duly obtained or filed and will remain valid and in effect
after the Merger, and the Company and its subsidiaries are in compliance with
the terms and conditions of all such notices, permits, licenses and similar
authorizations; (d) the Company and its subsidiaries have satisfied and are
currently in compliance with all financial responsibility requirements
applicable to their operations and imposed by any Governmental Entity under any
Environmental Law, and neither the Company nor any of its subsidiaries has
received any notice of noncompliance with any such financial responsibility
requirements; (e) there are no physical or environmental conditions existing on
any property of the Company or any of its subsidiaries or resulting from the
Company's or any such subsidiary's operations or activities, past or present, at
any location, that would give rise to any material on-site or off-site remedial
obligations under any Environmental Laws or that would impact the soil,
groundwater, surface water or human health; (f) since the effective date of the
relevant requirements of applicable Environmental Laws and to the extent
required by such applicable Environmental Laws, all hazardous or otherwise
regulated substances generated by the Company or any of its subsidiaries have
been transported only by carriers authorized under Environmental Laws to
transport such substances and wastes, and disposed of only at treatment,
storage, and disposal facilities authorized under Environmental Laws to treat,
store or dispose of such substances and wastes; (g) there has been no exposure
of any person or property to hazardous substances or any pollutant or
contaminant, nor has there been any release of hazardous substances, or any
pollutant or contaminant into the environment by the Company or any of its
subsidiaries or in connection with their properties or operations that could
reasonably be expected to give rise to any claim against the Company or any of
its subsidiaries for damages or compensation; and (h) the Company has delivered
to Parent all internal and external environmental audits and studies and all
correspondence on substantial environmental matters in the possession of the
Company relating to any of the current or former properties or operations of the
Company and its subsidiaries.
For purposes of this Agreement, the term "Environmental Laws" means any and
all laws, statutes, ordinances, rules, regulations, or orders of any
Governmental Entity pertaining to health or the environment currently in effect
in any and all jurisdictions in which the Company or any of its subsidiaries
owned or owns property or has conducted or conducts business, including without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act
of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986,
as amended, any state laws implementing the foregoing federal laws, and all
other environmental conservation or protection laws. For purposes of this
Agreement, the terms "hazardous substance" and "release" have the
D-12
<PAGE> 186
meanings specified in CERCLA and RCRA and shall include petroleum and petroleum
products, radon and PCB's, and the term "disposal" has the meaning specified in
RCRA; provided, however, that to the extent the laws of the state in which the
property is located establish a meaning for "hazardous substance," "release," or
"disposal" that is broader than that specified in either CERCLA or RCRA, such
broader meaning shall apply.
5.18 INSURANCE. Section 5.18(a) of the Company Disclosure Schedule sets
forth a complete and accurate list of all primary, excess and umbrella policies,
bonds and other forms of insurance currently owned or held by or on behalf of
and/or providing insurance coverage to the Company, its subsidiaries and their
businesses, properties and assets (or their directors, officers, salespersons,
agents or employees). Section 5.18(a) of the Company Disclosure Schedule also
sets forth the following information with respect to each insurance policy or
bond listed therein: coverage, limits, carrier, deductibles, annual premium,
policy term, special provisions and any estimated losses. All such policies are
in full force and effect. Neither the Company nor any of its subsidiaries has
received a notice of default under any such policy or notice of any pending or
threatened termination or cancellation, coverage limitation or reduction, or
material premium increase with respect to any such policy. Section 5.18(b) of
the Company Disclosure Schedule sets forth a complete and accurate summary of
all of the self-insurance coverage provided by the Company and its subsidiaries,
and no letters of credit have been posted and no cash has been restricted to
support any reserves for insurance. The insurance policies of the Company and
its subsidiaries are issued by insurers of recognized responsibility and insure
the Company, its subsidiaries and their businesses, properties and assets
against such losses and risks, and in such amounts, as are customary in the case
of corporations of established reputation engaged in the same or similar
businesses and similarly situated.
5.19 PROPERTIES.
(a) Section 5.19(a) of the Company Disclosure Schedule sets forth a
description (including the street address) of all real property owned or
leased by the Company or any of its subsidiaries (the "Real Estate"). No
lease agreement, letter of intent or proposal (whether written or oral) has
been entered into by the Company or any of its subsidiaries relating to the
Real Estate except as specified on Section 5.19(a) of the Company
Disclosure Schedule. No premises other than the Real Estate are used in the
business of the Company.
(b) Except for properties and assets disposed of in the ordinary
course of business consistent with past practices after June 30, 1998, the
Company and its subsidiaries have good and marketable title to, or hold by
valid and enforceable lease or license, free and clear of all liens, all
properties and assets, whether tangible or intangible, real, personal or
mixed, reflected in the Company's latest Quarterly Report on Form 10-Q for
the period ended September 30, 1998 or purported to be owned by the Company
and its subsidiaries. The equipment of the Company and its subsidiaries in
regular use has been well maintained and is in good and serviceable
condition, reasonable wear and tear excepted.
(c) The Real Estate is zoned for a classification that permits its
continued use in the manner currently used by the Company and its
subsidiaries, and the occupancy, operation and use of the Real Estate
conforms in all material respects to all applicable Laws, covenants,
conditions and restrictions applicable thereto. Improvements to the Real
Estate were constructed in compliance with, and remain in compliance with,
all applicable Laws, covenants, conditions or restrictions, and except for
current construction in process, to the extent required or applicable,
final certificates of occupancy have been issued for such improvements
permitting the existing use of such improvements. There are no actions
pending or, to the Company's knowledge, threatened that would alter the
current zoning classification of the Real Estate or alter any applicable
Laws, covenants, conditions or restrictions that would adversely affect the
use of the Real Estate in the business of the Company and its subsidiaries.
To the Company's knowledge, no insurance company or Governmental Entity has
given notice of any defects or inadequacies in the Real Estate or the
improvements thereon that would adversely affect the insurability or
usability of the Real Estate or such improvements or prevent the issuance
of new insurance policies thereon at rates not materially higher than
present rates. To the Company's knowledge, no fact or condition exists that
would result in the discontinuation of necessary utilities or services to
the Real Estate or the termination of current access to and from the Real
Estate.
D-13
<PAGE> 187
(d) There is no litigation or proceeding pending or, to the Company"s
knowledge, threatened against or relating to any of the Real Estate, and
there is no pending or, to the Company's knowledge, threatened or
contemplated condemnation actions or special assessments with respect to
the Real Estate. Neither the Company nor any of its subsidiaries has
received a request (written or otherwise) from any Governmental Entity with
respect to the dedication of any of the Real Estate. To the Company's
knowledge, there is no pending or contemplated change in any regulation or
private restriction applicable to the Real Estate.
(e) None of the Real Estate is situated in a special flood hazard area
according to any of the applicable city maps or flood insurance rate maps,
or the flood hazard boundary maps issued by the Department of Housing and
Urban Development, the Federal Insurance Administration or the Federal
Emergency Management Agency.
(f) No person has, or at the Effective Time will have, any right or
option to acquire all or any portion of the Real Estate.
(g) Except for the tenants under the leases described in Section
5.19(a) of the Company Disclosure Schedule (the "Leases"), there are no
parties in possession of, or that have the right to possess, any portion of
the Real Estate as lessees, tenants at sufferance or trespassers. The
Company and each of its subsidiaries have performed and complied with all
of their respective obligations under the Leases as and when required, and
there exists no fact or circumstance that, with or without notice or
passage of time, or both, could constitute a default of the landlord or
lessor under any of the Leases, or entitle any tenant thereunder to any
offset or defenses against the prompt and current payment of rent or the
performance of any other obligation of tenant thereunder. As of the date of
execution of this Agreement, there are no rental or other concessions of
any nature granted to tenants under the Leases except as set forth therein.
There are no Leases or other agreements with respect to the Real Estate
that give any tenant the right to purchase the Real Estate or any part
thereof. The rentals and other sums due or to become due under the Leases
have not been, and will not be, assigned, encumbered or subjected to any
liens as of the Effective Time. To the Company's knowledge, no tenant under
any of the Leases is in default thereunder, nor is there any fact or
circumstance that, with or without notice or the passage of time, or both,
would constitute a default of any tenant under any of the Leases.
5.20 YEAR 2000 COMPLIANCE. Except as described in Section 5.20 of the
Company Disclosure Schedule, the disclosure contained in the Company's SEC
Reports with respect to the Company's "Year 2000 Compliant" (as hereinafter
defined) status is correct in all material respects. To the extent that the
hardware, software and computer systems of the Company and its subsidiaries are
not "Year 2000 Compliant," such failure has not had and would not have a Company
Material Adverse Effect. As used herein, "Year 2000 Compliant" means that the
hardware, firmware, software and computer systems of the Company and its
subsidiaries (a) will completely and accurately address, produce, store and
calculate data involving dates beginning with January 1, 2000 and will not
produce abnormally ending or incorrect results involving such dates as used in
any forward-or regression-dated based functions; and (b) will provide that all
"date"-related functionalities and data fields include the indication of century
and millennium, and will perform calculations which involve a four-digit year.
5.21 NO COMMITMENTS. Except as described in Section 5.21 of the Company
Disclosure Schedule, none of the Company or any of its subsidiaries has entered
into any commitments, understandings or agreements of any kind with respect to
the proposed expansion of the Marietta facility.
5.22 TAKEOVER STATUTES. No "fair price," "moratorium," "control share
acquisition" or other similar anti-takeover statute or regulation to which the
Company or its subsidiaries or operations is subject (a "Takeover Statute") is
applicable to the transactions contemplated by this Agreement or the Inducement
Agreement.
5.23 INFORMATION FOR PROXY STATEMENT. None of the information supplied or
to be supplied by the Company and its subsidiaries and included or incorporated
by reference in the proxy statement relating to the Merger and the Merger
Agreement (the "Proxy Statement") will, on the date the Proxy Statement (and any
D-14
<PAGE> 188
amendment or supplement thereto) is first mailed to stockholders of the Company,
at the time of the stockholders' meeting to vote on the approval of the Merger
Agreement and the transactions contemplated thereby or at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading. If at any time prior to the Effective Time any event with respect to
the Company or any of its subsidiaries, or with respect to other information
supplied by the Company or any of its subsidiaries for inclusion in the Proxy
Statement, shall occur that is required to be described in an amendment of, or a
supplement to, the Proxy Statement, such event shall be so described, and such
amendment or supplement shall be promptly filed with the Commission and, as
required by law, distributed to the stockholders of the Company. The Proxy
Statement, insofar as it relates to the Company or its subsidiaries or other
information supplied by the Company for inclusion therein, will comply in all
material respects with the provisions of the Exchange Act and the regulations
promulgated thereunder.
VI. REPRESENTATIONS AND WARRANTIES OF
THE STOCKHOLDERS TO PARENT AND THE COMPANY
The Stockholders jointly and severally represent and warrant to Parent and
the Company as follows:
6.1 AUTHORITY, ENFORCEABILITY AND TITLE. The execution, delivery and
performance by each of the Stockholders of this Agreement will not conflict
with, require a consent, waiver or approval under, or result in a breach of or
default under, any of the terms of any contract, commitment or other obligation
(written or oral) to which any such Stockholder is bound. Each such Stockholder
has full right, power and authority to execute and deliver this Agreement and to
perform such Stockholder's obligations hereunder. This Agreement has been duly
executed and delivered by each Stockholder and constitutes a legal, valid and
binding obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms. Each Stockholder is the sole owner of and has the
right to vote with respect to such Stockholder's Shares listed in Exhibit A
subject only to the Inducement Agreement, and such Stockholder does not have any
right to acquire, nor is it the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of, any other
shares of any class of capital stock of the Company or any securities
convertible into or exchangeable or exercisable for any shares of any class of
capital stock of the Company. Each Stockholder owns its Shares free and clear of
all liens, claims, pledges, charges, proxies, restrictions, encumbrances,
proxies and voting agreements of any nature whatsoever (each an "Encumbrance")
other than as provided by this Agreement and the Inducement Agreement, and good
and valid title to such Stockholder's Shares, free and clear of any Encumbrance,
will pass to Parent upon the Closing.
6.2 REPRESENTATION BY COUNSEL. Each of the Stockholders has been
represented by counsel in connection with the transactions contemplated by this
Agreement and is not in an unequal bargaining position relative to Parent and
Merger Sub in connection therewith. Each of the Stockholders has relied wholly
on such Stockholder's own judgment and knowledge in entering into this Agreement
and has not been influenced to any extent whatsoever in entering into this
Agreement by any representations or statements of Parent or Merger Sub (or
anyone acting on their behalf), except as is expressly set forth herein.
VII. ADDITIONAL AGREEMENTS AND COVENANTS
7.1 ADDITIONAL AGREEMENTS OF THE PARTIES. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use all
commercially reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including using all commercially
reasonable efforts to obtain all necessary waivers, consents and approvals.
7.2 ADDITIONAL COVENANTS OF STOCKHOLDERS. Each of the Stockholders
covenants and agrees for the benefit of Parent that, until any termination of
this Agreement in accordance with the terms hereof, such Stockholder will not:
(a) sell, transfer, pledge, hypothecate, encumber, assign, tender or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer,
D-15
<PAGE> 189
pledge, hypothecation, encumbrance, assignment, tender or other disposition of,
any of such Stockholder's Shares or any interest therein; (b) grant any powers
of attorney or proxies or consents in respect of any of such Stockholder's
Shares, deposit any of such Shares into a voting trust, enter into a voting
agreement with respect to any of such Shares or otherwise restrict or take any
action adversely affecting the ability of such Stockholder freely to exercise
all voting rights with respect thereto; or (c) except as permitted by Section
8.7(b) of the Merger Agreement, directly, or indirectly through his or her
agents and representatives, initiate, solicit or encourage, any inquiries or the
making or implementation of any Alternative Proposal (as defined in the Merger
Agreement) or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to, an
Alternative Proposal, or otherwise facilitates any effort or attempt to make or
implement an Alternative Proposal; and such Stockholder shall (i) immediately
cease and cause to be terminated any existing activities, including discussions
or negotiations with any parties, conducted heretofore with respect to any of
the foregoing and will take the necessary steps to inform his or her agents and
representatives of the obligations undertaken in this Section, and (ii) notify
Parent immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with it.
7.3 WAIVER AND ASSIGNMENT BY STOCKHOLDERS. Upon the Closing and the
consummation of the Merger, each of the Stockholders waives, covenants not to
sue, and releases and forever discharges Parent, Merger Sub and their respective
directors, officers, employees, attorneys, accountants, agents and
representatives from any and all claims, liabilities, demands, controversies,
actions, causes of action, obligations, damages, costs and expenses (including
all judgments, amounts paid in settlement, court costs, attorneys' fees and
costs of investigation), at law or in equity, whether now known or unknown that
may be asserted against Parent and Merger Sub and their respective directors,
officers, employees, attorneys, accountants, agents and representatives, and
against the Company (and its directors, officers, employees, attorneys,
accountants, agents and representatives) arising from or in any way related to
the Merger, the Merger Agreement and any rights that any such Stockholder has or
may have thereunder, the Proxy Statement and the Inducement Agreement
(collectively, the "Claims"), provided that such Stockholder shall retain all of
its rights under this Agreement. Additionally, each of the Stockholders hereby
transfers and assigns to Parent any and all of such Claims.
7.4 ACKNOWLEDGMENT BY THE COMPANY AND THE STOCKHOLDERS. The Company and
each of the Stockholders hereby acknowledge and agree that no provision in this
Agreement shall be deemed or construed as a waiver by Parent or Merger Sub of
any of the conditions set forth in Article IX of the Merger Agreement to such
parties" obligations to effect the Merger except as otherwise agreed in the
Amendment.
VIII. CONDITIONS PRECEDENT
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective obligations of
each party to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing of the following
conditions:
(a) The Merger Agreement and the transactions contemplated thereby
shall have been approved and adopted by the requisite vote of the holders
of the Company Stock.
(b) The waiting period and any other requirements applicable to the
consummation of the Merger and the transactions contemplated by this
Agreement under the HSR Act and any applicable Foreign Acts shall have
expired or been terminated.
(c) No preliminary or permanent injunction or other order by any
federal or state court of competent jurisdiction or other Governmental
Entity which prevents the consummation of the Merger or the transactions
contemplated by this Agreement shall have been issued and remain in effect
(each party agreeing to use all commercially reasonable efforts to have any
such injunction removed).
D-16
<PAGE> 190
8.2 CONDITIONS TO OBLIGATION OF THE COMPANY AND THE STOCKHOLDERS. The
obligations of the Company and the Stockholders to effect the transactions
contemplated by this Agreement shall be subject to the fulfillment at or prior
to the Closing of the following conditions, unless waived by the Company:
(a) Parent shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Closing, and the representations and warranties of Parent contained
in this Agreement shall be true and correct when made and on and as of the
Closing as if made on and as of such date (except to the extent they relate
to a particular date), except as expressly contemplated or permitted by
this Agreement. The Company shall have received a certificate of the Chief
Executive Officer, President or a Vice President of Parent to that effect.
(b) The conditions set forth in Section 9.2 of the Merger Agreement
shall have been fulfilled, unless waived by the Company.
8.3 CONDITIONS TO OBLIGATIONS OF PARENT. The obligations of Parent to
effect the transactions contemplated by this Agreement shall be subject to the
fulfillment at or prior to the Closing of the following conditions, unless
waived by Parent. In addition, unless waived by Parent:
(a) The Company and the Stockholders shall have performed in all
material respects their agreements contained in this Agreement required to
be performed on or prior to the Closing, and the representations and
warranties of the Company and the Stockholders contained in this Agreement
shall be true in all material respects when made and on and as of the
Closing as if made on and as of such date (except to the extent they relate
to a particular date), except as expressly contemplated or permitted by
this Agreement. Parent shall have received a certificate of the Chief
Executive Officer, President or a Vice President of the Company to that
effect.
(b) The conditions set forth in Section 9.3 of the Merger Agreement
shall have been fulfilled, unless waived by Parent.
(c) Counsel to the Company and the Stockholders shall have delivered
to Parent an opinion or opinions in form and substance satisfactory to
Parent regarding the enforceability of this Agreement under Ohio law.
IX. TERMINATION, AMENDMENT AND WAIVER
9.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the transactions contemplated hereby may be abandoned at any time prior to the
Closing by the mutual consent of Parent, the Company and the Stockholders.
9.2 TERMINATION BY EITHER PARENT OR THE COMPANY. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned by any of
the parties hereto if (a) the transactions contemplated by this Agreement or the
Merger shall not have been consummated by April 15, 1999, or at any adjournment
or postponement thereof, or (b) a federal or state court of competent
jurisdiction or other Governmental Entity shall have issued an injunction or
other order which prevents consummation of the transactions contemplated by this
Agreement or the Merger, and such injunction or order shall have become final
and non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to clause (b) above shall have used all commercially reasonable efforts
to remove such injunction, order or decree; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under this Agreement or
the Merger Agreement in any manner that shall have approximately contributed to
the failure to consummate the transactions contemplated by this Agreement or the
Merger.
9.3 OTHER TERMINATION RIGHTS.
(a) This Agreement may be terminated at any time prior to the Closing,
by action of the Board of Directors of Parent, if the Board of Directors of
the Company shall have withdrawn or modified in a manner adverse to Parent
its approval or recommendation of this Agreement, the Merger Agreement or
D-17
<PAGE> 191
the Merger or shall have recommended an Alternative Proposal (as defined in
the Merger Agreement) to the Company's stockholders.
(b) This Agreement may be terminated and the transactions contemplated
by this Agreement may be abandoned at any time prior to the Closing, by
action of the Board of Directors of the Company, if, in compliance with
Section 8.7(c) of the Merger Agreement, the Board of Directors of the
Company shall have withdrawn or modified in a manner adverse to Parent its
approval or recommendation of this Agreement, the Merger Agreement or the
Merger or shall have recommended an Alternative Proposal to the Company's
stockholders.
9.4 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and the abandonment of the transactions contemplated by this
Agreement pursuant to this Article IX, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to Section 10.4
of the Merger Agreement and Sections 10.2 through 10.14 inclusive of this
Agreement. Moreover, in the event of termination of this Agreement pursuant to
Section 9.2(a), nothing herein shall prejudice the ability of the non-breaching
party to pursue any remedy at law or in equity, including an action seeking
damages from any other party for the breach of this Agreement.
X. MISCELLANEOUS
10.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations and warranties set forth in this Agreement except for those set
forth in Article VI shall terminate at the Closing. The representations and
warranties set forth in Article VI shall survive until expiration of the
applicable statutes of limitation. All covenants and agreements set forth in
this Agreement shall survive in accordance with their terms.
10.2 NOTICES. All notices or other communications under this Agreement
shall be in writing and shall be given by delivery (and shall be deemed to have
been duly given upon delivery) in person, by telegram, telex or telecopy, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to the Company:
Broughton Foods Company
210 North Seventh Street
P.O. Box 656
Marietta, Ohio 45750
Attention: Philip E. Cline
Telecopy No. (710) 376-9301
With a copy to:
Huddleston, Bolen, Beatty, Porter & Copen
611 Third Avenue
P.O. Box 2185
Huntington, West Virginia 25722-2185
Attention: Thomas Murray, Esq.
Telecopy No. (304) 522-4312
If to the Stockholders:
Marshall T. Reynolds
as Representative of the Stockholders
c/o Broughton Foods Company
210 North Seventh Street
P. O. Box 656
Marietta, Ohio 45750
Telecopy No. (710) 376-9301
D-18
<PAGE> 192
If to Parent:
Suiza Foods Corporation
2525 McKinney Avenue
Suite 1200
Dallas, Texas 75201
Attention: Gregg L. Engles
Telecopy No.: (214) 303-3499
With a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: William A. McCormack, Esq.
Telecopy No.: (214) 939-5849
or to such other address (or telecopy number) as any party may have furnished to
the other parties in writing in accordance with this Section.
10.3 FEES AND EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, except as provided in Section 9.4, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses, whether or not the transactions contemplated by this Agreement are
consummated.
10.4 PUBLICITY. So long as this Agreement is in effect, Parent, the
Company and the Stockholders agree to consult with each other in issuing any
press release or otherwise making any public statement with respect to the
transactions contemplated by this Agreement, and none of them shall issue any
press release or make any public statement prior to such consultation, except as
may be required by law or by obligations pursuant to any listing agreement with
the New York Stock Exchange.
10.5 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
10.6 ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
10.7 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Parent Disclosure
Schedule, the Company Disclosure Schedule and any documents delivered by the
parties in connection herewith and therewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto,
provided that the Merger Agreement, the Inducement Agreement, the Non-Disclosure
Agreement and any documents delivered by the parties in connection therewith
shall remain in full force and effect. No addition to or modification of any
provision of this Agreement shall be binding upon any party hereto unless made
in writing and signed by all parties hereto.
10.8 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors and by the Stockholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
D-19
<PAGE> 193
10.9 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to its rules
of conflict of laws.
10.10 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
10.11 HEADINGS AND TABLE OF CONTENTS. Headings of the Articles and
Sections of this Agreement and the Table of Contents are for the convenience of
the parties only, and shall be given no substantive or interpretive effect
whatsoever.
10.12 INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
10.13 WAIVERS. At any time prior to the Closing, the parties hereto, by or
pursuant to action taken by their Boards of Directors of Parent or the Company
or by the Stockholders, may (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
documents delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party. Except as provided in this
Agreement, no action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision hereunder
shall not operate or be construed as a waiver of any prior or subsequent breach
of the same or any other provision hereunder.
10.14 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.15 SUBSIDIARIES. As used in this Agreement, the word "subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization, or any organization of which such party is a
general partner.
10.16 ADJUSTMENTS; ADDITIONAL SHARES. In the event (i) of any stock
dividend, stock split, merger (other than the Merger) recapitalization,
reclassification, combination, exchange of shares or the like of the capital
stock of the Company on, of or affecting the Company Stock or (ii) that any
Stockholder shall become the owner of, or otherwise obtain the right to vote
with respect to, any additional shares of Company Stock or other securities
entitling the holder thereof to vote or give consent, then the terms of this
Agreement shall apply to the shares of capital stock or other instruments or
documents that the Stockholders own or have the right to vote immediately
following the effectiveness of the events described in clause (i) or any
Stockholder becoming the owner of or obtaining the right to vote with respect to
any Company Stock or other securities as described in clause (ii), as though, in
either case, they were Shares hereunder, provided that this Section 10.16 shall
only apply to any additional shares of Company Stock or other securities,
instruments or documents attributable to the Shares owned by such Stockholder
listed in Exhibit A.
D-20
<PAGE> 194
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
SUIZA FOODS CORPORATION
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll, Executive Vice
President-
Corporate Development
BROUGHTON FOODS COMPANY
By: /s/ MARSHALL T. REYNOLDS
------------------------------------
Title: Chairman of the Board of
Directors
STOCKHOLDERS:
/s/ MARSHALL T. REYNOLDS
--------------------------------------
Marshall T. Reynolds
/s/ PHILIP E. CLINE
--------------------------------------
Philip E. Cline
/s/ CHARLES R. HOOTEN, JR.
--------------------------------------
Charles R. Hooten, Jr.
/s/ NEAL W. SCAGGS
--------------------------------------
Neal W. Scaggs
WRIGHT FAMILY PARTNERSHIP
By: /s/ THOMAS W. WRIGHT
------------------------------------
Thomas W. Wright, Partner
THE HARRAH AND REYNOLDS
CORPORATION
By: /s/ MARSHALL T. REYNOLDS
------------------------------------
Marshall T. Reynolds, President
/s/ DOUGLAS V. REYNOLDS
--------------------------------------
Douglas V. Reynolds
/s/ SHIRLEY A. REYNOLDS
--------------------------------------
Shirley A. Reynolds
D-21
<PAGE> 195
APPENDIX DD
AMENDMENT TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT (this "Amendment"), dated as of April 28, 1999, to the Stock
Purchase Agreement (the "Stock Purchase Agreement"), dated as of January 18,
1999, by and among Suiza Foods Corporation, a Delaware corporation ("Parent"),
Broughton Foods Company, an Ohio corporation (the "Company"), and certain
stockholders of the Company listed on the signature pages hereto (the
"Stockholders"), is entered into by and among Parent, the Company and the
Stockholders;
WHEREAS, in order to induce Parent and Merger Sub to enter into Amendment
No. 1 ("Amendment No. 1"), dated as of January 18, 1999, to the Agreement and
Plan of Merger (the "Merger Agreement"), dated as of September 10, 1998, by and
among Parent, Suiza Foods Acquisition Corp., an Ohio corporation and
wholly-owned subsidiary of Parent ("Merger Sub"), and the Company, the
Stockholders entered into the Stock Purchase Agreement (the "Stock Purchase
Agreement"), dated as of January 18, 1999, with Parent and the Company;
WHEREAS, Parent, Merger Sub and the Company thereupon entered into
Amendment No. 1; and
WHEREAS, in order to induce Parent and Merger Sub to enter into Amendment
No. 2 ("Amendment No. 2") to the Merger Agreement, certain stockholders of the
Company are contemporaneously herewith entering into an Amendment to Inducement
Agreement (the "Inducement Agreement"), dated as of September 10, 1998, with
Parent, and the Stockholders are entering into this Amendment;
NOW, THERFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
1. PURCHASE CONSIDERATION. Section 2.1 of the Stock Purchase Agreement is
hereby deleted in its entirety and replaced with the following:
"2.1 Purchase Consideration. The purchase consideration (the "Purchase
Consideration") payable by Parent to the Stockholders for each of the
Shares shall be as follows:
(a) Cash Portion. Parent shall pay to the Stockholders eleven
dollars and twenty-five cents ($11.25) in immediately available funds
for each of the Shares.
(b) Contingent Cash Portion. In addition, Parent agrees to pay to
the Stockholders for each of the Shares an additional dollar and
twenty-five cents ($1.25) in immediately available funds if, at or prior
to the Closing, the Company shall provide to Parent a copy of a contract
or contracts between the Company and Save-A-Lot Ltd. or other
documentation in form and substance acceptable to Parent in its sole
discretion verifying that the Company is supplying (or is reasonably
projected to be supplying within 90 days after the Closing) at least a
majority of the aggregate volume of milk purchases by Save-A-Lot Ltd.
for its warehouses located in Macon, Georgia, Holt, Michigan, and
Columbus, Ohio (the "Specified Volume") or for some combination of such
warehouses and additional warehouses of Save-A-Lot Ltd. so long as the
total volume of milk purchases from the Company is equal to or exceeds a
majority of the Specified Volume.
The total amount payable by Parent to the Stockholders for each of the
Shares, as determined in accordance with this Section 2.1, is referred to herein
as the "Cash Portion"."
2. COMPANY ACTION; VOTE REQUIRED. Section 5.9 of the Stock Purchase
Agreement is hereby amended by the deletion of the last sentence thereof.
3. AUTHORITY, ENFORCEABILITY AND TITLE. The execution, delivery and
performance by each of the Stockholders of the Stock Purchase Agreement and this
Amendment does not conflict with, require a consent, waiver or approval under,
or result in a breach of or default under, any of the terms of any contract,
commitment or other obligation (written or oral) to which such Stockholder is
bound. Each such Stockholder
DD-1
<PAGE> 196
has full right, power and authority to execute and deliver the Stock Purchase
Agreement and this Amendment and to perform such Stockholder's obligations
thereunder and hereunder. The Stock Purchase Agreement and this Amendment have
been duly executed and delivered by such Stockholder and constitute the legal,
valid and binding obligations of such Stockholder, enforceable against such
Stockholder in accordance with their terms. Each Stockholder is the sole owner
of and has the right to vote with respect to such Stockholder's Shares subject
only to the Inducement Agreement as amended, and such Stockholder does not have
any right to acquire, nor is it the "beneficial owner" (as such term is defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of, any
other shares of any class of capital stock of the Company or any securities
convertible into or exchangeable or exercisable for any shares of any class of
capital stock of the Company. Each Stockholder owns its Shares free and clear of
all liens, claims, pledges, charges, proxies, restrictions, encumbrances,
proxies and voting agreements of any nature whatsoever (each an "Encumbrance")
other than as provided by the Stock Purchase Agreement and this Amendment and
the Inducement Agreement as amended, and good and valid title to such
Stockholder's Shares, free and clear of any Encumbrance, will pass to Parent
upon the Closing.
4. REPRESENTATION BY COUNSEL. Each of the Stockholders has been
represented by counsel in connection with the transactions contemplated by the
Stock Purchase Agreement and this Amendment and is not in an unequal bargaining
position relative to Parent and Merger Sub in connection therewith. Each of the
Stockholders has relied wholly on such Stockholder's own judgment and knowledge
in entering into the Stock Purchase Agreement and this Amendment and has not
been influenced to any extent whatsoever in entering into the Stock Purchase
Agreement and this Amendment by any representations or statements of Parent or
Merger Sub (or anyone acting on their behalf), except as is expressly set forth
herein.
5. REFERENCE TO AND EFFECT ON THE STOCK PURCHASE AGREEMENT.
(a) Upon execution of this Amendment, each reference in the Stock
Purchase Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import, and each reference in any document related thereto,
or executed in connection therewith, shall mean and be a reference to the
Stock Purchase Agreement as amended by this Amendment, and the Stock
Purchase Agreement and this Amendment shall be read together and construed
as one single instrument. In addition, each reference in the Stock Purchase
Agreement to the "Merger Agreement," "thereunder," "thereof," "therein" and
words of like import, and each reference in any document related to the
Merger Agreement, or executed in connection therewith, shall mean and be a
reference to the Merger Agreement as amended by Amendment No. 1 and
Amendment No. 2, and the Merger Agreement, Amendment No. 1 and Amendment
No. 2 and shall be read together and construed as one single instrument.
(b) Except as specifically amended by this Amendment, the Stock
Purchase Agreement shall remain in full force and effect and is hereby
ratified and confirmed by the parties.
DD-2
<PAGE> 197
IN WITNESS WHEREOF, this Amendment has been duly executed by the parties
hereto all as of the day and year first above written.
SUIZA FOODS CORPORATION
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll, Executive Vice
President-
Corporate Development
SUIZA FOODS CORPORATION
By: /s/ TRACY L. NOLL
------------------------------------
Tracy L. Noll, Executive Vice
President-
Corporate Development
BROUGHTON FOODS COMPANY
By: /s/ MARSHALL T. REYNOLDS
------------------------------------
Title: Chairman of the Board of
Directors
STOCKHOLDERS:
/s/ MARSHALL T. REYNOLDS
--------------------------------------
Marshall T. Reynolds
/s/ PHILIP E. CLINE
--------------------------------------
Philip E. Cline
/s/ CHARLES R. HOOTEN, JR.
--------------------------------------
Charles R. Hooten, Jr.
/s/ NEAL W. SCAGGS
--------------------------------------
Neal W. Scaggs
WRIGHT FAMILY PARTNERSHIP
By: /s/ THOMAS W. WRIGHT
------------------------------------
Thomas W. Wright, Partner
THE HARRAH AND REYNOLDS
CORPORATION
By: /s/ MARSHALL T. REYNOLDS
------------------------------------
Marshall T. Reynolds, President
/s/ DOUGLAS V. REYNOLDS
--------------------------------------
Douglas V. Reynolds
/s/ SHIRLEY A. REYNOLDS
--------------------------------------
Shirley A. Reynolds
DD-3
<PAGE> 198
BROUGHTON FOODS COMPANY
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
ON JUNE 10, 1999
The undersigned hereby appoints Philip E. Cline and Todd R. Fry, and each of
them, proxies, with full power of substitution and resubstitution, for and in
the name of the undersigned, to vote all shares of common stock of Broughton
Foods Company ("Broughton") which the undersigned would be entitled to vote if
personally present at the Special Meeting of Shareholders to be held on June
10, 1999, at 10:00 a.m., local time, at the Lafayette Hotel, 101 Front Street,
Marietta, Ohio 45750, or at any adjournment or postponement thereof, upon the
matters described in the accompanying Notice of Special Meeting of Shareholders
and Proxy Statement, receipt of which is hereby acknowledged, and upon other
business that may properly come before the Special Meeting of Shareholders or
any adjournment or postponement thereof. Said proxies are directed to vote on
the matters described in the Notice of Special Meeting of Shareholders and Proxy
Statement as follows on the reverse side, and otherwise in their discretion upon
such other business as may properly come before the Special Meeting of
Shareholders or any adjournment or postponement thereof.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THIS
PROXY WILL BE VOTED FOR THE PROPOSAL STATED ON THE REVERSE SIDE.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING ON JUNE 10,
1999. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
- -------------------------------------------------------------------------------
Please sign exactly as your name or names appear hereon. For more than one
owner as shown hereon, each should sign. When signing in a fiduciary or
representative capacity, please give full title. If this proxy is submitted by
a corporation, it should be executed in the full corporate name by a duly
authorized officer. If a partnership, please sign in the partnership name by an
authorized person.
- -------------------------------------------------------------------------------
