DEAN FOODS CO - S-4/A - 19971024 - MANAGEMENTS_DISCUSSION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF COUNTRY FRESH
OVERVIEW
Country Fresh was incorporated in Michigan in 1946 under the name "Grocers
Dairy Company" and changed its name to "Country Fresh, Inc" in 1981. Country
Fresh was originally formed as a grocers cooperative, but, in 1994, its articles
of incorporation were amended to structure it as a general for profit
corporation for federal tax purposes.
Country Fresh is a leading processor and distributor of fresh milk products
and related dairy products, ice cream and ice cream snacks in Michigan, northern
Ohio and northern Indiana, and a processor of hot pack juices and drink products
under co-packing agreements in Tennessee. The markets in which Country Fresh
operates tend to be relatively mature and do not offer opportunities for rapid
growth. As a result, Country Fresh's strategy has been to grow primarily through
acquisitions of small processors and processing plants and realize synergies
within the acquired companies by processing a complete range of dairy
by-products and through elimination of duplicated purchasing and administrative
operations.
RESULTS OF OPERATIONS
The following table presents certain information concerning Country Fresh's
results of operations, including information presented as a percentage of net
sales (dollars in thousands) for the fiscal years ended February 25, 1995, March
2, 1996 and March 1, 1997 and the 20 weeks ended July 20, 1996 and July 19,
1997:
UNAUDITED
20 WEEKS ENDED
--------------------
1995 1996 1997 JULY 20, 1996
-------------------- -------------------- -------------------- --------------------
DOLLARS % DOLLARS % DOLLARS % DOLLARS %
--------- --------- --------- --------- --------- --------- --------- ---------
Net Sales.............................. $ 310,164 100.0 $ 336,054 100.0 $ 353,037 100.0 $ 135,328 100.0
Cost of Sales.......................... 268,500 86.6 291,721 86.8 305,614 86.6 115,963 85.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross Profit........................... 41,664 13.4 44,333 13.2 47,423 13.4 19,365 14.3
Operating Expenses
Selling & Distribution............... 21,225 6.8 21,633 6.4 19,916 5.7 7,397 5.5
General & Administrative............. 15,036 4.9 15,700 4.7 16,010 4.5 5,907 4.4
Amortization of Intangibles.......... 100 -- 82 -- 656 .1 33 --
--------- --------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses............... 36,361 11.7 37,415 11.1 36,582 10.3 13,337 9.9
Operating Income....................... 5,303 1.7 6,918 2.0 10,841 3.1 6,028 4.4
Other (Income) Expense................. (810) (.3) 759 .2 783 .2 502 .3
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings Before Taxes on Income &
Cumulative Effect of Change in
Accounting........................... 6,113 2.0 6,159 1.8 10,058 2.9 5,526 4.1
Taxes on Income........................ 2,145 .7 2,090 .6 3,385 1.0 1,884 1.4
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings Before Cumulative Effect of
Change in Accounting................. 3,968 1.3 4,069 1.2 6,673 1.9 3,642 2.7
Cumulative Effect of Change in
Accounting........................... 2,272 .7 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net Earnings........................... $ 1,696 .6 $ 4,069 1.2 $ 6,673 1.9 $ 3,642 2.7
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
JULY 19, 1997
--------------------
DOLLARS %
--------- ---------
Net Sales.............................. $ 136,154 100.0
Cost of Sales.......................... 116,233 85.4
--------- ---------
Gross Profit........................... 19,921 14.6
Operating Expenses
Selling & Distribution............... 7,217 5.3
General & Administrative............. 6,234 4.6
Amortization of Intangibles.......... 19 --
--------- ---------
Total Operating Expenses............... 13,470 9.9
Operating Income....................... 6,451 4.7
Other (Income) Expense................. 343 .2
--------- ---------
Earnings Before Taxes on Income &
Cumulative Effect of Change in
Accounting........................... 6,108 4.5
Taxes on Income........................ 2,079 1.5
--------- ---------
Earnings Before Cumulative Effect of
Change in Accounting................. 4,029 3.0
Cumulative Effect of Change in
Accounting........................... -- --
--------- ---------
Net Earnings........................... $ 4,029 3.0
--------- ---------
--------- ---------
TWENTY WEEKS ENDED JULY 19, 1997 COMPARED TO TWENTY WEEKS ENDED JULY 20, 1996
NET SALES. On April 19, 1997 Country Fresh acquired certain assets of
Wesley Quaker Maid, Inc. ("Wesley"), a supplier of ice cream and novelty
products to the Great Atlantic and Pacific Tea Company. The twenty weeks ended
July 19, 1997 include the operating results of the Wesley plant from the date of
acquisition.
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Country Fresh's net sales increased slightly to $136.2 million in 1997 from
$135.3 million in 1996. The Wesley plant acquisition added $4.8 million in sales
in 1997, however, this increase was offset by lower volume from competitive
retail conditions in many of Country Fresh's markets.
COST OF SALES. Country Fresh's cost of sales margin was 85.4% in 1997
compared to 85.7% in 1996. The cost of sales decrease was primarily due to
reductions in the cost of raw milk and orange juice solids that have not been
passed on to customers, offset by increases in plant costs.
OPERATING EXPENSES. The operating expense margin was 9.9% in both 1997 and
1996. General and administrative expenses increased primarily due to an increase
in health care costs.
OPERATING INCOME. Country Fresh's operating income in 1997 was $6.5
million, an increase of 7.0% from operating income in 1996 of $6.0 million.
Country Fresh's operating income margin increased to 4.7% in 1997 from 4.4% in
1996 primarily due to the items discussed above.
OTHER (INCOME) EXPENSE. Interest expense was slightly lower in 1997 than
1996. The reduction in the expense was primarily due to lower average debt
levels in 1997 and reflects a program to repay debt faster than required. Other
income increased slightly primarily due to equity in earnings of a Country Fresh
joint venture entered into in December 1996.
NET EARNINGS. Country Fresh reported net earnings of $4.0 million in 1997
compared to $3.6 million in 1996. The 1997 net earnings improved due to the
items discussed above.
YEAR ENDED MARCH 1, 1997 COMPARED TO YEAR ENDED MARCH 2, 1996:
NET SALES. Country Fresh's net sales increased 5.1% to $353.0 million in
1997 from $336.1 million in 1996 primarily due to (a) a 14.5% increase in
Country Fresh's net sales of ice cream snacks, to $37 million up from $32
million in 1996, and (b) an increase in prices charged for milk to recoup
increases in raw milk costs.
COST OF SALES. Country Fresh's cost of sales margin was 86.6% in 1997
compared to 86.8% in 1996. The cost of sales decrease was primarily due to a
shift in the product mix to higher margin items such as ice cream and other
cultured products and to reductions in overhead costs, primarily plant
production losses, depreciation and self insured workers compensation claims.
The reduction in plant loss resulted from processing changes such as the
installation of new milk fillers, while the depreciation decrease reflects
relatively lower capital investments in 1996.
OPERATING EXPENSES. The operating expense margin was 10.3% in 1997 compared
to 11.1% in 1996. Delivery expenses decreased due to several changes in the
direct delivery of ice cream to support Country Fresh's strategy of eliminating
the double handling of products.
OPERATING INCOME. Country Fresh's operating income in 1997 was $10.8
million, an increase of 56.7% from operating income in 1996 of $6.9 million. The
operating income margin increased to 3.1% in 1997 from 2.0% in 1996 primarily
due to the increase in higher margin products in Country Fresh's product mix,
the effect of higher milk costs, and lower distribution costs.
OTHER (INCOME) EXPENSE. Interest expense declined $.5 million during 1997
from $2.4 million in 1996. The reduction in interest expense was primarily due
to lower average debt levels in 1997, reflecting management's program to repay
debt faster than required. Other income decreased $.5 million primarily due to a
reduction in interest income as a result of lower average investable cash
positions. On December 1, 1996, Country Fresh engaged in a joint venture, East
Coast Ice Cream L.L.C., to supply the east coast of the United States with
private label ice cream and novelties. Country Fresh's 1997 other income
includes $.1 million of its equity in earnings in the joint venture from the
date of investment.
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NET EARNINGS. Country Fresh reported net earnings of $6.7 million in 1997
compared to $4.1 million in 1996. Net earnings in 1997 improved due to (a)
higher margins on milk by-products, (b) increased distribution efficiencies and
(c) increased sales of ice cream and ice cream snacks.
YEAR ENDED FEBRUARY 28, 1996 COMPARED TO YEAR ENDED FEBRUARY 28, 1995.
NET SALES. Country Fresh's net sales increased 8.3% to $336.1 million in
1996 from $310.2 million in 1995. Net sales increased $17.9 million due to the
inclusion of a full year of operations of CF Ohio and Southeastern Juice Inc.,
which were acquired on November 20, 1994 and October 19, 1994, respectively. The
volume of ice cream snacks increased 21% from the addition of new customers and
additional products from existing customers.
COST OF SALES. Country Fresh's cost of sales margin was 86.8% in 1996
compared to 86.6% in 1995. A significant decrease in the butterfat portion of
raw milk and resulting increase in the skim portion of raw milk increased costs
late in calendar 1995 and was not passed on to customers until 1997. This raw
milk increase was partially offset by increases in plant labor efficiencies.
OPERATING EXPENSES. Country Fresh's operating expenses increased $1.1
million in 1996, but decreased as a percentage of net sales to 11.1% in 1996
from 11.7% in 1995. The operating expense increase was due to the inclusion of a
full year of operating expenses of CF Ohio and Southeastern Juice, which
accounted for operating expenses of $1.1 million for 1996.
OPERATING INCOME. Country Fresh's operating income increased 30.5% to $6.9
million in 1996 from $5.3 million in 1995. The increase in operating income was
primarily due to increased sales of ice cream snacks and lower distribution
costs.
OTHER (INCOME) EXPENSE. Interest expense rose $1.8 million in 1996 due to
the additional indebtedness incurred to recapitalize Country Fresh effective
February 26, 1995, for which Country Fresh borrowed $27 million to repurchase
48% of its outstanding common stock.
ADOPTION OF NEW ACCOUNTING STANDARD. Country Fresh incurred $2.3 million in
additional expense (net of a $1.2 million tax benefit) for the cumulative effect
of a change in accounting for post retirement benefits other than pensions in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
provisions of SFAS No. 106 were adopted as of the beginning of the year ended
February 25, 1995.
NET EARNINGS. Country Fresh reported net earnings of $4.1 million in 1996,
compared to $1.7 million in 1995. The decrease primarily resulted from the
cumulative effect of the change in accounting for postretirement benefits.
SEASONALITY
Country Fresh's ice cream and ice cream snack business is seasonal with peak
demand for these products occurring during the months of May through August.
Because ice cream and ice cream mixes have higher gross margins relative to
other fluid dairy items, results of operations could be affected if there is
adverse weather during this season (such as unusually mild weather). To meet the
summer peak demand, inventories are built up in January through May utilizing
cash flow from operations. In 1997, Country Fresh recorded approximately 48% of
its annual net sales of ice cream and ice cream snacks during this time period.
Country Fresh's fluid dairy operations are not subject to large seasonal
sales fluctuations. Country Fresh sells milk to schools, most of which are
closed during the summer months. Approximately 1.5% of Country Fresh's fluid
dairy sales were made to schools during 1997.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 1, 1997, Country Fresh had total stockholders' equity of $31.5
million and total indebtedness of $31.4 million (including long-term debt and
current portion of long-term debt). With one exception, for which a temporary
waiver was obtained, Country Fresh is currently in compliance with all covenants
and financial ratios contained in its debt agreements.
CASH FLOW
The working capital needs of Country Fresh have historically been met with
cash flow from operations, although debt has been required to recapitalize
Country Fresh and fund certain acquisitions. Net cash provided by operating
activities was $13.5 million for 1997 and $11.9 million for 1996. Investing
activities in 1997 included $8.8 million for property, plant and equipment, of
which $3.5 million was spent on Country Fresh's ice cream snack production
equipment. Financing activities for 1997 included payments of $5.4 million to
repay existing debt.
In April, 1995, Country Fresh completed a plan of recapitalization which
changed Country Fresh's capital structure by redeeming all Class A Common shares
and approximately 48% of the Class B Common shares for cash. Additionally,
approximately 6% of Class B Common shares were converted into Series A 8%
Cumulative Preferred Stock, with a par value of $320 per share. The remaining
Class B Common shares were converted into forty shares of no par voting Common
Stock. Payment for shares redeemed for cash was financed by borrowing $27.0
million under a then-existing $35.0 million long-term credit facility.
FUTURE CAPITAL REQUIREMENTS
Management expects that cash flow from operations along with additional
borrowings under existing and future credit facilities will be sufficient to
meet Country Fresh's requirements for fiscal 1998 and the foreseeable future. In
the future, Country Fresh intends to pursue additional acquisitions in its
existing regional markets. There can be no assurance, however, that Country
Fresh will have sufficient available capital resources to realize its
acquisition strategy.
CURRENT DEBT OBLIGATIONS
Country Fresh has three Economic Development Corporation bond issues ("EDC
bonds") which are secured by irrevocable letters of credit issued by financial
institutions. Interest on the EDC bonds is due semi-annually at rates (subject
to certain maximums) which will approximate market conditions for tax exempt
securities of the same stature. The EDC bonds have sinking fund obligations
which aggregate $.75 million annually and are secured by first mortgages on real
property and equipment with an aggregate book value of $9.1 million as of March
1, 1997. The revenue bonds have a total of $10.4 million outstanding as of July
19, 1997.
Country Fresh has a term loan and a revolving credit loan outstanding which
aggregate $17.0 million as of July 19, 1997. These loans are unsecured and the
term loan has required quarterly payments of $464,286. Interest is due
quarterly, based on Country Fresh's option of either prime or LIBOR plus 1.0% to
1.5% based on the ratio of funded debt to total capital. The revolving credit
loan permits borrowings up to $20 million and is due January 1, 2002.
Country Fresh has notes payable to shareholders and others totaling $1.1
million as of July 19, 1997. The notes require quarterly interest at 1% below
prime rate and are callable on the first day of any calendar quarter.
Country Fresh has a term loan outstanding as of July 19, 1997 for $1.8
million. Monthly installments are $21,938 including interest of 7.85%.
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A term and revolving credit agreement and certain of the EDC bonds contain
covenants which include restrictions on additional indebtedness, payment of
dividends in excess of prescribed amounts, and require Country Fresh to maintain
a current ratio of 1.35 to 1, working capital of $18.5 million (after September
1, 1997), tangible net worth of $21.4 million as of March 1, 1997, increasing $3
million annually, total liabilities to net worth of not more than 3.5 to 1,
decreasing .5 annually and fixed charge coverage ratios of 2.0 to 1.0.
INCOME TAXES
Country Fresh recognized effective tax rates of 33.7%, 33.9% and 35.1% for
1997, 1996 and 1995, respectively.
COMMODITY FUTURES CONTRACTS
Country Fresh uses commodity futures contracts to hedge the price risks
associated with the purchase of orange juice solids which are used in the
packaging of orange juice from concentrate. Country Fresh does not enter into
these contracts for speculative purposes, and the contracts generally mature in
less than one year. As of March 1, 1997, Country Fresh had no such contracts
outstanding.
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BUSINESS OF SUIZA FOODS
GENERAL
Suiza Foods is a leading manufacturer and distributor of fresh milk and
related dairy products, plastic containers and packaged ice in the United
States. Suiza Foods conducts its dairy operations primarily through Suiza-Puerto
Rico, Velda Farms, Swiss Dairy, Model Dairy, Dairy Fresh and Garelick Dairy, its
plastics operations through Franklin Plastics and its ice operations through
Reddy Ice. Each of these operating subsidiaries is a strong competitor with an
established reputation for customer service and product quality. Suiza Foods'
dairy and ice 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. Franklin Plastics'
customers include regional dairy manufacturers, bottled water processors,
including the Perrier Group of America, Inc. and Suntory Water Group Inc., and
other beverage manufacturers such as The Minute Maid Co. and Proctor & Gamble
Company, Inc.
Suiza Foods has grown primarily through a successful acquisition strategy,
having consummated 54 acquisitions since its inception in 1988, including 27
acquisitions since its initial public offering in April 1996. Through these
acquisitions, Suiza Foods has realized economies of scale and operating
efficiencies by eliminating duplicative manufacturing, distribution, purchasing
and administrative operations.
BUSINESS STRATEGY
Suiza Foods' strategy is to continue to expand its dairy, ice and related
food businesses primarily through acquisitions in new markets and subsequent
consolidating or add-on acquisitions in its existing markets. After entering new
markets through acquisitions of strong regional operators, Suiza Foods will
pursue consolidating or add-on acquisitions where such opportunities exist. In
addition, Suiza Foods will seek to expand its existing operations by adding new
customers, extending its product lines and securing distribution rights for
additional branded product lines.
Suiza Foods' acquisition strategy has historically focused on established
regional dairy and ice operations that have significant market share and
long-standing customer relationships. Suiza-Puerto Rico, founded in 1939, has
served the Puerto Rico market for over 50 years, and Velda Farms has served the
Florida dairy market for over 40 years. Garrido and Swiss Dairy, acquired in
July 1996 and September 1996, respectively, have each served their respective
markets for approximately 50 years. The predecessor of Model Dairy was founded
in 1906. Dairy Fresh has served its market for approximately 15 years, and
Garelick Dairy, founded in 1931, has served its market for over 60 years. Reddy
Ice entered the retail ice business in the 1920s.
Suiza Foods has implemented its consolidation strategy by acquiring and
integrating dairy operations into Suiza-Puerto Rico and Velda Farms, and a
number of ice companies into Reddy Ice. Management has enhanced the
profitability of the acquired operations through increased purchasing power and
by consolidating delivery routes, production, acquired brand names and human
resources into Suiza Foods' larger scale operations.
Through the acquisition of Franklin Plastics, Suiza Foods has expanded its
operations into the business of plastic container manufacturing. These plastic
containers are primarily used to package milk, water, juice and other beverages.
Suiza Foods' entry into the plastic container manufacturing industry is an
outgrowth of its in-house plastic container manufacturing operations of certain
of its regional dairy businesses. Management believes that the plastic container
industry presents attractive opportunities for growth. Suiza Foods' strategy
with respect to its plastic container manufacturing operations is to grow
internally and through acquisitions. Through this growth, Suiza Foods hopes to
capitalize on (a) the trend in the dairy industry to replace paper cartons with
plastic containers, (b) the trend in the dairy industry to outsource plastic
container manufacturing operations, (c) the rapid growth of the bottled water
industry, and (d) the consolidation in the plastic container manufacturing
industry.
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Since January 1997, Suiza Foods has acquired 11 ice businesses for aggregate
consideration of approximately $31.1 million. Through its acquisition strategy,
Suiza Foods has increased the geographic presence of its ice operations. Except
for ice businesses it acquires in new geographic markets, Suiza Foods generally
closes acquired manufacturing facilities and transfers the facilities' volume to
one of Suiza Foods' existing ice manufacturing plants.
THE 1997 ACQUISITIONS
DAIRY FRESH
In July 1997, Suiza Foods acquired substantially all of the assets of Dairy
Fresh L.P., a regional manufacturer of fresh milk, ice cream and related
products in North Carolina, for cash consideration of approximately $104.5
million (subject to adjustment and excluding transaction costs), plus the
assumption of certain current liabilities. Dairy Fresh had net sales of
approximately $117.0 million for the year ended December 31, 1996. Sales to
Dairy Fresh's two largest customers accounted for approximately 92% of Dairy
Fresh's total net sales for such period.
Dairy Fresh operates a manufacturing facility in Winston-Salem, North
Carolina focused on serving the needs of its large grocery store customers.
Dairy Fresh produces a limited line of high volume dairy products. Suiza Foods
believes that Dairy Fresh's operations are efficient and provide Suiza Foods'
customers with quality products on a cost effective basis.
GARELICK COMPANIES
In July 1997, Suiza Foods acquired the outstanding equity interests of the
Garelick Companies, which manufacture and distribute fresh milk and related
dairy products and process and distribute water throughout New England and
upstate New York and also manufacture and distribute plastic containers
primarily in the eastern United States, for aggregate consideration of
approximately $308.7 million (subject to adjustment and excluding transaction
costs). Garelick has traditionally operated two businesses: dairy (Garelick
Dairy) and plastics (Franklin Plastics). Combined net sales for the Garelick
Dairy and Franklin Plastics businesses totaled approximately $362 million for
the year ended September 30, 1996. At the closing of this acquisition, Suiza
Foods paid $293.7 million in cash and issued 446,100 shares of Common Stock
having a value of $15.0 million as of the day prior to the date of execution of
the acquisition agreement. Of the 446,100 shares of Common Stock issued as part
of the purchase price, 148,700 shares were issued into escrow, subject to the
satisfaction of an earnout provision related to Garelick Dairy.
INDUSTRY OVERVIEW
DAIRY
According to industry statistics, wholesale sales of fresh milk products in
the United States were approximately $22.8 billion in 1995, compared to $21.5
billion in 1988. Management believes that the dairy industry is mature in both
the United States and Puerto Rico.
The dairy industry has excess capacity and has been in the process of
consolidation for many years. Excess capacity has resulted from the development
of more efficient manufacturing techniques, the establishment of captive dairy
manufacturing operations by large grocery retailers and relatively little growth
in the demand for fresh milk products. As the industry has consolidated, many
smaller dairy processors have been eliminated and several large regional dairy
processors have emerged. According to industry statistics, in 1995 there were
approximately 651 fresh milk processing plants in the United States, a decline
of 540 from the 1,191 plants operating in 1982. The number of plants with 20 or
more manufacturing employees declined from 792 to 447 over the same period. As a
result of this consolidation trend, which management believes will continue,
Suiza Foods has had favorable opportunities to pursue its business strategy.
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PLASTICS
The plastic container manufacturing industry is undergoing consolidation,
which has led to the emergence of a number of large manufacturing companies.
Although captive manufacturing operations account for a significant portion of
total plastic container production, management believes that there is a trend in
the dairy industry to outsource these operations to independent manufacturers.
The plastic container manufacturing industry has experienced growth in
recent years, driven in large part by consumer preference for plastic
containers. The growth of the bottled water industry and increased demand for
single serve beverage containers have also contributed to growth in this
industry. Management believes that demand for plastic containers will continue
to increase because of these factors.
ICE
The ice industry is highly fragmented and is regional because of the
relatively high cost of transporting ice. Demand for ice is seasonal, with peak
demand occurring in the second and third calendar quarters. The availability of
ice during periods of high demand is important to grocery retailers and
convenience stores. The ice industry has therefore emerged as a service-oriented
business requiring efficient manufacturing facilities and distribution systems
capable of accommodating peak demand levels. Management believes that Suiza
Foods is one of the largest manufacturers and distributors of ice in the United
States and that it has significant market share in each of the markets in which
it operates.
PRODUCTS AND SERVICES
DAIRY
Suiza Foods' regional dairy operations manufacture and distribute fresh
milk, fruit drinks, coffee, juices, water and related products under proprietary
brand names and on a private-label basis for large customers. Suiza Foods also
purchases and distributes certain other products such as yogurt, packaged ice
cream and ice cream novelties.
PLASTICS
Suiza Foods manufactures and distributes plastic containers in a variety of
sizes, which are primarily used to package milk, water, juice and other
beverages. In addition, Suiza Foods has begun to manufacture plastic containers
for other food and industrial products, such as bleach and vinegar.
ICE
Suiza Foods manufactures and distributes ice products for retail, commercial
and institutional markets. Suiza Foods' primary product is cocktail ice in eight
pound bags, which it sells principally to convenience and grocery stores. Suiza
Foods also sells cocktail ice in various bag sizes ranging from three pounds to
40 pounds to restaurants, bars, stadiums, vendors and caterers. In addition,
Suiza Foods sells block ice in ten and 300 pound sizes to commercial and
industrial customers.
SALES AND DISTRIBUTION
DAIRY
Suiza Foods markets and sells its dairy product line to a variety of retail
and food service outlets including grocery stores, club stores, convenience
stores, gas stores, schools, restaurants, hotels and cruise ships. Suiza Foods'
regional dairy operations serve customers in its markets utilizing a large fleet
of delivery vehicles. Suiza-Puerto Rico is the larger of two fresh milk
processors in Puerto Rico and distributes its products to grocery stores, retail
outlets and schools, and also distributes third party brand name ice cream and
other refrigerated and frozen foods principally to medium-sized and large
grocery stores. Velda Farms serves customers throughout peninsular Florida and
focuses its distribution efforts on food service accounts, convenience stores,
club stores and schools. Swiss Dairy distributes fresh milk and a
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limited number of other products to high volume retailers in Southern California
and Nevada, including grocery and club stores. More than 88% of Swiss Dairy's
net sales during 1996 were made to three large retailers. Model Dairy
distributes fresh milk, ice cream and related products to grocery stores, retail
outlets, schools and food service accounts in northern Nevada and in certain
adjoining areas of northern California. Dairy Fresh's operations are similar to
Swiss Dairy since Dairy Fresh serves primarily high volume grocery stores with a
limited product line. Sales to Dairy Fresh's two largest customers accounted for
approximately 92% of Dairy Fresh's total net sales during 1996. Garelick Dairy
markets and sells its dairy product line to a diversified base of customers,
including grocery and convenience stores. For the year ended June 30, 1996,
Garelick Dairy's largest customer accounted for approximately 19% of its net
sales and its top ten customers accounted for approximately 60% of its net
sales.
PLASTICS
Suiza Foods markets and sells its plastic containers to a variety of
customers, including regional dairy processors, bottled water manufacturers and
other beverage manufacturers. Suiza Foods operates both stand-alone
manufacturing facilities, from which it delivers plastic containers to its
customer's facilities, and on-site manufacturing facilities located on its
customers' premises. Suiza Foods' on-site manufacturing facilities manufacture
and convey plastic containers directly to its customer's filling operations. At
these on-site facilities, Suiza Foods also manufactures plastic containers for
distribution to off-site customers.
ICE
Suiza Foods markets its ice products to convenience and grocery stores for
retail sales and, to a lesser extent, to business and institutional customers
that utilize Suiza Foods' products in their operations. As of September 30,
1997, Suiza Foods served approximately 24,700 sites from 29 ice manufacturing
facilities and 13 distribution centers. Suiza Foods provides ice merchandisers
to a substantial majority of these sites. During 1996, Suiza Foods' largest two
ice customers accounted for approximately 17% of net ice sales.
Suiza Foods' owns a majority of the delivery vehicles it uses to distribute
ice. In order to meet peak demand, Suiza Foods expands its fleet during the
summer season with short-term leased vehicles.
RAW MATERIALS AND SUPPLY
DAIRY
Suiza Foods purchases milk, its primary raw material, from farmers and farm
co-operatives under contractual arrangements. Certain aspects of Suiza Foods'
milk supply arrangements are regulated by governmental authorities. Fluid milk
is generally readily available. Suiza Foods has traditionally experienced slight
shortages in its milk supply in Puerto Rico during the months of September and
October. Management estimates that these shortages, when they occur, reduce its
Puerto Rico dairy sales by less than 2% during these months. Other raw
materials, such as coffee, juice concentrates, sweeteners and packaging supplies
are generally available from numerous suppliers and Suiza Foods is not dependent
on any single supplier for these materials. Certain of these raw materials are
purchased under long term contracts in order to obtain lower costs.
PLASTICS
The primary raw material used in Suiza Foods' plastics operations is resin.
Suiza Foods purchases its requirements for resin from a number of suppliers at
market prices. Suiza Foods does not maintain written supply agreements, however,
as resin is generally available in the market. Suiza Foods has not experienced
material supply problems with respect to its plastics operations.
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ICE
Except with respect to its water supply and electricity, Suiza Foods is not
dependent upon any single supplier for materials used in the manufacturing and
packaging of its ice products. Suiza Foods has not experienced any material
supply problems in the past with respect to its ice business.
COMPETITION
Suiza Foods' businesses are highly competitive. Suiza Foods has a number of
competitors in each of its major product, service and geographic markets, and
many of these competitors are larger, more established and better capitalized
than Suiza Foods.
DAIRY
UNITED STATES. Suiza Foods' competitors in its U.S. dairy processing and
distribution business include other large, independent dairy processing
companies and dairy processors owned by grocery chains, many of which are larger
and better capitalized than Suiza Foods. Due to the cost of transporting fresh
milk, competition in the fluid dairy business tends to be regional rather than
national, with flexibility of service, price, breadth of product line and
quality as the primary competitive factors.
In addition to competition from other dairy manufacturers, Suiza Foods(1)
Florida and Nevada dairy operations compete with food service companies and
other distributors of dairy products, many of which are large, well-capitalized,
national companies. Although competition in the dairy and food distribution
business is intense, management believes that Suiza Foods' focus on customer
service and tailored product lines and the strength and efficiency of its
distribution system allow it to compete effectively. In its Florida and Nevada
ice cream distribution businesses, Suiza Foods competes with large integrated
dairy and ice cream manufacturing companies and independent distributors of
national ice cream brands. Because Suiza Foods offers brands manufactured by
third parties as well as its own brand of ice cream products, Suiza Foods
competes effectively in these markets by offering convenience stores and other
small retailers a broad line of ice cream products and frozen novelties. By
carrying a broad line of popular national and other brands, Suiza Foods
generates profitable sales volumes from retail sites that single line or other
more limited distributors may find uneconomical to service.
PUERTO RICO. Suiza Foods owns and operates two of the three fresh milk
manufacturing facilities in Puerto Rico. Suiza Foods' competitor, Vaqueria Tres
Monjitas ("Tres Monjitas"), operates a single manufacturing plant. Suiza Foods
manufactures and distributes approximately 66% of the fresh milk sold in Puerto
Rico while Tres Monjitas, which is well capitalized and operates an efficient
manufacturing plant, manufactures and distributes approximately 34%. Suiza Foods
competes primarily on the basis of service, price, brand name recognition and
quality. Because of Suiza Foods' size, the quality of its manufacturing
facilities, the efficiency of its largely non-union work force, the strength of
its distribution network and the strength of its brand name, management believes
Suiza Foods can continue to compete effectively in the Puerto Rico dairy
business.
Suiza Foods does not presently face competition in the Puerto Rico fresh
dairy business from outside Puerto Rico, nor does it expect to in the
foreseeable future. Suiza Foods' fresh dairy business does, however, compete
with shelf stable milk products, which are manufactured by one manufacturer in
Puerto Rico and also imported from the United States and Canada. Management
believes that shelf stable milk competes with fresh milk primarily where the
consumer lacks adequate refrigeration or in small quantity uses, such as coffee
creamers. Management further believes that sales of shelf stable milk are
approximately one-tenth as large as sales of fresh milk and that sales of shelf
stable products have shown moderate volume increases in recent years.
In the refrigerated ready-to-serve fruit drink segment, Tres Monjitas is
Suiza Foods' largest direct competitor located in Puerto Rico. In addition to
competition from other local manufacturers and distributors of refrigerated
ready-to-serve fruit drinks, Suiza Foods competes against numerous other
64
beverage companies, including large United States-based manufacturers and
marketers of carbonated and non-carbonated beverages. These competitors are
generally larger and better capitalized than Suiza Foods. Although management
believes that competition will continue to grow from fruit drink and other
beverage companies, management anticipates that Suiza Foods will be able to
continue to compete effectively in the fruit drink segment because of the
strength and efficiency of its distribution network, its recognizable brands and
the established presence of its products in the dairy case.
PLASTICS
Suiza Foods' competitors in the plastic container manufacturing industry
include large independent manufacturing companies. In addition, certain
vertically integrated food and industrial companies operate captive plastic
container manufacturing facilities. The primary competitive factors in the
plastic container manufacturing industry are price, quality and service. Many of
Suiza Foods' competitors are larger and better capitalized than Suiza Foods and
have greater financial, operational and marketing resources than Suiza Foods.
Management believes that its knowledge of the particular needs of the dairy
industry gained from Franklin Plastics' relationship with Garelick Dairy and its
focus on customer service has allowed it to compete effectively in the plastic
container markets for dairy products and bottled water. Management also believes
that that these factors, coupled with Suiza Foods' technical expertise, should
enable Suiza Foods to expand into new markets.
ICE
Suiza Foods competes primarily with smaller independent regional ice
manufacturers and machines that manufacture and package ice at store locations.
In addition to this direct competition, certain convenience and grocery
retailers operate commercial ice plants for internal use. During peak season,
however, Suiza Foods frequently services retailers that manufacture their own
ice. To further compete in this segment, Suiza Foods also offers ice machines
that manufacture and package ice at customer locations.
Competition in the ice business is based primarily on service, price and
quality. In order to successfully compete, an ice manufacturer must be able to
substantially increase production and distribution on a seasonal basis while
maintaining cost efficiency. Management believes that the size and quality of
Suiza Foods' ice facilities, its high regional market share and its route
density allow it to compete effectively. Because only one ice manufacturer
typically serves an individual retail site, Suiza Foods' ice products generally
do not face competition at the retail level.
Several major grocery chains within Suiza Foods' ice markets manufacture ice
at their own ice plants. While Suiza Foods does not supply these and other
vertically integrated grocery retailers/manufacturers, such companies generally
manufacture ice products for internal use only and do not compete for third
party accounts. However, a significant increase in the utilization of captive
commercial ice plants or on-site manufacturing by retailers currently serviced
by Suiza Foods could have an adverse effect on Suiza Foods' operations.
65
BUSINESS OF COUNTRY FRESH
GENERAL
Country Fresh is a leading manufacturer, supplier and distributor of milk,
ice cream and related products in the Midwest. Country Fresh's products are
principally marketed in Michigan, northern Indiana, northern Illinois and
northern Ohio, although Country Fresh has, through East Coast Ice Cream, L.L.C.,
begun selling ice cream novelty products in some east coast states. Country
Fresh is among the 30 largest dairy food processors in the United States.
Country Fresh was incorporated under the laws of Michigan in 1946 under the
name "Grocer's Dairy Company" and changed its name to "Country Fresh, Inc" in
1981. Country Fresh was originally formed as a grocers' cooperative, but its
Articles of Incorporation were subsequently amended to make it a general profit
corporation. Country Fresh discontinued its cooperative status for federal tax
purposes in 1994.
BUSINESS STRATEGY
Customer satisfaction lies at the heart of Country Fresh's corporate
mission. However, Country Fresh also remains committed to growth through capital
expansions, new products, line extensions and business acquisitions.
While maintaining and expanding its core dairy business, Country Fresh has
in recent years begun focusing on other products. In the last quarter of 1996,
Country Fresh, together with Protein Capital Corp. of Laurel, Maryland, formed
East Coast Ice Cream, L.L.C. to supply the east coast of the United States with
novelty snack products. Other growth in marketing includes the licensing of
SMILK, a fruit flavored nonfat milk line, for certain parts of the United
States.
PRODUCTS
Country Fresh and its subsidiaries process raw milk into such products as
fortified and homogenized milk and cream, ice cream, low fat ice cream, cream
cheese, cottage cheese, fresh and frozen yogurt, specialty dips, sherbet,
eggnog, sour cream, buttermilk and extended shelf life products such as half &
half, coffee cream and whipped cream. In addition, Country Fresh processes and
markets purified water, orange juice and various juice and fruit drinks. Country
Fresh also manufactures and markets frozen dessert products.
Country Fresh and its subsidiaries market their products under trademarks or
trade names such as Country Fresh-TM-, McDonald-TM-, Burger Dairy,-TM- Home
Dairy-TM-, Orchard Grove-TM-, Sun Born-TM-, Country Lane-TM-, and Frostbite-TM-.
Through license agreements, Country Fresh also manufactures and/or markets
products for trademarks or trade names owned by other companies, such as
Smilk-TM-, Nestles-Registered Trademark-, Guilt Free-TM-, Alaskan Classics and
Borden-Registered Trademark-.
SALES AND DISTRIBUTION
Country Fresh's products are principally marketed in Michigan, northern
Indiana, northern Illinois and northern Ohio. Grocery store chains account for a
large portion of Country Fresh's customers. However, no single customer
purchases more than 10% of Country Fresh's consolidated sales. Country Fresh's
shareholders, which are predominantly retailer grocers in Michigan, are regular
customers of Country Fresh. As such, they participate in Country Fresh's various
marketing programs.
Dairy products are principally delivered to grocery chain stores or
warehouses directly from Country Fresh's processing plants by Country Fresh, in
trucks which it owns or leases, and by independent distributors. Products are
also delivered to Country Fresh's distribution branches from which distribution
is then made to customers. In addition, Country Fresh distributes directly to
food service warehouses throughout the Midwest.
66
RAW MATERIALS AND SUPPLY
Country Fresh's business is dependent upon obtaining adequate supplies of
raw and processed agricultural products. Historically, Country Fresh has been
able to obtain adequate supplies of agricultural products from numerous
suppliers.
Country Fresh purchases raw milk directly from farmers, or through the
Independent Cooperative Milk Producers Association and Michigan Milk Producers
Association. Country Fresh does not have long-term purchase contracts for
agricultural products. The price of raw milk is extensively regulated.
Certain commodities, such as orange juice, and various packaging supplies
are purchased from numerous sources on a normal purchase order basis. Country
Fresh is not dependent upon any single supplier and is confident that any lost
supplier requirements could be replaced in the ordinary course of business.
COMPETITION
Country Fresh's business is highly price competitive with relatively low
operating margins. Quality and customer service are important factors in
securing and maintaining business.
In certain markets, some supermarket chain stores have their own dairy
products processing plants. Generally, in each major market and product class
there are a number of competitors, some of which have greater sales and assets
than Country Fresh's operations in that market. The degree of penetration and
competitive conditions in each market varies, but Country Fresh does not
consider that it has any material competitive advantage in any of its major
markets or product classes that would insulate it from competition.
DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Merger Agreement, the executive officers of Country Fresh
will remain as the executive officers of the Surviving Corporation, until their
successors are duly elected or appointed and qualified. The directors of Merger
Sub will remain as directors of the Surviving Corporation until their successors
are duly elected. Accordingly, none of the current directors of Country Fresh
will remain as directors of the Surviving Corporation after the Merger.
Mr. Delton Parks, President, Chief Executive Officer and a director of
Country Fresh, will become a director of Suiza Foods after the Merger. Mr.
Parks, who is 58 years of age, has served as President, Chief Executive Officer
and a director of Country Fresh since 1980. His term as a Director of Country
Fresh would expire at Country Fresh's annual meeting of shareholders in 1998.
Mr. Parks also serves on the boards of directors and as the president of Country
Fresh's subsidiaries.
Under the terms of the Merger Agreement, Suiza Foods has agreed to take all
such actions as are necessary to ensure that the employment agreement between
Delton Parks and Country Fresh is honored. Under the terms of this employment
agreement, which is dated October 13, 1994, Mr. Parks serves as President and
Chief Executive Officer of Country Fresh, is paid a base salary, is eligible for
certain bonuses and is entitled to certain other benefits. The employment
agreement also makes Mr. Parks eligible for certain stock options. (See "Certain
Terms of the Merger Agreement--Country Fresh Options.") The employment agreement
does not have a specific term; instead, Mr. Parks is considered an "at will"
employee. However, if the agreement is terminated by Country Fresh for any
reason other than disability (in which case certain disability benefits would be
paid to Mr. Parks) or by Mr. Parks for "good reason" (as defined in the
agreement) Mr. Parks is entitled to certain severance benefits.
67
EMPLOYEES
Country Fresh employs approximately 380 persons in its combined office and
its main fully automated dairy processing facility. At its dairy plant in Flint,
Michigan, Country Fresh employs approximately 250 persons. Through subsidiaries,
Country Fresh also owns a dairy plant in Livonia, Michigan, at which
approximately 170 persons are employed, a dairy plant in New Paris, Indiana, at
which approximately 125 persons are employed, a frozen dessert plant in Toledo,
Ohio at which approximately 275 persons are employed, a dairy plant in Toledo,
Ohio, at which approximately 50 persons are employed, a juice packing plant in
Chattanooga, Tennessee, at which approximately 20 persons are employed, and
distribution centers in Alpena, Battle Creek, Bad Axe, Dewitt, and Traverse
City, Michigan and Toledo, Ohio, at which approximately 50 persons are employed.
Country Fresh also leases a sales office in Lansing, Michigan at which
approximately 10 persons are employed.
PROPERTIES
The headquarters and main plant of Country Fresh, Inc. are located at 2555
Buchanan, S.W., Wyoming, Michigan. Country Fresh, Inc. also owns various other
parcels of real estate in Wyoming, Michigan.
Either directly or through its subsidiaries, Country Fresh owns or leases
real estate used as processing plants, warehouse space or for other purposes in
the following cities: Livonia, Michigan; Flint, Michigan; Detroit, Michigan; New
Paris, Indiana; Toledo, Ohio; and Chattanooga, Tennessee. Country Fresh also
owns or leases various additional parcels of real estate throughout Michigan.
LEGAL PROCEEDINGS
Country Fresh is subject from time to time to legal proceedings and claims
that arise in the ordinary course of business. However, in the opinion of
management, none of these proceedings is material to Country Fresh's
consolidated financial condition or results of operations, except as described
in the following paragraph.
In May 1996, Country Fresh and its subsidiaries entered into a Compliance
Agreement in Lieu of Debarment with the Food and Consumer Services ("FCS")
Division of the United States Department of Agriculture. This agreement arose
out of Country Fresh's November 1993 guilty plea to conspiracy to allocate
contracts for the supply of milk and other dairy products and to rig the bids
for such contracts to certain schools and school districts in Michigan. This
agreement, which has a general term of three years, requires Country Fresh to,
among other things, maintain records sufficient to provide complete information
as to its compliance with the agreement and to allow FCS to examine its books,
records and other documents for the purpose of evaluating Country Fresh's
compliance with the agreement, its conduct in its business dealings with all of
its customers, its compliance with accepted business practices and its
compliance with the requirements of contracts involving federal nonprocurement
transactions. The agreement also requires Country Fresh to maintain a Compliance
Program upon the terms and conditions of the agreement, to maintain a compliance
review committee, to report suspected misconduct to FCS, to prepare and submit
certain periodic written compliance reports to FCS, and to retain an independent
audit or consulting firm annually to evaluate Country Fresh's compliance with
the terms of the agreement, among other things. Country Fresh believes it is in
compliance with the terms of the agreement.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF COUNTRY FRESH
Holders of record of Country Fresh Capital Stock on the close of business on
the Record Date will be entitled to notice of and to vote at the Special
Meeting. As of September 30, 1997, there were 3,503,987 shares of Country Fresh
Common Stock and 11,691 shares of Country Fresh Preferred Stock outstanding.
Each share of Country Fresh Capital Stock is entitled to one vote at the Special
Meeting. See "The Special Meeting--Quorum and Vote Required."
68
The following table sets forth information concerning the number of shares
of Country Fresh Capital Stock held by each shareholder who is known to Country
Fresh's management to be the beneficial owner of more than 5% of the Country
Fresh Common Stock or 5% of the Country Fresh Preferred Stock as of September
30, 1997. The percentages appearing in the following tables for ownership of
Country Fresh Common Stock and Country Fresh Preferred Stock are based upon
3,503,987 shares and 11,691 shares outstanding, respectively, as of September
30, 1997, plus 240,000 shares of Country Fresh Common Stock issuable under
vested and exercisable Stock Options.
NUMBER OF NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF SHARES OF OF OF VOTING
BENEFICIAL OWNER COMMON STOCK PERCENT PREFERRED STOCK PERCENT POWER(1)
-------------------------------------------------- -------------- ----------- ----------------- ----------- -----------
The Gerald M. Breen Living Trust ................. 41,920 1.1% 994 8.5% 1.2%
562 Burns
Milford, Michigan 48281
Brooks Supermarket, Inc. ......................... -- -- 804 6.9 *
420 W. Main Street
Carson City, Michigan 48811
G & R Felpausch Company .......................... 356,600 9.5 1,500 12.8 10.1
127 S. Michigan Avenue
Hastings, Michigan 49058(2)
Great Day Inc. ................................... 108,360 2.9 598 5.1 3.1
2566 Leonard Street, N.W.
Grand Rapids, Michigan 49504(3)
Francis McGuire .................................. -- -- 1,250 10.7 *
5955 N. 32nd Street
Richland, Michigan 49083(4)
Oleson's Foods, Inc. ............................. 227,120 6.1 -- -- 6.4
901 West Front Street
Traverse City, Michigan 49684(5)
Delton Parks(6) .................................. 248,000 6.6 -- -- 7.1
c/o Country Fresh, Inc.
2555 Buchanan S.W.
Grand Rapids, Michigan 49518
* Less than 1%
(1) Each share of Country Fresh Common Stock and Country Fresh Preferred Stock
is entitled to one vote, voting together as a single class on most issues.
However, approval of the Merger Agreement also requires the affirmative vote
of a majority of the outstanding shares of Country Fresh Preferred Stock,
voting as a separate class. See "The Special Meeting--Quorum and Vote
Required."
(2) These shares are also reported as beneficially owned by Mr. Feldpausch in
the following table. See Note (5) to the following table.
(3) These shares are also reported as beneficially owned by Mr. DeYoung in the
following table. See Note (4) to the following table.
(4) These shares are also reported as beneficially owned by Mr. McGuire in the
following table. See Note (9) to the following table.
(5) These shares are also reported as beneficially owned by Mr. Oleson in the
following table. See Note (10) to the following table.
(6) See Note (11) to the following table.
69
The following table sets forth the beneficial ownership of the Country Fresh
Capital Stock by: (a) each executive officer and Director of Country Fresh; and
(b) all executive officers and Directors of Country Fresh as a group.
PERCENTAGE OF
VOTING
BENEFICIAL OWNER COMMON STOCK PERCENT PREFERRED STOCK PERCENT POWER(1)
------------------------------------------------ -------------- ----------- ----------------- ----------- -------------
Roger L. Boyd(2)................................ 60,000 1.6% -- --% 1.6%
Gerald M. Breen(3).............................. 44,920 1.2 994 8.5 1.2
Ronald A. DeYoung(4)............................ 108,360 2.9 598 5.1 2.9
Mark S. Feldpausch(5)........................... 356,600 9.5 1,500 12.8 9.5
Jeffery A. Gietzen(6)........................... 83,160 2.2 -- -- 2.2
Martin P. Hill(7)............................... 110,000 2.9 -- -- 2.9
Robert J. Leppink(8)............................ 176,840 4.7 520 4.5 4.7
Frances J. McGuire(9)........................... -- --% 1,250 10.7 *
Donald W. Oleson(10)............................ 267,120 7.1 500 4.2 7.1
Delton C. Parks(11)............................. 248,000 6.6 -- -- 6.6
John Williams(12)............................... 7,516 * -- -- *
Raymond Booth(13)............................... 1,886 * -- -- *
Nicholas G. Kelble(13).......................... 6,037 * -- -- *
Joseph Risdon(14)............................... 5,630 * -- -- *
All executive officers and directors as a group
(14 persons).................................. 1,476,069 39.4 5,362 45.9 39.4
* Less than 1%
(1) Each share of Country Fresh Common Stock and Country Fresh Preferred Stock
is entitled to one vote, voting together as a single class on most issues.
However, approval of the Merger Agreement also requires the affirmative vote
of a majority of the outstanding shares of Country Fresh Preferred Stock,
voting as a separate class. See "The Special Meeting--Quorum and Vote
Required."
(2) Includes 12,000 shares and 8,000 shares of Country Fresh Common Stock held
by Hillsdale Market House, Inc. and Bob's Market House, Inc., respectively.
Mr. Boyd serves as President and director, and as a shareholder of each of
these entities.
(3) Includes 3,000 shares of Country Fresh Common Stock held by Orchard-10 IGA,
Inc. of which Mr. Breen serves as President and director and of which Mr.
Breen is a shareholder. Also includes 41,920 shares of Country Fresh Common
Stock and 994 shares of Country Fresh Preferred Stock held by a trust for
which Mr. Breen serves as trustee.
(4) Consists of shares held by Great Day, Inc., of which Mr. DeYoung serves as
President and director and of which Mr. DeYoung is a shareholder.
(5) Consists of shares held by G & R Felpausch Company, of which Mr. Feldpausch
serves as Chief Executive Officer, secretary and director.
(6) Includes 1,080 shares owned jointly by Mr. Gietzen and his wife, and 82,080
shares held by D & W Food Centers, Inc., of which Mr. Gietzen serves as
President and Chief Executive Officer and is a director.
(7) Consists of 93,160 shares and 16,840 shares of Country Fresh Common Stock
held by Harding & Hill, Inc. and Harding's Markets-West, Inc., respectively.
Mr. Hill serves as President and is a director and shareholder of Harding &
Hill, Inc., and is affiliated with Harding's Markets-West, Inc.
(8) Consists of (a) 26,520 shares of Country Fresh Common Stock held by
Leppink's, Inc., of which Mr. Leppink serves as President and is a director
and shareholder; (b) 55,220 shares of Country Fresh Common Stock held by
Leppink Development Limited Partnership, of which Mr. Leppink serves as a
general partner; (c) 37,360 shares of Country Fresh Common Stock held by
Leppink Lakeview, Inc.,
70
an affiliate of Mr. Leppink; (d) 56,245 shares of Country Fresh Common Stock
and 520 shares of Country Fresh Preferred Stock held by Leppink Family
Enterprises, an affiliate of Mr. Leppink; and (e) 1,495 shares of Country
Fresh Common Stock held by the Kelly J. Leppink Trust, an affiliate of Mr.
Leppink.
(9) Consists of shares of Country Fresh Preferred Stock held by Town & Country
Market, Inc., of which Mr. McGuire is the sole shareholder.
(10) Includes 227,120 shares of Country Fresh Common Stock held by Oleson's
Foods, Inc., of which Mr. Oleson is the President, a director and the sole
shareholder. Also includes 20,000 shares of Country Fresh Common Stock and
500 shares of Country Fresh Preferred Stock owned by Mr. Oleson's wife.
(11) Includes 240,000 shares of Country Fresh Common Stock subject to options
that are currently vested and exercisable, but excludes 180,000 additional
shares subject to unvested options, which will vest and become exercisable
immediately prior to consummation of the Merger. See "Certain Terms of the
Merger Agreement--Country Fresh Options," Also excludes 50,400 shares of
Country Fresh Common Stock held in a generation skipping transfer trust, of
which three of Mr. Parks' sons are trustees.
(12) Mr. Williams is Senior Vice President-Finance of Country Fresh.
(13) Messrs. Booth and Kelble are Senior Vice Presidents of Country Fresh.
(14) Consists of shares of Country Fresh Common Stock held by a trust for which
Mr. Risdon, who is a Senior Vice President of Country Fresh, serves as
trustee.
The following table reflects the number of shares of Suiza Common Stock and
Suiza Preferred Stock that the specified person will hold following consummation
of the Merger and the percentages of such shares that will be outstanding
following consummation of the Merger. These percentages were computed with
reference to a total of 17,720,490 shares of Suiza Common Stock outstanding
after the Merger, and 11,691 shares of Suiza Preferred Stock outstanding after
the Merger (assuming that no holder of Country Fresh Preferred Stock exercises
dissenters' rights). The figures in the column concerning Suiza Common Stock
assume an exchange ratio of .5454 shares of Suiza Common Stock for each share of
Country Fresh Common Stock and do not take into account the "top up" provisions
described under the heading "Certain Terms of The Merger Agreement--Top Up
Provisions." In addition, fractional shares of Suiza Common Stock have been
disregarded. Please refer to the Notes to the above tables for information with
respect to each person's holdings of Country Fresh Capital Stock.
SUIZA COMMON PERCENT OF SUIZA PREFERRED PERCENT OF
STOCK CLASS STOCK CLASS
-------------- ------------- ----------------- -------------
Roger L. Boyd............................................. 32,724 * % -- --%
Gerald M. Breen........................................... 24,499 * 994 8.5
Ronald A. DeYoung......................................... 59,099 * 598 5.1
Mark S. Feldpausch........................................ 194,489 * 1,500 12.8
Jeffery A. Gietzen........................................ 45,355 * -- --
Martin P. Hill............................................ 59,994 * -- --
Robert J. Leppink......................................... 96,448 * 520 4.5
Frances J. McGuire........................................ -- -- 1,250 10.7
Donald W. Oleson.......................................... 145,687 * 500 4.3
Delton C. Parks........................................... 135,295 * -- --
John Williams............................................. 4,099 * -- --
Raymond Booth............................................. 1,028 * -- --
Nicholas G. Kelble........................................ 3,292 * -- --
Joseph Risdon............................................. 3,070 * -- --
All executive officers and directors as a group (14
persons)................................................ 805,079 4.5% 5,362 45.9%
* Less than one percent.
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DESCRIPTION OF SUIZA CAPITAL STOCK
The authorized capital stock of Suiza Foods consists of 101,000,000 shares,
of which 100,000,000 shares are Suiza Common Stock and 1,000,000 shares of
preferred stock, $.01 par value per share. At September 30, 1997, 15,809,415
shares of Suiza Common Stock were outstanding and held of record by 77
shareholders and no shares of preferred stock were outstanding. A more detailed
description of Suiza's capital stock is contained in its Registration Statement
on Form 8-A dated February 19, 1997 and incorporated herein by reference. See
"Incorporation of Certain Information by Reference."
COMMON STOCK
The issued and outstanding shares of Suiza Common Stock are, and the shares
being offered hereby will, upon payment therefor, be validly issued, fully paid
and nonassessable. Subject to the rights of holders of Preferred Stock, the
holders of outstanding shares of Suiza Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Suiza Board may from time to time determine. The shares of Suiza
Common Stock are neither redeemable nor convertible, and the holders thereof
have no preemptive or subscription rights to purchase any securities of Suiza
Foods. Each outstanding share of Suiza Common Stock is entitled to one vote on
all matters submitted to a vote of shareholders. There is no cumulative voting
in the election of directors.
PREFERRED STOCK
Suiza's Articles of Incorporation authorize the Suiza Board to issue
preferred stock in classes or series and to establish the designations,
preferences, qualifications, limitations or restrictions of any class or series
with respect to the rate and nature of dividends, the price and terms and
conditions on which shares may be redeemed, the terms and conditions for
conversion or exchange into any other class or series of the stock, voting
rights and other terms. Suiza Foods may issue, without the approval of the
holders of Suiza Common Stock, preferred stock that has voting, dividend or
liquidation rights superior to the Suiza Common Stock and that may adversely
affect the rights of holders of Suiza Common Stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
for other corporate purposes, could, among other things, adversely affect the
voting power of the holders of Suiza Common Stock and could have the effect of
delaying, deferring or preventing a change in control of Suiza Foods.
In connection with the Merger, the Suiza Board has authorized the issuance
of the Suiza Preferred Stock. A description of the Suiza Preferred Stock
follows:
STATED VALUE. The Suiza Preferred Stock will have a stated value of $320
per share.
DIVIDENDS. The holders of Suiza Preferred Stock, in preference to holders
of Suiza Common Stock, will be entitled to receive, when, as and if declared by
the Board of Directors, out of funds legally available for distribution to
stockholders, cumulative dividends of $25.60 per share per annum, and no more.
Dividends will accumulate and (if declared) be payable semiannually on the first
day of March and September in each year (each a "Dividend Payment Date" or
collectively, "Dividend Payment Dates"), commencing March 1, 1998, except that
if any Dividend Payment Date is not a business day in Dallas, Texas, then such
semi-annual dividend will be payable on the next succeeding business day and
such next succeeding business day will be the Dividend Payment Date. Dividends
on the shares of Suiza Preferred Stock will accrue and be cumulative from
September 1, 1997 and (if declared) will be payable on each Dividend Payment
Date to stockholders of record on the record date, which will be not more than
45 days nor less than 10 days preceding such Dividend Payment Date, fixed for
such purpose by the Suiza Board in advance of such Dividend Payment Date. If no
date is fixed by the Suiza Board, the record date will be 10 days preceding the
Dividend Payment Date. The amount of dividends payable on shares of Suiza
Preferred Stock for each full semiannual dividend period will be computed by
dividing $25.60 by two. Dividends payable on the Suiza Preferred Stock for any
period less than a full semiannual period will be
72
computed on the basis of a 360-day year of twelve 30-day months; provided,
however that the dividends payable on the Series A Preferred Stock for the
initial dividend period shall be $12.80. Notwithstanding the foregoing, and
except as provided below in Section 4 with respect to certain redemptions,
dividends on the Suiza Preferred Stock do not accrue until the applicable
Dividend Payment Date, at which time they accrue in full. Dividends paid on
shares of Suiza Preferred Stock in an amount less than the total amount of the
dividends at the time accumulated and payable on such shares will be allocated
PRO RATA on a share-by-share basis among all such shares at the time
outstanding. No interest will be payable on any dividends paid after the
applicable Dividend Payment Date.
So long as any shares of Suiza Preferred Stock are outstanding, no dividend
will be paid or declared, no funds will be set aside for payment of dividends,
and no distribution will be made on the Suiza Common Stock or other preferred
stock of Suiza Foods ranking junior to the Suiza Preferred Stock until all
dividends accrued on the Suiza Preferred Stock have been paid for the current
and all prior dividend periods.
LIQUIDATION PREFERENCE. Upon the liquidation, dissolution or winding up of
the affairs of Suiza Foods, whether voluntary or involuntary, the holders of
Suiza Preferred Stock will be entitled to receive in full out of the assets of
Suiza Foods available for distribution to stockholders, including its capital,
before any amount will be paid to, or distributed among, the holders of Suiza
Common Stock or other preferred stock ranking junior to the Suiza Preferred
Stock, the sum of $320 per share, plus all accrued and unpaid dividends to the
time of payment.
REDEMPTION. Shares of Suiza Preferred Stock may be redeemed, as a whole or
in part, at the option of Suiza Foods by vote of the Suiza Board at any time or
from time to time, upon no less than 30 or more than 120 days' notice. If less
than all the outstanding shares of the Suiza Preferred Stock are to be redeemed,
the shares to be redeemed will be determined by lot or pro rata, in the manner
that the Suiza Board prescribes. The redemption price for shares of the Suiza
Preferred Stock will be $320 per share plus accrued and unpaid dividends to the
date fixed for redemption. Pro rata dividends on any shares of Suiza Preferred
Stock to be redeemed will be deemed to accrue as of the date fixed for
redemption.
Written notice of redemption will be given to each holder of record of the
shares of Suiza Preferred Stock to be redeemed, by mailing a notice of
redemption to the holder by first class mail, at the holder's address as it will
appear on the stock record books of Suiza Foods, at least 30 days and not more
than 120 days before the date fixed for redemption. Each notice will specify the
shares of stock to be redeemed, the redemption price, the date fixed for
redemption, the place for payment of the redemption price and for surrender of
the certificate representing the shares to be redeemed, and if less than the
total number of shares held by the holder are to be redeemed, the number of
shares of the holder to be redeemed.
If notice of redemption has been given and if, on or before the date fixed
for redemption, the redemption price is provided and set aside by Suiza Foods
(with a bank with trust powers or in a separate account of Suiza Foods) for the
pro rata benefit of the holders of the shares called for redemption, then, from
and after the date fixed for redemption, the shares of Suiza Preferred Stock
called for redemption will no longer be deemed outstanding, the dividends on the
shares will cease to accumulate, and all rights with respect to the shares will
cease and terminate, except only the right of the holders of the shares to
receive the redemption price of the shares called for redemption, but without
interest. The Suiza Board may designate a bank with trust powers as a depositary
of the funds to be used for redemption of the shares and as agent of Suiza Foods
for the giving of the notices of redemption, the receipt of the shares called
for redemption and the payment of the redemption price, the acts of the
designated agent on behalf of Suiza Foods to be as effective and to have the
same results as if the acts were done by Suiza Foods.
Any monies deposited by Suiza Foods with a designated bank and unclaimed at
the end of three years from the date fixed for redemption will be repaid to
Suiza Foods upon its request after which repayment the holders of the shares
called for redemption will look only to Suiza Foods for the payment of those
monies.
73
Suiza Foods is not obligated to make payments into or to maintain any
sinking fund for the Suiza Preferred Stock.
VOTING. Each share of Suiza Preferred Stock will have one vote on all
matters upon which holders of Suiza Common Stock are entitled to vote. Shares of
Suiza Preferred Stock and shares of Suiza Common Stock will be treated as a
single class or series of shares for all voting purposes except to the extent a
class or series vote is provided by law.
PREEMPTIVE RIGHTS. No holders of any shares of Suiza Preferred Stock, as
such, will have any preemptive or preferential right to subscribe for or
purchase any shares of any class or series of capital stock of Suiza Foods, now
or later authorized, or any securities convertible into, or carrying options or
warrants to purchase, shares of any class or series, now or later authorized,
whether issued for cash, property, services, by way of dividends or otherwise.
LIMITATIONS. In addition to other rights as may be provided under
applicable law, without the affirmative vote of the holders of a majority of the
outstanding Suiza Preferred Stock, Suiza Foods may not authorize or create any
class or series of stock ranking prior to the Suiza Preferred Stock with respect
to dividends or the distribution of assets in liquidation.
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COMPARISON OF SHAREHOLDER RIGHTS
Upon consummation of the Merger, the shareholders of Country Fresh, a
Michigan corporation, will become stockholders of Suiza Foods, a Delaware
corporation. Although the MBCA and the Delaware General Corporation Law ("DGCL"
or "Delaware Law") are similar in many respects, there are a number of
differences between the two statutes which should be carefully considered by
Country Fresh shareholders in evaluating the Merger. The following summary,
which sets forth certain material differences between the two statutes, does not
purport to be a complete statement of all differences between the DGCL and the
MBCA, nor does it purport to be a complete statement of the provisions of the
two statutes which it compares. The summary is qualified in its entirety by
reference to the MBCA and the DGCL, Country Fresh's Articles of Incorporation
and Bylaws, and Suiza Foods' Certificate of Incorporation and Bylaws.
AMENDMENTS TO ARTICLES OR CERTIFICATE OF INCORPORATION
The Country Fresh Articles provide that they may be amended, altered,
changed, added to or repealed in the manner prescribed by statute. To amend a
corporation's articles of incorporation, the MBCA generally requires approval of
the holders of a majority of all outstanding shares entitled to vote at a
meeting of shareholders. To amend a Delaware corporation's certificate of
incorporation, the DGCL requires the affirmative recommendation of the board of
directors and the approval of a majority of all outstanding shares entitled to
vote. Under both the MBCA and the DGCL, the holders of the outstanding shares of
a class are entitled to vote as a class upon any proposed amendment to the
articles or certificate of incorporation, as the case may be, if the amendment
would increase or decrease the number of authorized shares of the class,
increase or decrease the par value of the shares of the class (with respect to
the DGCL), or alter or change the powers, preferences or special rights of the
shares of the class so as to adversely affect the holders of the class of
shares.
AMENDMENTS TO BYLAWS
Under the DGCL, the authority to adopt, amend or repeal the bylaws of a
Delaware corporation is held exclusively by the stockholders entitled to vote
unless such authority is conferred upon the board of directors in the
corporation's certificate of incorporation. The Suiza Foods Certificate
expressly grants the authority to alter, amend, or repeal the bylaws or to adopt
new bylaws to the board of directors as well as the stockholders. The Suiza
Foods Bylaws provide that they may be altered, amended or repealed or new bylaws
may be adopted at any annual meeting of the stockholders or at any special
meeting of the stockholders at which a quorum is present or represented, if
notice thereof is contained in the notice of such special meeting, by the
affirmative vote of the holders of 66 2/3 percent of the shares entitled to vote
at such meeting, or by the affirmative vote of a majority of the entire board of
directors at any regular meeting of the board or at any special meeting of the
board.
The MBCA provides that the shareholders or the Board of a Michigan
corporation may adopt, amend or repeal the bylaws unless such power is expressly
reserved to the shareholders in the corporation's articles of incorporation or
bylaws. The Country Fresh Articles do not expressly reserve such power to the
shareholders. The Country Fresh Bylaws provide that they may be amended, altered
or repealed by the Country Fresh shareholders at any meeting, by an affirmative
vote of the holders of the majority of the shares of common stock issued and
outstanding, provided the substance of the proposed amendment shall have been
stated in the notice of the meeting, or by unanimous vote of all the
shareholders without such notice. The Country Fresh Bylaws also provide that
they may be amended, altered or repealed by the Country Fresh Board at any
meeting, by an affirmative vote of the majority of the Board, provided the
substance of the proposed amendment shall have been stated in the notice of the
meeting, or by unanimous vote of the Board without such notice.
75
BOARD CLASSIFICATION
The Country Fresh Bylaws divide Country Fresh's directors into three classes
with each class serving until the third annual meeting succeeding their
election. Suiza Foods' Certificate and Bylaws provide that the Suiza Board shall
be divided into three classes, nearly equal in number as possible, with each
class serving three year terms. The classified board provision could increase
the likelihood that, in the event of a takeover of Suiza Foods, incumbent
directors will retain their positions. In addition, the classified board
provision will help ensure that the Suiza Board, if confronted with an
unsolicited proprosal from a third party that has acquired a block of the voting
stock of Suiza Foods, will have sufficient time to review the proposal and
appropriate alternatives and to seek the best available result for all
stockholders.
FILLING VACANCIES IN THE BOARD OF DIRECTORS
Under both Michigan and Delaware law, newly created directorships resulting
from an increase in the number of directors may be filled by a majority vote of
the directors then in office, even if the number of directors then in office is
less than a quorum. The MBCA and the DGCL also provide that unless the articles
or certificate of incorporation or bylaws otherwise provide, vacancies occurring
by reason of the removal of directors with or without cause may be filled by a
majority vote of the directors then in office. In addition, under the DGCL, if,
at the time of filling any vacancy or newly created directorship, the directors
then in office constitute less than a majority of the entire board of directors,
the Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least 10% of the total number of shares outstanding at
the time and having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office.
The Country Fresh Bylaws provide that vacancies in the Country Fresh Board
from any cause shall be filled by vote of a majority of the remaining directors,
subject, in case the remaining directors constitute less than a majority of the
whole board, to the rights of shareholders as provided by law. The Suiza Foods
Bylaws provide that vacancies in the board of directors from any cause may be
filled by a majority of the remaining or existing directors.
REMOVAL OF DIRECTORS
Neither Country Fresh's Articles of Incorporation nor its Bylaws provide for
the removal of directors. Under the MBCA, any director or the entire board of
directors generally may be removed, with or without cause, by the holders of a
majority of the shares entitled to vote in the election of directors.
Under Delaware law, any director or the entire board of directors generally
may be removed, with or without cause, by the holders of a majority of the
shares entitled to vote at an election of directors. However, unless the
corporation's certificate of incorporation provides otherwise, if the
corporation's board of directors is classified, directors may be removed only
for cause. The Suiza Board is classified, and its Certificate and Bylaws
expressly provide that a director may be removed only for cause. These
provisions thus could have the effect of delaying, deterring, or preventing the
acquisition of control of Suiza Foods by means of tender offer, open market
purchases, a proxy contest, or otherwise.
VOTE REQUIRED FOR MERGERS
The MBCA and the DGCL generally require the affirmative vote of a majority
of a corporation's outstanding shares entitled to vote, unless the articles or
certificate of incorporation, as applicable, require a greater proportion, to
authorize a merger, share exchange, dissolution or disposition of all or
substantially all of its assets, except that (a) unless required by its charter,
no stockholder vote is required of a corporation surviving a merger if: (i) the
corporation's charter is not amended by the merger; (ii) each share of stock of
the corporation will be an identical share of the surviving corporation after
the merger; and (iii) under the DGCL the number of shares to be issued in the
merger does not exceed 20% of the
76
corporation's outstanding common stock immediately prior to the effective date
of the merger and (b) unless a dissolution is adopted by a majority of the board
of directors, under the DGCL, a dissolution must be approved by all stockholders
entitled to vote. Neither the Country Fresh's Articles of Incorporation nor
Suiza Foods' Certificate of Incorporation require a greater proportion than a
majority affirmative vote to approve a merger.
ANTI-TAKEOVER PROVISIONS
The MBCA provides that "control shares" of a corporation acquired in a
control share acquisition have no voting rights except as granted by the
corporation's shareholders. "Control shares" are shares that, when added to
shares previously owned by a shareholder, increase such shareholder's voting
power to 20% or more of the shareholder voting power of the corporation's
shareholders. A control share acquisition must be approved by a majority of the
votes cast by shareholders entitled to vote excluding shares owned by the
acquiror and certain officers and directors. No such approval is required,
however, for gifts of shares or acquisitions of shares pursuant to a merger to
which the corporation is a party. The DGCL has no similar provision.
The MBCA also prohibits Michigan corporations, the shares of which are
listed on a national securities exchange, from purchasing any of its shares from
any person who holds 3% or more of its shares unless an offer to repurchase is
made to all shareholders at the same price, its shareholders authorize the
purchase, the shares have been held for at least two years, the purchase is made
in the open market, the price is not greater than the average market price
during the previous 30 business days or the purchase is otherwise authorized by
the MBCA. The DGCL has no similar provision.
The MBCA provides that business combinations between a Michigan corporation
and a beneficial owner of 10% or more of the voting power of such corporation,
unless exempted by board resolution prior to the interested shareholder becoming
interested, require the approval of 90% of the votes of each class of stock
entitled to be cast and at least 2/3 of the votes of each class of stock
entitled to be cast other than shares owned by such 10% owner. Such requirements
will not apply if (a) the corporation's board of directors approves the
transaction prior to the time the 10% owner becomes a 10% owner or (b) the
transaction satisfies certain fairness standards, certain other conditions are
met and the 10% owner has been a 10% owner for at least five years.
The DGCL prohibits certain transactions between a Delaware corporation and
an "interested shareholder," which is defined as a person that is directly or
indirectly a beneficial owner of 15% or more of the voting power of the
outstanding voting stock of a Delaware corporation and such persons' affiliates
and associates. This provision prohibits certain business combinations (defined
broadly to include mergers, consolidations, sales or other dispositions of
assets having an aggregate value equal to 10% or more of the consolidated assets
of the corporation, and certain other transactions) between an interested
stockholder and a corporation for a period of three years after the date the
interested stockholder became an interested stockholder. However, the
prohibition does not apply if: (a) the business combination is approved by the
corporation's board of directors prior to the date the interested stockholder
became an interested shareholder; (b) the interested stockholder acquired at
least 85% of the voting stock of the corporation (excluding shares held by
directors of the corporation who are also officers and shares held under certain
employee stock plans) in the transaction in which it became an interested
stockholder; or (c) the business combination is approved by a majority of the
board of directors and the affirmative vote of two-thirds of the votes entitled
to be cast by stockholders other than the interested stockholder at an annual or
special meeting. This provision of the DGCL applies automatically to a Delaware
corporation unless otherwise provided in its certificate of incorporation or
bylaws or if it has less than 2,000 stockholders of record or does not have
voting stock listed on a national securities exchange or listed for quotation
with a registered national securities association. Neither the Suiza Foods'
Certificate nor the Suiza Foods Bylaws exempt Suiza Foods from this provision.
77
DISSENTERS' RIGHTS
Under the MBCA and the DGCL, holders of shares have the right, in certain
circumstances, to dissent from certain extraordinary corporate transactions as
to which they have voting rights by demanding payment in cash for their shares
equal to the fair value of such shares, as determined by agreement with the
corporation or by a court in an action timely brought by the corporation or the
dissenters.
Unlike the MBCA, the DGCL grants dissenters' appraisal rights only in the
case of certain mergers and not in certain transactions involving a sale or
transfer of assets, a share exchange, a charter amendment or control share
acquisition and certain other transactions. The DGCL does not extend appraisal
rights in a merger to holders of shares listed on a national securities exchange
or designated as a national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 stockholders if stockholders are required to accept as
consideration in the merger only stock of the surviving corporation, shares of
stock of another corporation which at the effective date will be listed on a
national securities exchange or designated as a national market system security
on an inter-dealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders, cash in lieu of
fractional shares or a combination of the above. The MBCA does not extend
appraisal rights in most situations where the shares held are listed on a
national securities exchange or held of record by 2,000 or more shareholders or
where the consideration received is cash or a combination of cash and shares
listed on a national securities exchange or held of record by 2,000 or more
shareholders.
LIMITATION ON DIRECTORS' LIABILITY
The Country Fresh Articles limit the liability of Country Fresh's directors
to Country Fresh or its shareholders, except to the extent prohibited by the
MBCA, for monetary damages for breach of fiduciary duty. Under the MBCA,
director liability cannot be limited for: (a) a breach of the director's duty of
loyalty; (b) acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law; (c) a violation of Section 551(1) of the
MBCA (involving unlawful distributions to shareholders and loans to directors,
officers or employees); (d) a transaction from which the director derived an
improper personal benefit; or (e) an act or omission occurring before March 1,
1987.
In accordance with the DGCL, the Suiza Foods Certificate provides that a
director shall not be personally liable to Suiza Foods or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability: (a) for any breach of the director's duty of loyalty to Suiza Foods
or its stockholders; (b) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law; (c) for unlawful
payments of dividends or unlawful stock repurchases or redemptions; or (d) for
any transactions from which the director derived an improper personal benefit.
INDEMNIFICATION
Both the MBCA and DGCL contain provisions setting forth conditions under
which a corporation may indemnify its directors and officers. These provisions
are generally referred to as "statutory indemnification" provisions.
Corporations are permitted to adopt charter provisions or bylaws which provide
for additional indemnification of directors and officers. These non-exclusive
provisions are generally referred to as "non-statutory indemnification"
provisions. Non-statutory indemnification provisions are generally adopted to
expand the circumstances and liberalize the conditions under which
indemnification will occur. The statutory indemnification provisions under the
MBCA and the DGCL are substantially the same, although the MBCA's non-statutory
provisions may be slightly broader with respect to indemnification in suits
brought by or in the right of the corporation since the MBCA expressly permits
indemnification of amounts paid in settlement in connection with such suits
while the DGCL does not expressly permit such indemnification (except for
payment of expenses incurred in connection with such suit). As a result,
directors, officers, employees or agents who agree to a settlement in a
derivative suit brought on behalf of
78
Country Fresh may be indemnified by Country Fresh for the amount paid in
settlement as well as expenses incurred in connection with the suit if the
standards set forth in the MBCA and the Country Fresh Bylaws are met.
The Country Fresh Bylaws provide that any officer, director, employee or
agent of Country Fresh shall be indemnified by Country Fresh against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such suit,
action, or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the
corporation, or its shareholders, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
Suiza Foods Certificate provides that the officers and directors shall, and any
employees and agents may, be indemnified by Suiza Foods against all expense,
liability, and loss (including attorneys' fees, judgments, fines, and amounts
paid in settlement) reasonably incurred in connection with any suit, action, or
proceeding to the fullest extent authorized by the DGCL, which requires that the
person acted in good faith and in a manner the person resaonably believed to be
in or not opposed to the best interests of Suiza Foods and, with respect to any
criminal action or proceeding, had not reasonable cause to believe the person's
conduct was unlawful.
SHAREHOLDER/STOCKHOLDER MEETINGS
The MBCA provides that if a corporation's annual meeting is not held for 90
days after the date designated therefor or for 15 months after its last annual
meeting, a court may order the meeting or election to be held upon application
by a shareholder. Under the DGCL, if an annual meeting is not held within 30
days of the date designated for such meeting, or if not held for a period of 13
months after the last annual meeting, the Delaware Court of Chancery may
summarily order a meeting to be held upon the application of any stockholder or
director.
Under the MBCA and the DGCL, special meetings of shareholders and
stockholders, as the case may be, may be called by the board of directors and by
such person or persons as so authorized by the charter or the bylaws. The
Country Fresh Bylaws provide that special meetings of shareholders may be called
at any time by the Secretary or any other officer whenever directed by the Board
of Directors, or by the Chairman of the Board or the President, or upon the
written request of twenty-five (25) holders of common stock of the corporation
entitled to vote on the business to be transacted at such meeting, delivered to
such officer. The Suiza Foods Certificate and Bylaws provide that special
meetings of the stockholders may be called at any time by the chief executive
officer or by a majority of the members of the board of directors.
ACTION BY WRITTEN CONSENT
Under the MBCA, any shareholder action required or permitted to be taken by
shareholder vote may be taken with the unanimous written consent of the
shareholders. The articles of incorporation may provide that such shareholder
action may be taken upon the written consent of holders of the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. The Country
Fresh Articles do not so provide. Under the DGCL, unless the charter provides
otherwise, any action required to be taken or which may be taken at a meeting of
stockholders may be taken without a vote, without a meeting and without prior
notice, with the written consent of not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. The Suiza Foods
Certificate does not provide otherwise.
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PAYMENT OF DIVIDENDS
Under the DGCL, a corporation may generally pay dividends out of surplus or,
if there is no surplus, out of the net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year, unless the capital of the
corporation has been diminished by depreciation in the value of its property,
losses or otherwise to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. The MBCA permits Country Fresh to
pay dividends and make other distributions unless, as a result, Country Fresh
would become insolvent or its assets would be less than its liabilities (each as
valued as provided in the MBCA) plus any preferential rights.
LEGAL MATTERS
The legality of the Suiza Common Stock to be issued in connection with the
Merger will be passed upon for Suiza Foods by Hughes & Luce, L.L.P., Dallas,
Texas. A partner with Hughes & Luce, L.L.P., beneficially owns 41,795 shares of
Suiza Common Stock. The Federal income tax consequences of the Merger to the
Country Fresh shareholders are being passed upon by Warner Norcross & Judd LLP,
Grand Rapids, Michigan.
EXPERTS
The consolidated financial statements of Suiza Foods Corporation as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996; the financial statements of Pre-Acquisition Velda Farms as of
April 9, 1994 and December 31, 1994 and for the period from January 1, 1994 to
April 9, 1994 and for the year ended December 31, 1993; the financial statements
of Swiss Dairy, a Corporation, as of December 30, 1995 and December 31, 1994 and
for each of the three years in the period ended December 30, 1995; and the
consolidated financial statements of Country Fresh, Inc. as of March 1, 1997 and
March 2, 1996 and for each of the three years in the period ended March 1, 1997,
included in or incorporated by reference into this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
either appearing herein or which are incorporated herein by reference. The
consolidated financial statements of Garrido & Compania, Inc. as of June 30,
1996 and 1995 and for each of the years in the three year period ended June 30,
1996 incorporated by reference into this Prospectus have been audited by KPMG
Peat Marwick LLP, independent auditors, as stated in their report which is
incorporated herein by reference. The financial statements of Model Dairy, Inc.
as of October 31, 1995 and 1994 and for the years then ended incorporated by
reference into this Prospectus have been audited by Barnard, Vogler & Co.,
independent auditors, as stated in their report which is incorporated herein by
reference. The financial statements of Dairy Fresh, L.P., a Delaware limited
partnership, as of December 31, 1996 and 1995 and for the years then ended and
the period from July 1, 1994 (date of acquisition) to December 31, 1994,
incorporated by reference into this Prospectus have been audited by McGladrey &
Pullen, LLP, independent auditors, as stated in their report which is
incorporated herein by reference. The combined financial statements of The
Garelick Companies, as of September 30, 1996 and 1995 and for each of the three
years in the period ended September 30, 1996, incorporated by reference into
this Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as stated in their report which is incorporated herein by
reference. The consolidated financial statements of The Morningstar Group Inc.,
as of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996 included in or incorporated by reference into this
Prospectus have been audited by Arthur Andersen LLP, independent accountants, as
indicated in their report with respect thereto. The combined financial
statements of Presto Food Products, Inc. and Affiliate, as of December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
incorporated by reference into this Prospectus have been audited by Price
Waterhouse LLP, independent auditors, as stated in their report incorporated
herein by reference. Such financial statements are included herein or
incorporated herein by reference in reliance upon the respective reports of such
firms given upon their authority as experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
Independent Auditors' Report....................................................... F-2
Consolidated Balance Sheets........................................................ F-3
Consolidated Statements of Operations.............................................. F-4
Consolidated Statements of Stockholders' Equity.................................... F-5
Consolidated Statements of Cash Flows.............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
Condensed Consolidated Balance Sheets.............................................. F-26
Condensed Consolidated Statements of Operations.................................... F-27
Condensed Consolidated Statements of Cash Flows.................................... F-28
Notes to Condensed Consolidated Financial Statements............................... F-29
THE MORNINGSTAR GROUP INC.
Independent Auditors' Report....................................................... F-33
Consolidated Balance Sheets........................................................ F-34
Consolidated Statements of Operations.............................................. F-35
Consolidated Statements of Stockholders' Equity.................................... F-36
Consolidated Statements of Cash Flows.............................................. F-37
Notes to Consolidated Financial Statements......................................... F-39
Condensed Consolidated Balance Sheets.............................................. F-56
Condensed Consolidated Statements of Operations.................................... F-57
Condensed Consolidated Statements of Cash Flows.................................... F-58
Notes to Condensed Consolidated Financial Statements............................... F-60
COUNTRY FRESH, INC.
Independent Auditors' Report....................................................... F-62
Consolidated Balance Sheets........................................................ F-63
Consolidated Statements of Earnings................................................ F-64
Consolidated Statements of Shareholders' Equity.................................... F-65
Consolidated Statements of Cash Flows.............................................. F-66
Notes to Consolidated Financial Statements......................................... F-67
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Suiza Foods Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Suiza Foods
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Suiza Foods
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Dallas, Texas
February 18, 1997
F-2
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
---------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 8,951 $ 3,177
Accounts receivable..................................................................... 50,608 31,045
Inventories............................................................................. 19,228 11,346
Prepaid expenses and other current assets............................................... 2,754 1,380
Refundable income taxes................................................................. 2,312
Deferred income taxes................................................................... 3,672 1,448
---------- ----------
Total current assets.................................................................. 87,525 48,396
PROPERTY, PLANT AND EQUIPMENT............................................................. 123,260 92,715
DEFERRED INCOME TAXES..................................................................... 8,524
INTANGIBLE AND OTHER ASSETS............................................................... 164,839 91,411
---------- ----------
TOTAL................................................................................. $ 384,148 $ 232,522
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses................................................... $ 46,664 $ 31,957
Income taxes payable.................................................................... 1,105 2,415
Current portion of long-term debt....................................................... 12,876 15,578
---------- ----------
Total current liabilities............................................................. 60,645 49,950
LONG-TERM DEBT............................................................................ 226,693 171,745
DEFERRED INCOME TAXES..................................................................... 3,278 1,367
COMMITMENTS AND CONTINGENCIES.............................................................
STOCKHOLDERS' EQUITY:
Preferred stock.........................................................................
Common stock, 10,741,729 and 6,313,479 shares issued and outstanding.................... 107 63
Additional paid-in capital.............................................................. 89,337 31,023
Retained earnings (deficit)............................................................. 4,088 (21,626)
---------- ----------
Total stockholders' equity............................................................ 93,532 9,460
---------- ----------
TOTAL................................................................................. $ 384,148 $ 232,522
---------- ----------
---------- ----------
See notes to consolidated financial statements.
F-3
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NET SALES............................................................... $ 520,916 $ 430,466 $ 341,108
COST OF SALES........................................................... 388,548 312,633 240,468
------------ ------------ ------------
GROSS PROFIT............................................................ 132,368 117,833 100,640
OPERATING COSTS AND EXPENSES:
Selling and distribution.............................................. 70,709 64,289 54,248
General and administrative............................................ 21,913 19,277 16,935
Amortization of intangibles........................................... 4,624 3,703 3,697
------------ ------------ ------------
Total operating costs and expenses.................................... 97,246 87,269 74,880
------------ ------------ ------------
INCOME FROM OPERATIONS.................................................. 35,122 30,564 25,760
OTHER (INCOME) EXPENSE:
Interest expense, net................................................. 17,470 19,921 19,279
Merger and other costs................................................ 571 10,238 1,660
Other income, net..................................................... (4,012) (469) (268)
------------ ------------ ------------
Total other (income) expense.......................................... 14,029 29,690 20,671
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS....................... 21,093 874 5,089
INCOME TAXES (BENEFIT).................................................. (6,836) 2,450 844
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS................................. 27,929 (1,576) 4,245
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT.................... 2,215 8,462 197
------------ ------------ ------------
NET INCOME (LOSS)....................................................... $ 25,714 $ (10,038) $ 4,048
------------ ------------ ------------
------------ ------------ ------------
NET EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary loss............................... $ 2.81 $ (0.26) $ 0.69
Extraordinary loss.................................................... (0.22) (1.38) (0.03)
------------ ------------ ------------
Net income (loss)..................................................... $ 2.59 $ (1.64) $ 0.66
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING..................................... 9,921,822 6,109,398 6,156,387
------------ ------------ ------------
------------ ------------ ------------
See notes to consolidated financial statements.
F-4
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK ADDITIONAL RETAINED
------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL WARRANTS (DEFICIT) TOTAL
------------ ----------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
BALANCE, JANUARY 1, 1994................... 67,708 $ 1 $ 15,217 $ 523 $ (15,579) $ 162
Issuance of common stock................. 11,960 5,677 5,677
Increase in market value of warrants..... 57 (57) --
Net income............................... 4,048 4,048
------------ ----- ----------- ----- ---------- ----------
BALANCE, DECEMBER 31, 1994................. 79,668 1 20,894 580 (11,588) 9,887
Issuance of common stock................. 11,832 5,080 (580) 4,500
Capital contribution (Note 11)........... 5,111 5,111
Net loss................................. (10,038) (10,038)
69 for 1 stock split (Note 11)........... 6,221,979 62 (62) --
------------ ----- ----------- ----- ---------- ----------
BALANCE, DECEMBER 31, 1995................. 6,313,479 63 31,023 -- (21,626) 9,460
Issuance of common stock................. 4,428,250 44 58,314 58,358
Net income............................... 25,714 25,714
------------ ----- ----------- ----- ---------- ----------
BALANCE, DECEMBER 31, 1996................. 10,741,729 $ 107 $ 89,337 $ -- $ 4,088 $ 93,532
------------ ----- ----------- ----- ---------- ----------
------------ ----- ----------- ----- ---------- ----------
See notes to consolidated financial statements.
F-5
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- ----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 25,714 $ (10,038) $ 4,048
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation............................................................ 9,930 9,258 8,244
Amortization of intangible assets, including deferred financing costs... 5,458 4,686 4,876
Gain on the sale of assets.............................................. (21) (265) (177)
Extraordinary loss from early extinguishment of debt.................... 2,215 8,462 197
Merger and other nonrecurring costs..................................... 571 10,238 1,660
Noncash and imputed interest............................................ 236 1,087 483
Minority interests...................................................... 101 556
Deferred income taxes................................................... (8,895) (414) 333
Changes in operating assets and liabilities:
Accounts receivable................................................... (5,187) (1,881) (108)
Inventories........................................................... (3,346) (599) (73)
Prepaid expenses and other assets..................................... (163) 1,007 (222)
Refundable income taxes............................................... (2,312)
Accounts payable and accrued expenses................................. 967 716 4,862
Income tax payable.................................................... (1,575) 649 254
----------- ----------- ----------
Net cash provided by operating activities............................. 23,592 23,007 24,933
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................................ (14,022) (10,392) (4,784)
Proceeds from sale of property, plant and equipment....................... 500 691 245
Purchases of investments and other assets................................. (1,608)
Cash outflows for acquisitions............................................ (111,380) (2,425) (61,357)
----------- ----------- ----------
Net cash used in investing activities................................... (124,902) (12,126) (67,504)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt........................................ 110,550 154,505 67,585
Repayment of debt......................................................... (58,304) (154,387) (30,906)
Payments of deferred financing, debt restructuring and merger costs....... (3,520) (8,972) (1,660)
Issuance of common stock, net of expenses 58,358 4,087 5,677
Purchase of subsidiary preferred stock and minority interests............. (8,332) (61)
----------- ----------- ----------
Net cash provided by (used in) financing activities..................... 107,084 (13,099) 40,635
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 5,774 (2,218) (1,936)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................. 3,177 5,395 7,331
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................... $ 8,951 $ 3,177 $ 5,395
----------- ----------- ----------
----------- ----------- ----------
See notes to consolidated financial statements.
F-6
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. Suiza Foods Corporation (the "Company" or "Suiza Foods") is a
manufacturer and distributor of fresh milk products, refrigerated ready-to-serve
fruit drinks and coffee in Puerto Rico; fresh milk and related dairy products in
Florida, California and Nevada; and packaged ice in Florida and the southwestern
United States.
On March 31, 1995, the Company became the holding company for the operations
of Suiza Holdings, L.P. and subsidiaries; Velda Holdings, L.P.; Velda Holdings,
Inc. and subsidiaries; and Reddy Ice Corporation (collectively, the "Combined
Entities") through the issuance of 6,313,479 shares of its common stock in
exchange for all of the outstanding equity interests of the Combined Entities.
The Company accounted for this combination using the pooling of interests method
of accounting, whereby the assets acquired and liabilities assumed are reflected
in the consolidated financial statements of the Company at the historical
amounts of the Combined Entities, which, in the case of Velda Farms, only
includes the results of operations from April 10, 1994, the date it was acquired
in a purchase business combination.
The Company and its subsidiaries provide credit terms to customers generally
ranging up to 30 days, perform ongoing credit evaluations of their customers and
maintain allowances for potential credit losses based on historical experience.
The preparation of financial statements requires the use of significant
estimates and assumptions by management; actual results could differ from these
estimates. Certain prior year amounts have been reclassified to conform to
current year presentation.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company; its U.S. operating subsidiaries, Velda Farms, Inc.
("Velda Farms"), Swiss Dairy Corporation ("Swiss Dairy"), Model Dairy, Inc.
("Model Dairy") and Reddy Ice Corporation ("Reddy Ice"); and its Puerto Rico
operating subsidiaries, Suiza Dairy Corporation ("Suiza Dairy"), Suiza Fruit
Corporation ("Suiza Fruit"), Neva Plastics Manufacturing Corp. ("Neva Plastics")
and Garrido & Compania ("Garrido") (collectively, "Suiza-Puerto Rico"). All
significant intercompany balances and transactions are eliminated in
consolidation.
INVENTORIES. Pasteurized and raw milk inventories are stated at the lower
of average cost or market. Raw materials, spare parts and supplies, and
merchandise for resale inventories are stated at the lower of cost, using the
first-in, first-out ("FIFO") method, or market. Manufactured finished goods
inventories are stated at the lower of average production cost or market.
Production costs include raw materials, direct labor and indirect production and
overhead costs.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE
-------------------------------------------------------------- ------------------------------
Buildings and improvements.................................... Ten to 40 years
Machinery and equipment....................................... Five to 20 years
Motor vehicles................................................ Five to 15 years
Furniture and fixtures........................................ Three to ten years
Capitalized lease assets are amortized over the shorter of their lease term
or their estimated useful lives. Expenditures for repairs and maintenance which
do not improve or extend the life of the assets are expensed as incurred.
F-7
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS. Intangible assets include the following intangibles
which are amortized over their related useful lives:
INTANGIBLE ASSET USEFUL LIFE
------------------------------------------- -------------------------------------------------
Goodwill................................... Straight-line method over 20 to 40 years
Identifiable intangible assets:
Customer list............................ Straight-line method over seven to ten years
Trademarks/trade names................... Straight-line method over 30 years
Noncompetition agreements................ Straight-line method over the terms of the
agreements
Deferred financing costs................... Interest method over the terms of the related
debt (ranging from seven to 11 years)
Organization costs......................... Straight-line method over five years
The Company periodically assesses the net realizable value of its intangible
assets, as well as all other assets, by comparing the expected future net
operating cash flows, undiscounted and without interest charges, to the carrying
amount of the underlying assets. The Company would evaluate a potential
impairment if the recorded value of these assets exceeded the associated future
net operating cash flows. Any potential impairment loss would be measured as the
amount by which the carrying value exceeds the fair value of the asset. Fair
value of assets would be measured by market value, if an active market exists,
or by a forecast of expected future net operating cash flows, discounted at a
rate commensurate with the risk involved.
INTEREST RATE AGREEMENTS. Interest rate swaps, caps and floors are entered
into as a hedge against interest exposure of variable rate debt. Differences
between amounts to be paid or received on these interest rate agreements
designated as hedges are included in interest expense as payments are made or
received. Gains or losses on other agreements not designated as hedges are
included in income as incurred. Amounts paid to acquire interest rate caps and
amounts received for interest rate floors are amortized as an adjustment to
interest expense over the life of the related agreement.
REVENUE. Revenue is recognized when the product is shipped to the customer.
INCOME TAXES. Since March 31, 1995, the Company's U.S. operating
subsidiaries have been included in the consolidated tax return of the Company.
The Company's Suiza Dairy, Suiza Fruit and Neva Plastics subsidiaries are
organized as Delaware companies and are required to file separate U.S. and
Puerto Rico income tax returns; however, since their operations are in Puerto
Rico, they are eligible for Section 936 tax credits which may reduce or
eliminate U.S. income taxes due. Garrido is organized under the laws of the
Commonwealth of Puerto Rico and is only required to file a separate tax return
in Puerto Rico.
Effective January 1, 1996, substantially all of the Company's Puerto Rico
operations are 90% exempt from Puerto Rico income taxes and 100% exempt from
property, municipal, certain excise and other taxes, and fees pursuant to the
Puerto Rico Agricultural Tax Incentives Act of 1995. Prior to this date, only
the Company's Suiza Fruit and Neva Plastics subsidiaries had similar exemptions
through separate tax grants in Puerto Rico. These operations are, however,
subject to a 10% withholding tax on distributions from Puerto Rico to the United
States.
F-8
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to March 31, 1995, the Combined Entities were separate taxpayers and
income taxes were provided for in the financial statements, where applicable,
based on each company's separate income tax return and tax status. As a result,
since certain of Suiza-Puerto Rico's operations were organized as a partnership
and Reddy Ice's operations were organized as a small business corporation under
Subchapter S, no income taxes were provided in the financial statements.
However, had these operations been subject to corporate income taxes, available
net operating losses would have been sufficient to eliminate any corporate
income taxes due.
Deferred income taxes are provided for temporary differences in the
financial statement and tax bases of assets and liabilities using current tax
rates. Deferred tax assets, including the benefit of net operating loss
carryforwards, are evaluated based on the guidelines for realization and may be
reduced by a valuation allowance.
CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
EARNINGS (LOSS) PER SHARE. The Company computes earnings per share based on
the weighted average number of common shares outstanding during the year, as
adjusted for the stock split (Note 11), including common equivalent shares, when
dilutive.
2. ACQUISITIONS
In April 1994, the Company acquired all of the outstanding common stock of
Velda Farms, Inc., a wholly owned subsidiary of The Morningstar Group, Inc. The
total purchase price, including related acquisition and financing costs, was
approximately $54.8 million, which was funded with the net proceeds from the
issuance of common stock, the proceeds from the issuance of subordinated notes,
term loan and revolving credit facility advances, and preferred stock issued to
the seller. In connection with the refinancing of debt at the date of the
combination, the term loan, revolving credit facility advances and preferred
stock were repaid.
In June 1994, the Company acquired Mayaguez Dairy, Inc. for a total purchase
price, including costs and expenses, of approximately $7.6 million, which was
funded primarily by additional term loan borrowings of $7.0 million.
In November 1994, the Company acquired all of the net assets of the Florida
Division of Flav-O-Rich, Inc. The total purchase price, including related
acquisition and financing costs, was approximately $5.9 million, which was
funded with revolving credit agreement borrowings, along with a subordinated
note payable to the seller and an amount payable to the seller upon the final
purchase price settlement, which was paid subsequent to year-end.
In July 1996, the Company acquired all of the outstanding common stock of
Garrido for approximately $35.8 million, including related acquisition and
financing costs, which was funded primarily by additional term loan borrowings
under the Senior Credit Facility. In connection with this acquisition, the
purchase agreement requires the payment of a contingent purchase price of up to
$5.5 million based on the future performance of this operation, which will be
accounted for as an adjustment to the purchase price when this contingency is
resolved should a payment of all or a portion of this contingent purchase price
be required. In addition, as a result of the adoption of the Puerto Rico
Agricultural Tax Incentives Act of 1995, as discussed in more detail in Note 10,
the Company may be eligible for tax credits on a portion of its
F-9
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS (CONTINUED)
investment in Garrido of between $6.2 million and $8.8 million, which are
dependent on the receipt of a favorable ruling on the availability of such tax
credits from the Treasury Department in Puerto Rico. Should a favorable ruling
on these tax credits be received, the Company will account for these tax
benefits as an adjustment of the purchase price, which would result in a
reduction of goodwill.
In September 1996, the Company acquired all of the net assets of Swiss Dairy
for approximately $55.1 million, including related acquisition costs, which was
funded primarily by borrowings under the revolving credit and acquisition
facilities of the Senior Credit Facility.
In December 1996, the Company acquired all of the net assets of Model Dairy,
along with certain assets held by affiliates of the seller, for approximately
$27.0 million, including related acquisition costs, which was funded primarily
by borrowings under the acquisition facility of the Senior Credit Facility.
In addition to the above acquisitions, during 1996, 1995 and 1994, the
Company acquired certain net assets of and entered into noncompetition
arrangements with 18 separate ice companies and two dairies for cash, including
costs and expenses, of approximately $8.4 million in 1996, $2.4 million in 1995
and $.3 million in 1994, along with the issuance of notes payable to the sellers
of approximately $.2 million in 1996, $.1 million in 1995 and $.4 million in
1994, all of which were funded by Senior Credit Facility borrowings.
The above acquisitions were accounted for using the purchase method of
accounting as of their respective acquisition dates, and accordingly, only the
results of operations of the acquired companies subsequent to their respective
acquisition dates are included in the consolidated financial statements of the
Company. At the acquisition date, the purchase price was allocated to assets
acquired, including identifiable intangibles, and liabilities assumed based on
their fair market values. The excess of the total purchase prices over the fair
values of the net assets acquired represented goodwill. In connection with the
acquisitions, assets were acquired and liabilities were assumed as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- ----------
(IN THOUSANDS)
Purchase prices:
Net cash paid............................................. $ 111,380 $ 2,425 $ 61,357
Subsidiary preferred stock issued 3,000
Notes and amounts payable to seller....................... 173 91 4,495
Cash acquired in acquisitions............................. 14,937 142
---------- --------- ----------
Total purchase prices....................................... 126,490 2,516 68,994
Fair values of net assets acquired:
Fair values of assets acquired............................ 63,598 2,317 53,590
Liabilities assumed....................................... (14,076) (10,924)
---------- --------- ----------
Total net assets acquired................................... 49,522 2,317 42,666
---------- --------- ----------
Goodwill.................................................... $ 76,968 $ 199 $ 26,328
---------- --------- ----------
---------- --------- ----------
F-10
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS (CONTINUED)
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1995 and 1996, as if the above 1996
acquisitions had occurred at the beginning of 1995.
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net sales............................................................. $ 662,174 $ 634,186
Income before extraordinary loss...................................... 30,634 2,008
Net income (loss)..................................................... 28,419 (6,454)
Earnings (loss) per share............................................. 2.86 (1.06)
The unaudited pro forma results of operations are not necessarily indicative
of what the actual results of operations of the Company would have been had the
acquisitions occurred at the beginning of 1995, nor do they purport to be
indicative of the future results of operations of the Company.
3. ACCOUNTS RECEIVABLE
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Trade customers, including route receivables............................ $ 47,785 $ 28,435
Milk industry and milk price stabilization fund......................... 168 1,839
Suppliers............................................................... 715 604
Officers and employees.................................................. 554 425
Other................................................................... 2,594 1,090
--------- ---------
51,816 32,393
Less allowance for doubtful accounts.................................... (1,208) (1,348)
--------- ---------
$ 50,608 $ 31,045
--------- ---------
--------- ---------
4. INVENTORIES
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Pasteurized and raw milk and raw materials.............................. $ 7,693 $ 4,278
Parts and supplies...................................................... 5,584 3,105
Finished goods.......................................................... 5,951 3,963
--------- ---------
$ 19,228 $ 11,346
--------- ---------
--------- ---------
F-11
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Land.................................................................. $ 20,104 $ 15,582
Buildings and improvements............................................ 45,016 33,264
Machinery and equipment............................................... 63,614 47,119
Motor vehicles........................................................ 13,173 9,994
Furniture and fixtures................................................ 22,360 18,219
---------- ----------
164,267 124,178
Less accumulated depreciation......................................... (41,007) (31,463)
---------- ----------
$ 123,260 $ 92,715
---------- ----------
---------- ----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. LONG-TERM DEBT
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Senior Credit Facility:
Revolving loan facility............................................. $ 8,600 $ 10,900
Acquisition facility................................................ 69,100
Term loans.......................................................... 125,000 123,750
Subordinated notes.................................................... 36,000 51,101
Capital lease obligations and other................................... 869 1,572
---------- ----------
239,569 187,323
Less current portion.................................................. (12,876) (15,578)
---------- ----------
$ 226,693 $ 171,745
---------- ----------
---------- ----------
SENIOR CREDIT FACILITY. In September 1996, the Company amended its existing
credit facility and entered into a supplemental credit facility with a group of
lenders, including First Union National Bank of North Carolina, as agent, and
The First National Bank of Chicago, as syndication agent, which provide for an
aggregate senior credit facility (the "Senior Credit Facility") of $250.0
million comprised of (i) a $130.0 million term loan facility; (ii) a $30.0
million revolving credit facility and (iii) a $90.0 million acquisition
facility. Under the terms of the Senior Credit Facility, the term loan is
amortized over five and one-half years, and the revolving credit facility
expires on March 31, 2000. Any amounts drawn under the acquisition facility that
are outstanding on September 30, 1998, will be amortized in fifteen quarterly
installments. Amounts outstanding under the Senior Credit Facility bear interest
at a rate per annum equal to one of the following rates, at the Company's
option: (i) the sum of a base rate equal to the higher of the Federal Funds rate
plus 50 basis points or First Union National Bank of North Carolina's prime
commercial lending rate, plus a margin that varies from 0 to 75 basis points
depending on the Company's ratio of defined indebtedness to EBITDA (as defined
in the Senior Credit Facility); or (ii) The London Interbank Offering Rate
("LIBOR") plus a margin that varies from 75 to 200 basis points depending on the
Company's ratio of defined indebtedness to EBITDA. The Company pays a commitment
fee on unused amounts of the revolving facility and the acquisition facility
that ranges from 20 basis points to 37.5 basis points, based on the Company's
ratio of defined indebtedness to EBITDA. The blended interest rate in effect at
December 31, 1996, on the Senior Credit Facility was 7.2%.
Interest is payable quarterly, and scheduled principal installments on the
term loan facilities are due in quarterly installments of approximately $2.5
million through June 1997, increasing to $3.75 million on September 30, 1997,
$5.0 million on September 30, 1998, $5.375 million on September 30, 1999, and
$6.0 million on September 30, 2000, with the remaining unpaid balance due on
March 31, 2002. Loans under the Senior Credit Facility are collateralized by
substantially all assets.
SUBORDINATED NOTES. On March 31, 1995, the Company issued subordinated
notes, which carried interest rates ranging from 12% to 15%, to replace certain
of the existing subordinated notes of the Combined Entities. On April 22, 1996,
the Company used $15.7 million of the net proceeds from its initial public
offering to repay all the outstanding principal balances of the 15% subordinated
notes. The remaining subordinated notes bear interest at rates ranging from 12%
to 13.5% (12.5% on a weighted
F-13
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. LONG-TERM DEBT (CONTINUED)
average basis), payable on a semiannual basis in March and September of each
year, with semiannual principal installments due in varying amounts commencing
in 2001, with the remaining unpaid principal balances due at maturity on March
31, 2004. The notes are subordinated to the loans under the Senior Credit
Facility. As is discussed in Note 19, in January 1997, the Company repaid all of
the outstanding principal balances of these remaining subordinated notes with a
portion of the proceeds from the sale of common stock.
OTHER DEBT. Other debt includes various promissory notes for the purchase
of property, plant and equipment and capital lease obligations. The various
promissory notes payable provided for interest at rates ranging from 10% to
prime plus 1% and were payable in monthly installments of principal and interest
until maturity, when the remaining principal balance was due. Capital lease
obligations represent machinery and equipment financing obligations which are
payable in monthly installments of principal and interest and are collateralized
by the related assets financed.
INTEREST RATE AGREEMENTS. The Company has five interest rate derivative
agreements in place, which have been designated as hedges against the Company's
variable interest rate exposure on its loans under the Senior Credit Facility.
The first agreement, which has a notional amount of $14.0 million, matures in
May 1997 and caps interest on LIBOR loans at 7.5%, plus the applicable LIBOR
margin. The second and third agreements, each of which has a notional amount of
$27.5 million and mature in June 1998, fix the interest rates on LIBOR loans at
6.0%, plus the applicable LIBOR margin. The fourth and fifth agreements, which
each have a notional amount of $25.0 million and mature in December 1997, fix
the interest rates on LIBOR loans at 6.01%, plus the applicable LIBOR margin.
These derivative agreements provide hedges for the Senior Credit Facility loans
by limiting or fixing the LIBOR interest rates specified in the Senior Credit
Facility (5.6% at December 31, 1996) at the above rates until the indicated
expiration dates of these interest-rate-derivative agreements. The original
costs and premiums of these derivative agreements are being amortized on a
straight-line basis as a component of interest expense. The Company has
designated these interest rate agreements as hedges against its interest rate
exposure on its variable rate loans under the Senior Credit Facility.
The Company is exposed to market risk under these arrangements due to the
possibility of exchanging a lower interest rate for a higher interest rate. The
counterparties are major financial institutions, and the risk of incurring
losses related to credit risk is considered by the Company to be remote.
DEBT COVENANTS. The Company's Senior Credit Facility contains various
financial and other restrictive covenants and requirements that the Company
maintain certain financial ratios, including leverage (computed as the ratio of
the aggregate outstanding principal amount of defined indebtedness to EBITDA, as
defined), fixed charges (computed as the ratio of EBITDA to defined fixed
charges), interest coverage (computed as the ratio of EBITDA to defined interest
expense) and minimum net worth. The Senior Credit Facility also contains
limitations on capital expenditures, investments, the payment of dividends and
the incurrence of additional indebtedness and requires certain mandatory
prepayments from the proceeds of certain dispositions of property.
F-14
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. LONG-TERM DEBT (CONTINUED)
SCHEDULED MATURITIES. The scheduled maturities of long-term debt, which
include capitalized lease obligations, at December 31, 1996, were as follows (in
thousands):
The Company leases certain property, plant and equipment used in its
operations under both capital and operating lease agreements. Such leases, which
are primarily for machinery and equipment and vehicles, have lease terms ranging
from two to nine years. Certain of the operating lease agreements require the
payment of additional rentals for maintenance, along with additional rentals,
based on miles driven or units produced. Rent expense, including additional
rent, was $8.0 million, $6.3 million and $4.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
The composition of capital leases which are reflected as property, plant and
equipment in the balance sheets is as follows:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Machinery and equipment..................................................... $ 812 $ 1,370
Less accumulated amortization............................................... (366) (415)
--------- ---------
$ 446 $ 955
--------- ---------
--------- ---------
Future minimum payments at December 31, 1996, under noncancelable capital
and operating leases with terms in excess of one year are summarized below (in
thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. INCOME TAXES
The provisions for income taxes (benefit), excluding the current tax
benefits of $0.9 million and $0.7 million applicable to the extraordinary losses
during 1996 and 1995, respectively, are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Current taxes payable:
Federal......................................................... $ 1,925 $ 2,763 $ 491
State........................................................... 134 101 20
Deferred income taxes............................................. (8,895) (414) 333
--------- --------- ---------
$ (6,836) $ 2,450 $ 844
--------- --------- ---------
--------- --------- ---------
The following is a reconciliation of income taxes expense (benefit) reported
in the statements of operations:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
Tax expense at statutory rates............................... $ 7,383 $ 306 $ 1,959
Tax benefit from tax-exempt earnings......................... (2,711) (1,532) (2,745)
Tax expense from losses not subject to taxes at the corporate
level...................................................... 1,612
Puerto Rico tax credits...................................... (11,750)
Net operating loss carryforwards............................. 188 1,344
Nondeductible expenses....................................... 1,841 202
Other........................................................ 242 35 84
---------- --------- ---------
$ (6,836) $ 2,450 $ 844
---------- --------- ---------
---------- --------- ---------
F-16
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. INCOME TAXES (CONTINUED)
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Deferred income tax assets:
Asset valuation reserves................................................ $ 244 $ 326
Nondeductible accruals.................................................. 1,785 1,122
Puerto Rico tax credits................................................. 10,076
Net operating loss carryforwards........................................ 91 1,989
Valuation allowance..................................................... (1,989)
--------- ---------
12,196 1,448
Deferred income tax liabilities:
Depreciation............................................................ (1,174) 312
Amortization of intangibles............................................. (2,177) (1,185)
Foreign distributions and other......................................... 73 (494)
--------- ---------
(3,278) (1,367)
--------- ---------
Net deferred income tax asset............................................. $ 8,918 $ 81
--------- ---------
--------- ---------
These net deferred income tax assets are classified in the consolidated
balance sheet as follows:
The Company had established a valuation allowance for deferred tax assets
related to net operating loss carryforwards of the Company's Suiza Dairy
subsidiary in Puerto Rico, which under Puerto Rico law were only available for
utilization against future taxable income of this subsidiary. Because of the
continuing operating losses of this subsidiary, the Company was unable to
determine that it is more likely than not that the net deferred tax assets of
this subsidiary would be realized. During 1996, the deferred tax asset related
to these net operating loss carryforwards and the related valuation allowance
was substantially eliminated as a result of the reduction in tax rates in Puerto
Rico from the Puerto Rico Agricultural Tax Incentives Act of 1995.
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico
Agricultural Tax Incentives Act of 1995, which reduced the effective income tax
rate for qualified agricultural business from 39% to 3.9% and provided for a 50%
tax credit for certain "eligible investments" in qualified agricultural
businesses in Puerto Rico. During 1996, the Company made investments in its
Puerto Rico dairy, fruit,
F-17
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. INCOME TAXES (CONTINUED)
plastics and Garrido operations, all of which were certified as qualified
agricultural businesses in Puerto Rico during 1996.
In connection with these investments, the Company believes that it has met
the eligible investment criteria of this act related to its investment in its
Puerto Rico dairy subsidiary. Accordingly, in 1996, the Company recognized
$15.75 million in tax credits related to this qualifying investment. Of this
amount, the Company (i) sold $4.0 million of tax credits to third parties,
resulting in a cash gain of $3.4 million (net of a discount and related
expenses), which is recorded in other income, and (ii) recognized a deferred tax
asset for the remainder of the tax credit in the amount of $11.75 million,
resulting in a corresponding credit to tax expense. These tax credits can be
used by the Company to eliminate both Puerto Rico income taxes and the 10%
Puerto Rico withholding tax on distributions from the Company's Puerto Rico
operations.
The Company is currently investigating whether its $43.0 million investment
in its fruit and plastics operations will qualify for tax credits based on
recent rulings by Puerto Rico tax authorities and has requested a formal ruling
on the allowability of such tax credits from the Treasury Department in Puerto
Rico. If a favorable ruling on the availability of these additional tax credits
is obtained, the Company will recognize substantial additional tax benefits in
the form of either a deferred tax asset or proceeds from the sale of such
credits.
11. STOCKHOLDERS' EQUITY
CAPITAL SHARES. Authorized capital shares of the Company include 1,000,000
shares of preferred stock with a par value of $.01 per share and 20,000,000
shares of common stock with a par value of $.01 per share. There have been no
shares of preferred stock issued by the Company. The rights and preferences of
preferred stock are established by the Company's Board of Directors upon
issuance. On March 31, 1995, the Company issued 6,313,479 shares of common stock
in exchange for all of the outstanding equity interests of the Combined
Entities, including profits interests that were granted to certain individuals
as compensation for services in identifying, structuring and negotiating certain
acquisitions. Immediately prior to the combination date, the existing investors
fixed this profits interest by mutual agreement and exchanged equity interests
among investors and these individuals. In connection with this exchange, the
Company recorded a compensation expense charge to merger expense of $5.1
million, which approximated the fair value of these interests, and resulted in a
capital contribution in the same amount.
COMMON STOCK SPLIT. On February 28, 1996, the Company's Board of Directors
authorized a 69 for 1 stock split in the form of a common stock dividend payable
to stockholders of record on February 29, 1996. All references in the
consolidated financial statements to number of common shares outstanding and per
share amounts, and all references to common stock issued, stock options and
related prices in the notes to the consolidated financial statements have been
restated to reflect the split.
STOCK OFFERINGS. On April 22, 1996, the Company sold 3,795,000 shares of
common stock, $.01 par value per share, in an initial public offering at a price
to the public of $14.00 per share. Following this offering, the Company had
10,108,479 shares of common stock issued and outstanding. The public offering
provided net cash proceeds to the Company of approximately $48.6 million. Of
this amount, $31.1 million was used to repay senior debt, $15.7 million was used
to repay the Company's 15% subordinated notes, and $1.8 million was used to pay
prepayment penalties related to the early extinguishment of the 15% subordinated
notes. As a result of these transactions, the Company recorded a $2.2 million
extraordinary
F-18
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. STOCKHOLDERS' EQUITY (CONTINUED)
loss from extinguishment of debt which included $1.8 million in prepayment
penalties and $1.3 million for the write-off of deferred financing costs related
to the repaid debt, net of a tax benefit of $0.9 million. In addition, on August
7, 1996, the Company sold 625,000 shares of its common stock at a price of
$16.00 per share in a private placement to a single investor. Following the
private sale, the Company had 10,739,729 shares of common stock issued and
outstanding. As is discussed in more detail in Note 19, in January 1997, the
Company completed the sale of additional shares of its common stock.
STOCK OPTION AND RESTRICTED STOCK PLANS. In connection with the
combination, the Company adopted an exchange option and restricted stock plan,
whereby the outstanding stock options granted by the Combined Entities were
converted into options to acquire 586,523 shares of common stock on
substantially the same terms as the prior options. These options are exercisable
at prices ranging from $.03 to $6.79 per share, which approximated the fair
market value of such shares at the date of original grant. At December 31, 1996,
577,760 of such options were outstanding, of which 480,450 were exercisable at
prices ranging from $.03 to $6.79 per share. The options vest ratably in five
annual increments and may be exercised, to the extent vested, over the ten-year
period following the award date.
Effective March 31, 1995, the Company also adopted the Option and Restricted
Stock Plan (the "Plan"), which provides for grants of incentive and nonqualified
stock options and awards of restricted stock to directors and key employees of
the Company or its subsidiaries of up to 1,069,500 shares, provided that no more
than 379,500 shares may be awarded as restricted stock. Under the terms of the
Plan, the options vest ratably over a three-year period, except for options
granted to outside directors, which vest immediately. The Plan also provides
that the exercise price of stock options will not be less than the fair market
value on the date of grant, and in the case of an incentive stock option granted
to an employee owning more than 10% of the common stock of the Company on the
date of grant, not less than 110% of the fair market value. On March 31, 1995,
the Company's Board of Directors granted 474,375 options pursuant to the Plan at
an exercise price per share of $10.51. In addition, during the remainder of
1995, the Company granted options for an additional 3,450 shares at the same
exercise price per share. At December 31, 1995, 477,825 options were outstanding
at an exercise price of $10.51 per share, of which 3,450 shares were
exercisable.
In 1996, the Company granted options to purchase 398,153 shares at exercise
prices ranging from $12.32 to $17.50 per share. At December 31, 1996, 873,978
options were outstanding at exercise prices ranging from $10.51 to $17.50 per
share, of which 739,035 shares were exercisable.
Effective January 1, 1997, the Board of Directors authorized the grant of
options for 141,500 shares at an exercise price of $20.25 per share.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation has been
recognized since stock options granted under these plans were at exercise prices
which approximated market value at the grant date. Had compensation expense been
determined for current period stock option grants using fair value methods
provided for in
F-19
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. STOCKHOLDERS' EQUITY (CONTINUED)
SFAS 123, the Company's pro forma net income (loss) and net earnings (loss) per
common share would have been the amounts indicated below:
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Compensation cost......................................................................... $ 1,697 $ 765
Net income (loss):
As reported............................................................................. $ 25,714 $ (10,038)
Pro forma............................................................................... 24,611 (10,543)
Net earnings (loss) per share:
As reported............................................................................. $ 2.59 $ (1.64)
Pro forma............................................................................... 2.48 (1.73)
Stock option share data:
Stock options granted during period..................................................... 398,153 477,825
Weighted average exercise price......................................................... $ 14.87 $ 10.51
Average option compensation value (a)................................................... 8.86 6.41
(a) Calculated in accordance with the Black-Scholes option pricing model, using
the following assumptions: expected volatility of 30% to 35%; expected
dividend yield of 0%; expected option term of ten years and risk-free rate
of return as of the date of grant which ranged from 5.64% to 7.15% based on
the yield of ten-year U.S. treasury securities.
WARRANTS. Prior to March 31, 1995, each of the Combined Entities had
entered into various warrant agreements with their subordinated and junior
subordinated noteholders which granted such holders the right to purchase equity
interests in each of the companies. These warrants were exercisable, in whole or
in part, at various dates through December 31, 2005. Immediately prior to the
combination, all warrant holders exercised their warrants to acquire equity
interests in the Combined Entities in consideration for aggregate proceeds of
$4.1 million and received shares of the Company's common stock in the
combination.
12. PENSION AND PROFIT SHARING PLANS
The Company's subsidiaries each sponsor an employees savings and profit
sharing plan. Non-union employees who have completed one or more years of
service and have met other requirements pursuant to the plans are eligible to
participate in the plans. The employees participating in the plans can generally
make contributions to the plans of between 6% and 8% of their annual
compensation, and each of the subsidiaries can elect to match such
contributions. During each of the years ended December 31, 1996, 1995 and 1994,
the Company expensed contributions to the plans of approximately $0.8 million.
Certain of the Company's recently acquired subsidiaries participate in
various multiemployer union pension plans, which are administered jointly by
management and union representatives and which sponsor most full-time and
certain part-time union employees who are not covered by the Company's other
plans. The pension expense for these plans approximated $0.2 million during
1996. The Company
F-20
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
12. PENSION AND PROFIT SHARING PLANS (CONTINUED)
could, under certain circumstances, be liable for unfunded vested benefits or
other expenses of jointly administered union/management plans. At this time, the
Company has not established any liabilities because withdrawal from these plans
is not probable or reasonably possible.
13. MERGER AND OTHER COSTS
MERGER AND OTHER COSTS. During 1995 and 1994, the Company incurred merger
and other costs of $10.2 million and $1.7 million, respectively, which consisted
of the costs associated with the negotiation of the merger and preparation of
related merger documents and agreements, financial consulting costs and other
costs related to the combination of $8.8 million and $1.4 million in 1995 and
1994, respectively; and other non-operating costs of $1.4 million and $0.3
million, respectively. During 1995, these other merger costs included a one-time
$0.5 million payment to cancel an existing management consulting agreement; a
one-time tax cost of $1.5 million to convert the Company's Puerto Rico operating
subsidiaries to United States corporations; the write-off of $0.4 million in
unamortized organization costs; and $5.1 million to recognize compensation
expense related to the issuance of common stock in exchange for a negotiated
profits interest (Note 12), which resulted in a capital contribution in the same
amount. Other non-operating costs included $0.3 million of bank fees in 1994
related to the funding of bridge loans to repay certain indebtedness, and during
1995, $0.7 million of costs associated with several uncompleted acquisitions and
$0.7 million of costs associated with an uncompleted debt offering.
During 1996, the Company expensed non-operating costs of $0.6 million in
connection with fees and expenses paid to amend its Senior Credit Facility.
EXTRAORDINARY LOSS. During 1996, 1995 and 1994, as a result of the
repayment of the outstanding indebtedness, the Company expensed approximately
$2.2 million (net of income tax benefit of $0.9 million), $8.5 million (net of
income tax benefit of $0.7 million) and $0.2 million, respectively, of debt
issuance, legal and other costs associated with extinguishment of prior credit
facilities. These amounts have been classified as an extraordinary loss in
accordance with the provisions of Statement of Financial Accounting Standards
No. 4, "Reporting Gains and Losses From the Extinguishment of Debt."
F-21
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
14. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Cash paid for interest........................................................... $ 16,932 $ 17,226 $ 16,929
Cash paid for taxes.............................................................. 4,662 1,432 362
Noncash transactions:
Issuance of subsidiary preferred stock in connection with acquisitions......... 3,000
Issuance of subordinated notes and amounts payable to the seller in connection
with acquisitions............................................................ 173 91 4,495
Dividends payable or paid in additional preferred stock on subsidiary stock...... 197
Distribution of investment and related debt in a bread bag manufacturer to
shareholders of Reddy Ice.................................................... 1,534
Acquisition of minority interest common stock and exercise of warrants 993
Compensation expense recorded as a capital contribution........................ 5,111
Subordinated notes issued in lieu of interest.................................... 236 671 430
15. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are parties, in the ordinary course of
business, to certain claims and litigation. In management's opinion, the
settlement of such matters is not expected to have a material impact on the
consolidated financial statements.
In addition, the Company is a party to employment agreements with certain
officers which provided for minimum compensation levels and incentive bonuses
along with provisions for termination of benefits in certain circumstances. The
Company also entered into a consulting and noncompetition arrangement with a
former officer providing for monthly payments of $12,500 for services to be
rendered in the future, which expires in March 1998.
16. RELATED PARTY TRANSACTIONS
Prior to March 31, 1995, the Company had consulting agreements with certain
stockholders and affiliates requiring the payment of monthly consulting fees,
plus expenses, in consideration for financial advisory and oversight services
provided to it by such stockholders. These consulting agreements, which were
cancelable only at the option of such stockholders over their term, were
canceled in the combination. During the years ended December 31, 1995 and 1994,
the Company expensed $0.2 million and $0.9 million, respectively, plus expenses
under the provisions of these agreements, which are included in general and
administrative expenses. In addition, the Company paid an affiliate of one of
its stockholders investment banking fees of $1.1 million, along with related
expenses, during the year ended December 31, 1994, for acquisition and financing
services, which were included as part of the costs and expenses of the
acquisition.
F-22
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
17. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Information about the Company's operations in the Dairy and Ice businesses
and in different geographic areas for the three years ended December 31, 1996,
is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," the Company is required to disclose an estimate of the fair value
of the Company's financial instruments as of December 31, 1996 and 1995.
Differences between the historical presentation and estimated fair values can
occur for many reasons, including taxes, commissions, prepayment penalties,
make-whole provisions and other restrictions as well as the inherent limitations
in any estimation technique.
Due to their near-term maturities, the carrying amounts of accounts
receivable and accounts payable are considered equivalent to fair value. In
addition, because the interest rates on the Company's revolving credit and term
loan facilities and certain other debt are variable, their fair values
approximate their carrying values.
Certain of the Company's long-term debt bears fixed interest rates and is
privately placed with unique terms and no active market. The fair value of such
long-term debt was determined by discounting future cash flows at current market
yields. In addition, the Company has entered into various interest rate
agreements to reduce the Company's sensitivity to changes in interest rates on
its variable rate debt. The fair values of these instruments were determined
based on current values for similar instruments with similar terms. The
following is a summary of the asset (liability) values for both the carrying
values and fair values of such instruments:
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
HISTORICAL HISTORICAL
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Fixed rate debt............................... $ (36,696) $ (34,036) $ (52,472) $ (53,621)
Interest rate agreements...................... (143) (1,220)
19. SUBSEQUENT EVENTS
On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01
par value per share, in a public offering at a price to the public of $22.00 per
share. Following this offering, the Company had 15,011,729 shares of common
stock issued and outstanding. The public offering provided net cash proceeds to
the Company of approximately $89.0 million. Of this amount, $36 million was used
to repay subordinated notes and $4.3 million was used to pay prepayment
penalties related to the early extinguishment of the subordinated notes, which,
along with the remaining balance of unamortized deferred loan costs, will be
reported as an extraordinary loss from the early extinguishment of debt in 1997.
The remainder of the net proceeds were used to repay a portion of the
outstanding balance of the acquisition facility of the Company's Senior Credit
Facility.
As discussed in Note 11, on April 22, 1996, and August 7, 1996, the Company
sold 3,795,000 shares and 625,000 shares, respectively, of its common stock,
which provided net cash proceeds to the Company of approximately $58.4 million,
which was used to repay existing debt. In addition, as discussed above, on
January 28, 1997, the Company sold an additional 4,270,000 shares of its common
stock, which provided net cash proceeds to the Company of approximately $89.0
million, which was used to repay debt. Had these sales of common stock occurred
on January 1, 1996, the supplemental pro forma net earnings per
F-24
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
19. SUBSEQUENT EVENTS (CONTINUED)
share before extraordinary losses from the early extinguishment of debt for the
year ended December 31, 1996, would have decreased by $.47 to $2.34.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1996 and 1995 (dollars in thousands, except per share data):
QUARTER
----------------------------------------------------------
1996 FIRST SECOND THIRD FOURTH FULL YEAR
----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Net sales............................................ $ 109,035 $ 116,272 $ 139,304 $ 156,305 $ 520,916
Gross profit......................................... 26,420 32,970 38,090 34,888 132,368
Income before extraordinary loss..................... 383 4,553 18,937 4,056 27,929
Net income........................................... 383 2,338 18,937 4,056 25,714
Earnings per common share:
Income before extraordinary loss................... 0.06 0.46 1.68 0.35 2.81
Net income......................................... 0.06 0.24 1.68 0.35 2.59
1995 FIRST SECOND THIRD FOURTH FULL YEAR
----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Net sales............................................ $ 104,876 $ 110,029 $ 110,549 $ 105,012 $ 430,466
Gross profit......................................... 26,207 31,046 33,439 27,141 117,833
Income (loss) before extraordinary loss.............. (9,889) 2,332 4,711 1,270 (1,576)
Net income (loss).................................... (18,351) 2,332 4,711 1,270 (10,038)
Earnings per common share:
Income (loss) before extraordinary loss............ (1.80) 0.37 0.75 0.20 (0.26)
Net income (loss).................................. (3.34) 0.37 0.75 0.20 (1.64)
Earnings per common share calculations for each of the quarters were based
on the weighted average number of shares outstanding for each period, and the
sum of the quarters may not necessarily be equal to the full year earnings per
common share amount.
The results for the first quarter of 1995 included $8.8 million of merger
costs related to the combination along with $8.5 million of extraordinary losses
from the early extinguishment of debt repaid at the combination date.
The results for the second quarter of 1996 include $2.2 million of
extraordinary losses from the early extinguishment of debt repaid with the
proceeds of the Company's initial public offering.
The results for the third quarter of 1996 include a gain on the sale of
Puerto Rico tax credits of $3.4 million and a tax benefit related to the
recognition of the remaining amount of such credits of $11.8 million, partially
offset by $0.6 million in financing costs related to the amendment of the
Company's Senior Credit Facility.
F-25
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 8,951 $ 7,130
Accounts receivable........................................................... 50,608 50,784
Inventories................................................................... 19,228 21,536
Prepaid expenses and other current assets..................................... 2,754 3,369
Refundable income taxes....................................................... 2,312 --
Deferred income taxes......................................................... 3,672 3,796
------------ -----------
Total current assets........................................................ 87,525 86,615
PROPERTY, PLANT AND EQUIPMENT................................................... 123,260 136,281
DEFERRED INCOME TAXES........................................................... 8,524 8,319
INTANGIBLE AND OTHER ASSETS..................................................... 164,839 171,091
------------ -----------
TOTAL....................................................................... $384,148 $402,306
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses......................................... $ 46,664 $ 42,118
Income taxes payable.......................................................... 1,105 1,154
Current portion of long-term debt............................................. 12,876 17,323
------------ -----------
Total current liabilities................................................... 60,645 60,595
LONG-TERM DEBT.................................................................. 226,693 128,150
DEFERRED INCOME TAXES........................................................... 3,278 4,928
COMMITMENTS AND CONTINGENCIES...................................................
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 100,000,000 shares authorized,
10,741,729 and 15,286,968 shares issued and outstanding..................... 107 153
Additional paid-in capital.................................................... 89,337 183,263
Retained earnings............................................................. 4,088 25,217
------------ -----------
Total stockholders' equity.................................................. 93,532 208,633
------------ -----------
TOTAL....................................................................... $384,148 $402,306
------------ -----------
------------ -----------
See notes to condensed consolidated financial statements.
F-26
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1996 1997 1996 1997
------------ ------------- ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NET SALES................................................ $ 116,272 $ 171,694 $ 225,307 $ 336,819
COST OF SALES............................................ 83,302 125,478 165,917 252,047
------------ ------------- ------------ -------------
GROSS PROFIT............................................. 32,970 46,216 59,390 84,772
OPERATING COSTS AND EXPENSES:
Selling and distribution............................... 17,180 22,102 32,682 42,244
General and administrative............................. 4,884 7,583 9,805 16,397
Amortization of intangibles............................ 1,023 1,510 1,960 2,982
------------ ------------- ------------ -------------
Total operating costs and expenses................... 23,087 31,195 44,447 61,623
------------ ------------- ------------ -------------
INCOME FROM OPERATIONS................................. 9,883 15,021 14,943 23,149
OTHER (INCOME) EXPENSE:
Interest expense, net.................................. 3,872 2,910 8,488 6,580
Other income, net...................................... (172) (222) (252) (18,575)
------------ ------------- ------------ -------------
Total other (income) expense......................... 3,700 2,688 8,236 (11,995)
------------ ------------- ------------ -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........ 6,183 12,333 6,707 35,144
INCOME TAXES............................................. 1,630 3,376 1,771 10,745
------------ ------------- ------------ -------------
INCOME BEFORE EXTRAORDINARY LOSS......................... 4,553 8,957 4,936 24,399
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT..... (2,215) -- (2,215) (3,270)
------------ ------------- ------------ -------------
NET INCOME............................................... $ 2,338 $ 8,957 $ 2,721 $ 21,129
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
NET EARNINGS (LOSS) PER SHARE:
Income before extraordinary loss....................... $ 0.46 $ 0.55 $ 0.58 $ 1.57
Extraordinary loss..................................... (0.22) -- (0.26) (0.21)
------------ ------------- ------------ -------------
Net income........................................... $ 0.24 $ 0.55 $ 0.32 $ 1.36
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
WEIGHTED AVERAGE SHARES OUTSTANDING...................... 9,921,715 16,342,250 8,455,332 15,509,388
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
See notes to condensed consolidated financial statements.
F-27
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE
30,
-----------------------
1996 1997
---------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 2,721 $ 21,129
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 4,479 6,512
Amortization of intangible assets, including deferred financing costs............... 2,297 3,401
Loss on the sales of assets......................................................... 20 38
Extraordinary loss from early extinguishment of debt................................ 2,215 3,270
Noncash and imputed interest........................................................ 236 --
Deferred income taxes............................................................... 767 1,731
Changes in operating assets and liabilities:
Accounts and notes receivable..................................................... (2,625) 104
Inventories....................................................................... (899) (2,082)
Prepaid expenses and other assets................................................. 37 (1,676)
Accounts payable and other accrued expenses....................................... (1,959) (4,465)
Income taxes payable.............................................................. (511) 5,535
---------- -----------
Net cash provided by operating activities....................................... 6,778 33,497
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.......................................... (7,984) (9,067)
Proceeds from the sale of property, plant and equipment............................. 245 67
Cash outflows for acquisitions...................................................... (4,176) (16,278)
---------- -----------
Net cash used in investing activities............................................. (11,915) (25,278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt.................................................. 8,653 28,000
Repayment of debt................................................................... (52,322) (122,096)
Payment of deferred financing costs and debt prepayment penalties................... (1,800) (4,970)
Issuance of common stock, net of expenses........................................... 48,608 89,026
---------- -----------
Net cash provided by (used in) financing activities................................. 3,139 (10,040)
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS................................................... (1,998) (1,821)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 3,177 8,951
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 1,179 $ 7,130
---------- -----------
---------- -----------
See notes to condensed consolidated financial statements.
F-28
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of June 30, 1997 and for
the three month and six month periods ended June 30, 1997 and 1996 have been
prepared by Suiza Foods Corporation (the "Company" or "Suiza Foods") without
audit. In the opinion of management, all necessary adjustments (which include
only normal recurring adjustments) to present fairly, in all material respects,
the consolidated financial position, results of operations and cash flows of the
Company as of June 30, 1997 and for the three month and six month periods ended
June 30, 1997 and 1996 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the Company's 1996 financial
statements contained in its Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 29, 1997.
2. INVENTORIES
AT DECEMBER 31, AT JUNE 30,
1996 1997
--------------- -----------
Pasteurized and raw milk and raw materials...................... $ 7,693 $ 9,795
Parts and supplies.............................................. 5,584 6,067
Finished goods.................................................. 5,951 5,674
------- -----------
$ 19,228 $ 21,536
------- -----------
------- -----------
3. LONG-TERM DEBT
AT DECEMBER 31, AT JUNE 30,
1996 1997
--------------- -----------
Senior credit facility:
Revolving loan facility....................................... $ 8,600 $ 2,800
Acquisition loan facility..................................... 69,100 --
Term loan facility............................................ 125,000 142,000
Subordinated notes............................................ 36,000 --
Capital lease obligations and other debt........................ 869 673
--------------- -----------
239,569 145,473
Less: current portion........................................... (12,876) (17,323)
--------------- -----------
$ 226,693 $ 128,150
--------------- -----------
--------------- -----------
On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01
par value per share, in a public offering (the "Offering") at a price to the
public of $22.00 per share. The Offering provided net cash proceeds to the
Company of approximately $89.0 million. Of this amount, $36.0 million was used
to repay subordinated notes and $4.3 million was used to pay prepayment
penalties related to the early extinguishment of the subordinated notes, which,
along with the related balance of unamortized deferred loan costs and net of
related income tax benefits, was reported as an extraordinary loss from the
early extinguishment of debt. The remainder of the net proceeds were used to
repay a portion of the outstanding balance of the acquisition loan facility of
the Company's Senior Credit Facility.
F-29
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
3. LONG-TERM DEBT (CONTINUED)
On March 5, 1997, the Company amended its Senior Credit Facility. Pursuant
to this amendment, the Company's term loans were expanded from a $130.0 million
facility into a $150.0 million facility. Quarterly amortization payments
beginning March 31, 1997 on this facility are $4.0 million, increasing to: 1)
$4.5 million on March 31, 1998; 2) $5.0 million on March 31, 1999; 3) $5.5
million on March 31, 2000; 4) $6.0 million on March 31, 2001; 5) $6.5 million on
March 31, 2002, with a final installment of $24.0 million due on March 31, 2003.
The Company further amended its Senior Credit Facility to increase the
acquisition loan facility from $90.0 million to $100.0 million. The Company is
required to pay interest only on amounts drawn under the acquisition loan
facility until June 30, 1999, at which time any outstanding balance will convert
into a term loan facility with scheduled amortization.
On July 31, 1997, the Company amended its Senior Credit Facility to provide
for an aggregate of $700.0 million comprised of: (i) a $150.0 million term loan;
(ii) a $50.0 million revolving credit facility; (iii) a $325.0 million revolving
acquisition facility, and (iv) a $175.0 million acquisition term loan. Under the
terms of the Senior Credit Facility, the $150.0 million term loan will be
amortized over six years beginning September 30, 1997 and the revolving credit
facility expires on September 30, 2003. The availability under the revolving
acquisition facility will decrease at the end of each calendar quarter beginning
December 31, 2000 by $20.3 million until December 31, 2002, when it begins
reducing by $40.6 million each quarter until maturity on September 30, 2003. The
$175.0 million acquisition term loan will be amortized over five years beginning
December 31, 1999. Amounts outstanding under the Senior Credit Facility will
bear interest at a rate per annum equal to one of the following rates, at the
Company's option: (i) the sum of a base rate equal to the higher of the Federal
Funds rates plus 50 basis points or First Union National Bank's prime commercial
lending rate, plus a margin that varies from 0 to 50 basis points depending on
the Company's ratio of defined indebtedness to EBITDA (as defined in the Senior
Credit Facility); or (ii) The London Interbank Offered Rate ("LIBOR") plus a
margin that varies from 75 to 150 basis points depending on the Company's ratio
of defined indebtedness to EBITDA. The Company will pay a commitment fee on
unused amounts of the revolving facility and the revolving acquisition facility
that ranges from 20 to 37.5 basis points, based on the Company's ratio of
defined indebtedness to EBITDA.
4. TAXES
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico
Agricultural Tax Incentives Act of 1995, which reduced the effective income tax
rate for qualified agricultural businesses from 39% to 3.9% and provided for a
50% tax credit for certain "eligible investments" in qualified agricultural
businesses in Puerto Rico. During 1996, the Company made investments in its
Suiza-Puerto Rico dairy, fruit, plastics and coffee operations, all of which
were certified as qualified agricultural businesses in Puerto Rico during 1996.
During 1996, the Company recognized $15.75 million in tax credits related to
qualifying investment made in its Puerto Rico dairy subsidiary which met the
eligible investment criteria of this act. However, in 1996 the Company did not
recognize any of the potential tax credits related to its investments in its
Puerto Rico fruit, plastics and coffee operations since certain rulings in 1996
by Puerto Rico tax authorities created uncertainty as to whether these
investments met the eligible investment criteria of the act and whether these
additional tax credits had been earned.
During the first quarter of 1997, the Company obtained a ruling from the
Commonwealth of Puerto Rico confirming that its investments in its Suiza-Puerto
Rico fruit and plastics subsidiaries qualified for the
F-30
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
4. TAXES (CONTINUED)
50% tax credit. Accordingly, in March 1997, the Company recognized a
nonrecurring gain of $18.1 million, net of discounts and related expenses ($11.5
million after income taxes) for earned tax credits which at March 31, 1997, it
had agreed to sell to third parties. During the second quarter of 1997, the
Company completed the sale of substantially all of these tax credits to the
third parties.
The Company is currently investigating whether its investment in its coffee
business will qualify for additional tax credits based on recent rulings by
Puerto Rico tax authorities and is awaiting a ruling from the Treasury
Department in Puerto Rico on the availability of such tax credits. If the
Company ultimately qualifies for such credits, the Company will account for
these tax benefits as an adjustment of the purchase price of the coffee
business, which would result in a reduction of goodwill.
5. ACQUISITIONS
During the quarter, the Company acquired four small ice businesses for total
consideration of approximately $10.7 million. Estimated annual sales of these
ice companies are $8.3 million. Since June 30, 1997, the Company has acquired
three ice companies for approximately $5.9 million, bringing the total number of
acquired ice companies in 1997 to ten, with estimated aggregate annual sales of
$15.8 million.
On July 1, 1997, the Company completed the acquisition of substantially all
the assets of Dairy Fresh L.P., a Delaware limited partnership ("Dairy Fresh"),
for approximately $104.5 million in cash (subject to adjustment and excluding
transaction costs), plus the assumption of certain current liabilities. Dairy
Fresh is a manufacturer of fresh milk and ice cream products based in
Winston-Salem, North Carolina. During its fiscal year ended December 31, 1996,
Dairy Fresh reported net sales of approximately $117.0 million throughout the
southeastern United States. The Company will use the acquired assets to continue
operating the business previously operated by Dairy Fresh. The Company financed
the acquisition with borrowings under its Senior Credit Facility.
On July 31, 1997 the Company completed the purchase of all the outstanding
stock of three affiliated dairy manufacturing and distribution companies, as
well as an affiliated water bottling and distribution company, and 16 affiliated
plastic manufacturing companies headquartered in Franklin, Massachusetts
(collectively, the "Garelick Companies"). In connection with this acquisition
the Company paid aggregate cash consideration of approximately $293.7 million
(subject to adjustment and excluding transaction costs) and issued 446,100
shares of common stock to acquire the outstanding stock and repay existing
indebtedness of the Garelick Companies. The combined businesses operated by the
Garelick Companies reported net sales of approximately $363 million during the
fiscal year ended September 30, 1996. The dairy operations of the Garelick
Companies are operated through Garelick Farms in Franklin, Massachusetts,
Fairdale Farms in Bennington, Vermont, and Grant's Dairy in Bangor, Maine. The
Garelick Companies also operate the Miscoe Springs water bottling company in
Mendon, Massachusetts and 16 plastic bottle manufacturing operations located in
Connecticut, Florida, Georgia, Illinois, Louisiana, Maine, Massachusetts, New
Jersey, North Carolina, Ohio, Pennsylvania, Texas and Virginia. The acquisition
of the Garelick Companies expands the geographic presence of the Company's dairy
operations into the northeastern United States and expands the Company's
operations into the related business of plastic container manufacturing.
F-31
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
5. ACQUISITIONS (CONTINUED)
In connection with the acquisition of the Garelick Companies, the Company
increased the size of its Senior Credit Facility from $300.0 million to $700.0
million in the aggregate (see footnote 3--Long-Term Debt).
6. STOCKHOLDERS' EQUITY
On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01
par value per share, in a public offering at a price to the public of $22.00 per
share. On March 12, 1997, the Company issued 133,000 shares of its common stock
in partial consideration of the purchase of an ice company. As of June 30, 1997
the Company had 15,286,968 shares of common stock issued and outstanding.
F-32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
The Morningstar Group Inc.:
We have audited the accompanying consolidated balance sheets of The
Morningstar Group Inc. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Morningstar Group Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
February 10, 1997
F-33
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash............................................................................... $ 4,786 $ 5,811
Receivables, net of allowance for doubtful accounts of $6,676 and $1,595,
respectively..................................................................... 57,802 28,043
Inventories........................................................................ 25,400 11,123
Prepaids and other................................................................. 3,015 1,597
Deferred tax assets................................................................ 7,339 3,089
Net assets held for sale........................................................... 676 836
------------ ------------
Total current assets............................................................. 99,018 50,499
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................................... 7,843 5,713
Buildings and improvements......................................................... 29,507 18,804
Machinery and equipment............................................................ 70,239 43,552
------------ ------------
Gross property, plant and equipment.............................................. 107,589 68,069
Less: Accumulated depreciation..................................................... (22,807) (17,748)
------------ ------------
Net property, plant and equipment................................................ 84,782 50,321
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets..................................................... 73,146 1,847
Goodwill........................................................................... 96,175 58,671
Deferred financing costs........................................................... 2,731 1,259
Other assets....................................................................... 139 112
------------ ------------
Total intangible and other assets................................................ 172,191 61,889
------------ ------------
Total assets..................................................................... $ 355,991 $ 162,709
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................... $ 32,968 $ 21,488
Accrued liabilities................................................................ 39,923 15,869
Current maturities of long-term debt............................................... 8,000 8,000
------------ ------------
Total current liabilities........................................................ 80,891 45,357
LONG-TERM DEBT (net of current maturities)........................................... 177,349 36,000
OTHER LONG-TERM LIABILITIES.......................................................... 3,269 1,959
DEFERRED TAX LIABILITIES............................................................. 5,694 2,070
COMMITMENTS AND CONTINGENCIES........................................................
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized; 15,298,111 shares in
1996 and 15,244,261 shares in 1995 issued........................................ 153 152
Additional paid-in capital......................................................... 73,179 71,991
Treasury stock, at cost (767,000 shares in 1996 and 230,000 shares in 1995)........ (6,140) (1,840)
Retained earnings.................................................................. 21,596 7,020
------------ ------------
Total stockholders' equity....................................................... 88,788 77,323
------------ ------------
Total liabilities and stockholders' equity....................................... $ 355,991 $ 162,709
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated statements.
F-34
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
----------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND
SHARE AMOUNTS)
NET SALES....................................................................... $ 394,306 $ 304,730 $ 292,314
COST OF GOODS SOLD.............................................................. 302,801 232,948 222,145
----------- -------------- --------------
GROSS PROFIT.................................................................... 91,505 71,782 70,169
OPERATING COSTS AND EXPENSES:
Distribution.................................................................. 17,056 16,120 18,689
Selling and marketing......................................................... 32,839 22,233 21,295
General and administrative.................................................... 15,450 13,001 11,778
----------- -------------- --------------
Total operating costs and expenses.......................................... 65,345 51,354 51,762
----------- -------------- --------------
OPERATING INCOME................................................................ 26,160 20,428 18,407
INTEREST EXPENSE................................................................ 3,647 3,921 4,446
AMORTIZATION OF DEFERRED FINANCING COSTS........................................ 379 381 351
DIVIDEND INCOME................................................................. -- (268) --
OTHER INCOME, NET............................................................... (286) (1,008) (1,244)
----------- -------------- --------------
INCOME BEFORE INCOME TAXES...................................................... 22,420 17,402 14,854
PROVISION FOR INCOME TAXES...................................................... 7,844 6,062 5,533
----------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS............................................... 14,576 11,340 9,321
DISCONTINUED OPERATIONS:
Income from discontinued operations........................................... -- -- 903(a)
Gain on disposal.............................................................. -- 184(b) 423(b)
----------- -------------- --------------
INCOME FROM DISCONTINUED OPERATIONS............................................. -- 184 1,326
NET INCOME...................................................................... $ 14,576 $ 11,524 $ 10,647
----------- -------------- --------------
----------- -------------- --------------
EARNINGS PER COMMON SHARE:
Continuing operations......................................................... $ .96 $ .74 $ .62
Discontinued operations....................................................... -- .02 .09
----------- -------------- --------------
Earnings per common share..................................................... $ .96 $ .76 $ .71
----------- -------------- --------------
----------- -------------- --------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING................ 15,133,887 15,245,562 15,050,538
(a) Net of applicable tax provision of $507.
(b) Net of applicable tax provision of $216 and $2,865.
The accompanying notes are an integral part of these consolidated statements.
F-35
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
COMMON AND ADDITIONAL TREASURY RETAINED
SHARES PAID-IN STOCK AT EARNINGS
ISSUED CAPITAL COST (DEFICIT) TOTAL
------------ -------------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1993....................... 14,287,212 $ 69,684 $ -- $ (15,151) $ 54,533
Exercise of stock options........................ 633,585 1,622 -- -- 1,622
Net income....................................... -- -- -- 10,647 10,647
------------ ------- ---------- ---------- ---------
Balance, December 31, 1994....................... 14,920,797 71,306 -- (4,504) 66,802
Exercise of stock options........................ 323,464 837 -- -- 837
Purchase of treasury stock....................... -- -- (1,840) -- (1,840)
Net income....................................... -- -- -- 11,524 11,524
------------ ------- ---------- ---------- ---------
Balance, December 31, 1995....................... 15,244,261 72,143 (1,840) 7,020 77,323
Exercise of stock options........................ 53,850 381 -- -- 381
Income tax benefits of stock options............. -- 808 -- -- 808
Purchase of treasury stock....................... -- -- (4,300) -- (4,300)
Net income....................................... -- -- -- 14,576 14,576
------------ ------- ---------- ---------- ---------
Balance, December 31, 1996....................... 15,298,111 $ 73,332 $ (6,140) $ 21,596 $ 88,788
------------ ------- ---------- ---------- ---------
------------ ------- ---------- ---------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-36
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.............................................. $ 389,101 $ 306,918 $ 284,605
Interest received......................................................... 129 224 134
Income tax refund......................................................... 156 -- --
Cash paid to suppliers and employees...................................... (354,037) (272,992) (259,147)
Interest paid............................................................. (2,971) (4,220) (4,395)
Income taxes paid......................................................... (4,171) (3,199) (2,663)
---------- ---------- ----------
Net cash provided by Continuing Operations................................ 28,207 26,731 18,534
Net cash used by Discontinued Operations.................................. -- -- (3,403)
---------- ---------- ----------
Net cash provided by operating activities................................. 28,207 26,731 15,131
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries:
Working capital........................................................... (3,268) -- --
Property, plant and equipment............................................. (29,926) -- --
Other assets.............................................................. (111,809) -- --
Other long-term (assets) liabilities...................................... (311) -- --
---------- ---------- ----------
(145,314) -- --
---------- ---------- ----------
Capital expenditures...................................................... (11,462) (10,705) (7,622)
Proceeds from sale of assets.............................................. -- 2 32
Dividends received from Preferred Stock................................... -- 268 --
Other..................................................................... (52) 1,258 682
---------- ---------- ----------
Net cash used by Continuing Operations.................................... (156,828) (9,177) (6,908)
Discontinued Operations:
Sale of Discontinued Operations........................................... -- -- 50,237
Sale of Preferred Stock................................................... -- 3,000 --
Capital and other expenditures............................................ -- -- (482)
---------- ---------- ----------
Net cash provided by Discontinued Operations.............................. -- 3,000 49,755
---------- ---------- ----------
Net cash provided (used) by investing activities.......................... (156,828) (6,177) 42,847
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................................... 381 837 1,622
Purchase of treasury stock................................................ (4,300) (1,840) --
Proceeds from issuance of long-term debt.................................. 160,000 -- --
Net borrowings (repayments) under revolving credit facility............... 22,349 (1,892) (14,783)
Principal payments on long-term debt...................................... (50,834) (14,000) (45,470)
Dividends paid............................................................ -- -- (535)
---------- ---------- ----------
Net cash provided (used) by financing activities.......................... 127,596 (16,895) (59,166)
NET INCREASE (DECREASE) IN CASH............................................. (1,025) 3,659 (1,188)
CASH, BEGINNING OF PERIOD................................................... 5,811 2,152 3,340
---------- ---------- ----------
CASH, END OF PERIOD......................................................... $ 4,786 $ 5,811 $ 2,152
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-37
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
NET INCOME.................................................................... $ 14,576 $ 11,524 $ 10,647
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATIONS:
Discontinued Operations net income........................................ -- (184) (1,326)
Depreciation.............................................................. 6,378 5,122 4,344
Amortization of intangibles............................................... 3,291 2,700 2,632
(Gain) loss on fixed asset retirements.................................... -- -- (243)
Increase in deferred tax assets........................................... (4,250) 3,635 4,222
Change in assets and liabilities net of effects from acquisitions and
divestitures of subsidiaries:
Accounts receivable....................................................... (5,205) 2,426 (3,707)
Inventories............................................................... (1,243) (583) 987
Prepaids and other........................................................ 1,493 151 3,569
Accounts payable.......................................................... 1,747 4,225 (655)
Accrued liabilities....................................................... 8,011 (4,076) (1,986)
Other long-term liabilities............................................... 3,409 1,791 50
---------- ---------- ----------
Total adjustments......................................................... 13,631 15,207 7,887
---------- ---------- ----------
Net cash provided by Continuing Operations................................ 28,207 26,731 18,534
Discontinued Operations:
Discontinued Operations net income........................................ -- 184 1,326
Gain on disposal.......................................................... -- (184) (423)
Change in working capital................................................. -- -- (4,914)
Depreciation and amortization............................................. -- -- 608
---------- ---------- ----------
Net cash used by Discontinued Operations.................................. -- -- (3,403)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... $ 28,207 $ 26,731 $ 15,131
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-38
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND BUSINESS
BACKGROUND
The Morningstar Group Inc., a Delaware corporation (together with its
subsidiaries, the "Company" or "Morningstar") was formed in March 1991. On April
1, 1988, the Company's predecessor, MorningStar Foods Inc., acquired
substantially all of the net assets and operations of the Dairy Group of The
Southland Corporation.
BUSINESS
The Company's Continuing Operations include its specialty operations which
manufacture and market shelf stable, refrigerated and frozen food products
including nationally branded products, other specialty, dairy-based cultured and
ultra-pasteurized products and non-dairy based food products. Discontinued
Operations include all previously divested regional dairy operations and other
divested operations.
2. PRESTO FOOD PRODUCTS, INC. ACQUISITION
On December 3, 1996, the Company acquired all of the issued and outstanding
shares of capital stock of Presto Food Products, Inc. ("Presto"), a California
corporation, from the shareholders of Presto pursuant to a stock purchase
agreement dated as of October 20, 1996, by and among the Company, Presto and the
Presto shareholders. Presto's sales for the year ended December 31, 1995, were
approximately $139.5 million. Presto is a national manufacturer, marketer and
distributor of non-dairy and dairy products, such as Mocha Mix non-dairy coffee
creamers, Jon Donaire desserts and ice cream cakes, aerosols, bakery toppings
and icings, frozen pre-whipped toppings and creamers, serving customers
throughout the United States since 1937. The Company paid approximately $123.5
million in cash for the stock acquired and assumed approximately $37.4 million
in related liabilities. The allocation of the purchase price was based on
preliminary estimates of fair value. The final allocation may be revised if the
appraised values are significantly different from the preliminary estimates.
Included in the assumed liabilities is approximately $3.2 million related to
costs associated with the involuntary termination and/or relocation of certain
employees of the acquired company. The terminated employees represent redundant
and excess personnel in the operations, marketing, selling, and general and
administrative areas. This termination plan will likely be completed by the
second quarter of 1997. In conjunction with the consummation of the Presto
acquisition, the Company renegotiated its credit agreement. Funds provided by
the renegotiated Senior Credit Agreement ("Senior Credit Agreement") were
utilized to pay off existing senior debt of approximately $44.8 million, to
acquire the capital stock of Presto for $123.5 million and to pay approximately
$2.1 million in fees and expenses associated with the Presto acquisition. The
Company accounted for the acquisition as a purchase and accordingly, Presto's
results are included in the 1996 Consolidated Statement of Operations for the
period December 3, 1996, through December 31, 1996.
F-39
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. PRESTO FOOD PRODUCTS, INC. ACQUISITION (CONTINUED)
Unaudited pro forma operating results of the Company, assuming the
acquisition had been made as of January 1, 1995, follow. Such information
includes adjustments to reflect additional goodwill and intangible amortization,
a reduction in redundant and excess personnel related costs, additional interest
expense, additional amortization of deferred financing costs and additional
income tax expense.
YEAR ENDED
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Pro forma net sales................................................... $ 528,056 $ 444,202
---------- ----------
---------- ----------
Pro forma net income from Continuing Operations....................... $ 18,325 $ 13,799
---------- ----------
---------- ----------
Pro forma net income.................................................. $ 18,325 $ 13,983
---------- ----------
---------- ----------
Pro forma earnings per share from Continuing Operations............... $ 1.21 $ 0.91
---------- ----------
---------- ----------
Pro forma earnings per share.......................................... $ 1.21 $ 0.92
---------- ----------
---------- ----------
3. OTHER ACQUISITIONS
WACKY WILLIE ACQUISITION
On October 1, 1996, the Company completed the acquisition of the rights to
the Wacky Willie and Killer Shake trademarks for $300,000 in cash from Killer
Productions Company. There were no liabilities associated with the acquisition,
nor were there any other assets included in the transaction. The Company may at
its sole option, before August 1999, pay an additional $700,000 to Killer
Productions representing the final portion of the purchase price. In addition,
in the event net sales reach $5.0 million in any consecutive twelve-month period
ending on or before August 1999, the Company will be required to pay the
additional $700,000 representing the final portion of the purchase price. The
funding for this purchase was provided by the Company's operations. Sales of
Killer Shake are included in the 1996 Consolidated Statement of Operations for
the period January 1, 1996, through December 31, 1996. The Company manufactured
and sold this product under a license arrangement for the period January 1,
1996, through September 30, 1996.
CREAM PRODUCTS ACQUISITION
On August 1, 1996, the Company completed the purchase of substantially all
of the assets of Cream Products Company ("Cream Products"), located in Chicago,
Illinois. Cream Products' sales for the year ended December 31, 1995, were
approximately $24.6 million. Cream Products is a manufacturer and distributor of
dairy and non-dairy products primarily supplying food makers and food service
customers throughout the United States since 1938. The Company paid
approximately $5.9 million in cash for the assets acquired, and assumed
approximately $2.3 million in related liabilities. Funds for this acquisition
were provided by the Company's operations in conjunction with its revolving
credit facility. The Company
F-40
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. OTHER ACQUISITIONS (CONTINUED)
accounted for the acquisition as a purchase and accordingly, Cream Products'
results are included in the 1996 Consolidated Statement of Operations for the
period August 1, 1996, through December 31, 1996.
LA CORONA ACQUISITION
On May 28, 1996, the Company completed the purchase of substantially all of
the assets of La Corona Foods, Inc. ("La Corona"), located in Glendale, Arizona.
La Corona's sales for the fiscal year ended September 30, 1995, were
approximately $6.9 million. The Company paid approximately $3.4 million in cash
for the assets purchased, and assumed approximately $2.5 million in related
liabilities. The funding for this acquisition was provided by the Company's
operations. The Company accounted for the acquisition as a purchase and
accordingly, La Corona's results are included in the 1996 Consolidated Statement
of Operations for the period May 29, 1996, through December 31, 1996.
MERKTS CHEESE ACQUISITION
On March 19, 1996, the Company completed the acquisition of substantially
all of the assets of Merkts Cheese Company ("Merkts"), located in Bristol,
Wisconsin. Merkts recorded approximately $10.3 million in sales for the fiscal
year ending June 30, 1995. The Company paid approximately $3.6 million in cash
for the assets purchased, and assumed approximately $0.4 million in liabilities.
The funding for this acquisition was provided by the Company's operations. The
Company accounted for the acquisition as a purchase and accordingly, Merkts'
results are included in the 1996 Consolidated Statement of Operations for the
period March 20, 1996, through December 31, 1996.
4. DISCONTINUED OPERATIONS
The Company has made significant divestitures since its inception and as a
result, the size and scope of the Company's operations have changed
significantly. In 1991, the Company divested a novelty/ice cream operation in
Texas and closed a novelty/ice cream operation in Missouri. In 1992, the Company
divested a regional dairy operation and a novelty/ice cream operation, both
located in Maryland. On April 13, 1994, the Company completed the divestiture of
its Florida-based fluid milk operation Velda Farms Inc. ("Velda") for $51.0
million, consisting of $48.0 million in cash after working capital adjustments
and $3.0 million of 9% Series A Preferred Stock (the "Preferred Stock"). The
Company deferred the gain on the Preferred Stock pending realization of the
gain. The majority of the cash proceeds were used to pay down external bank debt
and to fund federal and state taxes generated by the gain on the sale. The sale
of Velda concluded the divestiture of the Company's regional dairies which were
considered a major and distinct segment of its business. As such, the operations
of the regional dairies and other divested operations have been restated and
presented in the consolidated financial statements to conform with discontinued
operations treatment ("Discontinued Operations").
On March 31, 1995, the Preferred Stock was redeemed by its issuer at face
value plus accrued dividends. The $3.0 million gain on the stock, less
applicable taxes and other reserves of $2.3 million, was reflected in
Discontinued Operations in the Consolidated Statements of Operations during the
first quarter of 1995. The Company also recognized $268,000 in dividends,
related to the Preferred Stock, during the first quarter of 1995 which was
recorded in Continuing Operations. The Company recorded an additional loss from
Discontinued Operations of approximately $0.5 million, net of tax benefits,
during the second quarter of 1995, related to Discontinued Operations reserves
and other liabilities.
F-41
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. DISCONTINUED OPERATIONS (CONTINUED)
Net sales of the Discontinued Operations were $38.6 million in 1994.
Interest expense of $0.4 million was allocated to Discontinued Operations during
1994. The allocation method was based upon the ratio of net assets of
Discontinued Operations to the sum of consolidated net assets plus consolidated
debt, less debt specifically allocated to certain of the Company's subsidiaries.
5. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intracompany
transactions and balances have been eliminated.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company sells
its products to supermarkets, convenience stores, dairies, food service and
institutional organizations, club stores and private label suppliers located in
all 50 states and over 20 foreign countries, with a concentration of customers
located in California. The Company performs ongoing credit evaluations of its
customers' financial condition. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other relevant information.
CASH AND CASH EQUIVALENTS
The Company considers overnight investments to be cash.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories are summarized as follows (in
thousands):
AT DECEMBER 31,
--------------------
1996 1995
--------- ---------
Raw materials and supplies.............................................. $ 11,767 $ 5,975
Finished goods.......................................................... 13,633 5,148
--------- ---------
Total................................................................. $ 25,400 $ 11,123
--------- ---------
--------- ---------
Finished goods inventories include the costs of materials, labor and plant
overhead.
F-42
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of the assets, as follows:
USEFUL LIFE
ASSET CATEGORY (YEARS)
--------------------------------------------------------------------------- -----------------
Machinery and equipment.................................................... 3 - 10
Buildings and improvements................................................. 25
Property sold or retired is eliminated from the accounts in the year of
disposition. Major expenditures for renewals and betterments are capitalized
while maintenance and repairs are charged against income.
IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets related to the acquisition of Favorite were
added in 1993, and are being amortized over their estimated useful lives which
is generally five years. Identifiable intangible assets of approximately $72.3
million were recorded in connection with the acquisitions consummated in 1996.
These assets are being amortized on a straight-line basis over a range of 5-40
years. Amortization costs totaled $1.0 million in 1996, $0.7 million in 1995,
and $0.7 million in 1994. Accumulated amortization was $2.8 million and $1.8
million at December 31, 1996 and 1995, respectively.
GOODWILL
Goodwill is amortized on a straight-line basis over a range of 25-40 years
and is recorded at cost less accumulated amortization. Goodwill of approximately
$39.4 million was recorded in connection with the acquisitions consummated in
1996. Amortization costs totaled $1.9 million in 1996, $1.7 million in 1995, and
$1.7 million in 1994. Accumulated amortization was $10.4 million and $8.5
million at December 31, 1996 and 1995, respectively.
DEFERRED FINANCING COSTS
Costs incurred that relate to the issuance of indebtedness and the
corresponding accumulated amortization are included in deferred financing costs
in the accompanying consolidated balance sheets. Deferred financing costs
related to existing debt are amortized over the life of the related debt. In
conjunction with renegotiating its Senior Credit Agreement in December 1996, the
Company incurred deferred financing costs of approximately $2.7 million.
Accumulated amortization was $87,000 and $1.5 million at December 31, 1996 and
1995, respectively.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued "SFAS" No.
121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of."
This statement is effective for financial statements beginning after December
15, 1995. The Company elected to adopt the statement effective December 31,
1995. The adoption of SFAS No. 121 had no material effect on the Company's
financial statements.
F-43
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company continually evaluates whether events and circumstances indicate
that the remaining carrying amount of an asset may not be recoverable or the
remaining useful life may warrant revision. To make this evaluation, the Company
uses its estimate of undiscounted future cash flows (without interest charges)
over the remaining life of the asset.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
AT DECEMBER 31,
--------------------
1996 1995
--------- ---------
Accrued interest........................................................ $ 1,140 $ 407
Payroll and benefits (accrued wages, vacation and profit sharing)....... 8,315 4,080
Restructuring accruals.................................................. 60 230
Insurance accruals...................................................... 5,527 5,195
Income and property taxes............................................... 5,791 1,491
Marketing and advertising............................................... 6,863 2,017
Acquisition related accruals............................................ 6,290 --
Other accrued liabilities............................................... 5,937 2,449
--------- ---------
Total................................................................. $ 39,923 $ 15,869
--------- ---------
--------- ---------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial position of the Company at December 31, 1996 and 1995,
includes certain financial instruments which may have a fair value that is
different from that which is currently reflected in the financial statements.
However, any variation in value is insignificant.
USE OF ESTIMATES
The preparation of these 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.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment to customers.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has not entered into any derivatives or other speculative
financial instruments as of December 31, 1996.
F-44
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amount of assets and liabilities recognized for financial reporting
and tax purposes and are measured by applying currently enacted tax laws. The
effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
OTHER INCOME
Other income primarily consists of royalty revenue.
EARNINGS PER COMMON SHARE
The earnings per common share is computed based on the fully diluted
weighted average number of shares of the Company's common stock and common stock
equivalents outstanding during the period. Common stock equivalents represent
the dilutive effect of the assumed exercise of certain outstanding stock
options.
FINANCIAL STATEMENT PRESENTATION
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-45
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES
The components of the provision for income taxes from Continuing Operations
are as follows (in thousands):
Temporary differences and carryforwards which give rise to a significant
portion of net deferred income tax assets are as follows (in thousands):
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
Deferred tax assets: Net operating loss carryforward.................... $ -- $ 385
Accrued vacation....................................................... 588 504
Accrued workers' compensation.......................................... 1,671 1,397
Acquisition reserves................................................... 2,394 --
Other insurance reserves............................................... 666 657
Restructuring reserves................................................. 350 396
Other accrued expenses and reserves.................................... 2,182 1,454
Other deferred tax assets.............................................. 600 2,340
--------- ---------
Total deferred tax assets............................................ 8,451 7,133
Deferred tax liabilities: Accelerated depreciation and amortization...... 6,759 2,901
Other deferred tax liabilities......................................... 47 140
--------- ---------
Total deferred tax liabilities....................................... 6,806 3,041
Valuation allowance...................................................... -- (3,073)
--------- ---------
Net deferred tax assets................................................ 1,645 1,019
Noncurrent deferred tax liabilities.................................... (5,694) (2,070)
--------- ---------
Current deferred tax assets............................................ $ 7,339 $ 3,089
--------- ---------
--------- ---------
The Company reduced goodwill by approximately $21,000, $5.6 million and $4.2
million for the years ended December 31, 1996, 1995 and 1994, respectively,
representing realization of deferred tax assets created prior to the Company's
financial restructuring transaction.
F-46
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES (CONTINUED)
The provision for income taxes was different from the amount computed using
the statutory income tax rate for the reasons set forth in the following table
(in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Provision computed at statutory rate.......................... $ 7,846 $ 5,917 $ 5,050
State income taxes............................................ 1,243 1,025 905
Tax on non-deductible goodwill amortization................... 486 473 516
Utilization of previously unrecognized deferred tax assets.... (2,265) (1,405) (1,107)
Other......................................................... 534 52 169
--------- --------- ---------
Provision for income taxes.................................... $ 7,844 $ 6,062 $ 5,533
--------- --------- ---------
--------- --------- ---------
7. LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
AT DECEMBER 31,
---------------------
1996 1995
---------- ---------
Senior term loan....................................................... $ 160,000 $ 41,000
Revolving credit facility.............................................. 22,349 --
Industrial development revenue bonds................................... 3,000 3,000
---------- ---------
Total long-term debt................................................. 185,349 44,000
Less: Current maturities............................................. (8,000) (8,000)
---------- ---------
Long-term debt, net of current maturities............................ $ 177,349 $ 36,000
---------- ---------
---------- ---------
Maturities of long-term debt at December 31, 1996, are as follows (in
thousands):
On December 2, 1996, in conjunction with the Presto acquisition, the Company
renegotiated a $220.0 million credit agreement ("Senior Credit Agreement").
Funding provided by the Senior Credit Agreement was utilized to acquire the
capital stock of Presto for approximately $123.5 million, to pay off
F-47
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. LONG-TERM DEBT (CONTINUED)
the existing senior debt of approximately $44.8 million and to pay $2.1 million
in fees and expenses associated with the Presto acquisition.
The base interest rate on the Term Loan and the Revolver is the prime rate
plus an applicable margin spread. Both facilities have alternative rate options
based upon applicable margin spreads above the London Interbank Offered Rate
("LIBOR"). At December 31, 1996, $160.0 million in borrowings under the Term
Loan were outstanding at an interest rate of 6.95% and $22.4 million in
borrowings were outstanding under the Revolver at an interest rate of 6.99%.
Borrowings under these lending facilities are secured by virtually all of the
assets of the Company. Up to $15.0 million in letters of credit may be issued
under the Revolver, of which $8.8 million was issued and outstanding at December
31, 1996. As of December 31, 1996, approximately $28.8 million was additionally
available to the Company under the $60.0 million Revolver. A fee of 1.5% per
year is charged on outstanding letters of credit. A 0.42% per year commitment
fee on uncommitted funds is payable quarterly. The Revolver matures on December
1, 2002, coincident with the scheduled maturity of the Term Loan. The Senior
Credit Agreement contains numerous covenants pertaining to management and
operations of the Company including, among other restrictions, limitations on
the amount of annual capital expenditures as well as specification of certain
maximum leverage ratios, minimum fixed charge coverage ratios and minimum net
worth. The Senior Credit Agreement also requires mandatory prepayment of the
loans under certain conditions such as the sale of assets, excess cash flow, the
issuance of new debt or equity and the receipt of certain other cash proceeds.
During April 1994, the Company completed the sale of Velda for approximately
$51.0 million, consisting of $48.0 million in cash after working capital
adjustments and $3.0 million in 9% Series A Preferred Stock. In conjunction with
the sale, the Company paid down approximately $36.7 million of its then existing
senior term loan and $11.8 million of its then existing revolver.
The Company was in compliance with all financial covenants as of December
31, 1996.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds were issued on December 14, 1988,
to fund the construction of a waste water treatment facility at the Company's
Frederick, Maryland, processing plant. The bonds mature on December 1, 2003, and
bear interest that fluctuates weekly based upon market factors. The interest
rate in effect for these bonds on December 31, 1996, was 4.30%.
8. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company has adopted a defined contribution profit sharing plan for the
purpose of providing retirement benefits for eligible non-union employees. At
December 31, 1996, eligible employees totaled 363, of which 214 were
participants in the plan. Contributions are made by the Company and by plan
participants. Company contributions are allocated to the participants on the
basis of individual contributions, the age of the participant and the number of
years that the participant has been in the plan. During 1996 the Company also
contributed to two single-employer and five multi-employer pension/retirement
F-48
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
plans under the terms of various union contracts, which covered 778 of its 1,403
employees at December 31, 1996. The number of union pension plans and the
portion of employees covered has varied from year to year. Contributions to
these pension plans are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Defined contribution profit sharing plan......................... $ 416 $ 250 $ 230
Union pension plans.............................................. 1,445 1,182 1,122
POST-RETIREMENT BENEFIT PLANS
In December 1990, the Financial Accounting Standards Board issued its
standard on accounting for post retirement benefits other than pensions. This
standard requires that the expected cost of these benefits must be charged to
expense during the years that the employees render service. The cost of
providing these benefits has been primarily paid by non-union retirees and the
Company's calculation of its obligation is not material as of December 31, 1996.
The Company's union employees participate in various defined contribution
union plans that provide health care and other welfare benefits during their
employment and after retirement. Amounts charged to expense and contributed to
these health and welfare plans totaled approximately $2.0 million in 1996, $2.0
million in 1995, and $2.6 million in 1994. Having made these payments, no
remaining obligations exist for these years under the union plans.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain plant facilities and related equipment and
vehicles under operating lease arrangements. Lease expense pursuant to such
arrangements was approximately $4.3 million in 1996, $3.2 million in 1995, and
$3.0 million in 1994.
The following is a summary of future minimum annual lease payments under
noncancelable operating lease obligations as of December 31, 1996 (in
thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
As of December 31, 1996, the Company had entered into employment agreements
with certain key management personnel which provide for annual compensation and
benefits and also provide for certain severance payments to be made to such
individuals in the event of a change in control (as defined) of the Company or
the involuntary termination of such individuals for reasons other than cause (as
defined). As of December 31, 1996, the maximum amount payable under these
employment agreements was approximately $4.6 million in the aggregate.
LITIGATION
From time to time the Company is subject to litigation in the ordinary
course of its business. In connection with the divestitures of certain of the
Company's operations, the Company assumed certain obligations of
indemnification, none of which is believed to be material to the Company. The
Company maintains insurance in respect of certain losses that may result from
its current or future operations. The Company believes that the outcome of any
existing litigation, after considering the indemnities and insurance related to
such litigation, would not have a material impact on its business, financial
condition or results of operations.
10. RELATED PARTY TRANSACTIONS
HICKS MUSE
The Company had previously entered into a financial advisory agreement dated
March 1, 1991, as amended, pursuant to which Hicks Muse provided financial
advisory services to the Company. Effective September 30, 1995, this agreement
was terminated. As compensation for such services, the Company paid Hicks Muse
an advisory fee, together with all reasonable expenses incurred in connection
therewith. The Company paid advisory fees of $150,000 and $114,000 in 1995 and
1994, respectively, and reimbursed Hicks Muse approximately $28,000 and $37,000
for expenses for each year, respectively. Hicks Muse was also paid a fee of
$300,000 relating to the sale of Velda.
11. EQUITY
EMPLOYEE AND DIRECTOR STOCK OPTIONS
The Company has several stock-based compensation plans, which are described
below. The Company applies Accounting Principles Board ("APB") Opinion 25 and
related Interpretations in accounting for its stock-based compensation plans. In
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which, if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of its stock-based compensation plans.
Adoption of the cost recognition provisions of SFAS 123 is optional and the
Company has decided not to elect these provisions. However, pro forma
disclosures as if the Company had adopted these cost recognition provisions in
1995 are required for fiscal years beginning after December 15, 1995. The
Company has elected to provide these disclosures for its fiscal year which began
on January 1, 1996.
F-50
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
1991 STOCK OPTION PLAN
In March 1991, the Company established the 1991 Incentive and Nonstatutory
Stock Option Plan which provides for the issuance of options to purchase 999,999
shares of common stock to key employees of the Company. At December 31, 1996,
769,941 tenure options and 228,258 incentive options had been granted to
employees. Upon completion of the common stock offering in 1992, the incentive
options became vested, resulting in compensation expense of $1.1 million. The
exercise price for all options granted was $2.56 per share, which was the fair
market value of the options at the date of issuance. The options expire ten
years after the date of their issuance.
1992 STOCK OPTION PLAN
In July 1992, the Company established the 1992 Incentive and Nonstatutory
Stock Option Plan which provides for the issuance of options to purchase 181,818
shares of common stock to key employees of the Company. At December 31, 1996,
175,000 options had been granted to employees. The exercise price for 25,000 of
the options granted in 1992 is $9.00 per share, which was the fair market value
of the options at the date of issuance. The exercise price for 120,000 of the
options granted in 1994 is $7.00 per share, which was the fair market value of
the options at the date of issuance. The exercise price for 30,000 of the
options granted in 1995 is $6.75 per share, which was the fair market value of
the options at the date of issuance. The options granted in 1992 become
exercisable over a three-year period and expire ten years after the date of
their issuance. One-third of the options granted in 1994 became exercisable on
the date of issuance, while the remaining options vest in equal amounts over two
years. The options granted in 1995 vest ratably over a three-year period. The
options granted in 1994 and 1995 expire ten years after the date of their
issuance. Under this plan, 14,000 options had been exercised as of December 31,
1996.
1992 DIRECTOR STOCK OPTION PLAN
In April 1992, the Company established the 1992 Director Stock Option Plan
which provides for the issuance of options to purchase 39,062 shares of common
stock to non-employee directors of the Company. At December 31, 1996, 39,062
options had been granted to non-employee directors. The exercise price for these
options is $2.56 per share, which was the fair market value of the options at
the date of issuance. The options become exercisable over a three-year period
and expire ten years after the date of their issuance. As of December 31, 1996,
no options under this plan had been exercised.
1994 STOCK OPTION PLAN
In June 1994, the Company established the 1994 Incentive and Nonstatutory
Stock Option Plan which provides for the issuance of options to purchase 250,000
shares of common stock to key employees of the Company. At December 31, 1996,
231,000 options had been granted to employees. The exercise price for 195,000 of
the options granted in 1994 is $7.00 per share, which was the fair market value
of the options at the date of issuance. The exercise price for 24,000 of the
options granted in 1995 is $8.00 per share, which was the fair market value of
the options at the date of issuance. An additional 12,000 options were granted
in 1996 under this plan at exercise prices of $9.50 (6,000 options) and $10.00
(6,000 options), which were the fair market values of the options on each
issuance date. These options become exercisable over a three-year period and
expire ten years after the date of their issuance. Under this plan, 26,000
options had been exercised as of December 31, 1996.
F-51
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
1996 STOCK OPTION PLAN
In May 1996, the Company amended the 1994 Incentive and Nonstatutory Stock
Option Plan to provide for the issuance of options to purchase up to 1,440,000
shares of common stock to key employees of the Company. At December 31, 1996,
1,212,000 options had been granted to employees. The exercise price for these
options is $10.25 per share, which was the fair market value of the options at
the date of issuance. 387,000 of the options become exercisable over a
three-year period and 825,000 of the options became exercisable on the date of
issuance. These options expire ten years after the date of their issuance. As of
December 31, 1996, no options under this plan had been exercised.
1996 DIRECTOR STOCK OPTION PLAN
In May 1996, the Company established the 1996 Director Stock Option Plan
which provides for the issuance of options to purchase 50,000 shares of common
stock to non-employee directors of the Company. At December 31, 1996, 40,000
options had been granted to non-employee directors. The exercise price for these
options is $10.25 per share, which was the fair market value of the options at
the date of issuance. The options become exercisable over a three-year period
and expire ten years after the date of their issuance. As of December 31, 1996,
no options under this plan had been exercised.
CHAIRMAN OPTION PLAN
On February 15, 1994, the Compensation Committee of the Company's Board of
Directors approved the issuance of options to purchase 600,000 shares of common
stock of the Company to C. Dean Metropoulos, Chairman and CEO of the Company. As
of December 31, 1996, 600,000 options had been granted to Mr. Metropoulos. The
exercise price for these options is $6.50 per share, which was the fair market
value of the options at the date of issuance. One-third of these options became
exercisable on the date of issuance, while the remaining options vested in equal
amounts over two years. The options expire ten years after the date of their
issuance. As of December 31, 1996, no options under this plan had been
exercised.
F-52
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
SUMMARY OF OPTIONS (NUMBER OF OPTIONS)
1992 1996
DIRECTOR CHAIRMAN DIRECTOR
1991 PLAN 1992 PLAN PLAN 1994 PLAN PLAN 1996 PLAN* PLAN
----------- ----------- ----------- ----------- ------------ ----------- ---------
Outstanding at December 31,
1994........................... 335,413 176,000 39,062 210,000 600,000 -- --
Granted in 1995.................. -- 30,000 -- 81,000 -- -- --
Canceled in 1995................. (13,049) (31,000) -- (70,000) -- -- --
Exercised in 1995................ (311,464) -- -- (2,000) -- -- --
----------- ----------- ----------- ----------- ------------ ----------- ---------
Outstanding at December 31,
1995........................... 10,900 175,000 39,062 219,000 600,000 -- --
Granted in 1996.................. -- -- -- 12,000 -- 1,212,000 40,000
Canceled in 1996................. -- -- -- -- -- -- --
Exercised in 1996................ (5,850) (14,000) -- (24,000) -- -- --
----------- ----------- ----------- ----------- ------------ ----------- ---------
Outstanding at December 31,
1996........................... 5,050 161,000 39,062 207,000 600,000 1,212,000 40,000
----------- ----------- ----------- ----------- ------------ ----------- ---------
----------- ----------- ----------- ----------- ------------ ----------- ---------
Exercisable at December 31,
1995........................... 10,900 105,000 39,062 52,000 600,000 -- --
----------- ----------- ----------- ----------- ------------ ----------- ---------
----------- ----------- ----------- ----------- ------------ ----------- ---------
Exercisable at December 31,
1996........................... 5,050 141,000 39,062 119,000 600,000 825,000 --
----------- ----------- ----------- ----------- ------------ ----------- ---------
----------- ----------- ----------- ----------- ------------ ----------- ---------
* Granted under 1994 Stock Option Plan as amended.
PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and earnings
per common share for 1996 and 1995 would approximate the pro forma amounts below
(in thousands, except per share data):
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1995
------------ ------------ ------------ ------------
Net income......................... $ 14,576 $ 10,770 $ 11,524 $ 11,460
Earnings per common share.......... .96 .72 .76 .75
F-53
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
Pro forma charges to expense for options granted in 1996 and 1995 are as
follows (in thousands):
The fair value of each option grant is estimated on the date of grant using
the Modified Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995, respectively: risk free
interest rates of 6.47% and 6.65%; expected dividend yields of 0.00% and 0.00%;
expected lives of 4.0 years and 4.0 years; expected volatility of 40.31% and
39.86%. The weighted average fair value of options granted in 1996 and 1995 was
$10.31 and $6.93, respectively. The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future amounts. SFAS 123 does not apply
to awards prior to 1995.
STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that it had
approved a plan pursuant to which the Company may repurchase up to $20.0 million
of its common stock. The purchases will be effected through open market
transactions or negotiated transactions from time to time, depending on the
market price of the stock and other factors. As of December 31, 1995, 230,000
shares had been repurchased by the Company at a cost of $1.8 million. As of
December 31, 1996, the Company had purchased an additional 537,000 shares at a
cost of $4.3 million.
F-54
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1996 and
1995, is as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ----------
DOLLARS IN THOUSANDS:
Net sales.............................. 1996 $ 81,724 $ 85,693 $ 99,869 $ 127,020
1995 71,893 74,882 73,167 84,788
Gross profit........................... 1996 19,386 19,996 20,588 31,535
1995 17,269 17,718 16,295 20,500
Income from Continuing Operations...... 1996 2,831 3,463 3,027 5,255
1995 2,269 2,846 2,316 3,909
Income (loss) from Discontinued
Operations........................... 1996 -- -- -- --
1995 694 (510) -- --
Net income............................. 1996 2,831 3,463 3,027 5,255
1995 2,963 2,336 2,316 3,909
PER COMMON SHARE:
Income from Continuing Operations...... 1996 $ 0.19 $ 0.23 $ 0.20 $ 0.34
1995 0.15 0.19 0.15 0.25
Income (loss) from Discontinued
Operations........................... 1996 -- -- -- --
1995 0.05 (0.03) -- --
Net income............................... 1996 0.19 0.23 0.20 0.34
1995 0.20 0.16 0.15 0.25
Market price range:
High................................... 1996 10.00 12.25 11.88 20.00
Low.................................... 1996 7.88 9.13 10.25 11.88
High................................... 1995 7.50 8.00 9.25 9.00
Low.................................... 1995 5.50 6.38 6.38 7.50
F-55
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash.......................................................................... $ 2,167 $ 4,786
Receivables, net of allowance for doubtful accounts of $8,852 and $6,676...... 48,038 57,802
Inventories................................................................... 25,689 25,400
Prepaids and other............................................................ 2,599 3,015
Deferred tax assets........................................................... 7,339 7,339
Net assets held for sale...................................................... 630 676
----------- ------------
Total current assets........................................................ 86,462 99,018
PROPERTY, PLANT AND EQUIPMENT:
Land.......................................................................... 12,551 7,843
Buildings..................................................................... 35,131 29,507
Machinery and equipment....................................................... 80,189 70,239
----------- ------------
Gross property, plant and equipment......................................... 127,871 107,589
Less: Accumulated depreciation................................................ (27,163) (22,807)
----------- ------------
Net property, plant and equipment........................................... 100,708 84,782
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets................................................ 71,808 73,146
Goodwill...................................................................... 90,189 96,175
Deferred financing costs...................................................... 2,495 2,731
Other assets.................................................................. 661 139
----------- ------------
Total intangible and other assets........................................... 165,153 172,191
----------- ------------
TOTAL ASSETS.................................................................... $352,323 $355,991
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 27,102 $ 32,968
Accrued liabilities........................................................... 36,364 39,923
Current portion of long-term debt............................................. 11,500 8,000
----------- ------------
Total current liabilities................................................... 74,966 80,891
LONG-TERM DEBT (net of current maturities)...................................... 169,200 177,349
OTHER LONG-TERM LIABILITIES..................................................... 3,020 3,269
DEFERRED TAX LIABILITIES........................................................ 5,694 5,694
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized; 15,382,942 shares
in 1997 and 15,261,061 shares issued in 1996................................ 153 153
Additional paid-in capital.................................................... 73,873 73,179
Treasury stock, at cost (767,000 shares in 1997 and 1996)..................... (6,140) (6,140)
Retained earnings............................................................. 31,557 21,596
----------- ------------
Total stockholders' equity.................................................. 99,443 88,788
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $352,323 $355,991
----------- ------------
----------- ------------
The accompanying notes are an integral part of these consolidated statements.
F-56
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
NET SALES........................................... $ 140,374 $ 85,693 $ 270,672 $ 167,417
Cost of goods sold................................ 100,953 65,698 196,022 128,036
Selling, distribution, and general and
administrative.................................. 26,337 14,239 51,223 28,737
------------- ------------- ------------- -------------
OPERATING INCOME.................................... 13,084 5,756 23,427 10,644
OTHER (INCOME) AND EXPENSES:
Interest expense.................................. 3,310 645 6,562 1,342
Amortization of deferred financing costs.......... 116 95 236 190
Other income, net................................. (131) (191) (249) (382)
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES.......................... 9,789 5,207 16,878 9,494
Provision for income taxes........................ 4,012 1,744 6,917 3,200
------------- ------------- ------------- -------------
NET INCOME.......................................... $ 5,777 $ 3,463 $ 9,961 $ 6,294
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
EARNINGS PER COMMON SHARE........................... $ .37 $ .23 $ .64 $ .42
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING....................................... 15,716,000 14,724,000 15,643,651 14,778,316
The accompanying notes are an integral part of these consolidated statements.
F-57
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers........................................................... $ 280,622 $ 169,021
Interest received...................................................................... 35 127
Income tax refund...................................................................... -- 156
Cash paid to suppliers and employees................................................... (245,771) (148,572)
Interest paid.......................................................................... (7,415) (1,617)
Income taxes paid...................................................................... (7,773) (2,807)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................ 19,698 16,308
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary: Working capital............................................. (1,290) (125)
Property, plant and equipment.......................................................... (1,559) (3,613)
Other assets........................................................................... (4,151) (3,315)
----------- ----------
Net cash used by acquisition of subsidiary........................................... (7,000) (7,053)
Capital expenditures................................................................... (10,121) (4,455)
Proceeds from sale of fixed assets..................................................... 19 --
Other.................................................................................. (1,260) 1,173
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES.................................................... (18,362) (10,335)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................................. 694 118
Net payments under revolving credit facility........................................... (649) --
Payments on long-term debt............................................................. (4,000) (4,000)
Purchase of treasury stock............................................................. -- (4,300)
----------- ----------
NET CASH USED BY FINANCING ACTIVITIES.................................................... (3,955) (8,182)
----------- ----------
NET DECREASE IN CASH..................................................................... (2,619) (2,209)
CASH, BEGINNING OF PERIOD................................................................ 4,786 5,811
----------- ----------
CASH, END OF PERIOD...................................................................... $ 2,167 $ 3,602
----------- ----------
----------- ----------
The accompanying notes are an integral part of these consolidated statements.
F-58
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
NET INCOME.................................................................................. $ 9,961 $ 6,294
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOW FROM OPERATIONS:
Depreciation.............................................................................. 5,243 2,938
Amortization of intangibles............................................................... 2,988 1,350
Increase in deferred taxes................................................................ -- 21
Change in assets and liabilities, net of effects from acquisition of subsidiary:
Accounts receivable....................................................................... 10,477 1,604
Inventories............................................................................... 398 (1,094)
Prepaids and other........................................................................ 416 (70)
Accounts payable.......................................................................... (5,866) 2,384
Accrued liabilities....................................................................... (3,670) 3,018
Long-term liabilities..................................................................... (249) (138)
--------- ---------
NET CASH PROVIDED BY OPERATIONS............................................................. $ 19,698 $ 16,308
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated statements.
F-59
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1997, and for the six
months then ended have been prepared by The Morningstar Group Inc. (the
"Company" or "Morningstar") without audit. In the opinion of management, all
necessary adjustments (which include only normal recurring adjustments) to
present fairly, in all material respects, the consolidated financial position,
results of operations and changes in cash flows at June 30, 1997, and for the
six months then ended, have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the Company's 1996 financial
statements contained in its most recent Annual Report on Form10-K. Certain prior
year balances have been reclassified to conform to the current year
presentation.
On February 3, 1997, the Company completed the purchase of substantially all
of the assets of the frozen whipped toppings business of Van de Kamp's, Inc.
("VDK"). VDK's sales for the year ended December 31, 1996 were approximately
$13.1 million. VDK is a manufacturer and distributor of frozen whipped toppings
primarily supplying retail customers throughout the United States. The Company
paid approximately $7.0 million in cash for the assets acquired, and assumed
approximately $.1 million in related liabilities. The source of funding was
provided by the Company's operations in conjunction with its revolving credit
facility.
During the first six months of 1997, the company received appraised values
on certain assets acquired in the Presto Food Products, Inc. acquisition. As a
result, the allocation of the purchase price was revised resulting in a
reclassification of $9.2 million from goodwill to property, plant and equipment.
2. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories are summarized as follows (in
thousands):
AT JUNE 30,
1997 AT DECEMBER 31, 1996
--------------- --------------------
Raw materials and supplies............................. $ 14,443 $ 11,767
Finished goods......................................... 11,246 13,633
------- -------
Total................................................ $ 25,689 $ 25,400
------- -------
------- -------
Finished goods inventories include the costs of materials, labor and plant
overhead.
F-60
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
3. DEBT
The Company's outstanding long-term debt and average interest rates in
effect on June 30, 1997 were:
AMOUNT OF DEBT AVERAGE INTEREST RATE
-------------- ---------------------
(IN THOUSANDS)
Senior term loan................................................................ $156,000 7.130%
Revolving credit facility (a)................................................... 21,700 7.256%
Industrial development revenue bonds............................................ 3,000 4.080%
--------------
Total......................................................................... 180,700
Less: Current maturities........................................................ 11,500
--------------
Long-term debt, net of current maturities....................................... $169,200
--------------
--------------
(a) As of June 30, 1997, approximately $21,700,000 was outstanding under the
revolving credit facility and letters of credit totaling $7,974,000 were
issued. As of June 30, 1997, the Company had $30,326,000 in additional
borrowing capacity under the terms of its revolving credit facility.
4. EARNINGS PER COMMON SHARE
The earnings per common share is computed based on the weighted average
number of shares of the Company's common stock and common stock equivalents
outstanding during the period. Common stock equivalents represent the dilutive
effect of the assumed exercise of certain outstanding stock options.
The Company intends to adopt SFAS No. 128 "Earnings Per Share" "SFAS 128"
effective December 15, 1997 and present December 31, 1997 and prior periods
earnings per share under SFAS128. Early adoption of the new statement is not
permitted. The calculation of basic earnings per share under SFAS 128 will have
a favorable impact as it excludes potentially dilutive options previously
included in the calculation of primary earnings per share.
5. STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that it had
approved a plan pursuant to which the Company may repurchase up to $20.0 million
of its common stock. The purchases will be effected through open market
transactions or negotiated transactions from time to time, depending on the
market price of the stock and other factors. As of December 31, 1996, 767,000
shares had been repurchased by the Company at a cost of $6.1 million. As of June
30, 1997, the Company had not purchased any additional shares.
F-61
INDEPENDENT AUDITORS' REPORT
Board of Directors
Country Fresh, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Country Fresh,
Inc. and subsidiaries as of March 1, 1997 and March 2, 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended March 1, 1997. 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, such financial statements present fairly, in all material respects,
the consolidated financial position of Country Fresh, Inc. and subsidiaries as
of March 1, 1997 and March 2, 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
March 1, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, in fiscal
year 1995 the Company changed its method of accounting for postretirement
benefits other than pensions to conform with Statement of Financial Accounting
Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions."
DELOITTE & TOUCHE LLP
Grand Rapids, Michigan
May 5, 1997
F-62
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 2, MARCH 1, JULY 19,
1996 1997 1997
------------ ------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 11,651,121 $ 10,524,048 $ 6,697,162
Accounts receivable, net of the allowance for doubtful accounts of $1,227,000,
$670,000 and $672,000....................................................... 23,863,323 24,311,205 26,084,045
Inventories (Note 2).......................................................... 12,564,674 14,297,557 18,846,324
Deferred taxes on income (Note 7)............................................. 1,122,000 1,168,000 1,186,000
Prepaid income taxes.......................................................... 94,213
Prepaid expenses and other.................................................... 1,117,599 998,880 240,585
------------ ------------ ------------
Total current assets........................................................ 50,412,930 51,299,690 53,054,116
DEFERRED TAXES ON INCOME (Note 7)............................................... 2,543,000 2,970,000 3,059,000
PROPERTY, PLANT AND EQUIPMENT (Note 4):.........................................
Land and improvements......................................................... 2,852,510 3,124,502 3,224,502
Buildings..................................................................... 26,796,538 29,814,418 29,814,418
Machinery and equipment....................................................... 56,456,723 61,210,938 64,346,224
Shipping containers........................................................... 8,881,155 9,475,755 9,579,400
Transportation equipment...................................................... 12,507,898 14,391,892 14,633,233
------------ ------------ ------------
107,494,824 118,017,505 121,597,777
Accumulated depreciation...................................................... (68,987,812) (75,335,243) (78,122,058)
------------ ------------ ------------
38,507,012 42,682,262 43,475,719
OTHER ASSETS.................................................................... 3,302,314 2,254,340 2,352,934
------------ ------------ ------------
TOTAL ASSETS.................................................................... $ 94,765,256 $ 99,206,292 $101,941,769
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable........................................................ $ 18,029,941 $ 18,973,756 $ 19,226,753
Accrued expenses (Note 3)..................................................... 11,297,087 11,659,319 11,089,591
Income taxes payable.......................................................... 1,963,787 2,262,333
Current portion of long-term debt (Note 4).................................... 2,809,721 2,835,646 3,766,924
------------ ------------ ------------
Total current liabilities................................................... 32,136,749 35,432,508 36,345,601
LONG-TERM DEBT (Note 4)......................................................... 32,152,297 28,571,200 26,522,684
POST RETIREMENT BENEFITS (Notes 5 and 6)........................................ 5,350,118 3,668,633 3,557,633
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 98):
Preferred stock, Series A, 8% cumulative, par value $320 a share; 31,250
authorized shares........................................................... 3,800,000 3,741,120 3,741,120
Common stock, no par value; 15,000,000 authorized shares...................... 1,774,092 1,869,950 1,897,660
Retained earnings............................................................. 19,552,000 25,922,881 29,877,071
------------ ------------ ------------
Total shareholders' equity.................................................. 25,126,092 31,533,951 35,515,851
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 94,765,256 $ 99,206,292 $101,941,769
------------ ------------ ------------
------------ ------------ ------------
See notes to consolidated financial statements.
F-63
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED TWENTY WEEKS ENDED
---------------------------------------- --------------------------
FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19,
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
NET SALES................................................... $310,164,014 $336,054,590 $353,037,053 $135,327,698 $136,154,331
COST OF GOODS SOLD.......................................... 268,500,028 291,721,220 305,613,569 115,962,551 116,232,837
------------ ------------ ------------ ------------ ------------
Gross profit.............................................. 41,663,986 44,333,370 47,423,484 19,365,147 19,921,494
OPERATING COSTS AND EXPENSES:
Selling and distribution.................................. 21,224,430 21,632,703 19,916,061 7,396,735 7,216,944
General and administrative................................ 15,036,712 15,699,730 16,009,777 5,907,043 6,234,400
Amortization of intangibles............................... 99,618 82,540 656,410 33,272 19,022
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses...................... 36,360,760 37,414,973 36,582,248 13,337,050 13,470,366
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS...................................... 5,303,226 6,918,397 10,841,236 6,028,097 6,451,128
OTHER (INCOME) EXPENSE:
Interest (income) expense, net............................ (258,505) 1,392,648 1,219,353 613,168 597,186
Miscellaneous income...................................... (551,116) (633,310) (435,642) (111,535) (254,070)
------------ ------------ ------------ ------------ ------------
Total other (income) expense............................ (809,621) 759,338 783,711 501,633 343,116
------------ ------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING............................................. 6,112,847 6,159,059 10,057,525 5,526,464 6,108,012
INCOME TAXES (Note 7)....................................... 2,145,000 2,090,000 3,385,000 1,884,000 2,079,000
------------ ------------ ------------ ------------ ------------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING... 3,967,847 4,069,059 6,672,525 3,642,464 4,029,012
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS (NET OF INCOME TAX BENEFIT OF
$1,170,376) (Note 6)...................................... 2,271,907
------------ ------------ ------------ ------------ ------------
NET EARNINGS................................................ $ 1,695,940 $ 4,069,059 $ 6,672,525 $ 3,642,464 $ 4,029,012
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
NET EARNINGS PER COMMON SHARE:
Before cumulative effect of change in accounting.......... $ 0.52 $ 1.04 $ 1.75 $ 0.97 $ 1.07
Cumulative effect of change in accounting................. (0.30)
------------ ------------ ------------ ------------ ------------
Net earnings............................................ $ 0.22 $ 1.04 $ 1.75 $ 0.97 $ 1.07
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 7,622,840 3,609,245 3,636,519 3,631,758 3,685,236
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
See notes to consolidated financial statements.
F-64
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TWENTY WEEKS ENDED JULY 19, 1997 AND YEARS ENDED MARCH 1, 1997, MARCH 2, 1996
AND FEBRUARY 25, 1995
PREFERRED STOCK SERIES
A 8% CUMULATIVE COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPTIAL EARNINGS TOTAL
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, February 27, 1994......... 191,313 $ 3,884,020 $ 6,305,559 $ 39,416,901 $ 49,606,480
Net earnings..................... 1,695,940 1,695,940
Issuance of common stock......... 2,669 56,900 462,532 519,432
Redemption of common stock....... (2,291) (48,220) (48,530) (373,966) (470,716)
Recapitalization expenses........ (86,569) (86,569)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, February 25, 1995......... -- -- 191,691 3,892,700 6,632,992 40,738,875 51,264,567
Net earnings..................... 4,069,059 4,069,059
Redemption of Class A common
stock and exchange of 40 shares
of no par common stock for
Class B common stock........... 7,451,549 (73,600) (73,600)
Redemption of common pursuant to
the redemption and exchange
offer.......................... 11,875 3,800,000 (4,157,520) (2,078,760) (6,632,992) (24,548,365) (29,460,117)
Issuance of common stock......... 4,459 35,672 35,672
Redemption of common stock....... (240) (1,920) (1,920)
Recapitalization expenses........ (403,569) (403,569)
Preferred stock dividends........ (304,000) (304,000)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, March 2, 1996............. 11,875 3,800,000 3,489,939 1,774,092 -- 19,552,000 25,126,092
Net earnings..................... 6,672,525 6,672,525
Issuance of common stock......... 11,637 97,458 97,458
Redemption of common and
preferred stock................ (184) (58,880) (200) (1,600) (60,480)
Preferred stock dividends........ (301,644) (301,644)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, March 1, 1997............. 11,691 3,741,120 3,501,376 1,869,950 -- 25,922,881 31,533,951
Net earnings (Unaudited)......... 4,029,012 4,029,012
Issuance of common stock
(Unaudited).................... 2,611 27,710 27,710
Preferred stock dividends
(Unaudited).................... (74,822) (74,822)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, July 19, 1997
(Unaudited)...................... 11,691 $ 3,741,120 3,503,987 $ 1,897,660 $ -- $ 29,877,071 $ 35,515,851
--------- ----------- ---------- ----------- ----------- ------------- -------------
--------- ----------- ---------- ----------- ----------- ------------- -------------
See notes to consolidated financial statements.
F-65
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED TWENTY WEEKS ENDED
---------------------------------------- ------------------------
FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19,
1995 1996 1997 1996 1997
------------ ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 1,695,940 $ 4,069,059 $ 6,672,525 $3,642,464 $4,029,012
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 7,932,522 8,401,628 6,577,718 2,600,153 2,786,815
Deferred income taxes..................................... (1,588,000) (126,000) (473,000) (297,000 ) (107,000 )
Post retirement benefits.................................. 1,540,535 459,795 (410,845) (158,018 ) (111,000 )
Change in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable..................................... (928,541) (2,059,592) (447,882) (4,991,501 ) (1,772,840 )
Inventories............................................. (1,064,010) (363,904) (1,732,883) (2,181,767 ) (2,279,467 )
Prepaid expenses and other.............................. 136,117 47,688 118,719 403,871 758,295
Accounts payable and accrued expenses................... 1,882,944 2,024,370 1,267,868 7,899,393 (316,731 )
Income taxes............................................ (1,487,000) (313,005) 2,058,000 864,000 298,546
------------ ------------ ----------- ----------- -----------
Net cash provided by operating activities............. 8,120,507 12,140,039 13,630,220 7,781,595 3,285,630
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (5,817,122) (7,213,562) (8,810,163) (3,497,237 ) (2,380,272 )
Cash paid for acquisitions (Note 10)...................... (3,862,913) (3,469,300 )
(Increase) decrease in other assets....................... 1,336,367 (1,112,394) (307,292) 536,079 (98,594 )
------------ ------------ ----------- ----------- -----------
Net cash used in investing activities................. (8,343,668) (8,325,956) (9,117,455) (2,961,158 ) (5,948,166 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (1,465,454) (7,231,685) (5,375,172) (1,183,941 ) (1,217,238 )
Proceeds from long-term borrowings........................ 27,000,000 100,000
Payments of recapitalization expenses..................... (86,569) (403,569)
Proceeds from issuance of common stock.................... 519,432 35,672 97,458 93,426 27,710
Redemption of preferred and common stock.................. (470,716) (28,319,096) (60,480)
Dividends paid on preferred stock......................... (304,000) (301,644) (60,480 ) (74,822 )
------------ ------------ ----------- ----------- -----------
Net cash used in financing activities................. (1,503,307) (9,222,678) (5,639,838) (1,150,995 ) (1,164,350 )
------------ ------------ ----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,726,468) (5,408,595) (1,127,073) 3,669,442 (3,826,886 )
CASH AND CASH EQUIVALENTS, BEGINNING........................ 18,786,184 17,059,716 11,651,121 11,651,121 10,524,048
------------ ------------ ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, ENDING........................... $17,059,716 $ 11,651,121 $10,524,048 $15,320,563 $6,697,162
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 615,498 $ 2,272,540 $ 1,993,371 $ 947,085 $ 629,580
Taxes on income paid...................................... 4,050,000 2,500,000 1,800,000 600,000 2,300,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of installment notes for the purchase of
transportation equipment................................ $ 1,652,233 $ -- $ 1,820,000 $ -- $ --
Collection of note receivable through the redemption of
common stock in the recapitalization (Note 8)........... 1,216,541
See notes to consolidated financial statements.
F-66
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Country Fresh, Inc. and its subsidiaries (the "Company") process
and market dairy and other related products to customers primarily located in
Michigan, northern Indiana, and northern Ohio. The Company provides credit terms
to its customers generally ranging up to 30 days, perform ongoing credit
evaluations of their customers and maintain allowances for potential credit
losses and rebates and allowances based on historical experience.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Country Fresh, Inc. and its wholly owned subsidiaries. All
significant intercompany profits, transactions and balances have been eliminated
in consolidation.
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. Although management believes the estimates are reasonable,
actual results could differ from those estimates.
FISCAL YEAR--The fiscal year of the Company ends on the Saturday closest to
the end of February. The fiscal years ended March 1, 1997 and February 25, 1995
were comprised of fifty-two weeks, whereas the fiscal year ended March 2, 1996
was comprised of fifty-three weeks. References to fiscal years 1995, 1996 and
1997 represent the Company's fiscal years ended February 25, 1995, March 2, 1996
and March 1, 1997, respectively.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash and
highly-liquid investments purchased with a remaining maturity at date of
purchase of approximately three months or less.
INVENTORIES--Inventories are primarily stated at the lower of cost, using
the LIFO (last-in, first-out) method, or market. The cost of manufactured
finished goods inventories include raw materials direct labor and indirect
production and overhead costs.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment assets are
recorded at cost. Depreciation is computed using both the straight-line and
declining balance methods based on the estimated useful lives of the related
assets.
ASSET USEFUL LIFE
-------------------------------------------- --------------------------------------------
Buildings and improvements Ten to 20 years
Machinery and equipment Three to 12 years
Shipping containers Three years
Transportation equipment Five to 12 years
Expenditures for maintenance and repairs are charged to expense as incurred
whereas major additions are capitalized.
The Company periodically assesses the carrying values of its long lived
assets, which primarily consists of its property, plant and equipment assets, by
comparing the expected undiscounted future cash flows to the carrying amount of
the asset, and would evaluate a potential impairment if the recorded value of
these
F-67
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets exceeded the associated future cash flows. Any adjustment to the carrying
value of long-lived assets is recognized on a current basis.
DEFERRED INCOME TAXES--Deferred income taxes are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future. Such deferred income
tax asset and liability computations are based on enacted tax laws and rates
applicable to periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
EARNINGS PER COMMON SHARE--The Company computes earnings per common shared
by dividing net earnings less dividends on preferred stock by the weighted
average number of common shares outstanding, including common equivalent shares.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's consolidated balance
sheet as of July 19, 1997 and the consolidated statements of earnings,
shareholders' equity and of cash flows for the twenty weeks ended July 20, 1996
and July 19, 1997, have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal, recurring
adjustments) necessary to present fairly the balance sheet of the Company at
July 19, 1997, and the results of operations and cash flows of the Company for
the twenty weeks ended July 20, 1996 and July 19, 1997, have been made. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
MARCH 2, MARCH 1, JULY 19,
1996 1997 1997
---------- ---------- ----------
(UNAUDITED)
Payroll............................... $3,305,793 $3,428,354 $2,871,207
Discounts, rebates and allowances..... 2,837,837 2,982,688 1,625,292
Insurance............................. 1,702,439 1,689,717 1,942,919
Retirement and pension................ 698,113 799,193 1,226,093
Containers............................ 2,752,905 2,759,367 3,424,080
---------- ---------- ----------
$11,297,087 11,659,319 11,089,591
---------- ---------- ----------
---------- ---------- ----------
The Company accrues customer discounts, rebates and allowances as earned by
its customers, which are generally paid either monthly, quarterly or annually
pursuant to the terms of the arrangement with the specific customer.
The Company is self-insured in certain states, up to specified limits, for
workers' compensation claims. Individual workers' compensation claims in excess
of $300,000 and aggregate workers' compensation claims between $2.2 million and
$20 million are insured through an insurance carrier. In addition, the Company
is self-insured, up to certain limits, for medical benefit claims. The estimated
cost of claims for workers' compensation and medical benefits are accrued as
incurred in the consolidated financial statements.
F-69
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
4. LONG-TERM DEBT
Long-term debt is summarized as follows:
MARCH 2, MARCH 1, JULY 19,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
Credit agreement:
Term loan facility........................................ $10,000,000 $ 8,000,000 $ 7,000,000
Revolving credit facility................................. 11,000,000 10,000,000 10,000,000
Revenue bonds:
Economic Development Corporation of the County of Elkhart,
Indiana................................................. 3,680,000 3,450,000 3,450,000
Economic Development Corporation of the City of Livonia,
Michigan................................................ 2,780,000 2,570,000 2,570,000
Toledo-Lucas County Port Authority........................ 4,590,000 4,335,000 4,335,000
Installment loan............................................ 1,512,262 1,809,968 1,758,816
Promissory notes payable.................................... 1,084,000 1,084,000 1,078,000
Other notes payable......................................... 315,756 157,878 97,792
----------- ----------- -----------
34,962,018 31,406,846 30,289,608
Less current portion........................................ (2,809,721) (2,835,646) (3,766,924)
----------- ----------- -----------
Total long-term debt........................................ $32,152,297 $28,571,200 $26,552,684
----------- ----------- -----------
----------- ----------- -----------
CREDIT AGREEMENT--The Company has a credit agreement with a syndicate of
banks which provides for both a term loan facility and a revolving credit
facility, which are unsecured and mature on January 1, 2002. The term loan
facility requires quarterly principal installments of $464,286 plus interest and
the revolving credit facility, which provides for maximum borrowings of up to
$20 million, requires quarterly interest payments. The interest rate under the
credit agreement is determined at the Company's option at either (i) the LIBOR
rate (6.38% at March 1, 1997) plus between 1% and 1.5%, based on certain
financial ratios of the Company, or (ii) the prime rate.
In addition to amounts available under the revolving credit facility of the
credit agreement, the Company also has a $5 million unsecured line of credit
with a bank, which expires in July 1998. No amounts are outstanding under this
line of credit agreement,
REVENUE BONDS--The Company has three series of revenue bonds outstanding
which require aggregate annual sinking fund redemption installments of $695,000,
and are secured by irrevocable letters of credit issued by financial
institutions, along with first mortgages on real property and equipment with an
aggregate net book value of approximately $9,100,000 at March 1, 1997, for
certain of the revenue bonds. Advances made, if any, under these letters of
credit provide for repayment of such advances either ratably over the remaining
life of the bond issue or within one year of such advance. Interest on the
revenue bonds is due semi-annually at rates, determined by the remarketing
agents (subject to certain maximums), which will approximate market conditions
for tax exempt securities of the same stature. At March 1, 1997, the interest
rates on the revenue bonds ranged from 3.4% to 3.75%. These revenues bonds are
included in the accompanying schedule of maturities on long-term debt based on
their mandatory sinking fund redemption installments.
F-70
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
4. LONG-TERM DEBT (CONTINUED)
INSTALLMENT NOTE PAYABLE--The Company has an installment note payable with
monthly payments of principal and interest of $21,938, which bears interest at a
fixed rate of 7.85% through December 31, 2001 and a variable rate determined
quarterly thereafter at the prime rate plus 1/2%. This installment note payable
is collateralized by the Company's airplane.
PROMISSORY NOTES PAYABLE--Between 1988 and 1993, the Company issued
unsecured promissory notes in units of $1,000 pursuant to a Promissory Note
Prospectus filed with the Corporation and Securities Bureau, Michigan Department
of Commerce. These promissory notes require quarterly interest payments at the
prime rate less 1% (7.25% at March 1, 1997) with a minimum interest rate of 8%,
which was reduced to 6% in 1993, and are repayable at the option of the Company
on any quarterly interest payment date. At March 2, 1996 and March 1, 1997,
$543,000 of these promissory notes were held by certain of the Company's
shareholders.
DEBT COVENANTS--The loans under the credit agreement and certain of the
revenue bonds contain covenants which include restrictions on additional
indebtedness and the payment of cash dividends in excess of prescribed amounts
and require the Company to maintain certain minimum financial ratios, including:
a current ratio of 1.35 to 1.0; working capital of $18,500,000; tangible net
worth of $21,500,000 at March 1, 1997, increasing $3,000,000 annually
thereafter; a ratio of total liabilities to net worth of not more than 3.5 to
1.0, decreasing .5 annually; and fixed charge coverage ratios (as defined) of
2.0 to 1.0. The Company's working capital at March 1, 1997 and March 2, 1996 was
less than the required amounts, however, this covenant was waived by the
respective lendors through February 1998.
DEBT MATURITIES--At March 1, 1997, future annual maturities on long-term
debt are summarized as follows:
At March 1, 1997 and March 2, 1996, the estimated fair value of the
Company's long-term debt, including current maturities, approximated its
carrying value. The estimated fair value was based on anticipated rates
available to the Company for debt with similar terms and maturities.
5. EMPLOYEE RETIREMENT PLANS
The Company's retirement programs include both defined benefit and defined
contribution pension plans. Substantially all of the Company's supervisory and
administrative personnel are covered by a non-contributory defined benefit
pension plan and the employees of a subsidiary which are covered by a non-
contributory defined benefit pension plan required by a collective bargaining
agreement. The benefits
F-71
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
5. EMPLOYEE RETIREMENT PLANS (CONTINUED)
under these defined benefit plans are based on years of service and, as to one
of the plans, the employee's compensation. The Company's funding policy is to
contribute annually the minimum amount required under ERISA regulations. Plan
assets consist principally of investments made with insurance companies under a
group annuity contract.
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's balance sheets at March 1, 1997 and March 2,
1996, respectively:
MARCH 2, MARCH 1,
1996 1997
------------- -------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefit obligations of
$11,973,482 in 1997 and $10,462,548 in 1996.................................... $ 10,943,674 $ 12,508,894
------------- -------------
------------- -------------
Projected benefit obligation for service rendered to date........................ $ 12,668,312 $ 14,980,825
Plan assets, at estimated fair value............................................... 11,624,776 14,056,504
------------- -------------
Projected benefit obligation in excess of the plan assets.......................... 1,043,536 924,321
Unrecognized net gain from past experience different from that assumed and effect
of changes in assumptions........................................................ 1,742,605 1,361,803
Unrecognized prior service cost.................................................... (938,367) (874,264)
Unrecognized initial net obligation at December 1, 1986 and March 1, 1987 being
amortized over 19 and 16 years, respectively..................................... (823,258) (735,027)
Adjustment required to reflect minimum liability................................... 1,232,462
------------- -------------
Accrued pension costs.............................................................. 2,256,978 676,833
Less current portion............................................................... (250,000) (200,000)
------------- -------------
Long-term.......................................................................... $ 2,006,978 $ 476,833
------------- -------------
------------- -------------
Net periodic pension costs for the fiscal years ended 1995, 1996 and 1997
included the following components:
1995 1996 1997
------------- ------------- -------------
Service cost-benefits earned during the year........................ $ 724,759 $ 748,726 $ 1,023,899
Interest cost on projected benefit obligation....................... 824,538 890,515 979,136
Actual return on plan assets........................................ (316,919) (1,824,261) (1,673,896)
Net amortization and deferral....................................... (385,888) 1,073,581 807,514
------------- ------------- -------------
Net periodic pension costs.......................................... $ 846,490 $ 888,561 $ 1,136,653
------------- ------------- -------------
------------- ------------- -------------
F-72
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
5. EMPLOYEE RETIREMENT PLANS (CONTINUED)
Assumptions used in the actuarial valuations were:
1995 1996 1997
--------- --------- ---------
Discount rates............................................................................. 8.25% 7.25% 7.50%
Rates of increase in compensation levels................................................... 4.75% 3.75% 4.00%
Expected long-term rate of return on assets................................................ 9.00% 9.00% 9.00%
Substantially all of the Company's supervisory and administrative personnel
may elect coverage in a salary reduction defined contribution retirement plan.
The plan provides for employer contributions as determined by the Board of
Directors. The Company's matching contributions to this plan were approximately
$110,000, $131,000 and $132,000 in 1995, 1996 and 1997, respectively.
Certain union hourly employees are participants in Company sponsored defined
contribution plans which provide for employer contributions in various amounts
ranging from $19 to $35 per pay period per participant. Contributions to these
plans amounted to approximately $245,000, $350,000 and $377,000 in 1995, 1996
and 1997, respectively.
In addition to the plans described above, the Company participates in
several multi-employer and other defined contribution plans covering
substantially all union employees. The expense for these plans aggregated
approximately $858,000, $809,000 and $848,000 in 1995, 1996 and 1997,
respectively.
The Multi-Employer Pension Plan Amendments Act of 1980 amended ERISA to
establish funding requirements and obligations for employers participating in
multi-employer plans, principally related to employer withdrawal from or
termination of such plans. Separate actuarial calculations of the Company's
position are not available with respect to the multi-employer plans.
6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Country Fresh, Inc. Employees' Retirement Health Care Plan provides
health care benefits to certain retirees of one subsidiary, who are covered
under specific group contracts. Postretirement health care coverage on
subsequent employment contracts has been eliminated, therefore, no additional
employees will be eligible under current agreements for such benefits. As
defined by the specific group contract, qualified covered associates may be
eligible to receive major medical insurance with deductible and coinsurance
provisions subject to certain lifetime maximums.
Effective February 27, 1994, the Company adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" (SFAS 106). Under SFAS 106, the Company is required to
accrue the estimated cost of retiree benefit payments, other than pensions,
during the employee's active service period. As permitted by SFAS 106, the
Company elected to recognize immediately the cumulative effect of the change in
accounting in the year ended February 25, 1995. The accumulated postretirement
benefit obligation amounted to $3,543,140 and $3,479,979 at March 2, 1996 and
March 1, 1997, respectively of which $3,343,140 and $3,191,800, respectively
were considered long-term liabilities. Postretirement health care expense for
1996 and 1997 consisted of interest cost on the accumulated postretirement
benefit obligation of $280,547 and $225,018, respectively.
F-73
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The Company continues to fund the cost of these benefits as incurred, which
required payments of $80,000, $180,000 and $287,000 in 1995, 1996 and 1997,
respectively.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.58% for the fiscal year ended March 1,
1997, gradually declining at a rate of approximately 1% per year to 5.25% in
2005 and remaining at that level thereafter, and the assumed discount rate in
determining the accumulated postretirement benefit obligation was 7.50%. A
one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit cost and the
service cost plus interest cost by between approximately 8% and 9%.
7. TAXES ON INCOME
The Company and its subsidiaries file a consolidated federal income tax
return. The provision for income taxes is comprised of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
7. TAXES ON INCOME (CONTINUED)
Deferred tax assets and liabilities resulting from temporary differences are
as follows at March 2, 1996 and March 1, 1997:
The Company leases a building, transportation equipment, certain packaging
equipment and computer equipment under operating lease agreements with terms
ranging from 1 to 5 years. The transportation and packaging equipment leases
provide for additional rentals based upon mileage and production, respectively,
and the computer equipment lease agreements include an option to purchase the
related equipment upon the expiration of the lease.
As of March 1, 1997, future minimum rental commitments under non-cancelable
operating leases are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
9. SHAREHOLDERS' EQUITY
Prior to February 21, 1995, the Company's common stock included shares of
both Class A and Class B common stock. On February 21, 1995, the Company's
shareholders approved a Plan of Recapitalization which, effective February 26,
1995, changed the Company's capital structure by redeeming all Class A common
shares at $100 per share, converting each Class B common share into forty shares
of no par value voting common stock, and creating 800,000 shares of preferred
stock of which 31,250 shares were designated as Series A, 8% cumulative with a
par value of $320. In connection with this Plan of Recapitalization, the Company
also approved a Redemption and Exchange Offer (the "Offer"), whereby the Company
offered to redeem up to 4,293,400 shares of common stock at $8 per share and to
convert up to 1,250,000 shares of common stock into Series A preferred stock at
the rate of forty shares of common stock for each share of Series A preferred
stock, par value $320 per share. As a result of the Offer, 3,682,520 shares of
common stock were redeemed for cash and 475,000 shares of common stock were
converted into 11,875 shares of Series A preferred stock. Payment for shares
redeemed under the Offer was financed by borrowings of $27 million under a $35
million credit facility. All per share and stock option data have been restated
to reflect the recapitalization transaction.
The Company's outstanding shares of common and preferred stock are held
primarily by its customers. Net sales to customers who were also shareholders
were approximately 43%, 41% and 35% of consolidated net sales in 1995, 1996 and
1997, respectively.
Effective December 1, 1989, the Board of Directors established a stock
option plan which provided for the grant of up to 1,000,000 stock options to
acquire the Company's common stock to officers and key employees, at an exercise
price equal to market value on the date of grant. During 1994, the Board of
Directors granted stock options to acquire 420,000 shares at $5.50 per share to
one key employee. There have been no subsequent stock option grants since that
date. As of March 2, 1996 and March 1, 1997, these options, covering 420,000
shares, remained outstanding. The options vest ratably over seven years from the
grant date and must be exercised within twelve years of the date of grant. As of
March 1, 1997, options were exercisable for 120,000 shares.
Since the Company's stock options are granted at prices equal to market
value, the Company does not recognize compensation expense for such options.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which became effective for the Company for the year
ended March 1, 1997, establishes a fair value method and disclosure standards
for stock-based employee compensation agreements. The Company intends to
continue its current accounting for stock-based compensation as allowed by SFAS
No. 123 and will disclose the pro forma effects of applying this new standard
for all future stock option grants. However, since the Company has not made any
grants since 1994, no pro forma disclosures are required.
10. ACQUISITIONS
On April 20, 1997, the Company acquired certain inventory and equipment
assets of Wesley Ice Cream Company for $3.5 million, which approximated the fair
value of the assets acquired, and entered into a five-year lease for the plant's
real estate. The consolidated statements of earnings include the operations of
this acquired business from the acquisition date.
In 1994, the Company paid $3.9 million to acquire certain assets of
Southeastern Juice Packers, Inc. and Toledo Milk Processing, Inc., which have
been accounted for as purchase business combinations.
F-76
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
10. ACQUISITIONS (CONTINUED)
Accordingly, the above purchase price has been allocated to the assets acquired
at their fair values, which resulted in the allocation of $3.5 million of the
purchase price to tangible assets, with the remaining excess of the purchase
price over the fair value of tangible assets acquired recorded as goodwill. The
consolidated statements of earnings include the operations of Southeastern Juice
Packers, Inc. and Toledo Milk Processing, Inc. from their respective dates of
acquisition.
* * * * *
F-77
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SUIZA FOODS CORPORATION
CF ACQUISITION CORP.
AND
COUNTRY FRESH, INC.
TABLE OF CONTENTS
PAGE NO.
---------
ARTICLE I THE MERGER.................................................................................... A-1
SECTION 1.01. The Merger............................................................................ A-1
SECTION 1.02. Closing; Closing Date; Effective Time................................................. A-1
SECTION 1.03. Effect of the Merger.................................................................. A-2
SECTION 1.04. Articles of Incorporation; Bylaws..................................................... A-2
SECTION 1.05. Directors and Officers................................................................ A-2
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES........................................... A-2
SECTION 2.01. Merger Consideration; Conversion and Cancellation of Securities....................... A-2
SECTION 2.02. Exchange and Surrender of Company Common Stock Certificates........................... A-3
SECTION 2.03. Exchange and Surrender of Company Preferred Stock Certificates........................ A-4
SECTION 2.04. Dissenting Shares..................................................................... A-6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................... A-6
SECTION 3.01. Organization and Qualification; Subsidiaries.......................................... A-6
SECTION 3.02. Charter and Bylaws.................................................................... A-6
SECTION 3.03. Capitalization........................................................................ A-6
SECTION 3.04. Authority............................................................................. A-7
SECTION 3.05. No Conflict; Required Filings and Consents............................................ A-7
SECTION 3.06. Permits; Compliance................................................................... A-8
SECTION 3.07. Financial Statements.................................................................. A-8
SECTION 3.08. Absence of Certain Changes or Events.................................................. A-9
SECTION 3.09. No Undisclosed Liabilities............................................................ A-9
SECTION 3.10. Absence of Litigation................................................................. A-9
SECTION 3.11. Employee Benefit Plans; Labor Matters................................................. A-10
SECTION 3.12. Taxes................................................................................. A-12
SECTION 3.13. Tax Matters; Pooling.................................................................. A-14
SECTION 3.14. Affiliates............................................................................ A-14
SECTION 3.15. Certain Business Practices............................................................ A-14
SECTION 3.16. Environmental Matters................................................................. A-14
SECTION 3.17. Vote Required......................................................................... A-15
SECTION 3.18. Brokers............................................................................... A-16
SECTION 3.19. Insurance............................................................................. A-16
SECTION 3.20. Properties............................................................................ A-16
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PAGE NO.
---------
SECTION 3.21. Certain Material Contracts............................................................ A-17
SECTION 3.22. Principal Customers and Suppliers; Competing Interests................................ A-18
SECTION 3.23. Intellectual Property Rights.......................................................... A-18
SECTION 3.24. Opinion of Financial Advisor.......................................................... A-18
SECTION 3.25. Information Supplied.................................................................. A-18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT COMPANIES........................................... A-19
SECTION 4.01. Organization and Qualification; Subsidiaries.......................................... A-19
SECTION 4.02. Charter and Bylaws.................................................................... A-19
SECTION 4.03. Capitalization........................................................................ A-19
SECTION 4.04. Authority............................................................................. A-20
SECTION 4.05. No Conflict; Required Filings and Consents............................................ A-20
SECTION 4.06. Permits; Compliance................................................................... A-20
SECTION 4.07. Reports; Financial Statements......................................................... A-21
SECTION 4.08. Absence of Certain Changes or Events.................................................. A-21
SECTION 4.09. Absence of Litigation................................................................. A-21
SECTION 4.10. Tax Matters; Pooling.................................................................. A-21
SECTION 4.11. Vote Required......................................................................... A-22
SECTION 4.12. Compliance with Laws.................................................................. A-22
SECTION 4.13. Merger Sub............................................................................ A-22
SECTION 4.14. Environmental Matters................................................................. A-22
SECTION 4.15. Information Supplied.................................................................. A-23
ARTICLE V COVENANTS..................................................................................... A-23
SECTION 5.01. Affirmative Covenants of the Company.................................................. A-23
SECTION 5.02. Negative Covenants of the Company..................................................... A-23
SECTION 5.03. Affirmative and Negative Covenants of Parent.......................................... A-25
SECTION 5.04. Non-Solicitation...................................................................... A-25
SECTION 5.05. Access and Information................................................................ A-26
SECTION 5.06. Appropriate Action; Consents; Filings................................................. A-27
SECTION 5.07. Pooling; Tax Treatment................................................................ A-28
SECTION 5.08. Public Announcements.................................................................. A-28
SECTION 5.09. NYSE Listing.......................................................................... A-28
SECTION 5.10. Merger Sub............................................................................ A-28
SECTION 5.11. Employee Benefit Plans................................................................ A-28
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PAGE NO.
---------
SECTION 5.12. Stock Option Plans.................................................................... A-28
SECTION 5.13. Buy-Sell Agreements................................................................... A-29
SECTION 5.14. Notes................................................................................. A-29
ARTICLE VI ADDITIONAL AGREEMENTS........................................................................ A-29
SECTION 6.01. Shareholder Approval and Meeting of Shareholders...................................... A-29
SECTION 6.02. Registration Statement; Proxy Statement............................................... A-30
SECTION 6.03. Indemnification....................................................................... A-31
ARTICLE VII CLOSING CONDITIONS.......................................................................... A-31
SECTION 7.01. Conditions to Obligations of Each Party Under This Agreement.......................... A-31
SECTION 7.02. Additional Conditions to Obligations of the Parent Companies.......................... A-31
SECTION 7.03. Additional Conditions to Obligations of the Company................................... A-33
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.......................................................... A-34
SECTION 8.01. Termination........................................................................... A-34
SECTION 8.02. Termination Intent Notice; Top Up Rights.............................................. A-35
SECTION 8.03. Effect of Termination................................................................. A-35
SECTION 8.04. Amendment............................................................................. A-35
SECTION 8.05. Waiver................................................................................ A-35
SECTION 8.06. Fees, Expenses and Other Payments..................................................... A-36
ARTICLE IX GENERAL PROVISIONS........................................................................... A-36
SECTION 9.01. Effectiveness of Representations, Warranties and Agreements........................... A-36
SECTION 9.02. Notices............................................................................... A-36
SECTION 9.03. Certain Definitions................................................................... A-37
SECTION 9.04. Headings.............................................................................. A-38
SECTION 9.05. Severability.......................................................................... A-38
SECTION 9.06. Entire Agreement...................................................................... A-39
SECTION 9.07. Assignment............................................................................ A-39
SECTION 9.08. Parties in Interest................................................................... A-39
SECTION 9.09. Specific Performance.................................................................. A-39
SECTION 9.10. Failure or Indulgence Not Waiver; Remedies Cumulative................................. A-39
SECTION 9.11. Governing Law......................................................................... A-39
SECTION 9.12. Counterparts.......................................................................... A-39
A-iii
EXHIBITS
Exhibit A Form of Company Affiliates Agreement
Exhibit B Legal Opinion of the Company's Counsel
Exhibit C Legal Opinion of Parent's Counsel
SCHEDULES:
Company Disclosure Statement
Parent Disclosure Statement
A-iv
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of September 18, 1997 (this
"Agreement"), is by and among Suiza Foods Corporation, a Delaware corporation
("Parent"), CF Acquisition Corp., a Michigan corporation and wholly owned
subsidiary of Parent ("Merger Sub"), and Country Fresh, Inc., a Michigan
corporation (the "Company"). Parent and Merger Sub are collectively referred to
herein as the "Parent Companies."
WHEREAS, Merger Sub, upon the terms and subject to the conditions of this
Agreement and in accordance with the Michigan Business Corporation Act
("Michigan Law"), will merge with and into the Company (the "Merger"), and
pursuant thereto, the issued and outstanding shares of common stock, no par
value, of the Company (the "Company Common Stock") will be converted into the
right to receive shares of common stock, $0.01 par value, of Parent (the "Parent
Common Stock") and the issued and outstanding shares of Series A 8% Preferred
Stock of the Company (the "Company Preferred Stock") will be converted into the
right to receive shares of preferred stock of Parent (the "Parent Preferred
Stock"), as set forth herein;
WHEREAS, the Board of Directors of the Company has determined that the
Merger is fair to, and in the best interests of, the Company and its
shareholders and has approved and adopted this Agreement and the transactions
contemplated hereby;
WHEREAS, the Board of Directors of Parent has determined that the Merger is
fair to, and in the best interests of, Parent and its shareholders and has
approved and adopted this Agreement and the transactions contemplated hereby;
WHEREAS, the Board of Directors of Merger Sub has approved and adopted this
Agreement and Parent, as the sole shareholder of Merger Sub, will adopt this
Agreement promptly after the execution hereof by the parties hereto;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under the provisions of section 368(a) of the United
States Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Merger is intended to be treated as a "pooling of interests"
for financial accounting purposes;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with Michigan Law, at the Effective
Time (as defined in Section 1.02), Merger Sub shall be merged with and into the
Company. As a result of the Merger, the separate corporate existence of Merger
Sub shall cease and the Company shall continue as the surviving corporation of
the Merger (the "Surviving Corporation"). Certain terms used in this Agreement
are defined in SECTION 9.03.
SECTION 1.02. CLOSING; CLOSING DATE; EFFECTIVE TIME. Unless this Agreement
shall have been terminated pursuant to SECTION 8.01 or SECTION 8.02, and subject
to the satisfaction or waiver of the conditions set forth in ARTICLE VII, the
consummation of the Merger and the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Warner
Norcross & Judd LLP, 900 Old Kent Building, III Lyon Street, NW, Grand Rapids,
Michigan as soon as practicable (but in any event within two business days)
after the satisfaction or waiver of the conditions set forth in ARTICLE VII, or
at such other date, time and place as Parent and the Company may agree;
provided, that the
A-1
conditions set forth in ARTICLE VII shall have been satisfied or waived at or
prior to such time. The date on which the Closing takes place is referred to
herein as the "Closing Date." As promptly as practicable on the Closing Date,
the parties hereto shall cause the Merger to be consummated by filing a
certificate of merger with the Department of Consumer and Industry Services of
the State of Michigan, in such form as required by, and executed in accordance
with the relevant provisions of, Michigan Law (the date and time of such filing,
or such later date or time agreed upon by Parent and the Company and set forth
therein, being the "Effective Time").
SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of Michigan Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the properties, rights, privileges and powers of the Company
and Merger Sub will vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and the Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
SECTION 1.04. ARTICLES OF INCORPORATION; BYLAWS. At the Effective Time,
the articles of incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be the articles of incorporation of the Surviving
Corporation and thereafter shall continue to be its articles of incorporation
until amended as provided therein and pursuant to Michigan Law. The bylaws of
Merger Sub, as in effect immediately prior to the Effective Time, shall be the
bylaws of the Surviving Corporation and thereafter shall continue to be its
bylaws until amended as provided therein and pursuant to Michigan Law.
SECTION 1.05. DIRECTORS AND OFFICERS. The directors of Merger Sub shall be
the directors of the Surviving Corporation at the Effective Time, each to hold
office in accordance with the charter and bylaws of the Surviving Corporation,
in each case until their respective successors are duly elected or appointed and
qualified. The officers of the Company immediately prior to the Effective Time
shall be the officers of the Surviving Corporation at the Effective Time, each
to hold office in accordance with the bylaws of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed and
qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF
SECURITIES. At the Effective Time, by virtue of the Merger and without any
action on the part of the Parent Companies, the Company or their respective
shareholders:
(a) Subject to the other provisions of this ARTICLE II, each share of
Company Common Stock issued and outstanding immediately prior to the Effective
Time shall be converted into .5454 shares of Parent Common Stock, subject to the
provisions of SECTION 8.02 (the "Merger Consideration")
(b) Notwithstanding the foregoing subsection (a), if between the date of
this Agreement and the Effective Time, the outstanding shares of Parent Common
Stock or Company Common Stock shall have been changed into a different number of
shares, by reason of any stock dividend, split, combination or similar event,
the Merger Consideration shall be correspondingly adjusted to reflect such stock
dividend, split, combination or similar event.
(c) All shares of the Company Common Stock shall cease to be outstanding
and shall automatically be canceled and retired, and each certificate previously
evidencing the Company Common Stock outstanding immediately prior to the
Effective Time (the "Converted Shares") shall thereafter represent the right to
receive, subject to SECTION 2.02(D), that number of shares of Parent Common
Stock determined pursuant to SECTION 2.01(A) and, if applicable, cash pursuant
to SECTION 2.02(D). The owners of certificates previously evidencing Converted
Shares shall cease to have any rights with respect to such Converted Shares
except as otherwise provided herein or by law. Such certificates previously
evidencing Converted Shares shall be exchanged for certificates evidencing whole
shares of Parent Common Stock upon the surrender of such
A-2
certificates in accordance with the provisions of SECTION 2.02, without
interest. No fractional shares of Parent Common Stock shall be issued in
connection with the Merger and, in lieu thereof, a cash payment shall be made
pursuant to SECTION 2.02(D).
(d) Each share of Company Preferred Stock issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares, as
defined in SECTION 2.04) shall be converted into one share of Parent Preferred
Stock having the same provisions as the Company Preferred Stock.
(e) Each share of common stock, no par value, of Merger Sub issued and
outstanding immediately prior to the Effective Time shall be converted into one
share of common stock, no par value, of the Surviving Corporation.
SECTION 2.02. EXCHANGE AND SURRENDER OF COMPANY COMMON STOCK CERTIFICATES.
(a) As soon as practicable after the Effective Time, each record holder of
certificates previously evidencing Converted Shares shall be entitled to
receive, and Parent shall cause the Exchange Agent (as defined in SECTION2.02(F)
below) to issue to each such record holder, upon surrender of such certificates
to the Exchange Agent, a certificate or certificates representing the number of
whole shares of Parent Common Stock into which the Converted Shares so
surrendered shall have been converted as aforesaid, in such denominations and
registered in such names as such holder may request. If such holder would
otherwise be entitled to fractional shares of Parent Common Stock, such holder
shall upon surrender of the certificates representing such shares held as
aforesaid, be paid an amount in cash in accordance with the provisions of
SECTION 2.02(D). Until so surrendered and exchanged, each certificate previously
evidencing Converted Shares shall represent solely the right to receive Parent
Common Stock and cash in lieu of fractional shares. Unless and until any such
certificates shall be so surrendered and exchanged, no dividends or other
distributions payable to the holders of record of Parent Common Stock as of any
time on or after the Effective Time shall be paid to the holders of record of
Converted Shares; PROVIDED, HOWEVER, that Parent shall deposit with the Exchange
Agent any such dividends or other distributions payable with respect to the
Parent Common Stock represented by any unsurrendered certificates evidencing
Converted Shares, and upon any such surrender and exchange of such certificates,
Parent shall cause the Exchange Agent to pay to the holders of record of
Converted Shares (i) the amount, without interest thereon, of dividends and
other distributions, if any, with a record date on or after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions, if any, with a record date on or after the Effective Time but
prior to surrender and a payment date occurring after surrender, payable with
respect to such whole shares of Parent Common Stock. Notwithstanding the
foregoing, no party hereto shall be liable to any former holder of Converted
Shares for any cash, Parent Common Stock or dividends or distributions thereon
delivered to a public official pursuant to applicable abandoned property,
escheat or similar law.
(b) All shares of Parent Common Stock issued upon the surrender for
exchange of certificates previously representing Converted Shares in accordance
with the terms hereof (including any cash paid pursuant to SECTION 2.02(D))
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such Converted Shares. At and after the Effective Time, there
shall be no further registration of transfers on the stock transfer books of the
Surviving Corporation of Company Common Stock that was outstanding immediately
prior to the Effective Time. If, after the Effective Time, certificates which
previously evidenced Converted Shares are presented to the Surviving Corporation
for any reason, they shall be canceled and exchanged as provided in this ARTICLE
II.
(c) If any certificate for shares of Parent Common Stock is to be issued in
a name other than that of the record holder, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed,
with signatures guaranteed, and otherwise in proper form for transfer and that
the record holder shall have paid to Parent or the Exchange Agent any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of
A-3
the record holder, or established to the satisfaction of Parent or the Exchange
Agent that such tax has been paid or is not payable.
(d) No certificates or scrip evidencing fractional shares of Parent Common
Stock shall be issued upon the surrender for exchange of certificates, and such
fractional share interests will not entitle the owner thereof to any rights of a
shareholder of Parent. In lieu of any such fractional shares, Parent shall cause
the Exchange Agent to pay to the owner thereof, upon surrender of such
certificate for exchange pursuant to this ARTICLE II, an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying (i) $40.00 by
(ii) the fractional interest to which the owner thereof would otherwise be
entitled (after taking into account all Converted Shares held of record by such
owner and all full shares of Parent Common Stock issued in respect thereof).
(e) Parent shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any former holder of Converted
Shares such amounts as Parent (or any affiliate thereof) is required to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by Parent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the former holder of the Converted Shares
in respect of which such deduction and withholding was made by Parent.
(f) At or prior to the Effective Time, Parent shall appoint an independent
exchange agent reasonably acceptable to the Company (the "Exchange Agent") as
its agent for purposes of, among other things, mailing and receiving letters of
transmittal and disbursing certificates of shares of Parent Common Stock, and
cash in lieu of fractional shares, to the former holders of Converted Shares.
Before the Effective Time Parent and the Exchange Agent shall enter into an
exchange agent agreement providing for, among other things, the matters set
forth in this ARTICLE II.
(g) Promptly (but in no event later than five business days) after the
Effective Time, Parent shall cause the Exchange Agent to mail and/or make
available to each former holder of Converted Shares a notice and letter of
transmittal advising such holder of the effectiveness of the Merger and the
procedures to be used for exchanging the certificates evidencing Converted
Shares as described in this ARTICLE II.
(h) If any certificate representing Converted Shares has been lost, stolen
or destroyed, the Exchange Agent shall issue and/or pay in exchange therefor,
upon receipt of an affidavit of the record holder thereof stating that such
certificate has been lost, stolen or destroyed and upon the posting of an
appropriate bond or other security, if requested by the Exchange Agent, the
certificates of shares of Parent Common Stock, Parent Preferred Stock and cash,
if any, to which the holder is entitled under this ARTICLE II.
SECTION 2.03. EXCHANGE AND SURRENDER OF COMPANY PREFERRED STOCK
CERTIFICATES.
(a) As soon as practicable after the Effective Time, each record holder of
certificates previously evidencing Company Preferred Stock shall be entitled to
receive, and Parent shall cause the Exchange Agent to issue to each such record
holder, upon surrender of such certificates to the Exchange Agent, a certificate
or certificates representing the number of shares of Parent Preferred Stock into
which the Company Preferred Stock so surrendered shall have been converted as
aforesaid, in such denominations and registered in such names as such holder may
request. Until so surrendered and exchanged, each certificate previously
evidencing Company Preferred Stock shall represent solely the right to receive
Parent Preferred Stock. Unless and until any such certificates shall be so
surrendered and exchanged, no dividends or other distributions payable to the
holders of record of Parent Preferred Stock as of any time on or after the
Effective Time shall be paid to the holders of record of Company Preferred
Stock; PROVIDED, HOWEVER, that Parent shall deposit with the Exchange Agent any
such dividends or other distributions payable with respect to the Parent
Preferred Stock represented by any unsurrendered certificates evidencing Company
Preferred Stock, and upon any such surrender and exchange of such certificates,
Parent shall cause the Exchange Agent to pay to the holders of record of Company
Preferred Stock (i) the amount, without
A-4
interest thereon, of dividends and other distributions, if any, with a record
date on or after the Effective Time theretofore paid with respect to such shares
of Parent Preferred Stock, and (ii) at the appropriate payment date, the amount
of dividends or other distributions, if any, with a record date on or after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such shares of Parent Preferred Stock.
Notwithstanding the foregoing, no party hereto shall be liable to any former
holder of Company Preferred Stock for any cash, Parent Preferred Stock or
dividends or distributions thereon delivered to a public official pursuant to
applicable abandoned property, escheat or similar law.
(b) All shares of Parent Preferred Stock issued upon the surrender for
exchange of certificates previously representing Company Preferred Stock in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Company Preferred Stock. At and
after the Effective Time, there shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of Company Preferred Stock
that was outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates which previously evidenced Company Preferred Stock
are presented to the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this ARTICLE II.
(c) If any certificate for shares of Parent Preferred Stock is to be issued
in a name other than that of the record holder, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed,
with signatures guaranteed, and otherwise in proper form for transfer and that
the record holder shall have paid to Parent or the Exchange Agent any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Parent Preferred Stock in any name other than that of the record holder, or
established to the satisfaction of Parent or the Exchange Agent that such tax
has been paid or is not payable.
(d) Parent shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any former holder of Company
Preferred Stock such amounts as Parent (or any affiliate thereof) is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by Parent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the former holder of the
Company Preferred Stock in respect of which such deduction and withholding was
made by Parent.
(e) Promptly (but in no event later than five business days) after the
Effective Time, Parent shall cause the Exchange Agent to mail and/or make
available to each former holder of Company Preferred Stock a notice and letter
of transmittal advising such holder of the effectiveness of the Merger and the
procedures to be used for exchanging the certificates evidencing Company
Preferred Stock as described in this ARTICLE II.
(f) If any certificate representing Company Preferred Stock has been lost,
stolen or destroyed, the Exchange Agent shall issue and/or pay in exchange
therefor, upon receipt of an affidavit of the record holder thereof stating that
such certificate has been lost, stolen or destroyed and upon the posting of an
appropriate bond or other security, if requested by the Exchange Agent, the
certificates of shares of Parent Preferred Stock to which the holder is entitled
under this ARTICLE II.
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SECTION 2.04. DISSENTING SHARES. Notwithstanding anything in this
Agreement to the contrary, shares of the Company Preferred Stock which
immediately prior to the Effective Time are held by shareholders who have
properly exercised and perfected dissenter rights under Michigan Law (the
"Dissenting Shares") shall not be converted into the right to receive shares of
Parent Preferred Stock as provided in SECTION 2.01(D) hereof, but the holders of
Dissenting Shares shall be entitled to receive such statutory dissenting
shareholder's consideration from the Surviving Corporation as shall be
determined pursuant to Michigan Law; PROVIDED, HOWEVER, that, if any such holder
shall have failed to perfect or shall withdraw or lose his right to dissent and
obtain payment under Michigan Law, such holder's shares of Company Preferred
Stock shall thereupon be deemed to have been converted as of the Effective Time
into the right to receive shares of Parent Preferred Stock, without any interest
thereon, as provided in SECTION 2.01(D) and such shares shall no longer be
Dissenting Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Parent Companies that:
SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Except as set
forth in SCHEDULE 3.01(I) of the disclosure statement delivered to Parent by the
Company (the "Company Disclosure Statement"), each of the Company and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, has all requisite power and authority to own, lease and operate
its properties and to carry on its business as it is now being conducted and is
duly qualified and in good standing to do business in each jurisdiction in which
the nature of the business conducted by it or the ownership or leasing of its
properties makes such qualification necessary, other than where the failure to
be so duly qualified and in good standing would not reasonably be expected to
have a Company Material Adverse Effect. The term "Company Material Adverse
Effect" (or "CMAE") as used in this Agreement shall mean any change or effect
that, individually or when taken together with all other such changes or
effects, is materially adverse to the business, operations, assets, financial
condition or results of operations of the Company and of its subsidiaries, taken
as a whole. SCHEDULE 3.01(II) of the Company Disclosure Statement sets forth a
true and complete list of all of the Company's directly or indirectly owned
subsidiaries, together with the jurisdiction of incorporation of each such
subsidiary and the percentage of each subsidiary's outstanding capital stock
owned by the Company or another subsidiary of the Company.
SECTION 3.02. CHARTER AND BYLAWS. The Company has heretofore furnished to
Parent complete and correct copies of the charter and the bylaws, in each case
as amended or restated, of the Company and each of its subsidiaries. Neither the
Company nor any of its subsidiaries is in violation of any of the provisions of
its charter or bylaws.
SECTION 3.03. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of (i) 800,000
shares of Preferred Stock, of which 31,250 shares are designated as Company
Preferred Stock, and (ii) 15,000,000 shares of Company Common Stock. As of the
date hereof 11,691 shares of Company Preferred Stock and 3,503,987 shares of
Company Common Stock were issued and outstanding. All of the outstanding capital
stock of the Company has been offered and sold in compliance with all applicable
securities laws. Except as set forth in SCHEDULE 3.03(A) to the Company
Disclosure Statement, no shares of capital stock of the Company are reserved for
any purpose. Each of the outstanding shares of capital stock of each of the
Company and its subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and has not been issued in violation of (nor are any of the
authorized shares of capital stock of the Company or any of its subsidiaries
subject to) any preemptive or similar rights created by statute, the charter or
bylaws of the Company or any of its subsidiaries, or any agreement to which the
Company or any of its subsidiaries is a party or bound,
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and the Company owns all of the capital stock of its subsidiaries free and clear
of all security interests, liens, claims, pledges, agreements, charges or other
encumbrances of any nature whatsoever.
(b) Except as set forth in SCHEDULE 3.03(B)(I) of the Company Disclosure
Statement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character to which the Company or any of its
subsidiaries is a party relating to the issued or unissued capital stock of the
Company or any of its subsidiaries or obligating the Company or any of its
subsidiaries to grant, issue or sell any shares of the capital stock of the
Company or any of its subsidiaries by sale, lease, license or otherwise. Except
as set forth in SCHEDULE 3.03(B)(II) to the Company Disclosure Statement, there
are no obligations, contingent or otherwise, of the Company or any of its
subsidiaries to (i) repurchase, redeem or otherwise acquire any shares of the
capital stock of the Company or any of its subsidiaries or (ii) provide material
funds to, or make any material investment in (in the form of a loan, capital
contribution or otherwise), or provide any guarantee with respect to the
obligations of, any other person, other than advances to subsidiaries in the
normal course of business. Except as described in SCHEDULE 3.03(B)(III) to the
Company Disclosure Statement, neither the Company nor any of its subsidiaries
(x) directly or indirectly owns, (y) has agreed to purchase or otherwise acquire
or (z) holds any interest convertible into or exchangeable or exercisable for,
any capital stock (or equivalent equity interest) of any corporation,
partnership, joint venture or other business association or entity (other than a
subsidiary). Except as set forth in SCHEDULE 3.03(B)(IV) of the Company
Disclosure Statement, there are no agreements, arrangements or commitments of
any character (contingent or otherwise) pursuant to which any person is or may
be entitled to receive any payment based on the revenues or earnings, or
calculated in accordance therewith, of the Company or any of its subsidiaries.
There are no voting trusts, proxies or other agreements or understandings to
which the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound with respect to the voting of any shares of
capital stock of the Company or any of its subsidiaries.
(c) SCHEDULE 3.03(C) to the Company Disclosure Statement sets forth a
complete and correct list as of the date hereof of all record holders of (i)
Common Stock, (ii) options to purchase Common Stock and (iii) Company Preferred
Stock.
(d) Since March 1, 1997, the Company has not declared or paid any dividend
on, or made any other distribution in respect of, outstanding shares of capital
stock of the Company, except for regularly scheduled semi-annual dividends on
the Company Preferred Stock.
SECTION 3.04. AUTHORITY. The Company has all requisite corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly authorized by all
necessary corporate action (including the unanimous approval of its Board of
Directors) and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (subject to, with respect to the consummation of the Merger,
the approval of this Agreement by the Requisite Shareholder Vote as described in
SECTION 3.17). This Agreement has been duly executed and delivered by the
Company and, assuming the due authorization, execution and delivery thereof by
the Parent Companies, constitutes the legal, valid and binding obligation of the
Company.
SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by the Company does not,
and the consummation by the Company of the transactions contemplated hereby will
not (i) conflict with or violate the charter or bylaws, in each case as amended
or restated, of the Company or any of its subsidiaries, (ii) conflict with or
violate any federal, state, foreign or local law, statute, ordinance, rule,
regulation, order, judgment or decree (collectively, "Laws") applicable to the
Company or any of its subsidiaries or by which any of their properties is bound
or subject or (iii) except as set forth on SCHEDULE 3.05(A) to the Company
Disclosure
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Statement, result in any breach of or constitute a default (or an event that
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or
require payment under, or result in the creation of a lien or encumbrance on any
of the properties or assets of the Company or any of its subsidiaries pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or any
of its subsidiaries is a party or by or to which the Company or any of its
subsidiaries or any of their properties is bound or subject, except in the case
of clauses (ii) and (iii) above, any conflict, violation, breach, default, lien
or encumbrance that would not reasonably be expected to have a CMAE. The Board
of Directors of the Company has taken all actions necessary under Michigan Law,
including approving the transactions contemplated by this Agreement and taking
appropriate actions under any shareholder protection laws, to ensure that any
restrictions imposed by Michigan Law or the Laws of any other jurisdiction
applicable to the Company or its subsidiaries on business combinations or the
owning or voting of the capital stock of the Company or any of its subsidiaries
do not, and will not, apply with respect to or as a result of the transactions
contemplated by this Agreement.
(b) Except as set forth in SCHEDULE 3.05(B) to the Company Disclosure
Statement, the execution and delivery of this Agreement by the Company does not,
and consummation of the transactions contemplated hereby will not, require the
Company to obtain any consent, license, permit, approval, waiver, authorization
or order of, or to make any filing with or notification to, any governmental or
regulatory authority, domestic or foreign (collectively, "Governmental
Entities"), except for applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the filing and
recordation of appropriate merger documents as required by Michigan Law, any
filings that may be required as a result of the legal or regulatory status of
Parent or Merger Sub, and any consent, license, permit, approval, authorization,
order, filing or notification that if not obtained or made would not reasonably
be expected to have a CMAE.
SECTION 3.06. PERMITS; COMPLIANCE. Each of the Company and its
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted, other than those that if not
possessed would not reasonably be expected to have a CMAE (collectively, the
"Company Permits"), and there is no action, proceeding or, to the Company's
knowledge, investigation pending or, to the Company's knowledge, threatened
regarding suspension or cancellation of any of the Company Permits that would
reasonably be expected to have a CMAE. Neither the Company nor any of its
subsidiaries is in conflict with, or in default or violation of (a) any Law
applicable to the Company or any of its subsidiaries or by or to which any of
their properties is bound or subject or (b) any of the Company Permits. other
than, in each such case, any conflict, default or violation that would not
reasonably be expected to have a CMAE. The Company has performed regular tests
in accordance with industry practice to determine whether its products comply in
all material respects with applicable Laws and regulations. Except as set forth
on SCHEDULE 3.06 to the Company Disclosure Statement, the Company has not
recalled any of its products during the last five years. Except as set forth on
SCHEDULE 3.06 to the Company Disclosure Statement, since February 28, 1994,
neither the Company nor any of its subsidiaries has received from any
Governmental Entity any written notification with respect to possible violations
of Laws that would reasonably be expected to have a CMAE.
SECTION 3.07. FINANCIAL STATEMENTS. The consolidated balance sheets of the
Company and its subsidiaries as of March 2, 1996 and March 1, 1997 and the
consolidated statements of earnings, shareholders' equity and cash flows of the
Company and its subsidiaries for the three years ended March 1, 1997, and all
related schedules and notes to the foregoing have been certified by Deloitte &
Touche, LLP, independent auditors. Each of the foregoing consolidated financial
statements (including, in each case, any related schedules and notes thereto) as
well as the unaudited consolidated balance sheets of the Company and its
subsidiaries as of July 19, 1997 (the "Latest Balance Sheet") and the unaudited
consolidated statements of earnings, shareholders equity and cash flows of the
Company and its subsidiaries for the four
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months ended July 19, 1997 (including, in each case, any related schedules and
notes thereto) and any financial statements of the Company and/or its
subsidiaries hereafter delivered to Parent (a) have been or will be prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except to the extent required by changes
in generally accepted accounting principles and as may be indicated in the notes
of the financial statements previously delivered to Parent and except, in the
case of interim financial statements, for the lack of footnotes and normal
year-end and audit adjustments and with respect to overreserved raw milk
accruals) and (b) do or will fairly present in all material respects the
financial position of the Company and its subsidiaries as of the respective
dates thereof and the results of operations and cash flows for the periods
indicated.
SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
SCHEDULE 3.08(I) of the Company Disclosure Statement, since March 1, 1997 each
of the Company and its subsidiaries has conducted its businesses only in the
ordinary course and in a manner consistent with past practice and there has not
been: (a) any damage, destruction or loss (whether or not covered by insurance)
with respect to any assets of the Company or any of its subsidiaries with a fair
market value in excess of $100,000; (b) any change by the Company or any of its
subsidiaries in their accounting methods, principles or practices; (c) any
declaration, setting aside or payment of any dividends or distributions in
respect of shares of the capital stock of the Company or any of its
subsidiaries, or any redemption, purchase or other acquisition by the Company or
any of its subsidiaries of any of their securities, other than (i) regularly
scheduled semi-annual dividends on the Company Preferred Stock and (ii)
dividends by a subsidiary of the Company to the Company or another subsidiary of
the Company; (d) any material increase in the benefits under, or the
establishment or amendment of, any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing or other employee benefit
plan, or any material increase in the compensation payable or to become payable
to directors, officers or employees of the Company or any of its subsidiaries,
except for annual merit or seniority increases in salaries or wages in the
ordinary course of business and consistent with past practice; (e) any
revaluation by the Company or any of its subsidiaries of any of their assets,
including the writing down or off of notes or accounts receivable and the
writing down of the value of inventory, other than in the ordinary course of
business and consistent with past practices; (f) any entry by the Company or any
of its subsidiaries into any commitment or transaction material to the Company
and its subsidiaries taken as a whole, including, without limitation, incurring
or agreeing to incur capital expenditures in excess of $100,000, other than as
expressly provided in or contemplated by the Company's 1998 capital budget,
which is set forth on SCHEDULE 3.08(II) to the Company Disclosure Statement (the
"Capital Budget"); (g) any increase in indebtedness for borrowed money other
than ordinary course of business increases in the Company's existing working
capital lines of credit with Harris Trust and Savings Bank and Old Kent Bank
consistent with past practice; (h) a loss of any of the Largest Customers or
Largest Suppliers, other than any loss that would not reasonably be expected to
have a CMAE; or (i) any Company Material Adverse Effect.
SECTION 3.09. NO UNDISCLOSED LIABILITIES. Except as and to the extent set
forth in SCHEDULE 3.09 of the Company Disclosure Statement or reflected or
reserved against in the Latest Balance Sheet, neither the Company nor any of its
subsidiaries has any liabilities or obligations, absolute, accrued, contingent
or otherwise ("Liabilities") except Liabilities that would not reasonably be
expected to have a CMAE.
SECTION 3.10. ABSENCE OF LITIGATION. Except as set forth in SCHEDULE 3.10
of the Company Disclosure Statement, there is no claim, action, suit,
litigation, proceeding, arbitration or, to the Company's knowledge,
investigation of any kind, at law or in equity (including actions or proceedings
seeking injunctive relief), pending or, to the Company's knowledge, threatened
against the Company or any of its subsidiaries or any properties or rights of
the Company or any of its subsidiaries that, if adversely determined, would
reasonably be expected to have a CMAE and neither the Company nor any of its
subsidiaries is subject to any continuing order of, consent decree, settlement
agreement or other similar written agreement with, or, continuing investigation
by, any Governmental Entity, or any judgment, order,
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writ, injunction, decree or award of any Government Entity or arbitrator,
including, without limitation, cease-and-desist or other orders that would
reasonably be expected to have a CMAE.
(a) Set forth in SCHEDULE 3.11(A) to the Company Disclosure Statement is a
complete and correct list of all material "employee benefit plans" (as defined
in the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
all material plans or policies providing for "fringe benefits" (including but
not limited to vacation, paid holidays, personal leave, employee discount,
educational benefit or similar programs), and each other material bonus,
incentive compensation, deferred compensation, profit sharing, stock, severance,
retirement, health, life, disability, group insurance, employment, stock option,
stock purchase, stock appreciation right, supplemental unemployment, layoff,
consulting, or any other similar plan, agreement, policy or understanding
(whether written or oral, qualified or nonqualified, currently effective or
terminated), and any trust, escrow or other agreement related thereto, which (i)
is or has been established, maintained or contributed to by the Company or any
ERISA Affiliate or with respect to which the Company or any ERISA Affiliate has
any liability, or (ii) provides benefits, or describes policies or procedures
applicable, to any officer, employee, director, former officer, former employee
or former director of the Company or any ERISA Affiliate, or any dependent
thereof, regardless of whether funded (each, an "Employee Plan," and
collectively, the "Employee Plans"). The term "ERISA Affiliate" shall mean any
corporation, trade or business the employees of which, together with the
employees of the Company, are required to be treated as employed by a single
employer under the provisions of ERISA or Code SECTION 414.
(b) Except as set forth on SCHEDULE 3.11(B) to the Company Disclosure
Statement and to the extent of coverage required under Code Section 4980B, to
the Company's knowledge, no written or oral representations have been made to
any employee or officer or former employee or officer of the Company or any of
its subsidiaries promising or guaranteeing any coverage under any employee
welfare plan for any period of time beyond the end of the current plan year.
Except as set forth on SCHEDULE 3.11(B) to the Company Disclosure Statement, the
consummation of the transactions contemplated by this Agreement will not
accelerate the time of payment or vesting, or increase the amount of
compensation (including amounts due under Employee Plans) due to any employee,
officer, former employee or former officer of the Company or any of its
subsidiaries.
(c) To the Company's knowledge, neither the Company nor any of its
subsidiaries, nor any present or former director, or officer, employee or agent
of the Company or any of its subsidiaries has made any material binding
commitments of the Company or any of its subsidiaries, written or oral, to any
present or former director, officer, agent or employee concerning his term,
condition, benefits or employment other than as set forth in SCHEDULE 3.11(C)to
the Company Disclosure Statement.
(d) With respect to each Employee Plan, the Company has made available to
Parent true, correct and complete copies of (i) the plan documents and summary
plan description; (ii) the most recent determination letter received from the
Internal Revenue Service; (iii) the annual reports required to be filed for the
two most recent plan years of each such Employee Plan; (iv) all related trust
agreements, insurance contracts or other funding agreements which implement such
Employee Plan; and (v) all other documents, records or other materials related
thereto reasonably requested by Parent.
(e) Set forth on SCHEDULE 3.11(E) to the Company Disclosure Statement is a
complete and correct list of all material "employee pension benefit plans" (as
defined in Section 3(2) of ERISA) maintained by the Company or any ERISA
Affiliate. Each such plan that is required to meet the employee pension benefit
plan qualification requirements of the Code meets such requirements in form and
operation in all material respects, and each such plan, and each trust (if any)
forming a part thereof, has received a favorable determination letter from the
Internal Revenue Service as to the qualification under the Code of such plan and
the tax-exempt status of such related trust, and, to the knowledge of the
Company, nothing has occurred since the date of such determination letter that
may materially adversely affect the qualification
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of such plan or the tax-exempt status of such related trust. All Employee Plans
purporting to qualify for special tax treatment under any provision of the Code,
including, without limitation, Code Sections 79, 105, 106, 125, 127, 129, 132,
421 or 501(c)(9) meet the requirements of such sections in form and in operation
in all material respects. All reports, returns or filings required by any
government agency have been timely filed in accordance with all applicable
requirements in all material respects.
(f) No condition exists that would subject the Company, any ERISA Affiliate
or Parent to any material excise tax, penalty tax or fine related to any
Employee Plan.
(g) Except as set forth on SCHEDULE 3.11(G) to the Company Disclosure
Statement, there are no agreements which will or may provide payments to any
officer, employee, shareholder, or highly compensated individual which will be
"parachute payments" under Code Section 280G that are nondeductible to the
Company or subject to tax under Code Section 4999 for which the Company or any
ERISA Affiliate would have withholding liability.
(h) Each Employee Plan has been operated in all material respects in
compliance with ERISA, the Code and all other applicable Laws; and except as
otherwise set forth on SCHEDULE 3.11(H) of the Company Disclosure Statement,
there are no material unfunded or underfunded liabilities existing under any
Employee Plans, and each Employee Plan could be terminated as of the Closing
Date without any material liability to Parent, the Company or any ERISA
Affiliate.
(i) There are no actions, suits, claims, audits, or, to the Company's
knowledge, investigations pending or, to the Company's knowledge, threatened
against, or with respect to, any of the Employee Plans or their assets that
would reasonably be expected to have a CMAE; and all contributions required to
be made to the Employee Plans have been made timely in all material respects.
(j) Except as set forth on SCHEDULE 3.11(J) of the Company Disclosure
Statement, neither the Company nor any of its subsidiaries is a party to any
collective bargaining or other labor union contract nor is any collective
bargaining agreement being negotiated by the Company or any of its subsidiaries.
The Company and its subsidiaries are in compliance with all applicable Laws
respecting employment, employment practices and wages and hours and with all
provisions of each collective bargaining agreement to which it is a party, other
than any noncompliance that would not reasonably be expected to have a CMAE.
During the last five years, except as set forth on SCHEDULE 3.11(J) to the
Company Disclosure Statement, the Company has not experienced any strike, labor
trouble, work stoppage, slow down or other interference with or impairment of
the business of the Company that would reasonably be expected to have a CMAE,
nor, to the Company's knowledge, has any of the foregoing been threatened within
the last five years. There is no pending or, to the Company's knowledge,
threatened labor dispute, strike or work stoppage against the Company or any of
its subsidiaries which may materially interfere with the respective business
activities of the Company or any of its subsidiaries prior to or after the
Effective Time. There is no pending or, to the Company's knowledge, threatened
material charge or complaint against the Company or any of its subsidiaries by
the National Labor Relations Board or any comparable state agency.
(k) SCHEDULE 3.11(K) of the Company Disclosure Statement sets forth, and
the Company has provided to Parent true and correct copies of, (i) all
employment agreements with officers or key employees of the Company or any its
subsidiaries; (ii) all agreements with consultants of the Company or any of its
subsidiaries; (iii) all non-competition agreements with the Company or any of
its subsidiaries; and (iv) any severance agreements, programs, policies, plans
or arrangements to which the Company or any of its subsidiaries is obligated,
whether or not written.
(l) The Employee Plans listed on SCHEDULE 3.11(L) of the Company Disclosure
Statement are the only Employee Plans that are subject to Part 3 of Title I of
ERISA or Title IV of ERISA (each, a "DB Plan"). The funding method used in
connection with each DB Plan is acceptable under ERISA, and the actuarial
assumptions used in connection with funding each DB Plan have been made
available to Parent. No material "accumulated funding deficiency" (as defined in
Section 302(a)(2) of ERISA) (whether or not
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waived and whether or not arising on account of inadequate Company or ERISA
Affiliate contributions, improper amortization of charges or credits in any
funding standard account, improper determination of any such charge, or credit,
or other reason) exists with respect to any plan year of any DB Plan. With
respect to each "employee pension benefit plan," as defined in Section 3(2) of
ERISA that is subject to the minimum funding requirements of Code Section 412
which the Company or any ERISA Affiliate maintains or contributes to or is
required to contribute to: (i) the Company and the ERISA Affiliates have paid in
all material respects all premiums (and interest charges and penalties for late
payment, if applicable) due the Pension Benefit Guaranty Corporation ("PBGC")
with respect to each such plan and each plan year thereof for which such
premiums are required, (ii) there has been no "reportable event" (as defined in
Section 4043(b) of ERISA and the regulations of the PBGC under such Section) for
which the 30 day notice is not waived, (iii) the termination of, or withdrawal
from, any such plan on or prior to the Closing Date, has not and will not
subject the Company, Parent or Merger Sub to any liability to the PBGC nor to
any material liability to any other party except as set forth on SCHEDULE
3.11(L) of the Company Disclosure Statement, (iv) no filing has been made by the
Company (or any ERISA Affiliate thereof) with the PBGC (and no proceeding has
been commenced by the PBGC) to terminate any such plan, (v) no amendment has
occurred which has required or could require the Company, Parent or Merger Sub
to provide security to any such plan under Code Section 401(a)(29), (vi) all
installment contributions required pursuant to Code Section 412(m) have been
paid by the Company and its ERISA Affiliates before the due date for such
contribution as set forth in Code Section 412(m) for each such plan, and (vii)
no partial termination has occurred or is expected to occur in connection with
the Merger or otherwise.
(m) With respect to any multiemployer plan (as defined in Section 3(37) of
ERISA) to which the Company or any ERISA Affiliate thereof contributes or has at
any time contributed or had an obligation to contribute (such multiemployer
plans being hereinafter collectively referred to as the "Multiemployer Plans"):
(i) the Company and each ERISA Affiliate thereof has or will have, as of
Closing, made all contributions to each Multiemployer Plan required by the terms
of such Multiemployer Plan or any collective bargaining agreement, (ii) except
as set forth on SCHEDULE 3.11(M) to the Company Disclosure Statement, none of
the Company, Parent or Merger Sub would be subject to any withdrawal liability
under Part 1 of Subtitle E of Title IV of ERISA if, as of the Closing Date, the
Company or any ERISA Affiliate thereof were to engage in a complete withdrawal
(as defined in ERISA Section 4203) or a partial withdrawal (as defined in ERISA
Section 4205) from any Multiemployer Plan, and (iii) the Company has made
available to Parent current, accurate and complete copies of all Multiemployer
Plans and of all collective bargaining agreements requiring contributions to be
made to any such Multiemployer Plan or Plans. Neither the Company nor any ERISA
Affiliate thereof has at any time prior to Closing (i) incurred any liabilities
under the provisions of Section 4062 of ERISA, (ii) withdrawn as a substantial
employer so as to become subject to the provisions of Section 4063 of ERISA,
(iii) ceased making contributions on or before the date of the Closing to any
Multiemployer Plan or (iv) made a complete or partial withdrawal from a
Multiemployer Plan so as to incur withdrawal liability as defined in Section
4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under Section 4207 or 4208 of ERISA).
SECTION 3.12. TAXES.
(a) Except as set forth on SCHEDULE 3.12(A) to the Company Disclosure
Statement or as accrued for in the Latest Balance Sheet, (i) all material
returns and reports ("Tax Returns") of or with respect to any Tax which is
required to be filed on or before the Closing Date by or with respect to the
Company or any of its subsidiaries have been or will be duly and timely filed,
(ii) all items of income, gain, loss, deduction and credit or other items
required to be included in each such Tax Return have been or will be so included
in all material respects and all information provided in each such Tax Return is
true, correct and complete, (iii) all Taxes which have become or will become due
with respect to the period covered by each such Tax Return have been or will be
timely paid in full in all material respects (other than Taxes being contested
in good faith for which adequate reserves have been made), (iv) all withholding
Tax requirements imposed on or with respect to the Company or any of its
subsidiaries have been or will be satisfied in full in all material
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respects, and (v) no material penalty, interest or other charge is or will
become due with respect to the late filing of any such Tax Return or late
payment of any such Tax.
(b) All Tax Returns of or with respect to the Company or any of its
subsidiaries, with unexpired or extended statutes of limitations, which have not
been audited by the applicable governmental authority are set forth in SCHEDULE
3.12(B) to the Company Disclosure Statement.
(c) Except as set forth on SCHEDULE 3.12(C) to the Company Disclosure
Statement, there is not in force any extension of time with respect to the due
date for the filing of any Tax Return of or with respect to the Company or any
of its subsidiaries or any waiver or agreement for any extension of time for the
assessment, collection or payment of any Tax of or with respect to the Company
or any of its subsidiaries.
(d) There are no pending audits, actions, proceedings, disputes, claims or,
to the Company's knowledge, investigations, with respect to or against the
Company or any of its subsidiaries for or with respect to any material Taxes, no
material assessment, deficiency or adjustment has been assessed or proposed with
respect to any Tax Return of or with respect to the Company or any of its
subsidiaries, and, to the Company's knowledge, there is no reasonable basis on
which any claim for material Taxes in excess of accruals reflected in the Latest
Balance Sheet can be asserted against the Company or any of its subsidiaries,
other than those disclosed (and with respect to which true and complete copies
of all audit or similar reports have been made available to Parent) on SCHEDULE
3.12(D) to the Company Disclosure Statement.
(e) The total amounts set up as liabilities for current and deferred Taxes
in the financial statements referred to in SECTION 3.07 are sufficient to cover
in all material respects the payment of all Taxes, whether or not assessed or
disputed, which are, or are hereafter found to be, or to have been, due by or
with respect to the Company and any of its subsidiaries up to and through the
periods covered thereby.
(f) The Company has previously delivered to Parent true and complete copies
of each written Tax allocation or sharing agreement and a true and complete
description of each unwritten Tax allocation or sharing arrangement affecting
the Company or any of its subsidiaries, if any.
(g) Except for statutory liens for current Taxes not yet due and payable or
being contested in good faith for which adequate reserves have been made, no
liens for Taxes exist upon the assets of any of the Company or its subsidiaries
that are material to the Company and its subsidiaries taken as a whole.
(h) To the Company's knowledge, neither the Company nor any of its
subsidiaries will be required to include any amount in income for any taxable
period beginning after March 2, 1997 as a result of a change in accounting
method for any taxable period ending on or before March 2, 1997 or pursuant to
any agreement with any Tax authority with respect to any such taxable period.
(i) Except as set forth on SCHEDULE 3.12(I) to the Company Disclosure
Statement, none of the property of the Company or any of its subsidiaries is
held in an arrangement for which partnership Tax Returns are being filed, and
neither the Company nor any of its subsidiaries owns any interest in any
controlled foreign corporation (as defined in section 957 of the Code), passive
foreign investment company (as defined in section 1296 of the Code) or other
entity the income of which is required to be included in the income of the
Company or such subsidiary.
(j) Except as set forth on SCHEDULE 3.12(J) to the Company Disclosure
Statement, none of the property of the Company or any of its subsidiaries is
subject to a safe-harbor lease (pursuant to section 168(f)(8) of the Internal
Revenue Code of 1954 as in effect after the Economic Recovery Tax Act of 1981
and before the Tax Reform Act of 1986) or is "tax-exempt use property" (within
the meaning of section 168(h) of the Code) or "tax-exempt bond financed
property" (within the meaning of section 168(g)(5) of the Code).
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(k) Neither the Company nor any of its subsidiaries has made an election
under section 341(f) of the Code.
(l) Except as set forth on SCHEDULE 3.12(L) to the Company Disclosure
Statement, neither the Company nor any subsidiary has ever been a member of an
affiliated group of corporations (as defined in section 1504(a) of the Code).
(m) Except for Canada, neither the Company nor any subsidiary is or has ever
been subject to Taxes in any jurisdiction outside the United States.
(n) To the Company's knowledge, no amounts paid by the Company or any of its
subsidiaries to any Employee Plan would fail to be deductible under section 404
of the Code.
SECTION 3.13. TAX MATTERS; POOLING.
(a) Neither the Company nor any of its affiliates has knowingly taken or
agreed to take any action that would prevent the Merger from (i) constituting a
reorganization qualifying under the provisions of section 368(a) of the Code or
(ii) being treated for financial accounting purposes as a "pooling of interests"
(the "Pooling Transaction") in accordance with generally accepted accounting
principles and the rules, regulations and interpretations of the Securities and
Exchange Commission (the "SEC").
(b) To the Company's knowledge, there is no current plan or intention by any
of the Company's shareholders to sell, exchange or otherwise dispose of a number
of shares of Parent Common Stock to be received in the Merger that would reduce
the aggregate ownership of Parent Common Stock by the Company's shareholders to
a number of shares having a value, as of the Effective Time, of less than 50
percent of the value of all of the Company Common Stock (including shares of the
Company Common Stock exchanged for cash in lieu of fractional shares of Parent
Common Stock) outstanding immediately prior to the Effective Time.
(c) Except as otherwise provided for herein, the Company will pay its
Expenses incurred in connection with the Merger.
SECTION 3.14. AFFILIATES. SCHEDULE 3.14 to the Company Disclosure
Statement identifies all persons who the Company reasonably believes may be
deemed to be affiliates of the Company under Rule 145 of the Securities Act of
1933, as amended (the "Securities Act"), including, without limitation, all
directors and executive officers of the Company. Concurrently with the execution
and delivery of this Agreement, the Company has delivered to Parent an executed
letter agreement, substantially in the form of EXHIBIT A hereto, from each
executive officer and director of the Company.
SECTION 3.15. CERTAIN BUSINESS PRACTICES. None of the Company, any of its
subsidiaries, or any directors, officers, agents or employees of the Company or
any of its subsidiaries has (a) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political activity,
(b) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (c)
made any other unlawful payment, in each case that would reasonably be expected
to have a CMAE.
SECTION 3.16. ENVIRONMENTAL MATTERS. Except for matters disclosed in
SCHEDULE 3.16 of the Company Disclosure Statement and except for matters
expressly disclosed in any report previously delivered to Parent by J. McNutt &
Associates, (a) the properties, operations and activities of the Company and its
subsidiaries are in compliance in all material respects with all applicable
Environmental Laws; (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, inquiry,
proceeding or, to the Company's knowledge, investigation by or before any
governmental authority under any Environmental Law that is or would be material
to the Company and its Subsidiaries taken as a whole; (c) all notices, permits,
licenses, or similar authorizations, if any, required to
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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
and its subsidiaries taken as a whole, 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, other than
where the failure to obtain or file such notices, permits, licenses or similar
authorizations would not reasonably be expected to have a CMAE, and will not
cease to remain valid and in effect solely as a consequence of the Merger, and
the Company and its subsidiaries are in compliance in all material respects 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 in all respects with all financial responsibility
requirements applicable to their operations and imposed by any governmental
authority under any Environmental Law, except where noncompliance would not
reasonably be expected to have a CMAE, and the Company and its subsidiaries have
not received any notice of material noncompliance with any such financial
responsibility requirements; (e) there are no physical or environmental
conditions existing on any property of the Company or its subsidiaries or
resulting from the Company's or such subsidiaries' operations or activities,
past or present, at any location, that would give rise to any material on-site
or off-site remedial obligations imposed on the Company or any of its
subsidiaries under any Environmental Laws or that would materially impact the
soil, groundwater, surface water or human health; (f) to the Company's
knowledge, 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
and 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 at any property owned or controlled by the Company or
any of its subsidiaries, nor has there been any release of hazardous substances,
or any pollutant or contaminant into the environment by the Company or its
subsidiaries at any property owned or controlled by the Company or any of its
subsidiaries, that could reasonably be expected to give rise to any material
claim against the Company or any of its subsidiaries for damages or
compensation; and (h) the Company and its subsidiaries have made available to
Parent all internal and external environmental audits and studies and all
correspondence on substantial environmental matters in the possession of the
Company or its subsidiaries reasonably requested by Parent relating to any of
the current properties or operations of the Company and its subsidiaries.
For purposes of this Agreement, the term "Environmental Laws" shall mean 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.
SECTION 3.17. VOTE REQUIRED. The only vote of the holders of any class or
series of the Company capital stock necessary to approve the Merger and adopt
this Agreement is the affirmative vote of holders of a majority of the
outstanding shares of each of the Company Common Stock and the Company
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Preferred Stock, voting separately as distinct classes (the "Requisite
Shareholder Vote"). No holders of Company Common Stock are entitled to
dissenters' rights under Section 762 or any other provision of the Michigan Law
with respect to shares of Company Common Stock.
SECTION 3.18. BROKERS. Except as set forth in SCHEDULE 3.18 to the Company
Disclosure Statement, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company. Prior to the date of this Agreement, the Company has
delivered to Parent a complete and correct copy of all agreements referenced in
SCHEDULE 3.18 to the Company Disclosure Statement pursuant to which any person
or such firm will be entitled to any payment or indemnification relating to the
transactions contemplated by this Agreement.
SECTION 3.19. INSURANCE. SCHEDULE 3.19 of the 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 and each of its subsidiaries
and their respective businesses, properties and assets (or their directors,
officers, salespersons, agents or employees), including the following
information for each such policy: (a) type(s) of insurance coverage provided;
(b) name of insurer; (c) effective date; (d) policy number; (e) per occurrence
and annual aggregate deductibles or self-insured retention; and (f) per
occurrence and annual aggregate limits of liability and the extent, if any, to
which the limits of liability have been exhausted. To the Company's knowledge,
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 and has
not received written notice of any pending or threatened termination or
cancellation, coverage limitation or reduction, or premium increase with respect
to any such policy that would reasonably be expected to have a CMAE. The Company
has made available to Parent a summary of any loss reports for the Company
issued by any of the Company's insurers since January 1, 1995. SCHEDULE 3.19 of
the Company Disclosure Statement sets forth a complete and accurate summary of
all of the self-insurance coverage provided by the Company and its subsidiaries
and except as set forth in such SCHEDULE 3.19, no letters of credit have been
posted and no cash has been restricted to support any reserves for insurance.
SECTION 3.20. PROPERTIES.
(a) SCHEDULE 3.20(A) to the Company Disclosure Statement sets forth a list
of all real property owned or leased by the Company or any of its subsidiaries
(the "Real Estate"), and the Company has furnished to Parent each applicable and
readily available survey, title policy and certificate of occupancy relating
thereto (along with any exception documents referenced therein). No contract,
option, lease agreement, letter of intent or proposal (whether written or oral)
has been entered into by the Company relating to the Real Estate except as
specified on SCHEDULE 3.20(A) to the Company Disclosure Statement. Except as
expressly noted otherwise in any report delivered to Parent by the Company or
the Parent's agents, the Company's and its subsidiaries' occupancy, operation
and use of the Real Estate conforms to all applicable subdivision, building
codes, health, safety, setback and zoning ordinances, and other Laws,
regulations and requirements applicable to the occupancy, operation and use
thereof, other than any failure to so conform that would not reasonably be
expected to have a CMAE. No premises other than the Real Estate are used in the
business of the Company or any of its subsidiaries. To the knowledge of the
Company, there are no actions pending or threatened that would alter the current
zoning classification of the Real Estate. To the knowledge of the Company, all
improvements included in the assets of the Company were constructed in
compliance with all applicable Laws, statutes, regulations, codes, covenants,
conditions and restrictions affecting the Real Estate or any part thereof, other
than any failure to comply that would not reasonably be expected to have a CMAE.
To the knowledge of the Company, no fact or conditions 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, other than any
discontinuation or termination that would not reasonably be expected to have a
CMAE.
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(b) Except for (i) liens and encumbrances (A) set forth on SCHEDULE 3.20(B)
to the Company Disclosure Statement, (B) for Taxes not yet due and payable or
being contested in good faith, (C) to secure indebtedness reflected on the
Latest Balance Sheet or described in SECTION 3.21(A)(III) (without regard to
dollar value), (D) relating to mechanics', materialmen's and other similar liens
arising in the ordinary course of business or (E) that do not exceed $250,000
individually or in the aggregate, and (ii) properties and assets disposed of in
the ordinary course of business consistent with past practices after the date of
the Latest Balance Sheet, the Company and its subsidiaries have good and
marketable title, free and clear of all liens and encumbrances, to all
properties and assets, whether tangible or intangible, real, personal or mixed,
reflected in the Latest Balance Sheet or SCHEDULE 3.20(A) to the Company
Disclosure Statement as being owned by the Company and its subsidiaries as of
the date thereof. All buildings, and all fixtures, equipment and other property
and assets which are material to the Company and its subsidiaries taken as a
whole, held under leases by the Company or its subsidiaries are held under valid
instruments enforceable by the Company or its subsidiaries in accordance with
their respective terms. The Company's and its subsidiaries' improvements and
equipment that are material to their business operations taken as a whole have
been well maintained and are in good and serviceable condition, reasonable wear
and tear excepted.
SECTION 3.21. CERTAIN MATERIAL CONTRACTS.
(a) SCHEDULE 3.21(A) to the Company Disclosure Statement lists each of the
following agreements and arrangements (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 and any
of its subsidiaries, taken as a whole (collectively, the "Material Contracts"):
(i) any supply, distribution or other agreements or arrangements pursuant to
which the Company or its subsidiaries sell or distribute any products and which
is not cancelable within 90 days notice without penalty; (ii) any warranty
agreements or arrangements under which the Company or any of its subsidiaries
has any Liability with a value in excess of $500,000; (iii) any capital or
operating leases or conditional sales agreements relating to vehicles or
equipment with a value in excess of $500,000; (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) insurance policies; (vi) any employment, consulting,
noncompetition, separation, collective bargaining, union or labor agreements or
arrangements; (vii) any agreement evidencing, securing or otherwise relating to
any indebtedness for which the Company or any of its subsidiaries has any
Liability in excess of $1,000,000, (viii) any material agreement with or for the
benefit of any shareholder, director, officer or employee of the Company or any
of its subsidiaries, or any affiliate or family member thereof; and (ix) any
other agreement or arrangement 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 $1,000,000 and which is not cancelable within 90 days
notice without penalty.
(b) The Company and its subsidiaries have performed all of their 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) under
any Material Contract, other than any failure to perform or any breach or
default that would not reasonably be expected to have a CMAE.
(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 (other than any term that if not enforced would not
reasonably be expected to have a CMAE), except as such enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent conveyance or other
similar laws affecting the enforcement of creditors' rights generally and
subject to general principles of equity and except for any Material Contract
that by its express terms expires on or before the Closing Date. 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.
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(d) Except as set forth in SCHEDULE 3.21(D) to the Company Disclosure
Statement, 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.
SECTION 3.22. PRINCIPAL CUSTOMERS AND SUPPLIERS; COMPETING INTERESTS. The
Company has made available to Parent a list of the ten largest customers by
dollar volume of the Company and its subsidiaries (the "Largest Customers") and
the ten largest suppliers by dollar volume of the Company and its subsidiaries
(the "Largest Suppliers"), with the amount of revenues or payments, as
applicable, attributable to each such customer and supplier), for the Company's
1996 and 1997 fiscal years and the first four months of its 1998 fiscal year.
Except as described in SCHEDULE 3.22(I), none of the Largest Customers or
Largest Suppliers has terminated or materially altered its relationship with the
Company since the beginning of the Company's 1998 fiscal year, or, to the
Company's knowledge, threatened to do so or otherwise notified the Company of
any intention to do so, and there has been no dispute with any of the Largest
Customers or Largest Suppliers since the beginning of the Company's 1998 fiscal
year, other than any alteration or dispute that would not reasonably be expected
to have a CMAE. Except as described in such SCHEDULE 3.22(II), none of the
Company, any of its subsidiaries, or, to the Company's knowledge, any director
or officer of any of the foregoing 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 business dealings with the Company or any
of its subsidiaries that are material to the Company and its subsidiaries taken
as a whole, other than the beneficial ownership of not more than 5% of the
voting securities of any such entity that are publicly traded.
SECTION 3.23. INTELLECTUAL PROPERTY RIGHTS. There are no registered
patents, trademarks, service marks, trade names or copyrights, or applications
for or licenses (to or from the Company or any of its subsidiaries) with respect
to any of the foregoing that are material to the Company and its subsidiaries
taken as a whole, that (a) are owned by the Company or any of its subsidiaries,
or with respect to which the Company or any of its subsidiaries has any rights,
or (b) are used, whether directly or indirectly, by the Company or any of its
subsidiaries, other than as set forth on SCHEDULE 3.23 to the Company Disclosure
Statement. The Company and its subsidiaries have the right to use the trademarks
and trade names set forth on such SCHEDULE 3.23 and any other computer software
and software licenses, intellectual property, proprietary information, trade
secrets, trademarks, trade names, copyrights, material and manufacturing
specifications, drawings and designs that are material to the Company and its
subsidiaries taken as a whole (collectively, "Intellectual Property"), without
infringing on or otherwise acting adversely to the rights or claimed rights of
any person, other than any infringement that would not reasonably be expected to
have a CMAE. Except as set forth on SCHEDULE 3.23 to the Company Disclosure
Statement, neither the Company nor any of its subsidiaries is obligated to pay
any royalty or other consideration to any person in connection with the use of
any Intellectual Property. To the Company's knowledge, no other person is
infringing in any material respect on the rights of the Company and its
subsidiaries in any of their Intellectual Property.
SECTION 3.24. OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of The Ohio Company to the effect that, as of the date of delivery of
such opinion, the consideration to be received by the holders of Company Common
Stock and Company Preferred Stock in the Merger is fair, from a financial point
of view, to such holders (the "Fairness Opinion"). The Company will promptly
deliver to Parent a true and complete written copy of such opinion.
SECTION 3.25. INFORMATION SUPPLIED. No representation or warranty of the
Company and no statement by the Company or other information contained in the
Company Disclosure Statement as of the date of such representation, warranty or
statement contains any untrue statement of material fact, or omits to state a
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which such statements were made, not
misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT COMPANIES
The Parent Companies hereby represent and warrant, jointly and severally, to
the Company that:
SECTION 4.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of the
Parent and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its state of incorporation or
organization and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as it is now being
conducted and is duly qualified and in good standing to do business in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary, other
than where the failure to be so duly qualified and in good standing would not
reasonably be expected to have a Parent Material Adverse Effect. The term
"Parent Material Adverse Effect" (or "PMAE") as used in this Agreement shall
mean any change or effect that, individually or when taken together with all
such other changes or effects, is materially adverse to the business,
operations, assets, financial condition or results of operations of Parent and
its subsidiaries, taken as a whole.
SECTION 4.02. CHARTER AND BYLAWS. Parent has heretofore furnished to the
Company a complete and correct copy of the charter and bylaws, as amended or
restated, of the Parent Companies. Neither Parent nor the Merger Sub is in
violation of any of the provisions of its charter or bylaws.
SECTION 4.03. CAPITALIZATION.
(a) The authorized capital stock of Parent consists of (i) 100,000,000
shares of Parent Common Stock, of which as of August 31, 1997, (A) 15,804,545
shares were issued and outstanding, (B) no shares were held in treasury and (C)
2,955,036 shares were reserved for future issuance pursuant to Parent's Exchange
Stock Option and Restricted Stock Plan, 1995 Stock Option and Restricted Stock
Plan, 1997 Stock Option and Restricted Stock Plan and 1997 Employee Stock
Purchase Plan (collectively, the "Parent Option Plans"); and (ii) 1,000,000
shares of preferred stock, par value $0.01 per share, of which no shares are
issued and outstanding. Except as described in this SECTION 4.03, in the SEC
Reports (as defined below) or in SCHEDULE 4.03(A)(I) of the disclosure statement
delivered to the Company by Parent (the "Payment Disclosure Statement"), as of
the date of this Agreement, no shares of capital stock of Parent are reserved
for any purpose. The outstanding shares of capital stock of Parent are duly
authorized, validly issued, fully paid and nonassessable, and have not been
issued in violation of (nor are any of the authorized shares of capital stock of
Parent subject to) any preemptive or similar rights created by statute, the
charter or bylaws of Parent, or any agreement to which Parent is a party or
bound. Parent owns all the outstanding capital stock of Merger Sub and, except
as set forth in SCHEDULE 4.03(A)(II) to the Parent Disclosure Statement, all of
the outstanding capital stock of each of its subsidiaries, free and clear of all
security interests, liens, claims, pledges, agreements, charges or other
encumbrances of any nature whatsoever.
(b) Except pursuant to the Parent Option Plans, or as set forth in SCHEDULE
4.03(B)(I) to the Parent Disclosure Statement or the SEC Reports (as defined
below), as of August 31, 1997 there are no options, warrants or other rights,
agreements, arrangements or commitments of any character to which Parent is a
party relating to the issued or unissued capital stock of Parent or obligating
Parent to grant, issue or sell any shares of its capital stock, by sale, lease,
license or otherwise. Except as set forth in SCHEDULE 4.03(B)(II) to the Parent
Disclosure Statement or the SEC Reports (as defined below), there are no
obligations, contingent or otherwise, of Parent to repurchase, redeem or
otherwise acquire any of its shares of capital stock. Except as set forth on
SCHEDULE 4.03(B)(III) to the Company Disclosure Statement, there are no voting
trusts, proxies or other agreements or understandings to which Parent is a party
or by which Parent is bound with respect to the voting of any shares of its
capital stock.
(c) The shares of Parent Common Stock to be issued pursuant to the Merger
and all Parent Common Stock issuable upon the exercise of the Stock Options
converted in the Merger pursuant to SECTION 5.12 will
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be duly authorized, validly issued, fully paid and nonassessable and not subject
to preemptive rights created by statute, Parent's charter or bylaws or any
agreement to which Parent is a party or is bound.
(d) The shares of Parent Common Stock to be issued in the Merger will be at
the Effective Time, approved for listing on the New York Stock Exchange ("NYSE")
and duly registered or qualified under federal and applicable state securities
Laws.
SECTION 4.04. AUTHORITY. Each of the Parent Companies has all requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by each of the Parent
Companies and the consummation by each of the Parent Companies of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of any of the
Parent Companies are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of the Parent Companies and, assuming the due authorization,
execution and delivery thereof by the Company, constitutes the legal, valid and
binding obligation of each of the Parent Companies.
SECTION 4.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by each of the Parent
Companies does not, and the consummation by the Parent Companies of the
transactions contemplated hereby will not (i) conflict with or violate the
charter or bylaws, in each case as amended or restated, of Parent or any of
Parent's subsidiaries, (ii) conflict with or violate any Laws applicable to
Parent or any of Parent's subsidiaries or by which any of their properties is
bound or subject, or (iii) except as set forth on SCHEDULE 4.05 to the Parent
Disclosure Statement result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Parent or any of Parent's subsidiaries pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Parent or any of
Parent's subsidiaries is a party or by or to which Parent or any of Parent's
subsidiaries or any of their respective properties is bound or subject, except
in the case of clauses (ii) and (iii) above, any conflict, violation, breach,
default, lien or encumbrance that would not reasonably be expected to have a
PMAE.
(b) The execution and delivery of this Agreement by each of the Parent
Companies does not, and the consummation of the transactions contemplated hereby
will not, require any of the Parent Companies to obtain any consent, license,
permit, approval, waiver, authorization or order of, or to make any filing with
or notification to, any Governmental Entities, except for applicable
requirements, if any, of the Securities Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act"), state securities or blue sky laws ("Blue
Sky Laws"), and the HSR Act, the filing and recordation of appropriate merger
documents as required by Michigan Law, any filings that may be required as a
result of the legal or regulatory status of the Company, and any consent,
license, permit, approval, authorization, order, filing or notification that if
not obtained or made would not reasonably be expected to have a PMAE.
SECTION 4.06. PERMITS; COMPLIANCE. Each of Parent and its subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted, other than those that if not possessed would not
reasonably be expected to have a PMAE (collectively, the "Parent Permits"), and
there is no action, proceeding or, to the Parent's knowledge, investigation
pending or, to the knowledge of Parent, threatened regarding suspension or
cancellation of any of the Parent Permits that would reasonably be expected to
have a PMAE. Neither Parent nor any of its subsidiaries is in conflict with, or
in material default or violation of (a) any Law applicable to Parent or any of
its subsidiaries or by or to which any of their respective properties is bound
or subject or (b) any of the Parent Permits, other than, in each such case, any
conflict, default or violation that would not reasonably be expected to have a
PMAE. Since December 31, 1995, neither Parent nor any
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of its subsidiaries has received from any Governmental Entity any written
notification with respect to possible violation of laws that would reasonably be
expected to have a PMAE.
SECTION 4.07. REPORTS; FINANCIAL STATEMENTS.
(a) Since December 31, 1995, Parent and its subsidiaries have filed all
forms, reports, statements and other documents required to be filed with the SEC
pursuant to the Exchange Act, including, without limitation, (i) all Annual
Reports on Form l0-K, (ii) all Quarterly Reports on Form 10-Q, (iii) all proxy
statements relating to meetings of shareholders (whether annual or special), and
(iv) all Current Reports on Form 8-K (collectively, the "SEC Reports"). Parent
has made available to the Company complete and correct copies of all SEC Reports
filed during the preceding 12 months, and will promptly make available to the
Company complete and correct copies of all SEC Reports filed after the date of
this Agreement. The SEC Reports, including all SEC Reports filed after the date
of this Agreement and prior to the Effective Time, (x) were or will be prepared,
as of the time they were or are filed, in all material respects in accordance
with the requirements of applicable Law and (y) did not at the time they were
filed, or will not at the time they are filed, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained or incorporated by reference in the SEC
Reports filed prior to the Effective Time (i) have been or will be prepared in
accordance with the published rules and regulations of the SEC and generally
accepted accounting principles applied on a consistent basis throughout the
periods involved (except to the extent required by changes in generally accepted
accounting principles and with respect to SEC Reports filed prior to the date of
this Agreement, as may be indicated in the notes thereto and except, in the case
of interim financial statements, for the lack of certain footnotes and normal
year-end and audit adjustments, and (ii) do or will fairly present in all
material respects the consolidated financial position of Parent and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows for the periods indicated.
SECTION 4.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the SEC Reports filed prior to the date of this Agreement or as contemplated by
this Agreement or as set forth in SCHEDULE 4.08 to the Parent Disclosure
Statement or the SEC Reports, (a) neither Parent nor any of its subsidiaries has
any Liabilities which would be reasonably expected to have a Parent Material
Adverse Effect, (b) since December 31, 1996, there has not been any Parent
Material Adverse Effect, and (c) Parent has conducted its business only in the
ordinary course of business in a manner consistent with past practices.
SECTION 4.09. ABSENCE OF LITIGATION. Except as set forth in SCHEDULE 4.09
to the Parent Disclosure Statement or the SEC Reports, there is no material
claim, action, suit, litigation, proceeding, arbitration or, to the knowledge of
Parent, investigation of any kind, at law or in equity (including actions or
proceedings seeking injunctive relief), pending or, to the knowledge of Parent,
threatened against Parent or any of its subsidiaries or any properties or rights
of Parent or any of its subsidiaries that, if adversely determined, would
reasonably be expected to have a PMAE and neither Parent nor any of its
subsidiaries is subject to any continuing order of, consent decree, settlement
agreement or other similar written agreement with, or, to the knowledge of
Parent, continuing investigation by, any Governmental Entity, or any judgment,
order, writ, injunction, decree or award of any Governmental Entity or
arbitrator, including, without limitation, cease-and-desist or other orders that
would reasonably be expected to have a PMAE.
SECTION 4.10. TAX MATTERS; POOLING. None of the Parent Companies nor, to
the knowledge of Parent, any of their affiliates has knowingly taken or agreed
to take any action that would prevent the Merger (a) from constituting a
reorganization qualifying under the provisions of section 368(a) of the Code or
(b) from being treated as a Pooling Transaction for financial accounting
purposes.
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SECTION 4.11. VOTE REQUIRED. No vote of the holders of any class or series
of Parent capital stock is required to approve the Merger and adopt this
Agreement. Parent, as the sole shareholder of Merger Sub, will promptly vote to
approve the Merger and adopt this Agreement.
SECTION 4.12. COMPLIANCE WITH LAWS. Neither Parent nor any of its
subsidiaries is currently violating, and since December 31, 1995 has not
violated, any Law, ordinance, regulation, judgment, order, decree, license or
permit, including without limitation any zoning ordinances, building codes,
Environmental Laws and occupational health and safety laws, except any
violations that would not reasonably be expected to have a PMAE.
SECTION 4.13. MERGER SUB. Except for Liabilities incurred in connection
with its organization, the Merger and the negotiation and consummation of the
transactions contemplated by this Agreement, Merger Sub has not incurred any
Liabilities nor engaged in any material business activities or entered into any
material agreement or arrangements.
SECTION 4.14. ENVIRONMENTAL MATTERS. Except for matters disclosed in
SCHEDULE 4.14 to the Parent Disclosure Statement or the SEC Reports, (a) the
properties, operations and activities of Parent and its subsidiaries are in
compliance in all material respects with all applicable Environmental Laws; (b)
Parent and its subsidiaries and the properties and operations of Parent and its
subsidiaries are not subject to any existing, pending or to Parent's knowledge,
threatened action, suit, claim, investigation, inquiry or proceeding by or
before any governmental authority under any Environmental Law that is or would
be material to Parent and its subsidiaries taken as a whole; (c) all notices,
permits, licenses, or similar authorizations, if any, required to be obtained or
filed by Parent or any of its subsidiaries under any Environmental Law in
connection with any aspect of the business of Parent and its subsidiaries taken
as a whole, 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, other than where the failure to obtain or file
such notices, permits, licenses or similar authorizations would not reasonably
be expected to have a PMAE, and will not cease to remain valid and in effect
solely as a consequence of the Merger, and Parent and its subsidiaries are in
compliance in all material respects with the terms and conditions of all such
notices, permits, licenses and similar authorizations; (d) Parent and its
subsidiaries have satisfied and are currently in compliance in all respects with
all financial responsibility requirements applicable to their operations and
imposed by any governmental authority under any Environmental Law, except where
any noncompliance would not reasonably be expected to have a PMAE, and Parent
and its subsidiaries have not received any notice of material noncompliance with
any such financial responsibility requirements; (e) there are no physical or
environmental conditions existing on any property of Parent or its subsidiaries
or resulting from Parent's or such subsidiaries' operations or activities, past
or present, at any location, that would give rise to any material on-site or
off-site remedial obligations imposed on Parent or any of its subsidiaries under
any Environmental Laws or that would materially impact the soil, groundwater,
surface water or human health; (f) to Parent's knowledge, 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 Parent and 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 at any property owned or controlled by Parent or any of its
subsidiaries, nor has there been any release of hazardous substances, or any
pollutant or contaminant into the environment by Parent or its subsidiaries at
any property owned or controlled by Parent or any of its subsidiaries, that
could reasonably be expected to give rise to any material claim against Parent
or any of its subsidiaries for damages or compensation; and (h) Parent and its
subsidiaries have made available to the Company all internal and external
environmental audits and studies and all correspondence on substantial
environmental matters in the possession of Parent or its subsidiaries reasonably
requested by the Company relating to any of the current properties or operations
of Parent and its subsidiaries.
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SECTION 4.15. INFORMATION SUPPLIED. No representation or warranty of the
Parent Companies and no statement by the Parent Companies or other information
contained in the Parent Disclosure Statement as of the date of such
representation, warranty or statement, contains any untrue statement of material
fact, or omits to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which such statements
were made, not misleading.
ARTICLE V
COVENANTS
SECTION 5.01. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby
covenants and agrees that, prior to the Effective Time, unless otherwise
required by applicable Law, expressly contemplated by this Agreement or
consented to in writing by Parent, the Company will and will cause its
subsidiaries to:
(a) operate its business in all material respects only in the usual and
ordinary course consistent with past practices;
(b) use its reasonable efforts to preserve substantially intact its
business organization, maintain its Material Contracts, Company Permits and
Intellectual Property and other material rights, retain the services of its
respective officers and key employees and maintain its relationships with
its material customers and suppliers;
(c) maintain and keep its properties and assets in as good repair and
condition as at present, ordinary wear and tear excepted, and maintain
supplies and inventories in quantities consistent with its customary
business practice;
(d) use its reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained; and
(e) from the date of this Agreement and to the Effective Time, promptly
supplement or amend the Company Disclosure Statement with respect to any
matter that arises or is discovered after the date hereof that, if existing
or known at the date hereof, would have been required to be set forth or
listed in the Company Disclosure Statement; provided, that for purposes of
determining the rights and obligations of the parties hereunder (other than
the obligation of the Company under this SECTION 5.01(E)), any such
supplemental or amended disclosure will not be deemed to have been disclosed
to Parent unless Parent otherwise expressly consents in writing.
SECTION 5.02. NEGATIVE COVENANTS OF THE COMPANY. Except as otherwise
required by applicable Law, expressly contemplated by this Agreement, set forth
on SCHEDULE 5.02 or consented to in writing by Parent, from the date of this
Agreement until the Effective Time, the Company will not do, and will not permit
any of its subsidiaries to do, any of the foregoing:
(a) (i) increase the compensation payable to or to become payable to any
director or executive officer, except for annual merit and seniority
increases in the ordinary course of business consistent with past practices
and increases resulting from the operation of compensation arrangements in
effect prior to the date hereof; (ii) grant any severance or termination pay
(other than pursuant to the normal severance policy of the Company or its
subsidiaries as in effect on the date of this Agreement) to, or enter into
or amend any employment or severance agreement with, any director, officer
or key employee; (iii) establish, adopt or enter into any employee benefit
plan or arrangement except in connection with the re-negotiation of any
expired union contract or labor agreement; or (iv) amend or otherwise modify
in any respect that would reasonably be expected to be materially adverse to
the Company and its subsidiaries taken as a whole, any of the Material
Contracts, any DB Plan or any other employee benefit plans, programs,
agreements, policies or other arrangements described in this Agreement that
are material to the Company and its subsidiaries taken as a whole, except in
connection with the re-negotiation of any expired union contract or labor
agreement;
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(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for (i) regularly
scheduled semi-annual dividends on the Series A Preferred Stock, and (ii)
dividends by a wholly owned subsidiary of the Company to the Company or
another wholly owned subsidiary of the Company;
(c) (i) redeem, purchase or otherwise acquire any shares of its or any
of its subsidiaries' capital stock or any securities or obligations
convertible into or exchangeable for any shares of its or its subsidiaries'
capital stock, or any options, warrants or conversion or other rights to
acquire any shares of its or its subsidiaries' capital stock or any such
securities or obligations; (ii) effect any reorganization or
recapitalization; or (iii) split, combine or reclassify any of its or its
subsidiaries' capital 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 its or its subsidiaries' capital stock;
(d) (i) issue, deliver, award, grant or sell, or authorize or propose
the issuance, delivery, award, grant or sale (including the grant of any
security interests, liens, claims, pledges, limitations in voting rights,
charges or other encumbrances) of, any shares of any class of its or its
subsidiaries' capital stock, any securities convertible into or exercisable
or exchangeable for any such shares, or any rights, warrants or options to
acquire any such shares; or (ii) amend or otherwise modify the terms of any
such rights, warrants or options the effect of which shall be to make such
terms less favorable to the Company or any of its subsidiaries;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets of any other person (other than in the ordinary
course of business and consistent with past practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, any of its assets or any assets of any of its
subsidiaries, except in the ordinary course of business and consistent with
past practice;
(g) release any third party from its obligations, or grant any consent,
under any existing standstill provision relating to a Competing Transaction
(as defined in SECTION 5.04(B)) or otherwise under any similar
confidentiality or other agreement, or fail to enforce in all material
respects any such agreement;
(h) adopt or propose to adopt any amendments to its charter or bylaws;
(i) (i) materially change any of its methods of accounting in effect at
March 1, 1997, or (ii) make or rescind any express or deemed election
relating to Taxes, settle or compromise any material claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, or change any of its methods of reporting income or
deductions for federal income tax purposes from those employed in the
preparation of the federal income tax returns for the taxable year ending
March 1, 1997, except, in each case, as may be required by Law or generally
accepted accounting principles;
(j) (i) incur any obligation for borrowed money or purchase money
indebtedness, whether or not evidenced by a note, bond, debenture or similar
instrument, except under existing lines of credit or purchase money
indebtedness incurred in the ordinary course of business consistent with
past practice and provided that the aggregate amount thereof in no event
exceeds $3,000,000 and except as expressly provided in or contemplated by
the Capital Budget, or (ii) make or incur any capital expenditure except in
the ordinary course of business consistent with past practice and provided
that the amount thereof shall not exceed $250,000 for any one item or
$1,000,000 in the aggregate, except as expressly provided in or contemplated
by the Capital Budget;
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(k) enter into any arrangement, agreement or contract with any third
party (other than customers in the ordinary course of business) that would
constitute a Material Contract if existing on the date of this Agreement
which provides for an exclusive arrangement with that third party or is
substantially more restrictive on the Company or substantially less
advantageous to the Company than arrangements, agreements or contracts
existing on the date hereof;
(l) agree in writing or otherwise to do any of the foregoing.
SECTION 5.03. AFFIRMATIVE AND NEGATIVE COVENANTS OF PARENT.
(a) Parent hereby covenants and agrees that, prior to the Effective Time,
unless otherwise required by applicable Law, expressly contemplated by this
Agreement or consented to in writing by the Company, Parent will and will cause
its subsidiaries to:
(i) operate its business in all material respects only in the usual and
ordinary course consistent with past practices; and
(ii) from the date of this Agreement to the Effective Time, promptly
supplement or amend the Parent Disclosure Statement with respect to any
matter that arises or is discovered after the date hereof that, if existing
or known at the date hereof, would have been required to be set forth or
listed in the Parent Disclosure Statement; provided, that for purposes of
determining the rights and obligations of the parties hereunder (other than
the obligation of the Parent under this SECTION 5.03(A)(II)), any such
supplemental or amended disclosure will not be deemed to have been disclosed
to the Company unless the Company otherwise expressly consents in writing.
(b) Except as expressly contemplated by this Agreement or otherwise
consented to in writing by the Company, from the date of this Agreement until
the Effective Time, Parent will not do, and will not permit any of its
subsidiaries to do, any of the following:
(i) knowingly take any action which would result in a failure to
maintain the listing of the Parent Common Stock on the NYSE or registration
of the Parent Common Stock under the Securities Act or the Exchange Act;
(ii) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock except for dividends by a
wholly owned subsidiary of Parent to Parent or another wholly owned
subsidiary of Parent;
(iii) adopt or propose to adopt any amendments to its charter or bylaws,
which would have an adverse impact on the consummation of the transactions
contemplated by this Agreement;
(iv) repurchase any shares of Parent Common Stock during the period
commencing with the mailing of the Proxy Statement (as defined below) and
ending on the Closing Date; or
(v) agree in writing or otherwise to do any of the foregoing.
SECTION 5.04. NON-SOLICITATION.
(a) Subject to subsection (b) below, the Company hereby covenants and agrees
that it will not, and will use all reasonable best efforts to cause its
subsidiaries and affiliates not to, initiate, solicit or encourage (including by
way of furnishing information or assistance), or take any other action to
facilitate, any inquiries or the making of any proposal relating to, or that may
reasonably be expected to lead to, any Competing Transaction (as defined in
subsection (b) below), or enter into substantive discussions or negotiate with
any person or entity in furtherance of such inquiries or to obtain a Competing
Transaction, or agree to or endorse any Competing Transaction, or authorize or
permit any of the officers, directors or employees of the Company or any of its
subsidiaries or any investment banker, financial advisor, attorney, accountant
or other representative retained by the Company or any of its subsidiaries or
affiliates, as applicable, to take any such action, and the Company shall
promptly (and in any event within two business
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days) notify Parent of all material terms of any such inquiries and proposals
received by the Company or any of its subsidiaries or affiliates, as applicable,
or by any such officer, director, investment banker, financial advisor,
attorney, accountant or other representative relating to any of such matters.
(b) Notwithstanding anything to the contrary set forth in subsection (a)
above or elsewhere in this Agreement, nothing contained in this Agreement shall
prohibit the Board of Directors of the Company from (i) furnishing information
to, or entering into discussions or negotiations with, any person or entity in
connection with an unsolicited BONA FIDE proposal for a Competing Transaction
from a person or entity reasonably believed by the Company to have the financial
ability to consummate the Competing Transaction on a timely basis, if, and only
to the extent that (A) the Company has complied fully and in a timely manner
with its obligations to notify Parent of all material terms of the Competing
Transaction in accordance with SECTION 5.04(A), (B) the Board of Directors of
the Company, after consultation with and based upon the advice of independent
legal counsel, determines in good faith that such action is necessary for such
Board of Directors to comply with its fiduciary duties to the shareholders of
the Company under applicable Law and (C) prior to furnishing such information
to, or entering into discussions or negotiations with, such person or entity the
Company (x) provides prior written notice to Parent to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such person or entity and (y) enters into with such person or entity a
confidentiality agreement in reasonably customary form on terms not more
favorable to such person or entity than the terms contained in that certain
Confidentiality Agreement dated March 13, 1997 between Parent and the Company
(the "Confidentiality Agreement"); (ii) failing to make or withdrawing or
modifying its recommendation for the Merger referred to in SECTION 6.02(A); or
(iii) making or disclosing any position or taking any other action if the Board
of Directors of the Company, after consultation with and based on the advice of
independent legal counsel, determines in good faith that such action is
necessary for such Board of Directors to comply with its fiduciary duties to the
shareholders of the Company under applicable Law. For purposes of this
Agreement, "Competing Transaction" shall mean any of the following (other than
the transactions contemplated by this Agreement) involving the Company or any of
its subsidiaries: (I) any acquisition of all or a material portion of the
Company and its subsidiaries taken as a whole by any merger, consolidation,
share exchange, business combination or similar transaction; (II) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more
of the assets of the Company and its subsidiaries taken as a whole, (III) any
offer for 20% or more of the outstanding shares of capital stock of the Company;
or (IV) any public announcement of a proposal, plan or intention to do any of
the foregoing or any agreement to engage in any of the foregoing.
SECTION 5.05. ACCESS AND INFORMATION.
(a) The Company shall, and shall cause its subsidiaries to (i) afford to
Parent and its officers, directors, employees, accountants, consultants, legal
counsel, agents and other representatives (collectively, the "Parent
Representatives") reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, agents, properties, offices and other
facilities of the Company and its subsidiaries and to the books and records
thereof and (ii) furnish promptly to Parent and the Parent Representatives such
information concerning the business, properties, contracts, records and
personnel of the Company and its subsidiaries (including, without limitation,
financial, operating and other data and information) as may be reasonably
requested, from time to time, by Parent.
(b) Parent shall, and shall cause its subsidiaries to (i) afford to the
Company and its officers, directors, employees, accountants, consultants, legal
counsel, agents and other representatives (collectively, the "Company
Representatives") reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, accountants, agents, properties, offices and
other facilities of Parent and its subsidiaries and to the books and records
thereof and (ii) furnish promptly to the Company and the Company Representatives
such information concerning the business, properties, contracts, records and
personnel of Parent and its subsidiaries (including, without limitation,
financial, operating and other data and information) as may be reasonably
requested, from time to time, by the Company.
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(c) Notwithstanding the foregoing provisions of this SECTION 5.05, neither
party shall be required to grant access or furnish information to the other
party to the extent that such access or the furnishing of such information is
prohibited by Law or would waive any rights to privileged communications.
Subject to SECTION 9.01(A), no investigation by the parties hereto made
heretofore or hereafter shall affect the representations and warranties of the
parties which are herein contained and each such representation and warranty
shall survive such investigation.
(d) The information received pursuant to subsections (a) and (b) above shall
be deemed to be "Confidential Information" for purposes of the Confidentiality
Agreement.
(a) Subject to the terms and conditions herein and applicable Law, each of
the Parent Companies and the Company shall use (and shall cause each of their
respective subsidiaries to use, as applicable) all reasonable efforts to (i)
take, or cause to be taken, all appropriate action, and do, or cause to be done,
all things necessary, proper or advisable under applicable Law or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
(ii) obtain from any Governmental Entities or other third parties any consents,
licenses, permits, waivers, approvals, authorizations or orders required to be
obtained or made by the Parent Companies or the Company or any of their
subsidiaries, as applicable, in connection with the authorization, execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby, including, without limitation, the Merger, (iii) make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement and the Merger required under (A) the Securities Act and the
Exchange Act and the rules and regulations thereunder, and any other applicable
federal or state securities laws, (B) the HSR Act and (C) any other applicable
Law; provided that the parties shall cooperate with each other in connection
with the making of all such filings, including providing copies of all such
documents to the nonfiling party and its advisors prior to filings and, if
requested, shall accept all reasonable additions, deletions or changes suggested
in connection therewith. The Company and the Parent Companies shall furnish all
information required for any application or other filing to be made pursuant to
the rules and regulations of any applicable Law (including all information
required to be included in the Proxy Statement or the Registration Statement) in
connection with the transactions contemplated by this Agreement. Parent and the
Company shall request early termination of the waiting period with respect to
the Merger under the HSR Act.
(b) The Parent Companies and the Company agree to cooperate with respect to,
and shall cause each of their respective subsidiaries to cooperate with respect
to, and agree to use all reasonable efforts vigorously to contest and resist,
any action, including legislative, administrative or judicial action, and to
have vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order, whether temporary, preliminary or permanent (an "Order"), of any
Governmental Entity that is in effect and that restricts, prevents or prohibits
the consummation of the Merger or any other transactions contemplated by this
Agreement, including, without limitation, by vigorously pursuing all available
avenues of administrative and judicial appeal and all available legislative
action.
(c) Each of the Parent Companies and the Company shall give (or shall cause
their respective subsidiaries to give, as applicable) any notices to third
parties, and use (and cause their respective subsidiaries to use, as applicable)
all reasonable efforts to obtain any third party consents (i) necessary, proper
or advisable to consummate the transactions contemplated by this Agreement, (ii)
otherwise required under any Material Contracts, Company Permits or other
agreements in connection with the consummation of the transactions contemplated
hereby or (iii) required to prevent a Company Material Adverse Effect from
occurring prior to the Effective Time or a Parent Material Adverse Effect from
occurring after the Effective Time. In the event that any party shall fall to
obtain any third party consent described above and the parties agree to
consummate the Merger without such consent, such party shall use its best
efforts, and shall take any such actions reasonably requested by the other
parties, to limit the adverse effect upon the Company and Parent, their
respective subsidiaries, and their respective businesses
A-27
resulting, or which could reasonably be expected to result after the Effective
Time, from the failure to obtain such consent.
(d) Each of the Parent Companies and the Company shall promptly notify the
other of (i) any material change in its current or future business, financial
condition or results of operations, (ii) any material complaints, investigations
or hearings (or communications indicating that the same may be contemplated) of
any Governmental Entities with respect to its business or the transactions
contemplated hereby, (iii) the institution or the threat of material litigation
involving it or any of its subsidiaries or (iv) any event or condition that
might reasonably be expected to cause any of its representations, warranties,
covenants or agreements set forth herein not to be true and correct in all
material respects at the Effective Time.
SECTION 5.07. POOLING; TAX TREATMENT.
(a) Each party hereto shall use all reasonable efforts to cause the Merger
to be treated for financial accounting purposes as a Pooling Transaction, and
shall not knowingly take, and shall use all reasonable efforts to prevent any
affiliate of such party from taking, any actions which could prevent the Merger
from being treated for financial accounting purposes as a Pooling Transaction.
(b) Each party hereto shall use all reasonable efforts to cause the Merger
to qualify, and shall not knowingly take, and shall use all reasonable efforts
to prevent any affiliate of such party from taking, any actions which could
prevent the Merger from qualifying as a reorganization under the provisions of
Section 368(a) of the Code.
SECTION 5.08. PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with
the other parties hereto before issuing any press release or otherwise making
any public statements with respect to the Merger and shall not issue any such
press release or make any such public statement prior to such consultation,
except as otherwise required by applicable Law or the rules of the NYSE. The
press release announcing the execution and delivery of this Agreement shall be a
joint press release of Parent and the Company.
SECTION 5.09. NYSE LISTING. Parent shall use all reasonable efforts to
cause the shares of Parent Common Stock to be issued in the Merger to be
approved for listing (subject to official notice of issuance) on the NYSE prior
to the Effective Time.
SECTION 5.10. MERGER SUB. Prior to the Effective Time, Merger Sub shall
not conduct any business or make any investments other than as specifically
contemplated by this Agreement and will not have any assets (other than a de
minimis amount of cash paid to Merger Sub for the issuance of its stock to
Parent) or Liabilities.
SECTION 5.11. EMPLOYEE BENEFIT PLANS. On and after the Closing Date,
Parent shall cause the Company to take all such actions as are necessary so that
(i) for not less than six months after the Closing Date, employees of the
Company or its subsidiaries during such period will be provided employee
benefits and similar plans and programs as will provide benefits which in the
aggregate are not materially less favorable than those provided to such
employees as of the date hereof, and (ii) those employment agreements listed in
SCHEDULE 3.11(C) of the Company Disclosure Statement are honored by the Company.
Except as otherwise provided herein or pursuant to any collective bargaining
agreement to which the Company is a party, Parent may terminate, amend, suspend
or modify any employee benefits or plans of the Company or any of its
subsidiaries at any time.
SECTION 5.12. STOCK OPTION PLANS.
(a) OPTION PLANS. Parent and the Company shall take such actions not
inconsistent with the Merger being accounted for financial accounting purposes
as a Pooling Transaction, including (with respect to the Company) the amendment
of its existing option plans and any options outstanding thereunder (the "Stock
Options") to permit Parent to assume, and Parent shall assume, effective at the
Effective Time, the Stock
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Options that remain unexercised in whole or in part as of the Effective Time and
substitute 229,068 shares of Parent Common Stock (assuming all 420,000 Stock
Options remain unexercised in whole) with a per share exercise price of $10.08
for the shares of the Company Common Stock purchasable under the assumed Stock
Options (the "Assumed Options"), which assumption and substitution shall not
give the optionee additional benefits which the optionee did not have under the
Stock Options before such assumption and shall be assumed on the same terms and
conditions as the Stock Options being assumed, subject to the foregoing;
provided, however, if the Top-Up Notice referred to in SECTION 8.02 shall have
been delivered by Parent, the Assumed Options shall be for a number of shares of
Parent Common Stock equal to (x) 229,068 times (y) $36.00 and divided by (z) the
Average Price and the per share exercise price shall be equal to (x) $10.08
times (y) the Average Price and divided by (z) $36.00. Parent acknowledges that
upon assumption pursuant to this SECTION 5.12 the Assumed Options will be fully
vested and exerciseable.
(b) REGISTRATION. Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Parent Common Stock for
delivery upon exercise of the Assumed Options. As soon as practicable after the
Effective Time (and in no event later than sixty days after the Effective Time),
Parent shall file a registration statement on Form 8 (or other appropriate form)
with respect to the shares of Parent Common Stock subject to the Assumed Options
(to the extent such shares are not covered by a previously filed registration
statement), shall use its best efforts to maintain the effectiveness of such
registration statement for so long as any of the Assumed Options remain
outstanding, and shall cause the shares of Parent Common Stock to be issued upon
the exercise of the Stock Options to be approved for listing on the NYSE.
SECTION 5.13. BUY-SELL AGREEMENTS. The Company shall terminate on or
before the Closing Date without any liability to the Company all existing
buy-sell agreements to which it is a party covering any shares of the capital
stock of the Company.
SECTION 5.14. NOTES. The Company shall repay in full the indebtedness
relating to those certain notes listed on SCHEDULE 5.14 to the Company
Disclosure Statement on or prior to the Effective Time.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. SHAREHOLDER APPROVAL AND MEETING OF SHAREHOLDERS.
(a) The Company shall, promptly after the date of this Agreement, take all
actions necessary in accordance with Michigan Law and its charter and bylaws to
convene a special meeting of the Company's shareholders to approve this
Agreement and the Merger (the "Shareholders Meeting"), and the Company shall
consult with Parent in connection therewith and coordinate the timing of such
meeting with the distribution of the Registration Statement and the Proxy
Statement (as defined below). Subject to SECTION 5.04(B), the Company shall use
all reasonable efforts to solicit from shareholders of the Company proxies in
favor of the approval and adoption of this Agreement and to secure the vote of
shareholders required by Michigan Law and its charter and bylaws to approve and
adopt this Agreement.
(b) Notwithstanding the foregoing, in the event that the Board of Directors
of the Company receives a proposal for a Competing Transaction that, in the
exercise of their fiduciary obligations (as determined in good faith by the
Board of Directors after consultation with outside counsel), they determine to
be a Superior Transaction (as defined below), the Board of Directors may
withdraw or modify its approval or recommendation of this Agreement or the
Merger, approve or recommend any such Superior Transaction, or enter into an
agreement with respect to such Superior Transaction and terminate this
Agreement. For purposes of this Agreement, a "Superior Transaction" means any
Competing Transaction the terms of which the Board of Directors determines in
their good faith reasonable judgment (after reviewing the advice of, and
consultation with, its financial advisor and legal counsel) to be more favorable
to the Company's shareholders than the transactions contemplated by this
Agreement.
(a) As promptly as practicable after the execution of this Agreement, Parent
shall prepare and file with the SEC a registration statement on Form S-4 (such
registration statement, together with any amendments thereof or supplements
thereto, being the "Registration Statement"), including a proxy statement and
form of proxy for shareholders of the Company (together with any amendments
thereof or supplements thereto, in each case in the form or forms mailed to the
Company's shareholders, the "Proxy Statement"), in connection with the
registration under the Securities Act of the Parent Common Stock to be issued in
the Merger and, to the extent permitted under applicable Law, the Parent Common
Stock to be issued upon the exercise of the Stock Options. Parent will promptly
respond to any comments from the SEC and will use its best efforts to cause the
Registration Statement to be declared effective as promptly as practicable, and
shall take any action required to be taken under any applicable federal or state
securities laws in connection with the issuance of shares of Parent Common Stock
in the Merger. The Company shall furnish to Parent all information concerning it
and the holders of the Company's capital stock as Parent may reasonably request
in connection with such actions. Subject to SECTION 5.04(B), the Proxy Statement
shall include the recommendation of the Company's Board of Directors in favor of
the Merger and adoption of this Agreement.
(b) Parent shall provide the Company the opportunity to review and comment
on each form of Registration Statement and Proxy Statement, each amendment and
supplement thereto, and each responsive correspondence to the SEC, in each case
at a reasonable time before filing with or sending to the SEC. In addition,
Parent shall provide to the Company copies of all correspondence to and from the
SEC concerning the Registration Statement or Proxy Statement and any amendment
or supplement thereto. Parent shall include in the Registration Statement and
Proxy Statement and each amendment and supplement thereto information relating
to the Company and its subsidiaries only as authorized by the Company or as
required by applicable Law. Parent shall promptly notify the Company of any stop
orders or threatened stop orders with respect to the Registration Statement or
Proxy Statement.
(c) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, 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 therein not misleading. The information supplied by the
Company for inclusion in the Proxy Statement shall not, at the date the Proxy
Statement (or any supplements thereto) is first mailed to shareholders at the
time of the Shareholders Meeting 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 therein, in the
light of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event or circumstance relating to the
Company or any of its affiliates, or its or their respective officers or
directors, should be discovered by the Company that should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
the Company shall promptly inform Parent thereof in writing.
(d) The information supplied by the Parent Companies for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, 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 therein not misleading. The information supplied by the
Parent Companies for inclusion in the Proxy Statement shall not, at the date the
Proxy Statement (or any supplements thereto) is first mailed to shareholders at
the time of the Shareholders Meeting 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 therein, in
the light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to
Parent or any of its affiliates, or to their respective officers or directors,
should be discovered by Parent that should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement Parent shall
promptly inform the Company thereof in writing. All documents that Parent is
responsible for filing with
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the SEC in connection with the transactions contemplated hereby will comply as
to form in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Exchange Act and
the rules and regulations thereunder.
SECTION 6.03. INDEMNIFICATION. From and after the Effective Time, Parent
shall and shall cause the Surviving Corporation (including, if necessary,
providing the Surviving Corporation with sufficient funds) to, exculpate,
indemnify and hold harmless all past and present officers, directors, employees
and agents of the Company and its subsidiaries (the "Company Indemnified
Parties") against all losses, claims, damages, expenses or Liabilities arising
out of or related to any acts or omissions, or alleged acts or omissions,
occurring at or prior to the Effective Time to the same extent and on the same
terms and conditions (including with respect to the advancement of expenses)
provided for in the Company's or any such subsidiary's charter or bylaws (or
similar organization documents), agreements in effect as of the date hereof or
applicable Law. Any determination required to be made with respect to whether a
Company Indemnified Party is entitled to such indemnification under the
applicable charter or bylaws shall be made by independent counsel selected by
the Company Indemnified Party reasonably satisfactory to Parent (whose
reasonable fees and expenses shall be paid by Parent or the Surviving
Corporation unless such independent counsel determines that such fees and
expenses should be paid by the Company Indemnified Party, in which case they
shall be paid by the Company Indemnified Party).
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.01. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. The respective obligations of each party to effect the Merger and
the other transactions contemplated hereby shall be subject to the satisfaction
at or prior to the Closing Date of the following conditions, any or all of which
may be waived in writing by the parties hereto, in whole or in part, to the
extent permitted by applicable Law:
(a) The Registration Statement shall have been declared effective by the
SEC under the Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings for
that purpose shall have been initiated by the SEC. Parent shall have received
all Blue Sky and other authorizations necessary to consummate the transactions
contemplated by this Agreement.
(b) This Agreement and the Merger shall have been approved by the Requisite
Shareholder Vote.
(c) No Governmental Entity or federal or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is in effect and which has
the effect of making the Merger illegal or otherwise prohibiting consummation of
the Merger; and no such Governmental Entity shall have initiated or threatened
to initiate any proceeding seeking any of the foregoing.
(d) The applicable waiting period under the HSR Act with respect to the
transactions contemplated by this Agreement shall have expired or been
terminated.
(e) Parent and the Company shall have been advised in writing by Deloitte &
Touche, LLP on the Closing Date that the Merger should be treated for financial
accounting purposes as a Pooling Transaction.
SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE PARENT
COMPANIES. The obligations of the Parent Companies to effect the Merger and the
other transactions contemplated hereby are also subject to the satisfaction at
or prior to the Closing Date of the following conditions, any or all of which
may be waived in writing by Parent, in whole or in part:
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(a) The representations and warranties of the Company contained in this
Agreement shall be true and correct as of the Closing Date as though made on and
as of the Closing Date (except to the extent such representations and warranties
specifically relate to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date and except, with
respect to representations and warranties of the Company that are not subject to
a CMAE qualification (other than the representations and warranties contained in
the first and fifth sentences of SECTION 3.03(A), which must be true and correct
in all material respects), where the failure to be true and correct would not
reasonably be expected to have, individually or in the aggregate with all such
failures, a CMAE). The Parent Companies shall have received a certificate of the
Company signed by the President and the Chief Financial Officer and dated the
Closing Date, to such effect.
(b) The Company shall have performed or complied in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Closing Date. The Parent Companies shall
have received a certificate of the Company signed by the President and the Chief
Financial Officer and dated the Closing Date, to that effect.
(c) Since the date of this Agreement, there shall have been no change,
occurrence or circumstance in the current or future business, financial
condition or results of operations of the Company and its subsidiaries taken as
a whole having or reasonably likely to have a Company Material Adverse Effect.
The Parent Companies shall have received a certificate of the Company signed by
the President and the Chief Financial Officer and dated the Closing Date, to
such effect.
(d) There shall not have been any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any Governmental Entity in connection with the grant of a regulatory
approval or consent necessary, in the reasonable judgment of Parent, to the
continuing operation of the current or future business of the Company, which
imposes any condition or restriction upon the Parent Companies or the business
or operations of the Company which, in the reasonable judgment of Parent, would
be materially burdensome in the context of the transactions contemplated by this
Agreement.
(e) Hughes & Luce, L.L.P. shall have delivered to Parent its written
opinion substantially to the effect that (i) the Merger will constitute a
reorganization within the meaning of section 368(a) of the Code, (ii) Parent,
Merger Sub and the Company will each be a party to that reorganization within
the meaning of section 368(b) of the Code, and (iii) Parent, Merger Sub and the
Company will not recognize any gain or loss for U.S. federal income tax purposes
as a result of the Merger.
(f) The holder of all of the Company's outstanding stock options shall have
consented to the assumption pursuant to SECTION 5.12 of all such options.
(g) Counsel to the Company shall have delivered a written legal opinion to
Parent, in form and substance satisfactory to Parent and its counsel, covering
the matters set forth in EXHIBIT C.
(h) The Company shall have obtained each consent and approval necessary in
order that the transactions contemplated hereby do not constitute a breach or
violation of, or result in a right of termination or acceleration of any
encumbrance on any portion of the Company's assets, any Material Contract, or
any license, or franchise of the Company or Company Permit, other than any such
breach, violation, termination or acceleration that would not reasonably be
expected to have a CMAE. The Parent Companies shall have received a certificate
of the Company signed by the President and the Chief Financial Officer and dated
the Closing Date, to such effect.
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(i) Parent shall have received a certificate no later than two days prior to
Closing Date from the Company signed by the President and Chief Financial
Officer of the Company setting forth the estimated amount of the Company's
Expenses.
(j) All proceedings taken by the Company and all instruments executed and
delivered by the Company on or prior to the Closing Date in connection with the
transactions herein contemplated shall be reasonably satisfactory in form and
substance to Parent.
SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by the Company, in whole or in part:
(a) The representations and warranties of the Parent Companies contained in
this Agreement shall be true and correct as of the Closing Date as though made
on and as of the Closing Date (except to the extent such representations and
warranties specifically relate to an earlier date, in which case such
representations and warranties shall be true and correct as of such earlier date
and except, with respect to the representations and warranties of the Parent
Companies that are not subject to a PMAE qualification, where the failure to be
true and correct would not reasonably be expected to have, individually or in
the aggregate with all such failures, a PMAE). The Company shall have received a
certificate of Parent signed by the Chief Executive Officer and the Chief
Financial Officer and dated the Closing Date, to such effect.
(b) The Parent Companies shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by them on or prior to the Closing Date. The Company
shall have received a certificate of Parent signed by the Chief Executive
Officer and the Chief Financial Officer and dated the Closing Date, to that
effect.
(c) All of the shares of Parent Common Stock to be issued hereunder shall
have been registered under the Securities Act, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and such
shares of Parent Common Stock shall have been authorized for listing, subject to
official notice of issuance, on the NYSE.
(d) Counsel to the Parent Companies shall have delivered a written legal
opinion to the Company, in form and substance satisfactory to the Company and
its counsel, covering the matters set forth in EXHIBIT D.
(e) Since the date of this Agreement, there shall have been no change,
occurrence or circumstance in the business, financial condition or results of
operations of Parent and its subsidiaries taken as a whole having or reasonably
likely to have a Parent Material Adverse Effect. The Company shall have received
a certificate of Parent signed by the President and the Chief Financial Officer
and dated the Closing Date, to such effect.
(f) The person listed in SCHEDULE 7.03(F) to the Company Disclosure
Statement shall have been elected to the Board of Directors of Parent effective
immediately after the Effective Time.
(g) Warner Norcross and Judd LLP shall have delivered to the Company its
written opinion substantially to the effect that (i) the Merger will constitute
a reorganization within the meaning of section 368(a) of the Code, (ii) Parent,
Merger Sub and the Company will each be a party to that reorganization within
the meaning of section 368(b) of the Code, (iii) Parent, Merger Sub and the
Company will not recognize any gain or loss for U.S. federal income tax purposes
as a result of the Merger, (iv) no gain or loss will be recognized by the
shareholders of the Company who receive shares of Parent Common Stock in the
Merger, except to the extent of any cash received in lieu of a fractional share
of Parent Common Stock, (v) the basis of Parent Common Stock to be received by
shareholders of the Company will, in each instance, be the same as the basis of
the respective shares of the Company Common Stock surrendered in exchange
therefor, (vi) the holding period of the Parent Common Stock to be received by
shareholders of the Company will, in each instance, include the period during
which the
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Company Common Stock surrendered in exchange therefor was held, provided that
the Company Common Stock was, in each instance, held as a capital asset in the
hands of the shareholder of the Company at the Effective Time, and (vii) no gain
or loss will be recognized by the holder of the Stock Options by reason of the
substitution pursuant to SECTION 5.12 hereof of shares of Parent Common Stock
purchasable under such Stock Options.
(h) All proceedings taken by the Parent Companies and all instruments
executed and delivered by the Parent Companies on or prior to the Closing Date
in connection with the transactions herein contemplated shall be reasonably
satisfactory in form and substance to the Company.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this Agreement
and the Merger by the shareholders of the Company:
(a) by mutual consent of Parent and the Company;
(b) by Parent, if the Company shall have failed to perform in any material
respect any of it covenants or agreements set forth in this Agreement, or (i) if
the representations and warranties set forth in the first and fifth sentences of
SECTION 3.03(A) shall not be true and correct in all material respects, (ii) if
any of the representations or warranties of the Company set forth in this
Agreement that are subject to a CMAE qualification shall not be true and correct
or (iii) if any such representations and warranties that are not so qualified
(other than the representations and warranties contained in the first and fifth
sentences of SECTION 3.03(A)) shall not be true and correct and such failure
would reasonably be expected to have, individually or in the aggregate with all
such failures, a CMAE, in either case such that the conditions set forth in
SECTIONS 7.02(A) or (B), as the case may be, would be incapable of being
satisfied by February 28, 1998; provided, that in any case, a willful breach
shall be deemed to cause such conditions to be incapable of being satisfied for
purposes of this SECTION 8.01(B);
(c) by the Company, if the Parent Companies shall have failed to perform in
any material respect any of it covenants or agreements set forth in this
Agreement, or if any of the representations or warranties of the Parent
Companies set forth in this Agreement that are subject to a PMAE qualification
shall not be true and correct or any such representations and warranties that
are not so qualified shall not be true and correct and such failure would
reasonably be expected to have, individually or in the aggregate with all such
failures, a PMAE, in either case such that the conditions set forth in SECTIONS
7.03(A) or (B) of this Agreement, as the case may be, would be incapable of
being satisfied by February 28, 1998; provided, that in any case, a willful
material breach shall be deemed to cause such conditions to be incapable of
being satisfied for purposes of this Section 8.01(c);
(d) by either Parent or the Company if there shall be any Order which is
final and nonappealable preventing the consummation of the Merger, except if the
party relying on such Order to terminate this Agreement has not complied with
its obligations under SECTION 5.06(B) of this Agreement;
(e) by either Parent or the Company if the Merger shall not have been
consummated before February 28, 1998;
(f) by either Parent or the Company if this Agreement and the Merger shall
fail to receive the Requisite Shareholder Vote;
(g) by Parent, if (i) the Board of Directors of the Company withdraws,
modifies or changes its recommendation of the Merger referred to in SECTION
6.02(A) in a manner adverse to Parent or shall have resolved to do any of the
foregoing; (ii) the Board of Directors of the Company shall have recommended
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any Competing Transaction or shall have resolved to do so; or (iii) the Company
enters into a letter of intent or a definitive agreement for a Competing
Transaction;
(h) by the Company, if the Board of Directors of the Company (i) withdraws
its recommendation of the Merger referred to in SECTION 6.02(A) if there exists
at such time a Superior Transaction, or (ii) recommends approval or acceptance
of a Superior Transaction, in each case only if the Board of Directors of the
Company, after consultation with and based upon the advice of independent legal
counsel, determines in good faith that such action is necessary for such Board
of Directors to comply with their fiduciary duties under applicable Law; or
(i) in accordance with SECTION 8.02.
The right of any party hereto to terminate this Agreement pursuant to this
SECTION 8.01 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
SECTION 8.02. TERMINATION INTENT NOTICE; TOP UP RIGHTS. If the Average
Price is less than $36.00, the Company shall have the right to terminate this
Agreement or to request Parent (the "Top Up Request"), notwithstanding SECTION
2.01(A), to increase the Common Stock Merger Consideration (the "Adjusted
Consideration") to a number of shares equal to $68,800,000 divided by the
Average Price. The Top-Up Request shall be delivered to Parent in writing no
later than 9:00 a.m. Michigan time on the Closing Date. If the Company delivers
a Top-Up Request, the Closing shall be postponed for two business days and
Parent shall have the right to give notice to the Company (the "Top-Up Notice")
that Parent elects (notwithstanding SECTION 2.01(A)) to proceed with the Merger
at the Adjusted Consideration. The Top-Up Notice shall be delivered to the
Company in writing no later than 9:00 a.m. Michigan time on the business day
immediately following the day on which the Company delivered the Top-Up Request.
If Parent has not delivered a Top-Up Notice by the above deadline, the Company
shall have the right to give notice to Parent (the "Closing Notice") that,
notwithstanding its delivery of the Top-Up Request, the Company elects to
proceed with the Merger without adjustment to the Common Stock Merger
Consideration on the terms and conditions set forth in this Agreement. The
Closing Notice shall be delivered to Parent in writing no later than 6:00 p.m.
Michigan time on the business day prior to the Closing Date (as delayed above).
If the Company has not delivered the Closing Notice by the above deadline, this
Agreement shall terminate without further action by any of the parties.
SECTION 8.03. EFFECT OF TERMINATION. Except as provided in SECTION 8.06 or
SECTION 9.01(B), in the event of the termination of this Agreement pursuant to
SECTION 8.01 or SECTION 8.02, this Agreement shall forthwith become void, there
shall be no liability on the part of the parties to the other parties and all
rights and obligations of any party hereto shall cease, except that nothing
herein shall relieve any party of any liability for any willful breach of such
party's representations, warranties, covenants or agreements contained in this
Agreement, and each party hereby irrevocably waives and releases any other claim
that may exist upon such termination.
SECTION 8.04. AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors,
as applicable, at any time prior to the Effective Time; PROVIDED, HOWEVER, that,
after approval of the Merger by the Requisite Shareholder Vote no amendment may
be made, which under applicable Law may not be made without the approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
SECTION 8.05. WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of any other party hereto, (b) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by any other party
with any of the agreements or
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conditions contained herein. Any such extension or waiver shall be valid only if
set forth in an instrument in writing signed by the party or parties to be bound
thereby. For purposes of this SECTION 8.05, the Parent Companies as a group
shall be deemed to be one party.
SECTION 8.06. FEES, EXPENSES AND OTHER PAYMENTS.
(a) Except as provided in this SECTION 8.06(B), all Expenses incurred by the
parties hereto shall be borne solely and entirely by the party which has
incurred such Expenses.
(b) The Company agrees that if this Agreement is terminated pursuant to
SECTION 8.01(G) or (h) and the Parent Companies are not in material breach of
any material representation, warranty, covenant or agreement of the Parent
Companies contained herein, then the Company shall pay to Parent a fee of
$500,000, and reimburse all of Parent's Expenses up to $500,000, plus, if the
foregoing fees are payable and any Competing Transaction is consummated within
one hundred eighty (180) days after such termination, then the Company shall pay
in addition to the foregoing a fee of $4,000,000.
(c) Any payment required to be made pursuant to SECTION 8.06(B) shall be
made as promptly as practicable but not later than three business days after
request or termination of this Agreement or consummation of any Competing
Transaction, as the case may be, and shall be made by wire transfer of
immediately available funds to an account designated by Parent.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) None of the representations or warranties in this Agreement or any
instrument delivered pursuant to this Agreement will survive the Effective Time.
The covenants and agreements of the parties hereto and the Surviving Corporation
will survive the Effective Time without limitation (other than those that, by
their terms, contemplate a shorter survival period). The representations and
warranties set forth in ARTICLE III (including the Company Disclosure Statement
thereto) constitute the only representations and warranties of the Company in
connection with this Agreement and the transactions contemplated hereby. If
either of the Parent Companies or any Parent Representative, on the one hand, or
the Company or any Company Representative, on the other, knows on or before the
date of this Agreement of facts, conditions or circumstances that as they are
actually known to exist (and without any further developments, events or
circumstances) constitute a breach of any representations or warranties made in
or in connection with this Agreement by the Company or the Parent Companies, as
the case may be, such representations and warranties shall be deemed to be
qualified to the extent of such knowledge.
(b) Nothing herein shall be construed to cause the Confidentiality Agreement
to terminate upon the termination of this Agreement pursuant to ARTICLE VIII.
SECTION 9.02. NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the
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following addresses (or at such other address for a party as shall be specified
by like changes of address) or sent by electronic transmission to the facsimile
number specified below:
If to any of the Parent Companies,
(a) to:
Suiza Food Corporation
3811 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
Attention: Gregg L. Engles
Facsimile: (214) 528-9929
with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street
Suite 2800
Dallas, Texas 75201
Attention: Alan J. Bogdanow
Facsimile: (214) 939-6100
(b) If to the Company, to:
Country Fresh, Inc.
2555 Buchanan Avenue, SW
Grand Rapids, Michigan 49518
Attention: Delton Parks
Facsimile: (616) 243-5926
with a copy to:
Warner Norcross & Judd LLP
900 Old Kent Building
111 Lyon Street, N. W.
Grand Rapids, Michigan 49503
Attention: Tracy T. Larsen
Facsimile: (616) 752-2510
Any such notice shall be effective upon receipt if personally delivered or
telecopied, or one business day after delivery to a courier for next-day
delivery, or three business days after delivery by mail. Any party or other
recipient may from time to time change its address and facsimile number for
purposes of this Agreement by providing notice of such change as provided above;
PROVIDED, HOWEVER, that no notice of a change in address or facsimile number
shall be effective against a party that does not actually receive the notice.
SECTION 9.03. CERTAIN DEFINITIONS. For the purposes of this Agreement, the
term:
(a) "affiliate" means a person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned person.
(b) "Average Price" means the weighted average price of all transactions in
Parent Common Stock on the NYSE as reported on the Bloomberg Financial Markets
System (or an equivalent system) for the three (3) trading days immediately
prior to the Closing Date. If the Closing is postponed following the Company's
delivery of a Top-Up Request pursuant to SECTION 8.02, the Average Price shall
not be recomputed.
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(c) a person shall be deemed a "beneficial owner" of or to have "beneficial
ownership" of the Company Common Stock or Parent Common Stock, as the case may
be, in accordance with the interpretation of the term "beneficial ownership" as
defined in Rule 13d-3 under the Exchange Act, as in effect on the date hereof;
provided that a person shall be deemed to be the beneficial owner of, and to
have beneficial ownership of, the Company Common Stock or Parent Common Stock,
as the case may be, that such person or any affiliate of such person has the
right to acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights, warrants or options, or
otherwise.
(d) "business day" means any day other than a day on which banks in the
State of Texas are authorized or obligated to be closed.
(e) "control" (including the terms "controlled," "controlled by," and
"under common control with") means the possession, directly or indirectly, or as
trustee or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock or as
trustee or executor, by contract or credit arrangement or otherwise.
(f) "Expenses" shall include all out-of-pocket expenses (including, without
limitation, all fees and expenses of counsel, accountants, investment bankers,
experts and consultants to a party hereto and its affiliates) reasonably
incurred by a party or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of this
Agreement, the preparation, printing, filing and mailing of the Registration
Statement, the Proxy Statement, the solicitation of shareholder approval and all
other matters related to the consummation of the transactions contemplated
hereby.
(g) "knowledge", "known" or "knows" means with respect to any matter in
question, if an executive officer of the Company or Parent, as the case may be,
has actual knowledge of such matter.
(h) "person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as used in Section
13(d) of the Exchange Act).
(i) "subsidiary" or "subsidiaries" of the Company, Parent, the Surviving
Corporation or any other person, means any corporation, partnership, joint
venture or other legal entity of which the Company, Parent, the Surviving
Corporation or any such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or indirectly,
50% or more of the stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body of such corporation or other legal entity.
(j) "Tax" or "Taxes" means any and all taxes, charges, fees, levies,
assessments, duties or other amounts payable to any federal, state, local or
foreign taxing authority or agency, including, without limitation, (i) income,
franchise, profits, gross receipts, minimum, alternative minimum, estimated, ad
valorem, value added, sales, use, service, real or personal property, capital
stock, license, payroll, withholding, disability, employment, social security,
workers compensation, unemployment compensation, utility, severance, excise,
stamp, windfall profits, transfer and gains taxes, (ii) customs, duties,
imposts, charges, levies or other similar assessments of any kind, and (iii)
interest, penalties and additions to tax imposed with respect thereto.
(k) "trading day" means any day that the Parent Common Stock is traded on
the NYSE.
SECTION 9.04. HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Section references herein are, unless the
context otherwise requires, references to sections of this Agreement.
SECTION 9.05. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party or to
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the shareholders of the Company. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible and acceptable to each party.
SECTION 9.06. ENTIRE AGREEMENT. This Agreement (together with the
Exhibits, the Company Disclosure Statement and the Parent Disclosure Statement)
and the Confidentiality Agreement constitute the entire agreement of the
parties, and supersede all prior agreements and undertakings, both written and
oral, among the parties or between any of them, with respect to the subject
matter hereof.
SECTION 9.07. ASSIGNMENT. This Agreement shall not be assigned by
operation of Law or otherwise.
SECTION 9.08. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement; PROVIDED, HOWEVER, that SECTIONS 5.11, 5.12 and 6.03 hereof
shall be for the benefit of, and shall be enforceable by, the described
beneficiaries thereto and their heirs, legal representatives, successors and
assigns.
SECTION 9.09. SPECIFIC PERFORMANCE. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.
SECTION 9.10. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. Except as otherwise expressly
provided herein, all rights and remedies existing under this Agreement are
cumulative to, and not exclusive to, and not exclusive of, any rights or
remedies otherwise available.
SECTION 9.11. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of Delaware, regardless of
the Laws that might otherwise govern under applicable principles of conflicts of
Law, except to the extent that the Laws of Michigan mandatorily apply.
SECTION 9.12. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
SUIZA FOODS CORPORATION
By: /s/ GREGG L. ENGLES
--------------------------------
Name: Gregg L. Engles
CHAIRMAN AND CHIEF EXECUTIVE
Title: OFFICER
CF ACQUISITION CORP.
By: /s/ GREGG L. ENGLES
--------------------------------
Name: Gregg L. Engles
PRESIDENT AND CHIEF EXECUTIVE
Title: OFFICER
COUNTRY FRESH, INC.
By: /s/ DELTON PARKS
--------------------------------
Name: Delton Parks
Title: PRESIDENT
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COMPANY DISCLOSURE STATEMENT
Schedule 3.01(i) Organization and Qualification
Schedule 3.01(ii) Subsidiaries
Schedule 3.03(a) Reserved Capital Stock
Schedule 3.03(b)(i) Options, Warrants, Etc.
Schedule 3.03(b)(ii) Repurchase and Redemption Rights, Guaranties, Etc.
Schedule 3.03(b)(iii) Capital Stock of Other Entities
Schedule 3.03(b)(iv) Arrangements Involving Payments Based on Revenues or Earnings
Schedule 3.03(c) Record Holders of Capital Stock and Options
Schedule 3.05(a) No Conflict
Schedule 3.05(b) Required Filings and Contracts
Schedule 3.06 Permits; Compliance
Schedule 3.08(i) Absence of Certain Changes or Events
Schedule 3.08(ii) Capital Budget
Schedule 3.09 No Undisclosed Liabilities
Schedule 3.10 Absence of Litigation
Schedule 3.11(a) Employee Benefit Plans
Schedule 3.11(b) Representations Regarding Coverage; Effects of Transaction
Schedule 3.11(c) Commitments with Directors, Officers, Agents, and Employees
Schedule 3.11(e) Employee Pension Benefits Plans
Schedule 3.11(g) Parachute Payments
Schedule 3.11(h) Material Unfunded or Underfunded Liabilities Under Employee Plans
Schedule 3.11(j) Collective Bargaining Agreements; Impairment of Business
Schedule 3.11(k) Material Agreements Relating to Labor
Schedule 3.11(l) Defined Benefit Plans
Schedule 3.11(m) Multiemployer Plans
Schedule 3.12(a) Tax Returns
Schedule 3.12(b) Unaudited Tax Returns
Schedule 3.12(c) Extensions of Time for Filings
Schedule 3.12(d) Audits, Proceedings, Etc.
Schedule 3.12(i) Partnership Tax Returns; Foreign Entities
Schedule 3.12(j) Safe-Harbor Leases; Tax-Exempt Use Property or Bond Financed Property
Schedule 3.12(l) Affiliated Groups of Corporations
Schedule 3.14 Affiliates
Schedule 3.16(a) Compliance with Environmental Laws
Schedule 3.16(b) Actions, Investigations, Etc. Under Environmental Laws
Schedule 3.16(c) Notices, Permits, Licenses, Etc. Required by Environmental Laws
Schedule 3.16(d) Financial Responsibility Requirements Under Environmental Laws
Schedule 3.16(e) Conditions Giving Rise to Remedial Obligations
Schedule 3.16(f) Transportation and Disposal of Hazardous Substances
Schedule 3.16(g) Exposures to and Releases of Hazardous Substances
Schedule 3.18 Brokers
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Schedule 3.19 Insurance
Schedule 3.20(a) Real Estate
Schedule 3.20(b) Liens and Encumbrances
Schedule 3.21(a) Material Contracts
Schedule 3.21(d) Material Consents
Schedule 3.22(i) Relationships with Principal Customers and Suppliers
Schedule 3.22(ii) Ownership of Competitors, Customers, and Suppliers
Schedule 3.23 Intellectual Property Rights
Schedule 5.14 Notes
Schedule 7.03(f) Directors
Attachment 3.03(c) Common and Preferred Shareholders
Attachment 3.08(ii) Capital Budget
Attachment 3.19 Insurance
Attachment 3.20(b) UCC and Tax Lien Searches
Attachment 3.23 Tradenames and Service Marks
Attachment 5.14 Notes
PARENT DISCLOSURE STATEMENT
Schedule 4.03(a)(i) Reserved Capital Stock
Schedule 4.03(a)(ii) Subsidiaries
Schedule 4.03(b)(i) Options, Warrants, Etc.
Schedule 4.03(b)(ii) Repurchase and Redemption Rights
Schedule 4.03(b)(iii) Voting Arrangements
Schedule 4.05 No Conflict; Required Filings and Consents
Schedule 4.08 Absence of Certain Changes or Events
Schedule 4.09 Absence of Litigation
Schedule 4.14 Environmental Matters
A-42
APPENDIX B
[The Ohio Company Letterhead]
Member New York Stock Exchange
Corporate Finance Department
September 18, 1997
The Board of Directors
Country Fresh, Inc.
2555 Buchanan Ave. SW
Grand Rapids, Michigan 49518
Gentlemen:
You have requested our opinion, as investment bankers, as to the fairness to the
holders of outstanding shares of capital stock of Country Fresh, Inc. (the
"Company") of the consideration proposed to be paid to such holders pursuant to
the Agreement and Plan of Merger dated as of September 18, 1997 by and among the
Company, Suiza Foods Corporation ("Suiza") and CF Acquisition Corp., a
wholly-owned subsidiary of Suiza (the "Merger Agreement").
The Merger Agreement provides, subject to the satisfaction of various
conditions, for the merger of CF Acquisition Corp. into the Company (the
"Merger"). Upon consummation of the Merger, each outstanding share of common
stock, no par value, of the Company will be converted into the right to receive
0.5454 of a share of Suiza common stock, and each outstanding share of Series A
preferred stock, $320 stated value, of the Company will be converted into the
right to receive one share of Suiza preferred stock having identical terms.
We have acted as a financial advisor to the Company and will receive a fee for
our services which is contingent upon the consummation of the Merger.
For the purpose of arriving at our opinion, we have reviewed or considered,
among other things, the following:
(i) the Merger Agreement, and the negotiations relating thereto in which
we have participated;
(ii) the audited financial statements of the Company, for the fiscal years
ending 1992, 1993, 1994, 1995, 1996, 1997;
(iii) the annual divisional unaudited financial statements of the Company
for the fiscal years ending 1992, 1993, 1994, 1995, 1996, 1997;
(iv) the Company's consolidated budgeted plan for the fiscal year ending
March 1998;
(v) certain internal information, primarily financial in nature,
concerning the business and operations of the Company;
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(vi) the audited annual report and 10-K for Suiza for the year ended
December 31, 1996;
(vii) certain publicly available information concerning Suiza;
(viii) certain public information concerning merger and acquisition
transactions of Suiza as well as among companies engaged in the dairy
business and related businesses during 1996 and 1997;
(ix) meetings and discussions with certain officers and employees of the
Company and Suiza concerning the financial condition of both
companies; and
(x) other such studies, analyses, investigations and information as we
deemed necessary or appropriate.
In rendering this opinion, we have assumed, without independent verification,
the accuracy and completeness of the financial and other information which was
provided to us by the Company or was publicly available. However, we have no
reason to believe that any such information is not accurate or complete. We were
not requested to solicit and did not solicit other purchasers for the Company.
Our opinion necessarily is based upon conditions as they exist and can be
evaluated on the date thereof.
Based on the foregoing and such other matters we considered relevant, it is our
opinion that, as of the date hereof, the consideration to be received by the
holders of the Company's common stock and Series A Preferred Stock in the Merger
is fair to such holders from a financial point of view.
Very truly yours,
/s/ ROBERT A. COREA
------------------------------------------
Robert A. Corea
VICE PRESIDENT
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APPENDIX C
MICHIGAN DISSENTERS' RIGHTS STATUTE
Section 761--As used in sections 762 to 774:
(a) "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving corporation by merger of that
issuer.
(c) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 762 and who exercises that right when and in
the manner required by sections 764 through 772.
(d) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(e) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans of, if none, at a rate that is fair
and equitable under all the circumstances.
(f) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
(g) "Shareholder" means the record or beneficial shareholder.
Section 762--(1) A shareholder is entitled to dissent from, and obtain payment
of the fair value of his or her shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
if shareholder approval is required for the merger by section 703a or the
articles of incorporation and the shareholder is entitled to vote on the
merger, or the corporation is a subsidiary that is merged with its parent
under section 711.
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution but in including a sale pursuant to court
order.
(d) An amendment of the articles giving rise to dissent pursuant to
section 621.
(e) A transaction giving rise to a right to dissent pursuant to section
754.
(f) Any corporate action taken pursuant to a shareholder vote to the
extent the articles, bylaws, or a resolution of the board provides that
voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(g) The approval of a control share acquisition giving rise to a right
to dissent pursuant to section 799.
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(2) Unless otherwise provided in the articles, bylaws, or a resolution of
the board, a shareholder may not dissent from any of the following:
(a) Any corporate action set forth in subsection (1)(a) to (e) as to
share which are listed on a national securities exchange or held of record
by not less than 2,000 persons on the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting of
shareholders at which the corporate action is to be acted upon.
(b) A transaction described in subsection (1)(a) in which shareholders
receive cast or shares that satisfy the requirements of subdivision (a) or
any combination thereof.
(c) A transaction described in subsection (1)(b) in which shareholders
receive cash or shares that satisfy the requirements of subdivision (a) or
any combination thereof.
(d) A transaction described in subsection (1)(c) which is conducted
pursuant to a plan of dissolution providing for distribution of
substantially all of the corporation's net assets to shareholders in
accordance with their respective interests within 1 year after the date of
the transaction, where the transaction is for cash or shares that satisfy
the requirements of subdivision (a) or any combination thereof.
(3) A shareholder entitled to dissent and obtain payment for his or her
shares pursuant to subsection (1)(a) to (e) may not challenge the corporate
action creating his or her entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(4) A shareholder who exercises his or her right to dissent and seek payment
for his or her shares pursuant to subsection (1)(f) may not challenge the
corporate action creating his or her entitlement unless the action is unlawful
or fraudulent with respect to the shareholder or the corporation.
Section 763--(1) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his or her name only if he or she dissents
with respect to all shares beneficiallyowned by any 1 person and notifies the
corporation in writing of the name and address of each person on whose
beneficially owned he or she asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which he
or she dissents and his or her other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on his or her behalf only if all of the following apply:
(a) He or she submits to the corporation the record shareholder's
written consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights.
(b) He or she does so with respect to all shares of which he or she is
the beneficial shareholder or over which he or she has power to direct the
vote.
Section 764--(1) If proposed corporate action creating dissenters' rights under
section 762 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this act and shall be accompanied by a copy of sections 761 to 774.
(2) If corporate action creating dissenters' rights under section 762 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholder entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in section 766. A shareholder who
consents to the corporate action is not entitled to assert dissenters' rights.
Section 765--(1) If proposed corporate action creating dissenters' rights under
section 762 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must deliver to the corporation before the
vote is taken written notice of his or her intent to demand payment for his or
her
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shares if the proposed action is effectuated and must not vote his or her shares
in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) is
not entitled to payment for his or her shares under this act.
Section 766--(1) If proposed corporate action creating dissenters' rights under
section 762 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of section 765.
(2) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken, and must provide all of the following:
(a) State where the payment demand must be sent and where and when
certificates for shares must be deposited.
(b) Inform holders of shares without certificates to what extent
transfer of the shares will be restricted after the payment demand is
received.
(c) Supply a form for the payment demand that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether he or she acquired beneficial ownership of the shares
before the date.
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) notice is delivered.
Section 767--(1) A shareholder sent a dissenter's notice described in section
766 must demand payment, certify whether he or she acquired beneficial ownership
of the shares before the date required to be set forth in the dissenters' notice
pursuant to section 766(2)(c), and deposit his or her certificates in accordance
with the terms of the notice.
(2) The shareholder who demands payment and deposits his or her share
certificates under subsection (1) retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit his or her share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his or her shares under this act.
Section 768--(1) The corporation may restrict the transfer of shares without
certificates from the date the demand for their payment is received until the
proposed corporate action is taken or the restrictions released under section
770.
(2) The person for whom dissenters' rights are asserted as to shares without
certificates retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
Section 769--(1) Except as provided in section 771, within 7 days after the
proposed corporate action is taken or a payment demand is received, whichever
occurs later, the corporation shall pay each dissenter who complied with section
767 the amount the corporation estimates to be the fair value of his or her
shares, plus accrued interest.
(2) The payment must be accompanied by all of the following:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and if available at the latest interim financial statements.
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(b) A statement of the corporation's estimate of the fair value of the
shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under section
772.
Section 770--(1) If the corporation does not take the proposed action within 60
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on shares without certificates.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 766 and repeat the payment demand procedure.
Section 771--(1) A corporation may elect to withhold payment required by section
769 from a dissenter unless he or she was the beneficial owner of the shares
before the date set forth in the dissenters' notice pursuant to section
766(2)(c).
(2) To the extent the corporation elects to withhold payment under
subsection (1), after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall offer to pay this
amount to each dissenter who shall agree to accept it in full satisfaction of
his or her demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenters' right to demand payment under
section 772.
Section 772--(1) A dissenter may notify the corporation in writing of his or her
own estimate of the fair value of his or her shares and amount of interest due,
and demand payment of his or her estimate, less any payment under section 769,
or reject the corporation's offer under section 771 and demand payment of the
fair value of his or her shares and interest due, if any 1 of the following
applies:
(a) The dissenter believes that the amount paid under section 769 or
offered under section 771 is less than the fair value of his or her shares
or that the interest due is incorrectly calculated.
(b) The corporation fails to make payments under section 769 within 60
days after the date set for demanding payment.
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on shares without certificates within 60 days after the date set for
demanding payment.
(2) A dissenter waives his or her right to demand payment under this section
unless he or she notifies the corporation of his or her demand in writing under
subsection (1) within 30 days after the corporation made or offered payment for
his or her shares.
Section 773--(1) If a demand for payment under section 772 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the share
and accrued interest. If the corporation does not commence the proceeding within
the 60-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county in which the corporation's principal place of business or registered
office is located. If the corporation is a foreign corporation without a
registered office or principal place of business in this state,it shall commence
the proceeding in the county in this state where the principal place of business
or registered office of the domestic corporation whose shares are to be valued
was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be
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served with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) is plenary and exclusive. The court may appoint 1 or more persons
as appraisers to receive evidence and recommend decision on the question of fair
value. The appraisers have the powers described in the order appointing them, or
in any amendment to it. The dissenters are entitled to the same discovery rights
as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his or her
shares, plus interest, exceeds the amount paid by the corporation or for the
fair value, plus accrued interest, of his or her after-acquired shares for which
the corporation elected to withhold payment under section 771.
Section 773a--(1) In a proceeding brought pursuant to section 773, the court
may, pursuant to the agreement of the parties, appoint a referee selected by the
parties and subject to the approval of the court. The referee may conduct
proceedings within the state, or outside the state by stipulation of the parties
with the referee's consent, and pursuant to the Michigan court rules. The
referee shall have powers that include, but are not limited to, the following:
(a) To hear all pretrial motions and submit proposed orders to the
court. In ruling on the pretrial motion and proposed orders, the court shall
consider only those documents, pleadings, and arguments that were presented
to the referee.
(b) To require the production of evidence, including the production of
all books, papers, documents, and writings applicable to the proceeding, and
to permit entry upon designated land or other property in the possession or
control of the corporation.
(c) To rule upon the admissibility of evidence pursuant to the Michigan
rules of evidence.
(d) To place witnesses under oath and to examine witnesses.
(e) To provide for the taking of testimony by deposition.
(f) To regulate the course of the proceeding.
(g) To issue subpoenas, when a written request is made by any of the
parties, requiring the attendance and testimony of any witness and the
production of evidence including books, records, correspondence, and
documents in the witness or under his or her control, at a hearing before
the referee or a a deposition convened pursuant to subdivision (e). In case
of a refusal to comply with a subpoena, the party on whose behalf the
subpoena was issued may file a petition in the court for an order requiring
compliance.
(2) The amount and manner of payment of the referee's compensation shall be
determined by agreement between the referee and the parties, subject to the
court's allocation of compensation between the parties at the end of the
proceeding pursuant to equitable principles, notwithstanding section 774.
(3) The referee shall do all of the following:
(a) Make a record and reporter's transcript of the proceeding.
(b) Prepare a report, including proposed findings of fact and
conclusions of law, and a recommended judgment.
(c) File the report with the court, together with all original exhibits
and the reporter's transcript of the proceeding.
(4) Unless the court provides for a longer period, not more than 45 days
after being served with notice of the filing of the report described in
subsection (3), any party may serve written objections to the
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report upon the other party. Application to the court for action upon the report
and objections to the report shall be made by motion upon notice. The court,
after hearing, may adopt the report, may receive further evidence, may modify
the report, or may recommit the report to the referee with instructions. Upon
adoption of the report, judgment shall be entered in the same manner as if the
action had been tried by the court and shall be subject to review in the same
manner as any other judgment of the court.
Section 774--(1) The court in an appraisal proceeding commenced under section
773 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
access the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 772.
(2) The court may also access the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable in the
following manner:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of sections 764 through 772.
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this act.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to those counsel reasonable fees paid out of the amounts awarded the
dissenters who were benefited.
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APPENDIX D
EXCERPTS FROM THE JOINT PROXY STATEMENT/PROSPECTUS
FOR THE MORNINGSTAR MERGER
The following excerpts are taken from the Joint Proxy Statement/Prospectus
of Suiza Foods and Morningstar to be sent to the Suiza Foods and Morningstar
stockholders in connection with the proposed Merger between a subsidiary of
Suiza Foods and Morningstar. As used in this Appendix D, the "Merger" refers to
the proposed merger between a subsidiary of Suiza Foods and Morningstar;
"Morningstar Common Stock" refers to the common stock, $.01 par value per share,
of Morningstar; "Morningstar Stockholders" and "Suiza Stockholders" refers to
the stockholders of Morningstar and Suiza Foods, respectively; "Morningstar
Option" refers to options to purchase Morningstar Common Stock; a "Substitute
Option" refers to options to purchase Suiza Common Stock upon Suiza Foods'
assumption of Morningstar Options; the "Exchange Ratio" refers to the .85 shares
of Suiza Common Stock receivable for each share of Morningstar Common Stock in
the Merger; the "Merger Agreement" refers to the Agreement and Plan of Merger,
dated September 28, 1997, among Suiza Foods, SF Acquisition Corporation ("Sub")
and Morningstar; the "Effective Time" refers to the effective time of the
Merger; the "Morningstar Board" and the "Suiza Board" refer to the board of
directors of Morningstar and Suiza, respectively; and "New Morningstar" refers
to the surviving corporation in the Merger. Terms used in this Appendix D and
not otherwise defined, have the meanings assigned to them elsewhere in this
Proxy Statement/Prospectus.
THE MERGER
GENERAL
At the Effective Time of the Merger, Sub will be merged with and into
Morningstar, with Morningstar surviving the Merger as a wholly owned subsidiary
of Suiza Foods. In the Merger, each share of Morningstar Common Stock issued and
outstanding immediately before the Effective Time (excluding those held in the
treasury of Morningstar and those owned by Suiza Foods, Sub or any other
subsidiary of Suiza Foods), without any action on the part of the holder
thereof, will be converted into the right to receive 0.85 shares of Suiza Common
Stock. Cash will be paid in lieu of fractional shares of Suiza Common Stock. The
Merger will become effective at the date and time the Certificate of Merger is
filed with the Secretary of State of the State of Delaware, which will occur as
soon as practicable after receipt of requisite regulatory and stockholder
approvals and fulfillment of the other conditions set forth in the Merger
Agreement.
Based on the number of shares of Suiza Common Stock and Morningstar Common
Stock outstanding on September 30, 1997, the shares of Suiza Common Stock issued
to Morningstar Stockholders in the Merger will constitute approximately 44.2% of
the Suiza Common Stock outstanding after the Merger and the current Suiza
Stockholders will hold approximately 55.8% of the Suiza Common Stock outstanding
after the Merger. On the same basis, but also assuming that 1,911,075 additional
shares of Suiza Common Stock are issued in the Country Fresh Merger, Morningstar
Stockholders will hold approximately 41.4% of the Suiza Common Stock outstanding
after the Merger.
Each outstanding and unexercised Morningstar Option will be assumed by Suiza
Foods in the Merger and converted into a Substitute Option. Approximately
2,957,987 shares of Suiza Common Stock will be subject to Substitute Options,
based on the number of shares of Morningstar Common Stock subject to the
Morningstar Options as of September 30, 1997. The per share exercise price with
respect to the Substitute Options will equal the exercise price with respect to
the Morningstar Options divided by the Exchange Ratio.
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The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio of
0.85 shares of Suiza Common Stock for each share of Morningstar Common Stock.
Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the price of Suiza Common Stock or Morningstar Common
Stock. The price of Suiza Common Stock at the Effective Time may vary from its
price at the date of the Special Meetings. These variations may be the result of
changes in the business, operations, or prospects of Suiza Foods or Morningstar,
market assessments of the likelihood that the Merger will be consummated and the
timing thereof, general market and economic conditions, and other factors.
BACKGROUND OF THE MERGER
In April 1994, Morningstar sold its Florida-based fluid milk operation,
Velda Farms Inc., to a predecessor of Suiza Foods for approximately $48 million
in cash (after working capital adjustments) and $3 million in preferred stock
issued by such predecessor of Suiza Foods. This sale concluded the divestiture
of Morningstar's regional dairies, which were considered a distinct segment of
its business. In March 1995, Suiza Foods redeemed the preferred stock issued in
this transaction for its stated value plus accrued dividends.
During the spring of 1995, representatives of Morningstar and
representatives of Hicks, Muse & Co. Incorporated, now known as Hicks, Muse,
Tate & Furst Incorporated ("Hicks Muse"), met with representatives of Suiza
Foods and one other bidder to discuss a possible sale of Morningstar. At that
time, Hicks Muse controlled a majority of the voting stock of Morningstar
through an investment partnership. In May 1995, Suiza Foods and the other bidder
submitted acquisition proposals to the Morningstar Board. The Morningstar Board
rejected both of these proposals and determined not to pursue a sale of
Morningstar. Following this determination in July 1995, Hicks Muse caused the
investment partnership which held shares in Morningstar to distribute these
shares to the individual partners of the partnership, thereby relinquishing
voting control of Morningstar and terminating any further discussions or
activities, with Suiza Foods or other bidders, related to a possible sale of
Morningstar.
In early August of 1997, representatives of the management of Suiza Foods
met with representatives of the management of Morningstar. At that meeting, the
possibility was raised of a business combination between Morningstar and Suiza
Foods in which Morningstar Stockholders would receive Suiza Common Stock having
a current market value representing a significant premium to the then current
market price of the Morningstar Common Stock. On August 14, 1997, the
Morningstar Board authorized Morningstar management to pursue a possible
transaction with Suiza Foods.
From August 15 through September 26, representatives of Morningstar and
Suiza Foods, including their respective legal and financial advisors, conducted
a mutual exchange of business and financial information pursuant to
confidentiality agreements executed on August 18, 1997 and negotiated the terms
and conditions of a possible transaction. The Suiza Board discussed the possible
transaction at a meeting held on August 29, 1997, and the Morningstar Board
again discussed the possible transaction at a meeting held on September 26,
1997. During this time, Suiza Foods was also negotiating a merger transaction
with Country Fresh. Suiza Foods and Country Fresh signed a merger agreement with
respect to the Country Fresh Merger on September 18, 1997.
The discussions and negotiations between Morningstar and Suiza Foods
representatives were centered around the appropriate exchange ratios and
possible "collar" mechanisms for an exchange ratio, the synergies and other
benefits that could arise from a combination of Suiza Foods and Morningstar, and
the terms of the Merger Agreement. Final negotiations were conducted from
September 24 through 26, with agreement being reach on the Exchange Ratio of
0.85 on September 26, 1997, subject to approval by the respective Boards of
Directors of Suiza Foods and Morningstar. On September 27, 1997 the legal
advisors to Suiza Foods and Morningstar met and resolved outstanding issues on
the Merger Agreement.
On September 28, 1997, the respective boards of Suiza Foods and Morningstar
separately met to consider the Merger and the Merger Agreement, and after
receiving fairness opinions from their financial
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advisors, both the Suiza Board and the Morningstar Board approved the Merger and
the Merger Agreement. Later that day, the parties executed the Merger Agreement,
which was publicly announced on the morning of September 29, 1997 through a
joint press release before the opening of trading of the NYSE and Nasdaq.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS
SUIZA FOODS. The Suiza Board, based upon certain factors listed below,
including the opinion of its financial advisor, concluded that the Merger is
fair to and in the best interests of Suiza Foods and the Suiza Stockholders and
unanimously approved the Merger and resolved to recommend that the Suiza
Stockholders approve the Stock Issuance. It should be noted that one of the ten
members of the Suiza Board was unable to attend the meeting at which the Suiza
Board voted to recommend approval of the Stock Issuance. Accordingly, all
references in this Joint Proxy Statement/Prospectus to the unanimous approval or
recommendation of the Suiza Board shall mean that all members of the Suiza Board
other than such one absent member concurred in such approval or recommendation.
The Suiza Board believes that the merger will benefit Suiza Foods and the
Suiza Stockholders in a number of respects, including the following: (i) the
combined company will be the largest dairy company in the United States, and its
size, geographic reach and breadth of product offerings will allow it to offer
its customers more products, and to manufacture and deliver such products more
efficiently, than Suiza Foods or Morningstar could independently; (ii) the
branded character of Morningstar's product offerings will improve the gross
margin of Suiza Foods' product offerings; (iii) growth in sales of Morningstar's
branded and value-added product lines complement Suiza Foods' strategy of
growing through acquisition; (iv) Morningstar's national infrastructure for
manufacturing and distributing value-added dairy and non-dairy products should
afford Suiza Foods greater synergies from rationalizing the manufacturing and
distribution of value-added products of regional dairies acquired in the future;
(v) Morningstar's existing corporate infrastructure should allow Suiza Foods to
avoid creating a duplicative infrastructure of its own to manage its rapidly
expanding business; (vi) the additional cash flow from Morningstar's operations
should reduce Suiza Foods' leverage, expand its borrowing capacity and reduce
its borrowing costs and (vii) the issuance of Suiza Common Stock in the Merger
should materially increase the float and liquidity of the Suiza Common Stock.
In reaching its determination to recommend the Stock Issuance to Suiza
Stockholders, the Suiza Board considered, among other things, the following
factors and information:
1. the judgment, advice and analyses of its management with respect to the
strategic rationale behind the Merger and the financial and operational
benefits and challenges of the Merger, based in part on the business,
financial, accounting and legal due diligence performed with respect to
Morningstar;
2. the financial condition, results of operations, business, operations and
assets of each of Suiza Foods and Morningstar and other financial
information;
3. the operational opportunities and challenges of operating Morningstar as a
subsidiary of Suiza Foods and the management challenges associated with
successfully integrating the businesses of two public companies as well as
the many companies that have been acquired by Suiza Foods and Morningstar
over the last several years;
4. the strategic and competitive benefits of combining the two companies in
the respective markets that Suiza Foods and Morningstar serve;
5. current industry, economic and market conditions;
6. the terms and conditions of the Merger Agreement;
7. the opinion of its financial advisor;
8. historical market prices and trading information with respect to Suiza
Foods and Morningstar;
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9. the advice of Suiza Foods' independent accountants concerning the ability
of Suiza Foods and Morningstar to account for the Merger as a pooling of
interests for accounting purposes; and
10. the advice of Suiza Foods' counsel that the Merger should be treated as a
tax-free reorganization for federal income tax purposes.
The foregoing discussion of the factors and information considered by the
Suiza Board is not intended to be exhaustive. In view of the variety of factors
and information considered by the Suiza Board in connection with its evaluation
of the Merger, the Suiza Board did not find it practicable to assign, and did
not assign, relative weights to the specific factors and information considered
in reaching its conclusion that the Merger is in the best interests of Suiza
Foods and the Suiza Stockholders. In addition, individual members of the Suiza
Board may have given or assigned different weight to the factors and information
listed above as well as any other factors and information considered in reaching
their respective decisions. There can be no assurance that the expected benefits
of the Merger will be achieved.
MORNINGSTAR. The Morningstar Board, based upon, among other things, the
factors listed below concluded that the Merger is fair to, and in the best
interests of, Morningstar and the Morningstar Stockholders, unanimously approved
the Merger, the Merger Agreement and the transactions contemplated thereby, and
resolved to recommend that the Morningstar Stockholders approve the Morningstar
Proposal. It should be noted that two members of the Morningstar Board were
unable to attend the meetings of the Morningstar Board at which the Merger
Agreement was discussed. Accordingly, all references in this Joint Proxy
Statement/Prospectus to the unanimous approval or recommendation of the
Morningstar Board with respect to the Merger, the Merger Agreement and the
transactions contemplated thereby shall mean that all members of the Morningstar
Board other than the two absent members concurred in such approval or
recommendation.
In determining to approve the Merger Agreement and to recommend that the
Morningstar Stockholders approve the Morningstar Proposal, the Morningstar Board
based its opinion as to the transactions contemplated in the Merger Agreement
upon many different factors, including the following:
(i) the judgment, advice and analyses of its management with respect to the
strategic rationale behind the Merger and the financial and operational
benefits and challenges of the Merger, based in part on the business,
financial, accounting and legal due diligence performed with respect to
Suiza Foods;
(ii) current industry, economic, and market conditions;
(iii) the financial condition, results of operations and cash flows of
Morningstar and Suiza Foods on a historical basis and other financial
information;
(iv) the opinion of its financial advisor, to the effect that, as of the date
of such opinion the Exchange Ratio pursuant to the Merger Agreement was
fair from a financial point of view to the holders of Morningstar Common
Stock;
(v) the historical market prices and trading information in respect of
Morningstar Common Stock and Suiza Common Stock;
(vi) the terms and conditions of the Merger Agreement, including, without
limitation, the requirement of Morningstar Stockholder approval and the
fees that would be payable upon termination under certain circumstances;
and
(vii) the ability to consummate the Merger as a pooling-of-interests under
generally accepted accounting principles and as a tax-free reorganization
under Section 368(a) of the Code.
The Morningstar Board believes the Merger offers Morningstar Stockholders an
opportunity to participate in an entity that, following the Merger, will have a
greater financial flexibility, better opportunities for growth and better
financial outlook than Morningstar would have if it were to continue on a stand-
alone basis. There can be no assurances, however, that the expected benefits of
the Merger will be realized.
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The foregoing discussion of the factors and information considered by the
Morningstar Board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the Merger, the
Morningstar Board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination, and individual directors may have given differing weights to
different factors.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "pooling of interests" in
accordance with generally accepted accounting principles. Under this accounting
method, the historical financial information of Suiza Foods and Morningstar will
be restated to reflect the combined financial position and operations of both
companies. The combined financial position and operations may be adjusted to
conform the accounting practices of the companies. Pursuant to the Merger
Agreement, each of Suiza Foods and Morningstar has agreed to use its
commercially reasonable efforts to cause the Merger to qualify for "pooling of
interests" accounting treatment. Suiza Foods has agreed to use commercially
reasonable efforts to obtain a letter from Deloitte & Touche LLP and Morningstar
has agreed to use commercially reasonable efforts to obtain a letter from Arthur
Andersen LLP, in each case, stating that the Merger will qualify for "pooling of
interests" accounting treatment if consummated in accordance with the Merger
Agreement. Receipt of such written opinions is a condition to the consummation
of the Merger. However, such opinions will not be binding on the Commission.
RESTRICTIONS ON RESALE BY AFFILIATES
The shares of Suiza Common Stock to be received by Morningstar Stockholders
in connection with the Merger will be registered under the Securities Act and,
except as set forth in this paragraph, may be traded without restriction. The
shares of Suiza Common Stock to be issued in connection with the Merger and
received by persons who are deemed to be "affiliates" (as that term is defined
in Rule 145 under the Securities Act) of Morningstar prior to the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act (or, in the case of such persons who become
affiliates of Suiza Foods, Rule 144 under the Securities Act) or as otherwise
permitted under the Securities Act. Under guidelines published by the
Commission, the sale or other disposition of Suiza Common Stock or Morningstar
Common Stock by an affiliate of either Suiza Foods or Morningstar, as the case
may be, during the period commencing 30 days prior to the Effective Time and
ending upon the publication of financial results that include at least 30 days
of post-Merger combined operations of Suiza Foods and Morningstar (the "Pooling
Period") could preclude pooling of interests accounting treatment of the Merger.
Suiza Foods agreed in the Merger Agreement to use its best efforts to publish,
by public filing or announcement, the results of at least 30 days of post-merger
combined operations of Suiza Foods and Morningstar as soon after the Effective
Time as is commercially practicable and thereby minimize the duration of the
Pooling Period. Each of Morningstar and Suiza Foods agreed in the Merger
Agreement to use its reasonable efforts to deliver or cause to be delivered
written agreements of each such "affiliate" to the effect that such person will
not sell, transfer or otherwise dispose of any shares of Morningstar Common
Stock or Suiza Common Stock, as the case may be, during the Pooling Period and
that such person will not sell, transfer or otherwise dispose of Suiza Common
Stock at any time in violation of the Securities Act or the rules and
regulations promulgated thereunder, including Rule 145.
NEW MORNINGSTAR BOARD AND MANAGEMENT FOLLOWING THE MERGER
If the proposed Merger is approved and consummated, Morningstar Stockholders
will become stockholders of Suiza Foods, which will be under the direction of
the Board of Directors and management of Suiza Foods. The directors of Sub
immediately prior to the Effective Time will be the directors of New
Morningstar, and the officers of Sub immediately prior to the Effective Time
will be the officers of New Morningstar.
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BOARD OF DIRECTORS OF SUIZA FOODS FOLLOWING THE MERGER
Following the Merger, the New Suiza Board will consist of 12 members. Two
members of the New Suiza Board will be present members of the Morningstar Board,
and the remainder of the New Suiza Board will be Suiza Foods' current directors.
Suiza Foods has also agreed to add a thirteenth member to its Board of Directors
upon completion of the Country Fresh Merger.
GOVERNMENTAL APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until the following steps have been taken: (1)
Premerger Notification and Report Forms have been submitted and certain
information has been furnished to the FTC and the DOJ; and (2) applicable
waiting periods have expired or been terminated.
Suiza Foods and Morningstar agreed, pursuant to the Merger Agreement, to use
their respective best efforts to file or cause to be filed with the FTC and the
DOJ such notifications as are required to be filed under the HSR Act and the
rules and regulations promulgated thereunder, and to respond as promptly as
practicable to any requests for additional information made by either the FTC or
the DOJ. Pursuant to such agreement, on October 21, 1997 Suiza Foods and
Morningstar each filed Premerger Notification and Report Forms with the FTC and
the Antitrust Division. The statutory waiting period under the HSR Act is
scheduled to expire at 11:59 p.m. on November 20, 1997.
At any time before or after the consummation of the Merger and
notwithstanding the expiration or termination of the applicable HSR Act waiting
period, any federal or state antitrust authorities could take action under the
antitrust laws as they deem necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or seeking
divestiture of all or part of the assets of Suiza Foods or Morningstar. Private
parties may also seek to take legal action under the antitrust laws, if
circumstances permit.
If the FTC, the DOJ, or any other federal or state antitrust authority, were
to challenge the Merger, the consummation of the Merger could be postponed
beyond February 28, 1998, in which event either Suiza Foods or Morningstar would
be entitled to terminate the Merger Agreement. See "The Merger
Agreement--Termination."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Morningstar Board with respect to
the Merger, Morningstar Stockholders should be aware that certain officers and
directors of Morningstar have the following interests in the Merger separate
from and in addition to their interests as Morningstar Stockholders generally.
The Morningstar Board was aware of these interests and took them into account in
approving the Merger, the Merger Agreement and the transactions contemplated
thereby.
COMPOSITION OF NEW SUIZA BOARD. Immediately after the Effective Time, Suiza
Foods will take action necessary to create two additional seats on the Suiza
Board and to cause two of the current directors of Morningstar to be elected to
the Suiza Board. See "The Merger--Board of Directors of Suiza Foods Following
the Merger."
STOCK OPTIONS. The Merger Agreement provides that, at the Effective Time,
each outstanding and unexercised Morningstar Option, including those held by
directors and executive officers, will be converted into and become a Substitute
Option to acquire shares of Suiza Common Stock as described under "The Merger
Agreement--Consideration to be Received in the Merger." Pursuant to the terms of
the applicable Morningstar option plans, each of the outstanding and unexercised
Morningstar Options will become fully vested upon the consummation of the
Merger.
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RETENTION AND EMPLOYMENT AGREEMENTS. Morningstar is party to executive
retention agreements with each of Messrs. Armes, Ash and Jones that require
Morningstar to provide certain severance benefits in the event any of these
executives is terminated by Morningstar without "cause" (as defined in the
applicable executive retention agreement) or voluntarily terminates his
employment with Morningstar for "good reason" (as defined in the applicable
executive retention agreement) in contemplation of or within 180 days preceding
a "change of control" (as defined in the applicable executive retention
agreement) or within three years after a change of control. The Merger will
constitute a change in control for purposes of each of the executive retention
agreements.
The value of the severance benefits to be paid to Mr. Armes (in the event he
is terminated or voluntarily terminates his employment under the circumstances
described above) under his executive retention agreement is estimated to be
approximately $330,000. The value of the severance benefits to be paid to Mr.
Ash (in the event he is terminated or voluntarily terminates his employment
under the circumstances described above) under his executive retention agreement
is estimated to be approximately $330,000. The value of the severance benefits
to be paid to Mr. Jones (in the event he is terminated or voluntarily terminates
his employment under the circumstances described above) under his executive
retention agreement is estimated to be approximately $650,000.
In addition to the foregoing severance benefits, the executive retention
agreements for each of Messrs. Armes and Ash provide for the payment of a
retention bonus in the event that such executive remains employed by Morningstar
on the date of the change of control or is terminated by Morningstar without
cause in contemplation of and within 180 days preceding the change of control.
In each case, the amount of such retention bonus is equal to the executive's
highest annual base salary rate plus an amount equal to the higher of the
executive's target bonus for the fiscal year in which the termination occurs or
the immediately preceding fiscal year. The retention bonuses are payable not
later than three days following a change of control. As a result of the
consummation of the Merger, each of Messrs. Armes and Ash will be entitled to
receive a retention bonus in the amount of $217,500.
Each of the aforementioned executive retention agreements requires that
Morningstar "gross-up" the applicable executive with respect to any federal
taxes payable by such executive as a result of the payment to such executive of
the benefits contemplated by his executive retention agreement and with respect
to any excise taxes that become payable by such executive in respect of his
Morningstar Options.
Morningstar is a party to employment agreements with C. Dean Metropolous and
Michael J. Cramer (respectively, the "Metropolous Employment Agreement" and the
"Cramer Employment Agreement") which require Morningstar to provide certain
severance benefits to such executives. Under the Cramer Employment Agreement,
severance benefits in an amount equal to 1.5 times Mr. Cramer's annual
compensation (including salary, bonuses and allowances) for the last full year
of employment, but in no event less than $200,000 shall be payable by
Morningstar in the event Mr. Cramer is terminated by Morningstar "without cause"
(as defined in the Cramer Employment Agreement) or voluntarily terminates his
employment with Morningstar in the event of a "change in control" (as defined in
the Cramer Employment Agreement). The Merger will constitute a change in control
for purposes of the Cramer Employment Agreement. The value of the severance
benefits to be paid to Mr. Cramer under the Cramer Employment Agreement is
estimated to be approximately $200,000, plus the amount of the tax gross-up
required by such agreement. The severance benefits are payable within seven days
of any termination of Mr. Cramer by Morningstar without cause, or on the closing
date of a change in control.
Under the Metropolous Employment Agreement, severance benefits in an amount
equal to Mr. Metropolous' aggregate compensation (current salary and bonus based
on prior year's payment) for the balance of the then existing three-year term
shall be payable by Morningstar in the event of a "triggering event" (as defined
in the Metropolous Employment Agreement) or Mr. Metropolous terminates his
employment with Morningstar for "good reason" (as defined in the Metropolous
Employment Agreement) or Mr. Metropolous' employment is terminated by
Morningstar for any reason other than for
D-7
"cause" (as defined in the Metropolous Employment Agreement) or by Mr.
Metropolous' resignation or retirement. The value of the severance payment to be
paid to Mr. Metropolous under the Metropolous Employment Agreement is estimated
to be approximately $2,525,000, plus the amount of the tax gross-up required by
such agreement. The severance benefits are payable by Morningstar on the 14th
day following the termination.
FINANCIAL ADVISORY FEES. Two of Morningstar's existing directors, Charles
W. Tate and John R. Muse, are principals of Hicks Muse. Pursuant to a letter
agreement dated June 10, 1997, Morningstar engaged Hicks Muse to provide
financial advisory services in connection with the Merger. Pursuant to the terms
of this letter agreement, Morningstar has agreed to pay Hicks Muse, upon
consummation of the Merger, a transaction fee of .34% of the levered
consideration paid in the Merger. Morningstar has agreed to reimburse Hicks Muse
for its reasonable out-of-pocket expenses, including attorney's fees, and to
indemnify Hicks Muse against certain liabilities, including certain liabilities
under the federal securities laws.
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. Pursuant to the
Merger Agreement, New Morningstar and Suiza Foods are obligated to indemnify,
defend and hold harmless officers, directors and employees of Morningstar 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 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 which exist
prior to the Effective Time will survive the Merger and New Morningstar will
maintain in effect for not less than three years 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. In addition, the Merger
Agreement provides that New Morningstar or Suiza Foods may provide substitute
policies of at least the same coverage, provided that New Morningstar (or Suiza
Foods, if Suiza Foods provides substitute policies) will be required to obtain
only as much coverage as can be obtained by paying an annual premium not in
excess of 200% of the current annual premium paid by Morningstar for its
existing coverage. See "The Merger Agreement--Indemnification."
ABSENCE OF APPRAISAL RIGHTS
Under the DGCL, the Suiza Stockholders are not entitled to appraisal rights
with respect to the Stock Issuance and the Morningstar Stockholders are not
entitled to appraisal rights with respect to the Merger.
STOCK EXCHANGE LISTING
It is a condition to the Merger that the shares of Suiza Common Stock to be
issued by Suiza Foods in connection with the Merger will have been authorized
for listing on the NYSE, subject only to official notice of issuance. Upon
completion of the Merger, the Morningstar Common Stock will cease to be
authorized for trading on Nasdaq.
TREATMENT OF STOCK CERTIFICATES
After the Effective Time, each certificate previously representing shares of
Morningstar Common Stock will automatically represent, with no further action by
the holder thereof, the right to receive 0.85 shares of Suiza Common Stock for
each share of Morningstar Common Stock represented thereby. Harris Trust &
Savings Bank is the transfer agent and registrar (the "Exchange Agent") for the
Suiza Common Stock. As soon as practicable after the Effective Time, the
Exchange Agent will mail a letter of transmittal with instructions to each
holder of record of Morningstar Common Stock outstanding immediately prior to
the Effective Time for use in exchanging certificates formerly representing
shares of Morningstar Common Stock for certificates representing shares of Suiza
Common Stock. Certificates should not be surrendered by any holders of
Morningstar Common Stock until they have received the letter of transmittal from
the Exchange Agent.
D-8
THE MERGER AGREEMENT
GENERAL
The Merger Agreement contemplates the Merger of Sub with and into
Morningstar, with Morningstar surviving the Merger as a wholly owned subsidiary
of Suiza Foods. The Merger will become effective when the Certificate of Merger
is filed with the Secretary of State of the State of Delaware. It is anticipated
that such filing will be made promptly after the closing under the Merger
Agreement, which closing, in turn, should occur as soon as practicable after the
last of the conditions precedent to the Merger set forth in the Merger Agreement
has been satisfied or waived. The Merger Agreement obligates Suiza Foods to have
the shares of Suiza Common Stock to be issued in connection with the Merger
approved for listing on the NYSE, subject only to official notice of issuance,
prior to the Effective Time.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time, (a) each issued and outstanding share of Morningstar
Common Stock (excluding shares held in the treasury of Morningstar or shares
owned by Suiza Foods, Sub or any other subsidiary of Suiza Foods) will be
converted into the right to receive 0.85 shares of Suiza Common Stock, (b) each
share of Morningstar Common Stock held in the treasury of Morningstar or owned
by Suiza Foods, Sub or any other subsidiary of Suiza Foods will be canceled and
retired, (c) all of the issued and outstanding shares of common stock of Sub
will be converted into and become, in the aggregate, 10,000 fully paid and
nonassessable shares of common stock of New Morningstar and (d) each outstanding
and unexercised Morningstar Option will be assumed by Suiza Foods and converted
into a Substitute Option. The number of shares of Suiza Common Stock to be
subject to a Substitute Option will be determined by multiplying the number of
shares of Morningstar Common Stock subject to the related Morningstar Option by
the Exchange Ratio (rounded down to the nearest whole share), and the per share
exercise price with respect thereto will equal the per share exercise price of
the related Morningstar Option divided by the Exchange Ratio (rounded up to the
nearest full cent). Each Substitute Option will be subject to all of the other
terms and conditions of the Morningstar Option to which it relates. No
Morningstar Option will be accelerated by reason of the Merger to the extent the
Morningstar Board has discretion to make a determination to cause such
acceleration.
As soon as practicable after the Effective Time, Suiza Foods will cause to
be included under a registration statement on Form S-8 of Suiza Foods all shares
of Suiza Common Stock that are subject to Substitute Options and will maintain
the effectiveness of such registration statement until all Substitute Options
have been exercised, expired or forfeited.
For a further discussion of the treatment of Morningstar Options and other
employee benefit plans of Morningstar under the Merger Agreement, see "The
Merger--Interests of Certain Persons in the Merger."
EFFECTIVE TIME OF THE MERGER
Subject to the terms and conditions of the Merger Agreement, the Merger will
become effective at the date and time when the Certificate of Merger is filed
with the Secretary of State of the State of Delaware. The Certificate of Merger
will be filed as soon as practicable following fulfillment of the conditions
precedent of the Merger Agreement. See "--Conditions Precedent."
EXCHANGE OF SHARES
Suiza Foods has selected Harris Trust & Savings Bank as the Exchange Agent
for the Merger. As soon as practicable after the Effective Time, Suiza Foods
will make available, and each Morningstar Stockholder will be entitled to
receive, upon surrender to the Exchange Agent of one or more certificates
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("Certificates") representing shares of Morningstar Common Stock for
cancellation, certificates representing the number of shares of Suiza Common
Stock into which such shares were converted in the Merger and cash in
consideration of fractional shares (the "Share Consideration"). Holders of
unexchanged shares of Morningstar Common Stock will not be entitled to receive
any dividends or other distributions payable by Suiza Foods until their
Certificates are surrendered. Upon surrender, however, such holders will receive
accumulated dividends and distributions without interest, together with cash in
lieu of fractional shares. Holders of unexchanged shares of Morningstar Common
Stock will have no further claim upon the Exchange Agent twelve months after the
Effective Time and thereafter will look only to Suiza Foods and New Morningstar
for payment of the Share Consideration in respect of their shares of Morningstar
Common Stock.
Fractional shares of Suiza Common Stock will not be issued to holders of
Morningstar Common Stock. For each fractional share of Suiza Common Stock that
would otherwise be issued, the holder will receive, in lieu thereof, cash in an
amount equal to such fractional part of a share of Suiza Common Stock multiplied
by the average of the daily closing sale prices for the Suiza Common Stock for
the twenty (20) consecutive trading days on which such shares are actually
traded on the NYSE ending at the close of trading on the second trading day
immediately preceding the Effective Date.
CORPORATE ORGANIZATION AND GOVERNANCE
CERTIFICATE OF INCORPORATION. The Morningstar Charter as in effect at the
Effective Time will be the Charter of New Morningstar, and thereafter may be
amended in accordance with its terms and as provided by law and the Merger
Agreement.
BYLAWS. The Morningstar Bylaws as in effect at the Effective Time will be
the Bylaws of New Morningstar, and thereafter may be amended in accordance with
their terms and as provided by law and the Merger Agreement.
BOARD OF DIRECTORS; OFFICERS. The directors of Sub immediately prior to the
Effective Time will be the directors of New Morningstar, and the officers of Sub
immediately prior to the Effective Time will be the officers of New Morningstar,
in each case, until their respective successors are duly elected and qualified.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Suiza Foods, Morningstar and Sub, relating, among other things, to the
following: (i) their incorporation, existence, good standing, corporate power
and similar corporate matters; (ii) their capitalization; (iii) their
authorization, execution, delivery and performance and the enforceability of the
Merger Agreement and related matters; (iv) the absence of conflicts, violations
and defaults under their respective certificates of incorporation and bylaws and
certain other agreements and documents; (v) the documents and reports filed with
the Commission and the accuracy and completeness of the information contained
therein; (vi) the absence of certain material changes or events since June 30,
1997; (vii) pending or threatened investigations or litigation; (viii) employee
benefit matters; (ix) the receipt of fairness opinions from their respective
financial advisors; (x) compliance with applicable laws, ordinances and
regulations; (xi) tax matters; (xii) accounting matters relating to the
availability of "pooling of interests" accounting treatment; (xiii)
relationships with their respective customers and suppliers and (xiv)
intellectual property. Morningstar made additional representations and
warranties as to the approval of the Merger by the Morningstar Board, its
recommendation of the Merger and the Merger Agreement to the Morningstar
Stockholders and its determination that the Merger is advisable and fair to and
in the best interests of Morningstar and the Morningstar Stockholders.
All representations and warranties of Suiza Foods, Morningstar and Sub will
expire at the Effective Time.
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CONDUCT OF BUSINESS PENDING THE MERGER
SUIZA FOODS. Suiza Foods has agreed that prior to the Effective Time,
unless Morningstar otherwise agrees in writing or except as otherwise required
by the Merger Agreement, it will, and will cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as conducted prior to the date of the Merger
Agreement and will, or will 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 ongoing businesses will be
unimpaired at the Effective Time, and not propose or agree to (i) sell or pledge
or agree to sell or pledge any capital stock owned by it in any of its
subsidiaries or owned by any of its subsidiaries (except for certain stock
pledged as collateral pursuant to Suiza Foods' existing credit facilities), (ii)
except as contemplated in the merger agreement for the Country Fresh Merger,
amend the Suiza Charter or Suiza Bylaws, (iii) split, combine or reclassify its
outstanding capital 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
capital stock of Suiza Foods, or declare, set aside, authorize or pay any
dividend or other distribution payable in cash, stock or property or (iv)
directly or indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of Suiza Common Stock.
Suiza Foods has also agreed that, except in connection with acquisitions of
assets or businesses that are primarily engaged in the same businesses as those
conducted by Suiza Foods as of the date of the Merger Agreement and any
financing transactions or issuances of securities related thereto which, in each
case, do not require the approval of Suiza Stockholders, it will not, and will
not permit any of its subsidiaries to, (i) 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 capital stock of any class, any
indebtedness having the right to vote on any matter on which the Suiza
Stockholders may vote or any options, rights or warrants to acquire, or
securities convertible into, exercisable for or exchangeable for, shares of
capital stock other than issuances, deliveries or sales of Suiza Foods' stock or
options, rights or warrants, to acquire Suiza Foods' stock under Suiza Foods'
existing benefit plans; (ii) acquire, lease or dispose or agree to acquire,
lease or dispose of any capital assets or any other assets other than in the
ordinary course of business; (iii) 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; (iv)
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; (v) incur any material transaction fees, costs or expenses in addition
to those disclosed to Morningstar prior to the execution of the Merger Agreement
or (vi) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing.
Suiza Foods has further agreed (i) to use its best efforts to not, and not
to permit any of its subsidiaries to, take or cause to be taken any action,
whether before or after the Effective Time, which would disqualify the Merger as
a "pooling of interests" for accounting purposes or as a "reorganization" within
the meaning of Section 368(a) of the Code and (ii) not to, and not to 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 Suiza Foods, or any of its subsidiaries, except in
the ordinary course of business. Suiza Foods has also agreed that following the
Effective Time, it will file all tax returns on the basis that the Merger
qualifies as a "reorganization" within the meaning of Section 368(a)(1)(A) and
Section 368(a)(2)(E) of the Code and that it will not take any action which is
inconsistent with or contrary to such classification of the Merger for tax
purposes.
SUB. Sub has agreed not to engage, during the period from the date of the
Merger Agreement to the Effective Time, in any activities of any nature except
as provided in or contemplated by the Merger Agreement.
D-11
MORNINGSTAR. Morningstar has agreed that prior to the Effective Time,
unless Suiza Foods otherwise agrees in writing or except as otherwise required
by the Merger Agreement, it will, and will cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as conducted prior to the Merger Agreement and
will, and will 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 will be unimpaired
at the Effective Time, and not propose or agree to (i) sell or pledge or agree
to sell or pledge any capital stock owned by it in any of its subsidiaries or
owned by any of its subsidiaries, (ii) amend the Morningstar Charter or the
Morningstar Bylaws, (iii) 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 Morningstar Common Stock, or
declare, set aside, authorize or pay any dividend or other distribution payable
in cash, stock or property or (iv) directly or indirectly redeem, purchase or
otherwise acquire or agree to redeem, purchase or otherwise acquire any shares
of Morningstar Common Stock.
Morningstar has also agreed that it will not, and will not permit any of its
subsidiaries to, (i) 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 Morningstar Stockholders may vote or any option, rights or
warrants to acquire, or securities convertible into, exercisable for or
exchangeable for, shares of stock other than issuances, deliveries or sales
pursuant to existing obligations under its option plans; (ii) acquire, lease or
dispose or agree to acquire, lease or dispose of any capital assets or any other
assets other than in the ordinary course of business; (iii) 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; (iv) 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; (v) incur any material transaction fees, costs
or expenses in addition to those disclosed to Suiza Foods prior to the execution
of the Merger Agreement or (vi) enter into any contract, agreement, commitment
or arrangement with respect to any of the foregoing. Morningstar has also agreed
that except as required to comply with applicable law and except as provided in
the provisions relating to employee matters (see "--Employee Matters"), it will
not enter into any new (or amend any existing) employee benefit plan of
Morningstar 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.
Morningstar has further agreed not to, and not to permit any of its
subsidiaries to, take or cause to be taken any action, whether before or after
the Effective Time, which would disqualify the Merger as a "pooling of
interests" for accounting purposes or as a "reorganization" within the meaning
of Section 368(a) of the Code, or 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 Morningstar or any of its subsidiaries,
except in the ordinary course of business. Morningstar has also agreed that
following the Effective Time, it will file all tax returns on the basis that the
Merger qualifies as a "reorganization" within the meaning of Section
368(a)(1)(A) and Section 368(a)(2)(E) of the Code and that it will not take any
action which is inconsistent with or contrary to such classification of the
Merger for tax purposes.
ADDITIONAL AGREEMENTS
The Merger Agreement contains certain covenants and agreements of Suiza
Foods and Morningstar customary for transactions such as those contemplated by
the Merger Agreement. These relate to, among
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other things, (i) each party allowing the other access, during normal business
hours, to its properties, books, contracts, commitments and records, documents
filed pursuant to requirements of the Commission and such other information to
which the other party may reasonably request access, subject to existing
confidentiality obligations; (ii) the preparation of the Registration Statement
and this Joint Proxy Statement/Prospectus; (iii) each party using its reasonable
efforts to deliver an affiliate letter from each of its affiliates as to the
matters described under the caption "The Merger--Restrictions on Resales by
Affiliates" and using commercially reasonable efforts to cause the Merger to
qualify for "pooling of interests" accounting treatment; (iv) listing of the
shares of Suiza Common Stock to be issued in connection with the Merger by Suiza
Foods on the NYSE, upon official notice of issuance; (v) certain employee
matters; (vi) filing of such notifications as are required to be filed under the
HSR Act and responding to inquiries with respect thereto; (vii) using
commercially reasonable efforts to consummate and make effective the
transactions contemplated by the Merger Agreement, including the use of
commercially reasonable efforts to obtain all necessary waivers, consents and
approvals, to effect all necessary registrations and filings and to lift any
injunction to the Merger; (viii) conducting its business in a manner which would
not disqualify the Merger as a "pooling of interests" for accounting purposes;
(ix) filing tax returns on the basis that the Merger qualifies as a
"reorganization" within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(E) of the Code and taking no actions inconsistent with or contrary to
such classification of the Merger for tax purposes; (x) advising the other party
orally and in writing of any change or event that has had, or could have, a
material adverse effect on such party and providing copies of all filings made
by such party with the Commission or any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, in connection with the Merger Agreement and other transactions
contemplated thereby and (xi) the appointment of two of the current directors of
Morningstar to the New Suiza Board.
Suiza Foods has agreed to use commercially reasonable efforts to obtain a
letter from Deloitte & Touche LLP and Morningstar has agreed to use commercially
reasonable efforts to obtain a letter from Arthur Andersen LLP, in each case,
stating that the Merger qualifies for "pooling of interests" accounting
treatment if consummated in accordance with the Merger Agreement.
Suiza Foods has agreed to use its best efforts to publish, by public filing
or announcement, the results of at least 30 days of combined operations of Suiza
Foods and Morningstar as soon after the Effective Time as is commercially
practicable.
EMPLOYEE MATTERS
The Merger Agreement provides that, as of the Effective Time, the employees
of Morningstar and each subsidiary will continue employment with New Morningstar
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, that except as may be
specifically required by applicable law or any contract, New Morningstar and its
subsidiaries will not be obligated to continue any employment relationship with
any employee for any specific period of time. Except with respect to the stock
option plans to be assumed by Suiza Foods as provided in the Merger Agreement,
as of the Effective Time, New Morningstar will be the sponsor of the employee
benefit plans sponsored by Morningstar immediately prior to the Effective Time,
and Suiza Foods will cause New Morningstar and its subsidiaries to satisfy all
obligations and liabilities under such employee benefit plans; provided,
however, that, except as contemplated by the Merger Agreement, nothing contained
in the Merger Agreement will limit or restrict New Morningstar's right on or
after the Effective Time to amend, modify or terminate any of such employee
benefit plans. To the extent any employee benefit plan, program or policy of
Suiza Foods, New Morningstar, or their affiliates is made available to any
person who is an employee of Morningstar or any of its subsidiaries immediately
prior to the Effective Time: (i) service with Morningstar and its subsidiaries
by any employee prior to the Effective Time will be credited for eligibility and
vesting purposes and for purposes of qualifying for any additional benefits tied
to periods of service (such as higher rates of
D-13
matching contributions and eligibility for early retirement) under such plan,
program or policy, but not for benefit accrual purposes (except for disability,
vacation and severance, with respect to which service with Morningstar and its
subsidiaries will be credited for benefit accrual purposes) and (ii) with
respect to any benefit plans to which such employees may become eligible, Suiza
Foods will cause such plans to provide credit for any co-payments or deductibles
by such employees and waive all pre-existing condition exclusions and waiting
periods, other than limitations or waiting periods that have not been satisfied
under any benefit plans maintained by Morningstar and its subsidiaries for their
employees prior to the Effective Time.
INDEMNIFICATION
From and after the Effective Date, New Morningstar and Suiza Foods will be
required to indemnify, defend and hold harmless the officers, directors and
employees of Morningstar and its subsidiaries who were such at any time prior to
the Effective Time (the "Indemnified Parties") from and against all losses,
expenses, claims, damages or liabilities arising out of the transactions
contemplated by the Merger Agreement to the fullest extent permitted or required
under applicable law, and the Indemnified Parties will be advanced expenses
subject to a customary reimbursement agreement. All rights to indemnification
existing in favor of the directors, officers or employees of Morningstar as
provided in the Morningstar charter or the Morningstar bylaws, as in effect on
the date of the Merger Agreement, with respect to matters occurring through the
Effective Time, will survive the Merger and will continue in full force and
effect thereafter. New Morningstar will maintain in effect for not less than
three years after the Effective Time the current policies of directors' and
officers' liability insurance maintained by Morningstar with respect to matters
occurring on or prior to the Effective Time. The Merger Agreement further
provides that New Morningstar or Suiza Foods may substitute therefor policies of
at least the same coverage (with carriers comparable to Morningstar's existing
carriers) containing terms and conditions which are not materially less
advantageous to the Indemnified Parties, that New Morningstar will not be
required, in order to maintain or procure such coverage, to pay an annual
premium in excess of 200% of the current annual premium paid by Morningstar for
its existing coverage (the "Cap") and that if equivalent coverage cannot be
obtained, or can be obtained only by paying an annual premium in excess of the
Cap, New Morningstar will be required only to obtain as much coverage as can be
obtained by paying an annual premium equal to the Cap.
In the event that any action, suit, proceeding or investigation relating to
the Merger Agreement or to the transactions contemplated by the Merger Agreement
is commenced, whether before or after the Effective Time, Suiza Foods,
Morningstar and Sub agree to cooperate and use their respective reasonable
efforts to vigorously defend against and respond to the same.
NO SHOP
Each of Suiza Foods and Morningstar has agreed (i) that neither it nor any
of its subsidiaries will, and it will direct and use its best efforts to cause
its 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
(other than, in the case of Suiza Foods, any acquisitions of assets or
businesses that are primarily engaged in the same business as that conducted by
Suiza Foods and its subsidiaries as of the date of the Merger Agreement and any
financing transactions or issuances of securities related thereto which, in each
case, do not require approval by the Suiza Stockholders), involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, such party or any of its material 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
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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, or otherwise facilitate any effort or
attempt to make or implement an Alternative Proposal; (ii) that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted prior to the date of the
Merger Agreement with respect to any of the foregoing and (iii) that it will
notify the other party with reasonable promptness 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.
Notwithstanding the foregoing, the Merger Agreement provides that each of Suiza
Foods and Morningstar may, directly or indirectly, furnish information and
access to, and may participate in discussions and negotiate with, any
corporation, partnership, person or other entity, if such corporation,
partnership, person or other entity has submitted a written proposal to the
Board of Directors of such party relating to an Alternative Proposal if (i) the
Board of Directors of such party believes, in its good faith judgment, that such
Alternative Proposal is more favorable to such party's stockholders than the
Merger and is reasonably likely to be consummated or (ii) the Board of Directors
of such party, following consultation with 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 duty
to its stockholders imposed by law.
Neither the Morningstar Board nor any committee thereof may (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Suiza Foods,
the approval or recommendation by the Morningstar Board of the Merger Agreement
or the Merger or (ii) approve or recommend, or propose to approve or recommend,
any Alternative Proposal, unless (x) the Morningstar Board believes, in its good
faith judgment, that such Alternative Proposal is more favorable to the
Morningstar Stockholders than the Merger and is reasonably likely to be
consummated or (y) the Morningstar Board, following consultation with its
independent legal counsel relating thereto, determines in its good faith
judgment that failing to take such action in connection with such Alternative
Proposal would constitute a breach of the Morningstar Board's fiduciary duty to
the Morningstar Stockholders imposed by law.
Neither the Suiza Board nor any committee thereof may (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Morningstar,
the approval or recommendation by the Suiza Board of the Merger Agreement or the
issuance of Suiza Common Stock in connection with the Merger or (ii) approve or
recommend, or propose to approve or recommend, any Alternative Proposal, unless
(x) the Suiza Board believes, in its good faith judgment, that such Alternative
Proposal is more favorable to Suiza Stockholders than the Merger and is
reasonably likely to be consummated or (y) the Suiza Board, following
consultation with its independent legal counsel relating thereto, determines in
its good faith judgment that failing to take such action in connection with such
Alternative Proposal would constitute a breach of the Suiza Board's fiduciary
duty to the Suiza Stockholders imposed by law.
The Merger Agreement provides that nothing contained in the Merger Agreement
will prevent either Board from taking, and disclosing to its stockholders, a
position contemplated by Rule 14e-2(a) promulgated under the Exchange Act,
provided that such Board does not recommend that its stockholders tender their
shares in connection with any such tender offer unless such recommendation is
permitted as described above.
D-15
CONDITIONS PRECEDENT
The obligations of Suiza Foods, Morningstar and 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 Merger Agreement and the transactions contemplated thereby by the
requisite vote of the Morningstar Stockholders and the approval of the Stock
Issuance by the requisite vote of the Suiza Stockholders; (ii) the expiration or
termination of any waiting period applicable to the consummation of the Merger
under the HSR Act; (iii) the effectiveness of the Registration Statement, the
absence of a stop order suspending such effectiveness and the receipt of all
necessary approvals under state securities laws relating to the issuance of
Suiza Common Stock to be issued to Morningstar Stockholders in connection with
the Merger; (iv) there not having been issued and in effect any preliminary or
permanent injunction or order by any federal or state court in the United States
of competent jurisdiction prohibiting the consummation of the Merger (each of
the parties having agreed to use all commercially reasonable efforts to have any
such injunction lifted); (v) the listing on the NYSE, subject only to official
notice of issuance, of the shares of Suiza Common Stock to be issued pursuant to
the Stock Issuance; (vi) Morningstar having received an opinion of Weil, Gotshal
& Manges LLP and Suiza Foods having received an opinion of Hughes & Luce,
L.L.P., in each case, that the Merger will qualify as a reorganization within
the meaning of Section 368(a) of the Code and (vii) Morningstar having received
a letter from Arthur Andersen LLP, and Suiza Foods and Sub having received a
letter from Deloitte & Touche LLP, in each case, dated as of the closing date,
to the effect that the Merger will qualify for pooling of interest accounting
treatment if consummated in accordance with the Merger Agreement.
The obligation of Morningstar to effect the Merger is also subject to the
fulfillment of certain additional conditions, including (i) the accuracy of the
representations and warranties of Suiza Foods and Sub when made and on and as of
the Effective Time, except as expressly contemplated or permitted by the Merger
Agreement and, with respect to representations and warranties that are not
otherwise subject to a materiality qualifier, where the inaccuracy thereof would
not, alone or in the aggregate with all such inaccuracies, have a material
adverse effect on the business, properties, assets, condition (financial or
otherwise), liabilities or results of operation of Suiza Foods and its
subsidiaries, (ii) the performance in all material respects of the obligations
and covenants of Suiza Foods and Sub under the Merger Agreement and (iii) the
receipt of a certificate of the President and Chief Executive Officer or a Vice
President of each of Suiza Foods and Sub to such effect.
The obligation of Suiza Foods and Sub to effect the Merger is also subject
to the fulfillment of certain additional conditions, including (i) the accuracy
of the representations and warranties of Morningstar when made and on and as of
the Effective Time, except as expressly contemplated or permitted by the Merger
Agreement and, with respect to representations and warranties that are not
otherwise subject to a materiality qualifier, where the inaccuracy thereof would
not, alone or in the aggregate with all such inaccuracies, have a material
adverse effect on the business, properties, assets, condition (financial or
otherwise), liabilities or results of operation of Morningstar and its
subsidiaries, (ii) the performance in all material respects of the obligations
and covenants of Morningstar under the Merger Agreement and (iii) the receipt of
a certificate of the President and Chief Executive Officer or a Vice President
of Morningstar to such effect.
Prior to the Effective Time, the parties to the Merger Agreement may (i)
extend the time for the performance of any of the obligations or other acts of
the other parties thereto, (ii) waive any inaccuracies in the representations
and warranties contained therein or in any documents delivered pursuant thereto
and (iii) waive compliance with any of the agreements or conditions contained
therein.
TERMINATION
The Merger Agreement may be terminated by action of either the Suiza Board
or Morningstar Board and the Merger abandoned under certain circumstances,
including, but not limited to, the occurrence of
D-16
any of the following: (i) the Merger has not been consummated by February 28,
1998, provided that the terminating party has not breached in any material
respect its obligations under the Merger Agreement in any manner that would have
proximately contributed to the failure to consummate the Merger; (ii) the
requisite approval of the Merger, the Merger Agreement and the transactions
contemplated thereby by the Morningstar Stockholders is not obtained; (iii) the
requisite approval of the Stock Issuance by the Suiza Stockholders is not
obtained; or (iv) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action has become final and non-appealable,
provided that the party seeking to terminate the Merger Agreement has used all
commercially reasonable efforts to remove such injunction, order or decree.
The Merger Agreement may be also terminated and the Merger may be abandoned
at any time prior to the Effective Time, by action of (a) the Suiza Board, (i)
if the Morningstar Board has withdrawn or modified in a manner adverse to Suiza
Foods its approval or recommendation of the Merger Agreement or the Merger or
has recommended an Alternative Proposal with respect to Morningstar to
Morningstar's Stockholders or (ii) Suiza Foods shall have received an
Alternative Proposal which the Suiza Board believes, in its good faith judgment,
is more favorable to Suiza Foods' stockholders than the Merger and is reasonably
likely to be consummated or (b) the Morningstar Board, (i) if the Suiza Board
shall have withdrawn or modified in a manner adverse to Morningstar its approval
or recommendation of the Merger Agreement or the issuance of the Suiza Common
Stock in connection with the Merger or shall have recommended an Alternative
Proposal with respect to Suiza Foods to Suiza Stockholders or (ii) Morningstar
shall have received an Alternative Proposal which the Morningstar Board
believes, in its good faith judgment, is more favorable to Morningstar
Stockholders than the Merger and is reasonably likely to be consummated.
The Merger Agreement may also be terminated prior to the Effective Time,
before or after approval of the Suiza Stockholders or Morningstar Stockholders,
by the mutual consent of Suiza Foods and Morningstar.
In the event that (x) Suiza Foods terminates the Merger Agreement as
described in clause (a)(i) of the second preceding paragraph or (y) Morningstar
terminates the Merger Agreement as described in clause (b)(ii) of the second
preceding paragraph, then, in either such case, Morningstar shall concurrently
with such termination pay Suiza Foods a fee of $20,000,000 (a "Termination
Fee"), which amount shall be payable by wire transfer of same day funds, and
shall promptly reimburse Suiza Foods for all substantiated out-of-pocket costs
and expenses incurred by Suiza Foods in connection with the Merger Agreement and
the transactions contemplated thereby, including, without limitation, costs and
expenses of accountants, attorneys and financial advisors, up to an aggregate of
$2,000,000.
In the event that (x) Morningstar terminates the Merger Agreement as
described in clause (b)(i) of the third preceding paragraph or (y) Suiza Foods
terminates the Merger Agreement as described in clause (a)(ii) of the third
preceding paragraph, then, in either such case, Suiza Foods shall concurrently
with such termination pay Morningstar a fee of $20,000,000 (a "Suiza Termination
Fee"), which amount shall be payable by wire transfer of same day funds, and
shall promptly reimburse Morningstar for all substantiated out-of-pocket costs
and expenses incurred by Morningstar in connection with the Merger Agreement and
the transactions contemplated thereby, including, without limitation, costs and
expenses of accountants, attorneys and financial advisors, up to an aggregate of
$2,000,000.
The provisions in the Merger Agreement relating to, among other things, the
effect of termination and abandonment, fees and expenses, specific performance
and assignment will survive the termination of the Merger Agreement.
D-17
FEES AND EXPENSES
Whether or not the Merger is consummated, except as otherwise provided in
the Merger Agreement following the exercise of certain termination rights, all
costs and expenses incurred in connection with the Merger Agreement and the
transactions contemplated by the Merger Agreement will be paid by the party
incurring such expenses. Suiza Foods and Sub on the one hand and Morningstar on
the other hand will each be responsible for one half of all expenses relating to
printing, filing and mailing this Joint Proxy Statement/Prospectus and the
Registration Statement and all Commission and other regulatory filing fees
incurred in connection with this Joint Proxy Statement/Prospectus and the
Registration Statement.
D-18
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides that no director of
the Registrant will be personally liable to the Registrant or any of its
stockholders for monetary damages arising from the director's breach of
fiduciary duty as a director, with certain limited exceptions.
Pursuant to the provisions of Section 145 of the Delaware General
Corporation Law, every Delaware corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses, judgments, fines and amounts paid in settlement and reasonably
incurred in connection with such action, suit or proceeding. The power to
indemnify applies only if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests, or not opposed to the
best interests, of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification will be made
in the event of any adjudication of negligence or misconduct unless the court,
in its discretion, believes that in light of all the circumstances
indemnification should apply.
The Registrant's Certificate of Incorporation contains provisions requiring
it to indemnify its officers and directors to the fullest extent permitted by
the Delaware General Corporation Law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
See the Exhibit Index, beginning on page II-5.
(b) Financial Statement Schedules:
No financial statement schedules are required as all material required
information is disclosed in the notes to the Registrant's Consolidated Financial
Statements.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
II-1
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(4) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof;
(5) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request;
(6) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form;
(7) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described under
Item 20 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on October 23, 1997.
SUIZA FOODS CORPORATION
By: /s/ GREGG L. ENGLES
-----------------------------------------
Gregg L. Engles,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
We, the undersigned officers and directors of Suiza Foods Corporation,
hereby severally constitute and appoint Gregg L. Engles and Tracy L. Noll, and
each of them, our true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for each of us in our name, place and stead,
in any and all capacities, to sign Suiza Foods Corporation's Registration
Statement on Form S-4, and any other Registration Statement relating to the same
offering, and any and all amendments thereto (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby grant to such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as each of us might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or his or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
/s/ GREGG L. ENGLES
------------------------------ Chairman of the Board and October 23, 1997
Gregg L. Engles Chief Executive Officer
*
------------------------------ Vice Chairman of the Board October 23, 1997
Cletes O. Beshears
*
------------------------------ Vice Chairman of the Board October 23, 1997
Hector M. Nevares
*
------------------------------ Principal Financial and October 23, 1997
Tracy L. Noll Accounting Officer
*
------------------------------ Director October 23, 1997
Alan J. Bernon
II-3
*
------------------------------ Director October 23, 1997
Gayle O. Beshears
*
------------------------------ Director October 23, 1997
Stephen Green
*
------------------------------ Director October 23, 1997
Robert L. Kaminski
*
------------------------------ Director October 23, 1997
David F. Miller
*
------------------------------ Director October 23, 1997
P. Eugene Pender
*
------------------------------ Director October 23, 1997
Robert Piccinini
* by Gregg L. Engles, Attorney-in-fact
II-4
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
----------- ------------------------------------------------------------------------------------------------
2.1 -- Amended and Restated Reorganization Agreement; filed as Exhibit 2.1 to Suiza Foods' Registration
Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by reference.
2.2 -- Agreement and Plan of Merger dated as of September 18, 1997 by and among Suiza Foods, Merger
Sub, and Country Fresh (attached as Appendix A to the Proxy Statement/Prospectus).
4.1 -- Specimen of Common Stock Certificate; filed as Exhibit 4.1 to Suiza Foods' Registration
Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by reference.
4.2 -- Registrations Rights Agreement (Exhibit G-2 to Amended and Restated Reorganization Agreement);
filed as Exhibit 4.2 to Suiza Foods' Registration Statement on Form S-1 (Registration No.
333-1858) and incorporated herein by reference.
5.1 -- Opinion of Hughes & Luce, L.L.P. regarding legality of securities being registered.
8.1 -- Opinion of Warner Norcross & Judd LLP regarding tax matters.
12.1** -- Statements regarding computation of ratios.
23.1 -- Consent of Hughes & Luce, L.L.P. (contained in Exhibit 5.1)
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of Barnard, Vogler & Co.
23.5 -- Consent of McGladrey & Pullen, LLP.
23.6 -- Consent of Coopers & Lybrand L.L.P.
23.7 -- Consent of Arthur Andersen LLP.
23.8 -- Consent of Price Waterhouse LLP.
23.9 -- Consent of Warner Norcross & Judd LLP (contained in Exhibit 8.1).
23.10 -- Consent of Delton Parks.
23.11 -- Consent of The Ohio Company.
24.1 -- Power of Attorney (contained in the signature pages hereto).
99.1 -- Form of Proxy
** Previously filed
II-5
[Letterhead]
November 23, 1997
Suiza Foods Corporation
3811 Turtle Creek Blvd., Suite 1300
Dallas, Texas 75219
Ladies and Gentlemen:
We have acted as counsel to Suiza Foods Corporation, a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended, of 1,911,075 shares of the Company's common stock and 11,691
shares of the Company's Series A Preferred Stock (the "Shares"), as described in
the Company's Registration Statement on Form S-4 (the "Registration Statement")
filed with the Securities and Exchange Commission. The Company proposes to
issue Shares to the shareholders of Country Fresh, Inc., a Michigan corporation
("Country Fresh"), in connection with the acquisition of Country Fresh.
Capitalized terms not otherwise defined in this opinion have the meanings given
to them in the Registration Statement.
In rendering this opinion, we have examined and relied upon executed
originals, counterparts or copies of such documents, records and certificates
(including certificates of public officials and officers of the Company) as we
considered necessary or appropriate for enabling us to express the opinions set
forth herein. In all such examinations, we have assumed the authenticity and
completeness of all documents submitted to us as originals and the conformity to
originals and completeness of all documents submitted to us as photostatic,
conformed, notarized or certified copies.
Based on the foregoing, we are of the opinion that the Shares, when issued
and sold to the Country Fresh shareholders as described in the Registration
Statement and pursuant to the terms of the Merger Agreement (without waiver),
will be validly issued, fully paid and nonassessable.
This opinion may be filed as an exhibit to the Registration Statement. We
also consent to the reference to this firm as having passed on the validity of
the Shares under the caption "Legal Matters" in the Registration Statement. In
giving this consent, we do not admit that we are included in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
Hughes & Luce, L.L.P.
[LETTERHEAD]
October 22, 1997
Country Fresh, Inc.
2555 Buchanan Avenue, S.W.
Grand Rapids, Michigan 49518
You have requested our opinion regarding the federal income tax
consequences of the proposed affiliation of Country Fresh, Inc. (the
"Company") with Suiza Foods Corporation ("Parent") through the proposed
merger (the "Merger") of CF Acquisition Corp. ("Merger Sub"), a wholly owned
Merger Sub of Parent, with and into the Company under the terms of a
Agreement and Plan of Merger dated as of September 18, 1997 (the "Merger
Agreement"), among Parent, the Company and Merger Sub. Capitalized terms not
defined herein shall have the meanings ascribed to them in the Merger
Agreement.
Pursuant to the Merger Agreement, Parent has formed Merger Sub as a
wholly owned subsidiary for the sole purpose of the Merger. Merger Sub will
be merged with and into the Company under the Michigan Business Corporation
Act, as amended, and in accordance with the Merger Agreement. In the Merger,
all of the issued and outstanding shares common stock of the Company (the
"Company Common Stock") will be converted into shares of Parent common stock
(the "Parent Common Stock"), and the issued and outstanding shares of Series
A 8% Preferred Stock of the Company (the "Company Preferred Stock") will be
converted into preferred stock of the Parent (the "Parent Preferred Stock"),
and the surviving corporation will become a wholly owned subsidiary of the
Parent. The Company Common Stock and Company Preferred Stock are referred
to collectively as the "Company Stock," and the Parent Common Stock and
Parent Preferred Stock are referred to collectively as the "Parent Stock."
This opinion has been requested and is provided solely for the purpose of
inclusion as an exhibit to the Form S-4 Registration Statement filed by
Parent with the Securities and Exchange Commission in connection with the
proposed Merger. If the Merger occurs, it will occur at a date
significantly later than the date of this opinion. Applicable law,
regulations, judicial interpretations, regulatory positions, and known facts
are all subject to change. This opinion is based only upon such law,
regulations, interpretations, positions, and facts as are now in existence
and known to us as of the date of this opinion and assumes no change between
the date of this opinion and the date of the Merger. For this reason, this
opinion is not intended, and may not be relied upon, to satisfy the condition
precedent to the Merger stated in Section 7.03(g) of the Merger Agreement.
This opinion is based upon facts regarding the Merger as described in the
Merger Agreement, and upon the following assumptions:
Country Fresh, Inc.
October 22, 1997
Page 2
1. The Company Common Stock and Company Preferred Stock are the only
stock or equity interests in the Company issued and outstanding.
2. The fair market value of the Parent Common Stock to be received by
each shareholder of the Company will be approximately equal to the fair
market value of the Company Common Stock surrendered in the exchange. The
fair market value of the Parent Preferred Stock to be received by each
shareholder of the Company will be approximately equal to the fair market
value of the Company Preferred Stock surrendered in the exchange.
3. There is no plan or intention by the shareholders of the Company to
sell, exchange, transfer by gift or otherwise dispose of a number of shares
of Parent Stock received in the transaction that would reduce the
shareholders' ownership of Parent Stock to a number of shares having a value,
as of the effective date of the transaction, of less than fifty percent of
the value of all of the formerly outstanding Company Stock at the same date.
For purposes of this assumption, shares of Company Stock surrendered by
dissenters or exchanged for cash in lieu of fractional shares of Parent Stock
are treated as outstanding Company Stock on the date of the transaction.
4. Following the transaction, the Company will hold at least ninety
percent of the fair market value of its net assets and at least seventy
percent of the fair market value of its gross assets and at least ninety
percent of the fair market value of Merger Sub's net assets and at least
seventy percent of the fair market value of Merger Sub's gross assets held
immediately prior to the transaction. For purposes of this assumption,
amounts used by the Company or Merger Sub to pay reorganization expenses and
all redemptions and distributions (except for regular, normal dividends) made
by the Company will be included as assets of the Company or Merger Sub,
respectively, immediately prior to the transaction.
5. The Company has no plan or intention to issue additional shares of
its stock that would result in Parent losing control of the Company within
the meaning of Section 368(c) of the Internal Revenue Code of 1986, as
amended (the "Code").
6. Parent has no plan or intention to reacquire any of its stock issued
in the transaction, except fractional share interests.
7. Parent has no plan or intention to liquidate the Company; to merge
the Company with or into another corporation; to sell or otherwise dispose of
the stock of the Company; or to cause the Company to sell or otherwise
dispose of any of its assets or of any of the assets acquired from Merger Sub
except in the ordinary course of business or transfers described in Section
368(a)(2)(C) of the Code.
Country Fresh, Inc.
October 22, 1997
Page 3
8. Merger Sub will have no liabilities assumed by the Company and will
not transfer any assets subject to liabilities in the transaction.
9. Following the transaction, the Company will continue its historic
business or use a significant portion of its historic business assets in a
business.
10. Parent, Merger Sub, the Company and the shareholders of the Company
will pay their respective expenses incurred in connection with the
transaction.
11. At the time of the transaction, the Company will not have
outstanding any warrants, options, convertible securities, or any other type
of right pursuant to which any person could acquire stock in the Company
that, if exercised or converted, would affect Parent's acquisition or
retention of control of the Company, as defined in Section 368(c) of the Code.
12. Parent does not own, nor has it owned during the past five years,
any shares of the stock of the Company.
13. On the date of the transaction, the fair market value of the assets
of the Company will exceed the sum of its liabilities, if any, to which the
assets are subject.
14. The Company is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of Section 368(a)(3)(A) of the Code.
15. There is no intercorporate indebtedness existing between Parent and
the Company or between Merger Sub and the Company that was issued, acquired,
or will be settled at a discount.
16. Neither Parent nor the Company are investment companies as defined
in Section 368(a)(2)(F)(iii) and (iv) of the Code.
17. None of the compensation received by any shareholder-employees of
the Company will be separate consideration for or allocable to, any of their
shares of Company Common Stock; none of the shares of Parent Stock received
by any shareholder-employees will be separate consideration for, or allocable
to, any employment agreement; and the compensation paid to any
shareholder-employees will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length
for similar services.
Country Fresh, Inc.
October 22, 1997
Page 4
18. The stock options issued by the Company (the "Company Stock
Options") are not qualified stock options and have never been traded on an
established securities market.
19. Neither the Company Stock Options nor the amended options to
purchase shares of Parent Common Stock have a readily ascertainable fair
market value (within the meaning of section 1.83-7 of the Income Tax
Regulations).
20. The Merger will be consummated in accordance with the Merger
Agreement.
Based on the facts and assumptions set forth above, and subject to the
limitations and conditions identified in this opinion, it is our opinion that
the Merger of Merger Sub with and into the Company would give rise to the
following federal income tax consequences under the Code.
1. The Merger of Merger Sub with and into the Company will constitute a
reorganization within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(E) of the Code, and Parent, Merger Sub, and the Company will each
be "a party to a reorganization" within the meaning of Section 368(b) of the
Code.
2. Neither Parent, Merger Sub or the Company will recognize any gain or
loss for United States federal income tax purposes as a result of the Merger.
3. No gain or loss will be recognized by the shareholders of the
Company who receive shares of Parent Stock in exchange for all of their
shares of Company Stock, except to the extent of any cash received in lieu of
a fractional share of Parent Stock.
4. The basis of Parent Stock to be received by the shareholders of the
Company will, in each instance, be the same as the basis of the respective
shares of Company Stock surrendered in exchange therefor.
5. The holding period of the Parent Stock received by the shareholders
of the Company will, in each instance, include the holding period of the
respective shares of Company Stock surrendered in exchange therefor;
provided, that the Company Stock was, in each instance, held as a capital
asset in the hands of the shareholder at the Effective Time.
6. No income will be recognized by the holders of options to purchase
shares of Parent Common Stock by reason of the amendment of the terms of the
options pursuant to Section 5.12 (STOCK OPTION PLANS) of the Merger
Agreement.
Country Fresh, Inc.
October 22, 1997
Page 5
We express no opinion about the tax treatment of the Merger under other
provisions of the Code and regulations, of any conditions existing at the
time of, or the effects resulting from, the Merger that are not specifically
covered above, under foreign, state, or local laws, or under estate or gift
tax statutes. The particular circumstances of a shareholder of the Company
may cause the shareholder's tax consequences to differ from those described
in this opinion, including, but not limited to, shareholders of the Company
who are corporations, trusts, dealers in securities, financial institutions,
insurance companies, tax exempt organizations, persons who are not United
States citizens or resident aliens or domestic corporations, who acquired
Company Stock pursuant to employee stock options or otherwise as
compensation, who do not hold their shares as capital assets, who are subject
to the alternative minimum tax (to the extent that tax affects the tax
consequences), who are subject to the "golden parachute" provisions of the
Code (to the extent that tax affects the tax consequences), or who hold their
shares as part of a "straddle" or "conversion transaction."
This opinion represents our best legal judgment, but it has no binding
effect or official status of any kind, and no assurance can be given that
contrary positions may not be taken by the Internal Revenue Service or a
court considering the issues. Future changes in federal income tax laws and
the interpretation of the federal income tax laws can have retroactive
effect.
We hereby consent to the use of this opinion as an exhibit to, and
reference to this opinion in, Parent's Form S-4 Registration Statement.
WARNER NORCROSS & JUDD LLP
By /s/ Stephen R. Kretschman
--------------------------------
Stephen R. Kretschman, a Partner
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use and the incorporation by reference in this Amendment
No. 2 to the Registration Statement (Registration No. 333-37861) of Suiza Foods
Corporation on Form S-4 of our report on the consolidated financial statements
of Suiza Foods Corporation, dated February 18, 1997, appearing in the
Prospectus, which is part of this Amendment No. 2 to the Registration Statement,
and in the Annual Report on Form 10-K of Suiza Foods Corporation for the year
ended December 31, 1996; and of our reports on the financial statements of
Pre-Acquisition Velda Farms, dated November 4, 1994, and Swiss Dairy, a
Corporation, dated August 28, 1996, appearing in the final prospectus of Suiza
Foods Corporation dated January 22, 1997 and filed with the Securities and
Exchange Commission pursuant to Rule 424(B) on January 23, 1997 (File No.
333-18263). We also consent to the use in this Amendment No. 2 to the
Registration Statement of our report on the consolidated financial statements of
Country Fresh, Inc., dated May 5, 1997, appearing in such Prospectus, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 24, 1997
EXHIBIT 23.3
CONSENT OF KPMG PEAT MARWICK LLP
We consent to the incorporation by reference in this Amendment No. 2 to the
Registration Statement (Registration No. 333-37861) on Form S-4 of Suiza Foods
Corporation and the related prospectus of our report dated August 23, 1996, with
respect to the consolidated balance sheets of Garrido & Compania, Inc. and
Subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of earnings, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1996, appearing in the
final prospectus of Suiza Foods Corporation dated January 22, 1997 and filed
with the Securities and Exchange Commission pursuant to Rule 424(B) on January
23, 1997 (File No. 333-18263), and to the reference to us under the heading
"Experts" in this Prospectus which is part of such Amendment No. 2 to the
Registration Statement.
KPMG PEAT MARWICK LLP
San Juan, Puerto Rico
October 24, 1997
EXHIBIT 23.4
CONSENT OF BARNARD, VOGLER & CO.
We consent to the incorporation by reference in this Amendment No. 2 to the
Registration Statement (Registration No. 333-37861) of Suiza Foods Corporation
on Form S-4 of our report dated December 14, 1995, with respect to the balance
sheets of Model Dairy, Inc. as of October 31, 1995 and 1994, and the related
statements of earnings and retained earnings, and cash flows for years then
ended, appearing in the final prospectus of Suiza Foods Corporation dated
January 22, 1997 and filed with the Securities and Exchange Commission pursuant
to Rule 424(B) on January 23, 1997 (File No. 333-18263), and to the reference to
us under the heading "Experts" in the Prospectus which is part of such Amendment
No. 2 to the Registration Statement.
BARNARD, VOGLER & CO.
Reno, Nevada
October 24, 1997
EXHIBIT 23.5
CONSENT OF MCGLADREY & PULLEN, LLP
We hereby consent to the incorporation by reference in this Amendment No. 2
to the Registration Statement (Registration No. 333-37861) of Suiza Foods
Corporation on Form S-4 of our report dated March 10, 1997, except for Note 13
as to which the date is July 1, 1997, with respect to the financial statements
of Dairy Fresh, L.P., a Delaware limited partnership, included in the Current
Report on Form 8-K filed July 14, 1997, as amended on August 22, 1997, of Suiza
Foods Corporation, and to the reference to us under the heading "Experts" in the
Prospectus which is part of such Amendment No. 2 to the Registration Statement.
McGLADREY & PULLEN, LLP
Winston-Salem, North Carolina
October 24, 1997
EXHIBIT 23.6
CONSENT OF COOPERS & LYBRAND L.L.P.
We hereby consent to the incorporation by reference in this Amendment No. 2
to the Registration Statement (Registration No. 333-37861) of Suiza Foods
Corporation on Form S-4 of our report dated July 31, 1997, with respect to the
combined financial statements of The Garelick Companies, included in the Current
Report on Form 8-K filed July 14, 1997, as amended on August 22, 1997, of Suiza
Foods Corporation, and to the reference to us under the heading "Experts" in
this Prospectus which is part of such Amendment No. 2 to the Registration
Statement.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
October 24, 1997
EXHIBIT 23.7
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation of
our reports included in and incorporated by reference in this Amendment No. 2 to
the Registration Statement on Form S-4 of our report dated February 10, 1997,
included in the Prospectus, which is part of this Amendment No. 2 to the
Registration Statement, and in the annual report on Form 10-K of the Morningstar
Group Inc. for the year ended December 31, 1996 and to all references to our
firm included in this Amendment No. 2 to the Registration Statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
October 24, 1997
EXHIBIT 23.8
CONSENT OF PRICE WATERHOUSE LLP
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Amendment No. 2 to the Registration Statement on Form
S-4 of Suiza Foods Corporation of our report dated February 8, 1996 relating to
the combined financial statements of Presto Food Products, Inc. and Affiliate,
which appears in the Current Report on Form 8-K/A of The Morningstar Group Inc.
dated February 18, 1997. We also consent to the incorporation by reference of
our report dated February 8, 1996 relating to the Additional Information of
Presto Food Products, Inc. and Affiliate, which appears in such Current Report
on Form 8-K/A. We also consent to the references to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Los Angeles, California
October 24, 1997
EXHIBIT 23.10
CONSENT OF DELTON PARKS
I hereby consent to the reference to me under the captions "Interests of
Certain Persons in the Merger" and "Business of Country Fresh--Directors and
Executive Officers" in Amendment No. 2 to Suiza Foods Corporation's Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission on
or about October 23, 1997.
/s/ DELTON C. PARKS
--------------------------------------
Delton C. Parks
October 22, 1997
EXHIBIT 23.11
CONSENT OF THE OHIO COMPANY
We hereby consent to (i) the inclusion of our opinion letter, dated
September 18, 1997, to the Board of Directors of Country Fresh, Inc. (the
"Company") as Appendix B to the Proxy Statement/Prospectus relating to the
merger of CF Acquisition Corp., a wholly owned subsidiary of Suiza Foods
Corporation, with and into the Company and (ii) all references to The Ohio
Company under the headings "Summary," "The Merger--Background of the Merger,"
"The Merger--Reasons for the Merger," "The Merger-- Opinion of the Financial
Advisor to Country Fresh," and elsewhere in the Proxy Statement/Prospectus which
forms a part of this Registration Statement on Form S-4. In giving such consent,
we do not admit that we come within the category of persons whose consent is
required under, and we do not admit that we are "experts" for purposes of, the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.
THE OHIO COMPANY
By: /s/ ROBERT A. COREA
-----------------------------------------
Robert A. Corea
VICE PRESIDENT
October 21, 1997
Columbus, Ohio
PROXY
COUNTRY FRESH, INC.
SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 25, 1997
The undersigned shareholder acknowledges receipt of a Notice of Special
Meeting and a Proxy Statement/Prospectus for the special meeting of shareholders
of Country Fresh, Inc. to be held on November 25, 1997 (the "Special Meeting"),
and appoints Delton Parks and John Williams, or either of them, each with full
power of substitution, attorneys and proxies to represent the shareholder, and
to vote and act with respect to all shares of common stock and preferred stock
that the shareholder would be entitled to vote, at the Special Meeting and at
any adjournment of the Special Meeting on all matters that come before the
Special Meeting.
1. The proposal to approve the Agreement and Plan of Merger, dated as of
September 18, 1997, between Country Fresh, Inc., Suiza Foods Corporation and CF
Acquisition Corp. (the "Merger Agreement").
/ / For / / Against / / Abstain
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL.
2. In their discretion, upon any other matter which may properly come before
the Special Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF COUNTRY FRESH,
INC. IF THIS PROXY IS PROPERLY EXECUTED AND RETURNED, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS GIVEN, THE SHARES
WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT. THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED IN THE DISCRETION OF THE PROXIES ON ANY OTHER MATTER
WHICH COMES BEFORE THE SPECIAL MEETING.
The undersigned hereby revokes any proxy previously given to vote such shares at
the Special Meeting or at any adjournment thereof.
Please sign exactly as name(s)
appear(s) on your stock
certificate indicating, where
proper, official position or
representative capacity. When
shares are held by joint tenants,
both should sign.
Signature(s) of Shareholder(s)
Date: _____________________ , 1997
PLEASE MARK, SIGN, AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
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