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FILED PURSUANT TO RULE NO. 424(b)(3)
REGISTRATION NO. 333-86707
CHOCK FULL O'NUTS CORPORATION
370 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
Dear Shareholder:
Chock full o'Nuts board of directors has unanimously approved a merger
agreement between Chock full o'Nuts and Sara Lee Corporation. In the merger,
for each share of Chock full o'Nuts common stock you own, you will receive a
fraction between 0.5238 and 0.4231 of a share of Sara Lee common stock. We
will determine the exact fraction by dividing:
(1) $11.00, by
(2) the average price per share of Sara Lee common stock for the twenty
consecutive trading days following the date this proxy statement is
mailed.
If the average price exceeds $26.00, you will not receive less than 0.4231
of a share of Sara Lee common stock. If the average price is below $21.00, you
will not receive more than 0.5238 of a share of Sara Lee common stock, unless
Sara Lee elects to increase the ratio.
The aggregate number of shares of Sara Lee common stock that will be issued
in the merger will not be determined until after the twenty day trading
period. However, based upon the range of possible exchange ratios, we estimate
that 9,115,069 to 11,284,503 shares of Sara Lee common stock will be issued in
the merger.
You may calculate the actual value you will receive for each of your shares
of Chock full o'Nuts common stock by multiplying the exchange ratio by the
price per share of Sara Lee common stock on the date that the merger is
completed. You may contact Sara Lee at (888) 422-9881 to obtain a current
price per share of Sara Lee common stock and the exchange ratio based on the
prior twenty trading days. Sara Lee common stock is listed on the New York
Stock Exchange under the trading symbol "SLE," and on September 7, 1999, Sara
Lee common stock closed at $23 7/16 per share. You will receive cash for any
fractional shares of Sara Lee common stock which you would otherwise receive
in the merger.
We cannot complete the merger unless the holders of two-thirds of the
outstanding shares of Chock full o'Nuts common stock vote to adopt the merger
agreement. Only shareholders who hold shares of Chock full o'Nuts common stock
at the close of business on August 19, 1999 will be entitled to vote at the
special meeting. The special meeting of shareholders will be held on October
15, 1999, at 1:00 p.m., local time, at The Chase Manhattan Bank, 11th Floor,
Room A, 270 Park Avenue, New York, New York 10017.
You should consider the matters discussed under "Risk Factors Relating to
the Merger" on page 11 of this proxy statement/prospectus before voting. Also,
please review carefully the entire proxy statement/prospectus.
After careful consideration, Chock full o'Nuts' board of directors
unanimously approved the merger agreement and determined that the merger is
fair to you and in your best interests and unanimously recommends that you
vote for the adoption of the merger agreement.
Thank you for your support.
Sincerely,
Norman E. Alexander Marvin I. Haas
Chairman of the Board President and Chief Executive
Officer
Your vote is important.
Please promptly complete, sign, date and return your proxy.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of the merger described in the proxy
statement/prospectus or the Sara Lee common stock to be issued in connection
with the merger or determined if the proxy statement/prospectus is accurate or
adequate. Any representation to the contrary is a criminal offense.
The proxy statement/prospectus is dated September 8, 1999
and is first being mailed to shareholders on or about September 10, 1999.
<PAGE>
CHOCK FULL O'NUTS CORPORATION
370 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 15, 1999
To the Shareholders of Chock full o'Nuts Corporation:
We will hold a special meeting of the shareholders of Chock full o'Nuts
Corporation on Friday, October 15, 1999, at 1:00 p.m., local time, at The Chase
Manhattan Bank, 11th Floor, Room A, 270 Park Avenue, New York, New York 10017,
for the following purpose:
To consider and vote upon a proposal to adopt the merger agreement
between Chock full o'Nuts and Sara Lee. Under the merger agreement, Chock
full o'Nuts will become a wholly-owned subsidiary of Sara Lee, and each
outstanding share of Chock full o'Nuts common stock will be converted into
the right to receive a fraction of a share of Sara Lee common stock on the
terms more fully described in this proxy statement.
We will transact no other business at the special meeting, except other
business that may properly be brought before the special meeting or any
adjournment of it.
Only holders of record of shares of Chock full o'Nuts common stock at the
close of business on August 19, 1999, the record date for the special meeting,
are entitled to notice of, and to vote at, the special meeting and any
adjournments or postponements of it.
We cannot complete the merger unless the holders of at least two-thirds of
the outstanding shares of Chock full o'Nuts common stock vote to adopt the
merger agreement.
For more information about the merger, please review the accompanying proxy
statement/ prospectus and the merger agreement attached as Annex 1.
Whether or not you plan to attend the special meeting, please complete, sign
and date the enclosed proxy and return it promptly in the enclosed postage-paid
envelope. If you do not vote by proxy or in person at the special meeting, it
will have the same effect as a vote against the merger agreement.
Please do not send any stock certificates at this time.
By Order of the Board of Directors,
Howard M. Leitner
Senior Vice President
and Chief Financial Officer
New York, New York
September 8, 1999
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are Sara Lee and Chock full o'Nuts proposing to merge?
A: This is a unique opportunity for Chock full o'Nuts to join one of the
world's leading food and consumer products companies and for Chock full o'Nuts
shareholders to become stockholders of that company. We anticipate that the
merger will create growth and business expansion opportunities for Chock full
o'Nuts which are greater than those that would be available to Chock full
o'Nuts as an independent company. We believe that the merger will improve Chock
full o'Nuts manufacturing, sales, administration and distribution. We also
believe that we will realize improvements in our Door Store Delivery business
in which we deliver directly to our customers' business locations, rather than
to a centralized warehouse, by route delivery drivers. In addition, we believe
the greater financial resources available to Chock full o'Nuts, as a part of
Sara Lee will enable us to expand further in the business of servicing national
accounts. We believe the merger will enhance the geographical coverage of Sara
Lee's existing coffee business, expand its channels of distribution and improve
production flexibility.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
proxy statement/prospectus, please complete and sign your proxy and return it
in the enclosed return envelope as soon as possible, so that your shares may be
represented at the special meeting. If you sign and send in your proxy and do
not indicate how you want to vote, we will count your proxy as a vote in favor
of adoption of the merger agreement. If you abstain from voting or do not vote,
it will have the same effect as a vote against adoption of the merger
agreement. The special meeting will take place on October 15, 1999. You may
attend the special meeting and vote your shares in person. However, even if you
plan to attend the special meeting, we recommend that you complete, sign and
date the enclosed proxy and return it promptly in the enclosed postage-paid
envelope.
Q: Can I change my vote after I have mailed my signed proxy?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second, you
can complete and submit a new proxy. If you choose either of these two methods,
you must submit your notice of revocation or your new proxy to the Secretary of
Chock full o'Nuts at the address set forth below. Third, you can attend the
special meeting and vote in person. If you hold your shares through a broker or
bank, you should follow the instructions provided by that firm to revoke your
proxy.
Q: If my Chock full o'Nuts shares are held in "street name" by my broker, will
my broker vote my shares for me?
A: Your broker will not be able to vote your Chock full o'Nuts shares on your
behalf unless you provide instructions on how to vote. You should follow the
directions provided by your broker regarding how to instruct your broker to
vote your shares. Without instructions, your shares will not be voted, which
will have the same effect as a vote against adoption of the merger agreement.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, you will receive written instructions for
exchanging your stock certificates. Please do not send in your stock
certificates with your proxy.
Q: Who can help answer my questions?
A: If you have any questions about the merger or if you need additional copies
of this proxy statement/prospectus or the enclosed proxy, you should contact:
Howard M. Leitner
Senior Vice President and Chief Financial Officer
Chock full o'Nuts Corporation
370 Lexington Avenue
New York, New York 10017
Telephone: (212) 532-0300
i
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CHOCK FULL O'NUTS SARA LEE CORPORATION
Proxy Statement Prospectus
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... i
SUMMARY................................................................... 1
General................................................................. 1
The Special Meeting..................................................... 4
The Merger.............................................................. 4
The Companies........................................................... 6
Selected Consolidated Historical Financial Data......................... 7
Chock full o'Nuts..................................................... 7
Sara Lee.............................................................. 8
Unaudited Comparative Per Share Information............................. 9
RISK FACTORS RELATING TO THE MERGER....................................... 11
Chock full o'Nuts Shareholders May Receive Consideration Having a Value
of Less than $11.00 Per Share.......................................... 11
Potential Conflicts of Interest of Chock full o'Nuts' Directors and
Officers............................................................... 11
The Price of Sara Lee Common Stock May Be Affected by Factors Different
From Those Affecting the Price of Chock full o'Nuts Common Stock....... 12
THE SPECIAL MEETING....................................................... 13
Date; Time and Place.................................................... 13
Purpose of Special Meeting.............................................. 13
Record Date; Stock Entitled to Vote; Quorum............................. 13
Vote Required........................................................... 13
Voting by Chock full o'Nuts Directors and Executive Officers............ 13
Voting of Proxies....................................................... 13
Revocability of Proxies................................................. 14
Solicitation of Proxies................................................. 14
THE MERGER................................................................ 14
Background to the Merger................................................ 14
Reasons for the Merger and Board of Directors' Recommendation........... 16
Opinion of Credit Suisse First Boston Corporation....................... 17
Interests of Chock full o'Nuts Directors and Management in the Merger... 23
Agreements between Sara Lee and Chock full o'Nuts....................... 25
Accounting Treatment.................................................... 25
Form of the Merger...................................................... 25
Merger Consideration.................................................... 26
Chock full o'Nuts' Option to Terminate the Merger Agreement if the
Average Price of Sara Lee Common Stock is Below $21.00 Per Share....... 26
Conversion of Shares; Procedures for Exchange of Certificates;
Fractional Shares...................................................... 26
Effective Time of the Merger............................................ 27
Stock Exchange Listing of Sara Lee Common Stock......................... 27
Delisting and Deregistration of Chock full o'Nuts Common Stock.......... 28
Material United States Federal Income Tax Consequences of the Merger.... 28
Regulatory Matters...................................................... 30
Litigation.............................................................. 30
Appraisal Rights........................................................ 31
Effect on Awards Outstanding Under Chock full o'Nuts Stock Plans........ 31
Resale of Sara Lee Common Stock......................................... 31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
THE MERGER AGREEMENT...................................................... 32
DESCRIPTION OF SARA LEE CAPITAL STOCK..................................... 38
COMPARISON OF RIGHTS OF COMMON SHAREHOLDERS OF SARA LEE AND CHOCK FULL
O'NUTS................................................................... 39
Capitalization.......................................................... 39
Voting Rights........................................................... 39
Board of Directors...................................................... 39
Amendments to Certificates of Incorporation............................. 40
Amendments to Bylaws.................................................... 40
Shareholder Action...................................................... 40
Notice of Shareholder Actions........................................... 41
Special Shareholder Meetings............................................ 41
Limitation of Personal Liability of Directors........................... 41
Dividends............................................................... 42
Conversion.............................................................. 42
Dissenters or Appraisal Rights.......................................... 42
Business Combinations................................................... 43
Control Share Acquisitions.............................................. 44
Rights Plan............................................................. 45
COMPARATIVE STOCK PRICES AND DIVIDENDS.................................... 48
DESCRIPTION OF CHOCK FULL O'NUTS BUSINESS................................. 49
CHOCK FULL O'NUTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 54
MANAGEMENT OF CHOCK FULL O'NUTS........................................... 60
EXECUTIVE COMPENSATION AND TRANSACTIONS WITH OFFICERS, DIRECTORS AND
PRINCIPAL HOLDERS OF CHOCK FULL O'NUTS................................... 61
OWNERSHIP OF CHOCK FULL O'NUTS COMMON STOCK............................... 64
CHANGE OF AUDITORS........................................................ 66
LEGAL MATTERS............................................................. 66
EXPERTS................................................................... 66
SHAREHOLDER PROPOSALS..................................................... 66
WHERE YOU CAN FIND MORE INFORMATION....................................... 67
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS......................... 68
INDEX TO FINANCIAL STATEMENTS............................................. F-1
Annexes
Annex 1 Agreement and Plan of Merger
Annex 2 Opinion of Credit Suisse First Boston Corporation
</TABLE>
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and does not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should carefully read this
entire proxy statement/prospectus and the other documents to which we have
referred you. See "Where You Can Find More Information" on page 67. We have
included page references parenthetically to direct you to a more complete
description of the topics presented in this summary.
General
What Chock full o'Nuts Shareholders Will Receive in the Merger (page 26)
In the merger, for each share of Chock full o'Nuts common stock that you
own, you will receive a fraction between 0.5238 and 0.4231 of a share of Sara
Lee common stock. We will determine the exact fraction by dividing (1) $11.00
by (2) the average closing price per share of Sara Lee common stock on the New
York Stock Exchange for the 20 consecutive trading days commencing on the date
this proxy statement/prospectus is first mailed. This average price is referred
to as the "average price of Sara Lee common stock" in this proxy
statement/prospectus. You will receive cash for any fractional shares which you
would otherwise receive in the merger.
You may contact Sara Lee at (888) 422-9881 to obtain a current price per
share of Sara Lee common stock and an assumed exchange ratio based on the prior
twenty trading days. Such assumed exchange ratio will not necessarily be the
same as the exchange ratio as finally determined.
If the average price of Sara Lee common stock is greater than $26.00, then
the exchange ratio remains fixed at 0.4231. In this case, the value of the Sara
Lee common stock you receive may exceed $11.00 per share of Chock full o'Nuts
common stock. If the average price of Sara Lee common stock is less than
$21.00, then Sara Lee may decide to increase the exchange ratio above 0.5238
and/or make an additional cash payment so that the value of the consideration
you receive in the merger for each share of Chock full o'Nuts common stock that
you own is $11.00.
The following table sets forth the value of the Sara Lee common stock that
you would receive in exchange for one share of Chock full o'Nuts common stock
and the applicable exchange ratio as if they were calculated:
(1) on April 22, 1999, the last full trading day before Sara Lee's public
announcement that it had acquired a greater than 5% interest in Chock
full o'Nuts,
(2) on June 7, 1999, the last full trading day before the public
announcement of the merger, and
(3) on September 3, 1999, the last day for which such information could be
obtained before the date of this proxy statement/prospectus.
The table also provides examples of the resulting value and exchange ratio
assuming that the average price of Sara Lee common stock was $28.00, a price
above the upper end of the range for calculating the exchange ratio, and
$19.00, a price below the lower end of such range.
<TABLE>
<CAPTION>
Shares of Sara Lee
Equivalent Price Common Stock per
Price of Price of per Share of Share of Chock
Sara Lee Chock full o'Nuts Chock full o'Nuts full o'Nuts
Date Common Stock Common Stock Common Stock Common Stock
---- ------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
April 22, 1999.......... $ 24 $ 6 1/2 $11.00 .4469
June 7, 1999............ $24 9/16 $10 1/2 $11.00 .4527
September 7, 1999....... $23 7/16 $10 1/2 $11.00 .4926
Illustration--above
range.................. $ 28 -- $11.85 .4231
Illustration--below
range.................. $ 19 -- $ 9.95 .5238
</TABLE>
The exchange ratio will be determined prior to the date of the special
meeting to approve the merger.
1
<PAGE>
Right of Chock full o'Nuts to Terminate Agreement if the Average Price of Sara
Lee Common Stock is Below $21.00 Per Share (page 26)
If the average price of Sara Lee common stock is less than $21.00 and Sara
Lee does not increase the value of the consideration to $11.00 per share of
Chock full o'Nuts common stock, the board of directors of Chock full o'Nuts
may:
. accept 0.5238 of a share of Sara Lee common stock for each share of
Chock full o'Nuts common stock, or
. terminate the merger agreement.
If the Chock full o'Nuts board does not terminate the agreement, the value of
the Sara Lee common stock that you receive in the merger may be less than
$11.00 per share of Chock full o'Nuts common stock. In addition, if the average
price of Sara Lee common stock is $21.00 at the determination date but it
declines in price after the determination date through the effective time of
the merger, the Sara Lee common stock that you receive in the merger will be
valued at less than $11.00 per share of Chock full o'Nuts common stock.
Appraisal Rights
Chock full o'Nuts shareholders have no appraisal rights in connection with
the merger.
Material United States Federal Income Tax Consequences of the Merger (page 28)
The merger is intended to qualify as a tax-free reorganization within the
meaning of the Internal Revenue Code of 1986. It is a condition to the
completion of the merger that Chock full o'Nuts receive an opinion from Cahill
Gordon & Reindel and that Sara Lee receive an opinion from Skadden, Arps,
Slate, Meagher & Flom (Illinois), in each case stating that the merger will
qualify for United States federal income tax purposes as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code.
If Sara Lee pays all of the merger consideration in shares of Sara Lee
common stock, except for cash instead of a fractional share, you will not
recognize gain or loss for United States federal income tax purposes as a
result of the exchange of your Chock full o'Nuts common stock for Sara Lee
common stock in the merger, except for cash you receive instead of fractional
shares of Sara Lee common stock. If Sara Lee makes a cash payment to you
because the average price of Sara Lee common stock is less than $21.00 per
share, you will recognize gain, but not loss, with respect to each block of
Chock full o'Nuts common stock you surrender. The amount of the gain will be
equal to the lesser of:
(1) the amount of gain you realize with respect to that block as a result
of the merger; and
(2) the amount of cash received that is allocable to that block.
Tax matters are very complicated and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your own
tax advisors for a full understanding of the tax consequences of the merger to
you.
Board of Directors Recommendation to Shareholders (page 17)
The Chock full o'Nuts board of directors believes that the terms of the
merger agreement and the merger are fair to and in the best interests of Chock
full o'Nuts and its shareholders. The board unanimously recommends that the
shareholders vote "for" the adoption of the merger agreement.
To review the background and reasons for the merger in greater detail, as
well as risks related to the merger, see pages 11, 14-17.
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Opinion of Financial Advisor (page 17)
Credit Suisse First Boston Corporation, Chock full o'Nuts' financial
advisor, has delivered a written opinion dated June 8, 1999 to the Chock full
o'Nuts board of directors to the effect that, as of the date of the opinion and
based upon and subject to the matters described in the opinion, the exchange
ratio in the merger was fair, from a financial point of view, to the holders of
Chock full o'Nuts common stock, other than Sara Lee and its affiliates. The
complete opinion is attached to this proxy statement/prospectus as Annex 2. We
urge you to read it carefully in its entirety. Credit Suisse First Boston's
opinion is directed to the Chock full o'Nuts board of directors and does not
constitute a recommendation to any shareholder as to any matter relating to the
merger.
Interests of Chock full o'Nuts Directors and Management in the Merger (page 23)
In considering the recommendation of the Chock full o'Nuts board of
directors with respect to the merger, you should be aware of, and should
carefully consider that, the Chock full o' Nuts board of directors and members
of Chock full o'Nuts' management may have interests in the merger that are
different from, or in addition to, yours. These differences may create
potential conflicts of interest. In particular:
. Officers and directors of Chock full o'Nuts will be indemnified and
current directors' and officers' liability insurance will be continued,
in each case with respect to the merger and events or circumstances
occurring before the effective time of the merger or as a result of the
merger.
. As of July 31, 1999, 10 officers, three of whom are also directors, and
three employees of Chock full o'Nuts beneficially owned options to
purchase an aggregate of 413,493 shares of Chock full o'Nuts common
stock. Upon completion of the merger, all of these options will become
immediately exercisable. Each Chock full o'Nuts stock option will be
assumed by Sara Lee.
. Two officers, who are also directors, have restricted stock agreements
with Chock full o'Nuts. As a result of the merger, the vesting of shares
under these restricted stock agreements will be accelerated.
. Six Chock full o'Nuts officers, two of whom are also directors, have
entered into employment agreements that become effective upon a change
in control such as the merger. The terms of the employment agreements
generally include:
(1)a three year term beginning immediately after the change in control,
and
(2) base salary, bonus and other employee benefits at amounts existing
immediately before the change in control. In addition, the chief
executive officer, who is also a director, will receive an increase of
$75,000 in his base salary upon a change of control.
. Under the terms of the Chock full o'Nuts Annual Incentive Cash Bonus
Plan, 11 executives, three of whom are also directors, of Chock full
o'Nuts will receive the maximum bonus for which they are eligible for
the fiscal year in which the merger occurs.
. As a result of the merger, the severance benefits payable to all Chock
full o'Nuts non-union employees who do not have employment agreements
will be doubled under the Chock full o'Nuts severance plan.
. As a result of the merger, payments to three non-employee directors of
Chock full o'Nuts under the Unfunded Directors Retirement Plan will be
accelerated.
. Chock full o'Nuts has established a Benefits Protection Trust that is to
be used for litigation expenses incurred by Chock full o'Nuts employees,
including all executive officers of Chock full o'Nuts. This trust may be
used for specific expenses incurred after a change in control if the new
management of Chock full o'Nuts refuses to pay benefits under any
previously existing employment contract or benefit plan. The merger will
constitute a change in control.
3
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. Upon completion of the merger, Chock full o'Nuts must fund its non-
qualified, unfunded Supplemental Employee Retirement Plan in the
approximate amount of $1,050,000. This plan covers participants of Chock
full o'Nuts' Pension Plan whose benefits would otherwise be limited by
Internal Revenue Code limitations on qualified plan benefits.
The board of directors of Chock full o'Nuts was aware of these interests and
considered them, among other matters, in approving the merger.
The Special Meeting (page 13)
The special meeting of Chock full o'Nuts shareholders will be held at The
Chase Manhattan Bank, 11th Floor, Room A, 270 Park Avenue, New York, New York
10017, at 1:00 p.m., local time, on October 15, 1999. At the special meeting,
shareholders will be asked to consider and vote upon:
. the adoption of the merger agreement;
. the approval of any adjournment of the special meeting to solicit
additional votes in favor of the merger; and
. other business that may properly arise at the special meeting.
Record Date; Voting Power
You are entitled to vote at the special meeting if you owned shares of Chock
full o'Nuts common stock as of the close of business on August 19, 1999, the
record date.
On the record date, there were 11,288,837 shares of Chock full o'Nuts common
stock entitled to vote at the special meeting. You will have one vote at the
special meeting for each share of Chock full o'Nuts common stock that you owned
on the record date.
Vote Required
The affirmative vote of two-thirds of the shares of Chock full o'Nuts common
stock outstanding on the record date is required to adopt the merger agreement.
If you abstain from voting or do not vote, either in person or by proxy, it
will have the same effect as a vote against adoption of the merger agreement.
Voting by Chock full o'Nuts Directors and Executive Officers
On the record date, directors and executive officers of Chock full o'Nuts
and their affiliates owned and were entitled to vote 985,404 shares of Chock
full o'Nuts common stock, or approximately 8.7% of the shares of Chock full
o'Nuts common stock then outstanding. The directors and executive officers of
Chock full o'Nuts intend to vote the Chock full o'Nuts common stock owned by
them "for" adoption of the merger agreement.
The Merger (page 14)
The merger agreement is attached as Annex 1 to this proxy
statement/prospectus. We encourage you to read the merger agreement. It is the
principal document governing the merger. The following summarizes some of the
material terms of the merger agreement.
Conditions to the Merger (page 32)
Sara Lee and Chock full o'Nuts will complete the merger only if they satisfy
or, in some cases, waive several conditions, including the following:
. approval of the merger agreement by holders of two-thirds of the
outstanding shares of Chock full o'Nuts common stock;
4
<PAGE>
. no legal restraints or prohibitions exist which prevent the completion
of the merger;
. approval of the Sara Lee common stock issuable to Chock full o'Nuts
shareholders for listing on the New York Stock Exchange;
. from January 31, 1999 until the closing, there cannot be an event,
subject to some exceptions, having a material adverse effect on Chock
full o'Nuts other than those that have previously been disclosed;
. the representations and warranties of each of Sara Lee and Chock full
o'Nuts must be true and correct; and
. Sara Lee and Chock full o'Nuts each must satisfy their respective
covenants contained in the merger agreement.
Termination of the Merger Agreement (page 34)
Sara Lee and Chock full o'Nuts may jointly agree to terminate the merger
agreement at any time without completing the merger.
Sara Lee or Chock full o'Nuts may terminate the merger agreement if:
. Sara Lee and Chock full o'Nuts do not complete the merger by December
31, 1999;
. the Chock full o'Nuts shareholders do not approve the merger
agreement;
. a governmental authority or other legal action permanently prohibits
the completion of the merger; or
. the other party breached in any material respect any of its
representations, warranties or obligations under the merger agreement
and has not cured the breach within 30 days of receipt of written
notice.
Chock full o'Nuts may terminate the merger agreement if:
. (1) the Chock full o'Nuts board of directors receives an unsolicited
proposal by a third party to acquire Chock full o'Nuts on terms the
board determines to be more favorable to its shareholders than the
terms of the merger with Sara Lee;
(2) the Chock full o'Nuts board in good faith determines that it must
accept the offer in order to comply with its fiduciary duties to its
shareholders; and
(3) the Chock full o'Nuts board enters into an agreement with the
third party after (A) the board notifies Sara Lee of the proposal,
(B) Sara Lee does not offer to match the offer, and (C) Chock full
o'Nuts pays the termination fee described below; or
. the average price of Sara Lee common stock is less than $21.00 per
share and Sara Lee does not increase the value of the merger
consideration to $11.00 per share of Chock full o'Nuts common stock.
Sara Lee may terminate the merger agreement if the Chock full o'Nuts board
of directors withdraws or adversely modifies its approval or recommendation of
the merger agreement or fails to reconfirm its recommendation upon request by
Sara Lee. Sara Lee may also terminate the merger agreement if Chock full o'Nuts
receives an unsolicited takeover proposal from a third party unless Chock full
o'Nuts notifies Sara Lee of the proposal and rejects it or terminates
negotiations with the third party.
Termination Fee (page 35)
Chock full o'Nuts must pay Sara Lee a termination fee of $7 million and all
documented, out-of-pocket expenses of Sara Lee in connection with the merger
if:
. Chock full o'Nuts receives an acquisition proposal or an acquisition
proposal otherwise is publicly announced or the Chock full o'Nuts board
of directors withdraws or adversely modifies its
5
<PAGE>
recommendation, and in either case the Chock full o'Nuts shareholders do
not approve the merger agreement.
. Chock full o'Nuts terminates the merger agreement because a superior
proposal has been entered into and:
(1) Chock full o'Nuts has provided notice of that proposal to Sara Lee,
(2) Sara Lee has elected not to amend the merger agreement to match the
terms of that proposal, and
(3) in order for the Chock full o'Nuts board to comply with its
fiduciary duty to its shareholders, it must accept the proposal.
. Chock full o'Nuts intentionally or in bad faith materially breaches any
of its representations or warranties.
. Chock full o'Nuts enters into an agreement to complete or completes a
superior proposal within 12 months of a termination of the merger
agreement for any other reason except for a material breach by Sara Lee
of its representations and warranties.
Accounting Treatment (page 25)
The merger will be accounted for as a "purchase" transaction for accounting
and financial reporting purposes, in accordance with generally accepted
accounting principles.
The Companies
Chock full o'Nuts Corporation (page 49)
370 Lexington Avenue
New York, New York 10017
(212) 532-0300
Chock full o'Nuts is the fourth largest roaster, packer and marketer of
coffee in the United States based upon coffee pounds sold. Its broad range of
regular and decaffeinated, ground roast, instant and specialty coffees for the
foodservice and retail grocery industries are sold regionally throughout the
United States and Canada under various well known trademarks, including Chock
full o'Nuts, La Touraine and Cain's. Chock full o'Nuts is also one of the
largest marketers of foodservice and private label coffees in the United
States. The balance of Chock full o'Nuts' business is derived from franchising
its Quikava outlets and from real estate operations.
Sara Lee Corporation
Three First National Plaza, Suite 4600
Chicago, Illinois 60602-4260
(312) 726-2600
Sara Lee is a global food and consumer products company which markets a
variety of products under leading brand names, including Hanes, Coach, L'eggs,
Dim, Bali, Playtex, Champion, Kiwi, Hillshire Farm, Ball Park, Jimmy Dean,
Douwe Egberts and Sara Lee. Sara Lee has operations in more than 40 countries
and markets branded products in more than 140 countries. Sara Lee is organized
into five lines of business: Sara Lee Foods, Coffee and Tea, Branded Apparel,
Household and Body Care and Foodservice.
6
<PAGE>
Selected Consolidated Historical Financial Data
Chock full o'Nuts
The following selected consolidated financial data of Chock full o'Nuts at
July 31, 1998 and for the five fiscal years ended July 31, 1998 is derived from
Chock full o'Nuts' audited consolidated financial statements. Chock full o'Nuts
selected consolidated financial data as of July 31, 1998 and 1997 and for the
years ended July 31, 1998, 1997 and 1996 have been derived from its audited
financial statements included elsewhere in this proxy statement/prospectus. The
selected financial data as of July 31, 1996, 1995 and 1994 and for the years
ended July 31, 1995 and 1994 have been derived from Chock full o'Nuts' audited
financial statements which are not included in this proxy statement/prospectus,
but may be obtained as described under "Where You Can Find More Information."
The selected consolidated financial data of Chock full o'Nuts as of and for the
nine months ended April 30, 1999 and April 30, 1998 has been derived from
unaudited consolidated financial statements of Chock full o'Nuts contained
elsewhere in this proxy statement/prospectus. In the opinion of Chock full
o'Nuts' management, the nine month financial data includes all necessary
adjustments for a fair presentation of that data in conformity with generally
accepted accounting principles. The per share data set forth below has been
retroactively adjusted for a 3% stock dividend in July 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended July 31, Nine Months Ended
---------------------------------------------- -------------------
(Unaudited)
April 30, April 30,
1994 1995 1996 1997 1998 1999 1998
-------- -------- -------- -------- -------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $263,511 $326,141 $321,135 $362,204 $394,357 $270,260 $306,295
Income from continuing
operations............. 8,243 6,738 4,631 7,914 5,499 558 5,566
Total assets............ 208,807 207,005 199,435 217,330 201,184 200,359 204,185
Long-term debt.......... 110,427 106,569 105,235 106,066 92,247 88,349 98,018
Shareholders' equity.... 58,262 64,937 63,487 71,881 77,555 78,515 77,371
Working capital......... 81,590 89,612 87,053 99,086 92,229 87,544 102,247
Working capital ratio... 3.6 to 1 4.3 to 1 4.7 to 1 4.5 to 1 5.9 to 1 5.0 to 1 6.3 to 1
PER COMMON SHARE:
Income from continuing
operations:
Basic.................. $ .80 $ .65 $ .45 $ .76 $ .53 $ .05 $ .54
Diluted................ .57 .51 .41 .55 .45 .05 .40
Stock dividends
distributed............ 3% 3% -- -- -- -- --
Shareholders' equity.... 5.43 6.05 5.91 6.70 7.16 7.24 7.16
Average shares
outstanding--basic (in
thousands)............. 10,364 10,333 10,308 10,395 10,416 10,532 10,392
Average shares
outstanding--diluted
(in thousands)......... 22,186 22,160 22,129 22,216 21,766 21,241 21,920
</TABLE>
- --------
The year ended July 31, 1994 includes a $6,244 after tax gain on sale of
product line, $.61 per basic share and $.28 per diluted share.
The year ended July 31, 1997 includes a write-off of $1,500 relating to
litigation, $.09 per basic share and $.05 per diluted share and $767 income tax
credit relating to realization of prior year capital loss not previously
recorded, $.07 per basic share and $.03 per diluted share.
The year ended July 31, 1998 includes an after tax gain on sale of real estate
of $725, $.07 per basic share and $.03 per diluted share.
7
<PAGE>
Sara Lee
The following selected consolidated financial data of Sara Lee at June 27,
1998, for the five years ended June 27, 1998 and for the nine-month periods
ended March 27, 1999 and March 28, 1998 is derived from audited and unaudited
consolidated financial statements incorporated by reference in this proxy
statement/prospectus and, in the opinion of Sara Lee's management, includes all
necessary adjustments for a fair presentation of such data in conformity with
generally accepted accounting principles. The per share information has been
adjusted to reflect a 2-for-1 stock split, in the form of a stock dividend,
which was effective on December 1, 1998.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
---------------------------------------------- -------------------
July 2, July 1, June 29, June 28, June 27, March 27, March 28,
1994(1) 1995 1996 1997 1998(2) 1999 1998
------- ------- -------- -------- -------- --------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales............... $15,536 $17,719 $18,624 $19,734 $20,011 $14,810 $14,908
Operating income (loss). 632 1,596 1,793 1,905 (97) 1,504 (642)
Income (loss) before
income taxes........... 389 1,219 1,378 1,484 (443) 1,268 (883)
Net income (loss)....... 199 804 916 1,009 (523) 905 (826)
Effective tax rate...... 39.9% 34.1% 33.5% 32.0% 18.0% -- --
FINANCIAL POSITION:
Total assets............ $11,665 $12,431 $12,602 $12,953 $10,989 $10,580 $11,167
Total debt.............. 2,859 2,597 2,296 2,664 3,077 3,248 3,500
Operating cash flow to
average total debt (3). 25.8% 40.6% 41.4% 49.3% 56.8% -- --
Return on invested
capital (4)............ 12.6% 14.6% 15.0% 16.0% 17.5% -- --
PER COMMON SHARE:
Net income (loss)--
basic.................. $ .18 $ .81 $ .92 $ 1.02 $ (.57) $ .99 $ (.89)
Average shares
outstanding (in
millions).............. 955 955 963 959 939 908 944
Net income (loss)--
diluted................ .18 .79 .89 .99 (.57) .95 (.89)
Average shares
outstanding (in
millions).............. 997 996 1,007 1,004 939 953 944
Dividends............... .313 .335 .370 .410 .450 .365 .335
Book value at year-end.. 3.46 4.10 4.45 4.46 1.97 1.87 2.15
Market value at year-
end.................... 10.31 14.25 16.25 21.03 28.31 26.13 30.94
</TABLE>
- --------
(1) In 1994, a restructuring provision reduced operating income and income
before income taxes by $732 and net income by $495. In addition, in 1994,
the cumulative effect of adopting a mandated change in the method of
accounting for income taxes reduced net income by $35.
(2) In 1998, a restructuring provision reduced operating income and income
before income taxes by $2,040 and net income by $1,625.
(3) Average total debt includes total balance sheet debt, imputed lease
liabilities and auction preferred stock.
(4) Excludes unusual items.
8
<PAGE>
Unaudited Comparative Per Share Information
We have summarized below the per share information for our respective
companies on a historical and equivalent basis. The nine months ended 1999
historical information presented represents Chock full o'Nuts' fiscal nine-
month period ended on April 30, 1999, and Sara Lee's fiscal nine-month period
ended March 27, 1999. The fiscal year 1998 historical information presented
represents Chock full o'Nuts' fiscal year ended July 31, 1998, and Sara Lee's
1998 fiscal year ended June 27, 1998. The Sara Lee and Chock full o'Nuts
historical results for their respective fiscal year 1998 were audited. All
other financial information is unaudited.
You should read the pro forma, per share equivalent and historical
information together with the audited consolidated financial statements and
other financial information of Chock full o'Nuts included elsewhere in this
proxy statement/prospectus and of Sara Lee contained in the Forms 10-K and
Forms 10-Q filed by Sara Lee with the SEC and which are incorporated in this
proxy statement/prospectus by reference and/or in historical financial data
included in this document. We have presented the pro forma combined per share
data and Chock full o'Nuts equivalent information for informational purposes.
We do not know, and this table cannot represent, what the combined entities'
results of operations would actually have been had the transaction in fact
occurred at an earlier date or will be for any future date or period. Upon the
consummation of the merger, the actual financial position and results of
operations of the combined company may differ from the pro forma results
presented in this proxy statement/prospectus due to a variety of factors,
including, differences in operating results, additional purchase accounting
adjustments, or items identified under "Risk Factors."
We prepared the pro forma and Chock full o'Nuts per share equivalent income
statement information assuming the merger occurred at the beginning of its
fiscal year 1998, using a conversion ratio of .44221. We prepared the pro forma
and per share equivalent balance sheet information assuming the merger occurred
at the end of the third quarter of its fiscal year 1999, also with a conversion
ratio of .44221.
On August 26, 1999, Chock full o'Nuts called the convertible debentures for
redemption on September 14, 1999 at their par value. Convertible debenture
holders can convert their convertible debentures into Chock full o'Nuts common
stock at any time on or prior to September 13, 1999. Any Chock full o'Nuts
common stock issued as a result of the conversion of the convertible debentures
will be converted into Sara Lee common stock using the merger conversion ratio.
Convertible debentures that are redeemed at par value for cash will not receive
the premium from the equity conversion into Sara Lee common stock. The premium
received is equal to the difference between the value of Sara Lee common stock
to be received and the par value of the convertible debentures. Due to the
economic advantages of the equity conversion, in the pro forma information, we
have assumed that all of the Chock full o'Nuts convertible debentures will be
converted into Chock full o'Nuts common stock and then converted into Sara Lee
common stock on the merger date, using the .44221 conversion ratio.
For purposes of this disclosure, we used the number of shares of Chock full
o'Nuts common stock outstanding, as adjusted for the conversion of the
convertible debentures, and assumed an average price of Sara Lee common stock
for the twenty-day period of $24.875. The $24.875 is the value of Sara Lee
common stock on June 8, 1999, the date the merger agreement was signed. The
actual price may be above or below the actual trading range for the twenty-day
period. The conversion ratio is calculated by dividing $11 by the twenty-day
average price of Sara Lee common stock. If the price for the twenty-day period
is above $26 or below $21, Chock full o'Nuts and Sara Lee have rights relating
to adjusting the consideration or terminating the merger agreement which are
discussed in the "Summary" section of this proxy statement/prospectus.
If the 20-day average price of Sara Lee common stock is $26 per share, the
conversion ratio would be calculated as .4231. The use of this exchange ratio
would not modify the Pro Forma Combined disclosure presented in this table. The
Chock full o'Nuts Per Share Equivalents would be calculated by multiplying the
Pro Forma Combined amounts by the conversion ratio of .4231.
9
<PAGE>
If the 20-day average price of Sara Lee common stock is $21 per share, the
conversion ratio would be calculated as .5238. The use of this exchange ratio
would not modify the Pro Forma Combined disclosures presented in this table,
except for the Book Value Per Common Share for the fiscal year ended 1998 would
be $2.19, rather than the disclosed amount of $2.20. With a 20-day average
price of Sara Lee common stock of $21 per share, the Chock full o'Nuts' Per
Share Equivalents would be calculated by multiplying the Pro Forma Combined
amounts by the conversion ration of .5238.
Sara Lee has accounted for the merger using the purchase method of
accounting. Sara Lee has allocated all of the excess of the purchase price over
the net assets acquired to goodwill. The purchase price allocation used in the
pro forma information is preliminary.
<TABLE>
<CAPTION>
As Of or For As Of or For
the Nine Fiscal the Fiscal Year
Months Ended Ended
1999 1998
--------------- ---------------
<S> <C> <C>
Pro Forma Combined:
Net income (loss) per common share--basic....... $0.98 $(0.56)
Net income (loss) per common share--diluted..... 0.94 (0.56)
Cash dividends declared per common share(1)..... 0.363 0.447
Book value per common share..................... 2.10 2.20
Chock full o'Nuts Per Share Equivalents(2):
Net income (loss) per common share--basic....... $0.43 $(0.25)
Net income (loss) per common share--diluted..... 0.42 (0.25)
Cash dividends declared per common share........ 0.16 0.20
Book value per common share..................... 0.93 0.97
Chock full o'Nuts--Historical:
Net income per common share--basic.............. $ .05 $ .53
Net income per common share--diluted............ .05 .45
Cash dividends declared per common share........ -- --
Book value per common share..................... 7.24 7.16
Sara Lee--Historical:
Net income (loss) per common share--basic....... $ .99 $ (.57)
Net income (loss) per common share--diluted..... .95 (.57)
Cash dividends declared per common share........ .365 .45
Book value per common share..................... 1.87 1.97
</TABLE>
- --------
(1) The Pro Forma Combined dividends per share are computed using actual
dividends paid by each company divided by pro forma weighted average
shares outstanding. Sara Lee's current annual dividend rate is $.50 per
share and using the .44221 conversion ratio, each share of Chock full
o'Nuts common stock would receive $.22 per share.
(2) The Chock full o'Nuts per share equivalent information is calculated by
multiplying the pro forma amounts by the conversion ratio of .44221. The
Chock full o'Nuts Per Share Equivalents amount represents the pro forma
dividends declared adjusted for the exchange ratio.
10
<PAGE>
RISK FACTORS RELATING TO THE MERGER
In addition to the other information included and incorporated by reference
in this proxy statement/prospectus, Chock full o'Nuts shareholders should
consider carefully the matters described below in determining whether to adopt
the merger agreement.
Chock full o'Nuts Shareholders May Receive Consideration Having a Value of Less
than $11.00 Per Share.
Under the merger agreement, the exchange ratio will not exceed 0.5238 shares
of Sara Lee common stock. If (1) the average price of Sara Lee common stock is
below $21.00 per share, (2) Sara Lee does not elect to increase the merger
consideration, and (3) your board decides to proceed with the transaction, you
may receive consideration having a value of less than $11.00 per share. For
example, if the average price is $19.00 per share and your board decides to
proceed with the transaction, the exchange ratio would be 0.5238 or $9.95 per
share.
The prices of Sara Lee common stock and Chock full o'Nuts common stock at
the closing of the merger may vary from their respective prices on the date of
this proxy statement/prospectus and on the date of the special meeting as well
as from the average price of Sara Lee common stock. Therefore, although we have
structured the merger to provide you with a value of $11.00 per share of Chock
full o'Nuts common stock, changing prices from the date of determination to the
date of the merger may result in you receiving a value of less than $11.00 per
share. In addition, significant declines in the price of Sara Lee common stock
during the determination period which continue subsequent to the determination
period may result in an average price of Sara Lee common stock being in excess
of $21.00 per share, yet result in Chock full o'Nuts shareholders receiving
stock with a value of less than $11.00 per share. These price fluctuations may
be caused by changes in the business, operations or prospects of Sara Lee or
Chock full o'Nuts, market assessments of the likelihood that the merger will be
completed, the timing of the completion of the merger, the prospects of post-
merger operations, regulatory considerations, general market and economic
conditions or other factors. We urge you to obtain current market quotations
for Sara Lee common stock and Chock full o'Nuts common stock.
Potential Conflicts of Interest of Chock full o'Nuts' Directors and Officers.
In considering the Chock full o'Nuts board of directors' recommendation to
adopt and approve the merger, you should be aware that some officers and
directors of Chock full o'Nuts may have potential conflicts of interest. The
Chock full o'Nuts' board believes that it appropriately considered these
conflicts of interest, together with other relevant factors, when recommending
the merger to you. Potential conflicts of interest include:
. the acceleration of the vesting of Chock full o'Nuts options to 10
officers, three of whom are directors, and restricted stock to two
officer/directors as a result of the merger,
. the acceleration of retirement payments to three Chock full o'Nuts' non-
employee directors,
. the employment agreements of six executive officers, two of whom are
also directors, becoming effective as a result of the merger,
. the fact that 11 executives of Chock full o'Nuts, three of whom are also
directors, will receive the maximum bonus for which they are eligible
under Chock full o'Nuts' Annual Incentive Cash Bonus Plan,
. the fact that, as a result of the merger agreement, the severance
benefits of all non-union employees who do not have employment
agreements will be doubled,
. the acceleration of the funding of benefits under the Supplemental
Employee Retirement Plan, and
. the fact that benefits are accrued under the Benefits Protection Trust
as a result of the merger.
11
<PAGE>
Finally, under the terms of the merger agreement, Sara Lee will indemnify
the directors and officers of Chock full o'Nuts for six years after the
effective time of the merger. Sara Lee has also agreed to cause the surviving
corporation to provide directors' and officers' liability insurance for the
directors and officers of Chock full o'Nuts for three years after the effective
date of the merger.
The Price of Sara Lee Common Stock May Be Affected by Factors Different From
Those Affecting the Price of Chock full o'Nuts Common Stock.
Upon completion of the merger, holders of Chock full o'Nuts common stock
will become holders of Sara Lee common stock. Sara Lee's business differs from
that of Chock full o'Nuts since Sara Lee operates significant businesses
outside of the coffee industry, and Sara Lee's results of operations, as well
as the price of Sara Lee common stock, may be affected by factors different
from those affecting Chock full o'Nuts' results of operations and the price of
Chock full o'Nuts common stock. In particular Sara Lee's business and results
of operations may be affected by, among others, the following:
. the effect on future revenues and expenses of Sara Lee's December 1998
voluntary recall of certain packaged meat products and the governmental
investigation and litigation arising from the recall,
. Sara Lee's ability to realize forecasted savings as well as improvements
in productivity and efficiency from its restructuring program,
. significant competitive activity, including advertising, promotional and
price competition, and changes in consumer demand for Sara Lee's
products,
. fluctuations in the cost and availability of various raw materials,
. inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer
acceptance,
. Sara Lee's ability to successfully integrate acquisitions into its
existing operations and the availability of new acquisitions, joint
ventures and alliance opportunities that build stockholder value, and
. Sara Lee's and our suppliers' and customers' ability, to adequately
address the "Year 2000" computer issue.
In addition, Sara Lee's results may also be affected by general factors, such
as economic conditions, political developments, currency exchange rates,
including the impact of the conversion to the euro currency, interest and
inflation rates, accounting standards, taxes, and laws and regulations
affecting Sara Lee in markets where it competes.
For more information regarding Sara Lee's and Chock full o'Nuts' businesses
and factors to consider in connection with each company's business, see Sara
Lee's Annual Report on Form 10-K for the fiscal year ended June 27, 1998 and
its Quarterly Report on Form 10-Q for the quarter ended March 27, 1999, which
are incorporated by reference in this proxy statement/prospectus, and
"Description of Chock Full O'Nuts Business" on page 49 of this proxy
statement/prospectus.
12
<PAGE>
THE SPECIAL MEETING
We are furnishing this proxy statement/prospectus to shareholders of Chock
full o'Nuts as part of the solicitation of proxies by the Chock full o'Nuts
board of directors for use at the special meeting.
Date; Time and Place
We will hold the special meeting at The Chase Manhattan Bank, 11th Floor,
Room A, 270 Park Avenue, New York, New York 10017, at 1:00 p.m., local time, on
Friday, October 15, 1999.
Purpose of Special Meeting
At the special meeting, we are asking you to adopt the merger agreement. The
Chock full o'Nuts board of directors has determined that the merger is fair to,
and in the best interests of, Chock full o'Nuts shareholders. The board
unanimously approved the merger agreement and the merger and unanimously
recommends that Chock full o'Nuts shareholders vote "for" adoption of the
merger agreement.
Record Date; Stock Entitled to Vote; Quorum
You are entitled to vote at the special meeting if you owned shares as of
the close of business on August 19, 1999, the record date. On the record date,
there were 11,288,237 shares of Chock full o'Nuts common stock entitled to vote
at the special meeting. You will have one vote at the special meeting for each
share of Chock full o'Nuts common stock that you owned on the record date. A
quorum is present at the special meeting if a majority of the shares of Chock
full o'Nuts common stock issued and outstanding and entitled to vote on the
record date is represented in person or by proxy. In the event that a quorum is
not present at the special meeting, we expect that the meeting will be
adjourned or postponed to solicit additional proxies.
Vote Required
The affirmative vote of holders of two-thirds of the shares of Chock full
o'Nuts common stock outstanding on the record date is required to adopt the
merger agreement. If you abstain from voting or do not vote, either in person
or by proxy, it will have the same effect as a vote against adoption of the
merger agreement.
Voting by Chock full o'Nuts Directors and Executive Officers
On the record date, directors and executive officers of Chock full o'Nuts
and their affiliates owned and were entitled to vote 985,404 shares of Chock
full o'Nuts common stock, or approximately 8.7% of the shares of Chock full
o'Nuts common stock outstanding on the record date. The directors and executive
officers of Chock full o'Nuts intend to vote the Chock full o'Nuts common stock
owned by them "for" adoption of the merger agreement.
Voting of Proxies
All shares represented by properly executed proxies received in time for the
special meeting will be voted at the special meeting in the manner specified by
the holders. Properly executed proxies that do not contain voting instructions
will be voted "for" adoption of the merger agreement.
Shares of Chock full o'Nuts common stock represented at the special meeting
but not voting will be treated as present at the special meeting for purposes
of determining the presence or absence of a quorum for the transaction of all
business. Shares of Chock full o'Nuts common stock for which proxies have been
received but the holders have abstained will also count for determining a
quorum.
Only shares affirmatively voted for adoption of the merger agreement,
including properly executed proxies that do not contain voting instructions,
will be counted as favorable votes for that proposal. If you abstain from
voting or do not vote, either in person or by proxy, it will have the same
effect as a vote against adoption of the merger agreement. Brokers who hold
shares of Chock full o'Nuts common stock in street name for customers who are
the beneficial owners of those shares must receive specific instructions from
those customers or they may not give a proxy to vote those customers' shares.
These non-voted shares are referred to as broker non-
13
<PAGE>
votes and have the effect of votes against adoption of the merger agreement.
The persons whom shareholders name as proxies may propose and vote for one
or more adjournments of the special meeting, including adjournments to permit
further solicitations of proxies. No proxy voted against the proposal to adopt
the merger agreement will be voted in favor of any adjournment or postponement.
Chock full o'Nuts does not expect that any matter other than the proposal to
adopt the merger agreement will be brought before the special meeting. If,
however, the Chock full o'Nuts board of directors properly presents other
matters, the persons named as proxies will vote in accordance with their
judgment.
Revocability of Proxies
If you grant a proxy on the enclosed form of proxy, you are not precluded
from voting in person at the special meeting. If you are not the owner of
record but hold your shares through a broker or bank, you should take
appropriate steps to obtain a legal proxy from the owner of record if you wish
to vote at the special meeting. You may revoke a proxy at any time before its
exercise by: (1) filing with the Secretary of Chock full o'Nuts a duly executed
revocation of proxy, (2) by submitting a duly executed proxy to the Secretary
of Chock full o'Nuts bearing a later date or (3) by appearing at the special
meeting and voting in person. Attendance at the special meeting will not itself
constitute revocation of a proxy. If you hold your shares through a broker or
bank, you should follow the instructions provided by that firm to revoke your
proxy.
Solicitation of Proxies
Chock full o'Nuts will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by mail, the directors, officers and
employees of Chock full o'Nuts and its subsidiaries may solicit proxies from
shareholders by telephone or other electronic means or in person. Chock full
o'Nuts will cause brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of stock
held of record by them. Chock full o'Nuts will reimburse these custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses in doing
so.
The Altman Group will assist in the solicitation of proxies by Chock full
o'Nuts. Chock full o'Nuts will pay a fee estimated at $15,000, plus expenses.
If we request The Altman Group to contact individual shareholders, Chock full
o'Nuts will separately pay The Altman Group its customary fee, plus expenses
for providing these services. Chock full o'Nuts will also pay the reasonable
mailing charges of brokerage firms and other custodians, as established by NYSE
guidelines. Chock full o'Nuts will indemnify The Altman Group against any
losses arising out of its proxy soliciting services on behalf of Chock full
o'Nuts.
Shareholders should not send stock certificates with their proxies. You
should use the transmittal form with instructions for the surrender of Chock
full o'Nuts common stock certificates which will be mailed to you as soon as
practicable after completion of the merger.
THE MERGER
The following discussion summarizes the background of the merger and the
material terms of the merger. You should read carefully the remainder of this
proxy statement/prospectus and the merger agreement, which is attached as Annex
1 to this proxy statement/prospectus.
Background to the Merger
In a letter dated August 15, 1997, Sara Lee invited Chock full o'Nuts to
negotiate a business combination acceptable to both companies and their
respective shareholders. On August 20, 1997, Chock full o'Nuts indicated that
it was not interested in pursuing these negotiations.
On July 8, 1998, Sara Lee submitted a written proposal to the board of
directors of Chock full o'Nuts proposing that Sara Lee acquire Chock full
o'Nuts at a purchase price of $9.50 per share in cash or shares of Sara Lee
common stock. On July 29, 1998, Sara Lee submitted another letter reiterating
its offer. On August 12, 1998, the board of directors of Chock full o'Nuts
responded that it was reviewing and evaluating the proposal with the assistance
of Credit Suisse First Boston, its financial advisor.
14
<PAGE>
On September 15, 1998, representatives of both companies and their financial
advisors met. At this meeting, the proposal and related matters were discussed.
Several telephone conversations between representatives of Sara Lee and Chock
full o'Nuts regarding the proposal occurred during September and October 1998.
On October 2, 1998, Chock full o'Nuts and Sara Lee entered into a
confidentiality agreement. Based upon its discussions with Chock full o'Nuts
and its representatives, in a letter to the Chock full o'Nuts board of
directors delivered on October 16, 1998, Sara Lee increased its proposal to
$10.50 per share in cash or shares of Sara Lee common stock. On October 23,
1998, the Chock full o'Nuts board of directors, through its financial advisors,
rejected this second proposal but indicated that it would be willing to discuss
a transaction at a higher price. On October 29, 1998, Credit Suisse First
Boston relayed to the Chock full o'Nuts board of directors that Sara Lee had
indicated that it was not interested in increasing its offer.
In a letter to the Chock full o'Nuts board of directors dated March 10,
1999, Sara Lee again indicated its interest in acquiring Chock full o'Nuts. In
light of Chock full o'Nuts' unfavorable operating performance and stock price
decline, Sara Lee offered to acquire Chock full o'Nuts at a price of $9.50 per
share. On March 22, 1999, Chock full o'Nuts rejected this proposal as
inadequate. At the direction of Chock full o'Nuts, Credit Suisse First Boston
subsequently approached, and held discussions with, selected third parties to
solicit indications of interest in a possible acquisition of Chock full o'Nuts.
None of these parties, however, submitted a firm offer regarding a transaction
with Chock full o'Nuts.
On April 12, 1999, representatives of Sara Lee informed Credit Suisse First
Boston that, as of that day, Sara Lee had acquired beneficial ownership of more
than 5% of Chock full o'Nuts' common stock. Representatives of the parties had
further discussions during the week of April 12 regarding a possible meeting
between the parties. On April 16, 1999, Sara Lee's legal advisors delivered to
Chock full o'Nuts' financial advisors a proposed form of merger agreement with
respect to the acquisition of Chock full o'Nuts by Sara Lee. On April 19, 1999,
representatives of Sara Lee and its financial advisors met with representatives
of Chock full o'Nuts and its financial advisors to discuss the recent
performance of Chock full o'Nuts, a possible transaction between the parties
and related matters. Sara Lee indicated that it was willing to increase its
offer above $10.00 per share in connection with negotiations regarding a
merger.
On April 20, 1999, Sara Lee increased its offer to $10.50 per share in cash.
Credit Suisse First Boston, at the direction of Chock full o'Nuts, then told
Sara Lee that the Chock full o'Nuts board of directors would consider a
transaction at $12.50 per share in Sara Lee common stock. Later that day in a
letter to the board of directors, Sara Lee proposed to acquire Chock full
o'Nuts at a price of $10.50 per share with the consideration to be paid in the
form of Sara Lee common stock. In the same letter, Sara Lee offered to amend
the terms of this proposal to include structural elements which the Chock full
o'Nuts' advisors had indicated would have value to its shareholders. Through a
press release issued on April 22, 1999, Chock full o'Nuts also rejected this
proposal as inadequate.
On April 22, 1999, Sara Lee filed a Schedule 13D with the SEC, which
disclosed its acquisition of shares and convertible debentures representing
5.29% of the then-outstanding shares of Chock full o'Nuts common stock and its
intent to acquire Chock full o'Nuts.
On May 4, 1999, Sara Lee issued a press release announcing that it would
commence a tender offer to acquire all of the outstanding securities of Chock
full o'Nuts not owned by Sara Lee. Sara Lee offered $10.50 per share of Chock
full o'Nuts common stock, $1,275.82 net per $1,000 principal amount of Chock
full o'Nuts 7% debentures and $1,344.43 net per $1,000 principal amount of
Chock full o'Nuts 8% debentures. Sara Lee filed an amendment to its Schedule
13D with the SEC disclosing its intention. The tender offer was commenced on
May 7, 1999.
On May 4, 1999, Sara Lee filed with the FTC and the Antitrust Division of
the Department of Justice a Premerger Notification and Report Form under the
Hart-Scott-Rodino Act with respect to its offer. At 11:59 p.m., New York City
time, on May 19, 1999, the waiting period with respect to the acquisition under
the Hart-Scott-Rodino Act expired.
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<PAGE>
On May 20, 1999, Chock full o'Nuts filed its Schedule 14D-9 with the SEC,
urging its shareholders to reject the tender offer as not representing the
potential value of the company achievable for its shareholders.
Between May 27, 1999 and June 7, 1999, representatives of both parties'
financial advisors discussed generally the possible terms and structure of a
potential transaction between Sara Lee and Chock full o'Nuts. The possible
terms discussed included the form of consideration, the structure of the collar
and values, in cash and/or Sara Lee common stock, to the Chock full o'Nuts
shareholders of between $10.50, proposed by Sara Lee's financial advisors, and
$11.50, proposed by Chock full o'Nuts financial advisors, per share of Chock
full o'Nuts common stock. However, the parties did not reach an agreement and
did not make any formal offers or counteroffers.
On June 7, 1999, Sara Lee issued a press release announcing the extension of
the expiration date of the offer until 5:00 p.m., New York City time, on
Friday, June 18, 1999. The offer was previously scheduled to expire at 12:00
midnight on June 4, 1999. As of midnight, New York City time, on June 4, 1999,
5,572,167 shares of common stock, $28,454,000 principal amount of the 7%
debentures and $17,506,000 principal amount of the 8% debentures were validly
tendered and not withdrawn. Sara Lee also disclosed that its representatives
had held discussions over the prior few days with representatives of Chock full
o'Nuts regarding a potential merger between the parties and that these
discussions were continuing.
Between June 7-8, 1999, as a result of preliminary discussions between both
parties' financial advisors, Sara Lee formally proposed a merger on the terms
and conditions set forth in the merger agreement, which was approved by the
Chock full o'Nuts board of directors.
On June 8, 1999, Sara Lee and Chock full o'Nuts jointly announced that they
had entered into the merger agreement. Sara Lee also announced that in
connection with the merger agreement, it had terminated the cash tender offer.
All securities tendered in the tender offer were returned to their holders
after the termination of the cash tender offer.
Reasons for the Merger and Board of Directors' Recommendation
Reasons for the Merger.
The Chock full o'Nuts board of directors has unanimously approved the merger
agreement and the merger. The board believes that the merger is fair to, and in
the best interests of, Chock full o'Nuts and its shareholders and unanimously
recommends that Chock full o'Nuts shareholders vote "for" the adoption of the
merger agreement.
In the course of reaching its decision to adopt the merger agreement, the
Chock full o'Nuts board of directors consulted with Chock full o'Nuts'
management, as well as its outside legal counsel and its financial advisors,
and considered a number of factors, including the following:
1. Chock full o'Nuts Business, Conditions and Prospects. The Chock full
o'Nuts board of directors considered information with respect to the
financial condition, results of operations and business of Chock full
o'Nuts, on both a historical and prospective basis, and current
industry, economic and market conditions. Management and Chock full
o'Nuts legal and financial advisors reviewed with the Chock full o'Nuts
board of directors information regarding Chock full o'Nuts' financial
condition and prospects after conducting financial, legal and business
due diligence.
2. Sara Lee's Business, Condition and Prospects. The Chock full o'Nuts
board of directors considered information with respect to the financial
condition, results of operations and business of Sara Lee, and current
industry, economic and market conditions. Chock full o'Nuts' advisors
reviewed with the Chock full o'Nuts board of directors information
regarding Sara Lee's financial condition based on publicly available
information concerning Sara Lee and discussions with Sara Lee's
financial advisors. In evaluating Sara Lee, the Chock full o'Nuts board
of directors considered, among other things, Sara Lee's operational and
market data in comparison to other companies engaged in similar
industries.
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<PAGE>
3. Opinion of Credit Suisse First Boston. The Chock full o'Nuts board of
directors considered the opinion of Credit Suisse First Boston as to the
fairness, from a financial point of view, of the exchange ratio in the
merger to the holders of Chock full o'Nuts common stock, other than Sara
Lee and its affiliates. This opinion is more fully described below under
the caption "Opinion of Credit Suisse First Boston."
4. Liquidity of Sara Lee's Common Stock. The Chock full o'Nuts board of
directors considered the likely liquidity of the Sara Lee common stock
which will be provided to Chock full o'Nuts shareholders as a result of
the merger.
5. Terms of the Merger. The Chock full o'Nuts board of directors considered
a number of factors related to the terms of the merger including the
following:
(a) Chock full o'Nuts Option to Refuse Any Exchange Value Below $11.00
per share. In the event that the average price of Sara Lee common
stock, as of the determination date, falls to a value which would
result in you receiving less than $11.00 in Sara Lee common stock
for each share of Chock full o'Nuts common stock surrendered, Chock
full o'Nuts has the option to terminate the merger agreement unless
Sara Lee supplements the shares of Sara Lee stock with additional
stock and/or cash to provide $11.00 in value.
(b) Potential for Chock full o'Nuts Shareholders to Benefit from an
Increase in the Value of Sara Lee Common Stock Prior to the
Merger. In the event that the average price of Sara Lee common
stock increases above $26.00 per share, the merger agreement
provides that Chock full o'Nuts shareholders will participate in
any increase in value over $26.00.
The foregoing discussion of the information and factors considered and given
weight by the Chock full o'Nuts board of directors is not exhaustive. The
discussion includes all material factors considered by the Chock full o'Nuts
board of directors. In reaching its determination to approve and recommend
approval and adoption of the merger agreement and in view of the wide variety
of factors considered in connection with its evaluation, the Chock full o' Nuts
board of directors did not assign any relative or specific weights to the
foregoing factors. Individual directors may have given differing weights to the
different factors.
Recommendation of the Chock full o'Nuts Board of Directors.
After careful consideration, the Chock full o'Nuts board of directors has
unanimously determined that the terms of the merger agreement and the merger
are fair to, and in the best interests of, Chock full o'Nuts and its
shareholders and has approved the merger agreement and the merger. The Chock
full o'Nuts board of directors unanimously recommends that the shareholders of
Chock full o'Nuts vote "for" the adoption of the merger agreement.
Opinion of Credit Suisse First Boston Corporation
Credit Suisse First Boston has acted as Chock full o'Nuts' financial advisor
in connection with the merger. Credit Suisse First Boston was selected by Chock
full o'Nuts based on Credit Suisse First Boston's experience, expertise and
familiarity with Chock full o'Nuts and its business. Credit Suisse First Boston
is an internationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, the Chock full
o'Nuts board requested that Credit Suisse First Boston evaluate the fairness,
from a financial point of view, to the holders of Chock full o'Nuts common
stock of the exchange ratio in the merger. On June 7, 1999, at a meeting of the
Chock full o'Nuts board held to evaluate the merger, Credit Suisse First Boston
rendered to the Chock full o'Nuts board an oral opinion to the effect that, as
of the date of the opinion and based on and subject to the matters
17
<PAGE>
described in the opinion, the exchange ratio in the merger was fair, from a
financial point of view, to the holders of Chock full o'Nuts common stock,
other than Sara Lee and its affiliates. This oral opinion was confirmed by
delivery of a written opinion dated June 8, 1999, the date of the merger
agreement.
The full text of Credit Suisse First Boston's written opinion dated June 8,
1999 to the Chock full o'Nuts board, which describes the procedures followed,
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex 2 to, and is incorporated by reference in, this proxy
statement/prospectus. Credit Suisse First Boston has consented to the inclusion
of its opinion letter as Annex 2 to this proxy statement/prospectus. In giving
its consent, Credit Suisse First Boston does not admit that it comes within the
category of persons whose consent is required under, and does not admit that it
is an "expert" for purposes of, the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder. Credit Suisse First Boston's
opinion is addressed to the Chock full o'Nuts board and relates only to the
fairness, from a financial point of view, of the exchange ratio in the merger.
It does not address any other aspect of the proposed merger or any related
transaction and does not constitute a recommendation to any shareholder as to
any matter relating to the merger. The summary of Credit Suisse First Boston's
opinion included in this proxy statement/prospectus is qualified in its
entirety by reference to the full text of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and publicly available business and financial information relating to
Chock full o'Nuts and Sara Lee. Credit Suisse First Boston also reviewed other
information relating to Chock full o'Nuts, including financial forecasts for
Chock full o'Nuts prepared by the management of Chock full o'Nuts, provided to
or discussed with Credit Suisse First Boston by Chock full o'Nuts, and met with
the management of Chock full o'Nuts to discuss the business and prospects of
Chock full o'Nuts. In addition, Credit Suisse First Boston reviewed with
representatives of Sara Lee management specific publicly available information
and near-term analysts' earnings estimates for Sara Lee. Sara Lee management
indicated they were not aware of anything that would lead them to believe that
those estimates were unreasonable.
Credit Suisse First Boston also considered financial and stock market data
of Chock full o'Nuts and Sara Lee and compared those data with similar data for
other publicly held companies in businesses similar to Chock full o'Nuts and
Sara Lee and considered, to the extent publicly available, the financial terms
of other business combinations and other transactions recently effected. Credit
Suisse First Boston also considered other information, financial studies,
analyses and investigations and financial, economic and market criteria which
Credit Suisse First Boston determined were relevant. In connection with its
engagement, Credit Suisse First Boston was requested to approach, and hold
discussions with, selected third parties to solicit indications of interest in
a possible acquisition of Chock full o'Nuts.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the information that was
provided to or otherwise reviewed by it and relied on the information being
complete and accurate in all material respects. With respect to financial
forecasts for Chock full o'Nuts, Credit Suisse First Boston was advised, and
assumed, that the forecasts were reasonably prepared on bases reflecting the
best currently available estimates and judgments of the management of Chock
full o'Nuts as to the future financial performance of Chock full o'Nuts. Credit
Suisse First Boston also reviewed with Sara Lee management the reasonableness
of publicly available financial information relating to Sara Lee. With respect
to the potential synergies and strategic benefits anticipated to result from
the merger, Chock full o'Nuts management advised Credit Suisse First Boston,
and Credit Suisse First Boston assumed, that the estimates represented the best
currently available estimates of the management of Chock full o'Nuts, including
as to the amount, timing and achievability of those synergies and strategic
benefits. Credit Suisse First Boston also assumed, with the consent of Chock
full o'Nuts and its legal advisors, that the merger will be treated as a tax-
free reorganization for federal income tax purposes.
Credit Suisse First Boston was not requested to, and did not, make an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of Chock full o'Nuts or Sara Lee, and was not furnished
18
<PAGE>
with any evaluations or appraisals. Credit Suisse First Boston's opinion was
necessarily based on information available to, and financial, economic, market
and other conditions as they existed and could be evaluated by, Credit Suisse
First Boston on the date of its opinion. Credit Suisse First Boston did not
express any opinion as to the actual value of the Sara Lee common stock when
issued in the merger or the prices at which the Sara Lee common stock will
trade after the merger.
In preparing its opinion to the Chock full o'Nuts board, Credit Suisse First
Boston performed a variety of financial and comparative analyses, including
those described below. The summary of Credit Suisse First Boston's analyses
described below is not a complete description of the analyses underlying Credit
Suisse First Boston's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to summary description. In arriving at its
opinion, Credit Suisse First Boston made qualitative judgments as to the
significance and relevance of each analysis and factor considered by it.
Accordingly, Credit Suisse First Boston believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors
or focusing on information presented in tabular format, without considering all
analyses and factors or the narrative description of the analyses, could create
a misleading or incomplete view of the processes underlying its analyses and
opinion.
In its analyses, Credit Suisse First Boston considered industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Chock full o'Nuts and
Sara Lee. No company, transaction or business used in Credit Suisse First
Boston's analyses as a comparison is identical to Chock full o'Nuts or Sara Lee
or the proposed merger, and an evaluation of the results of those analyses is
not entirely mathematical. Rather, the analyses involve complex considerations
and judgments concerning financial and operating characteristics and other
factors that could affect the acquisition, public trading or other values of
the companies, business segments or transactions being analyzed.
The estimates contained in Credit Suisse First Boston's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse First
Boston's analyses and estimates are inherently subject to substantial
uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one of
many factors considered by the Chock full o'Nuts board of directors in its
evaluation of the proposed merger and should not be viewed as determinative of
the views of the Chock full o'Nuts board of directors or management with
respect to the exchange ratio or the merger.
The following is a summary of the material analyses performed by Credit
Suisse First Boston in connection with its opinion to the Chock full o'Nuts
board dated June 8, 1999. The financial analyses summarized below include
information presented in tabular format. In order to fully understand Credit
Suisse First Boston's financial analyses, the tables must be read together with
the text of each summary. The tables alone do not constitute a complete
description of the financial analyses. Considering the data set forth in the
tables below without considering the full narrative description of the
financial analyses, including the methodologies and assumptions underlying the
analyses, could create a misleading or incomplete view of Credit Suisse First
Boston's financial analyses.
Discounted Cash Flow Analysis. Credit Suisse First Boston estimated the
present value of the stand-alone, unlevered, after-tax free cash flows that
Chock full o'Nuts could produce over the fiscal years 2000 through 2009 based
on three scenarios. The first scenario, the management case, was based on
estimates of the management of Chock full o'Nuts. The other scenarios, the
adjusted management case I and the adjusted management case II, were based on
adjustments to the management case developed with and reviewed by the
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<PAGE>
management of Chock full o'Nuts in order to examine areas of potential
sensitivity that could impact growth and profitability. Specifically, the
adjusted management cases reflected, among other things, a reduction of
approximately 50% in the growth of coffee volume and the growth of sales of
other non-coffee products, and an increase in selling, general and
administrative costs as a percentage of total sales. In addition, the adjusted
management case II reflected a reduction of approximately 10% in the spread
between sales prices and the cost of coffee, as well as an increase in the cost
of goods sold on non-coffee products. Credit Suisse First Boston reviewed the
per share equity reference ranges implied in each scenario both with and
without giving effect to the incremental value of the potential synergies that
the management of Chock full o'Nuts believed that a buyer could realize in a
merger with Chock full o'Nuts.
Ranges of estimated terminal values, that is the estimated value of the cash
flows after 2009, for Chock full o'Nuts were calculated using multiples of 2009
earnings before interest, taxes, depreciation and amortization, commonly
referred to as EBITDA, of 5.0x to 7.0x and 4.0x to 6.0x estimated fiscal year
2009 pre-tax synergies. The free cash flow streams and estimated terminal
values were then discounted to present value using discount rates of 9.0% to
10.0%, based on the weighted average cost of capital for Chock full o'Nuts.
This analysis indicated the following implied approximate per share equity
reference ranges for Chock full o'Nuts:
<TABLE>
<CAPTION>
Adjusted Adjusted
Management Case Management Case I Management Case II
---------------- ----------------- ------------------
<S> <C> <C> <C>
Without synergies....... $ 9.50 to $12.25 $ 7.25 to $10.00 $ 5.50 to $ 8.50
With corporate overhead
synergies.............. $12.25 to $14.50 $10.00 to $12.25 $ 8.50 to $10.75
With food service and
corporate overhead
synergies.............. $14.50 to $16.75 $12.25 to $14.50 $10.75 to $13.00
</TABLE>
Selected Mergers and Acquisitions Analysis. Credit Suisse First Boston
analyzed, among other things, the implied purchase prices and transaction
multiples paid or proposed to be paid in the following selected merger and
acquisition transactions in the branded food and foodservice sectors:
Branded Food Transactions
<TABLE>
<CAPTION>
Date
Acquiror Target Announced
-------- ------ ---------
<C> <S> <C>
. Cadbury Schweppes, PLC The Procter & Gamble Company
(Hawaiian Punch brand) 4/16/99
. New World Pasta Company Hershey Foods Corporation (pasta 12/15/98
division)
. Agrilink Foods, Inc. Dean Foods Company (vegetable 7/27/98
division)
. ConAgra, Inc. Nabisco, Inc. (Egg Beaters brand) 7/21/98
. PepsiCo, Inc. Tropicana Products, Inc. 7/21/98
. ConAgra, Inc. GoodMark Foods, Inc. 6/18/98
. Desc, S.A. de C.V. Authentic Specialty Foods, Inc. 5/8/98
. Suiza Foods Corporation The Morningstar Group, Inc. 9/29/97
. Aurora Foods, Inc. Kraft Foods, Inc. (Log Cabin 5/12/97
brand)
. IBP, inc. Foodbrands America, Inc. 5/5/97
. Aurora Foods, Inc. MB Foods Inc. (Mrs. Butterworth's 12/31/96
brand)
. Kellogg Company Kraft Foods, Inc. (Lender's Bagel 11/18/96
brand)
. Hicks Muse Tate & Furst American Home Food Corporation 11/1/96
. The Morningstar Group, Inc. Presto Food Products, Inc. 10/20/96
. General Mills, Inc. Ralcorp Holdings, Inc. (branded
cereal and snack businesses) 8/14/96
. Keebler Corporation G.F. Industries, Inc. (Sunshine 6/5/96
snack brand)
</TABLE>
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Foodservice Transactions
<TABLE>
<CAPTION>
Date
Acquiror Target Announced
-------- ------ ---------
<C> <S> <C>
. Sysco Corporation Doughtie's Foods, Inc. 2/17/99
. Sara Lee Corporation The Quaker Oats Company
(Continental Coffee division) 8/10/98
. AmeriServe Food Distribution, Inc. Prosource, Inc. 1/30/98
. U.S. Foodservice Rykoff-Sexton, Inc. 6/30/97
. United Natural Foods, Inc. Stow Mills, Inc. 6/23/97
. Nash-Finch Company Super Food Services, Inc. 10/8/96
</TABLE>
For the selected transactions, Credit Suisse First Boston compared equity
values as multiples of latest 12 months net income and enterprise values, that
is equity market value plus debt and less cash, as multiples of latest 12
months sales, EBITDA and earnings before interest and taxes, commonly referred
to as EBIT. All multiples were based on financial information available at the
time of the relevant transaction, except for the Sara Lee/The Quaker Oats
Company transaction, which was based on information provided by Chock full
o'Nuts management. Credit Suisse First Boston applied a range of selected
multiples of sales, EBITDA, EBIT and net income statistics derived from the
selected transactions to corresponding financial data of Chock full o'Nuts,
after adjustment to exclude integration costs associated with Chock full o'Nuts
acquisition of Park, operating losses from Chock full o'Nuts Quikava division
and losses associated with changes in the price of green coffee. This analysis,
using the management case estimates, indicated an implied equity reference
range for Chock full o'Nuts of approximately $10.00 to $11.75 per share.
Selected Companies Analysis.
Credit Suisse First Boston compared financial, operating and stock market
data of Chock full o'Nuts to corresponding data of the following publicly
traded companies in the branded food and foodservice sectors:
<TABLE>
<CAPTION>
Branded Food Companies Foodservice Companies
---------------------- ---------------------
<C> <S>
. Celestial Seasonings, Inc. Fleming Companies, Inc.
. Dean Foods Company Performance Food Group Company
. International Home Foods, Inc. Sysco Corporation
. J & J Snack Foods Corp. United Natural Foods, Inc.
. Lance, Inc. U.S. Foodservice
. McCormick & Company, Incorporated
. Ralcorp Holdings, Inc.
. Riviana Foods Inc.
. Tasty Baking Company
. Vlassic Foods International Inc.
</TABLE>
For the selected companies, Credit Suisse First Boston compared equity
values as a multiple of estimated calendar years 1999 and 2000 net income, and
enterprise values as a multiple of latest 12 months and estimated calendar
years 1999 and 2000 sales, EBITDA and EBIT. Estimated financial data for the
selected companies were based on estimates of selected investment banking
firms. Credit Suisse First Boston then applied a range of selected multiples of
estimated calendar years 1999 and 2000 sales, EBITDA, EBIT and net income
statistics derived from the selected companies to corresponding financial data
of Chock full o'Nuts, utilizing the management case estimates. This analysis
indicated an implied equity reference range for Chock full o'Nuts of
approximately $7.00 to $9.25 per share.
Premium and Multiples Overview. Credit Suisse First Boston derived an equity
value for Chock full o'Nuts implied in the merger by multiplying the total
number of fully diluted shares of Chock full o'Nuts common stock outstanding on
June 7, 1999 by the estimated consideration to be paid in the merger of $11.00
per share. Credit Suisse First Boston then derived an enterprise value for
Chock full o'Nuts implied in the
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<PAGE>
merger by adding the net debt of Chock full o'Nuts as of January 31, 1999 to
this implied equity value. Using these results, Credit Suisse First Boston
calculated the enterprise value multiples of Chock full o'Nuts' latest 12
months and estimated fiscal 1999 sales, EBITDA and EBIT, and equity value
multiples of Chock full o'Nuts' latest 12 months and estimated fiscal 1999 net
income implied by the exchange ratio. Estimated financial data used in this
analysis was based on the management case estimates. Credit Suisse First Boston
also reviewed multiples of Chock full o'Nuts latest 12 months operational data
and estimated fiscal 1999 operating results as adjusted to exclude integration
costs associated with Chock full o'Nuts' acquisition of Park, operating losses
from the Quikava division and losses or gains associated with changes in the
price of green coffee. This review indicated the following multiples for Chock
full o'Nuts implied by the exchange ratio:
<TABLE>
<S> <C>
Enterprise Value as a multiple of:
Latest 12 months sales.............................................. 0.6x
Latest 12 months EBITDA............................................. 10.1x
Latest 12 months EBIT............................................... 17.2x
Latest 12 months adjusted EBITDA.................................... 7.4x
Latest 12 months adjusted EBIT...................................... 10.6x
Estimated 1999 sales................................................ 0.7x
Estimated 1999 EBITDA............................................... 13.2x
Estimated 1999 EBIT................................................. 27.8x
Estimated 1999 adjusted EBITDA...................................... 8.3x
Estimated 1999 adjusted EBIT........................................ 12.5x
Equity Value as a multiple of:
Latest 12 months net income......................................... 30.1x
Latest 12 months adjusted net income................................ 18.3x
Estimated 1999 net income........................................... 53.7x
Estimated 1999 adjusted net income.................................. 11.5x
</TABLE>
In addition, Credit Suisse First Boston reviewed the implied premiums to
Chock full o'Nuts' closing share prices on April 22, 1999, immediately before
Sara Lee's filing of its Schedule 13D relating to its acquisition of Chock full
o'Nuts common stock, and on June 4, 1999, one week before the Chock full o'Nuts
board meeting to approve the merger. This analysis indicated an implied premium
to Chock full o'Nuts' closing share price on April 22, 1999 of approximately
72% and an implied premium to its closing share price on June 4, 1999 of
approximately 5%.
Miscellaneous. Under the terms of Credit Suisse First Boston's engagement,
Chock full o'Nuts has agreed to pay Credit Suisse First Boston for its
financial advisory services upon completion of the merger an aggregate fee
equal to the sum of 1.5% of the aggregate consideration, including liabilities
assumed, payable in the merger up to and including aggregate consideration
implied at $11.00 per share, plus 5.0% of the incremental amount of aggregate
consideration in excess of $11.00 per share. Chock full o'Nuts also has agreed
to reimburse Credit Suisse First Boston for its reasonable out-of-pocket
expenses, including the fees and expenses of legal counsel and any other
advisor retained by Credit Suisse First Boston, and to indemnify Credit Suisse
First Boston and related parties against liabilities, including liabilities
under the federal securities laws, arising out of Credit Suisse First Boston's
engagement.
Credit Suisse First Boston and its affiliates have in the past provided
financial services to Chock full o'Nuts unrelated to the proposed merger, for
which services Chock full o'Nuts has agreed to reimburse Credit Suisse First
Boston for its expenses. In the ordinary course of business, Credit Suisse
First Boston and its affiliates may actively trade the debt and equity
securities of both Chock full o'Nuts and Sara Lee for their own accounts and
for the accounts of customers and, accordingly, may at any time hold long or
short positions in these securities.
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<PAGE>
Interests of Chock full o'Nuts Directors and Management in the Merger
In considering the recommendation of the Chock full o'Nuts board of
directors with respect to the merger, you should be aware of, and should
carefully consider that, the Chock full o'Nuts board and members of Chock full
o'Nuts' management may have interests in the merger that are different from, or
in addition to, the interests of the other shareholders. These differences may
create potential conflicts of interest. The following summarizes potential
conflicts of interest with respect to the merger:
The Chock full o'Nuts Board of Directors. Immediately following the merger,
the board of directors of Chock full o'Nuts will be replaced by the directors
of CFN Acquisition Corporation. The Chock full o'Nuts Unfunded Directors
Retirement Plan covers directors who are not and never have been employees of
Chock full o'Nuts. Under the terms of the plan, each outside director who
retires from the board of directors with at least five full years of service as
a director of Chock full o'Nuts shall, at the later of age 65 or on the date on
which such director retires from the Chock full o'Nuts board of directors,
receive for a period of 10 years an annual cash benefit payment equal to the
regular annual director's fee in effect upon such director's retirement. As a
result of the merger, those outside directors who have reached the age of 65
and have served on the board for at least five years will be immediately
eligible for the payments. Others will be eligible immediately upon reaching
age 65 provided they have served for five years before the merger.
The following table sets forth those directors of Chock full o'Nuts that
will be immediately eligible for payments under the Unfunded Directors
Retirement Plan and the amount of the annual cash benefit payable to such
director:
<TABLE>
<CAPTION>
Amount of
Director annual benefit
-------- --------------
<S> <C>
Norman E. Alexander....... $16,000
Stuart Z. Krinsly......... $16,000
David S. Weil............. $16,000
</TABLE>
Indemnification of Directors and Officers of Chock full o'Nuts. For a period
of six years from and after the effective time of the merger, Sara Lee must
cause the surviving corporation to indemnify the current or former directors or
officers of Chock full o'Nuts against any losses, claims, damages, judgments,
settlements, liabilities, costs or expenses arising out of or pertaining to
acts or omissions, or alleged acts or omissions, by them in their capacities as
officers and directors occurring at or before the effective time of the merger.
For a period of three years from and after the effective time, Sara Lee or the
surviving corporation must maintain policies of directors' and officers'
liability insurance with coverage of comparable scope and amount to Chock full
o'Nuts' existing coverage, as long as the annual aggregate premium does not
exceed 150% of the annual premium currently paid by Chock full o'Nuts for its
existing coverage. If the annual premium does exceed this amount, Sara Lee or
the surviving corporation must obtain a policy with the greatest coverage
available for a cost not exceeding this amount.
Employment Agreements:
Generally. Chock full o'Nuts has previously entered into employment
agreements with Howard Leitner, Peter Baer, Al Hernandez, Richard Kassar and
Stephen Weise. The employment agreements become effective in the event of a
change in control. The merger will constitute a change in control under each of
these employment agreements. The employment agreements provide, among other
things, for:
. a three-year term beginning immediately after the change in control, and
. base salary, bonus and other employee benefits at amounts existing
immediately before the change in control.
Mr. Haas. Chock full o'Nuts has also previously entered into an amended and
restated employment agreement with Marvin Haas. The employment agreement with
Mr. Haas is substantially similar to the agreements with the other officers set
forth above. However, Mr. Haas' benefits are payable in the event of his
voluntary resignation for any reason following a change in control and not just
for specified reasons constituting "Good Reason." The other officers must have
"Good Reason" for terminating their contracts.
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<PAGE>
Mr. Haas' base salary for the balance of the term after a termination of
employment following a change in control is increased by $75,000 from that in
effect immediately before the change in control.
Stock Options and Restricted Stock Agreements. Under the Chock full o'Nuts
1984 Incentive Compensation Plan, 10 officers and three employees of Chock full
o'Nuts have options to purchase an aggregate of 413,493 shares of Chock full
o'Nuts common stock. Of these options, 35,333 are not currently exercisable.
All of these options are exercisable at prices of between $5.25 per share and
$8.50 per share. Upon completion of the merger, all of these options will
become immediately exercisable and will be converted into options to purchase a
number of shares of Sara Lee common stock equal to:
. (1) the number of shares of Chock full o'Nuts common stock that could
have been purchased under the Chock full o'Nuts options multiplied by
. (2) the exchange ratio, at a price per share of Sara Lee common stock
equal to the per share option exercise price specified in the Chock full
o'Nuts stock options, divided by the exchange ratio.
In the merger agreement, Chock full o'Nuts agreed not to grant any
additional options under the 1984 Incentive Compensation Plan. The following
table lists the officers and employees of Chock full o'Nuts that will have
their options vested as a result of the merger and the number of shares
underlying those options:
<TABLE>
<CAPTION>
Number of shares
Officer/Employee underlying options
---------------- ------------------
<S> <C>
Howard Leitner......................................... 5,333
Richard Kassar......................................... 5,000
Tom Donnell............................................ 5,000
Anthony Fazzari........................................ 5,000
Stephen Weise.......................................... 5,000
Al Hernandez........................................... 5,000
Michael Goldman........................................ 5,000
</TABLE>
Additionally, Howard Leitner and Martin Cullen had previously entered into
restricted stock agreements with Chock full o'Nuts. Under the terms of these
agreements, 19,546 restricted shares which were to vest in 2001, will vest
immediately upon consummation of the merger. Mr. Leitner will receive 17,769
shares having an aggregate market value of $184,353, and Mr. Cullen will
receive 1,777 shares having a market value of $18,436.
Incentive Cash Bonus Plan. Under the terms of the Chock full o'Nuts Annual
Incentive Cash Bonus Plan, 11 Chock full o'Nuts executives will receive the
maximum bonus for which they are eligible with respect to any fiscal year in
which a change in control occurs. These bonuses will be paid regardless of
whether the performance criteria for the bonuses have been met. The merger
constitutes a change in control as defined in the Annual Incentive Cash Bonus
Plan. These bonuses are payable 30 days after completion of the merger. The
following table sets forth the executives of Chock full o'Nuts that are
entitled to benefits under the Incentive Cash Bonus Plan and the amount of
bonus each executive is entitled to as a result of the merger:
<TABLE>
<CAPTION>
Executive Bonus
--------- --------
<S> <C>
Marvin Haas...................................................... $300,000
Howard Leitner................................................... 135,000
Richard Kassar................................................... 120,000
Martin Cullen.................................................... 66,000
Peter Baer....................................................... 56,000
Stephen Weise.................................................... 70,000
Anthony Fazzari.................................................. 74,000
Al Hernandez..................................................... 63,000
Scott Abbott..................................................... 63,000
Matthew Goldberg................................................. 42,000
Michael Goldman.................................................. 72,000
</TABLE>
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<PAGE>
Severance Plan. Under the terms of the Chock full o'Nuts severance plan, in
the event of a change in control, the severance benefits to which all non-union
employees and employees who do not have employment agreements are entitled will
be doubled. The merger will constitute a change in control under the severance
plan.
Benefits Protection Trust. Chock full o'Nuts has established a Benefits
Protection Trust with State Street Bank and Trust Company and has contributed
$700,000 to it. The trust fund is to be used for litigation expenses incurred
by Chock full o'Nuts employees, including all executive officers of Chock full
o'Nuts, if, after a change in control, the new management of Chock full o'Nuts
refuses to pay benefits under any employment contract or any employee benefit
plan maintained by Chock full o'Nuts. The merger will constitute a change in
control under the trust.
Supplemental Employee Retirement Plan. Chock full o'Nuts maintains a non-
qualified, unfunded Supplemental Employee Retirement Plan, which covers those
participants of Chock full o'Nuts' Pension Plan whose benefits would otherwise
be limited by Internal Revenue Code limitations on qualified plan benefits. A
participant in the Supplemental Employee Retirement Plan is entitled to a
benefit equaling the difference between: (1) the amount of benefits the
participant is entitled to without reduction, limited to a maximum of $130,000
at normal retirement, and (2) the amount of benefits the participant is
entitled to after reduction, i.e., those payable under the pension plan. Chock
full o'Nuts must fund the Supplemental Employee Retirement Plan, in the
approximate amount of $1,050,000, immediately upon a change in control of Chock
full o'Nuts. The merger constitutes a change in control under the Supplemental
Employee Retirement Plan.
Agreements between Sara Lee and Chock full o'Nuts
On August 26, 1999, Chock full o'Nuts called its outstanding 7% convertible
debentures and 8% convertible debentures for redemption on September 14, 1999.
Sara Lee has entered into a credit agreement with Chock full o'Nuts in order to
fund these redemptions. Sara Lee has committed to loan up to a total principal
amount of $80.3 million. Of this amount, $50.7 million is committed to fund the
redemption of the 7% convertible debentures, referred to as the "A loan," and
$29.6 million is committed to fund the redemption of the 8% convertible
debentures, referred to as the "B loan." The A loan will mature on April 1,
2012 and amounts outstanding under this loan will bear interest, payable semi-
annually, at the annual rate of 7%. The B loan will mature on September 15,
2006 and amounts outstanding under this loan will bear interest, payable semi-
annually, at the annual rate of 8%. These term loans are unsecured obligations
of Chock full o'Nuts and are junior and subordinated to all of its senior
indebtedness.
Accounting Treatment
The merger will be accounted for as a "purchase" transaction for accounting
and financial reporting purposes, in accordance with generally accepted
accounting principles. Accordingly, Sara Lee will make a determination of the
fair value of Chock full o'Nuts' assets and liabilities in order to allocate
the purchase price to the assets acquired and the liabilities assumed. The
purchase price allocation is subject to revision when additional information
concerning asset and liability valuation is obtained.
Form of the Merger
Subject to the terms and conditions of the merger agreement and in
accordance with New York law, at the effective time of the merger, CFN
Acquisition Corp., a wholly-owned subsidiary of Sara Lee and a party to the
merger agreement, will merge with and into Chock full o'Nuts. Chock full o'Nuts
will survive the merger as a wholly-owned New York subsidiary of Sara Lee and
will continue under the name "Chock full o'Nuts Corporation."
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<PAGE>
Merger Consideration
At the effective time of the merger, for each share of Chock full o'Nuts
common stock that you own, you will receive a fraction between 0.5238 and
0.4231 of a share of Sara Lee common stock. We will determine the exact
fraction by dividing:
(1) $11.00, by
(2) the average price of Sara Lee common stock on the New York Stock
Exchange for the 20 consecutive trading days beginning on the date this
proxy statement/prospectus is first mailed to Chock full o'Nuts
shareholders.
If the average price of Sara Lee common stock is greater than $26.00, then
each share of Chock full o'Nuts common stock will be exchanged for 0.4231 of a
share of Sara Lee common stock. In this case, the value of the Sara Lee common
stock you receive may be more than $11.00 per share of Chock full o'Nuts common
stock. If the average price of Sara Lee common stock is less than $21.00, then
Sara Lee may elect to increase the exchange ratio above 0.5238 and/or make an
additional cash payment so that the value of the consideration you receive in
the merger for each share of Chock full o'Nuts common stock that you own is
$11.00. Shareholders will receive cash for any fractional shares which they
would otherwise receive in the merger.
Chock full o'Nuts' Option to Terminate the Merger Agreement if the Average
Price of Sara Lee Common Stock is Below $21.00 Per Share
If the average price of Sara Lee common stock is less than $21.00, Sara Lee
may increase the exchange ratio and/or make an additional cash payment so that
the value of consideration to the Chock full o'Nuts shareholders is $11.00 per
share of Chock full o'Nuts. If Sara Lee does not elect to increase the
consideration, then the Chock full o'Nuts board of directors may terminate the
merger agreement. It is not possible to know whether the termination right will
be triggered until after the determination date. The Chock full o'Nuts board of
directors has not decided whether it will exercise its right to terminate the
merger agreement if the termination right is triggered. In considering whether
to exercise its termination right in this situation, the Chock full o'Nuts
board of directors would, consistent with its fiduciary duties, take into
account all relevant facts and circumstances that exist at that time and would
consult with its financial advisors and legal counsel. Among the factors the
Chock full o'Nuts board of directors would take into account in making this
determination would be:
. the likelihood of obtaining greater value for Chock full o'Nuts' current
shareholders through a business combination or sale other than that
contemplated by the merger agreement;
. the financial condition, results of operations and business of Chock
full o'Nuts' and Sara Lee on both an historical and prospective basis;
and
. the financial prospects for Chock full o'Nuts' current shareholders if
they continue as shareholders of Chock full o'Nuts as compared to their
financial prospects as stockholders of Sara Lee.
Approval of the merger agreement by the shareholders of Chock full o'Nuts
will confer on the Chock full o'Nuts board of directors the power, consistent
with its fiduciary duties, to elect to consummate the merger in the event the
termination right is triggered whether or not there is any increase in the
merger consideration and without any further action by, or resolicitation of,
the shareholders of Chock full o'Nuts.
Conversion of Shares; Procedures for Exchange of Certificates; Fractional
Shares
Chock full o'Nuts common stock will be automatically converted into the
right to receive Sara Lee common stock at the effective time of the merger. As
soon as practicable after the effective time of the merger, The First National
Bank of Chicago, the exchange agent, will send a transmittal letter to each
former Chock full o'Nuts shareholder. The transmittal letter will contain
instructions for obtaining shares of Sara Lee common stock in exchange for
shares of Chock full o'Nuts common stock. Chock full o'Nuts shareholders should
not return stock certificates with the enclosed proxy.
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<PAGE>
After the effective time of the merger, each certificate that previously
represented shares of Chock full o'Nuts common stock will represent only the
right to receive the merger consideration. Until holders of certificates of
Chock full o'Nuts common stock have surrendered those certificates to the
exchange agent for exchange, they will not receive dividends or distributions
on the Sara Lee common stock, with a record date after the effective time of
the merger, into which these shares are to be converted. Until the certificates
are surrendered, holders will also not receive any cash payment for fractional
shares of Sara Lee common stock or additional cash merger consideration elected
to be paid by Sara Lee, if any. When holders surrender these certificates, they
will receive any unpaid dividends and any cash for fractional shares of Sara
Lee common stock or additional cash payments without interest.
If there has been a transfer of ownership of Chock full o'Nuts common stock
that is not registered in the records of Chock full o'Nuts' transfer agent, a
certificate representing the proper number of shares of Sara Lee common stock
may be issued to the non-registered holder if:
. the certificate is properly endorsed or otherwise is in proper form for
transfer; and
. the person requesting the issuance will (a) pay any transfer or other
taxes resulting from the issuance of shares of Sara Lee common stock to
a person other than the registered holder of the certificate or (b)
establish to Sara Lee that this tax has been paid or is not applicable.
All shares of Sara Lee common stock issued upon conversion of shares of
Chock full o'Nuts common stock, including any cash paid instead of any
fractional shares of Sara Lee common stock, will be issued in full satisfaction
of all rights relating to the shares of Chock full o'Nuts common stock.
No fractional shares of Sara Lee common stock will be issued to any Chock
full o'Nuts shareholder upon surrender of certificates of Chock full o'Nuts
common stock. Promptly after the effective time of the merger, the exchange
agent will determine the excess of (1) the number of whole shares of Sara Lee
common stock delivered to the exchange agent by Sara Lee over (2) the aggregate
number of whole shares of Sara Lee common stock to be distributed to former
holders of Chock full o'Nuts common stock. The exchange agent will sell the
excess shares on the New York Stock Exchange and will hold the proceeds in
trust for the former holders of Chock full o'Nuts common stock. The exchange
agent will determine the portion of the proceeds to be paid to each former
holder of Chock full o'Nuts common stock by multiplying:
(1) the amount of net aggregate proceeds held in trust, by
(2) a fraction, the numerator of which is the amount of the fractional
share interest to which a holder would otherwise be entitled and the
denominator of which is the aggregate amount of fractional share
interests to which all holders of Chock full o'Nuts common stock are
entitled.
Effective Time of the Merger
The merger will become effective upon the filing of the certificate of
merger with the New York Secretary of State or any later time as is agreed upon
by Sara Lee and Chock full o'Nuts and specified in the certificate of merger.
We will file the certificate of merger as soon as practicable, but no later
than the second business day, after satisfaction or waiver of the conditions to
the completion of the merger.
Stock Exchange Listing of Sara Lee Common Stock
It is a condition to the completion of the merger that the Sara Lee common
stock issuable to Chock full o'Nuts shareholders in the merger be approved for
listing on the New York Stock Exchange, subject to official notice of issuance.
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<PAGE>
Delisting and Deregistration of Chock full o'Nuts Common Stock
If the merger is completed, Chock full o'Nuts common stock will be delisted
from The New York Stock Exchange and will be deregistered under the Securities
Exchange Act of 1934.
Material United States Federal Income Tax Consequences of the Merger
The following general discussion summarizes the opinion of Cahill Gordon &
Reindel, special counsel to Chock full o'Nuts, as to the anticipated material
United States federal income tax consequences of the merger to holders of Chock
full o'Nuts common stock who exchange their stock for Sara Lee common stock or
stock and cash in the merger, which opinion is filed as an exhibit to the
registration statement of which this proxy statement/prospectus is a part. This
discussion addresses only those shareholders who hold their Chock full o'Nuts
common stock as a capital asset and does not address all of the United States
federal income tax consequences that may be relevant to particular shareholders
in light of their individual circumstances or to shareholders who are subject
to special rules under United States federal income tax law, including
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities or foreign currencies, foreign holders, persons who hold their
shares as a hedge against currency risk, or as part of a constructive sale,
straddle or conversion transaction, or holders who acquired their shares upon
the exercise of employee stock options or otherwise as compensation. The
following discussion is not binding on the Internal Revenue Service. It is
based upon the Internal Revenue Code, Treasury regulations, administrative
rulings and court decisions, all as in effect as of the date of this proxy
statement/prospectus, all of which are subject to change, possibly with
retroactive effect. Tax consequences of the merger under state, local and
foreign laws are not addressed.
Holders of Chock full o'Nuts common stock are strongly urged to consult
their tax advisors as to the specific tax consequences of the merger to them,
including the applicability and effects of federal, state, local and foreign
income and other tax laws in their particular circumstances.
No ruling has been, or will be, sought from the Internal Revenue Service as
to the United States federal income tax consequences of the merger. It is a
condition to the completion of the merger that Chock full o'Nuts receive an
opinion from Cahill Gordon & Reindel and that Sara Lee receive an opinion from
Skadden, Arps, Slate, Meagher & Flom (Illinois), special counsel to Sara Lee,
in each case stating that the merger will qualify for United States federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code. In rendering its tax opinions, each special counsel
may require and rely, as to factual matters, upon assumptions, representations
and covenants, including representations and covenants contained in
certificates of officers of Chock full o'Nuts, CFN Acquisition Corporation,
Sara Lee and others, reasonably satisfactory in form and substance to each
counsel. An opinion of counsel represents counsel's best legal judgment and is
not binding on the Internal Revenue Service or any court. Accordingly, the
Internal Revenue Service may challenge the conclusion reached by counsel, and a
court may sustain this challenge.
Exchange of Chock full o'Nuts Common Stock Solely for Sara Lee Common
Stock. Holders of Chock full o'Nuts common stock who exchange their Chock full
o'Nuts common stock solely for Sara Lee common stock in the merger will not
recognize gain or loss for United States federal income tax purposes, except
with respect to gain, if any, realized with respect to a fractional share of
Sara Lee common stock. Each holder's aggregate tax basis in the Sara Lee common
stock received in the merger by holders of Chock full o'Nuts who exchanged all
of their Chock full o'Nuts common stock solely for Sara Lee common stock,
including any fractional share of Sara Lee common stock, will be the same as
his or her aggregate tax basis in the Chock full o'Nuts common stock
surrendered in the merger. The holding period of the Sara Lee common stock
received in the merger by a holder of Chock full o'Nuts common stock will
include the holding period of Chock full o'Nuts common stock that he or she
surrendered in the merger.
Exchange of Chock full o'Nuts Common Stock for Sara Lee Common Stock and
Cash. If Sara Lee elects to make a cash payment to Chock full o'Nuts
shareholders because the average price of Sara Lee common stock is less than
$21.00, each Chock full o'Nuts holder will recognize gain, but not loss, with
respect to each block of Chock full o'Nuts stock owned by the holder, in an
amount equal to the lesser of (1) the amount of
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<PAGE>
gain, if any, realized by a Chock full o'Nuts shareholder as a result of the
merger, which would be the excess of the amount of cash, other than cash
received with respect to a fractional share of Sara Lee common stock, and the
fair market value of the Sara Lee common stock, including fractional shares,
received in the merger that is allocable to this block of Chock full o'Nuts
common stock over the tax basis of this block, and (2) the amount of cash
received, other than cash received with respect to a fractional share of Sara
Lee common stock, that is allocable to this block of Chock full o'Nuts common
stock. A "block" is each group of shares with the same tax basis and holding
period. For purposes of this calculation, the aggregate amount of cash and Sara
Lee common stock will be allocated proportionately among the shares of Chock
full o'Nuts common stock surrendered. Any recognized gain will be treated as
capital gain unless the cash received, other than cash received with respect to
a fractional share of Sara Lee common stock, has the effect of the distribution
of a dividend, in which case the gain should be treated as a dividend to the
extent of the shareholder's ratable share of Chock full o'Nuts undistributed
earnings and profits.
In general, the determination as to whether the gain recognized in the
exchange will be treated as capital gain or dividend income depends upon
whether and to what extent that exchange reduces the holder's actual and
constructive percentage stock ownership of Sara Lee. For purposes of that
determination, the holder is treated as if it first exchanged all of its shares
of Chock full o'Nuts common stock solely for Sara Lee common stock and then
Sara Lee immediately redeemed (the "hypothetical redemption") a portion of this
Sara Lee common stock in exchange for the cash the holder actually received,
other than cash received with respect to a fractional share of Sara Lee common
stock. The gain recognized in that exchange will be treated as capital gain if
under Section 302 of the Internal Revenue Code the hypothetical redemption is
(1) "not essentially equivalent to a dividend" or (2) "substantially
disproportionate" with respect to the holder.
Whether the hypothetical redemption is "not essentially equivalent to a
dividend" with respect to a holder will depend upon the holder's particular
circumstances. At a minimum, however, in order for the hypothetical redemption
to be "not essentially equivalent to a dividend," the deemed redemption must
result in a "meaningful reduction" in the holder's hypothetical percentage
stock ownership of Sara Lee. In general, that determination requires a
comparison of (1) the percentage of the outstanding stock of Sara Lee the
holder actually and constructively owns immediately before the hypothetical
redemption and (2) the percentage of the outstanding stock of Sara Lee the
holder actually and constructively owns immediately after the hypothetical
redemption.
The hypothetical redemption will be "substantially disproportionate" with
respect to a holder if the percentage of the outstanding voting stock of Sara
Lee actually and constructively owned by the holder immediately after the
hypothetical redemption is less than 80% of the percentage of the outstanding
voting stock of Sara Lee actually and constructively owned by the holder
immediately before the hypothetical redemption, treating the Sara Lee common
stock acquired by Sara Lee in the hypothetical redemption as outstanding.
However, the hypothetical redemption will not be treated as substantially
disproportionate unless the holder's actual and constructive ownership of Sara
Lee common stock immediately following and before the hypothetical redemption
also meets the 80% requirement of the preceding sentence.
In applying the foregoing tests, under attribution rules, a shareholder will
be treated as owning stock owned and, in some cases, constructively owned by
family members, by estates and trusts of which the holder is a beneficiary, and
by affiliated entities, as well as stock subject to an option actually or
constructively owned by the stockholder or these other persons. As the rules
are complex, each holder that believes it may be subject to these rules should
consult its tax advisor.
Under the foregoing tests, in most circumstances, gain recognized by a
holder that exchanges its share of Chock full o'Nuts common stock for a
combination of Sara Lee common stock and cash is expected to be treated as
capital gain, and will be long-term gain if the holding period for these shares
was greater than one year as of the date of the merger. However, holders of
Chock full o'Nuts common stock who receive these cash payments should consult
their own tax advisors to determine the proper treatment of these cash payments
in their individual situations, including the impact, if any, of Chock full
o'Nuts common stock or Sara Lee common stock owned by related persons.
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<PAGE>
The aggregate tax basis of Sara Lee common stock received by a holder,
including any fractional share of Sara Lee common stock, that exchanges a block
of shares of Chock full o'Nuts common stock for a combination of Sara Lee
common stock and cash, other than cash received with respect to a fractional
share of Sara Lee common stock, pursuant to the merger, will be the same as the
aggregate tax basis of the exchange block of shares of Chock full o'Nuts common
stock, decreased by the cash received, other than cash received with respect to
a fractional share of Sara Lee common stock, and increased by any recognized
gain, whether capital gain or dividend income, other than gain recognized with
respect to a fractional share of Sara Lee common stock. The holding period of
Sara Lee common stock will include the holding period of the exchange block of
shares of Chock full o'Nuts common stock.
If a holder has differing basis and/or holding periods in respect of its
shares of Chock full o'Nuts common stock, it should consult its tax advisor
before the exchange with regard to identifying the particular basis and/or
holding period of the shares of Chock full o'Nuts to be surrendered in the
merger and the particular basis and/or holding period of the particular shares
of Sara Lee common stock it receives in the merger since several methods of
determination may be available.
Cash Received for Fractional Shares. Cash received by a holder of Chock full
o'Nuts common stock instead of a fractional share interest in Sara Lee common
stock will be treated as proceeds of the sale of the fractional share interest,
and a holder of Chock full o'Nuts common stock should generally recognize
capital gain or loss for United States federal income tax purposes. The gain or
loss will be measured by the difference between the amount of cash received and
the portion of the tax basis of the share of Chock full o'Nuts allocable to
this fractional share interest. Any capital gain or loss will be long-term
capital gain or loss if the holding period for the share of Chock full o'Nuts
was greater than one year as of the date of the merger.
Maximum Tax Rates. The maximum individual federal income tax rate, that
applies to ordinary income and gains from the sale or exchange of capital
assets held for one year or less, is 39.6%. The maximum individual federal
income tax rate on gains from the sale of capital assets held for more than one
year is 20%. The maximum corporate federal income tax rate, that applies to
ordinary income and all capital gains, is 35%.
Regulatory Matters
Under the Hart-Scott-Rodino Act and related rules, the merger may not be
completed unless the waiting period requirements have been satisfied. On May 4,
1999, Sara Lee filed its Notification and Report Form with the Antitrust
Division of the Department of Justice and the Federal Trade Commission. On May
14, 1999, Chock full o'Nuts filed its Notification and Report Form with the
Antitrust Division of the Department of Justice and the Federal Trade
Commission. On May 19, 1999, the waiting period expired. At any time before or
after the effective time of the merger, the Antitrust Division, the Federal
Trade Commission or others could take action under the antitrust laws,
including seeking to prevent the merger. We cannot be sure that a third party
will not challenge the merger on antitrust grounds and that any challenge will
not be successful.
See "The Merger Agreement--Conditions to the Completion of the Merger."
Litigation
Since April 26, 1999, seven putative class action lawsuits have been filed
by alleged shareholders of Chock full o'Nuts against certain officers and
directors of Chock full o'Nuts and Chock full o'Nuts, in the Supreme Court of
the State of New York, styled Laura Benjamin v. Chock Full o'Nuts Corp., et
al., C.A. No. 999108759, Sandra Kafenbaum, et al. v. Mark A. Alexander, et al.,
C.A. No. 99602054, Staniloff v. Alexander, et al., C.A. No. 99602054, Victor v.
Chock Full o'Nuts Corp., et al., C.A. No. 99602254, Gutterman v. Alexander, et
al., C.A. No. 99602412, Janner v. Chock Full o'Nuts Corp., et al., C.A. No.
9910826, and Bollinger v. Chock Full o'Nuts et al., C.A. No. 99109951. A motion
to consolidate the pending class actions for
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pre-trial and trial purposes was granted by order dated June 15, 1999. In
addition, since April 26, 1999, three shareholder's derivative complaints have
been filed by alleged shareholders of Chock full o'Nuts against certain
officers and directors of Chock full o'Nuts and, nominally, Chock full o'Nuts,
(1) in the Supreme Court of the State of New York, styled Harbor Finance
Partners and Alan Freburg v. Marvin I. Haas, et al., No. 99-602013, and Josh
Staniloff v. Marvin Haas, et al., No. 99-111658, (2) in the United States
District Court for the Southern District of New York, styled Richard A. Ash v.
Norman E. Alexander, et al., No. 99 Civ. 3820. The two state derivative actions
have been combined into one and consolidated with the class actions for
purposes of discovery. Each of the class action suits and the shareholder's
derivative suits set forth substantially similar allegations of purported
misconduct and breach of fiduciary duties by several of the officers and
directors of Chock full o'Nuts and its board of directors related to their
conduct and consideration of the business combination between Chock full o'Nuts
and Sara Lee. The relief sought in these cases include unspecified damages,
attorneys' fees and equitable relief, including, among other things, orders
requiring the individual defendants to carry out their fiduciary duties,
enjoining them from proceeding with alleged violations complained of in the
complaints, and requiring certain directors to disgorge all profits allegedly
earned from purported insider stock transactions during the relevant time
period.
Appraisal Rights
Under New York corporate law, holders of Chock full o'Nuts common stock are
not entitled to appraisal rights in connection with the merger. This is
because, on the record date, Chock full o'Nuts common stock was listed for
trading on The New York Stock Exchange and will be converted into shares of
Sara Lee common stock, which at the effective time of the merger will also be
listed on the New York Stock Exchange.
Effect on Awards Outstanding Under Chock full o'Nuts Stock Plans
At the effective time of the merger, Sara Lee will assume each stock option
plan of Chock full o'Nuts and all outstanding equity-based awards. Each option
to acquire shares of Chock full o'Nuts common stock under these plans will be
converted into an option to acquire Sara Lee common stock on the same terms and
conditions. The number of shares of Sara Lee common stock to be subject to the
option will be equal to the number of shares of Chock full o'Nuts common stock
subject to the Chock full o'Nuts option multiplied by the applicable exchange
ratio and rounded to the nearest whole share. The exercise price per share of
Sara Lee common stock under an option will be equal to the aggregate exercise
price for the shares of Chock full o'Nuts common stock subject to the Chock
full o'Nuts option divided by the total number of shares of Sara Lee common
stock to be subject to the option. As of July 31, 1999, the number of shares of
Chock full o'Nuts common stock reserved for issuance under the plans was
413,493.
Resale of Sara Lee Common Stock
Sara Lee common stock issued in the merger will not be subject to any
restrictions on transfer under the Securities Act of 1933, except for shares
issued to any Chock full o'Nuts shareholder who is an "affiliate" of Chock full
o'Nuts or Sara Lee for purposes of Rule 145 under the Securities Act. We expect
that each affiliate will agree not to transfer any Sara Lee common stock
received in the merger except in compliance with the resale provisions of Rule
144 or 145 or another provision of the Securities Act. We also expect that each
affiliate will not dispose of any Sara Lee common stock received in connection
with the merger unless, in the opinion of counsel to Sara Lee, the transaction
will not have any adverse consequences for Sara Lee with respect to the
treatment of the merger for tax purposes. Chock full o'Nuts must use reasonable
efforts to cause its affiliates to enter into these agreements. Chock full
o'Nuts has also agreed to use reasonable efforts to cause its affiliates to
comply with the transfer restrictions referred to in this section. This proxy
statement/prospectus does not cover resales of Sara Lee common stock received
by any person upon completion of the merger. We have not authorized any person
to use this proxy statement/prospectus in connection with any resale.
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THE MERGER AGREEMENT
The following description summarizes the material provisions of the merger
agreement. Shareholders should read carefully the merger agreement, which is
attached as Annex 1 to this proxy statement/prospectus.
Conditions to the Completion of the Merger. The closing of the merger will
take place two days after the satisfaction of the conditions described in the
merger agreement or another date as is agreed to by the parties. Each party's
obligation to effect the merger is subject to the satisfaction or waiver of
various conditions which include, in addition to other customary closing
conditions, the following:
. approval of the merger agreement by holders of two-thirds of the
outstanding shares of Chock full o'Nuts common stock;
. no court or other governmental entity of competent jurisdiction
entering, enacting, enforcing or issuing any judgment, order, statute,
law or regulation, no other legal restraint or prohibition being in
effect, and no suit, action or proceeding by any governmental entity
being pending that would prevent the completion of the merger;
. all material consents, approvals, and authorizations, except the filing
of the merger certificate, from any governmental entity having been made
or obtained;
. the Commission declaring the registration statement on Form S-4, of
which this proxy statement/prospectus forms a part, effective under the
Securities Act and not subjecting it to any stop order or proceedings
seeking a stop order; and
. approval of the Sara Lee common stock issuable to Chock full o'Nuts
shareholders in the merger for listing on the New York Stock Exchange,
subject to official notice of issuance.
In addition, each party's obligation to effect the merger is further subject
to the satisfaction or waiver of the following additional conditions:
. the representations and warranties of the other party in the merger
agreement must be true and correct for those representations and
warranties expressly limited by "material" or "material adverse effect,"
and must be true in all material respects for those not so limited, as
of the effective time of the merger;
. the other party to the merger agreement must have performed in all
material respects all obligations required to be performed by it under
the merger agreement on or before the date on which the merger is to be
completed; and
. Chock full o'Nuts having received from Cahill Gordon and Reindel, its
special counsel, and Sara Lee having received from Skadden, Arps, Slate,
Meagher & Flom (Illinois), its special counsel, an opinion in each case
dated as of the closing date stating that the merger will qualify for
United States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
Finally, Sara Lee does not have to effect the merger if there has occurred a
material adverse effect to Chock full o'Nuts since January 31, 1999 that has
not been disclosed publicly in SEC filings and/or to Sara Lee in the merger
agreement.
The merger agreement provides that a "material adverse change" or "material
adverse effect" means, when used in connection with a party, any adverse change
or effect that is material to the business, financial condition, results of
operations or assets of the party and its subsidiaries taken as a whole, other
than any change or effect: (1) relating to the economy or securities markets in
general and (2) relating generally to the industries in which the party
operates, including without limitation, fluctuations in coffee prices
generally, but not specifically relating to the party.
Chock full o'Nuts cannot be sure that all of the conditions to the merger
will be satisfied or waived by the party permitted to do so. Chock full o'Nuts
cannot at this point determine whether it would resolicit proxies in
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the event that it decides to waive any of the items listed above. This decision
would depend upon the facts and circumstances leading to Chock full o'Nuts'
decision to complete the merger and whether Chock full o'Nuts believes there
has been a material change in the terms of the merger and its effect on Chock
full o'Nuts shareholders. In making this determination, Chock full o'Nuts would
consider, among other factors:
. the reasons for the waiver, the effect of the waiver on the terms of the
merger,
. whether the requirement being waived was necessary in order to make the
deal fair to the shareholders from a financial point of view,
. the availability of alternative transactions and
. the prospects of Chock full o'Nuts as an independent entity.
If Chock full o'Nuts determines that a waiver of a condition would
materially change the terms of the merger, including the expected qualification
of the merger as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, it will resolicit proxies.
No Solicitation. Under the merger agreement, Chock full o'Nuts will not
directly or indirectly:
. solicit, initiate, facilitate or encourage any inquiries or acquisition
proposals, as described below;
. engage in any negotiations or discussions concerning, or provide any
non-public information or data to any person or entity relating to, an
acquisition proposal; or
. agree to, approve or recommend any acquisition proposal, or otherwise
facilitate any effort or attempt to make or implement an acquisition
proposal.
If the Chock full o'Nuts board of directors determines in good faith, after
consultation with its financial and legal advisors, that any of these actions
is necessary in order to comply with its fiduciary duties under applicable law,
Chock full o'Nuts, in response to an unsolicited superior proposal, subject to
providing prior oral and written notice of its decision to do so to Sara Lee,
may:
. furnish under a customary confidentiality agreement information about
Chock full o'Nuts and its subsidiaries to any person making a superior
proposal and
. participate in negotiations regarding a superior proposal.
The term "acquisition proposal" means any offer or proposal for, or any
indication of interest in, a merger or other business combination with Chock
full o'Nuts or any subsidiary or the acquisition of any equity interest in, or
a substantial portion of the assets of Chock full o'Nuts or any subsidiary; and
The term "superior proposal" means any bona fide written acquisition
proposal, not subject to any financing condition or which includes written
commitments to finance the transaction from one or more financial institutions
capable of providing these commitments. The proposal must be for all of the
outstanding shares of Chock full o'Nuts common stock and/or the outstanding
debentures of Chock full o'Nuts. The proposal must also be on terms that the
Chock full o'Nuts board of directors determines, in good faith, after receiving
the advice of a financial advisor of nationally recognized reputation, are more
favorable and provide greater value to all Chock full o'Nuts shareholders,
except Sara Lee, than does the merger with Sara Lee.
Except as expressly permitted by the merger agreement, the Chock full o'Nuts
board of directors or any committee of the board may not:
. withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Sara Lee, the approval or recommendation by the Chock
full o'Nuts board of directors or committee of the merger or the merger
agreement;
. approve or recommend, or propose publicly to approve or recommend, any
takeover proposal; or
. cause Chock full o'Nuts to enter into any letter of intent, agreement in
principle, acquisition agreement or other similar agreement related to
any takeover proposal, other than any agreement entered into
concurrently with a termination as described in the next sentence in
order to facilitate this action.
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Notwithstanding the foregoing, in response to a superior proposal which was
not solicited by Chock full o'Nuts and which did not otherwise result from a
breach of the provisions of the merger agreement described above, the Chock
full o'Nuts board of directors may terminate the merger agreement. However, the
board may only terminate the merger agreement if
. the Chock full o'Nuts board of directors determines in good faith that
it is necessary to comply with its fiduciary duties to its shareholders,
. the Chock full o'Nuts board of directors has delivered written notice to
Sara Lee advising Sara Lee that the Chock full o'Nuts board of directors
is prepared to accept a superior proposal, and
. Sara Lee has not elected to amend the merger agreement to match the
terms of the superior proposal.
Chock full o'Nuts must pay a fee in the amount of $7 million, plus expenses,
to Sara Lee if it terminates the merger agreement to pursue a superior
proposal. See "--Termination" and "--Termination Fee."
Termination. The merger agreement may be terminated at any time before the
effective time of the merger, whether before or after adoption of the merger
agreement, by the shareholders of Chock full o'Nuts as follows:
. Sara Lee and Chock full o'Nuts may jointly agree to terminate the merger
agreement at any time without completing the merger.
. Sara Lee or Chock full o'Nuts may terminate the merger agreement if:
1. Sara Lee and Chock full o'Nuts do not complete the merger by
December 31, 1999; provided, however, that a party may not terminate
the merger agreement if its failure to perform any of its
obligations under the merger agreement has resulted in the failure
of the merger to be completed by that date;
2. the Chock full o'Nuts shareholders do not adopt the merger
agreement;
3. a statute, rule, regulation or executive order has been enacted,
entered or promulgated, which prohibits the completion of the
merger;
4. an order, decree, ruling or injunction has been entered and is final
and non-appealable, permanently restraining, enjoining or otherwise
prohibiting the merger; or
5. the other party breached in any material respect any of its
representations, warranties or obligations under the merger
agreement and has not cured the breach within 30 days of receipt of
notice.
. Chock full o'Nuts may terminate the merger agreement if:
1. the Chock full o'Nuts board of directors receives an unsolicited
superior proposal, and
2. the Chock full o'Nuts board enters into an agreement with the third
party making a superior proposal after it (A) notifies Sara Lee of
the proposal, (B) Sara Lee does not offer to amend the merger
agreement to match the offer, and (C) Chock full o'Nuts pays the
termination fee described below.
. Chock full o'Nuts may terminate the merger agreement if the average
price of Sara Lee common stock is less than $21.00 per share and Sara
Lee does not increase the merger consideration to a value, as of the
determination date, of $11.00 per share of Chock full o'Nuts common
stock.
. Sara Lee may terminate the merger agreement if the Chock full o'Nuts
board of directors withdraws or adversely modifies its approval or
recommendation of the merger agreement or fails to reconfirm its
recommendation upon request by Sara Lee.
. Sara Lee may also terminate the merger agreement if Chock full o'Nuts or
any of its directors or officers receives an unsolicited proposal and
Chock full o'Nuts fails to notify Sara Lee, within 30 days of receipt by
Sara Lee of notice of the existence of the proposal that (1) the
proposal has been rejected or withdrawn or (2) Chock full o'Nuts is no
longer engaged in negotiations or discussions regarding the proposal.
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Termination Fee. Chock full o'Nuts must pay Sara Lee a termination fee of $7
million and all documented, out-of-pocket expenses reasonably incurred by Sara
Lee and CFN in connection with the merger agreement and the merger if:
. Chock full o'Nuts shareholders receive an acquisition proposal, or an
acquisition proposal otherwise becomes publicly known, or the Chock full
o'Nuts board of directors withdraws or adversely modifies its
recommendation, and in either case the Chock full o'Nuts shareholders
fail to approve the merger agreement.
. Chock full o'Nuts terminates the merger agreement because a superior
proposal has been received.
. Chock full o'Nuts intentionally or in bad faith materially breaches any
of its representations or warranties.
. Chock full o'Nuts accepts a written offer for, or enters into an
agreement to complete or completes, a superior proposal with another
person within twelve months of termination of the merger agreement for
any other reason, except if Sara Lee materially breached its
representations and warranties or covenants and agreements and did not
cure the breach within 30 days of notice of breach.
Under the merger agreement, if Chock full o'Nuts fails to pay any
termination fee due, Chock full o'Nuts must pay the costs and expenses in
connection with any action taken to collect payment, together with interest on
the amount of the termination fee.
Conduct of Business Pending the Merger. Under the merger agreement, Chock
full o'Nuts has agreed that, before the effective time of the merger, it will:
. preserve in all material respects its business organization intact, and
. conduct its operations in the ordinary and usual course of business
consistent in all material respects with past practice, including,
retaining the services of employees and conducting business with
suppliers, customers, creditors and others having business relationships
with it.
In addition, Chock full o'Nuts has agreed, subject to some exceptions, that
it and its subsidiaries will comply with specific restrictions relating to the
following:
. the issuance or disposition of securities;
. the issuance of dividends and distributions;
. modification of the Chock full o'Nuts restated certificate of
incorporation and the amended and restated bylaws or other comparable
organizational documents;
. the corporate structure or ownership of any subsidiary;
. employees and employee benefits;
. entrance into or modification of contracts;
. affiliate transactions;
. the acquisition of assets or other entities;
. capital expenditures;
. settlement of litigation and claims;
. accounting policies and procedures;
. the incurrence of indebtedness;
. modification or action taken with respect to the rights agreement or
Section 912 of the NYBCL, which governs takeover attempts; and
. purchase contracts for green coffee.
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The agreements related to the conduct of Chock full o'Nuts business in the
merger agreement are complicated and not easily summarized. We urge you to
carefully read the section of the merger agreement entitled "Conduct of
Business by the Company."
Amendment; Extension and Waiver. Subject to applicable law, the parties may
amend the merger agreement by mutual agreement, in writing at any time.
However, after the merger agreement has been adopted by the shareholders of
Chock full o'Nuts, they may not amend the merger agreement to reduce the amount
or change the type of merger consideration without the consent of the
shareholders.
In addition, at any time before the effective time of the merger, either
party may:
. extend the time for performance of the obligations of any other party,
. waive inaccuracies in representations and warranties of any other party
contained in the merger agreement or in any related document, and
. except as provided in the merger agreement, waive compliance by any
other party with any agreements or conditions in the merger agreement.
Expenses. Whether or not the merger is completed, each party will pay its
own fees and expenses incurred in connection with the merger and the merger
agreement, except as otherwise provided in the merger agreement.
Representations and Warranties. The merger agreement contains customary
representations and warranties relating to, among other things:
. corporate organization and similar corporate matters of Sara Lee and
Chock full o'Nuts;
. the capital structure of Chock full o'Nuts;
. authorization, execution, delivery, performance and enforceability of,
and required consents, approvals, orders and authorizations of
governmental authorities relating to, the merger agreement and related
matters of Sara Lee and Chock full o'Nuts;
. documents filed by each of Sara Lee and Chock full o'Nuts with the SEC,
the accuracy of information contained in such documents and the absence
of undisclosed liabilities of each of Sara Lee and Chock full o'Nuts;
. the accuracy of information supplied by each of Sara Lee and Chock full
o'Nuts in connection with this proxy statement/prospectus and the
registration statement of which it is a part;
. absence of material changes or events concerning Chock full o'Nuts;
. compliance with applicable laws by Chock full o'Nuts;
. existing benefit plans of Chock full o'Nuts;
. matters relating to the Employee Retirement Income Security Act for
Chock full o'Nuts;
. filing of tax returns and payment of taxes by Chock full o'Nuts;
. required shareholder vote of Chock full o'Nuts;
. satisfaction or inapplicability of state takeover statutes' requirements
for Chock full o'Nuts;
. engagement and payment of fees of brokers, investment bankers, finders
and financial advisors by Chock full o'Nuts;
. receipt of a fairness opinion by Chock full o'Nuts from its financial
advisor;
. intangible assets of Chock full o'Nuts;
. environmental matters of Chock full o'Nuts;
. permits, licenses , approvals, exemptions, qualifications and
governmental authorizations necessary to conduct Chock full o'Nuts'
business;
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. Chock full o'Nuts having taken necessary action under its rights
agreement to ensure that the rights plan will not trigger the
distribution of rights as a result of entering into the merger agreement
and/or consummating the merger;
. intellectual property and year 2000 matters of Chock full o'Nuts;
. outstanding and pending material litigation of Chock full o'Nuts;
. performance of contracts of Chock full o'Nuts; and
. interim operations of CFN Acquisition Corporation.
Amendments to the Chock full o'Nuts Certificate of Incorporation. As of the
effective time of the merger, the Chock full o'Nuts restated certificate of
incorporation will be substantially identical to the certificate of
incorporation of CFN Acquisition Corporation immediately before the merger. For
a summary of certain provisions of the Chock full o'Nuts restated certificate
of incorporation and the associated rights of Chock full o'Nuts shareholders,
see "Comparison of Rights of Common Shareholders of Sara Lee and Chock full
o'Nuts."
Amendments to the Chock full o'Nuts By-laws. The merger agreement provides
that the bylaws of CFN Acquisition Corporation, as in effect immediately before
the effective time of the merger, will be the bylaws of the surviving
corporation following the merger until changed or amended. For a summary of
certain provisions of the Chock full o'Nuts bylaws and the associated rights of
Chock full o'Nuts shareholders, see "Comparison of Rights of Common
Shareholders of Sara Lee and Chock full o'Nuts."
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DESCRIPTION OF SARA LEE CAPITAL STOCK
The following summary of the capital stock of Sara Lee is subject in all
respects to applicable Maryland law, Sara Lee's charter and bylaws and Sara
Lee's rights agreement. See "Comparison of Rights of Common Shareholders of
Sara Lee and Chock full o'Nuts" and "Where You Can Find More Information."
The total authorized shares of capital stock of Sara Lee consist of:
. 1.2 billion shares of common stock, $.01 par value per share,
. 12 million shares of preferred stock, without par value, of which 6
million shares have been designated as Series A Junior Participating
Preferred Stock, and
. 1.5 million shares of convertible adjustable preferred stock, without
par value.
At the close of business on August 7, 1999, approximately 882 million shares
of Sara Lee common stock were issued and outstanding, and no shares of Sara Lee
preferred stock or convertible preferred stock were issued and outstanding.
Under Maryland law, stockholders generally are not liable for a corporation's
debts and obligations.
Sara Lee's charter authorizes its board of directors to classify any
unissued shares of preferred stock and to reclassify any previously classified
but unissued shares of any series, as authorized by the board. Before the board
may issue shares of any series, it is required by Maryland law and the charter
to set the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each series. The board
could authorize the issuance of shares of preferred stock with terms and
conditions which could have the effect of delaying, deferring or preventing a
transaction or a change in control of Sara Lee that might involve a premium
price for holders of common stock or otherwise be in their best interest.
The additional classes or series, as well as the common stock, will be
available for issuance without further action of Sara Lee's stockholders,
unless action is required by applicable law or the rules of any stock exchange
or automated quotation system on which Sara Lee's securities may be listed or
traded. Although the Sara Lee board of directors has no intention at the
present time of doing so, it could authorize the issuance of a class or series
that could, depending upon the terms of the class or series, delay, defer or
prevent a transaction or a change in control of Sara Lee that might involve a
premium price for holders of common stock or otherwise be in their best
interest.
Holders of shares of common stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of Sara Lee. Shares of Sara Lee common stock have
equal dividend, liquidation and other rights. Cumulative dividends, dividend
preferences and conversion, exchange and redemption provisions, to the extent
that some or all of these features may be present when shares of Sara Lee
preferred stock are issued, could have an adverse effect on the availability of
earnings for distribution to the holders of Sara Lee common stock or for other
corporate purposes.
For a description of the rights to acquire Sara Lee junior preferred stock
that are attached to shares of Sara Lee common stock, see "Comparison of Rights
of Common Shareholders of Sara Lee and Chock full o'Nuts--Rights Plan."
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COMPARISON OF RIGHTS OF COMMON SHAREHOLDERS
OF SARA LEE AND CHOCK FULL O'NUTS
The rights of Sara Lee stockholders are currently governed by the Maryland
General Corporation Law, Sara Lee's charter and Sara Lee's bylaws. The rights
of Chock full o'Nuts shareholders are currently governed by the New York
Business Corporation Law, Chock full o'Nuts' restated certificate of
incorporation and Chock full o'Nuts' amended and restated bylaws. Upon
completion of the merger, the rights of Chock full o'Nuts shareholders who
become stockholders of Sara Lee in the merger will be governed by the Maryland
General Corporation Law, Sara Lee's charter and Sara Lee's bylaws.
The following description summarizes the material differences which may
affect the rights of stockholders of Sara Lee and shareholders of Chock full
o'Nuts but is not a complete statement of all such differences, or a complete
description of the specific provisions referred to in this summary. We urge you
to read carefully the relevant provisions of the Maryland General Corporation
Law, Sara Lee's charter, Sara Lee's bylaws, the New York Business Corporation
Law, Chock full o'Nuts' restated certificate of incorporation and Chock full
o'Nuts' amended and restated bylaws.
SARA LEE CHOCK FULL O'NUTS
Capitalization
1.2 billion shares of common stock, 50 million shares of common stock,
$.01 par value per share, 12 million $.25 par value per share. At the
shares of preferred stock, without close of business on September 2,
par value, of which 6 million shares 1999, there were approximately
have been designated as Series A 11,561,000 shares of Chock full
Junior Participating Preferred o'Nuts common stock outstanding.
Stock, and 1.5 million shares of
convertible adjustable preferred
stock, without par value. Sara Lee's
authorized capital stock is more
fully described above under
"Description of Sara Lee Capital
Stock."
Voting Rights
One vote for each share held of One vote for each share held of
record on all matters submitted to a record on all matters submitted to a
vote of the stockholders; no vote of the shareholders; no
cumulative voting for the election cumulative voting for the election
of directors. of directors.
Board of Directors
Number. 17 members currently; must Number. 10 members currently; must
always be at least 3 directors and always be at least 9 and no more
no more than 25 directors; number of than 27 directors; number of
directors may be changed from time directors to be determined by a
to time by the majority of the majority of the entire board of
entire board of directors. No directors. Has a staggered board
staggered board. with three classes. Each class of
directors is elected for three-year
terms, and each class consists, as
nearly as possible, of one-third of
the total number of directors
constituting the entire board of
directors.
Vacancy. A vacancy on the Sara Lee Vacancy. A vacancy on the Chock full
board of directors, for any reason o'Nuts board of directors and newly
other than by reason of an increase created directorships resulting from
in the number of directors, will be any increase in the authorized
filled by the affirmative vote of a number of directors may be filled by
majority of the remaining directors the majority vote of the remaining
then in office, even though less directors, even though less than a
than a quorum. A vacancy as a result quorum.
of an increase in the number of
directors may be filled by action of
a majority of the entire board of
directors.
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SARA LEE CHOCK FULL O'NUTS
Removal. Sara Lee's charter does not Removal. Any director or the entire
address removal of directors. Chock full o'Nuts board of directors
Consequently, Maryland law provides may be removed for cause, at a
that the stockholders of a special meeting of shareholders, by
corporation may remove any director, the affirmative vote of the holders
with or without cause, by the of at least a majority of the voting
affirmative vote of a majority of power of all of the then outstanding
all of the votes entitled to be cast shares of capital stock entitled to
for the election of directors. vote generally in the election of
directors.
Amendments to Certificates of Incorporation
Two-thirds of all votes entitled to Majority of outstanding shares
be cast required to amend. required to amend.
Maryland law allows a corporation's 75% of the voting power of all of
charter to contain a provision the outstanding shares of capital
allowing its board of directors, by stock entitled to vote generally in
a majority vote of the entire board the election of directors required
of directors, to amend the to amend or repeal paragraphs 1, 2
corporation's charter to increase or or 5 of Article VI of Chock full
decrease the aggregate number of o'Nuts' restated certificate of
authorized shares of stock without incorporation, which relate to the
stockholder approval. Chock full o'Nuts board of
directors, vacancies on the board of
directors, removal of directors and
amending these paragraphs.
Maryland law also permits non-
economic changes to be made to the
charter with the approval of a
majority of the entire board of
directors, without shareholder
approval, including: changing the
name of a corporation, changing the
name or designation of any class or
series of a corporation's shares and
changing the aggregate par value of
a corporation's shares.
Amendments to Bylaws
The board has the exclusive power The board, by majority vote of the
and right to make, alter or repeal total number of directors, may
any or all of its bylaws at any adopt, amend or repeal the bylaws; a
time. majority of the voting power of the
then outstanding shares entitled to
vote at any regular or special
meeting of the shareholders may also
adopt, amend or repeal the bylaws.
Shareholder Action
Action may be taken without a Any action required or permitted to
meeting if (1) a unanimous written be taken by shareholders may be
consent setting forth the action is effected by written consent of all
signed by each stockholder entitled of the shareholders.
to vote on the matter and (2) a
written waiver of any right to
dissent is signed by each
stockholder entitled to notice of
the meeting but not entitled to vote
at it are filed with the records of
the stockholders' meetings.
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SARA LEE CHOCK FULL O'NUTS
Notice of Shareholder Actions
Advance written notice of (1) Advance written notice of
nominations for election of nominations for election of
directors and (2) business to be directors at a meeting of
properly brought before an annual shareholders required. Must be
meeting of stockholders is required. received by the secretary not less
Must generally be delivered to the than 30 days nor more than 60 days
secretary not later than 60 days nor before the meeting. If less than 40
earlier than 90 days before the days' notice or prior public
first anniversary of the preceding disclosure of the date of the
year's annual meeting. If the annual meeting is given or made to
meeting is advanced by more than 30 shareholders, any notice of
days or delayed by more than 60 days nomination must be received not
from the anniversary date, notice later than the close of business on
must be delivered not earlier than the tenth day following the earlier
90 days nor later than 60 days of (1) the day on which notice of
before the annual meeting or the the meeting was mailed or (2) the
tenth day following the day on which day on which public disclosure was
public announcement of the date of made.
the meeting is first made.
If Sara Lee calls a special meeting
of stockholders for the purpose of
electing one or more directors, any
stockholder who is a stockholder of
record both at the time of giving
notice to Sara Lee and at the time
of the special meeting may nominate
a director or directors. Written
notice must be delivered not earlier
than 90 days before the special
meeting and not later than the later
of (1) 60 days before the special
meeting or (2) 10 days following the
day on which public announcement is
first made of the date of the
special meeting and of the proposed
nominees proposed to be elected.
Special Shareholder Meetings
May be called by: (1) the chairman May be called by: (1) the chairman
of the board, (2) the board or (3) of the board, (2) the chief
stockholders entitled to cast at executive officer or (3) a majority
least a majority of all of the votes of the board then in office.
entitled to be cast at the special
meeting by request to the secretary.
A stockholder request for a special
meeting must state the purpose or
purposes of the meeting and the
matters proposed to be acted upon.
The request must also be delivered
to the secretary.
Limitation of Personal Liability of Directors
Under Maryland law, permitted to Under New York law, permitted to
limit the liability of directors and eliminate or limit the personal
officers to the corporation and its liability of directors to the
stockholders for money damages. corporation or its shareholders for
damages.
May not limit liability resulting May not limit liability:
from:
(1) actual receipt of an improper (1) if a judgment or other final
benefit or profit in money, property adjudication adverse to the director
or services or establishes bad faith, intentional
misconduct or a knowing violation of
law, or that the director personally
gained in fact a financial profit or
other advantage to which he was not
legally entitled or that the
director's acts violated other
specific provisions of New York law;
or
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SARA LEE CHOCK FULL O'NUTS
(2) active and deliberate dishonesty (2) for any act or omission before a
established by a final judgment as limitation on indemnification is
being material to the case of included as an amendment to the
action. certificate of incorporation.
Sara Lee's charter contains a Chock full o'Nuts' restated
provision which limits this certificate of incorporation
liability to the fullest extent contains a provision limiting the
permissible under Maryland law. personal liability of directors to
the corporation and the shareholders
to the fullest extent permitted
under New York law.
Dividends
Subject to any preferential rights The board may declare dividends on
of any other class or series of its outstanding shares in accordance
stock, the board may authorize and with law.
declare dividends out of assets
legally available for distributions.
Conversion
No rights to convert their shares No rights to convert their shares
into any other securities. into any other securities.
Dissenters or Appraisal Rights
Stockholders have the right to Shareholders of a New York
demand and to receive payment of the corporation have the right to
fair value of their stock, except as dissent and receive payment of the
otherwise provided by Maryland law, fair value of their shares, except
in the event of: as otherwise provided by New York
law, in the event of:
. a merger or consolidation, . amendments or changes to the
certificate of incorporation
adversely affecting their
shares,
. a share exchange,
. sales of all or substantially
all of the assets, . mergers or consolidations,
. a charter amendment altering . sales, leases, exchanges or
contract rights of other dispositions of all or
outstanding stock, as substantially all the
expressly set forth in the corporation's assets and
charter, and substantially
adversely affecting the
stockholder's rights, or
. share exchanges.
The right to demand and receive
. business combinations with payment of fair value does not apply
interested shareholders that to stock listed on a national
are subject to or exempted securities exchange or The Nasdaq
from Maryland's business National Market.
combination statute and in
connection with the approval
of voting rights of
stockholders under Maryland's
control share acquisition
statute.
Shareholders of Chock full o'Nuts do
not have appraisal rights in the
merger.
Except with respect to specific
business combinations and in
connection with appraisal and
dissenters' rights existing as a
result of Maryland's control share
acquisition statute, the right to
demand and receive payment of fair
value does not apply to the
following:
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SARA LEE CHOCK FULL O'NUTS
. stock listed on a national
securities exchange or The
Nasdaq National Market;
. stock of the successor in a
merger, unless the merger (1)
alters the contract rights of
the stock, as expressly set
forth in the charter and the
charter does not reserve the
right to do so or (2)
converts the stock in whole
or in part into something
other than stock, cash, scrip
or other interests, or
. stock of an open-end
investment company registered
with the SEC under the
Investment Company Act of
1940 and the stock is valued
in the transaction at its net
asset value.
Stockholders of Sara Lee do not have
appraisal rights in the merger.
The following sections describe in relative detail the different rights
relating to business combinations and takeover attempts applicable to the
shareholders of Sara Lee and Chock full o'Nuts, respectively. These rights are
complicated and not easily summarized. We urge you to refer to the relevant
laws, governing documents and rights plans for a complete understanding of the
rights relating to these important matters.
Business Combinations
Sara Lee. Under Maryland law, a number of business combinations between a
Maryland corporation and an interested stockholder are prohibited for five
years after the most recent date on which the interested stockholder became an
interested stockholder and after that time must be recommended by the board of
directors of the corporation and approved by:
(a) at least 80% of the votes entitled to be cast of its outstanding
voting shares, voting together as a single voting group, and
(b) two-thirds of the votes entitled to be cast of the outstanding
voting shares, other than shares held by the interested stockholder with
whom the business combination is to be effected;
unless the "fair price" provisions are complied with or the business
combination is either approved or exempted by the board of directors before the
interested stockholder becomes an interested stockholder.
Business combinations include mergers, consolidation, share exchanges or, in
some circumstances, asset transfers or issuances or reclassifications of equity
securities.
An "interested stockholder" is: (1) any person who beneficially owns 10% or
more of the voting power of the corporation's shares, unless before the person
beneficially owning voting power, the board of directors approved the
transaction making the person an interested stockholder, (2) an affiliate of
the corporation who, at any time within the two-year period before the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation, or (3) any affiliate of an
interested stockholder.
The business combinations statute could have the effect of delaying,
deferring or preventing unsolicited offers to acquire Sara Lee and of
increasing the difficulty of consummating an unsolicited offer.
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Chock full o'Nuts. Under New York law, a New York corporation is prohibited
from engaging in a "business combination" with an "interested shareholder" for
a period of five years following the date the person became an interested
shareholder, unless, before becoming an interested shareholder, the board of
directors approved either the business combination or the transaction in which
the shareholder became an interested shareholder. After the five-year period,
the business combination must be approved by a majority of shareholders other
than the interested shareholder or the price paid to all shareholders must meet
conditions relating to the type and minimum amount of consideration to be paid
to shareholders.
For purposes of the New York business combination law, a "business
combination" includes:
. a merger or consolidation,
. a sale, lease, pledge or other disposition of assets,
. a stock issuance or transfer,
. a liquidation or dissolution,
. a reclassification of securities,
. a recapitalization, or
. any transaction in which an interested shareholder benefits
disproportionately in relation to any other shareholder.
An "interested shareholder" is defined as any person or entity that
currently owns, directly or indirectly, or in the case of affiliates and
associates of the corporation, that owned at any time during the past five
years, more than 20% of the outstanding voting stock of the corporation.
Control Share Acquisitions
Sara Lee. Maryland law provides that control shares of a Maryland
corporation acquired in a control share acquisition have no voting rights
unless approved by two-thirds of the votes entitled to be cast by stockholders,
excluding shares of stock owned by the acquiring person, officers of the
corporation and directors of the corporation who are employees of the
corporation.
Control shares are voting shares of stock over which the acquiror is able to
exercise or direct the exercise of voting power, except solely by virtue of a
revocable proxy, that would entitle the acquiror to exercise voting power
electing directors within one of the following ranges: (1) one-fifth or more
but less than one-third, (2) one-third or more but less than a majority or (3)
a majority of all voting power.
Control shares do not include shares which the acquiring person is entitled
to vote as a result of having previously obtained stockholder approval. A
control share acquisition generally means the acquisition of control shares.
Once a person who has made or proposes to make a control share acquisition
has agreed to pay expenses and satisfied other conditions, the person may
compel the board of directors to call a special meeting of stockholders. The
special meeting must be held within 30 to 50 days of the demand to consider the
voting rights of the control shares. If no request is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver the acquiring person statement as required by Maryland law,
then, in general, the corporation may redeem any or all of the control shares.
It may not redeem those shares for which voting rights have previously been
approved. Fair value is determined without regard to voting rights, as of the
date of the last control share acquisition or of any meeting of stockholders at
which the voting rights of the control shares are considered and not approved.
If voting rights for control shares are approved at a stockholders meeting and
the acquiring person becomes entitled to vote a majority of the shares entitled
to vote, all other stockholders may exercise appraisal rights. The fair value
of the shares as determined for purposes of appraisal rights may not be less
than the highest
44
<PAGE>
price per share paid in the control share acquisition. Some of the limitations
and restrictions otherwise applicable to the exercise of dissenters' rights do
not apply in the context of control share acquisitions.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or excepted by the charter or the
bylaws of the corporation.
Sara Lee's bylaws provide that the control share acquisition statute does
not apply to any acquisition by any person of shares of Sara Lee stock.
However, this bylaw may be repealed by the board of directors at any time.
The control share acquisition statute could have the effect of delaying,
deferring or preventing unsolicited offers to acquire Sara Lee and of
increasing the difficulty of consummating an unsolicited offer.
Chock full o'Nuts. New York does not have a control share acquisition
statute.
Rights Plan
Sara Lee. On March 26, 1998, the Sara Lee board of directors authorized and
Sara Lee declared a dividend distribution of one preferred stock purchase right
for each outstanding share of the Sara Lee common stock. The Sara Lee board of
directors also authorized the issuance of one right for each share of Sara Lee
common stock issued after the record date and before the earliest of the
distribution date, the redemption, exchange or expiration of the rights. Except
as set forth below and subject to adjustment as provided in the Sara Lee rights
agreement, each right entitles the registered holder to purchase from Sara Lee
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
at a purchase price of $215 per right. The purchase price is subject to
adjustment from time to time to prevent dilution upon specified changes in Sara
Lee's capitalization. Sara Lee has reserved six million shares of preferred
stock for issuance upon exercise of the rights. The terms and conditions
relating to the rights are set forth in the Sara Lee rights agreement, dated
March 26, 1998.
The rights will separate from the Sara Lee common stock upon the earlier of:
. ten days following a public announcement that a person or group, known
as an "acquiring person," together with persons affiliated or associated
with it, has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Sara Lee common
stock. This date is referred to as the "stock acquisition date"; or
. ten business days, or any later date determined by the Sara Lee board of
directors, following the commencement of a tender offer or exchange
offer that would result in a person or group beneficially owning 15% or
more of the outstanding shares of Sara Lee common stock;
provided, however, that a person that beneficially owns less than 25% of the
outstanding Sara Lee common stock will not be an acquiring person and will not
cause the rights to be distributed if the person has reported or is required to
report its ownership of Sara Lee common stock on Schedule 13G or Schedule 13D
under the Exchange Act and the Schedule 13D does not state any intention to, or
reserve the right to, control or influence Sara Lee or engage in certain other
actions, so long as the person neither reports nor is required to report this
ownership other than as described in this proviso. The earlier of these dates
is referred to as the "distribution date."
The rights will first become exercisable on the distribution date and will
expire at the close of business on May 31, 2008, unless earlier redeemed or
exchanged by Sara Lee. Notwithstanding the foregoing, the rights will not be
exercisable after the occurrence of a triggering event until Sara Lee's right
of redemption has expired.
As soon as practicable after the distribution date, separate certificates
evidencing the rights will be mailed to holders of record of the Sara Lee
common stock as of the close of business on the distribution date. Then the
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<PAGE>
separate rights certificates alone will evidence the rights. Subject to some
exceptions, only shares of Sara Lee common stock issued before the distribution
date will be issued with rights.
If a person becomes an acquiring person, except pursuant to a qualifying
offer, it is referred to as a "triggering event." If a triggering event occurs,
the rights will "flip-in" and entitle each holder of a right, except as
provided below, to purchase, upon exercise at the then-current purchase price,
that number of shares of Sara Lee common stock having a market value of two
times the purchase price.
A "qualifying offer" is an offer for all outstanding shares of Sara Lee
common stock which the independent directors determine to be fair to, and
otherwise in the best interest of, Sara Lee and its stockholders after
receiving advice from one or more investment banking firms.
Any rights beneficially owned at any time on or after the earlier of the
distribution date and the stock acquisition date by an acquiring person or an
affiliate or associate of an acquiring person, whether or not such ownership is
subsequently transferred, will become null and void upon the occurrence of a
triggering event. Then any holder of the rights will have no right to exercise
them.
If, following a triggering event, Sara Lee is acquired in a merger or other
business combination in which its common stock does not remain outstanding or
is changed or 50% of the assets or earning power of Sara Lee and its
subsidiaries taken as a whole is sold or otherwise transferred to any person,
other than Sara Lee or any subsidiary of Sara Lee, in one or more related
transactions, the rights will "flip-over." Each holder of a right, except as
provided in the preceding paragraph, will be entitled to purchase that number
of shares of common stock of the acquiring company, or, in some circumstances,
one of its affiliates, which at the time of this transaction would have a
market value of two times the then-current purchase price. This provision does
not apply to a qualifying offer.
At any time until the earlier of (1) 15 days following the stock acquisition
date and (2) the expiration date, Sara Lee may redeem the rights in whole, but
not in part, at a price of $0.01 per right, subject to adjustments. Sara Lee
may, at its option, pay the redemption price in cash, shares of its common
stock or any other form of consideration determined to be appropriate by the
board of directors.
Under circumstances involving redemption after an acquiring person becomes
so or after a change of a majority of directors, redemption of the rights
requires the concurrence of a majority of continuing directors. Immediately
upon the action of Sara Lee's board of directors ordering redemption of the
rights, the right to exercise the rights will terminate and the holders of
rights will be entitled to receive only the applicable redemption price. In
addition, after a triggering event, at the election of the board of directors,
the outstanding rights not beneficially owned by an acquiring person or an
affiliate or associate of an acquiring person may be exchanged, in whole or in
part, for shares of Sara Lee common stock, or shares of preferred stock of Sara
Lee having essentially the same value or economic rights as the common stock
shares. Immediately upon the action of the board of directors authorizing any
exchange, and without any further action or notice, the rights subject to
exchange will terminate and will only entitle holders to receive the shares
issuable upon the exchange.
Until a right is exercised, the holder will have no rights as a stockholder
of Sara Lee, including, without limitation, the right to vote or to receive
dividends. While the distribution of the rights will not be taxable to
stockholders or to Sara Lee, stockholders may, depending upon the
circumstances, recognize taxable income if the rights become exercisable for
Sara Lee common stock, other consideration or common stock of the acquiring
company.
At any time before the distribution date, Sara Lee may, without the approval
of any holder of the rights, supplement or amend any provision of the rights
agreement. After a distribution date, the rights agreement may be amended only:
. to cure ambiguities,
. to correct inconsistent provisions,
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<PAGE>
. to shorten or lengthen any time period, under some circumstances only
with the concurrence of a majority of the continuing directors, or
. in ways that do not adversely affect the rights holders other than an
acquiring person.
From and after the distribution date, the rights agreement may not be
amended to lengthen (x) a time period relating to when the rights may be
redeemed when the rights are not then redeemable, or (y) any other time period
unless this lengthening is for the purpose of protecting, enhancing or
clarifying the rights of, and/or the benefits to, the holders of rights, other
than an acquiring person.
Chock full o'Nuts. On December 30, 1987, the Chock full o'Nuts board of
directors authorized and declared a dividend distribution of one right for each
outstanding share of its common stock on January 22, 1988 pursuant to the
original rights agreement dated as of December 30, 1987. This rights agreement
was subsequently amended and restated by the final rights agreement, which is
referred to throughout this proxy statement/prospectus as the "rights
agreement." Under the rights agreement, each right entitles the holder to
purchase one share at an exercise price of $28.00, subject to adjustment.
Under the rights agreement, until the close of business on the distribution
date, the rights will be evidenced by the certificates evidencing shares and
will be transferred with and only with share certificates. As soon as
practicable after the distribution date, certificates evidencing the rights
will be mailed to holders of record of the shares as of the close of business
on the distribution date, and then the separate rights certificates alone will
evidence the rights.
The "distribution date" occurs on the earlier of (1) 10 days following a
public announcement that, without Chock full o'Nuts' prior consent, a person or
group of affiliated or associated persons has acquired or obtained the right to
acquire, after December 30, 1987, beneficial ownership of securities having 20%
or more of the voting power of all outstanding voting securities of Chock full
o'Nuts or a person or group of affiliated persons that, on December 30, 1987,
beneficially owned securities having 20% or more of Chock full o'Nuts' voting
power, has acquired or obtained the right to acquire, after December 30, 1987,
beneficial ownership of securities representing an additional 2% of Chock full
o'Nuts' voting power, any such person or group being an "acquiring person," or
(2) 10 business days, or any later date as Chock full o'Nuts' board of
directors determines, following the commencement of, or a public announcement
of an intention to make, a tender offer or exchange offer which would result in
any person or group of related persons becoming an acquiring person without the
prior consent of Chock full o'Nuts.
In the event that a person becomes an acquiring person, unless pursuant to a
permitted offer, each holder of a right will for a 60-day period have the right
to receive, upon exercise, that number of shares having a market value of two
times the then-current exercise price of the right, subject to the availability
of a sufficient number of authorized but unissued shares. However, an acquiring
person's rights become void.
A "permitted offer" is a tender or exchange offer for all outstanding shares
at a price and on terms determined by at least a majority of the members of the
board of directors, who are not themselves acquiring persons or affiliates or
associates of an acquiring person, to be both adequate and otherwise in the
best interests of Chock full o'Nuts and its various constituents, including,
without limitation, both the long term and short term interests of Chock full
o'Nuts and its shareholders.
The rights are not exercisable until the distribution date. The rights will
expire at the earliest of (1) December 30, 2007, (2) consummation of a merger
transaction in connection with a permitted offer or (3) the date the rights are
redeemed by Chock full o'Nuts. At any time before there being an acquiring
person or the expiration of the rights, Chock full o'Nuts may redeem the rights
in whole, but not in part, at a redemption price of $.01 per right. Upon the
action of the board of directors ordering redemption of the rights, the rights
will terminate and the holders of rights will be entitled to receive only the
redemption price.
At any time after the acquisition by a person or group of beneficial
ownership of 20% or more of Chock full o'Nuts' voting power and before the
acquisition by that person or group of 50% or more of Chock full o'Nuts' voting
power, the board of directors may, at its option, exchange all or part of the
then outstanding
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rights for shares at an exchange ratio of one share per right, subject to
adjustment. However, the rights owned by the person or group become void.
Pursuant to the merger agreement, Chock full o'Nuts has amended its rights
agreement to exempt Sara Lee and the merger from operation of the rights
agreement, subject to Sara Lee's compliance with the terms of the merger
agreement.
COMPARATIVE STOCK PRICES AND DIVIDENDS
Sara Lee common stock is listed for trading on the New York Stock Exchange
under the trading symbol "SLE," and Chock full o'Nuts common stock is also
listed for trading on the New York Stock Exchange under the trading symbol
"CHF." The following table sets forth, for the periods indicated, dividends and
the high and low sales prices per share of both Sara Lee and Chock full o'Nuts
common stock on the New York Stock Exchange Composite Transaction Tape. We have
adjusted the price per share of Sara Lee common stock to reflect a 2-for-1
stock split in the form of a stock dividend which was effective on December 1,
1998. For current price information, shareholders are urged to consult publicly
available sources.
<TABLE>
<CAPTION>
Sara Lee
---------------------------
High Low Dividends
-------- -------- ---------
<S> <C> <C> <C>
Fiscal Year Ended June 27, 1998
First Quarter................................. 26 1/8 19 1/2 .105
Second Quarter................................ 28 1/2 23 3/4 .115
Third Quarter................................. 31 5/32 26 19/32 .115
Fourth Quarter................................ 31 13/16 28 7/32 .115
Fiscal Year Ended July 3, 1999
First Quarter................................. 29 19/32 22 5/32 .115
Second Quarter................................ 30 13/16 26 1/8 .125
Third Quarter................................. 29 7/8 23 1/2 .125
Fourth Quarter................................ 26 5/16 21 1/2 .125
Fiscal Year Ending July 1, 2000
First Quarter (through September 7, 1999)..... 24 7/16 21 3/16 .125
</TABLE>
In fiscal 1998, Sara Lee announced plans to repurchase $3 billion of its
common stock over a three-year period. Sara Lee repurchased $2.778 billion of
its common stock during fiscal 1998 and fiscal 1999. Sara Lee does not intend
to repurchase any shares of its common stock from the date of this proxy
statement/prospectus until the completion of the merger.
<TABLE>
<CAPTION>
Chock full o'Nuts
---------------------------
High Low Dividends
-------- -------- ---------
<S> <C> <C> <C>
Fiscal Year Ended July 31, 1998
First Quarter................................. 8 3/4 6 1/4 --
Second Quarter................................ 7 5/8 6 --
Third Quarter................................. 8 1/8 6 5/8 --
Fourth Quarter................................ 8 5/8 6 1/4 --
Fiscal Year Ended July 31, 1999
First Quarter................................. 7 1/2 4 3/4 --
Second Quarter................................ 7 7/8 5 1/16 --
Third Quarter................................. 9 15/16 4 13/16 --
Fourth Quarter................................ 10 7/8 9 3/8 --
Fiscal Year Ending July 31, 2000
First Quarter (through September 7, 1999)..... 10 9/16 10 5/16 --
</TABLE>
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DESCRIPTION OF CHOCK FULL O'NUTS BUSINESS
Chock full o'Nuts is the fourth largest roaster, packer and marketer of
coffee in the United States based on coffee pounds sold by Chock full o'Nuts.
Its broad range of regular and decaffeinated, ground roast, instant and
specialty coffees for the foodservice and retail grocery industries are sold
regionally throughout the United States and Canada under various well known
trademarks, including Chock full o'Nuts, LaTouraine and Cain's. Best known
among its products is Chock full o'Nuts brand premium, vacuum packed, all-
method grind coffee. Chock full o'Nuts is also one of the largest marketers of
foodservice and private label coffees. The balance of Chock full o'Nuts'
business is derived from its developing Quikava outlets and from real estate
operations.
Chock full o'Nuts was incorporated in 1932, and for many years, Chock full
o'Nuts' primary business was the operation of counter service restaurants,
under the Chock full o'Nuts name. In 1953, Chock full o'Nuts expanded its
business by marketing the coffee made famous in its restaurants to consumers
via supermarkets and other retail grocery outlets. Impactful advertising,
featuring the "Heavenly Coffee" jingle, made Chock full o'Nuts brand premium
coffee a market leader. In 1983, management discontinued Chock full o'Nuts'
restaurant operations and concentrated its efforts on the sale of coffee and
related food products. In 1994, Chock full o'Nuts commenced opening a limited
number of Chock Cafes in the New York metropolitan area. Chock Cafes offered
moderately priced specialty coffees, sandwiches, salads, bakery products,
snacks and other assorted food and beverage products. In October 1996, Chock
full o'Nuts adopted a plan to discontinue operations of these company-owned
cafes.
In July 1998, Chock full o'Nuts acquired the hot beverage business of Park
Foods, LLP, whose business consists primarily of sales of coffee, cappuccino,
cocoa and leaf tea to a nationwide customer base. See Note 2 of Notes to
Consolidated Financial Statements for the year ended July 31, 1998 for a more
detailed description of this transaction.
In January 1997, Chock full o'Nuts acquired substantially all of the assets
and assumed substantially all of the liabilities of Ireland Coffee & Tea
Company a leading roaster and distributor of coffees to hotels, restaurants and
institutions on the East Coast of the United States.
In March 1994, Chock full o'Nuts acquired all the assets and liabilities of
Quikava, a company whose menu features a full assortment of the most popular
specialty coffee beverages, plus a variety of freshly prepared foods and snacks
specifically suited for in-car consumption. Quikava's unique "double drive-
thru" format targets the suburban commuter and is uniquely suited to take
advantage of the growth of specialty coffees "away from home," where annual
growth rates are significant.
In December 1992, Chock full o'Nuts acquired the stock of Cain's Coffee Co.
and several trademarks related to that business. Cain's primary business is the
direct sale and distribution of coffee and related products under the Cain's
label to foodservice customers in twelve states primarily West of the
Mississippi. Cain's also sells coffee and tea to retail customers, using a
direct store distribution system.
In November 1992, Chock full o'Nuts acquired a controlling interest in a
partnership, which owned Dana Brown Private Brands, Inc., a company which
markets and sells private label coffee and tea products to food retailers and
distributors, located primarily in the Midwest.
In December 1986, Chock full o'Nuts acquired Greenwich Mills Company.
Established in 1912, Greenwich Mills Co. is a leading manufacturer and supplier
of coffee, tea and allied products to foodservice and private label customers.
The majority of their customers are located in markets east of the Mississippi.
Greenwich Mills's best known trademark is LaTouraine.
Corporate management is currently focused on the following growth
initiatives: (1) maximizing its foodservice franchise by significantly
broadening its customer base for Cain's, Chock full o'Nuts and LaTouraine brand
coffee, tea and allied products; (2) increasing retail grocery market shares
for such higher margin products as Chock full o'Nuts brand Cafe Blend,
decaffeinated, instant and Rich French Roast coffees;
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(3) selectively pursuing new business development opportunities that will
deliver significant volume and profit growth; and (4) expansion of its
developing Quikava drive-thru outlets through franchising.
Coffee and Related Products
According to certain available industry surveys and Chock full o'Nuts
estimates, total United States coffee sales by manufacturers in 1998 were
approximately $6 billion. Approximately 36% of total United States coffee sales
in 1998 were to foodservice customers.
Beverage Products Operations
Foodservice Sales and Marketing. In January 1985, Chock full o'Nuts began
using Chock full o'Nuts sales personnel and independent food brokers to market
its coffee and allied products to foodservice customers. These include chain
and independent restaurants, hospitals, airlines, schools, governmental
institutions, vending and office coffee service operators and other
institutional distributors. In December 1986, Chock full o'Nuts acquired
Greenwich Mills Company, which is a major direct sales and distribution
supplier in the eastern United States of coffee, tea and allied products to
foodservice customers and private label customers. Greenwich's best-known label
is LaTouraine, which enjoys a reputation for high quality. LaTouraine also
distributes spices, international coffee mixes, specialty coffees, whole bean
and pod espresso, hot chocolate, iced and hot tea, powdered soft drinks, soup
bases, and portion controlled jams, jellies and condiments.
In December 1992, Chock full o'Nuts acquired Cain's Coffee Co., which is a
major supplier in the Midwest and Southwest of products similar to those sold
by Greenwich Mills Company and LaTouraine to foodservice customers.
In the nine months ended April 30, 1999 and in fiscal 1998, respectively,
approximately 53% and 48% of sales were derived from processing and marketing
coffee and allied products for sale to foodservice customers. In fiscal 1997
and 1996, sales derived from processing and marketing of coffee and allied
products to food service customers accounted for 49% and 46% of sales,
respectively. Sales of coffee products to foodservice customers have
traditionally been less price-sensitive and depend more on the level of
customer service provided. These sales also tend to generate higher operating
margins, due to lower marketing and advertising expenses, than do sales of
coffee products to retail customers. In addition, the absence of competitors
with a dominant market position, makes Chock full o'Nuts' pricing to
foodservice customers less susceptible, as compared to pricing to retail
customers, to changes in price in response to pricing actions of any single
competitor.
Retail Sales and Marketing
Chock full o'Nuts currently sells most of its retail grocery coffee products
to supermarket chains, wholesalers and independent food outlets through
independent food brokers. Chock full o'Nuts' retail products include coffees
sold under the Chock full o'Nuts, Cain's, Ireland and Safari labels. Chock full
o'Nuts believes that its best known product, Chock full o'Nuts premium, vacuum
packed, all-method grind coffee, is superior to most competitors in being able
to produce a more consistent, better tasting, finished brew from a single,
"all-method grind," regardless of the coffee maker used. Chock full o'Nuts also
sells an "extended yield" coffee, which produces more cups than equivalent
quantities of standard yield coffee. Additionally, Chock full o'Nuts sells
decaffeinated roast and ground coffee, instant coffees, a premium quality Cafe
blend and a Rich French Roast coffee.
Chock full o'Nuts and Greenwich Mills Company roast, pack and market
regular, decaffeinated and instant coffees for sale by others under a variety
of private labels.
In the nine months ended April 30, 1999 and in fiscal 1998, respectively,
Chock full o'Nuts' coffee sales to retail customers accounted for approximately
43% and 46% of sales. In fiscal 1997 and 1996, coffee sales to retail customers
accounted for 44% and 48% of sales, respectively. Coffee sales under the Chock
full o'Nuts label represented approximately 4% of total branded retail grocery
coffee sales in the United States in the nine months ended April 30, 1999 and
in fiscal 1998.
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Chock full o'Nuts' all-method grind coffee is sold in most major
metropolitan areas of the United States and in the provinces of Ontario and
Quebec, Canada. Sales are concentrated in the New York metropolitan area,
upstate New York, New England, Philadelphia, Washington, D.C. and Florida.
Chock full o'Nuts believes that its distinctive packaging design and one grind
concept are important factors in the marketing of its coffee products.
Marketing a single grind coffee has enabled Chock full o'Nuts' all-method
grind coffee to be consistently one of the fastest moving items off
supermarket shelves in markets where its sales are concentrated.
The sales of Cain's, Ireland and Safari brand products are concentrated in
the Midwest, East and Southwest, respectively.
Suppliers and Manufacturing
Chock full o'Nuts' coffee is primarily a blend of readily available Central
and South American coffees. Chock full o'Nuts purchases approximately 100
million pounds of green coffee beans annually. All green coffee is purchased
from approximately 25 importers located in New York City, New Orleans and
Miami, who assume the risk of delivering beans that meet Chock full o'Nuts'
quality requirements at a guaranteed price. Chock full o'Nuts generally buys
its coffee through contracts providing for delivery in 4 to 12 weeks and
supplements these contracts with purchases on the spot market. All purchases
are subject to inspection and approval by the United States Food and Drug
Administration.
Manufacturing activities for coffee and related products are presently
conducted at the following facilities:
<TABLE>
<CAPTION>
Location Principal Use
- ------------------------ ------------------------------------------------------
<S> <C>
Brooklyn, New York...... Coffee Roasting Plant, Warehouse
St. Louis, Missouri..... Coffee Roasting Plant, Warehouse
Hialeah, Florida........ Coffee Roasting Plant, Warehouse
Rochester, New York..... Coffee Roasting Plant, Warehouse
Oklahoma City, Oklahoma. Coffee Roasting Plant and Processing Plant for Tea and
Related Food Products, Warehouse
Springfield, Missouri... Processing Plant for Spices, Warehouse
Pleasantville, New Coffee Roasting Plant, Warehouse
Jersey.................
</TABLE>
All of the above facilities are owned, except the Rochester, New York,
Springfield, Missouri and Pleasantville, New Jersey facilities, which are
leased. Chock full o'Nuts believes that it has sufficient production capacity
to meet its current and future needs.
Chock full o'Nuts also rents executive office space in New York City and
maintains warehousing facilities in over forty-five locations throughout the
United States. None of these facilities are material to Chock full o'Nuts's
operations.
Competition
The coffee business is highly competitive. Chock full o'Nuts competes for
retail customers with a number of nationally and regionally established
brands. Its largest competitors are Maxwell House, Yuban and Sanka Coffees
owned by Kraft Foods, Folger's Coffee owned by Procter & Gamble and Hills, MJB
and Chase & Sanborn owned by The Nestle Company, with combined annual sales
accounting for approximately 80% of the United States coffee market. The
profitability of Chock full o'Nuts' coffee sales to retail customers is
largely dependent on competitive pricing conditions.
There are many competitors in the business of selling coffee to foodservice
customers. However, Chock full o'Nuts believes that no single competitor's
sales constitute more than 15% of this market, other than Sara Lee with
approximately 25%. Sales of coffee, tea and allied products to foodservice
customers have
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traditionally been less price-sensitive and more dependent on the level of
service provided to such customers than sales of the same products to retail
customers. In addition, the absence of direct competitors with a dominant
market position has traditionally made Chock full o'Nuts's pricing to
foodservice customers less susceptible, as compared to pricing to retail
customers, to changes in price in response to pricing actions of any single
competitor.
Quikava Operations
Quikava is the operator and franchiser of double-drive thru outlets, which
offer a variety of specialty coffees, espresso-based drinks, fresh baked goods,
sandwiches, other "finger foods" and snacks. Quikava units are situated on
major commuter thoroughfares in suburban markets and offer quick-service of
quality beverages and snacks. Chock full o'Nuts intends to develop additional
Quikava units, most of which will be franchised. At July 31, 1999, Chock full
o'Nuts was operating six company owned units and there were 42 operating
franchised units.
Cafes
In June 1994, with the opening of a flagship store in Midtown Manhattan,
Chock full o'Nuts began to develop the business of operating retail cafes which
offered moderately priced specialty coffees, sandwiches, salads, bakery
products, snacks, and other assorted food and beverage products. In October
1996, Chock full o'Nuts discontinued the operations of its cafes due to store
operating losses resulting from high food and labor costs and insufficient
volume to cover high fixed and operating costs related to Midtown Manhattan
operations as well as a cafe corporate structure organized to support a much
higher number of locations.
Research and Development
Chock full o'Nuts invested a nominal amount in research and development for
the three years ended July 31, 1998 and the nine months ended April 30, 1999.
Trademarks
Certain trademarks (i.e., Chock full o'Nuts, LaTouraine, Eppen Smith,
Cain's, Safari and Ireland) are important to Chock full o'Nuts' business.
Employees
Chock full o'Nuts has approximately 1,440 employees, 15% of whom are
represented by labor unions. Chock full o'Nuts believes that its relations with
both union and non-union employees are good.
Real Estate Operations
Chock full o'Nuts is both lessor and lessee on several properties. These
properties had been part of Chock full o'Nuts original restaurant operations.
Additionally, Chock full o'Nuts owns a coffee roasting facility in Castroville,
California which it leases to another coffee company.
Properties
Chock full o'Nuts leases various premises under long-term leases expiring on
various dates through 2009. Several of these leases contain renewal options. No
Chock full o'Nuts-leased premises are owned by any of its officers or
directors. The following table sets forth the location and certain information
about Chock full o'Nuts' plants and other properties as of July 31, 1999. Chock
full o'Nuts considers all of these premises adequate for its present and
anticipated needs.
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<PAGE>
Plants and Other Properties
<TABLE>
<CAPTION>
Approximate Whether
Square Feet Owned or
Location Principal Use of Floor Space Leased
-------- ------------- -------------- --------
<S> <C> <C> <C>
Brooklyn, New Coffee Roasting, Plant, Warehouse 55,000 Owned
York
St. Louis, Coffee Roasting, Plant, Warehouse 77,000 Owned
Missouri
Secaucus, New Warehouse and Offices 104,000 Owned
Jersey
Hialeah, Coffee Roasting, Plant, Warehouse 50,000 Owned
Florida
Rochester, New Coffee Roasting, Plant, Warehouse 50,000 Leased
York
Oklahoma City, Coffee Roasting Plant, and Processing 150,000 Owned
Oklahoma Plant for Tea and Related Food
Products, Warehouse
Springfield, Processing Plant for Spices, Warehouse 30,000 Leased
Missouri
Pleasantville, Coffee Roasting Plant, Warehouse 47,000 Leased
New Jersey
574 Fifth Real Estate Operation 13,000 Leased
Avenue
New York, New
York
422 Madison Real Estate Operation 8,750 Leased
Avenue
New York, New
York
532 Madison Real Estate Operation 12,250 Leased
Avenue
New York, New
York
49 Broadway Real Estate Operation 12,000 Leased
New York, New
York
1420 Broadway Real Estate Operation 6,750 Leased
New York, New
York
370 Lexington Corporate Headquarters 11,000 Leased
Avenue
New York, New
York
Waverly Place Real Estate Operation 2,500 Leased
Corner
Green Street
New York, New
York
Castroville, Real Estate Operation 66,000 Owned
California
Queen Ann Quikava Operation 250 Leased
Plaza
Norwell, Mass.
1184 Main Quikava Operation 600 Leased
Street
Haverhill,
Mass.
84 Milford Quikava Operation 600 Leased
Road
Amherst, New
Hampshire
374 Bridge Quikava Operation 600 Leased
Street
N. Weymouth,
Mass.
895 Bald Hill Quikava Operation 600 Leased
Road Warwick,
Rhode Island
190 Old Derby Quikava Operation Headquarters 1,196 Leased
Street
Hingham, Mass.
83 Brockton Quikava Operations 600 Leased
Avenue
Abington,
Mass.
</TABLE>
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<PAGE>
CHOCK FULL O'NUTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, see "Special Note Regarding Forward-Looking Statements" elsewhere in
this proxy statement/prospectus.
Operations
The following is Chock full o'Nuts management's discussion and analysis of
significant factors that have affected Chock full o'Nuts operations during the
nine month periods ended April 30, 1998 and April 30, 1999 as reflected in its
unaudited condensed consolidated statements of operations and the fiscal years
ended July 31, 1996, July 31, 1997 and July 31, 1998 as reflected in the
audited consolidated statements of operations.
Nine Months Ended April 30, 1999 Compared to Nine Months Ended April 30, 1998
Net sales from beverage products decreased to $268,386,000 or 11.7% for the
nine months ended April 30, 1999 compared to $304,042,000 for the comparable
period of the prior year. The decrease was due to a decrease in the average
selling price of coffee of $.56 per pound, approximately $44,000,000 and in
commodity sales of approximately $7,000,000, offset by a 7.7%, or $15,000,000,
net increase in coffee pounds sold. The net increase in coffee pounds sold
during this period was primarily due to additional sales of $21,750,000 as a
result of the Park Coffee Company acquisition in July 1998. Operating profit
from beverage products was $7,192,000, a decrease of 52% for the nine months
ended April 30, 1999 compared to the prior year's comparable period. The
decrease for operations other than Park Coffee Company for the nine months
resulted from decreases in gross margins of approximately $6,500,000 and
increases in selling, general and administrative expenses of approximately
$1,500,000. Decreases in total gross margins were primarily due to (1) an
increase in manufacturing costs resulting from labor and overhead
inefficiencies in the manufacturing transition period for Park Coffee Company
of approximately $4,500,000 and (2) a decrease in the average selling price of
coffee that was greater, by $.08 per pound, than the decrease in the average
cost of green coffee, representing approximately $6,500,000. During the nine
months ended April 30, 1999 prices of green coffee ranged from a high of $1.35
to a low of $.97 per pound. Selling, general and administrative expenses
increased, other than those applicable to Park Coffee Company. The major
categories accounting for this increase were delivery costs of approximately
$1,085,000, resulting from the manufacturing transition period for Park Coffee
Company and increased coffee pounds sold, coupon costs of approximately
$585,000 compensation costs of approximately $550,000 and costs applicable to
the acquisition of Chock full o'Nuts by Sara Lee of approximately $600,000. The
increases in selling, general and administrative expenses were partially offset
by decreased amortization of purchased intangibles of approximately $525,000
and insurance costs of approximately $545,000.
Quikava's growth plans involve franchising the concept in order to generate
initial franchise fees and continuing royalty income to cover headquarters'
expenses. Franchise operated shop sales were $3,521,000 for nine months ended
April 30, 1999 versus $2,364,000, an increase of 49%, over the comparable 1998
period. Quikava company-operated shop sales were $1,874,000 for the nine months
ended April 30, 1999 compared to $2,253,000 in the comparable period of the
prior year. Company operated shops generate potential franchise interest and
provide exposure to the concept. Operating losses amounted to $936,000 for the
nine months ended April 30, 1999 compared to $1,367,000 in the comparable
period of the prior year. The operating losses consist primarily of
headquarters' expenses, such as payroll and related expenses for franchising
infrastructure and shop level losses, partially offset by initial franchise fee
income and royalty income on franchisee sales.
Net income was $558,000 ($.05 per basic share and diluted share) for the
nine months ended April 30, 1999, compared to $5,566,000 ($.54 per basic share
and $.40 per diluted share) for the comparable period of the prior year. The
decrease was primarily due to decreased operating profits from beverage
products and the
54
<PAGE>
gain on sale of real estate in fiscal 1998. This decrease was partially offset
by decreased income taxes, attributable to decreased income before income
taxes, and to a lesser extent decreased interest expense resulting from reduced
amounts of debt outstanding, increased interest income, resulting from
increased invested funds, and decreased operating losses from Quikava.
Year Ended July 31, 1998 Compared to Year Ended July 31, 1997
Net sales from beverage products increased to $390,731,000 or 8.4% for the
year ended July 31, 1998 compared to $360,467,000 for the prior year. The
increase was primarily due to increases in the average selling price of coffee
and to a lesser extent a 2.8% increase in coffee pounds sold. Operating profit
from beverage products was $17,854,000, a decrease of 24% for the year ended
July 31, 1998 compared to the prior year. The decrease resulted primarily from
decreased gross margins attributable to an increase in the average cost of
green coffee greater than the increase in the average selling price of coffee
and increased manufacturing costs, partially offset by increased coffee pounds
sold and increased sales of allied products. During the year ended July 31,
1998 prices for green coffee ranged from a high of $2.11 to a low of $1.06 per
pound. Selling, general and administrative expenses decreased slightly
primarily due to reduced coupon, compensation and bad debt costs and decreased
amortization of purchased intangibles, partially offset by increased
advertising, delivery and legal costs. Certain of Chock full o'Nuts' brokerage,
delivery and commission costs vary with the number of pounds sold, therefore
these selling expenses have increased in 1998 compared to 1997.
Quikava franchise operated shop sales were $3,531,000 for the year ended
July 31, 1998 versus $2,437,000 an increase of 45% over 1997. Quikava company-
operated shop sales were $3,626,000 for the year ended July 31, 1998 compared
to $3,737,000 in 1997. Operating losses amounted to $1,781,000 for the year
ended July 31, 1998, compared to $1,998,000 in the prior year. The operating
losses consisted primarily of headquarters' expenses such as payroll and
related expenses for franchising infrastructure and shop level losses,
partially offset by initial franchise fee income in 1998 and royalty income on
franchisee sales.
Net income was $5,499,000 ($.53 per basic share and $.45 per diluted share)
for the year ended July 31, 1998, compared to $7,914,000 ($.76 per basic share
and $.55 per diluted share). The difference was primarily due to reduced
operating profits from beverage products and to a lesser extent reduced
interest income resulting from decreased invested funds. This decrease in net
income was partially offset by decreased income taxes attributable to decreased
income before income taxes, the unfavorable litigation result in fiscal 1997,
the gain on sale of real estate in 1998 ($.07 per basic share and $.03 per
diluted share) and to a lesser extent reduced interest expense resulting from
reduced amounts of debt outstanding in the second half of the year.
Year End July 31, 1997 Compared to Year Ended July 31, 1996
In January 1997, Chock full o'Nuts acquired substantially all of the assets
and assumed substantially all of the liabilities of Ireland Coffee and Tea
Company, whose business consists of roasting and distributing coffees to
hotels, restaurants and institutions on the East Coast.
Net sales from beverage products increased $41,254,000 or 13% for the year
ended July 31, 1997, compared to the prior year. The increase was primarily due
to a 15% increase in coffee pounds sold. Operating profits from beverage
products were $23,498,000, an increase of 41% for the year ended July 31, 1997
compared to the prior year. The increase resulted primarily from increased
gross margins and the operations of Ireland Coffee and Tea Company from date of
acquisition, partially offset by increased selling, general and administrative
expenses. Increased gross margins were primarily due to increased coffee pounds
sold and a decrease in the average cost of green coffee. During the year ended
July 31, 1997 prices for green coffee ranged from a high of $3.15 to a low of
$1.03 per pound. Selling, general and administrative expenses increased
primarily due to increased advertising, brokerage and data processing costs and
salaries. Chock full o'Nuts' brokerage, delivery and commission costs vary with
the number of pounds sold, therefore these selling expenses have increased in
1997 compared to 1996.
55
<PAGE>
Net sales of Quikava franchise operated shops increased to $2,437,000 for
the year ended July 31, 1997 from $1,747,000 in the prior year. Quikava
company-operated shops with net sales of $3,737,000 in fiscal 1997 and
$1,922,000 in fiscal 1996 were opened in new markets to generate potential
franchisee interest and gain exposure to the concept. Operating losses
increased to $1,998,000 for the year ended July 31, 1997 compared to $1,649,000
in the prior year. The increase in operating losses consisted primarily of
increased headquarters' expenses such as payroll and related expenses for
franchising infrastructure and pre-opening costs and increased shop level
losses that were primarily due to the number of shops open less than 12 months,
partially offset by increased royalty income on increased franchisee sales. The
first year shops opening in new markets with lack of brand recognition resulted
in slower sales growth and greater shop level losses than established
comparable shops.
Income from continuing operations was $7,914,000 or $.76 per basic share and
$.55 per diluted share for the year ended July 31, 1997, compared to $4,631,000
or $.45 per basic share and $.41 per diluted share for the prior year. The
difference was primarily due to increased operating profits from beverage
products and to a lesser extent increased interest income resulting from
increased invested funds in the early part of fiscal 1997 and reduced interest
expense resulting from lower amounts of debt outstanding, partially offset by
increased income taxes, the write-off of amounts due from the previous owner of
an acquired business due to the result of unfavorable litigation and increased
operating losses from Quikava. Increased income taxes are primarily
attributable to increased income before income taxes, partially offset by
realization of a prior year capital loss not previously recorded. The net loss
for 1996 is due to a loss from discontinued operations of $6,167,000 or $.60
per basic share and $.28 per diluted share. See Note 5 of Notes to Consolidated
Financial Statements for the fiscal year ended July 31, 1998, included
elsewhere in this proxy statement/prospectus, for a more detailed description
of discontinued operations.
General inflation has been relatively low for the last several years;
however, green coffee prices have changed significantly during the nine months
ended April 30, 1999 and fiscal 1998, 1997 and 1996. While Chock full o'Nuts
manages its inventory to have rapid turnover, the changes in green coffee
prices have required Chock full o'Nuts at times to carry higher inventory
dollars than it might otherwise have done in a more stable green coffee market
and impacted Chock full o'Nuts' gross profit percentage.
Liquidity and Capital Resources
As of April 30, 1999, working capital was approximately $87,500,000 and the
ratio of current assets to current liabilities was 5.0 to 1.
As of April 30, 1999, the Chock full o'Nuts had unused borrowing capacity of
approximately $36 million under its credit facilities of $40 million with Fleet
Bank, N.A. and The Chase Manhattan Bank. See Note D of Notes to Unaudited
Condensed Consolidated Financial Statements for the nine months ended April 30,
1999 included elsewhere in this proxy statement/prospectus for a more detailed
description of bank credit facilities.
On December 4, 1998, Chock full o'Nuts redeemed $5,000,000 of its 8%
Convertible Subordinated Debentures using existing invested funds. Subsequent
to April 30, 1999 through September 2, 1999, $2,498,000 of Chock full o'Nuts 8%
Convertible Subordinated Debentures and $3,206,000 of Chock full o'Nuts 7%
Convertible Senior Subordinated Debentures were converted into 709,353 shares
of Chock full o'Nuts common stock. On August 26, 1999, Chock full o'Nuts called
its outstanding 8% Convertible Subordinated Debentures and 7% Convertible
Senior Subordinated Debentures for redemption on September 14, 1999. Sara Lee
has agreed to provide the necessary funds for redemption on terms substantially
identical to those in the existing indentures for the debentures, other than
the convertibility feature.
Chock full o'Nuts plans on expanding its Quikava franchised operations,
which, as of July 31, 1999, were operating in 42 locations. The sales of
Quikava operated and franchised units are not material to its consolidated
sales. Total Quikava store level operations are not currently profitable but
are being partially offset
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<PAGE>
by franchise fee and royalty income, however, overhead expenses related to
Quikava headquarters are currently resulting in losses of approximately
$1,000,000 on an annual basis.
Chock full o'Nuts believes that its cash flow from operations, its cash
equivalents and funds available under its amended and restated revolving credit
and term loan agreements with its Banks provide sufficient liquidity to meet
its working capital, expansion and capital requirements for at least the next
twelve months.
Green Coffee Market
Coffee is one of the leading commodities traded on futures exchanges.
Supplies fluctuate with the weather and prices can be and have been volatile.
The supply and price is affected by multiple factors, such as weather, weather
forecasts, consumption trends, changes in stock levels, export restrictions
observed by members of the Association of Coffee Producing Countries,
activities of hedge funds, politics and economics in the coffee producing
countries, many of which are lesser developed nations. While coffee trades
primarily on the futures market, coffee of the quality level sought by Chock
full o'Nuts can trade on a negotiated basis at a substantial premium above
commodity coffee pricing, depending upon the supply and demand at the time of
purchase.
In the sixties some coffee exporting countries plus a group of coffee
importing countries together formed the International Coffee Organization, or
the ICO. The principal aim of the organization was to stabilize coffee prices
in the world market. One of the instruments used to achieve this result was a
system allocating an export quota to each of the coffee producing countries. In
July 1989, this system was abandoned due to disagreements involving several
exporting as well as importing countries. In 1994, a new International Coffee
Agreement came into force which no longer included the price stability
mechanism. As a consequence, the function of the ICO changed. This organization
now provides a forum where exporting and importing countries can discuss
matters pertaining to coffee. In addition, the ICO publishes statistics about
the coffee market. It has thus become an administrative organization.
When the export quota system was abandoned in 1989, coffee prices declined
in the global market. Certain exporting countries were dissatisfied with the
new situation and tried to regain their grip on the international coffee
market. In 1993, they established the Association of Coffee Producing Countries
to boost coffee prices in the global market by keeping part of annual
production out of the world market. The members of the Association of Coffee
Producing Countries account for around 70% of world coffee exports. The
Association of Coffee Producing Countries attempts to achieve better prices by
agreeing export quotas for each member country and an export volume ceiling for
the organization as a whole.
The effect of the Association of Coffee Producing Countries on coffee prices
is difficult to determine in light of the dramatic price increases resulting
from the 1994 frosts in Brazil discussed below. Nonetheless, the Association of
Coffee Producing Countries met in November 1994 and resolved to sustain green
coffee prices. In January 1996, the Association of Coffee Producing Countries
agreed to extend its current limitations on the supply of green coffee which
were scheduled to expire in June 1996 through the 1996/1997 green coffee year.
No further actions have been taken by the Association of Coffee Producing
Countries subsequent to that date. Chock full o'Nuts is unable to predict
whether the Association of Coffee Producing Countries will be successful in
achieving its goals. Based on published statistics, as of July 31, 1999, the
supplies of green coffees held by roasters and buyers are near historically low
levels.
Brazil, the world's largest coffee producer, experienced frosts in June and
July of 1994 which reportedly damaged approximately 40% of the green coffee
crop. The announcement of the Brazilian frost damage caused a substantial
increase in green coffee prices and other coffee-product prices worldwide.
Chock full o'Nuts purchases a modest amount of its green coffee from Brazil. In
the third and fourth quarter of 1994 Chock full o'Nuts experienced a
significant increase in the price of green coffee which carried over into the
first three quarters of 1995. Chock full o'Nuts was not able to immediately
pass through to customers all of the price increases in the third and fourth
quarters of 1994 and the first quarter of 1995 following the significant
increase
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<PAGE>
in green coffee prices that resulted from the Brazilian aforementioned frosts.
Subsequent to such period through January 1997, Chock full o'Nuts's green
purchases and commitments returned to pricing levels closer to those that
existed prior to the frosts. In February 1997, green coffee bean prices began
to rise significantly reaching a high of $3.18 per pound in May 1997. This bull
market was somewhat unique in that the fundamental cause was very tight stocks
of arabica coffee in consuming countries. Historically, bull markets have been
the direct result of weather developments in Brazil, specifically cold weather
and drought that damages the following crop.
During fiscal 1998, the green coffee market was in the $1.06 to $2.11 per
pound range, and towards the end of that year at the lower end of this range.
From August 1997 until February 1998, coffee remained relatively high, most of
the time at above $1.70 per pound, when a fast, substantial and sustained drop
occurred caused by a significantly large Brazilian crop. This left Chock full
o'Nuts with large quantities of high-priced inventory while sales slowed as
retailers waited for the green coffee market to affect the price they pay for
roasted coffee and pressure intensified as major competitors cut prices in
response. The result was lower net income in the third quarter of fiscal 1998
compared to the first and second quarters and an approximate break-even in the
fourth quarter.
During the first nine months of fiscal 1999, the coffee market was in the
$.97 to $1.35 per pound range. The large Brazilian crop continues to overhang
the coffee market, notwithstanding the effects in Central America of Hurricane
Mitch, and the price of coffee, as of August 11, 1999, is at the lower end of
that range.
Chock full o'Nuts is unable to predict weather events in particular
countries that may adversely affect coffee supplies and price. Except for late
1994 and early 1995, Chock full o'Nuts generally has been able to pass green
coffee price increases through to its customers, thereby maintaining its gross
margins. Chock full o'Nuts cannot predict whether it will be able to pass
inventory price increases through to its customers in full in the future.
A significant portion of the green coffee supply of Chock full o'Nuts is
contracted for future delivery, generally between three and twelve months
forward with declining percentages of the supply being subject to future
contracts in the latter portions of each year, to ensure both an adequate
supply and reduced risk of price fluctuations. In addition, Chock full o'Nuts
uses options and futures for hedging purposes to reduce the risks of changing
green coffee prices. Green coffee is a large market with well-established
brokers, importers and warehousemen through which Chock full o'Nuts manages its
requirements. In addition to forward purchases, Chock full o'Nuts keeps
physical inventory in each of its production facilities and third-party
warehouses representing anywhere from four to ten weeks of supply requirements.
All coffee purchase transactions are in U.S. dollars, the industry's
standard currency. Chock full o'Nuts believes that it is not dependent upon any
one importer or broker for its supply of green coffee from any particular
country.
Retail customers are very price-sensitive about the purchase of coffee in
supermarkets. When retail prices increase dramatically, take away declines and
consumers switch to less expensive brands and high yield roasts. Likewise, food
service customers in times of price increase tend to stretch the use of
inventory.
Year 2000 Issue
In 1998, Chock full o'Nuts established an oversight committee, to review all
of its computer systems and programs, as well as the computer systems of the
third parties upon whose data or functionality Chock full o'Nuts relies in any
material respect, and to assess their ability to process transactions in the
Year 2000. Chock full o'Nuts has a formal Year 2000 Program focusing on three
key readiness areas: (1) Internal hardware/software and non-information
technology systems; (2) Supplier readiness; and (3) Customer readiness. For
each readiness area, Chock full o'Nuts has identified steps to perform and
developed timetables for Year 2000 compliance. Chock full o'Nuts has conducted
an assessment of internal applications and
58
<PAGE>
hardware. Some software applications have been made Year 2000 compliant and
resources have been assigned to address other applications based on their
criticality and the time required to make them Year 2000 compliant. All
software remediation is scheduled to be completed no later than the Fall of
1999. The Year 2000 compliance evaluation of hardware, including roasters,
grinders, bagging machines, telecommunication equipment, workstations and other
items, is complete. Chock full o'Nuts has identified and contacted key
suppliers. As of July 31, 1999, Chock full o'Nuts has received responses from
the majority of its key suppliers, most of which indicate that the suppliers
are in the process of developing remediation plans. Based on the supplier's
progress to adequately address the Year 2000 issue, Chock full o'Nuts is
developing a supplier action list and contingency plan to include alternative
sources of supply. Chock full o'Nuts has identified and been in contact with
its key customers. The customers have responded that they are or will be Year
2000 compliant.
Chock full o'Nuts has expensed approximately $350,000 for Year 2000 costs in
fiscal 1998, approximately $100,000 for Year 2000 costs in the first nine
months of fiscal 1999 and estimates future expenditures for Year 2000
compliance to be approximately $150,000. There can be no assurance, however,
that there will not be a delay in, or increased costs associated with, the
programs described in this section. Since the programs described in this
section are ongoing, all potential Year 2000 complications have not yet been
identified. Therefore, the potential impact of these complications on Chock
full o'Nuts financial condition and results of operations cannot be determined
at this time. If computer systems used by Chock full o'Nuts, its suppliers or
customers fail or experience significant difficulties related to the Year 2000,
Chock full o'Nuts results of operations and financial conditions could be
materially affected.
Chock full o'Nuts believes that the greatest risk presented by the Year 2000
problem is from third parties, such as its suppliers and utility providers that
may not have adequately addressed the problem. A failure of any such third
party's computer or other systems of sufficient magnitude could materially and
adversely affect the Company. The Company is not presently able to quantify
this risk. Chock full o'Nuts is monitoring news and progress reports pertaining
to those critical services performed by these third parties to determine the
effect on Chock full o'Nuts' ability to conduct its business.
Chock full o'Nuts believes its worst case scenario involves not being able
to produce at full capacity at one or two of its manufacturing plants. In such
a situation, the shortfall would be taken up by its other manufacturing
facilities. The Company intends to build up inventory before the end of the
calendar year and arrange for additional shifts for production during this
period of time.
Disclosure About Interest Rate Risk
Chock full o'Nuts is subject to market risk from exposure to fluctuations in
interest rates. At April 30, 1999, Chock full o'Nuts' long-term debt, other
than capitalized leases, consisted of $84 million of fixed rate long-term debt
(its convertible subordinated debentures) and $4 million of variable rate debt
under its revolving credit and term loans. Chock full o'Nuts does not enter
into derivative financial instruments for trading or speculative purposes.
Chock full o'Nuts does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 1999, although there can be no
assurance that interest rates will not significantly change.
Disclosure About Commodity Price Risk
Chock full o'Nuts uses coffee futures and options for hedging purposes to
reduce the effect of changing green coffee prices. At April 30, 1999, the total
value of coffee contracts was approximately $12.9 million. These contracts meet
the risk reduction and correlation criteria for hedge accounting and gains and
losses are deferred and recorded as a component of the underlying inventory
purchase. If the market value of green coffee at April 30, 1999 ($1.04) were to
increase by $.15, the effect would be to decrease inventory by approximately
$300,000. The effect of a $.15 decrease in the market value of green coffee
would not be significant. Chock full o'Nuts generally has been able to pass
green coffee prices increases through to its customers, thereby maintaining its
gross margins. Chock full o'Nuts cannot predict whether it will be able to pass
inventory price increases through to its customers in full in the future.
59
<PAGE>
MANAGEMENT OF CHOCK FULL O'NUTS
Executive Officers
The following lists the current executive officers of Chock full o'Nuts.
Upon the completion of the merger, the directors of CFN Acquisition Corporation
will become directors of Chock full o'Nuts.
Marvin I. Haas--Mr. Haas was elected to the Board of Directors of Chock full
o'Nuts in December 1990. In August 1993, Mr. Haas was elected Chief Executive
Officer of Chock full o'Nuts and in February 1995, he was elected President of
Chock full o'Nuts. He was Vice Chairman of the Board and Chief Operating
Officer of Chock full o'Nuts from October 1991 until February 1995. He was a
consultant to Chock full o'Nuts from September 1989 to May 1990. Mr. Haas was
President and Chief Operating Officer of Swissrose International, a dairy
products importer, for a period of more than five years through April 1987 and
subsequently was a self-employed consultant until joining Chock full o'Nuts. He
is 57 years old.
Richard Kassar--Mr. Kassar joined Chock full o'Nuts in October 1986 as
Corporate Controller and in 1992 became a Vice President. In 1995, he became
Vice President Operations in addition to Controller and in 1999 he became
Senior Vice President and Chief Operating Officer. He has been a Certified
Public Accountant for more than 20 years. Prior to joining Chock full o'Nuts,
he was a Manager of Finance and Administration of Amerada Hess Corporation for
over 5 years. He is fifty-two years old.
Howard M. Leitner--Mr. Leitner joined Chock full o'Nuts in August 1980 as
Chief Financial and Accounting Officer and later that year was elected a
director. He was President of Chock full o'Nuts from August 1986 until February
1995 and currently is a Senior Vice President. He has been a Certified Public
Accountant for more than 20 years and for two years prior to joining Chock full
o'Nuts he was an Audit Manager for Ernst & Whinney, now known as Ernst & Young
LLP and the successor to S. D. Leidesdorf & Co., with whom Mr. Leitner had been
employed as an accountant for the 15 preceding years. He is 58 years old.
Significant Employees
The following lists certain significant employees of Chock full o'Nuts.
Anthony Fazzari--Mr. Fazzari is currently Senior Vice President for Retail
Marketing and Sales for Chock full o'Nuts. He has been with Chock full o'Nuts
for over 13 years in charge of the retail and private label operations. He has
been in the coffee industry in a sales capacity for over 35 years working for
S.A. Schonbrunn, American Maize Company and Tetley Inc.
Thomas Donnell--Mr. Donnell has been the Chief Executive Officer for Cain's
Coffee Co. for over 18 years and has been affiliated with Cain's for over 30
years.
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<PAGE>
EXECUTIVE COMPENSATION AND TRANSACTIONS WITH
OFFICERS, DIRECTORS AND PRINCIPAL HOLDERS OF CHOCK FULL O'NUTS
The following information is furnished with respect to each of the executive
officers of Chock full o'Nuts who were executive officers of Chock full o'Nuts
at any time during the fiscal year ended July 31, 1999 and the two other
highest paid employees of Chock full o'Nuts that were not executive officers
during the fiscal year ended July 31, 1999:
Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
(in thousands)
-----------------------------
Fiscal Other Annual
Name and Principal Position Year Salary Bonus Compensation (a)
- --------------------------- ------ ------ ----- ----------------
<S> <C> <C> <C> <C>
Marvin I. Haas............................ 1999 $318 $20
President and 1998 268
Chief Executive Officer 1997 269 $205
Howard M. Leitner......................... 1999 241 45 20
Senior Vice President and 1998 222
Chief Financial Officer 1997 221 84
Thomas Donnell............................ 1999 181 25 5
Senior Vice President--Direct Store 1998 170 34
Deliveries 1997 163 65
Richard Kassar............................ 1999 206 40 20
Senior Vice President and Chief 1998 180
Operating Officer 1997 186 74
Anthony Fazzari........................... 1999 183 25 11
Senior Vice President--Retail 1998 172 8
Sales and Marketing 1997 170 50
</TABLE>
- --------
(a) Perquisites include use of corporate automobiles ranging between $1,000 and
$10,000, and life insurance ranging between $2,000 and $10,000.
On August 5, 1998, Chock full o'Nuts entered into employment agreements with
Marvin I. Haas, Howard M. Leitner, Richard Kassar and three other officers. The
agreements are effective in the event of a change in control and provide, among
other matters, for a term of three years beginning immediately after the change
in control and for base salary, bonus and other employee benefits at amounts
existing immediately prior to the change in control.
Options/SAR Grants in Last Fiscal Year
There were no options/SARs granted during fiscal 1999 to the named
executives and officers of Chock full o'Nuts.
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<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
Option/SAR Values
The following table summarizes options and SARs exercised during fiscal 1999
and presents the value of unexercised options and SARs held by the named
executives and the two other highest paid employees of Chock full o'Nuts at
fiscal year end:
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares Fiscal Year-End Fiscal Year-End
Acquired Valued Exercisable (E) Exercisable (E)
Name on Exercise Realized Unexercisable (U) Unexercisable (U)
- ---- ----------- -------- ----------------- -----------------
<S> <C> <C> <C> <C>
Marvin I. Haas........ 0 0 257,500E $1,190,938
Howard M. Leitner..... 0 0 19,641E 40,987
5,333U 18,319
Thomas Donnell........ 0 0 13,109E 20,480
5,000U 17,175
Richard Kassar........ 0 0 13,109E 20,480
5,000U 17,175
Anthony Fazzari....... 0 0 13,109E 20,480
5,000U 17,175
</TABLE>
Restricted stock share holdings at July 31, 1999 for Mr. Leitner and Martin
J. Cullen, a director, amounted to 17,769 shares ($184,353) and 1,777 shares
($18,436), respectively. These shares are to vest in March 2001. The unvested
portion of the shares are subject to forfeiture in the event Chock full o'Nuts
terminates employment for cause or the employee terminates employment for a
reason other than death, disability, retirement at or after normal retirement
date or good reason and to accelerated vesting in the event of termination of
employment by the employee for good reason, death, disability or retirement, or
after a change in control.
Chock full o'Nuts has established a Benefits Protection Trust with State
Street Bank and Trust Company and has contributed $700,000 thereto. It is to be
used for litigation expenses incurred by Chock full o'Nuts employees, including
all executive officers of Chock full o'Nuts, in the event that after a change
in control the new management of Chock full o'Nuts refuses to pay benefits
under any employment contract or any employee benefit plan maintained by Chock
full o'Nuts. At the present time, Chock full o'Nuts has no intention of making
additional contributions to the Benefits Protection Trust Fund.
Pension Plan
The Chock full o'Nuts Corporation Pension Plan is a noncontributory defined
benefit plan covering all non-union employees of Chock full o'Nuts. Employees
become eligible for membership in the Chock full o'Nuts Corporation Pension
Plan on the anniversary dates coinciding with or next following the date of
attainment of age 20 1/2 and completion of six months of service. Participants
become fully vested after 5 years of service.
The Chock full o'Nuts Corporation Pension Plan provides normal retirement
benefits, reduced early retirement benefits and increased post-retirement
benefits which are available at the employee's option. Benefits are payable in
the form of a straight life annuity or a 50% joint and survivor annuity. At
Normal Retirement (age 65) or Postponed Retirement (age 70), a participant
receives an annual pension payable in equal monthly installments equal to 2% of
his final 5 year average compensation times credited service to a maximum of
50% of the final 5 year average compensation. Credited service includes years
of service rendered after reaching age 22. The years of credited service under
the Chock full o'Nuts Corporation Pension Plan at July 31, 1999 of Messrs.
Haas, Leitner, Donnell, Kassar and Fazzari are 10, 20, 6, 12, and 12,
respectively.
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<PAGE>
Marvin I. Haas and Howard M. Leitner are the Trustees of the plan.
Chock full o'Nuts maintains a non qualified, unfunded Supplemental Employee
Retirement Plan, which covers those participants of the plan whose benefits
would otherwise be denied by reason of certain Internal Revenue Code
limitations on qualified plan benefits. A participant in the Supplemental
Employee Retirement Plan is entitled to a benefit equaling the difference
between the amount of benefits the participant is entitled to without
reduction, limited to $130,000 at normal retirement, and the amount of benefits
the participant is entitled to after the reduction. The Supplemental Employee
Retirement Plan provides for immediate funding in the event of a change in
control of Chock full o'Nuts and currently, would be approximately $1,050,000.
The table below shows the estimated annual pension benefits at normal
retirement age to an employee upon retirement under the Chock full o'Nuts
Corporation Pension Plan, taking into account the Supplemental Employee
Retirement Plan.
<TABLE>
<CAPTION>
15
Final Average Earnings Years 20 Years 25 Years 30 Years 35 Years
- ---------------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$300,000 and higher................. $78,000 $104,000 $130,000 $130,000 $130,000
$250,000............................ 75,000 100,000 125,000 125,000 125,000
$200,000............................ 60,000 80,000 100,000 100,000 100,000
$150,000............................ 45,000 60,000 75,000 75,000 75,000
$100,000............................ 30,000 40,000 50,000 50,000 50,000
</TABLE>
401(k) Cash or Deferred Compensation Plan
Chock full o'Nuts maintains a tax-qualified 401(k) cash or deferred
compensation plan that covers certain employees who have completed one year of
service and attained age 20. Participants are permitted, within the limitations
imposed by the Internal Revenue Code, to make pre-tax contributions to the plan
pursuant to salary reduction agreements. The contributions of the participants
are held in separate accounts which are always fully vested.
Employee Stock Ownership Plan
In November 1988, the Board of Directors of Chock full o'Nuts approved the
Chock full o'Nuts Corporation Employee Stock Ownership Plan which is a
noncontributory plan established to acquire shares of Chock full o'Nuts' common
stock for the benefit of all eligible employees. In May 1995, September 1995
and August 1997 Chock full o'Nuts loaned the Chock full o'Nuts Corporation
Employee Stock Ownership Plan $500,000, $500,000 and $1,000,000, respectively,
to be repaid in equal annual installments over eight years from the date of the
loan with interest primarily at 9% and 10%. Each full-time employee of Chock
full o'Nuts who is not represented by a labor union is eligible to participate
in the Chock full o'Nuts Corporation Employee Stock Ownership Plan on the date
which is one year after the date of his employment by Chock full o'Nuts. All
such participating employees are vested in those shares allocated to their
specific accounts after a period of five years or in the event of a change in
control (as defined). Shares are allocated to participant's accounts annually
based upon the annual compensation (up to $160,000) earned by each participant.
As Chock full o'Nuts makes annual contributions to the Chock full o'Nuts
Corporation Employee Stock Ownership Plan, these contributions are used to
repay the loans to Chock full o'Nuts, together with accrued interest. Deferred
compensation equal to the loans has been recorded as a reduction of
stockholders' equity representing Chock full o'Nuts' prepayment of future
compensation expense. As contributions are made, common stock is allocated to
ESOP participants and deferred compensation is reduced by the amount of the
principal payment on the loans. Marvin I. Haas and Howard M. Leitner are the
administrators of the Chock full o'Nuts Corporation Employee Stock Ownership
Plan.
As of the date of this proxy statement/prospectus a total of 5,039 shares,
4,907 shares, 2,130 shares, 5,691 shares and 5,966 shares of common stock were
allocated to each of the accounts of Messrs. Haas, Leitner, Donnell, Kassar and
Fazzari, respectively.
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<PAGE>
OWNERSHIP OF CHOCK FULL O'NUTS COMMON STOCK
The following table sets forth, as of July 31, 1999, the shares of Chock
full o'Nuts' common stock owned beneficially by each of the present directors
and named executive officers of Chock full o'Nuts individually and by all
present directors and executive officers of Chock full o'Nuts as a group:
<TABLE>
<CAPTION>
Common Stock Percent
Name of Beneficial Owner Beneficially Owned of Class
- ------------------------ ------------------ --------
<S> <C> <C>
Marvin I. Haas.................................... 448,324(1) 3.9%
Howard M. Leitner................................. 58,948(1) *
Mark A. Alexander................................. 3,020(2) *
Norman E. Alexander............................... 579,279(3) 5.1
Martin J. Cullen.................................. 27,388(1) *
Stuart Z. Krinsly................................. 1,280(4) *
Henry Salzhauer................................... 135,675(5) 1.1
R. Scott Schafler................................. 3,182 *
David S. Weil..................................... 6,796 *
Jerry Columbus.................................... 3,000 *
Richard Kassar.................................... 10,609(1) *
All directors and executive officers as a group
(11 persons), including the above named persons.. 2,041,641(1)(6) 17.6
</TABLE>
- --------
* Less than 1% of class.
(1) Includes for Messrs. Haas, Leitner, Cullen, Kassar and all directors and
officers as a group, respectively, 257,500, 19,641, 10,609, 10,609 and
298,359 shares granted under stock option agreements which are currently
exercisable.
(2) Includes 1,920 shares which would be received upon conversion of $15,000 of
the Chock full o'Nuts' 8% Convertible Subordinated Debentures.
(3) Includes shares owned by Galleon Syndication Corporation of which Norman E.
Alexander owns 100% of the issued and outstanding capital stock.
(4) Represents shares which would be received upon the conversion of $10,000 of
Chock full o'Nuts' 8% Convertible Subordinated Debentures.
(5) Includes 6,075 shares which would be received upon the conversion of
$50,000 of Chock full o'Nuts' 7% Convertible Senior Subordinated
Debentures.
(6) Includes 764,140 shares owned by the Chock full o'Nuts Employees Stock
Ownership Plan of which Marvin I. Haas and Howard M. Leitner are the
administrators.
64
<PAGE>
The following table sets forth, as of July 31, 1999, the shares of Chock
full o' Nuts' common stock owned beneficially by persons known by Chock full o'
Nuts to own more than five percent of the outstanding shares of Chock full o'
Nuts common stock:
<TABLE>
<CAPTION>
Name and Address of Beneficial Common Stock Percent
Owner Beneficially Owned of Class
- ------------------------------ ------------------ --------
<S> <C> <C>
Chock full o'Nuts Corporation 764,140(1) 6.8%
Employee Stock Ownership Plan
Chock full o'Nuts Corporation
370 Lexington Avenue
New York, New York 10017
Gabelli Funds, Inc. 2,266,828(2) 19.1%
One Corporate Center
Rye, New York 10580
Dimensional Fund Advisors, Inc. 742,276(3) 6.6%
1299 Ocean Avenue
11th Floor
Santa Monica, California 90401
WTG & Co., L.P. 745,000(4) 6.6%
500 Park Avenue
New York, New York 10022
Norman E. Alexander 579,279(5) 5.1%
Chock full o'Nuts Corporation
370 Lexington Avenue
New York, NY 10017
Sara Lee Corporation 598,328(6) 5.1%
Three First National Plaza
Chicago, Illinois 60602
</TABLE>
- --------
(1) See "Employee Stock Ownership Plan" included elsewhere in this proxy
statement/prospectus.
(2) This information has been reported as of April 28, 1999 on Amendment No. 30
to Schedule 13D dated May 6, 1999. Includes 581,755 shares which would be
received upon conversion of Chock full o'Nuts' 7% Convertible Senior
Subordinated Debentures and Chock full o'Nuts' 8% Convertible Subordinated
Debentures.
(3) This information has been reported as of December 31, 1998 on a Schedule
13G dated February 12, 1999.
(4) This information has been confirmed as of July 31, 1999 on September 1,
1999.
(5) Includes shares of common stock owned by Galleon Syndication Corporation of
which Norman E. Alexander owns 100% of the issued and outstanding capital
stock.
(6) This information has been reported as of April 12, 1999 on a Schedule 13D
dated April 22, 1999. Includes 487,128 shares of common stock which would
be received upon conversion of Chock full o'Nuts' 7% Convertible Senior
Subordinated Debentures and Chock full o'Nuts' 8% Convertible Subordinated
Debentures.
65
<PAGE>
CHANGE OF AUDITORS
In 1998, Chock full o'Nuts retained Grant Thornton LLP as its independent
auditors for the year ending July 31, 1998 after the Executive Committee of the
Board of Directors decided to replace Ernst & Young LLP. During the years 1996
and 1997 there were no disagreements on any matters of accounting principles or
practices, financial statement disclosure or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young LLP would have
caused Ernst & Young to make reference to the matter in their report. The
reports of Ernst & Young LLP, on the Chock full o'Nuts' financial statements
for the 1996 and 1997 fiscal years did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
LEGAL MATTERS
The validity of the shares of Sara Lee common stock to be issued in
connection with the merger will be passed upon for Sara Lee by Roderick A.
Palmore, Senior Vice President, General Counsel and Secretary of Sara Lee. The
tax opinion to be delivered to Chock full o'Nuts in connection with the merger
will be delivered by Cahill Gordon & Reindel. The tax opinion to be delivered
to Sara Lee in connection with the merger will be delivered by Skadden, Arps,
Slate, Meagher & Flom (Illinois).
EXPERTS
The consolidated financial statements and financial statement schedule of
Sara Lee at June 28, 1997 and June 27, 1998 and for each of the three years in
the period ended June 27, 1998 incorporated by reference in the proxy statement
to be delivered to Chock full o'Nuts' shareholders, which is referred to and
made a part of this proxy statement/prospectus, have been audited by Arthur
Andersen LLP, independent auditors, as set forth in their report on the audited
statements incorporated by reference elsewhere in this proxy
statement/prospectus which are included in reliance upon the report given upon
the authority of the firm as experts in accounting and auditing.
The consolidated financial statements of Chock full o'Nuts at July 31, 1998
and for the year then ended, appearing in this proxy statement/prospectus have
been audited by Grant Thornton LLP, independent certified public accountants.
The consolidated financial statements of Chock full o'Nuts at July 31, 1997 and
for each of the two years in the period ended July 31, 1997 have been audited
by Ernst & Young LLP, independent auditors. The reports of Grant Thornton LLP
and Ernst & Young LLP appearing elsewhere in this proxy statement/prospectus
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
SHAREHOLDER PROPOSALS
If the merger is not consummated, we anticipate that the 1999 Annual Meeting
of shareholders of Chock full o'Nuts will be held on or about December 15,
1999. All shareholder proposals must have been submitted to Martin J. Cullen,
Secretary of Chock full o'Nuts, no later than July 27, 1999, in order to be
considered for inclusion in the proxy materials for the meeting. The inclusion
of any proposal will be subject to applicable rules of the SEC.
66
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Sara Lee and Chock full o'Nuts file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may read and copy any
reports, statements or other information that Sara Lee and Chock full o'Nuts
file with the SEC at the SEC's public reference rooms at the following
locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. These SEC filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the SEC at "http://www.sec.gov." Reports, proxy statements and
other information concerning Sara Lee and Chock full o'Nuts may also be
inspected at the offices of the New York Stock Exchange at 20 Broad Street, New
York, New York 10005. Reports, proxy statements and other information
pertaining to Sara Lee are also available for inspection at the offices of the
Pacific Stock Exchange at 301 Pine Street, San Francisco, California 94104 and
the Chicago Stock Exchange at One Financial Place, 440 S. LaSalle Street,
Chicago, Illinois 60605. Reports, proxy statements and other information
pertaining to Chock full o'Nuts are also available for inspection at the
offices of The American Stock Exchange, 86 Trinity Place, New York, New York
10006.
Sara Lee filed a registration statement on Form S-4 on September 8, 1999 to
register with the SEC the Sara Lee common stock to be issued to Chock full
o'Nuts shareholders in the merger. This proxy statement/prospectus is a part of
that registration statement and constitutes a prospectus of Sara Lee in
addition to being a proxy statement of Chock full o'Nuts. As allowed by SEC
rules, this proxy statement/prospectus does not contain all the information you
can find in Sara Lee's registration statement or the exhibits to the
registration statement.
The SEC allows Sara Lee to "incorporate by reference" information into this
proxy statement/prospectus, which means that Sara Lee can disclose important
information to you by referring you to other documents filed separately with
the SEC. The information incorporated by reference is considered part of this
proxy statement/prospectus, except for any information superseded by
information contained directly in this proxy statement/prospectus or in later
filed documents incorporated by reference in this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents set
forth below that Sara Lee has previously filed with the SEC. These documents
contain important business and financial information about Sara Lee that is not
included in or delivered with this proxy statement/prospectus.
Sara Lee Filings (File No. 1-3344):
1. Annual Report on Form 10-K for the year ended June 27, 1998;
2. Quarterly Reports on Form 10-Q for the quarters ended September 26,
1998, December 26, 1998 and March 27, 1999;
3. Current Report on Form 8-K filed on December 23, 1998;
4. Definitive Proxy Statement filed on September 21, 1998; and
5. The description of Sara Lee common stock filed under Section 12 of the
Exchange Act on May 11, 1988, as subsequently amended (File No. 1-3344),
and Sara Lee's rights to acquire junior participating preferred stock
set forth in the Sara Lee Registration Statement on Form 8/A filed on
May 15, 1998.
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<PAGE>
Sara Lee also incorporates by reference additional documents that may be
filed with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
between the date of this proxy statement/prospectus and the date of the special
meeting. These include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
proxy statements.
Sara Lee has supplied all information contained or incorporated by reference
in this proxy statement/prospectus relating to Sara Lee and Chock full o'Nuts
has supplied all such information contained or incorporated by reference in
this proxy statement/prospectus relating to Chock full o'Nuts.
Chock full o'Nuts shareholders should not send in their Chock full o'Nuts
certificates until they receive the transmittal materials from the exchange
agent. Chock full o'Nuts shareholders of record who have further questions
about their share certificates or the exchange of their Chock full o'Nuts
common stock for Sara Lee common stock should call the exchange agent.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through the
companies, the SEC or the SEC's Internet web site as described above. Documents
incorporated by reference are available from Sara Lee without charge, excluding
all exhibits, except that if the companies have specifically incorporated by
reference an exhibit in this proxy statement/prospectus, the exhibit will also
be provided without charge. Shareholders may obtain documents incorporated by
reference or otherwise referred to in this proxy statement/prospectus by
requesting them in writing or by telephone from the appropriate company at the
following addresses:
<TABLE>
<S> <C>
Sara Lee Corporation Chock full o'Nuts Corporation
Three First National Plaza, Suite 4600 370 Lexington Avenue
Chicago, Illinois 60602-4260 New York, New York 10017
Attention: Stockholder Services Attention: Howard Leitner
Telephone: (312) 726-6200 Telephone: (212) 532-0300
</TABLE>
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus. We have not authorized anyone to
provide you with information that is different from what is contained in this
proxy statement/prospectus. This proxy statement/ prospectus is dated September
8, 1999. You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that date. Neither
the mailing of this proxy statement/prospectus to shareholders nor the issuance
of Sara Lee common stock in the merger creates any implication to the contrary.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations, business strategies,
operating efficiencies or synergies, competitive positions, growth
opportunities for existing products, plans and objectives of management,
markets for stock of Sara Lee and Chock full o'Nuts and other matters.
Statements in this proxy statement/prospectus that are not historical facts are
hereby identified as "forward-looking statements" for the purpose of the safe
harbor provided by Section 21E of the Exchange Act and Section 27A of the
Securities Act. Such forward-looking statements, including, without limitation,
those relating to the future business prospects, revenues and income, in each
case relating to Sara Lee and Chock full o'Nuts, wherever they occur in this
proxy statement/prospectus, are necessarily estimates reflecting the best
judgment of the senior management of Sara Lee and Chock full o'Nuts, as the
case may be, and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the forward-looking
statements. Such forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth in this proxy
statement/prospectus. Important factors that
68
<PAGE>
could cause actual results to differ materially from estimates or projections
contained in the forward-looking statements include, without limitation:
. the ability to integrate the operations of Sara Lee and Chock full
o'Nuts, including their respective product lines; and
. the effects of vigorous competition in the markets in which Sara Lee and
Chock full o'Nuts operate.
In addition, factors that could cause actual results of Chock full o'Nuts to
differ materially from estimates or projections contained in the forward-
looking statements include, without limitation:
. the availability of green coffee;
. green coffee prices;
. the success of operating initiatives;
. the ability to control development and operating costs;
. the success of advertising and promotional efforts;
. extensiveness of brand awareness;
. the ability to adhere to existing development schedules;
. the existence of adverse publicity;
. availability, locations and terms of sites for Quikava franchised
outlets;
. changes in business strategy or development plans;
. quality of management;
. availability, terms and deployment of capital;
. business abilities and judgment of personnel;
. availability of qualified personnel;
. labor and employee benefit costs;
. changes in or failure to comply with government regulations;
. construction costs; and
. the Year 2000 issue.
Words such as "estimate," "project," "plan," "intend," "expect," "believe"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
proxy statement/prospectus and the other documents incorporated by reference,
including, but not limited to, the Annual Report on Form 10-K for the year
ended June 27, 1998 of Sara Lee, including any amendments. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this proxy statement/prospectus. Neither
Sara Lee nor Chock full o'Nuts undertakes any obligation to publicly update or
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this proxy statement/prospectus or to reflect
the occurrence of unanticipated events.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Chock full o'Nuts Corporation
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Condensed Consolidated Balance Sheets as of April 30, 1999 and
July 31, 1998............................................................ F-2
Unaudited Condensed Consolidated Statements of Income for the Nine Month
Periods Ended
April 30, 1999 and April 30, 1998........................................ F-4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended April 30, 1999 and April 30, 1998.................... F-5
Unaudited Condensed Consolidated Statement of Stockholders' Equity for the
Nine Months Ended April 30, 1999......................................... F-6
Notes to Unaudited Condensed Consolidated Financial Statements............ F-8
Report of Independent Certified Public Accountants--Grant Thornton LLP.... F-10
Independent Auditors' Report of Ernst & Young LLP......................... F-11
Consolidated Balance Sheets as of July 31, 1998 and July 31, 1997......... F-12
Consolidated Statements of Operations for the Fiscal Years Ended July 31,
1998, July 31, 1997 and July 31, 1996.................................... F-13
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 31,
1998, July 31, 1997
and July 31, 1996........................................................ F-14
Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended
July 31, 1998,
July 31, 1997 and July 31, 1996.......................................... F-15
Notes to Consolidated Financial Statements................................ F-17
</TABLE>
F-1
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
------------ ------------
(Unaudited) (Note)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 5,468,420 $ 6,148,068
Receivables, principally trade,
less allowances for doubtful
accounts and discounts of
$1,438,000 and $1,329,000......... 34,761,406 40,559,581
Inventories........................ 62,576,303 60,641,309
Prepaid expense and other.......... 6,413,699 3,636,446
------------ ------------
Total current assets............. 109,219,828 110,985,404
Property, plant and
equipment-at cost...... $112,837,702 $105,372,427
Less allowances for
depreciation and
amortization......... (60,877,584) 51,960,118 (56,346,824) 49,025,603
------------ ------------
Real estate held for development or
sale, at cost....................... 2,133,463 2,175,344
Other assets and deferred charges.... 21,445,531 23,223,366
Excess of cost over net assets
acquired ........................... 15,600,317 15,773,875
------------ ------------
$200,359,257 $201,183,592
============ ============
</TABLE>
- --------
Note: The balance sheet at July 31, 1998 has been derived from the audited
financial statements at that date.
See notes to unaudited condensed consolidated financial statements.
F-2
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt........... $ 266,052
Accounts payable................................. 12,655,070 $ 8,502,778
Accrued expenses................................. 7,498,227 9,159,994
Income taxes..................................... 1,256,114 1,093,979
------------ ------------
Total current liabilities...................... 21,675,463 18,756,751
Long-term debt, excluding current installments..... 88,348,675 92,246,967
Other non-current liabilities...................... 3,049,759 3,854,833
Deferred income taxes.............................. 8,770,000 8,770,000
Stockholders' equity:
Common stock, par value $.25 per share;
Authorized 50,000,000 shares:
Issued 11,326,924 and 11,306,444 shares......... 2,831,731 2,826,611
Additional paid-in-capital....................... 52,216,913 52,064,121
Retained earnings................................ 31,406,008 30,848,452
Cost of 475,522 shares in treasury............... (6,573,719) (6,573,719)
Deferred compensation under stock bonus plan and
employees' stock ownership plan................. (1,365,573) (1,610,424)
------------ ------------
Total stockholders' equity..................... 78,515,360 77,555,041
------------ ------------
$200,359,257 $201,183,592
============ ============
</TABLE>
- --------
Note: The balance sheet at July 31, 1998 has been derived from the audited
financial statements at that date.
See notes to unaudited condensed consolidated financial statements.
F-3
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended April
30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Net sales......................................... $270,260,223 $306,294,851
Rentals from real estate.......................... 1,587,256 1,519,010
------------ ------------
271,847,479 307,813,861
Cost and expenses:
Cost of sales..................................... 194,947,136 227,998,972
Selling, general and administrative expenses...... 69,057,221 64,648,948
Expenses of real estate........................... 1,244,720 1,257,948
------------ ------------
265,249,077 293,905,868
------------ ------------
Operating profit:................................. 6,598,402 13,907,993
Gain on sale of real estate......................... 1,281,698
Interest income..................................... 545,831 418,165
Interest expense.................................... (5,618,405) (6,084,065)
Other (deductions)--net............................. (458,274) (41,675)
------------ ------------
Income before income taxes........................ 1,067,554 9,482,116
Income taxes........................................ 510,000 3,916,000
------------ ------------
Net income........................................ $ 557,554 $ 5,566,116
============ ============
Income per share:
Basic............................................. $ .05 $ .54
============ ============
Diluted........................................... $ .05 $ .40
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-4
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended April
30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Activities:
Net income......................................... $ 557,554 5,566,116
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property, plant
and equipment................................... 4,530,760 4,994,908
Amortization of deferred compensation and
deferred charges................................ 2,302,656 2,952,056
Gain on sale of real estate...................... (1,281,698)
Other, net....................................... (1,123,494) (1,889,791)
Changes in operating assets and liabilities:
Decrease in accounts receivable................ 5,689,554 3,024,062
(Increase)/decrease in inventory............... (1,934,994) 11,627,740
(Increase) in prepaid expenses................. (2,900,185) (679,302)
Increase/(decrease) in accounts payable,
accrued expenses and income taxes............. 2,652,660 (8,558,241)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 9,774,511 15,755,850
----------- -----------
Investing Activities:
Proceeds from sale of real estate.................. 6,685,941
Sales/(purchases) of marketable securities......... 122,932 (33,333)
Purchases of property, plant and equipment......... (6,306,482) (3,802,970)
Proceeds from/(advances to) co-packer, net......... 359,424 (1,014,768)
----------- -----------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES.. (5,824,126) 1,834,870
----------- -----------
Financing Activities:
Proceeds from/(payments of) revolving credit and
term loans, net................................... 369,967 (2,930,688)
(Payment of) convertible subordinated debentures... (5,000,000) (5,281,000)
Loan to employees' stock ownership plan............ (1,000,000)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES.............. (4,630,033) (9,211,688)
----------- -----------
(Decrease)/increase in Cash and Cash Equivalents..... (679,648) 8,379,032
Cash and Cash Equivalents at Beginning of Period..... 6,148,068 4,585,633
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 5,468,420 $12,964,665
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-5
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------
Issued In Treasury
------------- -------------
Shares Amount Shares Amount
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at July 31, 1998.......................... 11,306 $2,827 476 $6,574
Net Income........................................
Conversion of debentures.......................... 21 5
Deferred compensation under stock bonus plan and
employees' stock ownership plan:
Amortization....................................
------ ------ --- ------
Balance at April 30, 1999......................... 11,327 $2,832 476 $6,574
====== ====== === ======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-6
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
Deferred
Compensation
Under Stock
Bonus Plan and
Employees' Additional
Stock Paid-In Retained
Ownership Plan Capital Earnings
-------------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at July 31, 1998................... $1,610 $52,064 $30,848
Net Income................................. 558
Conversion of debentures................... 153
Deferred compensation under stock bonus
plan and employees' stock ownership plan:
Amortization............................. 244
------ ------- -------
Balance at April 30, 1999.................. $1,366 $52,217 $31,406
====== ======= =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-7
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1999
A. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended April 30, 1999 and 1998 are not necessarily indicative
of the results that may be expected for a full fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto as of and for the year ended July 31, 1998 included elsewhere in
this proxy statement/prospectus.
B. Basic per share data is based on the weighted average number of common
shares outstanding of 10,532,000 and 10,392,000 for the nine months ended
April 30, 1999 and 1998, respectively. Diluted per share data, assuming
conversion of debentures, is based on 21,241,000 and 21,920,000 shares
outstanding for the nine months ended April 30, 1999 and 1998. In addition,
net income is increased due to a reduction of interest and amortization
charges, net of income taxes, on the assumed conversion of debentures of
$2,996,000 and $3,205,000 for the nine months ended April 30, 1999 and 1998.
However for the nine month period ended April 30, 1999 the effect of the
assumed conversion is anti-dilutive and is therefore excluded from the
earnings per share calculation.
C. Inventories are stated at the lower of cost (first-in, first-out) or market.
The components of inventory consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
----------- -----------
<S> <C> <C>
Finished goods.................................... $38,771,425 $35,775,998
Raw materials..................................... 16,496,717 17,539,666
Supplies.......................................... 7,308,161 7,325,645
----------- -----------
$62,576,303 $60,641,309
=========== ===========
</TABLE>
D. Under the Company's amended and restated revolving credit and term loan
agreements (collectively, the "Loan Agreements") with Fleet Bank, N.A. and
The Chase Manhattan Bank (the "Banks"), the Company may, from time to time,
borrow funds from the Banks, provided that the total principal amount of all
such loans outstanding through November 30, 1999 may not exceed $40,000,000
and after such date may not exceed $20,000,000. Interest on all such loans
is equal to the prime rate or at the Company's option the London Interbank
Offering Rate ("LIBOR") plus 1.25%, subject to adjustment based on the level
of loans outstanding (7.75% at prime and 6.19% at LIBOR, at April 30, 1999).
Outstanding borrowings under the Loan Agreements may not exceed certain
percentages of and are collateralized by, among other things, the trade
accounts receivable and inventories, and substantially all of the machinery
and equipment and real estate of the Company and its subsidiaries. All loans
made under the term loan agreement ($3,000,000 at April 30, 1999) are to be
repaid in January 2003. Outstanding loans under the revolving credit
agreements are to be repaid in January 2003. Pursuant to the terms of the
Loan Agreements, the Company and its subsidiaries, among other things, must
maintain a minimum net worth and meet ratio tests for liabilities to net
worth and coverage of fixed charges and interest, all as defined. The Loan
Agreements also provide, among other things, for restrictions on dividends
(except for stock dividends) and require repayment of outstanding loans with
excess cash flow, as defined.
E. Prepaid expenses and other on the unaudited condensed consolidated balance
sheets includes deferred income taxes of $951,000.
F-8
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. As of August 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The adoption
of this Statement had no impact on the Company's net income or stockholders'
equity. This pronouncement sets forth requirements for disclosure of the
Company's comprehensive income and accumulated other comprehensive items.
Comprehensive income is defined as the change in equity during a period from
transactions or other events and circumstances unrelated to net income
(e.g., foreign currency translation gains and losses). In June 1997, the
FASB also issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," which is effective for the Company's fiscal year
ending July 31, 1999. The statement changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports. However, information is not to be presented for interim
financial statements in the first year of implementation. Adoption of SFAS
No. 131 is not expected to have a material effect on the Company's financial
statement disclosures. In June 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for the Company's fiscal year ending July 31, 2001. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement effective August 1,
2000. The Statement will require the Company to recognize all derivatives,
as defined, on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. The Company has not yet
determined what the effect of Statement No. 133 will be on the earnings and
financial position of the Company.
G. On December 4, 1998, the Company redeemed $5,000,000 of its 8% Convertible
Subordinated Debentures using existing invested funds. Subsequent to April
30, 1999 through September 2, 1999, $2,498,000 of the Company's 8%
Convertible Subordinated Debentures and $3,206,000 of the Company's 7%
Convertible Senior Subordinated Debentures were converted into 709,353
shares of Company Common Stock. On August 26, 1999, the Company called its
outstanding 8% Convertible Subordinated Debentures and 7% Convertible Senior
Subordinated Debentures for redemption on September 14, 1999. Sara Lee
Corporation has agreed to provide the necessary funds for redemption on
terms substantially identical to those in the existing indentures for the
debentures, other than the convertibility feature.
H. The Company uses coffee futures and options for hedging purposes to reduce
the effect of changing green coffee prices. The contracts that effectively
meet the risk reduction and correlation criteria are recorded using hedge
accounting. Effectiveness is measured based upon high correlation between
commodity gains and losses on the futures and options and those on the firm
commitment. Under hedge accounting, the gain or loss on the hedge is
deferred and recorded as a component of the underlying inventory purchase.
Gains and losses on hedges that are terminated prior to inventory purchases
are recorded in inventory until the inventory is sold.
I. In November 1997, the Company sold one of its downtown Manhattan properties
for approximately $6,900,000. The sale resulted in a pre-tax gain of
$1,282,000 or on an after tax basis approximately $750,000, $.07 per basic
share and $.03 per diluted share. The proceeds from this sale were used to
reduce outstanding bank indebtedness.
F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Chock full o'Nuts Corporation
New York, New York
We have audited the accompanying consolidated balance sheet of Chock full
o'Nuts Corporation and subsidiaries as of July 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Chock full o'Nuts Corporation and subsidiaries as of July 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended to conformity with generally accepted accounting principles.
Grant Thornton LLP
New York, New York
October 15, 1998
F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Chock full o'Nuts Corporation
New York, New York
We have audited the accompanying consolidated balance sheet of Chock full
o'Nuts Corporation and subsidiaries as of July 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended July 31, 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 audit.
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 provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Chock full o'Nuts Corporation and subsidiaries as of July 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended July 31, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
September 30, 1997
F-11
<PAGE>
CONSOLIDATED BALANCE SHEETS
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
July 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 6,148,068 $ 4,585,633
Receivables, principally trade, less allowances
for doubtful accounts and discounts of
$1,329,000 and $1,422,000--Notes 3 and 10(a).... 40,559,581 37,554,412
Inventories--Notes 1 and 3....................... 60,641,309 82,951,688
Prepaid expenses and other--Note 4............... 3,636,446 2,457,221
------------ ------------
Total current assets........................... 110,985,404 127,548,954
Property, plant and equipment, at cost--Note 3:
Land............................................. 3,127,640 3,114,889
Buildings and improvements....................... 15,161,611 14,805,429
Leaseholds and leasehold improvements............ 2,304,715 2,526,691
Machinery and equipment.......................... 84,778,461 78,162,457
------------ ------------
105,372,427 98,609,466
Less allowances for depreciation and
amortization.................................... 56,346,824 49,933,489
------------ ------------
49,025,603 48,675,977
Real estate held for development or sale, at cost
--Note 3.......................................... 2,175,344 7,635,427
Other assets and deferred charges, net--Note 10(b). 23,223,366 23,799,057
Excess of cost over net assets acquired, net....... 15,773,875 9,670,551
------------ ------------
$201,183,592 $217,329,966
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------ ------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................. $ 8,502,778 $ 13,590,697
Accrued expenses................................. 9,159,994 12,148,313
Income taxes--Note 4............................. 1,093,979 1,957,788
Current installments of long-term debt--Note 3... 766,000
------------ ------------
Total current liabilities...................... 18,756,751 28,462,798
Long-term debt, excluding current installments--
Note 3............................................ 92,246,967 106,065,753
Other non-current liabilities...................... 3,854,833 3,265,078
Deferred income taxes--Note 4...................... 8,770,000 7,655,000
Stockholders' equity--Notes 3 and 7:
Common stock, par value $.25 per share;
Authorized 50,000,000 shares;
Issued 11,306,444 and 11,211,068 shares......... 2,826,611 2,802,767
Additional paid-in capital....................... 52,064,121 51,357,008
Retained earnings................................ 30,848,452 25,349,146
------------ ------------
85,739,184 79,508,921
Deduct:
Cost of 475,522 shares in treasury............... (6,573,719) (6,573,719)
Deferred compensation under stock bonus plan and
employees' stock ownership plan................. (1,610,424) (1,053,865)
------------ ------------
Total stockholders' equity..................... 77,555,041 71,881,337
------------ ------------
Leases--Note 6
$201,183,592 $217,329,966
============ ============
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales.......................... $394,356,822 $364,203,601 $321,134,537
Rentals from real estate........... 2,011,257 2,091,307 2,156,070
------------ ------------ ------------
396,368,079 366,294,908 323,290,607
Costs and expenses:
Cost of sales...................... 293,304,109 257,078,504 229,477,193
Selling, general and administrative
expenses.......................... 85,682,621 86,018,181 77,223,407
Expenses of real estate............ 1,751,005 1,951,137 1,484,681
------------ ------------ ------------
380,737,735 345,047,822 308,185,281
------------ ------------ ------------
Operating profit..................... 15,630,344 21,247,086 15,105,326
Gain on sale of real estate--Note
10(c)............................... 1,281,698 460,000
Interest and dividend income......... 628,333 1,061,160 865,145
Interest expense..................... (7,903,211) (8,599,963) (8,783,798)
Other (deductions)/income--Notes
10(d) and (e)....................... (166,859) (1,495,891) 60,692
------------ ------------ ------------
Income before income taxes........... 9,470,305 12,212,392 7,707,365
------------ ------------ ------------
Income taxes--Note 4:
Current:
Federal.......................... 2,126,000 1,885,000 1,905,000
State and local.................. 709,000 753,000 488,000
Deferred........................... 1,136,000 1,660,000 683,000
------------ ------------ ------------
3,971,000 4,298,000 3,076,000
------------ ------------ ------------
Income from continuing operations.... 5,499,305 7,914,392 4,631,365
------------ ------------ ------------
Discontinued operations--Note 5:
(Loss) from operations, net of income
tax credits of $1,073,000........... (1,757,044)
(Loss) on disposition, net of
deferred income tax credit of
$2,590,000.......................... (4,410,000)
------------
(6,167,044)
------------ ------------ ------------
Net income/(loss).................... $ 5,499,305 $ 7,914,392 $ (1,535,679)
============ ============ ============
Income /(loss) per share--Note 1:
Basic:
Continuing operations............ $ .53 $ .76 $ .45
Discontinued operations.......... (.60)
------------ ------------ ------------
Net income/(loss)................ $ .53 $ .76 $ (.15)
============ ============ ============
Diluted:
Continuing operations............ $ .45 $ .55 $ .41
Discontinued operations.......... (.28)
------------ ------------ ------------
Net income....................... $ .45 $ .55 $ .13
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Operating Activities--Continuing
Operations:
Income from continuing operations
before income taxes.............. $ 9,470,305 $ 12,212,392 $ 7,707,365
Adjustments to reconcile pretax
income from continuing operations
to net cash provided by
continuing operations:
Depreciation and amortization of
property, plant and equipment.. 6,724,977 7,386,215 6,380,262
Amortization of deferred
compensation and deferred
charges........................ 3,732,609 4,437,262 4,561,305
Gain on sale of real estate..... (1,281,698) (460,000)
Other, net...................... (443,670) (312,060) (1,000,099)
Changes in operating assets and
liabilities, net of
acquisitions:
(Increase)/decrease in
receivables.................. (407,866) (4,889,186) 6,818,278
Decrease/(increase) in
inventories.................. 28,875,289 (21,960,180) 913,733
(Increase)/decrease in prepaid
expenses..................... (1,455,579) 1,600,484 (281,086)
(Decrease)/increase in
accounts payable, accrued
expenses and income taxes.... (9,871,375) 1,259,724 (5,098,044)
------------ ------------ -------------
Net cash provided by/(used
in) operating activities--
continuing operations....... 35,342,992 (265,349) 19,541,714
------------ ------------ -------------
Operating Activities--Discontinued
Operations:
Discontinued operations exclusive
of income taxes.................. (9,830,044)
Adjustments to reconcile pretax
loss from discontinued operations
to net cash used in discontinued
operations:
Provision for close down and
write-off of equipment......... 7,000,000
Depreciation and amortization... 431,623
Other........................... (192,929)
-------------
Net cash (used in)
discontinued operations..... (2,591,350)
------------ ------------ -------------
Income taxes--current.............. (2,835,000) (2,638,000) (1,320,000)
------------ ------------ -------------
Net cash provided by/(used
in) operating activities.... 32,507,992 (2,903,349) 15,630,364
------------ ------------ -------------
Investing Activities--Continuing
Operations:
Purchases of marketable
securities....................... (41,646) (34,026) (152,018,726)
Proceeds from sale and collection
of principal of marketable
securities....................... 79,993 158,863,555
Purchases of property, plant and
equipment........................ (6,926,061) (6,123,523) (7,411,199)
Acquisition of businesses......... (14,900,112) (5,872,858)
(Advances to)/proceeds from co-
packer........................... (923,893) 1,549,328 (3,132,245)
Proceeds from sale of real-estate. 6,685,941 460,000
Other............................. (13,147)
------------ ------------ -------------
Net cash (used in) investing
activities--continuing
operations.................. (16,105,771) (10,401,086) (3,251,762)
------------ ------------ -------------
Net cash (used in) investing
activities--discontinued
operations--Purchases of
property and equipment...... (2,608,543)
-------------
Net cash (used in) investing
activities.................. (16,105,771) (10,401,086) (5,860,305)
------------ ------------ -------------
Financing activities--Continuing
Operations:
Loan to employees' stock ownership
plan............................. (1,000,000) (500,000)
Net (payments of)/proceeds from
long-term debt................... (13,839,786) 1,596,285 (1,333,428)
------------ ------------ -------------
Net cash (used in)/ provided
by financing activities..... (14,839,786) 1,596,285 (1,833,428)
------------ ------------ -------------
Increase/(decrease) in cash and
cash equivalents--continuing
operations........................ 1,562,435 (11,708,150) 7,936,631
Cash and cash equivalents at
beginning of year--continuing
operations........................ 4,585,633 16,293,783 8,357,152
------------ ------------ -------------
Cash and cash equivalents at end of
year--continuing operations....... $ 6,148,068 $ 4,585,633 $ 16,293,783
============ ============ =============
Supplemental Information
Cash paid during the year:
Interest........................ $ 7,688,931 $ 8,143,201 $ 8,259,325
Income taxes.................... 3,958,061 2,168,425 848,539
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
---------------------------
Issued In Treasury
------------- -------------
Shares Amount Shares Amount
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at July 31, 1995.......................... 11,211 $2,803 476 $6,574
Net (loss)........................................
Deferred compensation under stock bonus plan and
employees' stock ownership plan:
Amortization....................................
Loan to employees' stock ownership plan.........
------ ------ --- ------
Balance at July 31, 1996.......................... 11,211 2,803 476 6,574
Net income........................................
Deferred compensation under stock bonus plan and
employees' stock ownership plan:
Amortization....................................
------ ------ --- ------
Balance at July 31, 1997.......................... 11,211 2,803 476 6,574
Net income
Conversion of debentures.......................... 95 24
Deferred compensation under stock bonus plan and
employees' stock ownership plan:
Loan to employees' stock ownership plan.........
Amortization....................................
------ ------ --- ------
Balance at July 31, 1998.......................... 11,306 $2,827 476 $6,574
====== ====== === ======
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
Years Ended July 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Deferred
Compensation
Under Stock
Bonus Plan and Additional
Employees' Stock Paid-In Retained
Ownership Plan Capital Earnings
---------------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at July 31, 1995................. $1,620 $51,357 $18,970
Net (loss)............................... (1,535)
Deferred compensation under stock bonus
plan and employees' stock ownership
plan:
Amortization........................... (586)
Loan to employees' stock ownership
plan.................................. 500
------ ------- -------
Balance at July 31, 1996................. 1,534 51,357 17,435
Net income............................... 7,914
Deferred compensation under stock bonus
plan and employees' stock ownership
plan:
Amortization........................... (480)
------ ------- -------
Balance at July 31, 1997................. 1,054 51,357 25,349
Net income............................... 5,499
Conversion of debentures................. 707
Deferred compensation under stock bonus
plan and employees' stock ownership
plan:
Loan to employees' stock ownership
plan.................................. 1,000
Amortization........................... (444)
------ ------- -------
Balance at July 31, 1998................. $1,610 $52,064 $30,848
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998, 1997 and 1996
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Fiscal year: The Company's year ends on the last Friday in July. Fiscal
years are designated as ending July 31 for convenience of reference.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Receivables--Concentration of Credit Risk: The Company's primary business is
the roasting, packing and marketing of a broad range of regular and
decaffeinated, ground roast, instant and specialty coffees for the Foodservice
and Retail Grocery Industries. These products are sold regionally throughout
the United States and Canada. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses relating to customers have consistently been within
management's expectations.
Cash Equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in, first-
out) or market and consist of:
<TABLE>
<CAPTION>
July 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Finished goods.................................... $35,775,998 $41,747,129
Raw materials..................................... 17,539,666 36,412,728
Supplies.......................................... 7,325,645 4,791,831
----------- -----------
$60,641,309 $82,951,688
=========== ===========
</TABLE>
Commodities: The Company uses coffee futures and options for hedging
purposes to reduce the effect of changing green coffee prices. The contracts
that effectively meet the risk reduction and correlation criteria are recorded
using hedge accounting. Effectiveness is measured based upon high correlation
between commodity gains and losses on the futures and options and those on the
firm commitment. Under hedge accounting, the gain or loss on the hedge is
deferred and recorded as a component of the underlying inventory purchase.
Gains and losses on hedges that are terminated prior to inventory purchases are
recorded in inventory until the inventory is sold.
Property, Plant and Equipment: Depreciation and amortization of property,
plant and equipment are computed by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes.
Long-Lived Assets: In accordance with Financial Accounting Standards Board
("FASB") Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", the Company records impairment
losses on long-lived assets used in operations, including intangible assets,
when events and circumstances indicate that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets.
F-17
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pre-opening Costs: Pre-opening costs are charged to operations as incurred.
Excess of Cost over Net Assets Acquired: The Company evaluates goodwill
impairment at the end of each quarter based on recoverability measured by
undiscounted estimated operating profits (i.e., pretax earnings before interest
expense and goodwill amortization). Under this approach, the carrying value
would be reduced to estimated realizable value if it is probable that
Management's best estimate of future operating profits during the goodwill
amortization period will be less than the carrying amount of the related
goodwill. Excess of cost over net assets acquired is being amortized on a
straight-line basis over periods of 40 and 15 years. Accumulated amortization
amounted to $2,319,000 and $2,010,000 at July 31, 1998 and 1997, respectively.
Other Intangibles: Other intangibles consist principally of trademarks,
covenants not to compete and customer lists. Such items are being amortized on
a straight-line basis over periods of 40, 5 and 7.5 years, respectively. See
Note 10(b). The Company evaluates any impairment of these assets on a basis
similar to goodwill.
Advertising Expenses: The cost of advertising is expensed as incurred. The
Company incurred $4,632,000, $4,253,000 and $3,130,000 in advertising costs
during 1998, 1997 and 1996, respectively.
Stock-Based Compensation: In October 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which provides an alternative to APB Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for stock-based compensation
issued to employees. The Statement allows for a fair value based method of
accounting for employee stock options and similar equity instruments. The
Company has determined it will continue to use APB Opinion No. 25 in accounting
for stock-based compensation for all options that are issued.
Per Share Data: Basic per share data is based on the following weighted
average number of common shares outstanding during each year adjusted for
unallocated shares in the employees' stock ownership plan and contingent
shares: 10,416,000, 10,395,000 and 10,308,000 in 1998, 1997 and 1996,
respectively. Diluted per share data, assuming conversion of debentures, the
aforementioned unallocated and contingent shares and the dilutive effect of
stock options, is based on 21,766,000, 22,216,000 and 22,129,000 common shares
outstanding in 1998, 1997 and 1996, respectively. In addition, net
income/(loss) is increased/(decreased) due to a reduction in interest and
amortization charges, net of income taxes, on the assumed conversion of
debentures of $4,237,000, $4,392,000 and ($4,396,000) for the years ended July
31, 1998, 1997 and 1996, respectively.
Recently Issued Accounting Standards: In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," which is effective for the Company's
fiscal year ending July 31, 1999. The statement addresses the reporting and
displaying of comprehensive income and its components. Adoption of SFAS No. 130
is not expected to have a material effect on the Company's financial statement
disclosures.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which is effective for the Company's
fiscal year ending July 31, 1999. The statement changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information
in their quarterly reports. Adoption of SFAS No. 131 is not expected to have a
material effect on the Company's financial statement disclosures.
In June 1998, the FASB issued Statement No. 133, accounting for Derivative
Instruments and Hedging Activities, which is effective for the Company's fiscal
year ending July 31, 2001. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to
adopt the new Statement effective August 1, 2000. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either
F-18
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be offset against the change in fair value of the hedged assets, liabilities,
or firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. The Company has not yet determined what the effect of Statement 133
will be on the earnings and financial position of the Company.
NOTE 2--ACQUISITIONS
In July 1998, the Company acquired the hot beverage business of Park Foods
LLP ("Park") for an adjusted purchase price of approximately $11,300,000 which
includes $750,000 for contingent payments. Park's business consists primarily
of sales of coffee, cappuccino, cocoa and leaf tea to a nationwide customer
base. In connection with the acquisition, which has been accounted for as a
purchase transaction, the Company acquired identifiable net tangible and
intangible assets with an estimated fair value of approximately $5,300,000. The
excess of cost over net assets acquired (approximately $6,000,000) is being
amortized over a period of 40 years using the straight-line method. The Company
used its existing cash to fund the purchase price. The Company is still
gathering certain information required to complete the allocation of the
purchase price. Further adjustments may arise as a result of the finalization
of the ongoing study.
The following unaudited pro forma results of operations assume the
acquisition of Park occurred at the beginning of fiscal 1997 and give effect to
certain adjustments, including amortization of excess of cost over net assets
acquired and reduced interest income, resulting from the acquisition and
related cash funding. Amounts for 1998 and 1997 include the pre-acquisition
results of operations for Park for the year ended June 30, 1998 and 1997. The
results are not necessarily indicative of what actually would have occurred if
the acquisition had been in effect for the entire period presented.
<TABLE>
<CAPTION>
Year Ended July
31
-----------------
1998 1997
-------- --------
(in
thousands,except
per share)
<S> <C> <C>
Net sales............................................... $461,523 $415,540
Net income.............................................. 5,740 8,629
Net income per share:
Basic................................................... .55 .83
Diluted................................................. .46 .59
</TABLE>
In January 1997, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of Ireland Coffee & Tea Company, a
leading roaster and distributor of coffees to hotels, restaurants and
institutions on the East Coast for approximately $8,000,000 which includes
$1,500,000 for contingent payments. In connection with the acquisition which is
being accounted for as a purchase, the Company acquired identifiable net
tangible and intangible assets with an estimated fair value of approximately
$3,900,000. The excess of cost over net assets acquired (approximately
$4,100,000) is being amortized over a period of 40 years using the straight-
line method. The pro forma effects on the Company's operations as if this
business had been acquired on August 1, 1995 are not material.
F-19
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31,
------------------------
1998 1997
----------- ------------
<S> <C> <C>
7% Convertible senior subordinated debentures
due 2012...................................... $51,693,000 $ 51,693,000
8% Convertible subordinated debentures due 2006 37,240,000 43,266,000
Revolving credit and term loan................. 3,313,967 11,872,753
----------- ------------
92,246,967 106,831,753
Less current installments...................... 766,000
----------- ------------
$92,246,967 $106,065,753
=========== ============
</TABLE>
The 7% and 8% debentures require annual sinking fund payments of $3,000,000
and $3,750,000, respectively, which after giving effect to previous conversions
and redemptions, commence April 1, 2000 and September 15, 1999, respectively,
and provide for balloon payments of $18,000,000 and $12,500,000 on April 1,
2012 and September 15, 2006, respectively. The debentures are convertible at
the option of the debenture holders into shares of the Company's common stock
at a price of $8.23 per share and $7.81 per share, respectively (subject to
adjustment). As of July 31, 1998, approximately 11,049,000 common shares are
reserved for issuance upon conversion of debentures.
Under the Company's amended and restated revolving credit and term loan
agreements (collectively the "Loan Agreements") with Fleet Bank, N.A. and The
Chase Manhattan Bank (the "Banks"), the Company may, from time to time, borrow
funds from the Banks, provided that the total principal amount of all such
loans outstanding through November 30, 1998 may not exceed $40,000,000 and
after such date may not exceed $20,000,000. Interest on all such loans is equal
to the prime rate or at the Company's option the London Interbank Offering Rate
("LIBOR") plus 1.75%, subject to adjustment based on the level of loans
outstanding (8.5% at prime and 7.44% at LIBOR, at July 31, 1998). Outstanding
borrowings under the Loan Agreements may not exceed certain percentages of and
are collateralized by, among other things, the trade accounts receivable and
inventories, and substantially all of the machinery and equipment and real
estate of the Company and its subsidiaries. All loans made under the term loan
agreement ($3,000,000 at July 31, 1998) are to be repaid in December 1999.
Outstanding loans under the revolving credit agreements are to be repaid in
December 1999. Pursuant to the terms of the Loan Agreements, the Company and
its subsidiaries, among other things, must maintain a minimum net worth and
meet ratio tests for liabilities to net worth and coverage of fixed charges and
interest, all as defined.
The Loan Agreements also provide, among other things, for restrictions on
dividends (except for stock dividends) and require repayment of outstanding
loans with excess cash flow, as defined.
As of July 31, 1998, long-term debt matures as follows: $6,246,967 (year
ending July 31, 2000),$6,750,000 (years ending July 31, 2001, 2002, and 2003)
and $65,750,000 thereafter.
The Company believes that the fair value of its 7% and 8% convertible
subordinated debentures approximates $50,659,000 and $37,240,000, respectively,
as indicated by the public trading prices of such debt.
F-20
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--INCOME TAXES
The provision for income taxes for continuing operations differs from the
expected Federal income tax for the reasons shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax provision expected
at the statutory rate................. $3,219,800 $4,152,213 $2,620,504
Effect on Federal income tax of:
State and local income taxes, net of
Federal income tax benefit............ 467,940 496,980 322,080
Amortization of excess of cost over net
assets acquired 69,020 68,000 68,000
Other.................................. 214,240 347,807 65,416
Realization of prior year capital loss
not previously recorded............... (767,000)
---------- ---------- ----------
$3,971,000 $4,298,000 $3,076,000
========== ========== ==========
</TABLE>
Deferred tax liabilities and assets are comprised of the following at July
31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net deferred non-current tax liabilities:
Net difference between tax and book basis of
property, plant and equipment............... $8,477,000 $7,755,000
Prepaid pension expense...................... 1,143,000 779,000
Compensation under stock bonus plan,
employees' stock ownership plan and other
qualified plans............................. (501,000) (387,000)
Other........................................ (349,000) (492,000)
----------- -----------
$8,770,000 $ 7,655,000
=========== ===========
Net deferred current tax assets:
Net difference between tax and book basis of
inventory................................... $ 339,000 $ 356,000
Allowance for doubtful accounts and
discounts................................... 485,000 463,000
Accrued expenses--close-down................. 28,000 169,000
Accrued cash bonus........................... 20,000 208,000
Other........................................ 79,000 72,000
----------- -----------
$951,000 $ 1,268,000
=========== ===========
</TABLE>
NOTE 5--DISCONTINUED OPERATIONS
In October 1996, the Company's Board of Directors adopted a plan to
discontinue operations of the Chock Cafes. Accordingly, the operating results
of the Chock Cafe operations, including provisions for estimated lease
termination costs, employee benefits and losses during the phase-out period of
approximately $1,800,000 and a write-off of leasehold improvements and
equipment and deferred charges of approximately $5,200,000 have been segregated
from continuing operations and reported as a separate line item on the
statement of operations. During the years ended July 31, 1998 and 1997,
respectively, approximately $480,000 and $1,250,000 were charged against the
previously established reserves.
F-21
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating results for the year ended July 31, 1996 (exclusive of any
corporate charges or interest expense and the aforementioned provisions)from
discontinued operations are as follows: Net sales $3,783,397; Cost of sales
$5,903,142; Selling, general and administrative expenses $710,299; Operating
loss $2,830,044; Income tax credits $1,073,000; and Loss from operations
$1,757,044.
NOTE 6--LEASES
The Company and subsidiaries lease manufacturing plants, warehouses, office
space and Quikava locations and related premises. Leases which provide for
payment of property taxes, utilities and certain other expenses, expire on
various dates through 2009 and contain renewal options. As of July 31, 1998,
the Company's obligation for future minimum rental payments, assuming the
exercise of renewal options, aggregated $17,674,000. Payments required in the
following five fiscal years amount to $4,654,000 (1999), $3,983,000 (2000),
$2,747,000 (2001), $1,577,000 (2002) and $1,115,000 (2003). Rental expense
charged to continuing operations under operating leases for the years ended
July 31, 1998, 1997 and 1996 was $4,531,000, $4,751,000 and $4,150,000,
respectively.
As of July 31, 1998, future minimum rental payments due from tenants under
sub-leases of retail facilities and related premises aggregated $16,313,000.
Amounts receivable in the following five fiscal years amount to $2,000,000
(1999), $2,014,000 (2000), $1,954,000 (2001), $1,820,000 (2002) and $1,778,000
(2003).
NOTE 7--STOCKHOLDERS' EQUITY
A non-contributory employee stock ownership plan ("ESOP") acquires shares of
the Company's common stock for the benefit of all eligible employees. The
Company has made loans to the ESOP to be repaid in equal annual installments
over 8 years with interest primarily at 9% and 10%. Deferred compensation equal
to the loans has been recorded as a reduction of stockholders' equity
representing the Company's prepayment of future compensation expense. As the
Company makes annual contributions to the ESOP, these contributions will be
used to repay the loans to the Company, together with accrued interest, and
common stock is allocated to ESOP participants and deferred compensation is
reduced.
As of December 30, 1997, the Company's Board of Directors extended the
Company's Shareholder Rights Plan through December 30, 2007. The original
Shareholder Rights Plan was adopted in 1987 and would have expired on December
30, 1997. The Company's Shareholder Rights Plan is designed to deter coercive
or unfair takeover tactics and to prevent a person or group from gaining
control of the Company without offering a fair price to all shareholders. The
Company's Shareholder Rights Plan provides for distribution to shareholders of
a right to purchase one share of the Company's common stock currently for $28
(subject to anti-dilution adjustments) as a dividend on each of the Company's
outstanding common shares. These rights are not currently exercisable and will
only become exercisable upon the happening of certain events. Under certain
circumstances, the rights entitle the holders to receive, upon payment of the
then current exercise price of the right, that number of shares of Company
common stock having a market value of two times the then current exercise price
of the right. The rights are redeemable at $.01 per right at any time prior to
the occurrence of certain events.
The Company's incentive compensation plan provides, among other things, for
incentive or non-qualified stock options, stock appreciation rights,
performance units, restricted stock and incentive bonus awards. During the
years ended July 31, 1998 and 1996, respectively, non-qualified stock options
for the purchase of 53,000 and 16,000 shares, at prices of $6.94 and $5.25 per
share were granted to key executives under the plan. During the year ended July
31, 1998 options to purchase 8,500 shares with an exercise price of $8.50 per
share were forfeited. At July 31, 1998, there were outstanding options for
401,000 shares with an average exercise
F-22
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
price of $6.52 per share. Options granted are exercisable at the fair market
value at date of grant and, subject to termination of employment (a) expire
five years from the date of grant with respect to the fiscal 1998 grants and
(b) expire ten years from the date of grant with respect to all prior grants,
are non-transferable other than on death, and are exercisable in three equal
annual installments commencing (a) one year from date of grant with respect to
the fiscal 1998 grants (b) three years from date of grant with respect to all
prior grants.
Had compensation cost for the Company's stock option plan been determined
based on the fair market value at the grant date for awards in 1998 and 1996
consistent with the provisions of SFAS 123, the Company's net income would have
been reduced by approximately $25,000 in 1998 and $1,000 in 1997 and net loss
would have been increased by approximately $2,000 in 1996, with no affect on
per share amounts. These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period, and additional options may be granted in
future years. The fair value for the options awarded was estimated at the date
of grant using the Black-Scholes model with the following assumptions: expected
dividend yield--0, expected stock price volatility : 1998--24%, 1997 and 1996--
22%, risk-free interest rate: 1998--5.69%, 1997--6.15% and 1996--5.34% and
expected life of options--4 years.
Under the incentive compensation plan, as of July 31, 1998, 31,000 common
shares are outstanding which were issued to key executives in 1987 and 1988.
These shares are subject to restricted stock agreements which provide that the
shares will vest ratably over periods through 2001. Such shares are subject,
upon the occurrence of certain events, to either forfeiture or accelerated
vesting. The fair value of the shares on the dates of issuance is being charged
to operations as compensation during the period the restrictions remain in
effect. At July 31, 1998, 76,500 shares were available under the plan.
NOTE 8--PENSION PLANS
The Company has non-contributory defined benefit pension plans covering all
employees who have completed six months of service, have attained age twenty
and one-half and are not covered by union-sponsored plans. The benefits are
based on years of service and the employee's compensation during the last 60
months of employment. The pension plans are funded to accumulate sufficient
assets to provide for accrued benefits. In addition, contributions are made to
multi-employer plans which provide defined benefits to union employees.
A summary of the components of net periodic pension cost for the defined
benefit plans for the three years ended July 31, 1998 and total contributions
charged to pension expense for the union-sponsored plans follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned
during the year............ $ 1,886 $ 1,681 $ 1,729
Interest cost on projected
benefit obligation......... 2,441 2,246 1,985
Actual return on plan
assets..................... (2,370) (2,021) (1,866)
Net amortization and
deferral................... 174 211 144
------- ------- -------
Net pension cost of defined
benefit plans 2,131 2,117 1,992
Union-sponsored plans....... 339 335 319
------- ------- -------
Total pension expense... $2,470 $2,452 $2,311
======= ======= =======
</TABLE>
F-23
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheet at July 31, for the defined benefit pension
plans (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
Plans Whose Plans Whose
Assets Assets
Exceed Exceed
Accumulated Accumulated
Benefits Benefits
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation....................... $(29,263) $(27,641)
======== ========
Accumulated benefit obligation.................. $(29,937) $(27,967)
======== ========
Projected benefit obligation.................... $(33,991) $(31,141)
Plan assets, consisting primarily of U.S.
treasury notes, other U.S. agency issues,
guaranteed insurance contracts and corporate
investments, at fair value..................... 31,923 29,404
-------- --------
Projected benefit obligation (in excess of) plan
assets........................................... (2,068) (1,737)
Unrecognized prior service cost................. 333 280
Unrecognized net loss........................... 6,862 5,586
Unrecognized net asset at August 1, 1987; net of
amortization................................... (397) (484)
-------- --------
Net pension asset recognized in the
consolidated balance sheet................... $ 4,730 $ 3,645
======== ========
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.5% and 4% and 8% and 4%, respectively, at
July 31, 1998 and 1997. The expected long-term rate of return on plan assets
was 8.0% in 1998, 1997 and 1996, respectively.
During fiscal 1998, the Company adopted an unfunded supplemental executive
retirement plan for certain key executives. The plan provides for benefits that
supplement those provided by a defined benefit plan and for immediate funding
in the event of a change in control of the Company (as defined). At July 31,
1998, the projected benefit obligation for this plan was approximately $450,000
and expense for this plan was approximately $50,000.
F-24
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended July 31, 1998 and 1997:
<TABLE>
<CAPTION>
Fiscal 1998
-----------
Three Months Ended
------------------
April
October 31 January 31 30 July 31
---------- ---------- ------- --------
(Thousands of Dollars Except Per Share
Data)
<S> <C> <C> <C> <C>
Net sales..................... $108,275 $102,124 $95,896 $ 88,062
======== ======== ======= ========
Gross profit.................. $ 26,740 $ 26,529 $25,026 $ 22,757
======== ======== ======= ========
Net income/(loss)........... $ 1,568 $ 2,685 $ 1,313 $ (67)
======== ======== ======= ========
Per share:
Basic....................... $ .15 $ .26(1) $ .13 $ (.01)
======== ======== ======= ========
Diluted..................... $ .12 $ .17(1) $ .11 $ (.01)
======== ======== ======= ========
<CAPTION>
Fiscal 1997
-----------
Three Months Ended
------------------
April
October 31 January 31 30 July 31
---------- ---------- ------- --------
(Thousands of Dollars Except Per Share
Data)
<S> <C> <C> <C> <C>
Net sales..................... $ 82,577 $ 84,242 $95,306 $102,079
======== ======== ======= ========
Gross profit.................. $ 23,421 $ 25,787 $29,110 $ 28,807
======== ======== ======= ========
Net income.................. $ 1,451 $ 1,748 $ 2,236 $ 2,479(2)
======== ======== ======= ========
Per share:
Basic....................... $ .14 $ .17 $ .21 $ .24(2)
======== ======== ======= ========
Diluted..................... $ .11 $ .13 $ .15 $ .16
======== ======== ======= ========
</TABLE>
- --------
(1) Includes gain on sale of real estate of $725,000 or $.07 per basic share
and $.03 per diluted share (see Note 10(c)).
(2) Includes write-off of $1,500,000 relating to litigation, $.09 per basic
share and $.05 per diluted share and $767,000 income tax credit relating to
realization of prior year capital loss not previously recorded , $.07 per
basic share and $.03 per diluted share, (see Notes 10(d) and 4).
F-25
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--OTHER ITEMS
a. Receivables other than trade at July 31, 1998 and 1997 amount to $4,352,000
and $576,000, respectively. The 1998 amount includes $2,400,000 from the
seller of Park resulting from an adjustment to the purchase price (see Note
2) and the amount of an insurance claim (see Note 10(e)).
b. Other assets and deferred charges consist of (in thousands):
<TABLE>
<CAPTION>
July 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Deferred financing costs (1)............................. $ 2,051 $ 2,460
Non-compete agreements, net.............................. 854 1,424
Trademarks, net.......................................... 5,062 5,207
Customer lists, net...................................... 2,359 3,512
Due from co-packer....................................... 2,574 1,711
Prepaid pension expense.................................. 4,730 3,645
Other.................................................... 5,593 5,840
------- -------
$23,223 $23,799
======= =======
</TABLE>
- --------
(1) Being amortized over the terms of the related indebtedness (see Note 3).
c. In November 1997, the Company consummated the sale of one of its downtown
Manhattan properties for $6,900,000, resulting in an after tax gain of
$725,000.
d. In connection with closing a business and termination of a pension plan the
Company paid a liability for an underfunded pension plan of approximately
$1,500,000 and recorded a similar amount receivable at July 31, 1994 from
the previous owner of such business pursuant to certain provisions of the
acquisition agreement. The previous owner of the business contested the
liability to the Company and the Company commenced litigation seeking
collection of such amount. In August 1997, the United States District Court
Southern District of New York granted the previous owner's motion for
summary judgment. The Company then appealed the decision to the Second
Circuit. However, due to the then uncertainty surrounding the outcome of
such appeal and in light of the aforementioned decision, the Company wrote-
off the $1,500,000 due from the previous owner. Such amount is included in
other deductions in fiscal 1997. In August 1998, the Second Circuit affirmed
the decision of the District Court.
e. Other deductions in fiscal 1998, includes a $650,000 charge for the write-
off of leasehold improvements and equipment and provision for estimated
lease termination costs related to the Quikava operations. Other income in
fiscal 1998, includes $570,000 of income resulting from an insurance claim
of approximately $1,000,000 (the balance is shown as a reduction of cost of
sales) related to the unauthorized distribution of inventory.
F-26
<PAGE>
CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
NOTE 11--INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended July 31
----------------------------
1998 1997 1996
-------- -------- --------
(Amounts in Thousands)
<S> <C> <C> <C>
Net sales--Beverage products...................... $390,731 $360,467 $319,213
Net sales--Quikava................................ 3,626 3,737 1,922
-------- -------- --------
$394,357 $364,204 $321,135
======== ======== ========
Rental revenues................................... $ 2,011 $ 2,091 $ 2,156
======== ======== ========
Operating profit/(loss):
Beverage products............................... $ 17,854 $ 23,498 $ 16,708
Quikava......................................... (1,781) (1,998) (1,649)
Real estate..................................... 260 140 671
Eliminations.................................... (703) (393) (625)
-------- -------- --------
$ 15,630 $ 21,247 $ 15,105
======== ======== ========
Identifiable assets:
Beverage products............................... $171,642 $186,304 $152,168
Quikava......................................... 4,198 4,835 4,720
Real estate..................................... 3,901 9,356 9,493
Corporate....................................... 21,443 16,835 33,054
-------- -------- --------
$201,184 $217,330 $199,435
======== ======== ========
Depreciation and amortization:
Beverage products............................... $ 6,170 $ 6,843 $ 6,006
Quikava......................................... 378 366 197
Corporate....................................... 177 177 177
-------- -------- --------
$ 6,725 $ 7,386 $ 6,380
======== ======== ========
Capital expenditures:
Beverage products............................... $ 6,648 $ 5,154 $ 4,831
Quikava......................................... 170 953 2,566
Corporate....................................... 108 17 14
-------- -------- --------
$ 6,926 $ 6,124 $ 7,411
======== ======== ========
</TABLE>
The beverage products segment is engaged in the (a) roasting, packing and
marketing of regular, instant, decaffeinated and specialty coffees and (b)
packing and marketing of regular and decaffeinated tea for sale to Retail,
Foodservice and Private Label customers. Additionally, other related food
products are marketed and sold to Foodservice customers. Quikava operations
feature a full assortment of specialty coffee beverages and a variety of
freshly prepared foods and baked goods specifically suited for in-car
consumption. See Note 5 of Notes to Consolidated Financial Statements for
discontinued cafe operations. Operations of real estate represent rental and
other income principally from the Company's original restaurant facilities.
All of the Company's operations are located in the United States. Export
sales are not significant.
Identifiable assets under the caption "Corporate" include (1) cash and cash
equivalents, investments in marketable securities and short-term investments of
$5,214,000 (1998), $3,781,000 (1997) and $15,180,000 (1996) and (2) net assets
of discontinued operations of $895,000 (1997) and $941,000 (1996).
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annex 1
AGREEMENT AND PLAN OF MERGER
among
SARA LEE CORPORATION
CFN ACQUISITION CORPORATION
and
CHOCK FULL O'NUTS CORPORATION
Dated as of June 8, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
<C> <S> <C>
The Merger............................................................... 1
Section 1.1 The Merger.............................................. 1
Section 1.2 Closing................................................. 1
Section 1.3 Effective Time.......................................... 1
Section 1.4 Effects of the Merger................................... 1
Section 1.5 Certificate of Incorporation; By-Laws................... 1
Section 1.6 Directors and Officers of Surviving Corporation......... 2
ARTICLE II
Exchange of Shares....................................................... 2
Section 2.1 Conversion of Securities................................ 2
Section 2.2 Exchange of Certificates................................ 3
Section 2.3 Transfer of Shares After the Effective Time............. 4
Section 2.4 Company Stock Options................................... 4
ARTICLE III
Representations and Warranties of the Company............................ 5
Section 3.1 Due Incorporation and Authority......................... 5
Section 3.2 Capitalization.......................................... 5
Section 3.3 Authorization; Enforceability........................... 6
Section 3.4 No Violation or Conflict................................ 6
SEC Reports; Financial Statements; Indebtedness; Other
Section 3.5 Information............................................. 7
Section 3.6 Litigation.............................................. 7
Section 3.7 Absence of Certain Changes.............................. 8
Section 3.8 Performance of Contracts................................ 8
Section 3.9 Employee Benefit Plans.................................. 8
Section 3.10 Taxes................................................... 9
Section 3.11 Governmental Approvals.................................. 10
Section 3.12 Labor Matters........................................... 10
Section 3.13 Existing Permits and Violations of Law.................. 10
Section 3.14 Intangible Assets....................................... 11
Section 3.15 Year 2000............................................... 11
Section 3.16 Customers and Suppliers................................. 11
Section 3.17 Environmental Matters................................... 11
Section 3.18 Disclosure Documents.................................... 12
Section 3.19 Opinion of Financial Advisor............................ 12
Section 3.20 Certain Agreements...................................... 12
Section 3.21 Rights Agreement........................................ 13
Section 3.22 Vote Required........................................... 13
Section 3.23 Finders or Brokers...................................... 13
ARTICLE IV
Representations and Warranties of the Parent and the Sub................. 13
Section 4.1 Due Incorporation and Authority......................... 13
Section 4.2 Authorization; Enforceability........................... 13
Section 4.3 No Violation or Conflict................................ 14
</TABLE>
1-i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 4.4 SEC Reports; Financial Statements....................... 14
Section 4.5 Disclosure Documents.................................... 14
Section 4.6 Governmental Approvals.................................. 15
Section 4.7 Authorization of Parent Common Stock.................... 15
Section 4.8 Finders or Brokers...................................... 15
Section 4.9 Interim Operations of the Sub........................... 15
ARTICLE V
Covenants and Agreements................................................. 15
Section 5.1 Conduct of Business by the Company...................... 15
Shareholders Meeting; Registration Statement and Proxy
Section 5.2 Statement/Prospectus.................................... 17
Section 5.3 Listing of Parent Common Stock.......................... 17
Section 5.4 Access.................................................. 17
Section 5.5 Commercially Reasonable Efforts; Further Assurances..... 18
Section 5.6 Takeover Statute........................................ 18
Section 5.7 No Solicitation......................................... 18
Section 5.8 Public Announcement..................................... 19
Section 5.9 Notices of Certain Events............................... 19
Section 5.10 Indemnification and Insurance........................... 20
Section 5.11 Additional Reports...................................... 20
Section 5.12 Affiliates.............................................. 20
Section 5.13 Tax-Free Reorganization................................. 21
Section 5.14 Actions Regarding Debentures............................ 21
ARTICLE VI
Conditions to the Merger................................................. 21
Conditions to Each Party's Obligation to Effect the
Section 6.1 Merger.................................................. 21
Conditions to the Parent's and the Sub's Obligations to
Section 6.2 Effect the Merger....................................... 22
Conditions to the Company's Obligations to Effect the
Section 6.3 Merger.................................................. 22
ARTICLE VII
Termination.............................................................. 23
Section 7.1 Termination............................................. 23
Section 7.2 Rights on Termination................................... 24
Section 7.3 Termination Fee Payable to Parent....................... 24
Section 7.4 Other Remedies.......................................... 24
ARTICLE VIII
Miscellaneous............................................................ 25
Section 8.1 No Survival of Representations and Warranties........... 25
Section 8.2 Expenses................................................ 25
Section 8.3 Counterparts; Effectiveness............................. 25
Section 8.4 Governing Law........................................... 25
Section 8.5 Notices................................................. 25
Section 8.6 Assignment; Binding Effect.............................. 26
Section 8.7 Severability............................................ 26
Section 8.8 Enforcement of Agreement................................ 26
Section 8.9 Entire Agreement; No Third-Party Beneficiaries.......... 26
Section 8.10 Headings................................................ 26
</TABLE>
1-ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 8.11 Finders or Brokers....................................... 26
Section 8.12 Amendment or Supplement.................................. 27
Section 8.13 Extension of Time, Waiver, Etc........................... 27
ARTICLE IX
Definitions............................................................... 27
Section 9.1 Affiliate................................................ 27
Section 9.2 Agreement................................................ 27
Section 9.3 Code..................................................... 27
Section 9.4 Company Disclosure Schedule.............................. 27
Section 9.5 Company Financial Statements............................. 27
Section 9.6 Computer Programs........................................ 27
Section 9.7 Contracts................................................ 28
Section 9.8 Control.................................................. 28
Section 9.9 Employees................................................ 28
Section 9.10 Employee Benefit Plans................................... 28
Section 9.11 Environmental Claim...................................... 28
Section 9.12 Environmental Laws....................................... 28
Section 9.13 ERISA.................................................... 28
Section 9.14 Existing Liens........................................... 28
Section 9.15 Existing Permits......................................... 28
Section 9.16 Existing Plans........................................... 28
Section 9.17 Hazardous Materials...................................... 28
Section 9.18 Indebtedness............................................. 29
Section 9.19 Intangible Assets........................................ 29
Section 9.20 Investment............................................... 29
Section 9.21 Law...................................................... 29
Section 9.22 Lien..................................................... 29
Section 9.23 Material Adverse Effect.................................. 29
Section 9.24 Merger................................................... 29
Section 9.25 NYBCL.................................................... 29
Section 9.26 Parent Financial Statements.............................. 29
Section 9.27 Parent Material Adverse Effect........................... 29
Section 9.28 Person................................................... 30
Section 9.29 Significant Subsidiary................................... 30
Section 9.30 Subsidiary............................................... 30
Section 9.31 Taxes.................................................... 30
Section 9.32 Tax Return............................................... 30
</TABLE>
1-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of June 8, 1999 (the "Agreement"),
among Sara Lee Corporation, a Maryland corporation (the "Parent"), CFN
Acquisition Corporation, a New York corporation (the "Sub"), and Chock Full
O'Nuts Corporation, a New York corporation (the "Company"). Capitalized terms
used herein without definition shall have the meanings ascribed to them in
Article IX.
WHEREAS, the Boards of Directors of the Parent, the Sub and the Company have
approved and deem it advisable and in the best interests of their respective
stockholders to consummate the acquisition of the Company by the Parent upon
the terms and subject to the conditions provided for in this Agreement;
WHEREAS, in furtherance thereof it is proposed that the acquisition be
accomplished by a merger of the Sub with and into the Company (the "Merger")
pursuant to which each outstanding share of common stock, par value $.25 per
share, of the Company (the "Company Common Stock," and together with the common
stock purchase rights (the "Rights"), issued pursuant to the Amended and
Restated Rights Agreement, dated as of December 30, 1997, by and between the
Company and the American Stock Transfer & Trust Company as Rights Agent (the
"Rights Agreement") associated with such shares, the "Shares") will be
converted into the right to receive the Merger Consideration (as hereinafter
defined), upon the terms and conditions set forth in this Agreement; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, and intending to be
legally bound hereby, the Parent, the Sub and the Company agree as follows:
ARTICLE I
The Merger
Section 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the NYBCL, the Sub shall merge
with and into the Company, and the separate corporate existence of the Sub
shall thereupon cease, and the Company shall be the surviving corporation in
the Merger (the "Surviving Corporation") . The Surviving Corporation shall
possess all the rights, privileges, powers and franchises, and shall be subject
to all of the restrictions, disabilities, duties, debts and obligations, of the
Company and the Sub, all as provided in the NYBCL.
Section 1.2 Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m., Chicago time, on the later of August 26, 1999 or the date
that is no later than the second business day after satisfaction of the
conditions set forth in Article VI, unless another time or date is agreed to in
writing by the parties hereto. The Closing will be held at the offices of
Skadden, Arps, Slate, Meagher & Flom (Illinois), 333 West Wacker Drive,
Chicago, Illinois, unless another place is agreed to in writing by the parties
hereto.
Section 1.3 Effective Time. Subject to the provisions of this Agreement, on
the Closing Date, the parties shall file with the Secretary of State of the
State of New York a certificate of merger (the "Certificate of Merger")
executed in accordance with the relevant provisions of the NYBCL and shall make
all other filings or recordings required under the NYBCL in order to effect the
Merger. The Merger shall become effective upon the filing of the Certificate of
Merger or at such other time as is specified in the Certificate of Merger (the
time at which the Merger becomes fully effective being hereinafter referred to
as the "Effective Time").
Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the NYBCL.
Section 1.5 Certificate of Incorporation; By-Laws. (a) At the Effective
Time, the Restated Certificate of Incorporation of the Company, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with its terms and the NYBCL.
1-1
<PAGE>
(b) At the Effective Time, the By-Laws of the Sub, as in effect immediately
prior to the Effective Time, shall be the By-Laws of the Surviving Corporation
until thereafter amended as provided by the NYBCL, the Certificate of
Incorporation of the Surviving Corporation and the By-Laws.
Section 1.6 Directors and Officers of Surviving Corporation. (a) The
directors of the Sub at the Effective Time shall be the directors of the
Surviving Corporation until their respective successors are duly elected and
qualified or their earlier death, resignation or removal in accordance with the
Certificate of Incorporation and By-Laws of the Surviving Corporation.
(b) The officers of the Company at the Effective Time shall be the officers
of the Surviving Corporation until their respective successors are duly elected
and qualified or their earlier death, resignation or removal in accordance with
the Certificate of Incorporation and By-Laws of the Surviving Corporation.
ARTICLE II
Exchange of Shares
Section 2.1 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of the holders of any securities
of the Sub or the Company:
(a) The Shares (including the associated Rights) that are issued and
outstanding immediately prior to the Effective Time (other than Shares
owned by the Parent, the Sub or any direct or indirect wholly owned
subsidiary of the Parent (collectively, "Parent Companies") or any of the
Company's direct or indirect wholly owned subsidiaries or shares held in
the treasury of the Company) shall, by virtue of the Merger and without any
action on the part of the Sub, the Company or the holder thereof, be
cancelled and extinguished and converted into the right to receive the
number of validly issued, fully paid and non-assessable shares of common
stock, par value $0.01 per share, of the Parent (the "Parent Common Stock")
equal to the ratio (the "Exchange Ratio") determined by dividing $11.00 by
the average of the per share last sales prices, regular way (rounded to
four decimal points, the "Average Parent Price") of Parent Common Stock as
reported on the New York Stock Exchange, Inc. (the "NYSE") composite
transactions reporting system (as reported in the New York City edition of
The Wall Street Journal or, if not reported thereby, another authoritative
source) for the twenty (20) consecutive trading days (the "Averaging
Period") commencing on the date that the Proxy Statement/Prospectus (as
hereinafter defined) is mailed to the shareholders of the Company (the
"Merger Consideration"); provided, however, that in no event shall the
Exchange Ratio exceed .5238 (except, at the election of Parent, as provided
in Section 7.1(c)(iii)) or be less than .4231.
(b) Each Share (and associated Rights) issued and outstanding and owned
by the Parent Companies or any of the Company's direct or indirect wholly
owned subsidiaries or authorized but unissued shares held by the Company
immediately prior to the Effective Time shall cease to be outstanding, be
cancelled and retired without payment of any consideration therefor and
cease to exist.
(c) Each share of common stock of the Sub issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and non-assessable share of common stock of the
Surviving Corporation.
(d) The Exchange Ratio shall be adjusted to reflect fully the effect of
any stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Company Common Stock or Parent
Common Stock, as applicable), extraordinary dividend, reorganization,
recapitalization or any other like change with respect to Company Common
Stock or Parent Common Stock occurring after the date hereof and prior to
the Effective Time. References to the Exchange Ratio elsewhere in this
Agreement shall be deemed to refer to the Exchange Ratio as it may have
been adjusted pursuant to this Section 2.1(d).
(e) No fractional shares of Parent Common Stock shall be issued pursuant
hereto. In lieu of any such fractional share of Parent Common Stock, the
Parent shall pay to each former shareholder of the Company
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who otherwise would be entitled to receive a fractional share of Parent
Common Stock an amount in cash equal to the fraction of such share of
Parent Common Stock multiplied by the per share Merger Consideration. No
interest shall be paid on such amount.
Section 2.2 Exchange of Certificates. The manner of exchanging Shares in the
Merger shall be as follows:
(a) At or prior to the Effective Time, the Parent shall deposit with
Harris Trust and Savings Bank (the "Exchange Agent"), or such other
exchange agent selected by the Parent and reasonably acceptable to the
Company, for the benefit of the holders of Shares outstanding immediately
prior to the Effective Time, for exchange in accordance with this Section
2.2, through the Exchange Agent, certificates evidencing the shares of
Parent Common Stock issuable pursuant to Section 2.1(a) in exchange for
outstanding Shares (the shares of Parent Common Stock so deposited,
together with any dividends or distributions with respect to such shares of
Parent Common Stock payable after the Effective Time which also shall be
deposited with the Exchange Agent, the "Exchange Fund"). The Exchange Agent
shall, pursuant to irrevocable instructions, deliver the Merger
Consideration out of the Exchange Fund.
(b) As soon as practicable after the Effective Time, but in any event no
later than five (5) business days thereafter, the Exchange Agent shall mail
to each holder of record (other than holders of certificates representing
Shares referred to in Section 2.1(b)) of a certificate or certificates
which immediately prior to the Effective Time represented outstanding
Shares (the "Certificates") (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent and shall be in such form and have such other customary
provisions as the Parent and the Company may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for payment of the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration without any interest thereon, less any applicable withholding
of taxes, and the Certificate so surrendered shall forthwith be canceled.
The Merger Consideration with respect to the Shares represented thereby may
be paid to a person other than the person in whose name the Certificate so
surrendered is registered if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such
issuance shall pay any transfer or other nonincome taxes required by reason
of the payment of the Merger Consideration to a person other than the
registered holder or establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon
such surrender thereof, the Merger Consideration with respect to each of
the Shares represented thereby.
(c) Whenever a dividend or other distribution is declared by the Parent
on the Parent Common Stock, the record date for which is at or after the
Effective Time, the declaration shall include dividends or other
distributions on all shares issuable pursuant to this Agreement, provided
that no such dividends or other distributions declared or made shall be
paid to the holder of an unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby until the holder of such
Certificate shall surrender such Certificate in accordance with this
Article II.
(d) Any portion of the Exchange Fund which remains undistributed to the
holders of the Certificates as of the date which is six months after the
Effective Time shall be delivered to the Parent, upon demand, and any
holders of the Certificates who have not theretofore complied with this
Article II shall thereafter look only to the Parent or the Surviving
Corporation for payment of their claim for Merger Consideration.
(e) None of the Parent, the Company, the Sub or the Exchange Agent shall
be liable to any person in respect of any Shares or cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Certificate shall not have been
surrendered prior to seven years after the Effective Time (or immediately
prior to such earlier date on which any
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Merger Consideration, would otherwise escheat to or become the property of
any governmental body or authority), any such Merger Consideration, to the
extent permitted by applicable law, shall become the property of the
Surviving Corporation, free and clear of all claims or interest of any
person previously entitled thereto.
(f) The Exchange Agent shall invest any cash included in the Exchange
Fund, as directed by the Parent, on a daily basis. Any interest and other
income resulting from such investments shall be paid to the Parent.
(g) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration.
(h) Holders of unsurrendered Certificates will not be entitled to vote
at any meeting of shareholders of the Parent.
(i) Notwithstanding anything herein to the contrary, Certificates
surrendered for exchange into Merger Consideration by any "affiliate" (as
determined pursuant to Section 5.12) of the Company shall not be exchanged
until the Parent has received a written agreement from such Person as
provided in Section 5.12 hereof.
(j) The Exchange Agent or Parent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Company Common Stock such amounts as the
Exchange Agent, Parent or the Surviving Corporation, as the case may be, is
required to deduct and withhold with respect to such payment under the Code
or any provisions of state, local or foreign tax law. Any amounts so
withheld shall be treated for all purposes of this Agreement as having been
paid to the holder of the Company Common Stock in respect of which such
deduction and withholding was made.
Section 2.3 Transfer of Shares After the Effective Time. No transfers of
Shares shall be made on the stock transfer books of the Company after the
Effective Time.
Section 2.4 Company Stock Options. (a) At the Effective Time, by virtue of
the Merger and without any further action on the part of the Company or the
holder of each unexpired and unexercised option to purchase shares of Company
Common Stock (a "Company Stock Option"), under the Company Stock Plans (as
hereinafter defined) or otherwise granted by the Company outside of any Company
Stock Plan, each Company Stock Option shall be assumed by the Parent as
hereinafter provided. At the Effective Time, by virtue of the Merger and
without any further action on the part of the Company or the holder thereof,
each Company Stock Option will be automatically converted into an option (a
"Parent Stock Option") to purchase a number of shares of Parent Common Stock
equal to the number of shares of Company Common Stock that could have been
purchased under such Company Stock Option multiplied by the Exchange Ratio
(rounded to the nearest whole share), at a price per share of Parent Common
Stock equal to the per share option exercise price specified in the Company
Stock Option, divided by the Exchange Ratio (rounded to the nearest whole
cent); provided, however, that any Company Stock Option that is intended to
qualify as an "incentive stock option" under the Code shall be converted to a
Parent Stock Option in a manner that results in any such converted Company
Stock Option retaining its incentive stock option status. Such Parent Stock
Option shall otherwise be subject to the same terms and conditions as such
Company Stock Option. At the Effective Time, (i) all references in the Company
Stock Plans, the applicable stock option or other awards agreements issued
thereunder and in any other Company Stock Options to the Company shall be
deemed to refer to the Parent; and (ii) the Parent shall assume the Company
Stock Plans and all of the Company's obligations with respect to the Company
Stock Options.
(b) In respect of each Company Stock Option as converted into a Parent Stock
Option pursuant to Section 2.4(a) and assumed by the Parent, and the shares of
Parent Common Stock underlying such option, the Parent
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shall file as soon as practicable after the Effective Time with the Securities
and Exchange Commission (the "SEC"), and keep current the effectiveness of, a
registration statement on Form S-8 (which may be accomplished by amendment of
the Registration Statement (as hereinafter defined)) or other appropriate form
for as long as such options remain outstanding (and maintain the current status
of the prospectus with respect thereto). The Parent agrees to reserve a number
of shares of Parent Common Stock equal to the number of shares of Parent Common
Stock issuable upon the exercise of such Company Stock Options.
(c) Prior to the Effective Time, the Company shall use its best efforts to
(i) obtain all necessary consents from, and provide any required notices to,
holders of Company Stock Options and (ii) amend the terms of the applicable
Company Stock Option Plan, in each case as is necessary to give effect to the
provisions of this Section 2.4.
(d) The Company agrees that, from the date hereof through the Effective
Time, it will not grant any stock options, restricted stock, stock appreciation
rights or similar rights.
ARTICLE III
Representations and Warranties of the Company
The Company hereby represents and warrants to the Parent and the Sub on the
date of this Agreement that:
Section 3.1 Due Incorporation and Authority. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York, has the corporate power and authority to own its properties
and assets and to carry on its business as it is now being conducted and is
duly qualified to do business and is in good standing in each of the
jurisdictions in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect. The Company has delivered to the Parent copies of the
certificates of incorporation and by-laws or other organizational documents of
the Company. Such certificates of incorporation and by-laws or other
organizational documents are complete and correct and in full force and effect,
and neither the Company nor any of its Subsidiaries is in violation of any of
the provisions of their respective certificates of incorporation, by-laws or
similar organizational documents. Each of the Company's Subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or organization, has the corporate
power and authority to own its properties and assets and to carry on its
business as it is now being conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which the ownership of its
properties or the conduct of its business requires such qualification, except
for jurisdictions in which the failure to be so qualified would not,
individually or in the aggregate, have a Material Adverse Effect. All the
outstanding shares of capital stock of, or other ownership interests in, the
Company's Subsidiaries are duly authorized, validly issued, fully paid and non-
assessable and are owned by the Company, directly or indirectly, free and clear
of all liens, claims, mortgages, encumbrances, pledges, security interests,
equities or charges of any kind except the liens resulting from the pledge of
all of the outstanding shares of capital stock of the Company's Subsidiaries to
Fleet Bank, N.A. under the Amended and Restated Revolving Credit and Term Loan
Agreements with Fleet Bank, N.A. and The Chase Manhattan Bank, dated as of
January 1, 1996 (the "Company Credit Facility"). Other than the Subsidiaries,
there are no other Persons in which the Company owns, of record or
beneficially, any direct or indirect equity interest or any right (including
contingent rights) to acquire the same; provided, however, the Company has the
right (but not the obligation) to acquire an interest in Industrias Marino
and/or Cafe El Marino.
Section 3.2 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock. As of the date hereof,
(i) 10,996,510 shares of Company Common Stock are issued and outstanding; (ii)
401,000 shares of Company Common Stock are subject to outstanding options
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issued pursuant to the Company's 1984 Incentive Compensation Plan ("1984
Plan"), and 76,500 additional shares of Company Common Stock are reserved for
issuance under the 1984 Plan; (iii) 475,522 shares of Company Common Stock are
issued and held in the treasury of the Company; (iv) 6,232,077 shares of
Company Common Stock are reserved for issuance upon the conversion of the
Company's outstanding 7% Convertible Senior Subordinated Debentures due April
1, 2012 (the "7% Debentures"); and (v) 4,012,676 shares of Company Common Stock
are reserved for issuance upon the conversion of the Company's outstanding 8%
Convertible Subordinated Debentures due September 15, 2006 (the "8% Debentures"
and, together with the 7% Debentures, the "Debentures"). All the outstanding
shares are duly authorized, validly issued, fully paid and non-assessable.
Except with respect to the capital stock of the Company's Subsidiaries which is
pledged to Fleet Bank, N.A. pursuant to the Company Credit Facility and except
as set forth above or in Section 3.2 of the Company Disclosure Schedule, other
than the Company's obligations under the Rights Agreement and the transactions
contemplated by this Agreement, (1) there are no shares of capital stock of the
Company authorized, issued or outstanding, (2) there are no authorized or
outstanding options, warrants, calls, preemptive rights, subscriptions or other
rights, agreements, arrangements or commitments of any character relating to
the issued or unissued capital stock of the Company or any of its Subsidiaries,
obligating the Company or any of its Subsidiaries to issue, transfer or sell or
cause to be issued, transferred or sold any shares of capital stock or other
equity interest in the Company or any of its Subsidiaries or securities
convertible into or exchangeable for such shares or equity interests, or
obligating the Company or any of its Subsidiaries to grant, extend or enter
into any such option, warrant, call, subscription, agreement, arrangement or
commitment, and (3) there are no outstanding contractual obligations of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any Shares or other capital stock of the Company or any Subsidiary or to
provide funds to make any investment (in the form of a loan, capital
contribution or otherwise) in any Subsidiary or any other entity other than
loans to Subsidiaries in the ordinary course of business.
Section 3.3 Authorization; Enforceability. (a) The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby are within the corporate power and authority of the Company
and, subject to the provisions hereof, have been duly authorized by the Board
of Directors of the Company. Except for the requisite approval and
authorization of this Agreement and the Merger by the Company's Shareholders
pursuant to the NYBCL (the "Company Shareholder Approval"), no other corporate
proceeding or action on the part of the Company or the holders of any class or
series of the Company's capital stock is necessary to authorize the execution
and delivery by the Company of this Agreement and the consummation by it of the
transactions contemplated hereby. This Agreement is the valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar Laws generally
affecting the rights of creditors and subject to general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
(b) Prior to execution and delivery of this Agreement, the Board of
Directors of the Company has (at a meeting duly called and held) unanimously
(i) approved this Agreement and the transactions contemplated hereby in
accordance with the NYBCL, (ii) resolved to recommend the approval of this
Agreement by the Company's shareholders and (iii) directed that this agreement
be submitted to the Company's shareholders for their approval.
(c) No state antitakeover, "fair price," "moratorium," "control share
acquisition" or similar statute or regulation applicable to the Company
(including Section 912 of the NYBCL) would have the effect of invalidating or
voiding this Agreement or any material provision hereof or would subject the
Parent or the Sub to any impediment or condition in connection with the
exercise of any of their respective rights under this Agreement.
Section 3.4 No Violation or Conflict. Except as set forth in Section 3.4 of
the Company Disclosure Schedule, the execution and delivery of this Agreement
and all documents and instruments required by this Agreement to be executed and
delivered by the Company do not, and the consummation of the transactions
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contemplated hereby and compliance with the provisions hereof will not, (i)
result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any Contract or to the loss of a material benefit under any
Contract, or result in the creation of any Lien upon any of the properties or
assets of the Company or its Subsidiaries, (ii) conflict with or result in any
violation of any provision of the Restated Certificate of Incorporation or the
Amended and Restated By-Laws, in each case as amended, of the Company, (iii)
violate any Existing Permits or any Law applicable to the Company or its
Subsidiaries or any of their respective properties or assets, other than, in
the case of clauses (i) and (iii), any such violations, defaults, rights,
losses or Liens that, individually or in the aggregate, would not have a
Material Adverse Effect or would not affect adversely the ability of the
Company to consummate the transactions contemplated by this Agreement.
Section 3.5 SEC Reports; Financial Statements; Indebtedness; Other
Information. (a) The Company has filed with the SEC true and complete copies of
all forms, reports, schedules, statements and other documents required to be
filed by it since July 31, 1996 under the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder (collectively, the "Exchange
Act"), or the Securities Act of 1933, as amended, and the rules and regulations
thereunder (collectively, the "Securities Act") (as such documents have been
amended since the time of their filing, collectively, the "Company SEC
Reports"). As of their respective dates or, if amended, as of the date of the
last such amendment, the Company SEC Reports, including, without limitation,
any financial statements or schedules included therein (a) did not 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
light of the circumstances under which they were made, not misleading and (b)
complied in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, as the case may be, and the applicable
rules and regulations of the SEC thereunder at such time of filing.
(b) Company Financial Statements. The Company Financial Statements comply in
all material respects with the applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis by the Company during the periods involved, except as
otherwise described in the notes thereto and, in the case of the unaudited
interim financial statements, subject to usual and recurring year-end
adjustments that have not been and are not expected to be material in amount.
The Company Financial Statements fairly present in all material respects the
financial position of the Company as of the date set forth on each of such
Company Financial Statements and the results of operations of the Company for
the periods indicated. Except as set forth in Section 3.5(b) of the Company
Disclosure Schedule and except as set forth in the Company SEC Reports filed
and publicly available and except for liabilities and obligations incurred in
the ordinary course of business consistent with past practice since the date of
the most recent Company Financial Statements included in the Company SEC
Reports filed and publicly available prior to the date hereof, neither the
Company nor any of its Subsidiaries has any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) which are
reasonably likely to have a Material Adverse Effect, including any liabilities
arising or required to be accrued as a result of the consummation of the
transactions contemplated hereby.
(c) Indebtedness. As of June 7, 1999, the Company had outstanding
Indebtedness of $86,504,000 (including the Debentures).
(d) Additional Company Information. The information set forth in Section
3.5(d) of the Company Disclosure Schedule (including the financial information
with respect to the nine-month period ending April 30, 1999 (the "1999
Financial Information")), which was provided to the Parent prior to the date
hereof are accurate and complete statements of the matters set forth therein.
The information contained in the Company's Quarterly Report on Form 10-Q for
the nine months ended April 30, 1999 will not differ in any material respect
from the 1999 Financial Information.
Section 3.6 Litigation. (a) Except as disclosed in the Company SEC Reports
filed prior to the date hereof or in Section 3.6 of the Company Disclosure
Schedule, as of the date hereof, there are no actions, suits,
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claims (including worker's compensation claims), litigation or other
governmental or judicial proceedings or investigations or arbitrations pending
against the Company, its Subsidiaries or any of its properties, assets or
businesses, or, to the knowledge of the Company, any of the Company's or any
Subsidiary's current or former directors or officers or any other Person whom
the Company or any Subsidiary has agreed to indemnify that is reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect; (b) there
are no actions, suits or proceedings pending or, to the knowledge of the
Company, threatened against the Company by any Person which question the
legality or validity of the transactions contemplated by this Agreement; and
(c) there are no outstanding orders, judgments, injunctions, awards or decrees
of any Governmental Entity against the Company, its Subsidiaries, any of its
properties, assets or businesses, or, to the knowledge of the Company, any of
the Company's or its Subsidiaries' current or former directors or officers or
any other person whom the Company or any Subsidiary has agreed to indemnify
that is reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect.
Section 3.7 Absence of Certain Changes. Except as disclosed in the Company
SEC Reports filed prior to the date hereof or as set forth in Section 3.7 of
the Company Disclosure Schedule and except for matters directly resulting from
(x) the filing by Parent with the SEC of its Schedule 13D or its tender offer
with respect to the Company or (y) the execution of this Agreement and the
consummation of the transactions contemplated hereby, since January 31, 1999,
(a) the businesses of the Company and its Subsidiaries have been conducted in
the ordinary course consistent with past practice, (b) there has not been any
event, occurrence, development or state of circumstances or facts that has had,
or is reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect, and (c) neither the Company nor any of its Subsidiaries has
taken any action, which if taken after the date hereof, would constitute a
material breach of any provision set forth in Section 5.1 hereof (other than
paragraphs (d) and (g) of such Section 5.1).
Section 3.8 Performance of Contracts. Each of the Contracts is in full force
and effect and constitutes the legal and binding obligation of the Company and,
to the knowledge of the Company, constitutes the legal and binding obligation
of the other parties thereto, except where the failure to be in full force and
effect is not reasonably likely to have a Material Adverse Effect. There are no
existing breaches or defaults by the Company or, to the knowledge of the
Company, any other party under any Contract the effect of which would
constitute a Material Adverse Effect and, to the knowledge of the Company, no
event has occurred which, with the passage of time or the giving of notice or
both, could reasonably be expected to constitute such a breach or default. The
Company is not subject to the terms of any non-competition or other agreement
(including any area restrictions) which restrict in any material respect the
conduct of the respective businesses of the Company and its Subsidiaries as
presently conducted.
Section 3.9 Employee Benefit Plans. (a) Existing Plans. Except as set forth
in Section 3.9(a) of the Company Disclosure Schedule, neither the Company nor
any Company ERISA Affiliate (as hereinafter defined) maintains or contributes
to, nor is it bound by, nor has it maintained or contributed to at any time
during the three (3) years prior to the date hereof, any Existing Plan. To the
knowledge of the Company, all of the Existing Plans that are subject to ERISA
or the Code are in compliance in all material respects with ERISA and the Code.
Except as set forth in Section 3.9(b) of the Company Disclosure Schedule, no
Existing Plans have been adopted or modified in any material respect since July
31, 1998. All of the Existing Plans which are intended to meet the requirements
of Section 401(a) of the Code have been determined by the Internal Revenue
Service to be "qualified" within the meaning of the Code or have been filed
with the Internal Revenue Service with a request for a determination letter on
or prior to the end of the applicable remedial amendment period and, to the
knowledge of the Company, there are no facts which would adversely affect the
tax qualified status of any of the Existing Plans. "Company ERISA Affiliate"
shall mean any Person which together with the Company would be deemed a "single
employer" within the meaning of Section 4001 of ERISA.
(b) ERISA Code. There is no accumulated funding deficiency, within the
meaning of Section 302 of ERISA or Section 412 of the Code, in connection with
the Existing Plans. No reportable event, as defined in ERISA (other than
reportable events for which the 30-day notice requirement has been waived) has
occurred in
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connection with the Existing Plans since January 1, 1995. Except as set forth
in Section 3.9(c) of the Company Disclosure Schedule, neither the Company nor
any Company ERISA Affiliate is contributing to or has any material liability
with respect to any multiemployer plan within the meaning of Section 3(37) of
ERISA.
(c) Compliance. Neither the Company nor any Company ERISA Affiliate has
incurred, directly or indirectly, any material liability to or on account of an
Existing Plan pursuant to Title IV, Subtitle D of ERISA, and, to the knowledge
of the Company, no proceedings have been instituted to terminate any Existing
Plan that is subject to Title IV, Subtitle D of ERISA.
(d) ESOP. With respect to any Existing Plan that is an employee stock
ownership plan within the meaning of Section 4975(e)(7) of the Code (an "ESOP")
any indebtedness owed to the Company by any such ESOP is secured by the shares
of Company Common Stock acquired by such ESOP with the proceeds of such
indebtedness, provided, however, that in the event of a change in control of
the Company, any such indebtedness is forgiven or the Company is required to
make sufficient contributions to enable the ESOP to repay such indebtedness in
full.
(e) Funding. As of the last valuation date of each Existing Plan that is
subject to Title IV, Subtitle D of ERISA, the current value of the assets of
each such Existing Plan is at least ninety (90) percent of the present value of
the accrued benefits under each such Existing Plan, based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such Existing Plan's actuary with respect to such Existing Plan;
and all contributions or other amounts payable by the Company as of the
Effective Time with respect to the current or prior plan year of each Existing
Plan have been either paid or accrued on the balance sheet of the Company.
There are no material pending, or, to the knowledge of the Company, threatened
or anticipated claims (other than routine claims for benefits) by, on behalf of
or against any of the Existing Plans or any trusts related thereto.
(f) Other Plan Obligations. To the knowledge of the Company, neither the
Company nor any Company ERISA Affiliate, nor any Existing Plan, nor any trust
created thereunder, nor any trustee or administrator thereof, has engaged in a
transaction in connection with which the Company or any Company ERISA
Affiliate, any Existing Plan, any such trust, or any trustee or administrator
thereof, or any party dealing with any Existing Plan or any such trust could be
subject to either a civil penalty assessed pursuant to Section 409 or 502(j) of
ERISA or a tax imposed pursuant to Section 4975 or 4976 of the Code. No
Existing Plan provides death or medical benefits (whether or not insured), with
respect to current or former employees of the Company or any Company ERISA
Affiliate beyond their retirement other than (i) coverage mandated by
applicable Law or (ii) death benefits under any "employee pension plan," as
that term is defined in Section 3(2) of ERISA.
Section 3.10 Taxes. Except as disclosed in Section 3.10 of the Company
Disclosure Schedule and except as would not have a Material Adverse Effect:
(a) the Company and each of its Subsidiaries have timely filed or
caused to be filed (except where the failure to file on a timely basis has
not or will not result in the imposition of any material additional tax
liability and taking into account all extensions) all Tax Returns required
to be filed by them and all such Tax Returns were true, correct and
complete in all material respects when filed.
(b) the Company and each of its Subsidiaries have paid (or have had
paid on their behalf) or, where payment is not yet due, have established
(or have had established on their behalf and for their sole benefit and
recourse) an adequate accrual for the payment of all material Taxes due
with respect to any period ending on or prior to the Closing;
(c) none of the Company or any of its Subsidiaries has received written
notice of any ongoing, pending or threatened federal, state, local or
foreign tax audit or examination of any Tax Returns;
(d) there are no outstanding written requests, agreements, consents or
waivers to extend the statutory period of limitations applicable to the
assessment of any material Taxes or deficiencies against the Company or any
of its Subsidiaries;
(e) none of the Company or any of its Subsidiaries is a party to an
agreement or arrangement providing for the allocation or sharing of any
material Taxes;
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(f) there are no statutory liens for any material Taxes upon the assets
of the Company or any of its Subsidiaries, except liens for Taxes not yet
due and payable and liens for Taxes that are being contested in good faith
(and for which adequate accruals have been established);
(g) no consent to the application of Section 341(f)(2) of the Code has
been made or filed by or with respect to the Company, any of its
Subsidiaries or any of their assets or properties;
(h) none of the Company or any of its Subsidiaries have taken any action
that would require an adjustment pursuant to Section 481 of the Code by
reason of a change in accounting method or otherwise;
(i) except as disclosed in Section 3.10(i) of the Company Disclosure
Schedule, there have not been, nor will there be from the date hereof
through and including the Closing Date, any payments, or any agreements to
make payments, which would be "excess parachute payments" under Section
280G of the Code;
(j) none of the Company or any of its Subsidiaries has executed or
entered into any closing agreement pursuant to Section 7121 of the Code or
any predecessor provisions thereof or any similar provision of state or
other law with respect to any period for which the statue of limitations
has not expired;
(k) none of the Company or any of its Subsidiaries has been or is in
violation (or with notice or lapse of time or both, would be in violation)
of any applicable law relating to the payment or withholding of Taxes. The
Company and each of its Subsidiaries have duly and timely withheld from
employee salaries, wages and other compensation, and paid over to the
appropriate taxing authorities all amounts required to be so withheld and
paid over for all periods under all applicable laws; and
(l) none of the Company or any of its Subsidiaries is or has been a
"United States real property holding company" (as defined in Code Section
897(c)(2)) during the applicable period specified in Code Section
897(c)(1)(ii).
Section 3.11 Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
federal, state, local or foreign court, arbitral tribunal, administrative
agency or commission or other governmental or regulatory authority or
administrative agency (a "Governmental Entity") is required by the Company in
connection with the execution and delivery of this Agreement by the Company or
the consummation by the Company of the transactions contemplated hereby,
except: (a) the approvals described in Section 3.11 of the Company Disclosure
Schedule; (b) in connection with the applicable requirements of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and
antitrust or other competition laws of other jurisdictions; (c) pursuant to the
applicable requirements of the Securities Act, the Exchange Act, state blue sky
laws, the NYSE, and the rules and regulations promulgated thereby; and (d) the
filing of the Certificate of Merger as described in this Agreement.
Section 3.12 Labor Matters. Except as described in Section 3.12 of the
Company Disclosure Schedule, there is (i) no pending, nor has the Company
experienced since July 31, 1997 any, labor dispute, strike or organized work
stoppage and, to the knowledge of the Company, there is no threatened material
labor dispute, strike or organized work stoppage against the Company and (ii)
(A) to the knowledge of the Company, no union organizing activities are in
process or have been proposed or threatened involving any employees of the
Company not presently organized, and (B) no petitions have been filed or, to
the knowledge of the Company, have been threatened or proposed to be filed, for
union organization or representation of employees of the Company not presently
organized except with respect to matters in clauses (i) and (ii) which do not
have a Material Adverse Effect.
Section 3.13 Existing Permits and Violations of Law. The Company has all
licenses, permits, approvals, exemptions, orders, approvals, franchises,
qualifications, permissions, agreements and governmental authorizations which
the Company is required to have for the conduct of its business as currently
conducted, except where the failure to have the same would not have a Material
Adverse Effect. No action or proceeding is pending or, to the knowledge of the
Company, threatened that is reasonably likely to result in a revocation, non-
renewal, termination, suspension or other material impairment of any Existing
Permits, except for such revocations, non-renewals, terminations, suspensions
or other impairments as would not be reasonably likely to
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result in a Material Adverse Effect. The business of the Company is not being
conducted in violation of any applicable Law, except for such violations which
would not have a Material Adverse Effect. No Governmental Entity has indicated
to the Company an intention to conduct an investigation or review with respect
to the Company other than, in each case, those which would not have a Material
Adverse Effect.
Section 3.14 Intangible Assets. (i) There are no claims, demands or
proceedings instituted, pending or, to the knowledge of the Company, threatened
by any Person contesting or challenging the right of the Company or any of its
Subsidiaries to use any of its Intangible Assets; (ii) each trademark
registration, service mark registration, copyright registration and patent used
by the Company is owned by or licensed pursuant to a valid license agreement to
the Company or its Subsidiaries and, with respect to those owned by the Company
or its Subsidiaries, has been maintained in good standing and, with respect to
those licensed to the Company or its Subsidiaries, to the Company's knowledge,
has been maintained in good standing; (iii) to the knowledge of the Company,
there are no Intangible Assets owned by a third Person which the Company or any
of its Subsidiaries is using without license to do so; (iv) the Company and
each of its Subsidiaries owns or possesses adequate licenses or other rights to
use all Intangible Assets necessary to conduct its business as now conducted;
and (v) the consummation of the Merger and the transactions contemplated by
this Agreement will not impair the validity, enforceability, ownership or right
of the Company and each of its Subsidiaries to use its Intangible Assets;
except, in each of clauses (i) through (v), as would not result in a Material
Adverse Effect.
Section 3.15 Year 2000. Except as, individually or in the aggregate, is not
reasonably likely to result in a Material Adverse Effect:
(a) all of the Computer Programs, computer firmware, computer hardware
(whether general or special purpose) and other similar or related items of
automated, computerized and/or software system(s) that are used or relied
on by the Company or by any of its Subsidiaries in the conduct of their
respective businesses will not malfunction, will not cease to function,
will not generate incorrect data, and will not provide incorrect results
when processing, providing and/or receiving (i) date-related data into and
between the twentieth and twenty-first centuries and (ii) date-related data
in connection with any valid date in the twentieth and twenty-first
centuries; and
(b) all of the products and services sold, licensed, rendered or
otherwise provided by the Company or by any of its Subsidiaries in the
conduct of their respective businesses will not malfunction, will not cease
to function, will not generate incorrect data and will not produce
incorrect results when processing, providing and/or receiving (i) date-
related data into and between the twentieth and twenty-first centuries and
(ii) date-related data in connection with any valid date in the twentieth
and twenty-first centuries; and neither the Company nor any of its
Subsidiaries is or shall be subject to claims or liabilities arising from
their failure to do so; and
(c) neither the Company nor any of its Subsidiaries has made other
representations or warranties regarding the ability of any product or
service sold, licensed, rendered or otherwise provided by the Company or by
any of its Subsidiaries in the conduct of their respective businesses to
operate without malfunction, to operate without ceasing to function, to
generate correct data and to produce correct results when processing,
providing and/or receiving (i) date-related data into and between the
twentieth and twenty-first centuries and (ii) date-related data in
connection with any valid date in the twentieth and twenty-first centuries.
Section 3.16 Customers and Suppliers. Since January 31, 1999, other than as
a result of the execution of this Agreement and the consummation of the
transactions contemplated hereby, there has been no termination, cancellation
or material curtailment of the business relationship of the Company with any
customer or supplier or group of affiliated customers or suppliers which would
result in a Material Adverse Effect nor, to the knowledge of the Company, any
written notice of intent to so terminate, cancel or materially curtail such
business relationships.
Section 3.17 Environmental Matters. (a) Except as described in Section 3.17
of the Company Disclosure Schedule and except as is not reasonably likely to
result in a Material Adverse Effect, the Company
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is, and at all times has been, in full compliance with and has not been and is
not in violation of or liable under, any Environmental Law. The Company has not
received, any actual or threatened order, notice or other communication
(written or oral) from (i) any Governmental Body or third party or (ii) the
current or prior owner or operator of any property, of any actual or potential
violation or failure to comply with any Environmental Law, or of any actual or
threatened obligation to undertake or bear the cost of any Environmental Claim
with respect to any property or assets (whether real, personal or mixed) in
which the Company has had an interest except as is not reasonably likely to
result in a Material Adverse Effect.
(b) Except as described in Section 3.17 of the Company Disclosure Schedule
and except as is not reasonably likely to result in a Material Adverse Effect,
there are no pending or, to the knowledge of the Company, threatened
Environmental Claims, encumbrances, or other restrictions of any nature,
resulting from any liabilities or arising under or pursuant to any
Environmental Law, with respect to or affecting any property and assets
(whether real, personal or mixed) in which the Company has or had an interest.
(c) Environmental Permits. The Company has obtained all material
environmental, health and safety permits and governmental authorizations
(collectively, the "Environmental Permits") required for its operations, and
all such permits are in good standing and the Company is in compliance in all
material respect with all terms and conditions of the Environmental Permits.
Section 3.18 Disclosure Documents. None of the information supplied in
writing or to be supplied in writing by the Company for inclusion in (i) the
definitive proxy statement (as the same may be amended or supplemented from
time to time, the "Proxy Statement/Prospectus"), and (ii) the registration
statement on Form S-4 to be filed with the SEC by the Parent in connection with
the Merger (as the same may be amended or supplemented from time to time, the
"Registration Statement") including the Proxy Statement/Prospectus included
therein, will, in the case of the Proxy Statement/Prospectus, either at the
time of mailing of the Proxy Statement/Prospectus to shareholders of the
Company or at the time of the special meeting of the shareholders of the
Company (the "Shareholders Meeting") to be duly called, noticed, convened and
held as soon as practicable following the date hereof for the purpose of voting
to approve this Agreement and the Merger, 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 light of the
circumstances under which they are made, not misleading or will, in the case of
the Registration Statement, either at the time the Registration Statement is
filed with the SEC or at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading except that no representation or
warranty is made by the Company with respect to (i) any forward-looking
information regarding or statements made by the Company (whether or not
included in the Registration Statement) or (ii) with respect to the information
supplied by the Parent.
Section 3.19 Opinion of Financial Advisor. The Board of Directors of the
Company has received the opinion of Credit Suisse First Boston Corporation
("Credit Suisse First Boston"), its financial advisor, to the effect that, as
of the date of this Agreement, the Exchange Ratio, based upon and subject to
the assumptions and limitations set forth in such opinion, is fair to the
holders of the Company Common Stock (other than Parent and its Affiliates) from
a financial point of view, a copy of the written opinion of which will be
delivered to the Parent after receipt thereof by the Company.
Section 3.20 Certain Agreements. Except as set forth in Section 3.20 of the
Company Disclosure Schedule, the Company is not a party to any oral or written
Agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement. Except as
described in Section 3.20 of the Company Disclosure Schedule, the transactions
contemplated by this Agreement will not constitute a "change of control" under,
require the consent from or the giving of notice to any third party pursuant
to, or accelerate
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the vesting or repurchase rights under, the terms, conditions or provisions of
any loan or credit agreement, note, bond, mortgage or indenture or any
material license, lease, contract, Agreement or other instrument or obligation
to which the Company is a party or by which any of them or any of their
properties or assets may be bound. Except as set forth in Section 3.20 of the
Company Disclosure Schedule or as expressly provided herein, there are no
material amounts payable by the Company to any officers of the Company (in
their capacity as officers) as a result of the transactions contemplated by
this Agreement. Except as set forth in Section 3.20 of the Company Disclosure
Schedule, there are no contractual agreements between any officers or
directors of the Company and the Company.
Section 3.21 Rights Agreement. The Company has taken all action which may
be necessary under the Rights Agreement, so that the execution of this
Agreement and any amendments thereto by the parties hereto and the
consummation of the transactions contemplated hereby and thereby shall not
cause (i) the Parent and/or the Sub or their respective Affiliates or
Associates to become an Acquiring Person (as such terms are defined in the
Rights Agreement) unless this Agreement has been terminated in accordance with
its terms or (ii) a Distribution Date, a Stock Acquisition Date (as such terms
are defined in the Rights Agreement) or certain other events (as described in
the Rights Agreement) to occur, irrespective of the number of shares of
Company Common Stock acquired pursuant to the Merger or other transactions
contemplated by this Agreement.
Section 3.22 Vote Required. The affirmative vote of the holders of two-
thirds of the shares of the Company Common Stock entitled to vote with respect
to the Merger is the only vote of the holders of any class or series of the
Company's capital stock or other securities necessary for the Company to
approve the Merger, this Agreement and the transactions contemplated hereby.
Section 3.23 Finders or Brokers. Except for Credit Suisse First Boston with
respect to the Company, a copy of whose engagement agreement has been provided
to the Parent, neither the Company nor its Subsidiaries has employed any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to any fee or any
commission in connection with or upon consummation of the transactions
contemplated hereby.
ARTICLE IV
Representations and Warranties of the Parent and the Sub
The Parent and the Sub hereby represent and warrant to the Company on the
date of this Agreement that:
Section 4.1 Due Incorporation and Authority. Each of the Parent and the Sub
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation. Each of the Parent and the Sub
has the corporate power and authority to own its properties and assets and to
carry on its business as it is now being conducted and is duly qualified to do
business and is in good standing in each of the jurisdictions in which the
ownership of its properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to be so
qualified would not, individually or in the aggregate, have a Parent Material
Adverse Effect. The Parent has delivered to the Company copies of the
certificates of incorporation and by-laws or other organizational documents of
the Parent and the Sub.
Section 4.2 Authorization; Enforceability. Each of the Parent and the Sub
has the corporate power and authority to enter into this Agreement and carry
out its obligations hereunder and consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of the Parent and the Sub, and no other corporate proceeding or
action on the part of the Parent or the Sub is necessary to authorize this
Agreement and the consummation of the transactions contemplated hereby. This
Agreement is, and the other documents and instruments required by this
Agreement to be executed and delivered by the Parent and the Sub will be, when
executed and delivered by the Parent and the Sub, the valid and binding
obligations of the Parent and the Sub, enforceable against each party in
accordance with their respective terms, except as the
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enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar Laws generally affecting the rights of
creditors and subject to general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
Section 4.3 No Violation or Conflict. The execution and delivery of this
Agreement and all documents and instruments required by this Agreement to be
executed and delivered by the Parent and the Sub do not, and the consummation
of the transactions contemplated hereby and compliance with the provisions
hereof will not, (i) result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any contract, agreement and
obligation, written or oral, to which the Parent or the Sub is a party or by
which either of them or any of their assets are bound, including, without
limitation, any loan, bond, mortgage, indenture, lease, instrument, franchise
or license or to the loss of a material benefit under any such contract,
agreement or obligation or result in the creation of any Lien upon any of the
properties or assets of the Parent or the Sub, (ii) conflict with or result in
any violation of any provision of the certificate of incorporation or by-laws
or other equivalent organizational document, in each case as amended, of the
Parent and the Sub, (iii) violate any permits, licenses, approvals,
qualifications, authorizations, and registrations required by Law which the
Parent or the Sub has or holds or any Law applicable to the Parent or the Sub
or any of their respective properties or assets, other than, in the case of
clauses (i) and (iii), any such violations, defaults, rights, losses or Liens
that, individually or in the aggregate, would not have a Parent Material
Adverse Effect or would not affect adversely the ability of the Company to
consummate the Merger and the other transactions contemplated by this
Agreement.
Section 4.4 SEC Reports; Financial Statements. (a) The Parent has filed with
the SEC true and complete copies of all forms, reports, schedules, statements
and other documents required to be filed by it since June 29, 1996 under the
Exchange Act or the Securities Act (as such documents have been amended since
the time of their filing, collectively, the "Parent SEC Reports"). As of their
respective dates or, if amended, as of the date of the last such amendment, the
Parent SEC Reports, including, without limitation, any financial statements or
schedules included therein (a) did not 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 light of the
circumstances under which they were made, not misleading and (b) complied in
all material respects with the applicable requirements of the Exchange Act and
the Securities Act, as the case may be, and the applicable rules and
regulations of the SEC thereunder at such time of filing.
(b) Parent Financial Statements. The Parent Financial Statements comply in
all material respects with the applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis by the Parent during the periods involved, except as
otherwise described in the notes thereto and, in the case of the unaudited
interim financial statements, subject to usual and recurring year-end
adjustments that have not been and are not expected to be material in amount.
The Parent Financial Statements fairly present in all material respects the
financial position of the Parent as of the date set forth on each of such
Parent Financial Statements and the results of operations of the Parent for the
periods indicated.
Section 4.5 Disclosure Documents. None of the information supplied in
writing or to be supplied in writing by the Parent for inclusion in the Proxy
Statement/Prospectus and the Registration Statement will, in the case of the
Proxy Statement/Prospectus, either at the time of mailing of the Proxy
Statement/Prospectus to shareholders of the Company or at the time of the
Shareholders Meeting 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 light of the circumstances under which they are
made, not misleading or will, in the case of the Registration Statement, either
at the time the Registration Statement is filed with the SEC or at the time the
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. The Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act, except that no
representation or warranty is made by the Parent with respect to (i) any
forward-looking information regarding or statements made by the Parent (whether
or not included in the Registration Statement) or (ii) information supplied by
the Company.
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Section 4.6 Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
Governmental Entity is required by the Parent or the Sub in connection with the
execution and delivery of this Agreement by the Parent and the Sub or the
consummation by either of them of the transactions contemplated hereby, except:
(a) in connection with the applicable requirements of the HSR Act and antitrust
or other competition laws of other jurisdictions; (b) pursuant to the
applicable requirements of the Securities Act, the Exchange Act, state blue sky
laws, the NYSE, and the rules and regulations promulgated thereby; and (c) the
filing of the Certificate of Merger as described in this Agreement.
Section 4.7 Authorization of Parent Common Stock. Prior to the Effective
Time, the Parent will have taken all necessary action to permit it to issue the
number of shares of Parent Common Stock required to be issued pursuant to
Article II. Parent Common Stock issued pursuant to Article II will, when issued
in accordance with the terms hereof, be validly issued, fully paid and
nonassessable, and no stockholder of the Parent will have any preemptive right
of subscription or purchase in respect thereof.
Section 4.8 Finders or Brokers. Except for Goldman Sachs & Co. with respect
to the Parent, neither the Parent nor the Sub has employed any investment
banker, broker, finder or intermediary in connection with the transactions
contemplated hereby who might be entitled to any fee or any commission in
connection with or upon consummation of the transactions contemplated hereby.
Section 4.9 Interim Operations of the Sub. The Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
ARTICLE V
Covenants and Agreements
Section 5.1 Conduct of Business by the Company. From and after the date of
this Agreement and until the earlier of the termination of this Agreement or
the Effective Time (unless the other party shall otherwise agree in writing and
except as otherwise contemplated by this Agreement), the Company will preserve
in all material respects its business organization intact and will conduct its
operations according to its ordinary and usual course of business consistent in
all material respects with past practice, including, without limitation,
retaining the services of employees and conducting business with suppliers,
customers, creditors and others having business relationships with the Company.
Without limiting the generality of the foregoing, and except as otherwise
permitted in this Agreement or set forth on Section 5.1 of the Company
Disclosure Schedule, prior to the Effective Time, neither the Company nor its
Subsidiaries will:
(a) except for shares to be issued or delivered pursuant to outstanding
Options, upon conversion of the outstanding Debentures or issuances by a
Subsidiary of the Company to such Subsidiaries' parent, issue deliver,
sell, dispose of, pledge or otherwise encumber, or authorize or propose the
issuance, sale, disposition or pledge or other encumbrance of (A) any
additional shares of capital stock of any class, or any securities or
rights convertible into, exchangeable for, or evidencing the right to
subscribe for any shares of capital stock, or any rights, warrants,
options, calls, commitments or any other agreements of any character to
purchase or acquire any shares of capital stock or any securities or rights
convertible into, exchangeable for, or evidencing the right to subscribe
for, any shares of capital stock, or (B) any other securities in respect
of, in lieu of, or in substitution for, Company Common Stock outstanding on
the date hereof;
(b) amend its Restated Certificate of Incorporation or Amended and
Restated By-laws or, except to the extent required to comply with its
obligations hereunder, alter through merger, liquidation, reorganization,
restructuring or in any other fashion the corporate structure or ownership
of any Subsidiary of the Company (other than the Merger) or split, combine,
subdivide or reclassify any Company Common Stock or declare, set aside for
payment or pay any dividend, or make any other actual, constructive or
deemed distribution in respect of any Company Common Stock or otherwise
make any payments to shareholders of the Company in their capacity as such;
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(c) make payments or distributions (other than salaries, director fees,
expense reimbursements and other employee compensation in the ordinary
course of business consistent with past practice) to any Affiliate of the
Company; provided, however, dividends or distributions may be made between
wholly-owned Subsidiaries of the Company and between the Company and
wholly-owned Subsidiaries;
(d) enter into, accelerate, terminate, modify in any material respect,
or cancel any Contract involving either more than $250,000 or outside the
ordinary course of business or knowingly do any act or knowingly omit to do
any act or, to the extent within the Company's reasonable control,
knowingly permit any act or omission to act, which will cause a breach of
any of the Contracts that would have a Material Adverse Effect;
(e) (i) except in a manner consistent with past practice, grant any
increase in the rate of pay of any of the Employees; (ii) institute or
amend any Employee Benefit Plan unless required by Law; (iii) enter into or
modify any written employment agreement with any Person; or (iv) pay or
accrue any bonus or incentive compensation to any Person;
(f) make any acquisition, by means of merger, consolidation or
otherwise, or disposition (other than short term investments of the
Company's cash balances in the ordinary course of business or disposition
of assets or securities in the ordinary course of business, consistent with
past practice), of assets or securities;
(g) authorize or make any individual capital expenditure in excess of
$250,000 or authorize or make capital expenditures in excess of $1,000,000
in the aggregate (in the event the Closing does not occur before October
31, 1999, such maximum amount will be increased to $1,500,000 and if the
Closing does not occur before November 30, 1999, such amount will be
increased to $2,000,000), except for those capital expenditures which have
been authorized on the date hereof and are specifically set forth in
Section 5.1(g) of the Company Disclosure Schedule;
(h) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise) other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in, or contemplated
by, the Company Financial Statements or incurred in the ordinary course of
business consistent with past practice;
(i) except as may be required as a result of a change in law or in
generally accepted accounting principles, make any change in accounting
policies or procedures applied by the Company (including tax accounting
policies and procedures);
(j) create, incur or assume any Indebtedness or make any Investment,
other than in the ordinary course of business;
(k) waive, amend or otherwise alter the Rights Agreement or redeem the
Rights or take any action to render Section 912 of the NYBCL inapplicable
to any transaction other than the transactions contemplated by this
Agreement;
(l) enter into an agreement to purchase green coffee with a term
exceeding four months or in an amount in excess of $1,500,000 or enter into
agreements to purchase green coffee (other than fixed price contracts for
the purchase of green coffee, all of which is committed to be purchased
pursuant to a matching bona fide fixed price sales contract with a third
party customer) in an aggregate amount (together with all existing
agreements to purchase green coffee) in excess of 20 million pounds;
provided, that the Company will consult with the Parent and consider in
good faith its views prior to entering into any agreement that results in
such aggregate amount exceeding 16 million pounds;
(m) knowingly do any act or omit to do any act that would result in a
breach of any representation by the Company set forth in this Agreement; or
(n) authorize, or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
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Section 5.2 Shareholders Meeting; Registration Statement and Proxy
Statement/Prospectus. (a) The Company agrees to take all steps necessary to
cause the Shareholders Meeting to be duly called, noticed, convened and held as
soon as practicable following the date hereof for the purpose of voting to
approve this Agreement and the Merger. Except as provided in Section 7.1(c)
with respect to a Superior Proposal, the Board of Directors of the Company
shall recommend approval and adoption of this Agreement and the Merger by the
holders of Shares entitled to vote thereon ("Voting Shares").
(b) The Company and the Parent shall prepare as soon as practicable,
following the date of this Agreement, and shall file with the SEC, the
Registration Statement, including the related Proxy Statement/Prospectus, under
the Securities Act. The Company and the Parent each shall use all reasonable
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. The respective
parties will cause the Registration Statement to comply as to form in all
material respects with the applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations thereunder. The Company and the
Parent shall also take any action required to be taken under state blue sky
laws or other securities laws in connection with the issuance of Parent Common
Stock in the Merger.
(c) Each of the Company and the Parent shall furnish all information
concerning it required to be included in the Registration Statement, including
the related Proxy Statement/Prospectus. The Parent agrees that the written
information provided by it for inclusion in the Registration Statement and the
related Proxy Statement/Prospectus and each amendment or supplement thereto at
the time it is filed or becomes effective, and at the time that the Proxy
Statement/Prospectus which forms a part thereof is mailed to the shareholders
of the Company, will not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by the Parent in reliance upon and in conformity with
written information concerning the Company furnished to the Parent by the
Company specifically for use in the Registration Statement and the related
Proxy Statement/Prospectus. The Company agrees that the written information
provided by it specifically for inclusion in the Registration Statement and the
related Proxy Statement/Prospectus and each amendment or supplement thereto, at
the time it is filed or becomes effective, and at the time that the Proxy
Statement/Prospectus which forms a part thereof is mailed to the shareholders
of the Company, will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Section 5.3 Listing of Parent Common Stock. The Parent shall use its best
efforts to cause the shares of Parent Common Stock to be issued in the Merger
to be approved for listing on the NYSE, subject to official notice of issuance,
prior to the Closing Date.
Section 5.4 Access. The Company shall (and shall cause each of its
Subsidiaries to) afford to the officers, employees, accountants, counsel and
other authorized representatives of the Parent full and complete access upon
reasonable notice and at reasonable times, throughout the period prior to the
earlier of the Effective Time or the Termination Date, to its properties,
offices, employees, contracts, commitments, books and records (including but
not limited to Tax Returns and computer and information systems) and any
report, schedule or other document filed or received by it pursuant to the
requirements of federal or state securities laws and shall (and shall cause
each of its Subsidiaries to) furnish promptly to the Parent such additional
financial and operating data and other information as to its and its
Subsidiaries' respective businesses and properties as the Parent may from time
to time reasonably request; provided, however, that the Parent's access to the
Company's businesses which directly compete with the Parent (LaTouraine, Cain's
and Chock Food Service Distribution and Convenience Stores ("CFS"),
collectively, the "Competing Businesses") shall be limited to the top manager
of each Competing Business and shall not include customer lists and information
regarding specific customer locations, contract terms or other information
relating to the cost structure or margins of the Competing Businesses; provided
further, that the immediately preceding proviso shall not limit
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Parent's access to information regarding the costs of manufacturing, freight
and storage of the CFS business. From and after the date of this Agreement
until the earlier of the Closing Date or the first anniversary of any
termination of this Agreement, the Parent and its Subsidiaries agree not to
solicit for employment any person employed by the Competing Businesses or
employ any person known by the Parent to be an employee of the Company at the
time of employment. In the event that the transactions contemplated hereby are
not consummated, the Parent and each of its officers, employees, accountants,
counsel and other authorized representatives shall keep any information
obtained in accordance with this Section 5.4 confidential and not use such
information for any other purpose. The Parent and the Sub will use all
reasonable efforts to minimize any disruption to the businesses of the Company
and its Subsidiaries which may result from the requests for data and
information hereunder. No investigation pursuant to this Section 5.4 shall
affect any representation or warranty in this Agreement of any party hereto or
any condition to the obligations of the parties hereto.
Section 5.5 Commercially Reasonable Efforts; Further Assurances. (a) Subject
to the terms and conditions of this Agreement and applicable law, each of the
parties shall act in good faith and use its commercially reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement as soon as practicable. Without
limiting the foregoing, the parties shall (and shall cause their respective
subsidiaries, and use reasonable best efforts to cause their respective
affiliates, directors, officers, employees, agents, attorneys, accountants and
representatives, to) consult and fully cooperate with and provide assistance to
each other in (i) the preparation and filing with the SEC of the Registration
Statement and the Proxy Statement/Prospectus and all necessary amendments or
supplements thereto; (ii) obtain all necessary consents, approvals, waivers,
licenses, permits, authorizations, registrations, qualifications or other
permissions or actions by, and give all necessary notices to and make all
necessary filings with and applications and submissions to, any Governmental
Entity or other Person (except for approvals obtained under the HSR Act) as
soon as reasonably practicable after the date of this Agreement; and (iii)
provide all such information concerning such party, its Subsidiaries and its
officers, directors, employees, partners and affiliates as may be necessary or
reasonably requested in connection with any of the foregoing. Prior to making
any application to or filing with a Governmental Entity or other entity in
connection with this Agreement (other than filing under the HSR Act), each
party shall provide the other party with drafts thereof and afford the other
party a reasonable opportunity to comment on such drafts.
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each of the parties to this Agreement shall use their
commercially reasonable best efforts to take all such action.
(c) The Company, the Parent and the Sub each shall keep the other apprised
of the status of matters relating to completion of the transactions
contemplated hereby, including promptly furnishing the other with copies of
notices or other communications received by the Parent, the Sub or the Company,
as the case may be, or any of their respective Subsidiaries (other than in any
such case with respect to Acquisition Proposals (as hereinafter defined)), from
any third party and/or any Governmental Entity with respect to the transactions
contemplated by this Agreement.
Section 5.6 Takeover Statute. If any "fair price," "moratorium," "control
share acquisition" or other form of anti-takeover statute or regulation shall
become applicable to the transactions contemplated hereby, each of the Company,
the Parent and the Sub and the members of their respective Boards of Directors
shall grant such approvals and take such actions as are reasonably necessary so
that the transactions contemplated hereby may be consummated as promptly as
practicable on the terms contemplated hereby and otherwise act to eliminate or
minimize the effects of such statute or regulation on the transactions
contemplated hereby.
Section 5.7 No Solicitation. (a) The Company and its Affiliates shall not,
directly or indirectly, through any officer, director, employee, investment
banker, attorney, representative or agent of the Company or any of its
Subsidiaries, (i) solicit, initiate, facilitate, or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, an
Acquisition Proposal, (ii) engage in negotiations or discussions
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concerning, or provide any non-public information or data to any Person or
entity relating to, any Acquisition Proposal, or (iii) agree to, approve or
recommend any Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent the Company or its Board of
Directors from (A) furnishing nonpublic information or data to, or entering
into discussions or negotiations with, any Person in connection with an
unsolicited bona fide Acquisition Proposal for all of the outstanding shares at
a price more favorable to the Company's shareholders than the Merger, from a
party with sufficient financial resources available to it to consummate such a
transaction and that is reasonably likely to result in a Superior Proposal (as
hereinafter defined), if and only to the extent that the Company's Board of
Directors determines in good faith (after consultation with its financial and
legal advisors), that such action is necessary for such Board of Directors to
comply with its fiduciary duties under applicable law, and prior to furnishing
such non-public information to, or entering into discussions or negotiations
with, such Person or entity, such Board of Directors receives from such Person
or entity an executed confidentiality agreement containing customary terms and
conditions; (B) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal. The Company will immediately cease and
cause to be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing and
request the return of all information provided to third parties pursuant to a
confidentiality agreement. For purposes of this Agreement, "Superior Proposal"
means any bona fide written Acquisition Proposal, not subject to any financing
condition or which includes written commitments to finance such transaction
from one or more financial institutions capable of providing such commitments,
for all of the outstanding Shares and/or Debentures on terms that the Board of
Directors of the Company determines in good faith (after receiving the advice
of a financial advisor of nationally recognized reputation) are more favorable
and provide greater value to all the Company's shareholders than this Agreement
and the Merger taken as a whole. For purposes of this Agreement, "Acquisition
Proposal" means any offer or proposal for, or any indication of interest in, a
merger or other business combination involving the Company or any Subsidiary of
the Company or the acquisition of any equity interest in, or a substantial
portion of the assets of, the Company or any Subsidiary of the Company, other
than the transactions contemplated by this Agreement.
(b) The Company shall (i) promptly (and in no event later than 24 hours
after receipt of any Acquisition Proposal) notify the Parent after receipt by
it of any Acquisition Proposal or any inquiries indicating that any Person is
considering making or wishes to make an Acquisition Proposal, identifying such
Person, (ii) promptly notify the Parent after receipt of any request for
nonpublic information relating to it or any of its Subsidiaries or for access
to its or any of its Subsidiaries' properties, books or records by any Person,
identifying such Person and the information requested by such Person, that may
be considering making, or has made, an Acquisition Proposal and promptly
provide the Parent with any nonpublic information which is given to such Person
pursuant to this Section 5.7(b), (iii) keep the Parent advised of the status
and principal financial terms of any such Acquisition Proposal, indication or
request, and (iv) prior to furnishing any such information, provide reasonable
advance notice to the Parent that it intends to do so. The Company shall give
the Parent at least 24 hours' advance notice of any information to be supplied
to, and at least 24 hours' advance notice of any confidentiality or other
agreement to be entered into with, any Person making such Acquisition Proposal.
Section 5.8 Public Announcement. The Parent and the Company agree that
neither one of them will issue any press release or otherwise make any public
statement or respond to any press inquiry with respect to this Agreement or the
transactions contemplated hereby without the prior approval of the other party
(which approval will not be unreasonably withheld), except as may be required
by applicable law, order of any court or governmental agency or the rules of
the NYSE.
Section 5.9 Notices of Certain Events. Each party shall, upon obtaining
knowledge of any of the following, promptly notify the other party in writing
of: (i) any Material Adverse Effect with respect to such party; (ii) any change
which makes it likely that any representation, warranty or information set
forth in this Agreement or its schedules regarding such party or any of its
Subsidiaries is not or will not be true in any material respect at the Closing;
(iii) the occurrence or non-occurrence of any event the occurrence or non-
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occurrence of which would be likely to cause any condition to the obligations
of any party to effect the transactions contemplated by this Agreement not to
be satisfied; (iv) the failure of such party to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
pursuant to this Agreement which would be likely to result in any condition to
the obligations of any party to effect the transactions contemplated by this
Agreement not be satisfied; (v) any notice or other communication from any
Governmental Entity in connection with the Merger; or (vi) with respect to the
Company or any of its Subsidiaries, any actions, suits, claims, investigations
or other proceedings (or communications indicating that the same may be
contemplated) commenced or threatened against the Company or any of its
Subsidiaries which, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 3.6 or which relate to the
consummation of the Merger; provided, however, that the delivery of any notice
pursuant to this Section 5.9 shall not cure any breach of any representation or
warranty or otherwise limit or affect the remedies available to the other
party.
Section 5.10 Indemnification and Insurance. (a) From and after the Effective
Time, the Parent agrees to cause the Surviving Corporation to indemnify and
hold harmless the current or former directors or officers (the "Indemnified
Parties") of the Company against any losses, claims, damages, judgments,
settlements, liabilities, costs or expenses incurred in connection with any
claim, action, suit, proceeding or investigation arising out of or pertaining
to acts or omissions, or alleged acts or omissions, by them in their capacities
as such occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time (including, without
limitation, in connection with the Merger and the other transactions
contemplated by this Agreement), to the fullest extent that the Company or such
Subsidiaries would have been permitted, under the NYBCL and the Restated
Certificate of Incorporation or Amended and Restated By-laws of the Company or
the organizational documents of such Subsidiaries each as in effect on the date
of this Agreement. Such indemnification shall survive the Merger and shall
continue in full force and effect for a period of six years following the
Effective Time.
(b) For a period of three years following the Effective Time, the Parent or
the Surviving Corporation shall maintain in effect the Company's current
directors' and officers' liability insurance policy (the "Company Policy"), or
enter into a policy providing comparable coverage, covering those persons who
are currently covered by the Company Policy (a copy of which has been
heretofore delivered to the Parent); provided, however, that in no event shall
the Parent or the Surviving Corporation be required to expend in any one year
an amount in excess of 150% of the annual premiums currently paid by the
Company for such insurance; and, provided, further, that if the annual premiums
of such insurance coverage exceed such amount, the Parent or the Surviving
Corporation shall be obligated to obtain a policy with the greatest coverage
available for a cost not exceeding such amount.
Section 5.11 Additional Reports. The Company and the Parent shall furnish to
the other party copies of all reports of the type referred to in Section 3.5
and Section 4.4, respectively, which it files with the SEC on or after the date
hereof, and each of the Company and the Parent represents and warrants that as
of the respective dates thereof, such reports will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and the unaudited consolidated interim
financial statements included in such reports (including any related notes and
schedules) will fairly present in all material respects the financial position
of the Company and its consolidated Subsidiaries and the Parent and its
consolidated Subsidiaries, respectively, as of the dates thereof and the
results of operations and cash flows or other information included therein for
the periods or as of the date then ended (subject, in the case of the interim
financial statements, to normal, recurring year-end adjustments), in each case
in accordance with past practice and generally accepted accounting principles
consistently applied during the periods involved (except as otherwise disclosed
in the notes thereto).
Section 5.12 Affiliates. Prior to the Effective Time, the Company shall
deliver to the Parent a list of names and addresses of those Persons who are,
in the opinion of the Company, as of the time of the
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Shareholders Meeting, "affiliates" of the Company within the meaning of Rule
145 under the Securities Act. The Company shall provide to the Parent such
information and documents as the Parent shall reasonably request for purposes
of reviewing such list. There shall be added to such list the names and
addresses of any other Person subsequently identified by either the Parent or
the Company as a Person who may be deemed to be such an affiliate of the
Company; provided, however, that no such Person identified by the Parent shall
be added to the list of affiliates of the Company if the Parent shall receive
from the Company, on or before the date of the Shareholders Meeting, an opinion
of counsel reasonably satisfactory to the Parent to the effect that such Person
is not such an affiliate. The Company shall seek to deliver or cause to be
delivered to the Parent, prior to the date of the Shareholders Meeting, from
each affiliate of the Company identified in the foregoing list (as the same may
be supplemented as aforesaid), a letter dated as of the Closing Date
substantially in the form attached as Exhibit A (the "Affiliates Letter"). The
Parent shall not be required to maintain the effectiveness of the Registration
Statement or any other registration statement under the Securities Act for the
purposes of resale of Parent Common Stock by such affiliates received in the
Merger and the certificates representing Parent Common Stock received by such
affiliates shall bear a customary legend regarding applicable Securities Act
restrictions and the provisions of this Section 5.12.
Section 5.13 Tax-Free Reorganization. Each of the Parent, Sub and Company
shall use all reasonable efforts to cause the Merger to constitute a
"reorganization" within the meaning of Section 368(a) of the Code. Unless
otherwise required (and then only to the extent otherwise required) by a
"determination" (as defined in Section 1313(a)(1)) of the Code or by a similar
applicable provision of state or local income tax law, each party shall (i)
report the Merger on all tax returns and other filings as a reorganization with
in the meaning of Section 368(a) of the Code and (ii) not take any position
that is inconsistent with the characterization of the Merger as such a
reorganization in any audit, administrative proceeding, litigation or
otherwise.
Section 5.14 Actions Regarding Debentures. Prior to the Closing Date, the
Company will consult with the Parent and consider in good faith any
arrangements proposed by the Parent to call the outstanding Debentures for
redemption. The Company will cooperate with the Parent in connection with such
arrangements and take all actions reasonably requested to facilitate such
redemption; provided, that the Company will not be required to irrevocably call
the Debentures for redemption prior to the Closing Date unless it otherwise
agrees to do so.
ARTICLE VI
Conditions to the Merger
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) The Company Shareholder Approval shall have been obtained;
(b) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, restricts or makes illegal the
consummation of the Merger substantially on the terms contemplated hereby,
and there shall be no order or injunction of a court of competent
jurisdiction in effect precluding or restricting consummation of the
Merger;
(c) Other than the filing provided for in Section 1.3 hereof, all
filings required pursuant to Sections 3.11 and 4.6 hereof, and all material
consents, approvals, and authorizations required to be obtained prior to
the Effective Time by the parties hereto from any Governmental Entity to
consummate the Merger, shall have been made or obtained, as the case may
be;
(d) The Registration Statement shall have been declared effective by the
SEC under the Securities Act and no stop order suspending the effectiveness
of the Registration Statement shall have been issued by the SEC and no
proceeding for that purpose shall have been initiated by the SEC and not
concluded or withdrawn; and
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(e) The Parent Common Stock to be issued in the Merger shall have been
approved for listing on the NYSE, subject to official notice of issuance.
Section 6.2 Conditions to the Parent's and the Sub's Obligations to Effect
the Merger. The obligations of the Parent and the Sub to effect the Merger
shall be subject to the fulfillment at or prior to the Effective Time of each
of the following conditions:
(a) The representations and warranties made by the Company in this
Agreement shall be true and correct (i) in all respects at and as of the
Effective Time (as to representations and warranties specifically qualified
or limited by the term "Material Adverse Effect," the word "material" and
phrases of like import), and (ii) in all material respects at and as of the
Effective Time (as to representations and warranties not qualified or
limited by the term "Material Adverse Effect," the word "material" and
phrases of like import), in each case with the same force and effect as
though made at and as of the Effective Time (except to the extent they
relate to a specific date), the Company shall have performed in all
material respects all of its obligations under this Agreement theretofore
to be performed, and the Parent shall have received at the Effective Time a
certificate of the President and Chief Financial Officer of the Company to
that effect;
(b) During the period from January 31, 1999, to the Closing Date, there
shall not have occurred any Material Adverse Effect with respect to the
Company, that has not been fully disclosed in the Company SEC Reports or in
Section 6.2(c) of the Company Disclosure Schedule, that continues to exist
on the Closing Date and as of the Effective Time, except for matters
directly resulting from (x) the filing by Parent with the SEC of its
Schedule 13D or its tender offer with respect to the Company or (y) the
execution of this Agreement and the consummation of the transactions
contemplated hereby; and
(c) The Parent shall have received the opinion of Skadden, Arps, Slate,
Meagher & Flom (Illinois), special counsel to the Parent, dated the Closing
Date and in form and substance reasonably satisfactory to the Parent, to
the effect that, on the basis of facts, representations and assumptions set
forth in such opinion which are consistent with the state of facts existing
on the Closing Date, the Merger will be treated for federal income tax
purposes as a reorganization with in the meaning of Section 368(a) of the
Code. In rendering such opinion, Skadden, Arps, Slate, Meagher & Flom
(Illinois) may require and rely upon (and may incorporate by reference)
representations and covenants, including those contained in certificates of
officers of the Parent, Sub, the Company and others.
Section 6.3 Conditions to the Company's Obligations to Effect the Merger.
The obligations of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of each of the following
conditions:
(a) The representations and warranties made by the Parent and the Sub in
this Agreement shall be true and correct (i) in all respects at and as of
the Effective Time (as to representations and warranties specifically
qualified or limited by the term "Parent Material Adverse Effect," the word
"material" and phrases of like import), and (ii) in all material respects
at and as of the Effective Time (as to representations and warranties not
qualified or limited by the term "Parent Material Adverse Effect," the word
"material" and phrases of like import), in each case with the same force
and effect as though made at and as of the Effective Time (except to the
extent they relate to a specific date), the Parent and the Sub shall have
performed in all material respects all of their respective obligations
under this Agreement theretofore to be performed, and the Company shall
have received at the Effective Time a certificate of the President and
Chief Financial Officer of Parent to that effect; and
(b) The Company shall have received the opinion of Cahill Gordon &
Reindel, counsel to the Company, dated the Closing Date and in form and
substance reasonably satisfactory to the Company, to the effect that, on
the basis of facts, representations and assumptions set forth in such
opinion which are consistent with the state of facts existing on the
Closing Date, the Merger will be treated for federal income tax purposes as
a reorganization with in the meaning of Section 368(a) of the Code. In
rendering such opinion, Cahill Gordon & Reindel may require and rely upon
(and may incorporate by reference) representations and covenants, including
those contained in certificates of officers of the Parent, Sub, the Company
and others.
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ARTICLE VII
Termination
Section 7.1 Termination. This Agreement may be terminated and the
transactions contemplated by this Agreement may be abandoned at any time prior
to the Closing (whether before or after the Company Shareholder Approval), as
follows:
(a) by mutual written agreement duly authorized by the respective Boards
of Directors of the Parent and the Company;
(b) by either of the Company or the Parent if:
(i) the Effective Time shall not have occurred on or before December
31, 1999; provided, however, that the right to terminate this Agreement
pursuant to this clause shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the
primary cause of, or resulted in, the failure of the Effective Time to
occur on or before such date;
(ii) a statute, rule, regulation or executive order shall have been
enacted, entered or promulgated prohibiting the consummation of the
Merger substantially on the terms contemplated hereby;
(iii) an order, decree, ruling or injunction shall have been entered
permanently restraining, enjoining or otherwise prohibiting the
consummation of the Merger and such order, decree, ruling or injunction
shall have become final and non-appealable; or
(iv) at the Shareholders Meeting (including any adjournment or
postponement thereof) called pursuant to Section 5.2 hereof, the
Company Shareholder Approval shall not have been obtained;
(c) by the Company:
(1) if (a) the Company, upon the good faith determination of the
Board of Directors of the Company based on consultation with outside
legal counsel that such action is necessary in order for the Board of
Directors of the Company to comply with its fiduciary duties under
applicable Law, subject to complying with the terms of this Agreement,
enters into a binding written agreement concerning a transaction that
constitutes a Superior Proposal and, prior thereto, the Company
notifies the Parent in writing that it intends to enter into such an
agreement, attaching the most current version of such agreement to such
notice or a detailed description of the price and terms thereof, (b)
the Parent does not make, within two business days of receipt of the
Company's written notification of its intention to enter into a binding
agreement for a Superior Proposal, an offer to enter into an amendment
to this Agreement such that the Board of Directors of the Company
determines, in good faith after consultation with its financial
advisors, that this Agreement as so amended is at least as favorable,
from a financial point of view, to the shareholders of the Company as
the Superior Proposal and (c) the Company, prior to such termination,
pays to the Parent in immediately available funds any fees required to
be paid pursuant to Section 7.3. The Company agrees (A) that it will
not enter into a binding agreement referred to in clause (a) above
until after the close of business on the second business day after it
has provided the notice to the Parent required thereby and (B) to
notify the Parent promptly if its intention to enter into a written
agreement referred to in its notification shall change at any time
after giving such notification; or
(ii) if the Parent or the Sub shall have breached in any material
respect any of their respective representations or warranties such that
the closing condition in Section 6.3(a) would not be satisfied or the
Parent or the Sub shall have breached any covenant or other agreement
contained in this Agreement, which breach in either case cannot be or
has not been cured, in all material respects, within 30 days after the
giving of written notice to the Parent or the Sub, as applicable;
(d) by the Parent:
(i) if the Company shall have breached in any material respect any
of its representations or warranties such that the closing condition in
6.2(b) would not be satisfied or the Company shall have
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breached any covenant or other agreement contained in this Agreement
which breach in either case cannot be or has not been cured, in all
material respects, within 30 days after the giving of written notice to
the Company;
(ii) if, at any time prior to the Effective Time, the Board of
Directors of the Company shall have withdrawn or adversely modified its
approval or recommendation of this Agreement or failed to reconfirm its
recommendation of this Agreement within five business days after a
written request by the Parent to do so; or
(iii) at any time following the date 30 days after notice is
delivered by the Company as required in Section 5.7 concerning the
receipt of an Acquisition Proposal unless, prior to termination under
this subsection (d)(iii), the Company provides written notice to the
Parent that such Acquisition Proposal has been rejected or withdrawn or
the Company is no longer engaged in negotiations or discussions with
such other Person concerning the Acquisition Proposal; provided that
the 30-day time period shall be reduced with respect to any subsequent
Acquisition Proposal made by a Person whose Acquisition Proposal was
previously rejected or withdrawn as provided in this subsection
(d)(iii) to a number of days equal to 30 minus the number of days
lapsed from the receipt of any notice of any prior Acquisition Proposal
from such Person until the rejection or withdrawal of any such prior
Acquisition Proposal(s);
(e) if the Average Parent Price is less than $21.00, Parent shall
provide written notice to the Company prior to the close of business on the
first trading day following the end of the Averaging Period stating that
the Average Parent Price is below $21.00 and whether or not it elects to
increase the Merger Consideration as provided below (the "Parent
Election"). On or before the close of business on the first trading day
following its receipt of a Parent Election stating that the Parent has
elected not to increase the Merger Consideration, the Company may terminate
this Agreement by delivering a written notice to the Parent (the "Company
Termination Notice") stating that it has elected to terminate this
Agreement. If the Parent has elected to increase the Merger Consideration
in the Parent Election, then the Parent shall increase the Merger
Consideration by increasing the Exchange Ratio or by making a cash payment
(provided that the Merger shall continue to qualify as a reorganization
within the meaning of Section 368(a) of the Code) or by any combination
thereof (at the Parent's election), such that the Merger Consideration
shall consist of an aggregate number of shares of Parent Common Stock (and
cash, if any) having a value (based on the Average Parent Price of the
Parent Common Stock) equal to $11.00 per share of Company Common Stock. In
such event, no termination shall occur, and this Agreement will remain in
effect in accordance with its terms.
Section 7.2 Rights on Termination. In the event of termination and
abandonment of the Merger by any party pursuant to Section 7.1, written notice
thereof shall forthwith be given to the other parties, and this Agreement shall
terminate and the Merger and the other transactions contemplated hereby shall
be abandoned, without further action by any of the parties hereto. If this
Agreement is terminated and the transactions contemplated hereby are not
consummated pursuant to Section 7.1 of this Agreement, this Agreement shall
become void and of no further force and effect, except for (a) the provisions
of Section 5.4 relating to the obligation of the Parent and the Sub to keep
confidential and not to use certain information obtained from the Company and
in the second sentence of Section 5.4 and (b) the provisions of Section 7.3
relating to the Company's obligations to make certain payments to the Parent.
Section 7.3 Termination Fee Payable to Parent. Notwithstanding any provision
to the contrary contained herein, the Company shall immediately pay to the
Parent (x) the amount of $7 million and (y) all documented out-of-pocket
expenses reasonably incurred by the Parent and the Sub in connection with this
Agreement and the Merger if (i) either (1) the Company shall have received an
Acquisition Proposal or such a proposal shall have been publicly announced or
(2) the Board of Directors of the Company shall have withdrawn or adversely
modified its approval or recommendation of this Agreement, and in either such
case this Agreement is terminated pursuant to Section 7.1(b)(iv), (ii) this
Agreement is terminated pursuant to Section 7.1(c)(i) or Section 7.1(d)(i) (if
the breach thereof is due to the Company's intentional or bad faith
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acts), or (iii) if, within 12 months of a termination of this Agreement
pursuant to any other provision of Section 7.1 (other than Section 7.1(c)(ii)),
the Company or any of its Subsidiaries accepts a written offer for, or
otherwise enters into an agreement to consummate or consummates, a Superior
Proposal with another person, upon the signing of a definitive agreement
relating to such Superior Proposal, or, if no such agreement is signed, then
upon consummation of any such Superior Proposal, in which case such payment
shall be less any amounts paid as a result of a termination of this Agreement.
The amount in (x) above shall be paid concurrently with any such termination
and the amount in (y) above shall be paid in immediately available funds within
two (2) business days after receipt by the Company of reasonably detailed
evidence of the same.
Section 7.4 Other Remedies. Notwithstanding any provision to the contrary
contained herein, if this Agreement is terminated pursuant to Article 7 or
otherwise by the Company, on the one hand, or the Parent or the Sub, on the
other hand, and the non-terminating party is not entitled to receive the
payments described in Section 7.3 (as the case may be), then the non-
terminating party shall be entitled to pursue any available legal rights to
recover actual damages, including, without limitation, its reasonable costs and
expenses incurred in pursuing such recovery (including, without limitation,
reasonable attorneys' fees).
ARTICLE VIII
Miscellaneous
Section 8.1 No Survival of Representations and Warranties. None of the
representations or warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time.
Section 8.2 Expenses. (a) Except as expressly contemplated by this
Agreement, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs and expenses.
(b) The obligation to pay any termination fee or expenses pursuant to
Section 7.3 shall be in addition to any other rights or remedies that may be
available to the Parent, including, without limitation, the expenses to be paid
by the Company pursuant to Section 8.2(a). The Company shall make all such
payments promptly (and in any event within two business days of receipt by the
Company of written notice from the Parent) by wire transfer of immediately
available funds to an account designated by the Parent.
Section 8.3 Counterparts; Effectiveness. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original but
all of which shall constitute one and the same agreement. This Agreement shall
become effective when each party hereto shall have received counterparts hereof
signed by each of the other parties hereto.
Section 8.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to the
principles of conflicts of laws thereof.
Section 8.5 Notices. All notices and other communications hereunder shall be
in writing (including telecopy or similar writing) and shall be effective (a)
if given by telecopy, when such telecopy is transmitted to the telecopy number
specified in this Section 8.5 and the appropriate telecopy confirmation is
received or (b) if given by any other means, when delivered at the address
specified in this Section 8.5:
To the Parent or the Sub:
Sara Lee Corporation
Three First National Plaza
Chicago, Illinois 60602
Attention: Ms. Janet Langford Kelly
Senior Vice President, Secretary and General Counsel
Facsimile: (312) 558-4989
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with a copy to:
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive, Suite 2300
Chicago, Illinois 60606
Attention: Charles W. Mulaney, Jr.
Facsimile: (312) 407-0411
To the Company:
Chock Full O'Nuts Corporation
370 Lexington Avenue
New York, New York 10017
Attention: Mr. Howard M. Leitner
Senior Vice President and Chief Financial Officer
Facsimile: (212) 679-9737
with a copy to:
Cahill Gordon & Reindel
Eighty Pine Street
New York, New York 10005
Attention: W. Leslie Duffy
Facsimile: (212) 269-5420
Section 8.6 Assignment; Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that the Sub may assign, in its
sole discretion, all or any of its rights, interests and obligations hereunder
to the Parent or to any direct or indirect wholly owned Subsidiary of the
Parent. Subject to the preceding sentence, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 8.7 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, such provision shall be interpreted to be only so
broad as is enforceable.
Section 8.8 Enforcement of Agreement. The parties hereto agree that money
damages or other remedies at law would not be sufficient or adequate remedy for
any breach or violation of, or a default under, this Agreement by them and that
in addition to all other remedies available to them, each of them shall be
entitled to the fullest extent permitted by law to an injunction restraining
such breach, violation or default or threatened breach, violation or default
and to any other equitable relief, including, without limitation, specific
performance, without bond or other security being required.
Section 8.9 Entire Agreement; No Third-Party Beneficiaries. This Agreement
constitute the entire agreement, and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof and thereof and except for the provisions
of Section 5.10 hereof, is not intended to and shall not confer upon any Person
other than the parties hereto any rights or remedies hereunder.
Section 8.10 Headings. Headings of the Articles and Sections of this
Agreement are for convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
Section 8.11 Finders or Brokers. Except for Credit Suisse First Boston with
respect to the Company and Goldman Sachs & Co. with respect to the Parent,
neither the Company nor the Parent nor any of their
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respective Subsidiaries has employed any investment banker, broker, finder or
intermediary in connection with the transactions contemplated hereby who might
be entitled to any fee or any commission in connection with or upon
consummation of the Merger.
Section 8.12 Amendment or Supplement. Subject to applicable law, at any time
prior to the Effective Time, this Agreement may be amended or supplemented in
any and all respects, whether before or after the Company Shareholder Approval,
by written agreement of the parties hereto, by action taken by their respective
Boards of Directors, with respect to any of the terms contained in this
Agreement; provided, however that following the Company Shareholder Approval
there shall be no amendment or change to the provisions hereof which would
reduce the amount or change the type of consideration into which each Share
shall be converted upon consummation of the Merger without further approval by
the shareholders of the Company.
Section 8.13 Extension of Time, Waiver, Etc. At any time prior to the
Effective Time, any party may (a) extend the time for the performance of any of
the obligations or acts of any other party hereto; (b) waive any inaccuracies
in the representations and warranties of any other party hereto contained
herein or in any document delivered pursuant hereto; or (c) subject to the
proviso of Section 8.12 waive compliance with any of the agreements or
conditions of any other party hereto contained herein. Notwithstanding the
foregoing, no failure or delay by the Company, the Parent or the Sub in
exercising any right hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right hereunder. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party.
ARTICLE IX
Definitions
When used in this Agreement, and in addition to the other terms defined
herein, the following terms shall have the meanings specified:
Section 9.1 Affiliate. "Affiliate" shall mean, in relation to any party
hereto, any entity directly or indirectly controlling, controlled by or under
common control with such party.
Section 9.2 Agreement. "Agreement" shall mean this Agreement and Plan of
Merger, together with the Exhibits attached hereto, and the Company Disclosure
Schedule, as the same may be amended from time to time in accordance with the
terms hereof.
Section 9.3 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
Section 9.4 Company Disclosure Schedule. "Company Disclosure Schedule" means
the disclosure schedule delivered by the Company.
Section 9.5 Company Financial Statements. "Company Financial Statements"
shall mean the audited Consolidated Balance Sheet, Consolidated Statement of
Operations, Consolidated Statement of Cash Flows and Consolidated Statement of
Stockholders Equity of the Company and related notes for each of the fiscal
years ended on July 31, 1996, July 31, 1997 and July 31, 1998, and the
unaudited Consolidated Balance Sheet, Consolidated Statement of Operations,
Consolidated Statement of Cash Flows and Consolidated Statement of
Stockholders' Equity of the Company and related notes for the six months ended
January 31, 1998 and January 31, 1999, each as included in the Company SEC
Reports.
Section 9.6 Computer Programs. "Computer Programs" shall mean (i) any and
all computer software programs, including all source and object code, (ii) all
computer software programs incorporated in any equipment, including any
beverage dispensing equipment, owned or leased by the Company or its
Subsidiaries or provided by the Company or its Subsidiaries to customers, (iii)
databases and compilations, including any and all data and collections of data,
whether machine readable or otherwise, (iii) billing, reporting and other
management information systems, (iv) all descriptions, flow-charts and other
work product used to design, plan, organize and develop any of the foregoing,
(v) all content contained on any Internet site(s), and (vi) all documentation
including user manuals and training materials, relating to any of the
foregoing.
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Section 9.7 Contracts. "Contracts" shall mean all of the material contracts,
agreements and obligations to which the Company is a party or by which the
Company or any of its material assets are bound, including, without limitation,
any loan, bond, mortgage or indenture or material lease, instrument, franchise
or license.
Section 9.8 Control. "Control" (including the terms "controlling,"
"controlled by," and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
through the ownership of voting securities or by contract.
Section 9.9 Employees. "Employees" shall mean all of the employees of the
Company.
Section 9.10 Employee Benefit Plans. "Employee Benefit Plans" shall mean any
pension plan, profit sharing plan, bonus plan, incentive compensation plan,
stock purchase plan, stock ownership plan, stock option plan, stock
appreciation plan, employee benefit plan, employee benefit policy, retirement
plan, fringe benefit program, insurance plan, severance plan, disability plan,
health care plan, sick leave plan, death benefit plan, or any other plan,
program or policy to provide retirement income, fringe benefits or other
benefits to former or current employees of the Company (including, without
limitation, any employee pension benefit plan or employee welfare plan, but
excluding any multi-employer plan, as each term is defined in ERISA).
Section 9.11 Environmental Claim. "Environmental Claim" shall mean any and
all administrative, regulatory or judicial actions, suits, demands, demand
letters, directives, claims, Liens, investigations, proceedings or notices of
noncompliance or violation (written or oral) by any Person alleging liability
(including, without limitation, liability for enforcement, investigatory costs,
cleanup costs, governmental response costs, removal costs, remedial costs,
natural resources damages, property damages, personal injuries, or penalties)
arising out of, based on or resulting from: (A) the presence or environmental
release of any Hazardous Materials at any parcel of real property; or (B)
circumstances forming the basis of any violation or alleged violation, of any
Environmental Law; or (C) any and all claims by any Person seeking damages,
contribution, indemnification, cost, recovery, compensation or injunctive
relief resulting from the presence or Environmental Release of any Hazardous
Materials.
Section 9.12 Environmental Laws. "Environmental Laws" shall mean any
federal, state, local or foreign statute, Law, rule, ordinance, code, policy,
rule of common law and regulations relating to pollution or protection of human
health (excluding OSHA) or the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata),
including, without limitation, Laws and regulations relating to Environmental
Releases or threatened Environmental Releases of Hazardous Materials, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials.
Section 9.13 ERISA. "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as the same may be in effect from time to time.
Section 9.14 Existing Liens. "Existing Liens" shall mean those Liens
affecting any of the assets or properties of the Company.
Section 9.15 Existing Permits. "Existing Permits" shall mean those material
permits, licenses, approvals, qualifications, authorizations, and registrations
required by Law which the Company has or holds.
Section 9.16 Existing Plans. "Existing Plans" shall mean all material
Employee Benefit Plans of the Company in effect on the date hereof.
Section 9.17 Hazardous Materials. "Hazardous Materials" shall mean: (A) any
petroleum or petroleum products, radioactive materials, asbestos in any form
that is or could become friable, urea formaldehyde foam insulation, and
transformers or other equipment that contain dielectric fluid containing
polychlorinated biphenyls ("PCBs") above regulated levels and radon gas; and
(B) any chemicals, materials or substances which are now defined as or included
in the definition of "hazardous substances," "hazardous wastes,"
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"hazardous materials," "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants," or words of similar import,
under any Environmental Law; and (C) any other chemical, material, substance or
waste, exposure to which is now prohibited, limited or regulated by any
governmental authority.
Section 9.18 Indebtedness. "Indebtedness" shall mean all liabilities or
obligations of the Company, whether primary or secondary or absolute or
contingent: (a) for borrowed money; or (b) evidenced by notes, bonds,
debentures or similar instruments.
Section 9.19 Intangible Assets. "Intangible Assets" shall mean (a) any
invention, United States and foreign patents, pending patent applications,
trade names, trade dress, logos, corporate names, trademarks, service marks,
trademark registrations, service mark registrations, pending trademark
applications, pending service mark applications, registered copyrights, and
pending copyright applications, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith; (b) proprietary software; and (c) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier lists,
pricing and cost information, and business and marketing plans and proposals).
Section 9.20 Investment. "Investment" by the Company shall mean (a) any
transfer or delivery of cash, stock or other property or value by the Company
in exchange for equity, debt, preferred stock, partnership interests,
participations or any other security of another Person; (b) any loan or capital
contribution to or in any other Person; (c) any guaranty of any obligation to
pay money to, or perform an obligation of, any other Person; and (d) any
investments in any property or assets other than properties and assets acquired
and used in the ordinary course of the business of the Company.
Section 9.21 Law. "Law" shall mean any foreign, federal, state or local
governmental law, rule, regulation or requirement, including any rules,
regulations and orders promulgated thereunder and any orders, decrees, consents
or judgments of any governmental regulatory agencies and courts having the
force of law, other than any Environmental Laws.
Section 9.22 Lien. "Lien" shall mean, with respect to any asset (real,
personal or mixed): (a) any mortgage, pledge, lien, easement, lease, title
defect or imperfection or any other form of security interest, whether imposed
by Law or by Contract; and (b) the interest of a vendor or lessor under any
conditional sale agreement, financing lease or other title retention agreement
relating to such asset.
Section 9.23 Material Adverse Effect. "Material Adverse Effect" shall mean
with respect to the Company any adverse change or effect that is material to
the business, financial condition, results of operations or assets of the
Company and its Subsidiaries taken as a whole; other than any change or effect
(i) relating to the economy or securities markets in general or (ii) generally
relating to the industries in which the Company operates (including without
limitation, fluctuations in coffee prices generally) and not specifically
relating to the Company.
Section 9.24 Merger. "Merger" shall mean the merger of the Sub with and into
the Company pursuant to this Agreement.
Section 9.25 NYBCL. "NYBCL" shall mean the New York Business Corporation
Law.
Section 9.26 Parent Financial Statements. "Parent Financial Statements"
shall mean the audited Consolidated Balance Sheet, Consolidated Statement of
Income, each of the fiscal years ended on June 29, 1996, June 28, 1997 and June
27, 1998, each as included in the Parent SEC Reports and the unaudited
Consolidated Statement of Cash Flows and Consolidated Statement of
Stockholders' Equity of Parent and related notes for the nine months ended
March 31, 1999.
Section 9.27 Parent Material Adverse Effect. "Parent Material Adverse
Effect" shall mean with respect to the Parent any adverse change or effect that
is material to the business, financial condition, results of
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operations or assets of the Parent and its Subsidiaries taken as a whole; other
than any change or effect (i) relating to the economy or securities markets in
general or (ii) generally relating to the industries in which the Company
operates and not specifically relating to the Company.
Section 9.28 Person. "Person" shall mean a natural person, corporation,
limited liability company, association, joint stock company, trust,
partnership, governmental entity, agency or branch or department thereof, or
any other legal entity.
Section 9.29 Significant Subsidiary. "Significant Subsidiary" shall mean any
Subsidiary of the Company meeting the definition in Rule 1-02 of Regulation S-X
of the SEC.
Section 9.30 Subsidiary. "Subsidiary" shall mean any corporation, at least a
majority of the outstanding capital stock of which (or any class or classes,
however designated, having ordinary voting power for the election of at least a
majority of the board of directors of such corporation) shall at the time be
owned by the relevant Person directly or through one or more corporations which
are themselves Subsidiaries.
Section 9.31 Taxes. "Taxes" shall mean all taxes, charges, fees, levies or
other assessments, including, without limitation, all net income, gross income,
gross receipts, sales, use, service, service use, ad valorem, transfer,
franchise, profits, license, lease, withholding, social security, payroll,
employment, excise, estimated, severance, stamp, recording, occupation, real
and personal property, gift, value added, windfall profits or other taxes,
customs duties, fees, assessments or charges of any kind whatsoever, whether
computed on a separate, consolidated, unitary, combined or other basis,
together with any interest, fines, penalties, additions to tax or other
additional amounts imposed thereon or with respect thereto imposed by any
taxing authority (domestic or foreign).
Section 9.32 Tax Return. "Tax Return" shall mean any return, report or other
document required to be filed or in fact filed with any taxing authority with
respect to Taxes.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the date first above written.
Sara Lee Corporation
/s/ Ann E. Ziegler
By:________________________________
Name: Ann E. Ziegler
Title:
Vice President--Corporate
Development
CFN Acquisition Corporation
/s/ R. Henry Kleeman
By:________________________________
Name: R. Henry Kleeman
Title:Vice President and
Assistant Secretary
Chock Full O'Nuts Corporation
/s/ Howard M. Leitner
By:________________________________
Name: Howard M. Leitner
Title:Senior Vice President and
Chief Financial Officer
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Annex 2
CREDIT | FIRST CREDIT SUISSE FIRST BOSTON CORPORATION
SUISSE BOSTON Eleven Madison Avenue Telephone 212 325 2000
New York, NY 10010-3629
June 8, 1999
Board of Directors
Chock full o'Nuts Corporation
370 Lexington Avenue
New York, NY 10017
Members of the Board:
You have asked us to advise you with respect to the fairness to the holders of
the common stock of Chock full o'Nuts Corporation ("Chock"), other than Sara Lee
Corporation ("Sara Lee") and its affiliates, from a financial point of view of
the Exchange Ratio (as defined below) set forth in the Agreement and Plan of
Merger, dated as of June 8, 1999 (the "Merger Agreement"), by and among Sara Lee
Corporation ("Sara Lee"), CFN Acquisition Corporation, a wholly owned subsidiary
of Sara Lee ("Sub"), and Chock. The Merger Agreement provides for, among other
things, the merger of Sub with and into Chock (the "Merger") pursuant to which
each outstanding share of the common stock, par value $0.25 per share, of Chock
(the "Chock Common Stock") will be converted into the right to receive that
number of shares of the common stock, par value $0.01 per share, of Sara Lee
(the "Sara Lee Common Stock") equal to the ratio (the "Exchange Ratio")
determined by dividing $11.00 by the average of the per share last sales prices
of Sara Lee Common Stock as reported on the New York Stock Exchange, Inc. for
the 20 consecutive trading days commencing on the date that the proxy
statement/prospectus relating to the Merger is mailed to the shareholders of
Chock; provided that the Exchange Ratio will not exceed 0.5238 or be less than
0.4231, subject to adjustment and certain walk-away rights more fully described
in the Merger Agreement.
In arriving at our opinion, we have reviewed the Merger Agreement and certain
publicly available business and financial information relating to Chock and
Sara Lee. We have also reviewed certain other information relating to Chock,
including financial forecasts prepared by the management of Chock, provided to
or discussed with us by Chock, and have met with the management of Chock to
discuss the business and prospects of Chock. In addition, we have reviewed
publicly available forecasts for Sara Lee discussed with us by Sara Lee. We have
also considered certain financial and stock market data of Chock and Sara Lee,
and we have compared those data with similar data for other publicly held
companies in businesses similar to Chock and Sara Lee, and we have considered,
to the extent publicly available, the financial terms of certain other business
combinations and other transactions which have recently been effected. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant. In connection with our engagement, we were requested to approach third
parties to solicit indications of interest in a possible acquisition of Chock
and we held discussions with certain of these parties prior to the date hereof.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts for Chock, we have been advised, and have
assumed, that such forecasts have been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the management of Chock
as to the future financial performance of Chock. With respect to the publicly
available financial forecasts for Sara Lee, Sara Lee management has reviewed
such forecasts and has advised us that it believes that such forecasts represent
reasonable estimates and judgments of the future financial
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CREDIT | FIRST CREDIT SUISSE FIRST BOSTON CORPORATION
SUISSE | BOSTON
Board of Directors
Chock full o'Nuts
June 8, 1999
Page 2
performance of Sara Lee. With respect to the potential synergies and strategic
benefits (including the amount, timing and achievability thereof) anticipated to
result from the Merger, Chock management has advised us, and we have assumed,
that such estimates represent the best currently available estimates of the
management of Chock. We also have assumed, with your consent, that the Merger
will be treated as a tax-free reorganization for federal income tax purposes. In
addition, we have not been requested to make, and have not made, an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Chock or Sara Lee, nor have we been furnished with any such evaluations or
appraisals. Our opinion is necessarily based upon information available to us,
and financial, economic, market and other conditions as they exist and can be
evaluated, on the date hereof. We are not expressing any opinion as to the
actual value of the Sara Lee Common Stock when issued pursuant to the Merger or
the prices at which the Sara Lee Common Stock will trade subsequent to the
Merger.
We have acted as financial advisor to Chock in connection with the Merger and
will receive a fee for such services, a significant portion of which is
contingent upon the consummation of the Merger. We have in the past provided
investment banking services to Chock unrelated to the proposed Merger. In the
ordinary course of business, Credit Suisse First Boston and its affiliates may
actively trade the debt and equity securities of both Chock and Sara Lee for
their own accounts and for the accounts of customers and, accordingly, may at
any time hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of Chock in connection with its evaluation of the Merger, does not
constitute a recommendation to any shareholder as to how such shareholder should
vote with respect to any matter relating to the Merger, and is not to be quoted
or referred to, in whole or in part, in any registration statement, prospectus
or proxy statement, or in any other document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair to the holders of Chock Common Stock (other
than Sara Lee and its affiliates) from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
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