<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT
(PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934)
Filed by the registrant [X]
Filed by a party other than the registrant [_]
Check the appropriate box:
[_] Preliminary proxy statement [_]Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
Filing By:
RYKOFF-SEXTON, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Persons(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[_] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $0.10 per share, of Rykoff-Sexton, Inc.
(2) Aggregate number of securities to which transaction applies: 14,296,723
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $28,953,000*
(4) Proposed maximum aggregate value of transaction:*
(5) Filing fee: $5,791 (1/50th of 1% of the maximum aggregate value of the
transaction, and rounded up to the nearest whole dollar amounts).*
- --------
* Estimated solely for purpose of calculating the filing fee in accordance
with Exchange Act Rule 0-11. The filing fee was computed by multiplying
$28,953,000, the book value of US Foodservice Inc. as of September 30,
1995, by 1/50 of 1%. The proposed transaction relates to all of the
outstanding shares of Common Stock of US Foodservice Inc.
[X]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid: $11,824
(2) Form, schedule or registration statement no.: Schedule 14A Preliminary
Proxy Statement; Form S-4 Registration Statement No. 333-02175
(3) Filing party: Registrant
(4) Date filed: February 22, 1996; April 2, 1996.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Filed pursuant to Rule 424(b)(3) in connection with Registration Statement No.
333-02175
LOGO
RYKOFF-SEXTON, INC.
1050 Warrenville Road
Lisle, Illinois 60532-5201
Telephone: 708-964-1414
April 3, 1996
Dear Fellow Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Rykoff-Sexton, Inc. ("Rykoff-Sexton"), which will be held
on Wednesday, May 8, 1996 at 10:00 a.m., local time, at Rykoff-Sexton's
facility at One Sexton Drive, Glendale Heights, Illinois.
At this important meeting, you will be asked to approve the issuance of
Rykoff-Sexton Common Stock in connection with an Agreement and Plan of Merger
described herein (the "Merger Agreement") pursuant to which US Foodservice Inc.
("US Foodservice") will be merged with and into a wholly-owned subsidiary of
Rykoff-Sexton (the "Merger") and will become a wholly-owned subsidiary of
Rykoff-Sexton. As discussed in the accompanying Proxy Statement/Prospectus, in
the Merger each outstanding share of Class A Common Stock and Class B Common
Stock of US Foodservice (together, the "US Foodservice Common Stock") will be
converted into a number of shares of Rykoff-Sexton Common Stock derived by
dividing $25 by the Closing Date Market Price (as defined in the Merger
Agreement) of one share of Rykoff-Sexton Common Stock (the "Exchange Ratio"),
with a maximum Exchange Ratio of 1.457 and a minimum Exchange Ratio of 1.244.
The maximum and minimum Exchange Ratios correspond to a Closing Date Market
Price range of $17.16 to $20.10. Holders of US Foodservice Common Stock will
receive cash in lieu of any fractional shares.
US Foodservice is a highly-regarded distributor of food and related non-food
products. Through its 17 distribution centers, the company serves more than
40,000 customers in over 30 states, primarily in the Southeastern, Southwestern
and Mid-Atlantic regions.
We believe that the strategic combination of Rykoff-Sexton and US Foodservice
offers a significant opportunity for our stockholders, customers and employees,
as it will enhance Rykoff-Sexton's position as a leading broadline distributor
of high-quality food and related non-food products for the foodservice
industry. As a result of the Merger, we expect to be able to expand into new
geographic markets, lower our cost of goods through enhanced purchasing
leverage, capitalize on opportunities to increase sales of our self-
manufactured and private label, branded products, imported specialty food
products, equipment and supplies and contract and design services, and achieve
meaningful annual cost savings from inherent synergies. Following the Merger, I
will continue to hold the positions of Chairman and Chief Executive Officer.
Frank H. Bevevino, currently Chairman and Chief Executive Officer of US
Foodservice, and a 25-year veteran of the foodservice industry, will become
President and a Director of Rykoff-Sexton.
The accompanying Notice of Special Meeting of Stockholders and Proxy
Statement/Prospectus contain information about the Merger and the Special
Meeting. The Proxy Statement/Prospectus also provides a detailed description of
the business, operations and recent financial results of US Foodservice, a
privately-held company, which I am sure you, as stockholders of a public
company, will appreciate. We urge you to give this material your complete
attention.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS DETERMINED THE
MERGER TO BE IN THE BEST INTERESTS OF RYKOFF-SEXTON AND ITS STOCKHOLDERS.
ACCORDINGLY, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND DECLARED
ADVISABLE THE MERGER AGREEMENT AND THE MERGER BY ALL DIRECTORS PRESENT AND
RECOMMENDS THAT ALL RYKOFF-SEXTON STOCKHOLDERS VOTE TO APPROVE THE ISSUANCE OF
RYKOFF-SEXTON COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
<PAGE>
It is important that your shares be represented at the Special Meeting.
Therefore, whether or not you plan to attend the Special Meeting, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed postage prepaid envelope. If you attend the Special Meeting, you may
vote in person if you wish, even though you previously have returned your
proxy card.
We hope you will find it possible to attend the Special Meeting. We look
forward to the successful combination of Rykoff-Sexton and US Foodservice, and
to your continued support as a stockholder of Rykoff-Sexton.
Sincerely yours,
LOGO
Mark Van Stekelenburg
Chairman, President and Chief
Executive Officer
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD.
<PAGE>
RYKOFF-SEXTON, INC.
1050 WARRENVILLE ROAD
LISLE, ILLINOIS 60532-5201
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 8, 1996
TO THE STOCKHOLDERS OF RYKOFF-SEXTON, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Rykoff-
Sexton, Inc., a Delaware corporation ("Rykoff-Sexton"), will be held at One
Sexton Drive, Glendale Heights, Illinois, on Wednesday, May 8, 1996 at 10:00
a.m. local time (the "Special Meeting"), or at any adjournment or postponement
thereof, for the following purposes:
1. To approve the issuance of shares of Rykoff-Sexton Common Stock, par
value $.10 per share ("Rykoff-Sexton Common Shares"), in connection with an
Agreement and Plan of Merger, dated February 2, 1996 (the "Merger
Agreement"), among Rykoff-Sexton, US Foodservice Inc., a Delaware
corporation ("US Foodservice"), and USF Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Rykoff-Sexton ("Merger Sub"),
pursuant to which (i) US Foodservice will be merged into Merger Sub (the
"Merger"), (ii) each outstanding share of Class A Common Stock, par value
$.01 per share, and Class B Common Stock, par value $.01 per share, of US
Foodservice (together, the "US Foodservice Common Stock") (other than
shares, if any, held by Rykoff-Sexton, Merger Sub or any other subsidiary
of Rykoff-Sexton, shares held in treasury by US Foodservice and shares held
by holders who have properly perfected their appraisal rights under
Delaware law) will be converted into that number of Rykoff-Sexton Common
Shares (subject to rounding) equal to the quotient (the "Exchange Ratio")
derived by dividing $25 by the Closing Date Market Price (as defined in the
Merger Agreement) of one Rykoff-Sexton Common Share; provided, however,
that (x) if the foregoing would result in an Exchange Ratio greater than
1.457, the Exchange Ratio will be 1.457, and (y) if the foregoing would
result in an Exchange Ratio less than 1.244, the Exchange Ratio will be
1.244 and (iii) all outstanding options and warrants to purchase US
Foodservice Common Stock will be assumed by Rykoff-Sexton and converted
into options and warrants to purchase Rykoff-Sexton Common Shares. THE
MERGER IS MORE COMPLETELY DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES THERETO WHICH FORM A PART OF THIS
NOTICE, AND A COPY OF THE MERGER AGREEMENT IS ATTACHED AS APPENDIX A
THERETO.
2. To transact such other matters as may arise relating to the conduct of
the Special Meeting or any one or more adjournments or postponements
thereof.
Only holders of record of Rykoff-Sexton Common Shares at the close of
business on April 2, 1996, the record date for the Special Meeting, are
entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof.
The affirmative vote of the holders of Rykoff-Sexton Common Shares
representing a majority of the votes cast at the Special Meeting, assuming a
quorum of at least a majority of the Rykoff-Sexton Common Shares outstanding
are present at the Special Meeting, is necessary to approve the issuance of
Rykoff-Sexton Common Shares in connection with the Merger Agreement.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE AS PROMPTLY AS
POSSIBLE. IF YOU ATTEND THE MEETING, YOU MAY WITHDRAW THE PROXY AND VOTE IN
PERSON.
By Order of the Board of Directors
LOGO
Robert J. Harter, Jr.
Secretary
Lisle, Illinois
April 3, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 2
SUMMARY.................................................................... 4
The Companies............................................................ 4
The Special Meeting...................................................... 4
Matters to be Considered at Special Meeting.............................. 4
The Merger............................................................... 5
Rykoff-Sexton Summary Historical Consolidated Financial Data............. 13
US Foodservice Summary Historical Consolidated Financial Data............ 14
Unaudited Pro Forma Combined Summary Financial Data...................... 16
COMPARATIVE PER SHARE DATA................................................. 18
DIVIDENDS AND MARKET PRICES OF RYKOFF-SEXTON COMMON SHARES................. 19
CAPITALIZATION............................................................. 20
THE SPECIAL MEETING........................................................ 22
General.................................................................. 22
Matters to be Considered at the Special Meeting.......................... 22
Voting at the Meeting; Record Date....................................... 22
Vote Required............................................................ 23
THE MERGER................................................................. 23
General.................................................................. 23
Effective Time........................................................... 23
Conversion of Shares; Exchange of Certificates........................... 24
Background of the Merger................................................. 24
Effect of the Merger..................................................... 30
Recommendation of the Rykoff-Sexton Board of Directors; Reasons for the
Merger.................................................................. 30
Potential Cost Savings and Operating Synergies........................... 32
Opinion of Financial Advisor to Rykoff-Sexton............................ 33
Redemption or Purchase of Preferred Stock................................ 38
Rykoff-Sexton Financing and Receivables Securitization................... 39
Resale of Rykoff-Sexton Common Shares.................................... 40
Risk Factors............................................................. 41
Interests of Certain Persons in the Merger............................... 44
Listing of the Rykoff-Sexton Common Shares on the NYSE................... 47
Certain Federal Income Tax Consequences.................................. 47
Amendments to Rights Agreement........................................... 48
Regulatory Matters....................................................... 48
Accounting Treatment..................................................... 48
Appraisal Rights......................................................... 48
THE MERGER AGREEMENT....................................................... 50
General.................................................................. 51
Effective Time of the Merger............................................. 52
Representations and Warranties........................................... 53
Business of US Foodservice Pending the Merger............................ 54
Business of Rykoff-Sexton Pending the Merger............................. 55
No Solicitation.......................................................... 56
Certain Other Covenants.................................................. 57
Conditions; Waivers...................................................... 58
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Amendment; Termination................................................... 60
Expenses; Termination Fee................................................ 62
OTHER AGREEMENTS........................................................... 62
The ML Agreement......................................................... 62
The Standstill Agreement................................................. 63
The Registration Rights Agreement........................................ 67
The Tax Agreement........................................................ 68
OWNERSHIP OF RYKOFF-SEXTON COMMON SHARES................................... 71
MANAGEMENT OF RYKOFF-SEXTON AFTER THE MERGER............................... 73
Directors and Executive Officers After the Merger........................ 73
Executive Compensation................................................... 75
DESCRIPTION OF RYKOFF-SEXTON............................................... 81
General.................................................................. 81
Litigation............................................................... 81
DESCRIPTION OF US FOODSERVICE.............................................. 82
General.................................................................. 82
Business................................................................. 83
Products................................................................. 85
Customers................................................................ 85
Sales and Marketing...................................................... 86
Vendors.................................................................. 86
Distribution............................................................. 87
Properties............................................................... 87
Competition.............................................................. 88
Employees................................................................ 88
Legal Proceedings........................................................ 88
DESCRIPTION OF MERGER SUB.................................................. 89
US FOODSERVICE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 89
US Foodservice Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 92
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION......................... 97
DESCRIPTION OF RYKOFF-SEXTON CAPITAL STOCK................................. 107
General.................................................................. 107
Common Shares, Rights and Series A Preferred Stock....................... 107
Preferred Stock.......................................................... 110
THE WARRANTS............................................................... 111
DESCRIPTION OF US FOODSERVICE CAPITAL STOCK................................ 111
Common Stock............................................................. 111
Preferred Stock.......................................................... 112
Directors' Liability..................................................... 112
COMPARATIVE RIGHTS OF RYKOFF-SEXTON STOCKHOLDERS AND US FOODSERVICE
STOCKHOLDERS.............................................................. 113
Authorized Shares of Capital Stock; Dividend Rights...................... 113
Redemption and Repurchase of Capital Stock............................... 114
Liquidation Rights....................................................... 114
Voting Rights............................................................ 114
Supermajority Voting Requirements; Business Combinations................. 115
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Preemptive Rights......................................................... 116
Appraisal Rights.......................................................... 116
Special Meetings of Stockholders.......................................... 117
Stockholder Action Without a Meeting...................................... 117
Stockholder Proposal Procedures........................................... 117
Stockholder Rights Plan................................................... 117
Classified Board of Directors............................................. 117
Nominations of Directors.................................................. 117
Removal of Directors...................................................... 118
Vacancies in the Board of Directors....................................... 118
Indemnification........................................................... 118
Limitation of Personal Liability of Directors............................. 118
Amendment of Charter Documents............................................ 119
Amendment of By-Laws...................................................... 119
VALIDITY OF COMMON SHARES................................................... 119
EXPERTS..................................................................... 120
STOCKHOLDER PROPOSALS FOR 1996 ANNUAL MEETING............................... 120
OTHER BUSINESS.............................................................. 120
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF US FOODSERVICE................ F-1
</TABLE>
<TABLE>
<S> <C> <C>
APPENDICES
Appendix A Agreement and Plan of Merger
Appendix B Opinion of Goldman, Sachs & Co.
Appendix C Excerpt from the Delaware General Corporation Law Relating to Appraisal Rights
</TABLE>
iii
<PAGE>
RYKOFF-SEXTON, INC.
PROXY STATEMENT/PROSPECTUS
FOR SPECIAL MEETING OF STOCKHOLDERS OF RYKOFF-SEXTON, INC.
TO BE HELD ON MAY 8, 1996
This Proxy Statement/Prospectus is furnished in connection with the
solicitation on behalf of the Board of Directors of Rykoff-Sexton, Inc., a
Delaware corporation ("Rykoff-Sexton"), of proxies for use at a Special
Meeting of Stockholders (including any adjournments or postponements thereof,
the "Special Meeting") to be held at One Sexton Drive, Glendale Heights,
Illinois, on Wednesday, May 8, 1996, at 10:00 a.m., local time, for the
purposes set forth in the accompanying Notice.
This Proxy Statement/Prospectus also constitutes the prospectus of Rykoff-
Sexton relating to 14,294,457 shares of its Common Stock, par value $.10 per
share (the "Rykoff-Sexton Common Shares"), and Common Stock Purchase Warrants
evidencing the right to purchase 331,761 Rykoff-Sexton Common Shares to be
issued by Rykoff-Sexton in accordance with the terms of the Agreement and Plan
of Merger, dated February 2, 1996 (the "Merger Agreement"), described in this
Proxy Statement/Prospectus and attached hereto as Appendix A, by and among
Rykoff-Sexton, USF Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of the Rykoff-Sexton ("Merger Sub"), and US
Foodservice Inc., a Delaware corporation ("US Foodservice"). Pursuant to the
Merger Agreement, US Foodservice will merge with and into Merger Sub (the
"Merger"), and Merger Sub will be renamed US Foodservice Inc.
SEE "THE MERGER--RISK FACTORS" ON PAGE 41 FOR A DISCUSSION OF CERTAIN RISKS.
This Proxy Statement/Prospectus and the accompanying proxy card are first
being mailed on or about April 5, 1996, to all stockholders of Rykoff-Sexton.
Only holders of record of Rykoff-Sexton Common Shares at the close of business
on April 2, 1996 (the "Record Date") will be entitled to vote at the Special
Meeting.
This Proxy Statement/Prospectus does not cover any resales of Rykoff-Sexton
Common Shares to be received by US Foodservice stockholders upon consummation
of the Merger, and no person is authorized to make use of this Proxy
Statement/Prospectus in connection with any such resale. This Proxy
Statement/Prospectus does not constitute the solicitation of any proxy or
written consent of US Foodservice stockholders.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS- SION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
The date of this Proxy Statement/Prospectus is April 3, 1996.
<PAGE>
AVAILABLE INFORMATION
Rykoff-Sexton is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Copies of such reports, proxy
statements and other information filed by Rykoff-Sexton can be inspected and
copied, at prescribed rates, at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices located at Citicorp Center, 500 West Madison, 14th Floor,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York,
New York 10048. In addition, material filed by Rykoff-Sexton can be inspected
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005, on which the Rykoff-Sexton Common Shares are listed. US
Foodservice is not subject to the informational requirements of the Exchange
Act.
Rykoff-Sexton has filed with the SEC a registration statement on Form S-4
(herein, together with any amendments, supplements and exhibits, referred to
as the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Rykoff-Sexton Common Shares to be
issued in connection with the transactions contemplated by the Merger
Agreement. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the SEC. For
further information, reference is hereby made to the Registration Statement.
Such additional information may be obtained from the SEC's principal office in
Washington, D.C. Statements contained in this Proxy Statement/Prospectus as to
the contents of any contract or other document referred to herein are
necessarily summaries of such documents, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED
BY REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER OF RYKOFF-SEXTON COMMON SHARES, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO RYKOFF-
SEXTON, INC., 1050 WARRENVILLE ROAD, LISLE, ILLINOIS 60532-5201, (708) 964-
1414, ATTENTION: RICHARD J. MARTIN, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BEFORE APRIL 19, 1996.
The following documents previously filed by Rykoff-Sexton with the SEC
pursuant to the Exchange Act are incorporated herein by this reference:
1. Rykoff-Sexton's Annual Report on Form 10-K for the year ended April 29,
1995, including the information incorporated by reference from Rykoff-
Sexton's 1995 Annual Report to Stockholders (the "Annual Report on Form
10-K");
2. Rykoff-Sexton's Quarterly Reports on Form 10-Q for the quarterly periods
ended July 29, 1995, October 28, 1995 and January 27, 1996 ("Quarterly
Reports on Form 10-Q");
3. Rykoff-Sexton's Current Reports on Form 8-K dated February 21, 1995, as
amended by Form 8-K/A dated February 21, 1995 and Form 8-K/A-2 dated
February 21, 1995; November 1, 1995, as amended by Form 8-K/A-1 dated
November 1, 1995; and February 5, 1996; and
4. That portion of Rykoff-Sexton's Proxy Statement for the Annual Meeting
held September 15, 1995 incorporated by reference from the Annual Report
on Form 10-K.
All documents filed by Rykoff-Sexton pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date hereof and prior to the
date of the Special Meeting shall be deemed to be incorporated by reference
herein and to be a part hereof from the date any such document is filed.
2
<PAGE>
Any statements contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is incorporated by reference
herein) modifies or supersedes such statement. Statements herein shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained in any subsequently filed document that is incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded. All information appearing in this Proxy
Statement/Prospectus is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY RYKOFF-SEXTON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF RYKOFF-SEXTON OR US FOODSERVICE SINCE THE DATE HEREOF OR
THAT THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THEREOF. ALL INFORMATION REGARDING RYKOFF-SEXTON AND MERGER SUB
IN THIS PROXY STATEMENT/PROSPECTUS HAS BEEN SUPPLIED BY RYKOFF-SEXTON, AND ALL
INFORMATION REGARDING US FOODSERVICE HAS BEEN SUPPLIED BY US FOODSERVICE.
3
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus and the Appendices hereto. This summary is
not intended to be complete and is qualified in its entirety by reference to
more detailed information contained elsewhere in this Proxy
Statement/Prospectus, the Appendices and the documents incorporated herein by
reference. Unless the context otherwise requires, the information in this Proxy
Statement/Prospectus has been adjusted to reflect the .396-for-1 reverse stock
split of the outstanding shares of Class A Common Stock, par value $.01 per
share ("Class A Common Stock"), and Class B Common Stock, par value $.01 per
share ("Class B Common Stock" and together with the Class A Common Stock, the
"US Foodservice Common Stock"), of US Foodservice effective as of January 31,
1996. References to US Foodservice after the Effective Time (as defined below)
refer to Merger Sub, which will be renamed US Foodservice Inc. Stockholders of
Rykoff-Sexton and US Foodservice are urged to read this Proxy
Statement/Prospectus and the Appendices hereto in their entirety.
THE COMPANIES
Rykoff-Sexton is a leading broadline distributor of high-quality food and
related non-food products for the foodservice industry throughout the United
States. Rykoff-Sexton distributes its product line of approximately 41,000
items to restaurants, industrial cafeterias, healthcare facilities, hotels,
schools and colleges, supermarket service delicatessen departments and other
establishments where food is prepared or consumed away from home. It also
offers design and engineering services for all types of foodservice operations
through its contract/design group. Established in 1911, Rykoff-Sexton has grown
from a regional distributor to its present position as the fourth largest
broadline foodservice distributor in the nation. The principal executive
offices of Rykoff-Sexton are located at 1050 Warrenville Road, Lisle, Illinois
60532-5201, and its principal telephone number is (708) 964-1414. See
"DESCRIPTION OF RYKOFF-SEXTON."
US Foodservice is a leading provider of high-quality food and related non-
food products throughout its marketing regions and is the fifth largest
broadline foodservice distributor in the United States. US Foodservice serves
more than 40,000 customers in over 30 states, primarily in the Southeastern,
Southwestern and Mid-Atlantic regions of the United States. The principal
executive offices of US Foodservice are located at 1065 Highway 315, Cross
Creek Pointe, Wilkes-Barre, Pennsylvania 18702, and its principal telephone
number is (717) 831-7500. US Foodservice is currently owned by institutional
investors (including investment partnerships and an investment corporation (the
"ML Investors") managed by affiliates of Merrill Lynch & Co., Inc. ("ML &
Co.")), management and employees of US Foodservice, and other stockholders. The
ML Investors currently own approximately 78.2% of the outstanding US
Foodservice Common Stock. See "DESCRIPTION OF US FOODSERVICE."
Merger Sub, a wholly-owned subsidiary of Rykoff-Sexton, was formed by Rykoff-
Sexton solely for the purpose of effecting the Merger. The mailing address of
Merger Sub's principal executive offices is c/o Rykoff-Sexton, Inc., 1050
Warrenville Road, Lisle, Illinois 60532-5201, and its telephone number is (708)
964-1414.
THE SPECIAL MEETING
The Special Meeting of Stockholders of Rykoff-Sexton will be held on May 8,
1996, at 10 a.m., local time, at One Sexton Drive, Glendale Heights, Illinois.
MATTERS TO BE CONSIDERED AT SPECIAL MEETING
The purpose of the Special Meeting will be to (i) consider and vote on the
proposal to approve the issuance of Rykoff-Sexton Common Shares in connection
with the Merger Agreement and (ii) transact such other matters as may arise
relating to the conduct of the Special Meeting. See "THE SPECIAL MEETING--
Matters To Be Considered at the Special Meeting."
4
<PAGE>
Record Date; Stockholders Entitled To Vote
Only holders of record of Rykoff-Sexton Common Shares at the close of
business on the Record Date, April 2, 1996, will be entitled to notice of, and
to vote at, the Special Meeting. On March 31, 1996, there were 14,798,820
Rykoff-Sexton Common Shares outstanding, each of which will be entitled to one
vote on each matter properly submitted for vote to Rykoff-Sexton stockholders
at the Special Meeting. See "THE SPECIAL MEETING--Voting at the Meeting; Record
Date."
Vote Required
The consummation of the Merger is conditioned on, among other things, the
approval of the issuance of Rykoff-Sexton Common Shares in connection therewith
by stockholders of Rykoff-Sexton at the Special Meeting. Rykoff-Sexton
stockholders must approve the issuance of the Rykoff-Sexton Common Shares in
connection with the Merger in order to comply with requirements of the New York
Stock Exchange, Inc. (the "NYSE"), on which Rykoff-Sexton Common Shares are
listed. Stockholder approval is required if a listed company issues common
stock in an amount equal to or greater than 20% of the number of shares of
common stock outstanding prior to such issuance. Assuming the maximum number of
Rykoff-Sexton Common Shares are issued in the Merger, such shares would
constitute approximately 87% of the Rykoff-Sexton Common Shares outstanding
prior to such issuance.
The issuance of Rykoff-Sexton Common Shares will be approved upon receipt of
the affirmative vote of the holders of at least a majority of the votes cast at
the Special Meeting, assuming a quorum consisting of at least a majority of all
outstanding Rykoff-Sexton Common Shares are present at the Special Meeting. See
"THE SPECIAL MEETING--Vote Required." On March 31, 1996, directors and
executive officers of Rykoff-Sexton, together with their affiliates as a group,
owned 6.1% of the issued and outstanding Rykoff-Sexton Common Shares. See
"OWNERSHIP OF RYKOFF-SEXTON COMMON SHARES."
THE MERGER
Terms of the Merger
Pursuant to the terms of the Merger Agreement, US Foodservice will be merged
with and into Merger Sub, and Merger Sub will be renamed US Foodservice Inc.
The Merger Agreement provides that, upon the terms and subject to the
conditions thereof, at the Effective Time (as defined below) of the Merger,
each share of US Foodservice Common Stock issued and outstanding immediately
prior to the Merger (other than shares of US Foodservice Common Stock, if any,
held by Rykoff-Sexton, Merger Sub or any other subsidiary of Rykoff-Sexton,
shares held in treasury by US Foodservice and shares held by holders who have
properly perfected their appraisal rights under Delaware law) will be converted
into that number of Rykoff-Sexton Common Shares, rounded to the nearest
thousandth of a share, or if there is not a nearest thousandth of a share, to
the next higher thousandth of a share, equal to the quotient (the "Exchange
Ratio") derived by dividing $25 by the Closing Date Market Price (as defined
below) of one Rykoff-Sexton Common Share; provided, however, that (i) if the
foregoing would result in an Exchange Ratio greater than 1.457 (which would
occur if the Closing Date Market Price is less than $17.16), the Exchange Ratio
will be deemed to be 1.457, and (ii) if the foregoing would result in an
Exchange Ratio less than 1.244 (which would occur if the Closing Date Market
Price is greater than $20.10), the Exchange Ratio will be deemed to be 1.244.
The Exchange Ratio will be appropriately adjusted to reflect any split,
reclassification, combination, dividend (other than normal cash dividends) or
other distribution or change in the Rykoff-Sexton Common Shares as provided in
the Merger Agreement. "Effective Time" means the date and time of the filing of
a certificate of merger to be filed pursuant to the Delaware General
Corporation Law (the "DGCL") relating to the Merger with the Secretary of State
of the State of Delaware (or such later date and time as may be specified in
such certificate as permitted by such Secretary of State). "Closing Date Market
Price" means the arithmetic average of the last reported sales price of one
Rykoff-Sexton Common Share
5
<PAGE>
on the NYSE, as reported in the NYSE Composite Tape, during the period of the
20 most recent trading days ending on the third business day prior to the date
of the closing of the Merger (the "Closing Date"). See "THE MERGER--Conversion
of Shares; Exchange of Certificates."
A copy of the Merger Agreement is attached hereto as Appendix A and is
incorporated herein by reference. See "THE MERGER AGREEMENT."
The consummation of the Merger is conditioned on, among other things, the
approval by Rykoff-Sexton's stockholders at the Special Meeting of the issuance
of the Rykoff-Sexton Common Shares in connection with the Merger Agreement. The
Merger Agreement and the Merger must also be approved by the affirmative vote
of the holders of 66 2/3% of the outstanding US Foodservice Class A Common
Stock and by the affirmative vote of a majority of the votes represented by
holders of the outstanding US Foodservice Common Stock and $15 Cumulative
Redeemable Exchangeable Preferred Stock (the "Exchangeable Preferred Stock"),
voting as a class. However, the ML Investors collectively own approximately
78.2% of the outstanding US Foodservice Common Stock and 86.2% of the
outstanding US Foodservice Class A Common Stock, and certain affiliates of ML &
Co. own 100% of the outstanding Exchangeable Preferred Stock. The ML Investors
have agreed to vote their shares of the US Foodservice Common Stock in favor of
the Merger Agreement and the Merger. See "OTHER AGREEMENTS--The ML Agreement."
The vote of such shares of US Foodservice Common Stock is sufficient to ensure
that all requisite US Foodservice stockholder approvals will be obtained.
Stock Options and Warrants
As of March 31, 1996, US Foodservice had outstanding stock options to
purchase up to approximately 742,721 shares of US Foodservice Class A Common
Stock under certain stock option plans. Under the Merger Agreement, Rykoff-
Sexton has agreed to assume such options (the "Assumed Options"), on the terms
set forth therein, whether or not such options are vested or exercisable. Upon
the consummation of the Merger, the Assumed Options will constitute options to
acquire, on the same terms and conditions as were applicable to such US
Foodservice options (subject to certain adjustments), an adjusted number of
Rykoff-Sexton Common Shares based on the Exchange Ratio (presently estimated to
be 1,082,144 Rykoff-Sexton Common Shares in the aggregate assuming the maximum
Exchange Ratio). For those Assumed Options that by their terms vest according
to performance criteria ("performance options") and which are not vested in
accordance with their terms at the Effective Time (as defined below), the
performance criteria will be deemed satisfied on the first anniversary of the
Effective Time. Under the Merger Agreement, Rykoff-Sexton has agreed to file a
registration statement on Form S-8 with respect to the Rykoff-Sexton Common
Shares subject to the Assumed Options. See "THE MERGER AGREEMENT--General--
Conversion of US Foodservice Common Stock in the Merger."
US Foodservice has outstanding warrants to purchase 227,700 shares of US
Foodservice Class A Common Stock (the "Warrants"). Under the Merger Agreement,
Rykoff-Sexton has agreed to assume the Warrants (the "Assumed Warrants"). Upon
the consummation of the Merger, the Assumed Warrants will constitute warrants
to acquire, on the same terms and conditions as were applicable under the
Warrants, an adjusted number of Rykoff-Sexton Common Shares based on the
Exchange Ratio (presently estimated to be 331,761 Rykoff-Sexton Common Shares
in the aggregate, assuming the maximum Exchange Ratio). See "THE MERGER
AGREEMENT--General--Conversion of US Foodservice Common Stock in the Merger"
and "THE WARRANTS."
Effect of the Merger
In connection with the Merger, the holders of US Foodservice Common Stock
will receive an aggregate of up to 12,880,552 Rykoff-Sexton Common Shares
(assuming the maximum Exchange Ratio), representing approximately 46.5% of the
voting power of Rykoff-Sexton after the Merger. In addition, up to 1,413,905
Rykoff-Sexton Common Shares will be reserved for issuance upon the exercise of
the Assumed Options and
6
<PAGE>
Assumed Warrants. Assuming the maximum number of Rykoff-Sexton Common Shares
are issued in the Merger, the ML Investors will receive an aggregate of up to
10,076,010 Rykoff-Sexton Common Shares representing approximately 36.4% of the
voting power of Rykoff-Sexton after the Merger prior to the exercise of any
Assumed Options or Assumed Warrants or approximately 34.6% after the exercise
of all Assumed Options and Assumed Warrants.
As described under "THE MERGER--Resale of Rykoff-Sexton Common Shares," the
resale of the Rykoff-Sexton Common Shares received in the Merger by the ML
Investors and any other "affiliates" (as such term is used in Rules 144 and 145
under the Securities Act) of US Foodservice prior to the Merger will be
restricted. Rykoff-Sexton Common Shares received in the Merger by persons other
than "affiliates" will be freely transferable and will not be restricted except
as contemplated by arrangements entered into by certain US Foodservice
employees in connection with the forgiveness of certain management loans, and
except as provided in the Tax Agreement that the ML Investors and certain other
stockholders of US Foodservice will enter into with Rykoff-Sexton at the
Effective Time. See "THE MERGER--Effect of the Merger" and "--Interests of
Certain Persons in the Merger--US Foodservice Management Loans," and "OTHER
AGREEMENTS--The Tax Agreement." The ML Investors will have the right to require
Rykoff-Sexton to register all or a portion of their Rykoff-Sexton Common Shares
for sale under the Securities Act, which would permit the sale of such Rykoff-
Sexton Common Shares to the general public in the circumstances and subject to
the conditions and restrictions set forth in the Registration Rights Agreement
(as defined below). See "OTHER AGREEMENTS--The Registration Rights Agreement."
No predictions can be made as to the effect, if any, that market sales of such
shares, or the availability of such shares for future sales, will have on the
market price of Rykoff-Sexton Common Shares prevailing from time to time. Sales
of substantial amounts of Rykoff-Sexton Common Shares, or the perception that
such sales could occur, could adversely affect prevailing market prices for the
Rykoff-Sexton Common Shares and could impair Rykoff-Sexton's future ability to
raise capital through an offering of its equity securities. See "THE MERGER--
Risk Factors--Sale of Shares By ML Investors."
To provide assurances in connection with the qualification of the Merger as a
tax-free reorganization for federal income tax purposes, certain stockholders
of US Foodservice, including all of the ML Investors, will enter into the Tax
Agreement (as defined below) with Rykoff-Sexton at the Effective Time, pursuant
to which each such stockholder will be prohibited from selling, exchanging,
distributing or otherwise disposing of in any manner, during the two-year
period following the Effective Time, more than a certain percentage of the
Rykoff-Sexton Common Shares received in the Merger by such stockholder, with
such percentage to be determined by a formula at the Effective Time. For
purposes, however, of applying the transfer restrictions in the Tax Agreement
to the ML Investors, all of the Rykoff-Sexton Common Shares received in the
Merger by the ML Investors will be aggregated, and the ML Investors will be
treated as a single stockholder. See "OTHER AGREEMENTS--The Tax Agreement."
Pursuant to the Standstill Agreement (as defined below), the ML Investors and
Merrill Lynch Capital Partners, Inc., the general partner of certain of the ML
Investors ("MLCP" and, together with the ML Investors, the "ML Entities"), will
agree, among other things, to vote their Rykoff-Sexton Common Shares in favor
of Rykoff-Sexton's nominees for the Board of Directors. The ML Entities will
also be entitled to designate four nominees to the Rykoff-Sexton Board of
Directors, which is expected to have twelve members at the Effective Time, with
such number of nominees and Board members decreasing if the percentage of
outstanding Rykoff-Sexton Common Shares held by ML Entities falls below certain
levels. As a result of their ownership interest in Rykoff-Sexton, the ML
Entities may also influence the outcome of other matters submitted to Rykoff-
Sexton stockholders. See "THE MERGER--Effect of the Merger" and "--Risk
Factors" and "OTHER AGREEMENTS--The Standstill Agreement."
Recommendation of the Rykoff-Sexton Board of Directors; Reasons for the Merger
On February 2, 1996, the Rykoff-Sexton Board of Directors, by the unanimous
vote of all directors present at the meeting, approved the Merger Agreement and
the Merger and the issuance of the Rykoff-Sexton Common
7
<PAGE>
Shares in the Merger, determined that the Merger is in the best interests of
Rykoff-Sexton and its stockholders and recommended that the stockholders of
Rykoff-Sexton vote FOR the approval of the issuance of the Rykoff-Sexton Common
Shares in connection with the Merger. See "THE MERGER--Background of the
Merger." Prior to making this recommendation, the Rykoff-Sexton Board of
Directors carefully analyzed, with the assistance of its financial advisors,
the value of US Foodservice's business and the consideration proposed to be
paid by Rykoff-Sexton. See "THE MERGER--Recommendation of the Rykoff-Sexton
Board of Directors; Reasons for the Merger" and "--Opinion of Financial Advisor
to Rykoff-Sexton."
Opinion of Financial Advisor to Rykoff-Sexton
At the request of Rykoff-Sexton, on February 2, 1996, Goldman, Sachs & Co.
("Goldman Sachs") delivered an oral opinion to the Rykoff-Sexton Board of
Directors, which was subsequently confirmed in a written opinion dated February
2, 1996, to the effect that as of such date, the aggregate number of Rykoff-
Sexton Common Shares to be paid by Rykoff-Sexton for the outstanding US
Foodservice Common Stock pursuant to the Merger Agreement is fair to Rykoff-
Sexton. Goldman Sachs has confirmed such opinion by delivery of a written
opinion dated as of the date of this Proxy Statement/Prospectus. The full text
of the written opinion of Goldman Sachs dated as of the date of this Proxy
Statement/Prospectus is set forth as Appendix B to this Proxy
Statement/Prospectus and describes the assumptions made, matters considered and
limits on the review undertaken. Rykoff-Sexton stockholders are urged to read
the opinion in its entirety. See "THE MERGER--Opinion of Financial Advisor to
Rykoff-Sexton."
Rykoff-Sexton also retained BA Partners to act as a financial advisor in
connection with the Merger. BA Partners was not requested to, and did not,
provide a fairness opinion to the Rykoff-Sexton Board of Directors.
Redemption or Purchase of Preferred Stock
It is a condition precedent to the Merger that (i) all shares of the
Exchangeable Preferred Stock shall have been purchased by Rykoff-Sexton or
Merger Sub pursuant to the terms of a Redemption Agreement dated as of
September 8, 1995, as amended (the "ML Redemption Agreement"), among US
Foodservice, ML IBK Positions, Inc. ("ML IBK") and Merchant Banking L.P. No. IV
("MBIV") or otherwise in accordance with the terms of the Merger Agreement, and
(ii) all shares of US Foodservice's 10.0% Preferred Stock, par value $.01 per
share (the "10% Preferred Stock" and, together with the Exchangeable Preferred
Stock, the "Preferred Stock"), shall have been redeemed pursuant to the terms
of a Redemption Agreement dated as of September 26, 1995, as amended (the "Sara
Lee Redemption Agreement" and, together with the ML Redemption Agreement, the
"Stock Redemption Agreements"), between US Foodservice and Sara Lee Corporation
("Sara Lee") or otherwise in accordance with the terms of the Merger Agreement.
US Foodservice redeemed the 10% Preferred Stock pursuant to the Sara Lee
Redemption Agreement on March 1, 1996 for an aggregate redemption price of
approximately $21.3 million. See "THE MERGER--Redemption or Purchase of
Preferred Stock."
Rykoff-Sexton Financing and Receivables Securitization
Pursuant to the Commitment Letter dated February 2, 1996 (the "Commitment
Letter") from Bank of America National Trust and Savings Association ("BofA"),
BA Securities, Inc. ("BA Securities"), The Chase Manhattan Bank, N.A. ("Chase")
and Chase Securities, Inc. ("Chase Securities"), BofA and Chase have each
committed severally to provide Rykoff-Sexton funding of (i) up to $242.5
million toward a new bank credit facility (the "New Credit Facility") and (ii)
up to $55 million toward an accounts receivable securitization (the
"Receivables Securitization"), subject to the terms and conditions of the
Commitment Letter.
There can be no assurance as to whether, or the definitive terms on which,
the New Credit Facility or the Receivables Securitization actually will be
available to Rykoff-Sexton. BofA will act as administrative agent, BA
Securities will act as syndication agent and Chase will serve as an agent under
the New Credit Facility. In
8
<PAGE>
addition, BA Securities and Chase Securities will act as co-arrangers in the
syndication of the New Credit Facility to other financial institutions
acceptable to BofA, Chase and Rykoff-Sexton. The Commitment Letter contemplates
that the New Credit Facility will be comprised of three term loan facilities in
an aggregate principal amount of $335 million and a revolving credit facility
(the "Revolver") for up to $150 million that includes a letter of credit
sublimit of $45 million and a swingline facility of up to $15 million. The
Receivables Securitization will consist of a $110 million program pursuant to
which Rykoff-Sexton will sell certain of its trade accounts receivables on an
ongoing basis for cash or cash equivalents. US Foodservice intends to
restructure or refinance the present US Foodservice receivables facility. In
connection with such restructuring or refinancing, BofA may acquire part of the
existing facility, or BofA and Chase will consider increasing the size of the
Receivables Securitization to $200 million, but Chase and BofA have made no
commitment to do so in the Commitment Letter.
The net proceeds from the New Credit Facility and the Receivables
Securitization will equal approximately $595 million. These proceeds will be
used to make the payments to redeem the Exchangeable Preferred Stock, to
refinance indebtedness incurred by US Foodservice in connection with the
redemption in March 1996 of the 10% Preferred Stock, refinance US Foodservice's
currently outstanding debt, refinance Rykoff-Sexton's currently outstanding
debt under the Credit Agreement dated as of October 23, 1993 between Rykoff-
Sexton and BofA, as amended, provide financing for on-going working capital
needs and pay related fees and expenses, including certain prepayment premiums
payable in connection with the restructuring of US Foodservice's $90 million
receivables securitization program. See "THE MERGER--Rykoff-Sexton Financing
and Receivables Securitization" and "UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION."
The Commitment Letter provides that the obligations of Rykoff-Sexton, Merger
Sub and US Foodservice to effect the Merger are subject to the condition that
all conditions precedent to the closing of the financing described in the
Commitment Letter shall have been satisfied and that the transactions
contemplated by the Commitment Letter shall have been consummated.
The New Credit Facility and the Receivables Securitization will result in a
substantial increase in the level of long-term indebtedness of Rykoff-Sexton
after the Merger. This increase will have several important effects on the
operations of Rykoff-Sexton following the Merger, including the following: (i)
Rykoff-Sexton will have significant cash requirements to service debt, reducing
funds available to operations and future business opportunities and increasing
Rykoff-Sexton's vulnerability to adverse general economic and industry
conditions; (ii) the financial covenants and other restrictions contained in
the New Credit Facility and other agreements relating to the indebtedness of
Rykoff-Sexton will require it to meet certain financial tests and will restrict
its ability to borrow additional funds, to dispose of assets and to pay cash
dividends; (iii) the failure to comply with such financial covenants and other
restrictions may result in an event of default under the New Credit Facility
which, if not cured or waived, could have a material adverse effect on Rykoff-
Sexton and on the market value of Rykoff-Sexton Common Shares; (iv) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes may be limited, which could increase Rykoff-Sexton's
vulnerability to competitive pressures and adversely affect Rykoff-Sexton's
ability to expand; and (v) certain of Rykoff-Sexton's borrowings will be at
variable rates of interest, which could result in higher interest expense if
interest rates increase generally. See "THE MERGER--Risk Factors--Leverage and
Debt Service."
Certain Other Agreements
The ML Agreement. Under an agreement (the "ML Agreement") among Rykoff-Sexton
and the ML Entities entered into simultaneously with the Merger Agreement, the
ML Entities agreed that prior to the earlier of the Effective Time of the
Merger and the termination of the Merger Agreement they will not (i) dispose of
any US Foodservice Common Stock owned by them, (ii) acquire any additional US
Foodservice Common Stock without the prior written consent of Rykoff-Sexton,
(iii) enter into any voting agreement (other than the Standstill Agreement)
with respect to US Foodservice Common Stock owned by them or (iv) engage in
certain activities
9
<PAGE>
relating to business combinations involving US Foodservice other than the
Merger. In addition, the ML Entities agree that prior to the Effective Time
they will vote their shares of US Foodservice Common Stock in favor of the
Merger. See "OTHER AGREEMENTS--The ML Agreement."
The Standstill Agreement. The ML Agreement provides that, at the Effective
Time, Rykoff-Sexton and the ML Entities will enter into an agreement (the
"Standstill Agreement") providing, among other things, (i) for the designation
by the ML Entities of four nominees to the Rykoff-Sexton Board of Directors,
which is expected to have twelve members, with such number of nominees and
Board members decreasing if the percentage of outstanding Rykoff-Sexton Common
Shares held by the ML Entities falls below certain levels, (ii) that, for a
period of ten years, the ML Entities will not acquire beneficial ownership of
additional voting securities of Rykoff-Sexton representing voting power in
excess of 36.4% of the outstanding voting securities of Rykoff-Sexton and will
not take certain other actions relating to the control of Rykoff-Sexton, (iii)
that the ML Entities will vote in favor of Rykoff-Sexton's nominees for the
Rykoff-Sexton Board of Directors, (iv) for certain restrictions on transfer of
Rykoff-Sexton voting securities held by the ML Entities and (v) for a right of
first refusal, under specified circumstances, for Rykoff-Sexton in respect of
certain transfers by the ML Entities of Rykoff-Sexton Common Shares.
Notwithstanding the foregoing, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S") and its affiliates (other than the ML Entities) may
effect or recommend transactions in the ordinary course of its or their
business provided that they do not acquire beneficial ownership of more than 2%
of the outstanding voting securities of Rykoff-Sexton (with such percentage
increasing up to 5% if the percentage of outstanding Rykoff-Sexton voting
securities held by the ML Entities falls below certain levels). See "OTHER
AGREEMENTS--The Standstill Agreement."
The Registration Rights Agreement. The ML Agreement provides that at the
Effective Time, Rykoff-Sexton and the ML Investors will enter into an agreement
(the "Registration Rights Agreement") which will provide the ML Investors with
certain "demand" and "piggyback" registration rights and certain other parties
with "piggyback" registration rights, subject to certain conditions, requiring
Rykoff-Sexton to register for sale under the Securities Act all or a portion of
Rykoff-Sexton Common Shares owned by them. See "OTHER AGREEMENTS--The
Registration Rights Agreement."
The Tax Agreement. The ML Agreement provides that at the Effective Time,
Rykoff-Sexton and certain stockholders of US Foodservice, including all of the
ML Investors, will enter into an agreement (the "Tax Agreement") to provide
assurances in connection with the qualification of the Merger as a tax-free
reorganization for federal income tax purposes. Each stockholder of US
Foodservice that is a party to the Tax Agreement will agree, for the two-year
period following the Effective Time, not to sell, exchange, distribute or
otherwise dispose of in any manner more than a certain percentage of the
Rykoff-Sexton Common Shares received in the Merger by such stockholder, with
such percentage to be determined by a formula at the Effective Time. For
purposes, however, of applying the transfer restrictions in the Tax Agreement
to the ML Investors, all of the Rykoff-Sexton Common Shares received in the
Merger by the ML Investors will be aggregated, and the ML Investors will be
treated as a single stockholder. Provided that a stockholder of US Foodservice
that is a party to the Tax Agreement complies with the transfer restrictions
contained therein and satisfies certain other conditions, Rykoff-Sexton and
each other stockholder of US Foodservice that is a party to the Tax Agreement
will waive and release any claims that any of them might have against such
stockholder under the Tax Agreement or otherwise resulting from the failure of
the Merger to qualify as a tax-free reorganization for federal income tax
purposes. See "OTHER AGREEMENTS--The Tax Agreement."
Risk Factors
In deciding whether to approve the issuance of Rykoff-Sexton Common Shares in
connection with the Merger, Rykoff-Sexton stockholders should carefully
evaluate the matters set forth under "THE MERGER--Risk Factors."
10
<PAGE>
Regulatory Matters
The Merger is subject to the applicable provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (collectively, the "HSR Act"), which provides that certain
acquisition transactions (including the Merger) may not be consummated until
certain information has been furnished to the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the Federal Trade
Commission (the "FTC") and certain waiting period requirements have been
satisfied. Rykoff-Sexton and US Foodservice filed the required information and
material with respect to the Merger with the Antitrust Division and the FTC on
or about December 22, 1995. ML & Co. and certain of its affiliates filed the
required information with the Antitrust Division and the FTC on January 17,
1996 and January 25, 1996. The required waiting periods under the HSR Act for
Rykoff-Sexton and US Foodservice expired on January 21, 1996. Early termination
of the waiting periods for ML & Co. and such of its affiliates was granted on
January 29, 1996 and February 7, 1996. See "THE MERGER--Regulatory Matters."
Effective Time of the Merger
Following receipt of all required governmental approvals and satisfaction or
waiver (where permissible) of the other conditions to the Merger, the Merger
will be consummated and become effective at the time at which the certificate
of merger to be filed pursuant to the DGCL is accepted for filing by the
Secretary of State of the State of Delaware (or such later date and time as may
be specified in such certificate as may be permitted by such Secretary of
State). See "THE MERGER AGREEMENT--Effective Time of the Merger."
Exchange of Certificates in the Merger
Promptly after the Effective Time, Chemical/Mellon Shareholder Services,
L.L.C. (the "Exchange Agent") will mail a transmittal form and instructions to
each holder of record (other than Rykoff-Sexton, Merger Sub or any other
subsidiary of Rykoff-Sexton) of certificates which immediately prior to the
Effective Time represented outstanding shares of US Foodservice Common Stock,
which form and instructions are to be used in forwarding such certificates for
surrender and exchange for (i) certificates representing that number of whole
Rykoff-Sexton Common Shares that such holder has the right to receive pursuant
to the Merger and (ii) cash for any fractional Rykoff-Sexton Common Shares to
which such holder otherwise would be entitled. US FOODSERVICE STOCKHOLDERS ARE
REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL SUCH
TRANSMITTAL FORM AND INSTRUCTIONS ARE RECEIVED. Holders of certificates
formerly representing shares of US Foodservice Common Stock will not be
entitled to receive dividends or any other distributions from Rykoff-Sexton
until such certificates are so surrendered. Persons entitled to receive
dividends or other distributions in respect of the certificates surrendered in
connection with the Merger will not be entitled to receive interest on such
dividends or other distributions. See "THE MERGER--Conversion of Shares;
Exchange of Certificates."
Listing of the Rykoff-Sexton Common Shares on the NYSE
Rykoff-Sexton has agreed to use its reasonable best efforts to cause the
Rykoff-Sexton Common Shares that are to be issued pursuant to the Merger
Agreement and upon exercise of the Assumed Options and Assumed Warrants to be
listed for trading on the NYSE. Such authorization for listing is a condition
to the obligations of Rykoff-Sexton, Merger Sub and US Foodservice to
consummate the Merger. See "THE MERGER--Listing of the Rykoff-Sexton Common
Shares on the NYSE."
Business of US Foodservice and Rykoff-Sexton Pending the Merger
Each of US Foodservice and Rykoff-Sexton has agreed that, prior to the
Effective Time or earlier termination of the Merger Agreement, except as
contemplated by the Merger Agreement, it and its subsidiaries
11
<PAGE>
will each conduct its operations according to its ordinary course of business
consistent with past practice with certain exceptions permitted by the Merger
Agreement. In addition, unless the other party agrees in writing or except as
otherwise permitted pursuant to the Merger Agreement or as previously disclosed
to the other party, prior to the Effective Time neither US Foodservice, Rykoff-
Sexton nor any of their respective subsidiaries is permitted to engage in any
of a number of actions specified in the Merger Agreement. See "THE MERGER
AGREEMENT--Business of US Foodservice Pending the Merger" and "--Business of
Rykoff-Sexton Pending the Merger."
Interests of Certain Persons in the Merger; Management and Operations of US
Foodservice After the Merger
Certain stockholders and members of the management and Board of Directors of
US Foodservice have certain interests in the Merger that are different from, or
in addition to, the interests of stockholders of US Foodservice generally. See
"THE MERGER--Interests of Certain Persons in the Merger." As a condition to US
Foodservice's obligation to effect the Merger, Rykoff-Sexton is required to
execute a Registration Rights Agreement with certain "affiliates" (within the
meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act) of US Foodservice (including the ML Investors and Frank H.
Bevevino), which Registration Rights Agreement provides the ML Investors with
"demand" and "piggyback," and such other affiliates with "piggyback,"
registration rights requiring Rykoff-Sexton to register all or a portion of
Rykoff-Sexton Common Shares received by them. See "OTHER AGREEMENTS--The
Registration Rights Agreement."
In addition, pursuant to the Standstill Agreement, Rykoff-Sexton has agreed
to use its best efforts to cause to be appointed to the Rykoff-Sexton Board of
Directors four additional directors to be designated by the ML Entities
effective as of the Effective Time. See "OTHER AGREEMENTS--The Standstill
Agreement."
After the Merger, Merger Sub, as the surviving corporation in the Merger,
will be renamed US Foodservice Inc. US Foodservice will operate as the
distribution division of Rykoff-Sexton and will include the current Rykoff-
Sexton distribution operations. Mark Van Stekelenburg, the current Chairman,
President and Chief Executive Officer of Rykoff-Sexton, will continue to be
Chairman and Chief Executive Officer of Rykoff-Sexton following the Merger.
Frank H. Bevevino, the current Chairman of the Board of Directors and Chief
Executive Officer of US Foodservice, will be a member of the Rykoff-Sexton
Board of Directors and President of Rykoff-Sexton effective as of the Effective
Time. In addition, Mr. Bevevino will be Chief Executive Officer of US
Foodservice and in that capacity will be responsible for all Rykoff-Sexton
distribution operations. See "MANAGEMENT OF RYKOFF-SEXTON AFTER THE MERGER."
Conditions of the Merger; Termination
The consummation of the Merger is conditioned upon the fulfillment or waiver
(where permissible) of certain conditions set forth in the Merger Agreement.
The Merger Agreement may be terminated (i) by mutual consent of Rykoff-Sexton
and US Foodservice, (ii) by either Rykoff-Sexton or US Foodservice if the
Merger has not been consummated by July 31, 1996, and (iii) under certain other
circumstances. See "THE MERGER AGREEMENT--Conditions; Waivers" and "--
Amendment; Termination."
Expenses
Each of Rykoff-Sexton and US Foodservice will bear their own expenses
incurred in connection with the transactions contemplated by the Merger
Agreement, except that in the event of a dispute concerning the terms or
enforcement of the Merger Agreement, the prevailing party will be entitled to
reimbursement of reasonable legal fees and disbursements from the other party
or parties to such dispute. The Merger Agreement requires Rykoff-Sexton to pay
to US Foodservice a fee of $4,500,000 plus expenses of up to $1,000,000 if (i)
an RSI Alternative Proposal (as defined below) is publicly announced or sent to
holders of Rykoff-Sexton Common
12
<PAGE>
Shares prior to the Special Meeting, (ii) the issuance of the Rykoff-Sexton
Common Shares in connection with the Merger is not approved by the requisite
holders of Rykoff-Sexton Common Shares at the Special Meeting, and (iii) within
twelve months of the date on which the Special Meeting is held a definitive
agreement with respect to such RSI Alternative Proposal is executed by Rykoff-
Sexton. An "RSI Alternative Proposal" means a bona fide written offer submitted
to Rykoff-Sexton or the holders of Rykoff-Sexton Common Shares by any person
(other than US Foodservice or any affiliate of US Foodservice), unsolicited by
Rykoff-Sexton, for the acquisition or purchase of all or a material amount of
the assets or securities of, or any merger, consolidation or business
combination with, Rykoff-Sexton or any of its subsidiaries. See "THE MERGER
AGREEMENT--Expenses; Termination Fee."
Appraisal Rights
Under Delaware law, holders of US Foodservice Common Stock who comply with
the requirements of Section 262 of the DGCL will be entitled to appraisal
rights in connection with the Merger. A copy of Section 262 is attached to this
Proxy Statement/Prospectus as Appendix C. Holders of Rykoff-Sexton Common
Shares will not be entitled to appraisal rights in connection with the Merger.
See "THE MERGER--Appraisal Rights."
Certain Federal Income Tax Consequences
The consummation of the Merger is conditioned, among other things, upon the
receipt by Rykoff-Sexton of an opinion of Jones, Day, Reavis & Pogue, special
counsel for Rykoff-Sexton, to the effect that the Merger should be treated for
federal income tax purposes as a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"). Such opinion
will be dated the date of the closing of the Merger, will be based upon certain
customary representations, and will be subject to certain assumptions and
limitations set forth therein. No ruling will be sought from the Internal
Revenue Service (the "IRS") regarding the Merger, and the IRS may disagree with
the conclusions expressed in such opinion of counsel.
In accordance with such opinion, (i) neither Rykoff-Sexton nor the existing
stockholders of Rykoff-Sexton will recognize any gain or loss as a result of
the Merger, (ii) neither Merger Sub nor US Foodservice should recognize any
gain or loss as a result of the Merger, and (iii) no gain or loss should be
recognized by holders of US Foodservice Common Stock upon the conversion of
their shares of US Foodservice Common Stock into Rykoff-Sexton Common Shares
pursuant to the Merger. See "THE MERGER--Certain Federal Income Tax
Consequences."
EACH HOLDER OF US FOODSERVICE COMMON STOCK IS ADVISED TO CONSULT SUCH
HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF
THE MERGER UNDER FEDERAL, STATE, LOCAL, FOREIGN OR ANY OTHER APPLICABLE LAW.
Accounting Treatment
The Merger will be accounted for by Rykoff-Sexton under the purchase method
of accounting in accordance with generally accepted accounting principles.
RYKOFF-SEXTON SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data as of and for
the five fiscal years ended April 29, 1995 have been derived from Rykoff-
Sexton's Annual Report on Form 10-K, which has been incorporated by reference
herein. The summary historical financial data as of January 28, 1995 and
January 27, 1996 and for the thirty-nine weeks then ended, respectively, have
been derived from unaudited condensed consolidated financial statements and
notes thereto included in the Quarterly Report on Form 10-Q for the period
ended January 27, 1996, which has been incorporated by reference herein. Such
unaudited condensed consolidated
13
<PAGE>
financial statements have been prepared on the same basis as Rykoff-Sexton's
audited consolidated financial statements, and Rykoff-Sexton's management
believes that such unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial information presented.
Interim results are not necessarily indicative of results for the full fiscal
year. The summary historical consolidated financial data should be read in
conjunction with Rykoff-Sexton's consolidated financial statements and notes
thereto incorporated by reference herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
------------------------------------------------------- -----------------------
APRIL 27, MAY 2, MAY 1, APRIL 30, APRIL 29,
1991(1) 1992(1) 1993(1)(2) 1994(1) 1995(1) JANUARY 28, JANUARY 27,
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) 1995(1) 1996(1)(2)
---------- ---------- ---------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $1,404,770 $1,447,305 $1,412,943 $1,444,226 $1,569,019 $1,152,727 $1,314,695
Income (loss) from
continuing operations
before extraordinary
item and change in
accounting............. 12,882 7,930 (24,150) 4,121 9,376 7,006 6,066
Income (loss) per share
from continuing
operations before
extraordinary item and
change in accounting... 0.89 0.55 (1.66) 0.28 0.64 0.48 0.41
Cash dividends per
share.................. 0.48 0.48 0.26 -- 0.03 -- 0.06
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............ $ 397,536 $ 471,879 $ 448,411 $ 470,018 $ 524,068 $ 479,353 $ 631,731
Long-term debt.......... 91,028 139,333 144,669 151,227 146,536 130,089 137,891
Stockholders' equity.... 185,863 189,703 166,704 173,307 206,540 204,389 215,012
</TABLE>
- --------
(1) Statement of operations data for the fifty-two weeks ended April 29, 1995
include the results of Continental Foods, Inc. ("Continental") from
February 21, 1995, the date of its acquisition. Income statement data for
the thirty-nine weeks ended January 27, 1996 include the results of
Continental for the entire period. Statement of operations data for the
thirty-nine weeks ended January 27, 1996 include the results of operations
of H&O Foods, Inc. ("H&O Foods") from November 1, 1995, the date of its
acquisition. Statement of operations data and balance sheet data for all
periods presented exclude the results of Tone Brothers, Inc. ("Tone
Brothers"), which was disposed of by Rykoff-Sexton in October 1994 and
accounted for as a discontinued operation.
(2) During the fifty-two weeks ended May 1, 1993, Rykoff-Sexton recorded a
restructuring charge of $31 million to cover costs associated with a
planned business reorganization. This reorganization was completed during
the thirty-nine weeks ended January 27, 1996. With the completion of the
reorganization program, Rykoff-Sexton reversed the remaining unused portion
of the original $31 million charge. This unused portion, totalling $6.4
million, related primarily to over-estimates of facility closures, and
partly offsets expenses associated with the relocation of the Los Angeles
distribution center included in warehouse, selling, general and
administrative expenses.
US FOODSERVICE SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data as of December
31, 1994 and December 30, 1995 and for the fiscal years ended January 1, 1994,
December 31, 1994 and December 30, 1995, respectively, have been derived from
the consolidated financial statements of US Foodservice audited by Arthur
Andersen LLP, independent public accountants, included elsewhere herein.
The financial data for periods prior to January 3, 1993 are presented as set
forth due to the circumstances of the September 1993 merger of WS Holdings
Corporation ("WS Holdings"), the parent company of White Swan Inc. ("White
Swan"), with a wholly-owned subsidiary of US Foodservice (the "1993 Foodservice
Merger"). See "DESCRIPTION OF US FOODSERVICE--General." The 1993 Foodservice
Merger has been accounted for as a combination of companies under common
control. As such, the assets and liabilities of the merged entities have been
reflected at their historical carrying values in the consolidated financial
statements of US
14
<PAGE>
Foodservice. The results of operations have been presented as if the 1993
Foodservice Merger had occurred as of September 4, 1992, the date both US
Foodservice (then named Unifax Holdings, Inc. ("Unifax Holdings")) and WS
Holdings came under the common control of ML & Co. Prior to September 4, 1992,
the results of operations represent those of WS Holdings only. In addition,
effective January 2, 1993, WS Holdings changed its fiscal year end from the
last Saturday in June to the Saturday following the Friday nearest to December
31 to conform to US Foodservice's fiscal year end. As a result, the financial
data as set forth below include (i) data as of and for the fifty-two week
periods ended June 29, 1991 and June 27, 1992, respectively, which have been
derived from the audited consolidated financial statements of WS Holdings, not
included herein, (ii) data as of and for the twenty-seven week period ended
January 2, 1993 (which includes the results of WS Holdings for the entire
twenty-seven week period and the results of Unifax Holdings from September 4,
1992 through January 2, 1993), which have been derived from the audited
consolidated financial statements of US Foodservice, not included herein and
(iii) data as of January 1, 1994, which have been derived from the audited
consolidated financial statements of US Foodservice, not included herein.
The summary historical consolidated financial data should be read in
conjunction with the US Foodservice consolidated financial statements and notes
thereto and "US FOODSERVICE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA"
and "--US Foodservice Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
JANUARY 1, 1994(1) DECEMBER 31, 1994(1)(2) DECEMBER 30, 1995(3)
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------------ ----------------------- --------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............. $1,439,409 $1,470,061 $1,676,007
Income (loss) before
extraordinary item... (45,982) 12,911 7,797
Income (loss) per
share before
extraordinary item
attributable to
common stockholders.. (6.81) 0.68 0.02
Cash dividends per
share................ -- -- --
BALANCE SHEET DATA (AT
PERIOD END):
Total assets.......... $ 516,835 $ 554,509 $ 610,535
Long-term debt........ 294,102 294,388 343,334
Mandatory redeemable
preferred stock...... 54,772 57,137 53,196
Stockholders' equity
(deficit)............ (2,564) 28,678 30,791
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
JUNE 29, 1991 JUNE 27, 1992 27 WEEKS ENDED
(52 WEEKS) (52 WEEKS) JANUARY 2, 1993
------------------ ----------------------- --------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............. $ 650,984 $ 697,983 $ 627,955
Income (loss) before
extraordinary item... (1,802) (1,576) (2,024)
Income (loss) per
share before
extraordinary item
attributable to
common stockholders.. (2.68) (2.33) (0.81)
Cash dividends per
share................ -- -- --
BALANCE SHEET DATA (AT
PERIOD END):
Total assets.......... $ 243,530 $ 247,664 $ 553,425
Long-term debt........ 159,816 158,006 290,100
Mandatory redeemable
preferred stock...... 22,338 25,882 49,388
Stockholders' equity
(deficit)............ (10,344) (15,511) 58,018
</TABLE>
- --------
(1) Income (loss) before extraordinary item includes nonrecurring charges of
approximately $50.9 million in the fiscal year ended January 1, 1994 and
nonrecurring credits of $3.4 million in the fiscal year ended
15
<PAGE>
December 31, 1994. The charges and credits relate to nonrecurring
transactions including the write-off of unamortized goodwill and related
intangible assets attributable to three distribution centers and
restructuring and other charges. See "US FOODSERVICE SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA" and "--US Foodservice Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 14
to US Foodservice's consolidated financial statements included elsewhere
herein for a further explanation of such charges and credits.
(2) Statement of operations data for the fiscal year ended December 31, 1994
include the results of the Atlanta Distribution Center from September 9,
1994, the date of its acquisition, and of the Fort Myers, Orlando and
Riviera Beach Distribution Centers from September 16, 1994, the date of
their acquisition.
(3) Statement of operations data for the fiscal year ended December 30, 1995
include the results of the Fort Myers Meat & Seafood Distribution Center
from January 20, 1995, the date of its acquisition, and of the CP
Distribution Center from April 1, 1995, the date of its acquisition.
UNAUDITED PRO FORMA COMBINED SUMMARY FINANCIAL DATA
The following Unaudited Pro Forma Combined Summary Financial Data give pro
forma effect to the Merger and the other transactions described in "UNAUDITED
PRO FORMA COMBINED FINANCIAL INFORMATION." The Unaudited Pro Forma Combined
Summary Financial Data are derived from, are qualified in their entirety by,
and should be read in conjunction with the Unaudited Pro Forma Combined
Financial Information included elsewhere herein. The Unaudited Pro Forma
Combined Summary Financial Data and accompanying notes should also be read in
conjunction with Rykoff-Sexton's consolidated financial statements and notes
thereto which are incorporated by reference herein and with US Foodservice's
consolidated financial statements and notes thereto included elsewhere herein.
The pro forma data do not purport to represent what Rykoff-Sexton's results of
operations actually would have been had the Merger or such other transactions
occurred at the beginning of the period or as of the dates indicated or the
results of operations for any future period. The pro forma financial data is
based on estimates of financial effects that may not prove to be accurate over
time.
<TABLE>
<CAPTION>
52 WEEKS ENDED 39 WEEKS ENDED
APRIL 29, 1995 JANUARY 27, 1996
-------------- ----------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA: (1) (2)
Net sales..................................... $3,281,413 $2,666,428
Income from continuing operations............. 12,726 9,460
Earnings per share
Income from continuing operations--Minimum
Shares (3)................................. 0.49 0.36
Income from continuing operations--Maximum
Shares (3)................................. 0.45 0.33
Cash dividends per share (4).................... 0.03 0.06
</TABLE>
<TABLE>
<CAPTION>
AS OF
JANUARY 27, 1996
----------------
<S> <C>
BALANCE SHEET DATA: (1) (2)
Total assets................................................. $1,265,101
Long-term debt............................................... 487,729
Stockholders' equity......................................... 445,685
</TABLE>
- -------
(1) The unaudited pro forma income statement data for the fifty-two weeks
ended April 29, 1995 are comprised of the results of Rykoff-Sexton for the
fifty-two weeks ended April 29, 1995, the results of Continental for the
period May 1, 1994 to February 20, 1995, the results of H&O Foods for the
year ended April 29, 1995, and the results of US Foodservice for the
fifty-two weeks ended April 1, 1995. The unaudited pro forma
16
<PAGE>
income statement data for the thirty-nine weeks ended January 27, 1996 are
comprised of the results of Rykoff-Sexton for the thirty-nine weeks ended
January 27, 1996, the results of H&O Foods for the six months ended October
31, 1995 and the results of US Foodservice for the thirty-nine weeks ended
December 30, 1995. The unaudited pro forma balance sheet data has been
prepared by combining the consolidated balance sheet of Rykoff-Sexton as of
January 27, 1996 and the balance sheet of US Foodservice as of December 30,
1995.
(2) The pro forma income statement data and the balance sheet data give effect
to the Merger, the acquisitions of Continental and H&O Foods, the New
Credit Facility, the Receivables Securitization and other transactions as
more fully described in "UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION" contained elsewhere herein.
(3) As part of the Merger, Rykoff-Sexton will issue Rykoff-Sexton Common
Shares to US Foodservice stockholders based on the Exchange Ratio as
described in "THE MERGER--Conversion of Shares; Exchange of Certificates,"
and will assume the Assumed Options and the Assumed Warrants as described
in "THE MERGER AGREEMENT--General--Conversion of US Foodservice Common
Stock in the Merger." The income from continuing operations per share has
been computed using both the minimum possible number of shares issuable in
the Merger and the maximum possible number of shares issuable in the
Merger. The minimum number of shares represents Rykoff-Sexton's historical
weighted average shares plus 10,997,534 shares issued as part of the
Merger plus the dilutive effect of shares issuable pursuant to the Assumed
Options and the Assumed Warrants, assuming the minimum Exchange Ratio. The
maximum number of shares represents Rykoff-Sexton's historical weighted
average shares plus 12,880,552 shares issued as part of the Merger plus
the dilutive effect of shares issuable pursuant to the Assumed Options and
the Assumed Warrants, assuming the maximum Exchange Ratio.
(4) Cash dividends per share is calculated based on historical cash dividends
paid by Rykoff-Sexton. Financial covenants and other restrictions
contained in the New Credit Facility and other agreements relating to
Rykoff-Sexton's indebtedness will require it to meet certain financial
tests and may restrict its ability to pay dividends after the Merger. See
"DIVIDENDS AND MARKET PRICES OF RYKOFF-SEXTON COMMON SHARES."
17
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents Rykoff-Sexton's and US Foodservice's historical
per share data, unaudited pro forma combined per share data of Rykoff-Sexton
and pro forma equivalent per share data of US Foodservice. The unaudited pro
forma combined information is not necessarily indicative of actual or future
operating results or financial position that would have occurred or will occur
upon consummation of the Merger. The data set forth below should be read in
conjunction with Rykoff-Sexton's consolidated financial statements and notes
thereto which are incorporated by reference herein, and the consolidated
financial statements of US Foodservice and notes thereto which are included
elsewhere herein. The data should also be read in conjunction with the
information described in "UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION"
included elsewhere herein.
<TABLE>
<CAPTION>
RYKOFF-SEXTON US FOODSERVICE
------------------------------- -----------------------------------
52 WEEKS 39 WEEKS 52 WEEKS 52 WEEKS
ENDED OR AS OF ENDED OR AS OF ENDED OR AS OF ENDED OR AS OF
APRIL 29, 1995 JANUARY 27, 1996 DECEMBER 31, 1994 DECEMBER 30, 1995
-------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
HISTORICAL:
Book value per share.... $14.15 $14.53 $ 3.23 $ 3.47
Earnings per share:
Income from continuing
operations............. 0.64 0.41 N/A N/A
Net income.............. 2.24 0.41 N/A N/A
Net income (loss)
attributable to common
stockholders........... N/A N/A 0.68 0.02
Cash dividends per
share.................. 0.03 0.06 -- --
<CAPTION>
MINIMUM SHARES MAXIMUM SHARES
------------------------------- -----------------------------------
52 WEEKS 39 WEEKS 52 WEEKS 39 WEEKS
ENDED OR AS OF ENDED OR AS OF ENDED OR AS OF ENDED OR AS OF
APRIL 29, 1995 JANUARY 27, 1996 APRIL 29, 1995 JANUARY 27, 1996
-------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED:
Book value per share
(1).................. $17.09 $17.28 $15.92 $16.10
Earnings per share
(1).................. 0.49 0.36 0.45 0.33
Cash dividends per
share (2)............ 0.03 0.06 0.03 0.06
US FOODSERVICE PRO FORMA
EQUIVALENTS (3):
Book value per share.. 21.26 21.50 23.20 23.46
Earnings per share.... 0.61 0.45 0.66 0.48
Cash dividends per
share................ 0.04 0.08 0.04 0.09
</TABLE>
- --------
(1) As part of the Merger, Rykoff-Sexton will issue Rykoff-Sexton Common
Shares to holders of US Foodservice Common Stock based on the Exchange
Ratio as described in "THE MERGER--Conversion of Shares; Exchange of
Certificates," and will assume the Assumed Options and the Assumed
Warrants as described in "THE MERGER AGREEMENT--General--Conversion of US
Foodservice Common Stock in the Merger." The earnings per share, cash
dividends per share and book value per share have been computed using both
the minimum possible number of shares issuable in the Merger and the
maximum possible number of shares issuable in the Merger. The minimum
number of shares used to compute earnings per share represents Rykoff-
Sexton's historical weighted average shares plus 10,997,534 shares issued
as part of the Merger plus the dilutive effect of shares issuable pursuant
to the Assumed Options and the Assumed Warrants, assuming the minimum
Exchange Ratio. The maximum number of shares used to compute earnings per
share represents Rykoff-Sexton's historical weighted average shares plus
12,880,552 shares issued as part of the Merger plus the dilutive effect of
shares issuable pursuant to the Assumed Options and the Assumed Warrants,
assuming the maximum Exchange Ratio. The minimum number of shares to
compute book value per share represents Rykoff-Sexton's historical
outstanding shares plus 10,997,534 shares issued as part of the Merger.
The maximum number of shares to compute book value per
18
<PAGE>
share represents Rykoff-Sexton's historical outstanding shares plus
12,880,552 shares issued as part of the Merger.
(2) Cash dividends per share is calculated based on historical cash dividends
paid by Rykoff-Sexton. Financial covenants and other restrictions
contained in the New Credit Facility and other agreements relating to
Rykoff-Sexton's indebtedness will require it to meet certain financial
tests and may restrict its ability to pay dividends after the Merger. See
"DIVIDENDS AND MARKET PRICES OF RYKOFF-SEXTON COMMON SHARES."
(3) Represents the pro forma equivalent of one share of US Foodservice Common
Stock calculated by multiplying the pro forma information by the Exchange
Ratio of 1.244 of Rykoff-Sexton Common Shares for each share of US
Foodservice Common Stock (for minimum shares) and by the Exchange Ratio of
1.457 of Rykoff-Sexton Common Shares for each share of US Foodservice
Common Stock (for maximum shares).
DIVIDENDS AND MARKET PRICES OF RYKOFF-SEXTON COMMON SHARES
Rykoff-Sexton Common Shares are listed on the NYSE. The table below sets
forth, for the periods indicated, the reported high and low sale prices of
Rykoff-Sexton Common Shares on the NYSE Composite Tape and the semi-annual
cash dividends per share paid by Rykoff-Sexton on such shares. In December
1994, the Rykoff-Sexton Board of Directors declared a five-for-four stock
split, payable January 24, 1995, to stockholders of record on December 21,
1994. Share prices shown below have been adjusted to give effect to this stock
split.
<TABLE>
<CAPTION>
RYKOFF-SEXTON
----------------------------
COMMON SHARES CASH DIVIDENDS
------------- --------------
HIGH LOW PER SHARE
------ ------ --------------
<S> <C> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1994
First Quarter.................................... $12.88 $11.00 --
Second Quarter................................... 14.88 12.50 --
Third Quarter.................................... 17.75 14.63 --
Fourth Quarter................................... 17.63 14.75 --
FISCAL YEAR ENDED APRIL 29, 1995
First Quarter.................................... $16.88 $14.38 --
Second Quarter................................... 17.88 15.00 --
Third Quarter.................................... 16.75 15.88 --
Fourth Quarter................................... 17.88 14.88 $0.03
FISCAL YEAR ENDING APRIL 27, 1996
First Quarter.................................... $20.63 $17.25 $0.03
Second Quarter................................... 24.63 19.63 --
Third Quarter.................................... 22.50 15.63 0.03
Fourth Quarter (through April 1, 1996)........... 16.00 13.88 --
</TABLE>
On December 4, 1995, the last full trading day prior to the public
announcement of the execution of a letter of intent with respect to the Merger
and on February 2, 1996, the last full trading day prior to the public
announcement of the execution of the Merger Agreement, the closing price of
one Rykoff-Sexton Common Share as reported by the NYSE Composite Tape was
$19.50 and $15.75, respectively.
On April 1, 1996, the most recent practicable date prior to the printing of
this Proxy Statement/Prospectus for which sales price information was
obtainable, the last sale price of one Rykoff-Sexton Common Share as reported
by the NYSE Composite Tape was $15.88.
Because the market price of Rykoff-Sexton Common Shares is subject to
fluctuation, the market value of Rykoff-Sexton Common Shares that holders of
US Foodservice Common Stock will receive in the Merger may increase or
decrease prior to the Merger and the number of shares to be received based on
the Exchange Ratio may vary subject to the maximum and minimum specified in
the Merger Agreement and described herein. STOCKHOLDERS ARE URGED TO OBTAIN A
CURRENT MARKET QUOTATION FOR THE RYKOFF-SEXTON COMMON SHARES.
19
<PAGE>
On March 31, 1996, there were approximately 1,075 holders of record of
Rykoff-Sexton Common Shares.
US Foodservice is privately-held and there is, therefore, no established
public trading market for US Foodservice Common Stock. For information
regarding the US Foodservice Common Stock, see "COMPARATIVE PER SHARE DATA"
and "US FOODSERVICE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA."
Rykoff-Sexton's dividend policy following the Merger will be a decision to
be made by the Rykoff-Sexton Board of Directors from time to time based upon
the results of operations and financial condition of Rykoff-Sexton, the terms
of debt instruments and such other factors as the Rykoff-Sexton Board of
Directors considers relevant. Financial covenants and other restrictions
contained in the New Credit Facility and other agreements relating to Rykoff-
Sexton's indebtedness will require it to meet certain financial tests and may
restrict its ability to pay dividends.
CAPITALIZATION
The following table sets forth the capitalization of Rykoff-Sexton as of
January 27, 1996 and as adjusted at such date to give effect to the Merger,
the New Credit Facility, the Receivables Securitization and other transactions
as more fully described in "UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION." See "THE MERGER--Rykoff-Sexton Financing and Receivables
Securitization." This table should be read in conjunction with "UNAUDITED PRO
FORMA COMBINED FINANCIAL INFORMATION," and the consolidated financial
statements of Rykoff-Sexton and the related notes thereto incorporated by
reference herein.
<TABLE>
<CAPTION>
AS OF JANUARY 27,
1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term debt (1)(2)(3)................................ $115,888 $ 19,260
-------- --------
Long-term debt, excluding current maturities (1)
8 7/8% Senior Subordinated Notes, due in 2003.......... $129,129 $129,129
Tranche A Term Loan (2)................................ -- 150,000
Tranche B Term Loan (2)................................ -- 125,000
Tranche C Term Loan (2)................................ -- 60,000
Promissory notes from acquisitions (3)................. 7,730 7,730
Other debt and obligations under capital leases........ 1,032 15,870
-------- --------
Total long-term debt................................. $137,891 $487,729
-------- --------
Stockholders' equity
Preferred stock, $.10 par value per share
Authorized--10,000,000 shares; outstanding--none..... -- --
Common stock, $.10 par value per share (4)
Authorized--40,000,000 shares; outstanding--
14,799,601 on an actual basis and 27,679,835 on an
as adjusted basis................................... 1,513 2,801
Additional paid-in capital (4)......................... 95,136 323,721
Retained earnings (5).................................. 122,343 123,143
Treasury stock......................................... (3,980) (3,980)
-------- --------
Total stockholders' equity........................... 215,012 445,685
-------- --------
Total capitalization................................. $468,791 $952,867
======== ========
</TABLE>
- --------
(1) See Note 5 to the consolidated financial statements of Rykoff-Sexton
incorporated by reference herein for further information with respect to
the indebtedness of Rykoff-Sexton.
20
<PAGE>
(2) See "THE MERGER--Rykoff-Sexton Financing and Receivables Securitization"
for description of the indebtedness to be incurred by Rykoff-Sexton in
connection with the Merger.
(3) See Note 2 to Unaudited Pro Forma Combined Balance Sheet as set forth in
"UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION" for description of
the promissory notes issued in connection with the H&O Foods and
Continental acquisitions.
(4) Common stock and additional paid-in capital were computed using the number
of Rykoff-Sexton Common Shares that would be issued assuming an Exchange
Ratio of 1.457 (the number which results in the maximum number of Rykoff-
Sexton Common Shares that may be issued in connection with the Merger).
See "THE MERGER--Conversion of Shares; Exchange of Certificates."
(5) Change in retained earnings represents fees relating to the Receivables
Securitization, net of applicable income taxes, of $(1.2) million and the
forgiveness of notes receivable from the sale of stock to management, net
of applicable income taxes, of $2.0 million.
21
<PAGE>
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is furnished to Rykoff-Sexton's stockholders
in connection with the solicitation on behalf of the Rykoff-Sexton Board of
Directors of proxies for use at a Special Meeting to be held at One Sexton
Drive, Glendale Heights, Illinois, on Wednesday, May 8, 1996, at 10 a.m.,
local time. This Proxy Statement/Prospectus and the accompanying form of proxy
were first mailed to stockholders of Rykoff-Sexton on or about April 5, 1996.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, stockholders of Rykoff-Sexton will be asked (i) to
consider and vote upon a proposal to approve the issuance of Rykoff-Sexton
Common Shares in connection with the Merger Agreement and (ii) to transact
such other matters as may arise relating to the conduct of the Special Meeting
or any adjournments or postponements thereof. Pursuant to the Merger
Agreement, (a) each share of US Foodservice Common Stock issued and
outstanding immediately prior to the Merger (other than shares held by Rykoff-
Sexton, Merger Sub or any other subsidiary of Rykoff-Sexton, shares held in
treasury by US Foodservice and shares held by holders who have properly
perfected their appraisal rights under Delaware law) will be converted into
that number of shares of Rykoff-Sexton Common Shares (subject to rounding to
the nearest thousandth of a share) equal to the Exchange Ratio, with a maximum
Exchange Ratio of 1.457 (which corresponds to a Closing Date Market Price of
less than $17.16) and a minimum Exchange Ratio of 1.244 (which corresponds to
a Closing Date Market Price of more than $20.10), and (b) all outstanding
options and warrants to purchase US Foodservice Common Stock will be assumed
by Rykoff-Sexton.
VOTING AT THE MEETING; RECORD DATE
Only holders of record of Rykoff-Sexton's Common Shares at the close of
business on the Record Date will be entitled to vote at the Special Meeting.
As of March 31, 1996, there were 14,798,820 Rykoff-Sexton Common Shares
outstanding. Each Rykoff-Sexton Common Share entitles the holder to one vote.
There is no cumulative voting. There are no other voting securities of Rykoff-
Sexton outstanding.
The holders of a majority of the Rykoff-Sexton Common Shares issued and
outstanding and entitled to vote at the Special Meeting, present in person or
by proxy, shall constitute a quorum at the Special Meeting.
Votes cast in person or by proxy at the Special Meeting will be tabulated by
the inspectors of election appointed for the Special Meeting, who will
determine whether or not a quorum is present. With respect to approval of the
issuance of Rykoff-Sexton Common Shares, votes may be cast for, against or as
abstentions. Abstentions will be counted for purposes of determining the total
votes cast on the matter for which such abstention is noted. Abstentions will
have the effect of a negative vote on the issuance of Rykoff-Sexton Common
Shares in connection with the Merger Agreement. Broker/dealers who hold their
customers' shares in street name, may, under the applicable rules of the
exchange and other self-regulatory organizations of which the broker/dealers
are members, sign and submit proxies for such shares and may vote such shares
on routine matters, which, under such rules, typically include the election of
directors, but broker/dealers may not vote such shares on other matters, which
typically include transactions related to mergers, including the issuance of
shares in connection therewith, without specific instructions from the
customer who owns such shares. Proxies signed and submitted by broker/dealers
which have not been voted on certain matters as described in the previous
sentence, which includes the proposal to approve the issuance of Rykoff-Sexton
Common Shares in connection with the Merger Agreement, are referred to as
broker non-votes. Broker non-votes on a particular matter are not deemed to be
shares present and entitled to vote on such matter and, assuming presence of a
quorum, will not affect whether the issuance of Rykoff-Sexton Common Shares is
approved.
Each stockholder who signs and returns a proxy in the form enclosed with
this Proxy Statement/Prospectus may revoke the same at any time prior to its
use by giving notice of such revocation to Rykoff-Sexton in writing to the
Secretary of Rykoff-Sexton, by signing and returning a later dated proxy, or
by voting in person at the
22
<PAGE>
Special Meeting. Unless so revoked, the Rykoff-Sexton Common Shares
represented by each such proxy will be voted at the meeting and any
adjournment thereof. Presence at the meeting of a stockholder who has signed a
proxy does not alone revoke that proxy.
Rykoff-Sexton will bear the cost of soliciting proxies for the Special
Meeting. Rykoff-Sexton will also reimburse brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in
forwarding the soliciting material to beneficial owners of stock. Proxies are
being solicited primarily by mail, but officers and regular employees of
Rykoff-Sexton may also solicit proxies personally, by telephone or by special
letter. Rykoff-Sexton will also use the services of Morrow & Co., Inc. to aid
in the solicitation of proxies at an anticipated fee of $6,000, plus
reasonable out-of-pocket expenses.
If the accompanying proxy card is properly signed and returned to Rykoff-
Sexton prior to the Special Meeting and not revoked, it will be voted in
accordance with the instructions contained therein. IF NO INSTRUCTIONS ARE
GIVEN, THE PERSONS DESIGNATED AS PROXIES IN THE ACCOMPANYING PROXY CARD WILL
VOTE FOR APPROVAL OF THE ISSUANCE OF RYKOFF-SEXTON COMMON SHARES IN CONNECTION
WITH THE MERGER AGREEMENT.
The Rykoff-Sexton Board of Directors is not currently aware of any matters
other than those referred to herein which will come before the Special
Meeting. If any other matter arising from the conduct of the meeting should be
properly presented at the Special Meeting for action, the persons named in the
accompanying proxy card will vote the proxy in their own discretion unless
such authorization is withheld.
VOTE REQUIRED
The consummation of the Merger is conditioned on, among other things, the
approval of the issuance of Rykoff-Sexton Common Shares in connection
therewith by stockholders of Rykoff-Sexton at the Special Meeting. Although
Delaware law and Rykoff-Sexton's Restated Certificate of Incorporation, as
amended (the "Rykoff-Sexton Charter"), do not require Rykoff-Sexton to obtain
stockholder approval of the Merger or the issuance of Rykoff-Sexton Common
Shares in connection therewith, Rykoff-Sexton stockholders must approve such
issuance in order to comply with requirements of the NYSE (on which Rykoff-
Sexton Common Shares are listed) due to the number of Rykoff-Sexton Common
Shares to be issued in connection with the Merger. The NYSE rules require
stockholder approval if a listed company issues common stock in an amount
equal to or greater than 20% of the number of shares of common stock
outstanding prior to such issuance. The Rykoff-Sexton Common Shares to be
issued will constitute approximately 87% of the Rykoff-Sexton Common Shares
outstanding prior to such issuance (assuming the maximum number of Rykoff-
Sexton Common Shares are issued in the Merger). Such issuance will be approved
upon receipt of at least a majority of the votes cast at the Special Meeting,
assuming a quorum consisting of at least a majority of all outstanding Rykoff-
Sexton Common Shares are present at the Special Meeting. As of March 31, 1996,
directors and executive officers of Rykoff-Sexton, together with their
affiliates as a group, owned 6.1% of the issued and outstanding Rykoff-Sexton
Common Shares. See "OWNERSHIP OF RYKOFF-SEXTON COMMON SHARES."
THE BOARD OF DIRECTORS OF RYKOFF-SEXTON HAS ADOPTED THE MERGER AGREEMENT AND
RECOMMENDS A VOTE FOR THE ISSUANCE OF RYKOFF-SEXTON COMMON SHARES PURSUANT
THERETO.
THE MERGER
GENERAL
The discussion in this Proxy Statement/Prospectus of the Merger and the
Merger Agreement's principal terms is qualified in its entirety by reference
to the Merger Agreement, which is attached to this Proxy Statement/Prospectus
as Appendix A and incorporated herein by reference.
EFFECTIVE TIME
Following receipt of all required governmental approvals and satisfaction or
waiver (where permissible) of the other conditions to the Merger, the Merger
will be consummated and become effective at the Effective Time.
23
<PAGE>
CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
At the Effective Time, each issued and outstanding share of US Foodservice
Common Stock (other than shares, if any, owned by Rykoff-Sexton, Merger Sub or
any other subsidiary of Rykoff-Sexton, shares held in treasury by US
Foodservice and shares held by holders who have properly perfected their
appraisal rights under Delaware law) will be converted into that number of
Rykoff-Sexton Common Shares equal to the Exchange Ratio, with a maximum
Exchange Ratio of 1.457 (which corresponds to a Closing Date Market Price of
less than $17.16) and a minimum Exchange Ratio of 1.244 (which corresponds to
a Closing Date Market Price of more than $20.10). If, prior to the Effective
Time, Rykoff-Sexton should split, reclassify or combine the Rykoff-Sexton
Common Shares, pay a stock dividend or other stock distribution in Rykoff-
Sexton Common Shares, otherwise change the Rykoff-Sexton Common Shares into
any other securities, or make any other dividend or distribution on the
Rykoff-Sexton Common Shares (other than normal cash dividends), or if a record
date with respect to any of the foregoing is set, then the Exchange Ratio will
be appropriately adjusted to reflect such split, reclassification,
combination, dividend or other distribution or change. Based upon the number
of shares of US Foodservice Common Stock outstanding on March 31, 1996,
assuming the exercise of all outstanding Assumed Options and Assumed Warrants
(whether or not currently exercisable), and based upon the maximum Exchange
Ratio permitted by the Merger Agreement, a maximum of 14,294,457 Rykoff-Sexton
Common Shares may be issued in connection with the Merger.
Promptly after the Effective Time, the Exchange Agent will mail a
transmittal form and instructions to each holder of record (other than Rykoff-
Sexton, Merger Sub or any other subsidiary of Rykoff-Sexton) of certificates
that immediately prior to the Effective Time represented outstanding shares of
US Foodservice Common Stock (the "Certificates"), which form and instructions
are to be used in forwarding the Certificates for surrender and exchange for
(i) certificates representing that number of whole Rykoff-Sexton Common Shares
that such holder has the right to receive pursuant to the Merger and (ii) cash
for any fractional Rykoff-Sexton Common Shares to which such holder otherwise
would be entitled. US FOODSERVICE STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER
THEIR CERTIFICATES FOR EXCHANGE UNTIL SUCH TRANSMITTAL FORM AND INSTRUCTIONS
ARE RECEIVED. At and after the Effective Time and until surrendered as
provided above, Certificates will represent solely the right to receive
certificates representing that number of whole Rykoff-Sexton Common Shares
into which the shares of US Foodservice Common Stock formerly represented by
such Certificates were converted in the Merger and a cash payment in lieu of
any fractional shares, and the holders of Certificates will not be entitled to
receive dividends or any other distributions from Rykoff-Sexton until such
Certificates are so surrendered. Upon surrender of a Certificate, there will
be paid to the person in whose name such Rykoff-Sexton Common Shares are
issued any dividends or other distributions which have a record date after the
Effective Time and that became payable prior to such surrender with respect to
such Rykoff-Sexton Common Shares. After such surrender, there will be paid to
the person in whose name the Rykoff-Sexton Common Shares are issued any
dividends or other distributions on such shares that have a record date after
the Effective Time and prior to such surrender and a payment date after such
surrender, and such payment will be made on such payment date. In no event
shall the persons entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions.
BACKGROUND OF THE MERGER
Foodservice Industry Trends
The foodservice distribution business has been characterized in recent years
by stable growth. In 1995, the industry had aggregate sales of approximately
$129 billion, which represented an increase in sales from 1994 of
approximately 4.9% and was generally consistent with growth in previous years.
The foodservice distribution industry is extremely fragmented, with the 50
largest broadline and the 20 largest system and specialty distributors
accounting for less than 40% of the industry's total 1995 sales. The remaining
60%, or $78 billion, of the industry's sales were divided among approximately
3,000 distributors. The broadline distribution business is primarily organized
on a regional or local basis, with national broadline distributors accounting
for only 15% of industry sales.
24
<PAGE>
The foodservice distribution industry, while fragmented, has experienced
substantial consolidation as larger distributors have acquired smaller local
and regional distributors. Consolidation permits large foodservice
distributors to benefit from various economies of scale, increased purchasing
power, and the elimination of redundant management and overhead expenses.
Larger distributors have also been able to take advantage of more
sophisticated management techniques, such as management information systems
specifically designed to enhance customer service, lower costs and increase
operating efficiency.
In response to these trends, Rykoff-Sexton has pursued a strategy of
expanding its foodservice distribution operations, including expansion through
the acquisition of other foodservice companies, and of refocusing its business
from being a niche distributor to a "full-line" distributor offering new
product categories, including center-of-the-plate items such as meat, poultry
and seafood, as well as produce and other perishables. During fiscal 1995 and
the first nine months of fiscal 1996, Rykoff-Sexton completed a number of
strategic acquisitions in new and existing markets, including the purchase of
Baltimore-based Continental in February 1995, the specialty foods division of
Minneapolis-based Olfisco, Inc. in July 1995, and Las Vegas-based H&O Foods in
November 1995. In addition, in October 1994, Rykoff-Sexton sold Tone Brothers,
a spice blending operation, as part of its strategy of focusing on its core
foodservice distribution and private brand manufacturing operations. In the
last several years, Rykoff-Sexton has also built or significantly expanded a
number of facilities, including facilities in Chicago, Philadelphia, Phoenix,
Orlando, Greensboro, North Carolina, St. Louis, Detroit, Cincinnati and Los
Angeles, and expects to commence construction in 1996 of a new distribution
facility in Reno. Rykoff-Sexton has also closed a number of distribution
operations, including operations in Albuquerque, Rochester and Kansas City,
that did not meet Rykoff-Sexton's profit and market share objectives.
US Foodservice is the successor to the 1993 Foodservice Merger which
combined two regional broadline foodservice distributors, Unifax, Inc.
("Unifax") and White Swan. Since the 1993 Foodservice Merger, US Foodservice
has completed a number of strategic acquisitions in new and existing markets,
including the acquisition in 1994 of the assets of four distribution centers,
one in Georgia and three in Florida, and the 1995 acquisitions of the assets
of Fort Myers Meat & Seafood Co. in Fort Myers, Florida and the assets of City
Provisioners, Inc. in Ormond Beach, Florida. At present, US Foodservice serves
more than 40,000 customers in over 30 states, primarily in the Southeastern,
Southwestern and Mid-Atlantic regions of the United States. See "DESCRIPTION
OF US FOODSERVICE."
Rykoff-Sexton's objective is to become a premier broadline foodservice
distributor by generating additional sales to existing customers, establishing
relationships with new customers and providing superior customer service at
the lowest possible cost. Rykoff-Sexton's management believes that the
combination of its business with that of US Foodservice in the Merger will
further Rykoff-Sexton's strategic objective based upon its view that
consolidation in the foodservice distribution industry will continue, and that
sales growth and expansion in existing and into new markets will be essential
to compete as a low cost, high quality distributor in the foodservice
industry. See "--Recommendation of the Rykoff-Sexton Board of Directors;
Reasons for the Merger," "--Potential Cost Savings and Operating Synergies"
and "DESCRIPTION OF US FOODSERVICE."
Chronology of Events Leading up to the Merger
On September 8, 1995, US Foodservice filed a Registration Statement on Form
S-1 for a proposed initial public offering through underwriters (including
MLPF&S) of $170,000,000 in principal amount of debt securities (the "S-1
Registration Statement"). The S-1 Registration Statement was subsequently
amended to reduce the debt offering to $100,000,000 and include up to
approximately 7.2 million shares of US Foodservice Common Stock.
On September 26 and 27, 1995, Mark Van Stekelenburg, President and Chief
Executive Officer of Rykoff-Sexton, and Richard Martin, Senior Vice President
and Chief Financial Officer of Rykoff-Sexton, met with representatives of a
potential equity investor, Arthur Andersen LLP and MLPF&S (who was then
serving as Rykoff-Sexton's general advisor in connection with strategic
acquisitions) to discuss a number of possible acquisition candidates,
including US Foodservice. These discussions did not give rise to a proposal
with respect to a transaction.
25
<PAGE>
In early October 1995, Mr. Van Stekelenburg and representatives of MLPF&S
met again in Los Angeles to discuss a number of possible acquisition
candidates, including US Foodservice. Later that month, on October 23, 1995,
Mr. Van Stekelenburg asked MLPF&S to put Rykoff-Sexton in contact with US
Foodservice. MLPF&S agreed to do so and advised Mr. Van Stekelenburg that, in
view of the ownership interest of the ML Investors in US Foodservice, MLPF&S
would be unable to advise Rykoff-Sexton regarding any acquisition of US
Foodservice.
Late in October, in light of market conditions and other factors and after
discussions with MLCP and MLPF&S, US Foodservice began pursuing alternatives
to its primary strategy of an initial public offering, including a possible
sale of the company. On October 26, 1995, Mr. Van Stekelenburg received a call
from Frank Bevevino, the Chairman of the Board and Chief Executive Officer of
US Foodservice, to set a date on which they could meet to discuss a possible
business combination involving Rykoff-Sexton and US Foodservice.
On October 30, 1995, US Foodservice filed an amendment to the S-1
Registration Statement.
On November 1, 1995, Messrs. Van Stekelenburg and Bevevino met in
Pittsburgh, Pennsylvania to discuss a possible business combination involving
US Foodservice and Rykoff-Sexton. Messrs. Van Stekelenburg and Bevevino agreed
to continue discussions but the meeting did not otherwise result in a proposal
with respect to a transaction.
On November 2, 1995, Mr. Van Stekelenburg informed the Rykoff-Sexton Board
of Directors of his interest in pursuing a possible business combination with
US Foodservice and his discussions with representatives of US Foodservice.
Rykoff-Sexton's Board authorized management of Rykoff-Sexton to pursue further
discussions with US Foodservice regarding a possible business combination.
On November 9, 1995, Rykoff-Sexton, together with two potential equity
investors, submitted a preliminary proposal to representatives of MLCP, in its
capacity as general partner of majority stockholders of US Foodservice, to
acquire US Foodservice, indicating a value in the range of $16 to $18 per
share. This proposal, which offered the consideration in the form of cash or a
combination of cash and securities, was subject to customary conditions,
including due diligence and receipt of necessary approvals, including approval
of the Rykoff-Sexton Board of Directors. MLCP and US Foodservice had received
and were then evaluating a proposal from another party to acquire US
Foodservice.
On November 20, 1995, Rykoff-Sexton engaged BA Partners of Chicago, Illinois
to provide financial advisory services and to act as Rykoff-Sexton's financial
advisor in connection with a possible business combination involving US
Foodservice. Rykoff-Sexton also agreed to provide certain confidential
information to US Foodservice for the purpose of enabling US Foodservice to
evaluate a possible business combination. US Foodservice entered into a
confidentiality agreement on that date pursuant to which US Foodservice and
its stockholders agreed to maintain confidential information received from
Rykoff-Sexton and not to solicit to employ Rykoff-Sexton officers or employees
for a two-year period. In addition, for a period of three years, US
Foodservice and its stockholders agreed not to acquire Rykoff-Sexton voting
securities or to engage in the solicitation of proxies with regard to Rykoff-
Sexton voting securities or to form any "group" within the meaning of the
Exchange Act relating to Rykoff-Sexton voting securities without Rykoff-
Sexton's written consent.
On November 21, 1995, US Foodservice filed a further amendment to the S-1
Registration Statement and in the following days began preparing for the
marketing of the offering.
On November 21, 1995, Messrs. Van Stekelenburg and Martin, and
representatives of Rykoff-Sexton's potential equity investors who participated
in the November 9th proposal, met with Mr. Bevevino and David McAnally, Chief
Financial Officer of US Foodservice, in Chicago. At the November 21 meeting,
US Foodservice provided information, including financial information, to
enable Rykoff-Sexton to revise Rykoff-Sexton's November 9th proposal.
26
<PAGE>
On November 28, 1995, Rykoff-Sexton submitted a revised proposal to
representatives of MLCP to acquire all of the outstanding US Foodservice
Common Stock and approximately one million common stock equivalents held by
non-management owners for $22.50 in cash per share (or in Rykoff-Sexton Common
Shares, if desired by such stockholders) and to exchange shares of US
Foodservice Common Stock and common stock equivalents held by management for
Rykoff-Sexton Common Shares valued at $22.50. This proposal assumed redemption
of the Preferred Stock then outstanding for $50.5 million. This proposal was
also subject to customary conditions, including due diligence and receipt of
necessary approvals. MLCP and US Foodservice had received and were then
evaluating a revised proposal from the party that had previously made a
proposal to acquire US Foodservice.
Between November 28 and November 30, 1995, Mr. Van Stekelenburg continued
discussions with Mr. Bevevino of US Foodservice and representatives of MLCP
and MLPF&S regarding several possible variations on the structure for the
acquisition of US Foodservice set forth in the November 28th proposal,
including the possibility of an all stock transaction.
On December 1, 1995, Mr. Van Stekelenburg and a representative of BA
Partners met with representatives of MLCP and MLPF&S to discuss the principal
issues relating to the proposed acquisition by Rykoff-Sexton of US
Foodservice, including the terms of an all stock transaction. At that meeting,
a preliminary agreement was reached for a proposed strategic combination of US
Foodservice and Rykoff-Sexton on the terms described below, as well as an
exclusivity agreement among the parties, and the parties agreed to proceed
with negotiations regarding a letter of intent.
On December 2, 1995, Rykoff-Sexton submitted a proposed letter of intent to
MLCP and US Foodservice relating to a proposed strategic combination of US
Foodservice and Rykoff-Sexton in which each share of US Foodservice Common
Stock would be converted into the right to receive a number of shares of
Rykoff-Sexton Common Shares with a value of $25 per share, and the redemption
of all outstanding Preferred Stock for an aggregate of approximately $50.5
million, together with accrued interest from October 15, 1995 to the date of
redemption. MLCP and US Foodservice had again received and were then
evaluating a revised proposal from the third party that had previously made a
proposal to acquire US Foodservice. From December 2 through December 5, 1995,
members of senior management of US Foodservice, Rykoff-Sexton and MLCP and
their respective advisors engaged in further negotiations with respect to the
terms of the proposed letter of intent.
On December 4, 1995, the Rykoff-Sexton Board of Directors met in a regularly
scheduled meeting. At this meeting, Rykoff-Sexton's senior management made a
presentation on US Foodservice and its business, and discussed with members of
the Board the proposed business combination. Jones, Day, Reavis & Pogue,
Rykoff-Sexton's legal advisor, and BA Partners made presentations to the
Rykoff-Sexton Board of Directors regarding the proposed terms of the letter of
intent and discussed with the Rykoff-Sexton Board of Directors their views and
analyses of the proposed transaction. After discussion and consideration, the
Rykoff-Sexton Board of Directors authorized the execution by Rykoff-Sexton of
the letter of intent.
On December 5, 1995, Rykoff-Sexton, US Foodservice and MLCP, on behalf of
Merrill Lynch Capital Appreciation Partnership No. B-XVIII, L.P., ML Offshore
LBO Partnership No. B-XVIII, Merrill Lynch Capital Appreciation Partnership
No. XIII, L.P. and ML Offshore LBO Partnership No. XIII, executed a letter of
intent (the "Letter of Intent") confirming the parties' agreement to proceed
with negotiations for a proposed strategic combination of Rykoff-Sexton and US
Foodservice pursuant to which the outstanding US Foodservice Common Stock
would be converted into Rykoff-Sexton Common Shares at the Exchange Ratio. The
Letter of Intent also contemplated the redemption of the outstanding Preferred
Stock for approximately $50.5 million in cash (plus accrued and unpaid
interest from October 15, 1995), financing by Rykoff-Sexton of the
transaction, including the restructuring of the indebtedness of the combined
companies, the representation by the ML Entities on the Rykoff-Sexton Board of
Directors, and registration rights for the ML Entities on terms to be
negotiated. The Letter of Intent also contained an agreement that, through
January 19, 1996, US Foodservice, its stockholders and certain other
affiliates would not solicit alternative merger or business combination
proposals from third parties and would, subject to the fiduciary obligations
of US Foodservice and MLCP, negotiate exclusively with Rykoff-Sexton. US
Foodservice and MLCP agreed to pay Rykoff-Sexton an aggregate of $1,000,000 to
cover
27
<PAGE>
costs and expenses in the event of a termination of the exclusivity provisions
of the Letter of Intent, as permitted by the terms thereof in response to
certain unsolicited proposals. The Letter of Intent did not constitute a
legally binding obligation of the signatories thereto, other than with respect
to the exclusivity provision and a provision requiring joint approval by
Rykoff-Sexton and US Foodservice of press releases regarding the Letter of
Intent or the Merger. The Letter of Intent was otherwise subject to customary
conditions, including the preparation of definitive legal documentation for
the transaction, favorable completion of due diligence, board approvals and
the obtaining of commitments for sufficient financing for the restructuring of
the combined indebtedness of Rykoff-Sexton and US Foodservice. US Foodservice
agreed to postpone its efforts regarding the completion of the initial public
offering although the S-1 Registration Statement remained on file with the SEC
and the bank group that had committed to provide financing in connection with
the initial public offering remained so committed.
Pursuant to an engagement letter dated December 5, 1995, US Foodservice
confirmed its retention of MLPF&S to act as its financial advisor in
connection with the transaction.
On December 6, 1995, Rykoff-Sexton engaged Goldman Sachs to act as financial
co-advisor, along with BA Partners, to Rykoff-Sexton. See "--Opinion of
Financial Advisor to Rykoff-Sexton."
From December 7 through December 9, 1995, Messrs. Van Stekelenburg and
Bevevino met in Florida to discuss general business issues and due diligence
procedures for the transaction.
On December 11, 1995, Rykoff-Sexton and US Foodservice entered into a
confidentiality agreement pursuant to which Rykoff-Sexton agreed to maintain
confidential information received from US Foodservice in connection with the
transaction. From December 11 through December 12, 1995, Mr. Van Stekelenburg
and members of Rykoff-Sexton's senior management team met in Wilkes-Barre,
Pennsylvania with Mr. Bevevino, Thomas McMullen, President of US Foodservice,
Mr. McAnally and other senior management of US Foodservice to discuss in more
detail due diligence and other business issues to be pursued in the coming
weeks. During the balance of December 1995, the parties undertook extensive
financial, business and legal due diligence and representatives of Rykoff-
Sexton met with financing sources and Rykoff-Sexton's legal and financial
advisors. Financial and legal advisors of Rykoff-Sexton also met with advisors
and representatives of US Foodservice.
On December 28, 1995, Rykoff-Sexton's Board of Directors met via a telephone
conference with Rykoff-Sexton's senior management and Rykoff-Sexton's legal
and financial advisors to review with the Board the status of Rykoff-Sexton's
due diligence, negotiations on the definitive transaction documentation, and
discussions with Rykoff-Sexton's lenders regarding the proposed terms of the
Commitment Letter.
In late December 1995 and throughout January 1996, members of senior
management of Rykoff-Sexton and US Foodservice, as well as representatives of
the ML Entities, together with their financial and legal advisors, negotiated
the terms of the Merger Agreement. During this period, representatives of the
ML Entities and Rykoff-Sexton, together with their financial and legal
advisors, negotiated the terms of the ML Agreement, the Standstill Agreement,
the Registration Rights Agreement and the Tax Agreement. During this time, the
parties also continued to exchange financial, business and legal due diligence
materials, conducted additional due diligence and negotiated the terms of the
Commitment Letter.
On January 15, 1996, the Rykoff-Sexton Board of Directors met in a
regularly-scheduled meeting. At this meeting, members of Rykoff-Sexton's
senior management, together with Jones, Day, Reavis & Pogue, Rykoff-Sexton's
legal advisor, BA Partners and Goldman Sachs reviewed with the Rykoff-Sexton
Board, among other things, the background of the proposed Merger, financial
and legal aspects of the transaction, due diligence and synergy analyses
relating to the proposed Merger, valuation analyses relating to the Merger,
the terms of the Merger Agreement, the Standstill Agreement, the ML Agreement
and the Registration Rights Agreement, terms of the proposed refinancing and
the Commitment Letter, issues remaining to be negotiated, and other matters
described below under "--Recommendation of the Rykoff-Sexton Board of
Directors; Reasons for the Merger." Members of Rykoff-Sexton's senior
management and representatives of Jones, Day, Reavis & Pogue and
28
<PAGE>
Goldman Sachs made presentations to the Rykoff-Sexton Board of Directors and
discussed with the Rykoff-Sexton Board of Directors their views and analyses,
and related issues.
By a letter agreement dated January 18, 1996, MLCP, on behalf of the ML
Entities, and US Foodservice granted an extension of the exclusive negotiating
period under the Letter of Intent from January 19, 1996 to January 25, 1996.
This period was later extended to January 31, 1996, February 1, 1996 and
February 2, 1996 by subsequent letter agreements.
On January 31, 1996, the Rykoff-Sexton Board of Directors met again in a
special meeting. At this meeting, members of Rykoff-Sexton's senior
management, together with Jones, Day, Reavis & Pogue, BA Partners and Goldman
Sachs, reviewed with the Rykoff-Sexton Board, among other things, the current
status of the negotiations on the Merger Agreement and related agreements, as
well as the then current terms of such agreements, financial and legal aspects
of the transaction, valuation analyses relating to the transaction and other
matters described below under "--Recommendation of the Rykoff-Sexton Board of
Directors; Reasons for the Merger." Representatives of Jones, Day, Reavis &
Pogue and Goldman Sachs made presentations to the Rykoff-Sexton Board of
Directors and discussed with the Rykoff-Sexton Board their views and analyses,
and related issues.
On January 31, 1996, the US Foodservice Board of Directors met in a special
meeting. After discussion and consideration, the US Foodservice Board of
Directors approved the Merger Agreement and related agreements by the
unanimous vote of all directors, authorized the execution of such agreements
and recommended that the Merger Agreement be submitted for approval to
stockholders of US Foodservice. In addition, at the January 31st Board
meeting, the US Foodservice Board approved a .396 reverse stock split of the
US Foodservice Common Stock.
On February 2, 1996, the Rykoff-Sexton Board reconvened via telephone
conference for further consideration of the Merger Agreement and related
agreements. At this meeting, members of Rykoff-Sexton's senior management,
together with Jones, Day, Reavis & Pogue, BA Partners and Goldman Sachs
reviewed with the Rykoff-Sexton Board, among other things, the final terms of
the Merger Agreement and related agreements and other matters described below
under "--Recommendation of the Rykoff-Sexton Board of Directors; Reasons for
the Merger." Goldman Sachs delivered its oral opinion to Rykoff-Sexton Board
of Directors, which was subsequently confirmed in a written opinion dated
February 2, 1996 to the effect that as of such date, the number of Rykoff-
Sexton Common Shares to be paid by Rykoff-Sexton for the outstanding US
Foodservice Common Stock pursuant to the Merger Agreement is fair to Rykoff-
Sexton. After discussion and consideration, the Rykoff-Sexton Board approved
the Merger Agreement and the related agreements by the affirmative vote of all
directors present, authorized the execution of such agreements and recommended
that the issuance of shares pursuant to the Merger be submitted for approval
to the stockholders of Rykoff-Sexton. The Rykoff-Sexton Board also approved,
among other things, the draft Commitment Letter presented to it and authorized
officers of Rykoff-Sexton to negotiate, finalize and execute the Commitment
Letter. In addition, on February 2, by unanimous written consent, the Board of
Directors of Merger Sub, approved and adopted the Merger Agreement, and
Rykoff-Sexton, as sole stockholder of Merger Sub, approved and adopted the
Merger Agreement.
On February 2, 1996, the Merger Agreement was executed by Rykoff-Sexton,
Merger Sub and US Foodservice, and the ML Agreement was executed by Rykoff-
Sexton and the ML Entities. In addition, Rykoff-Sexton, BA Securities, Chase
and Chase Securities executed the Commitment Letter and ML IBK, MBIV and US
Foodservice executed an amendment to the ML Redemption Agreement to, among
other things, extend the period for redemption thereunder to (i) the earlier
to occur of (a) the closing of the Merger and (b) July 31, 1996 or (ii) if the
Merger Agreement is earlier terminated, at any time after the later of (a) May
31, 1996 and (b) the date of such termination.
On February 5, 1996, US Foodservice formally applied to the SEC for
withdrawal of the S-1 Registration Statement and all amendments filed with
respect thereto and terminated its commitment from the syndicate of financial
institutions which had committed to provide financing necessary in connection
with the initial public offering.
29
<PAGE>
EFFECT OF THE MERGER
In connection with the Merger, assuming the maximum number of Rykoff-Sexton
Common Shares are issued in the Merger, the persons who were holders of US
Foodservice Common Stock immediately before the Merger will receive an
aggregate of up to 12,880,552 Rykoff-Sexton Common Shares, representing
approximately 46.5% of the aggregate voting power of the Rykoff-Sexton Common
Shares after the Merger. In addition, up to 1,413,905 Rykoff-Sexton Common
Shares will be reserved for issuance upon the exercise of the Assumed Options
and the Assumed Warrants. Assuming the maximum number of Rykoff-Sexton Common
Shares are issued in the Merger, the ML Investors will receive an aggregate of
up to 10,076,010 Rykoff-Sexton Common Shares, representing approximately 36.4%
of the aggregate voting power of the Rykoff-Sexton Common Shares after the
Merger prior to the exercise of any Assumed Options or Assumed Warrants or any
other outstanding options to acquire Rykoff-Sexton Common Shares.
The resale of the Rykoff-Sexton Common Shares received in the Merger by the
ML Investors and any other "affiliates" (as such term is used in Rules 144 and
145 under the Securities Act) of US Foodservice prior to the Merger will be
restricted. See "--Resale of Rykoff-Sexton Common Shares." Rykoff-Sexton
Common Shares received in the Merger by persons other than "affiliates" will
be freely transferable and will not be restricted except as contemplated by
arrangements entered into by certain US Foodservice employees in connection
with the forgiveness of certain management loans, and except as provided in
the Tax Agreement that the ML Investors and certain other stockholders of US
Foodservice will enter into with Rykoff-Sexton at the Effective Time of the
Merger. See "--Interests of Certain Persons in the Merger--US Foodservice
Management Loans" and "OTHER AGREEMENTS--The Tax Agreement." The ML Investors
will have the right to require Rykoff-Sexton to register all or a portion of
their Rykoff-Sexton Common Shares for sale under the Securities Act, thus
permitting the sale of such Rykoff-Sexton Common Shares to the general public
in the circumstances and subject to the conditions and restrictions set forth
in the Registration Rights Agreement. See "OTHER AGREEMENTS--The Registration
Rights Agreement" and "--Risk Factors--Sale of Shares by ML Investors."
To provide assurances in connection with the qualification of the Merger as
a tax-free reorganization for federal income tax purposes, certain
stockholders of US Foodservice, including all of the ML Investors, will enter
into the Tax Agreement with Rykoff-Sexton at the Effective Time, pursuant to
which each such stockholder will be prohibited from selling, exchanging,
distributing or otherwise disposing of in any manner, during the two-year
period following the Effective Time, more than a certain percentage of the
Rykoff-Sexton Common Shares received in the Merger by such stockholder, with
such percentage to be determined by a formula at the Effective Time. For
purposes, however, of applying the transfer restrictions in the Tax Agreement
to the ML Investors, all of the Rykoff-Sexton Common Shares received in the
Merger by the ML Investors will be aggregated, and the ML Investors will be
treated as a single stockholder. See "OTHER AGREEMENTS--The Tax Agreement."
Pursuant to the Standstill Agreement, the ML Entities will agree, among
other things, to vote their Rykoff-Sexton Common Shares in favor of Rykoff-
Sexton's nominees for the Board of Directors. The ML Entities will also be
entitled to designate four nominees to the Rykoff-Sexton Board of Directors,
which will have twelve members, with such number of nominees and Board members
decreasing if the percentage of outstanding Rykoff-Sexton Common Shares held
by the ML Entities falls below certain levels. As a result of their ownership
interest in Rykoff-Sexton, the ML Entities may also influence the outcome of
other matters submitted to Rykoff-Sexton stockholders. See "--Risk Factors--
Concentration of Ownership" and "OTHER AGREEMENTS--The Standstill Agreement."
RECOMMENDATION OF THE RYKOFF-SEXTON BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Rykoff-Sexton Board of Directors believes that the Merger and the
transactions contemplated thereby are in the best interests of Rykoff-Sexton
and its stockholders. Accordingly, the Board of Directors of Rykoff-Sexton has
approved the Merger Agreement and the Merger, the issuance of the Rykoff-
Sexton Common Shares in the Merger and the reservation of Rykoff-Sexton Common
Shares for issuance under the Assumed Options and the Assumed Warrants, and
recommends that the Rykoff-Sexton stockholders vote FOR the approval of the
issuance of the Rykoff-Sexton Common Shares in connection with the Merger
Agreement.
30
<PAGE>
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the Rykoff-Sexton Board of Directors
considered a number of factors, including, without limitation, the factors
listed below. In view of the wide variety of factors considered in connection
with its evaluation of the Merger, the Rykoff-Sexton Board of Directors did
not consider it practicable to, nor did it attempt to, quantify or otherwise
assign relative weights to the specific factors it considered in reaching its
determination.
(i) Management's Recommendation. The Rykoff-Sexton Board of Directors
reviewed presentations from, and discussed the terms and conditions of the
Merger Agreement and the Merger with, senior executive officers of Rykoff-
Sexton, representatives of Rykoff-Sexton's legal counsel and
representatives of Goldman Sachs and BA Partners, Rykoff-Sexton's financial
advisors. The Rykoff-Sexton Board considered management's view of recent
trends in the United States foodservice industry. In particular, the
Rykoff-Sexton Board of Directors considered management's view that a
combination of Rykoff-Sexton's Distribution Division with US Foodservice,
the fifth largest broadline food distribution company in the United States
with a strong local and regional presence, would create an even stronger
competitor in the foodservice distribution industry. Rykoff-Sexton's
management noted that US Foodservice has been successful in integrating a
number of significant, regional acquisitions into an integrated foodservice
distribution business. In making its determination, the Rykoff-Sexton Board
also considered the view expressed by Rykoff-Sexton's management that the
Merger with US Foodservice would further Rykoff-Sexton's strategic
objectives. Rykoff-Sexton's management's view is based on its belief that
the pattern of consolidation in the foodservice industry will continue, and
that sales growth and expansion in existing and into new markets through
acquisitions will be essential to compete as a low-cost, high-quality
national distributor in the foodservice industry. The Rykoff-Sexton Board
also considered management's view that, if Rykoff-Sexton were not to enter
into the Merger Agreement, US Foodservice might well enter into a
combination transaction with another large foodservice distribution company
(an event that might result in gains that Rykoff-Sexton anticipated from
the Merger being realized by a competitor of Rykoff-Sexton) and the
importance of a transaction with US Foodservice in creating a larger
organization in order to maintain historical growth rates in an
increasingly consolidating industry and competitive environment.
(ii) US Foodservice's Business, Condition, Prospects and Management. In
evaluating the terms of the Merger, the Rykoff-Sexton Board of Directors
considered, among other things, the value of US Foodservice's business and
information with respect to the financial condition, results of operations
and businesses of US Foodservice, on both a historical and prospective
basis, and current industry, economic and market conditions. The Rykoff-
Sexton Board of Directors also considered the quality, experience and
breadth of US Foodservice's senior management team, distribution center
management and sales force, and the entrepreneurial, decentralized
corporate culture of US Foodservice. In evaluating US Foodservice's
prospects, the Rykoff-Sexton Board of Directors considered, among other
things, the strengths of US Foodservice's food distribution businesses,
including its strong market share in each of its local and regional markets
in which Rykoff-Sexton has less of a presence, its longstanding customer
relationships, and the challenges facing the foodservice distribution
business, including competition from traditional broadline foodservice
distribution competitors (such as Sysco Corporation and Alliant
Foodservice, Inc.) and specialized system distributors (such as Prosource
Distribution Services, Inc. and AmeriServ Food Company).
(iii) Strategic Benefits. In reviewing the Merger and US Foodservice's
assets and operations, the Rykoff-Sexton Board of Directors reviewed the
complementary nature of the businesses of the two companies, which have
little geographic overlap. The Rykoff-Sexton Board of Directors also
considered the potential of the combined entity to increase sales by
offering complementary product lines and services to customers now only
partially served by Rykoff-Sexton and/or US Foodservice, the economies of
scale, cost savings and synergies that management of Rykoff-Sexton believes
over time may result from the combination of Rykoff-Sexton and US
Foodservice as discussed below under "--Potential Cost Savings and
Operating Synergies," and the availability of experienced management to
address the challenges associated with successfully integrating the
businesses of the two corporations.
(iv) Comparable Transactions. The Rykoff-Sexton Board of Directors also
reviewed comparable transactions in the foodservice industry in considering
the strategic and financial rationale for the Merger.
31
<PAGE>
The Rykoff-Sexton Board of Directors reviewed a financial comparison of
Rykoff-Sexton and US Foodservice and studied the potential impact of the
Merger on the balance sheet and earnings per share of Rykoff-Sexton, and
the dilution arising from the Merger. The Rykoff-Sexton Board of Directors
also took into account Goldman Sachs' analysis that the aggregate
consideration to be paid pursuant to the Merger Agreement (considered as a
multiple of the latest twelve month sales, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and earnings before interest and
taxes ("EBIT")) was within the range of multiples paid in other selected
merger and acquisition transactions in the foodservice industry. See "--
Opinion of Financial Advisor to Rykoff-Sexton."
(v) Terms and Conditions of the Merger Agreement. The Rykoff-Sexton Board
of Directors considered the terms and conditions of the Merger Agreement,
together with the terms of the ML Agreement, Standstill Agreement,
Registration Rights Agreement, and Tax Agreement, and the amount and form
of consideration to be paid to the stockholders of US Foodservice. The
Rykoff-Sexton Board of Directors also considered provisions of the Merger
Agreement that would require Rykoff-Sexton to pay to US Foodservice a fee
of $4,500,000 plus expenses up to $1,000,000 if the issuance of the Rykoff-
Sexton Common Shares in connection with the Merger is not approved by
Rykoff-Sexton stockholders at a Rykoff-Sexton stockholders meeting
following the public announcement of an RSI Alternative Proposal, and a
definitive agreement with respect to such RSI Alternative Proposal is
executed by Rykoff-Sexton within twelve months of the date on which the
Special Meeting is held. See "THE MERGER AGREEMENT--Expenses; Termination
Fee."
(vi) Opinion of Goldman, Sachs & Co. The Rykoff-Sexton Board of Directors
considered as favorable to its determination the oral opinion delivered by
Goldman Sachs on February 2, 1996, which was subsequently confirmed in a
written opinion to the Rykoff-Sexton Board of Directors dated February 2,
1996, to the effect that as of such date, the aggregate number of Rykoff-
Sexton Common Shares to be paid by Rykoff-Sexton for the outstanding US
Foodservice Common Stock pursuant to the Merger Agreement is fair to
Rykoff-Sexton. The Rykoff-Sexton Board of Directors also considered the
oral and written presentations made to it by Goldman Sachs. See "--Opinion
of Financial Advisor to Rykoff-Sexton." A copy of Goldman Sachs' written
opinion to the Rykoff-Sexton Board of Directors, dated as of the date of
this Proxy Statement/Prospectus, is attached as Appendix B to this Proxy
Statement/Prospectus and is incorporated herein by reference.
(vii) Terms of the Refinancing. The Rykoff-Sexton Board of Directors
considered the terms and conditions of the proposed refinancing of the debt
of Rykoff-Sexton and US Foodservice in connection with the Merger,
including the proposed terms of the New Credit Facility and Receivables
Securitization. The Rykoff-Sexton Board of Directors also evaluated the
effect of such refinancing, including the additional indebtedness of US
Foodservice to be refinanced pursuant to the New Credit Facility, in light
of the potential synergies and cost savings which management believes could
result from the transaction, as well as the effect on Rykoff-Sexton of
increased indebtedness resulting from the Merger.
POTENTIAL COST SAVINGS AND OPERATING SYNERGIES
In evaluating the terms of the Merger, the Rykoff-Sexton Board of Directors
considered management's view that the Merger could create opportunities for
cost savings of approximately $10 million during the first twelve-month period
following the Effective Time, $20 million during the second twelve-month
period following the Effective Time, and $30 million annually thereafter.
These estimates were based on preliminary evaluations of opportunities for the
combined foodservice businesses of Rykoff-Sexton and US Foodservice to benefit
from cost savings and other synergies associated with various economies of
scale (both in manufacturing and in distribution), increased purchasing power,
and the elimination of redundant management and overhead expenses. Rykoff-
Sexton's management believes that the bulk of these cost savings should be
derived from the following opportunities:
(i) Enhanced purchasing leverage (resulting in a lower cost of goods) and
more favorable sales and marketing allowances from suppliers resulting from
the increased purchasing power of the combined companies;
(ii) Opportunities to increase Rykoff-Sexton's sales volume for self-
manufactured items;
32
<PAGE>
(iii) The combination of Rykoff-Sexton's and US Foodservice's management
and administrative functions, and the elimination of costs associated with
redundant departments and functions;
(iv) Opportunities to achieve operating efficiencies and synergies,
including (a) the consolidation of overlapping distribution centers and
related management teams, and reduction of redundant facility costs, and
(b) consolidation of transportation, routing and service logistics for
facilities with overlapping service areas, including the transfer of
customers from facilities servicing customers on a high cost, long-distance
basis to facilities within a closer geographic proximity;
(v) The capacity of the combined entity to increase sales by offering
additional product lines and services to customers now only partially
served by Rykoff-Sexton and/or US Foodservice, in particular, opportunities
for US Foodservice to (a) offer Rykoff-Sexton's line of equipment and
supplies, and contract and design services to additional customers through
US Foodservice's sales force, (b) sell Rykoff-Sexton's private label,
branded products which generally carry a higher gross margin, and (c) sell
Rykoff-Sexton's broad product line of imported specialty foods sourced
directly from Rykoff-Sexton's own re-distribution warehouses;
(vi) Cost savings from integrated, combined purchasing of equipment and
miscellaneous supplies, labels and packaging; and
(vii) Rationalization and consolidation of employee benefit plans,
including combined purchasing of insurance.
The cost savings estimates were developed solely for purposes of evaluating
the Merger, do not include non-recurring adjustments that will be recorded in
conjunction with the Merger, and should not be relied upon as an estimate of
actual cost savings that may be achieved. These estimates are based upon
assumptions that are inherently uncertain, though considered reasonable by
Rykoff-Sexton, and are subject to significant business, economic and
competitive uncertainties which are difficult to predict and often beyond the
control of management. Rykoff-Sexton and US Foodservice are currently
developing a strategy for implementing specific cost-saving measures and
operating synergies.
OPINION OF FINANCIAL ADVISOR TO RYKOFF-SEXTON
Rykoff-Sexton retained Goldman Sachs on December 6, 1995 as Rykoff-Sexton's
financial co-advisor (with BA Partners) in connection with the transaction
contemplated by the Merger Agreement.
At the request of Rykoff-Sexton, on February 2, 1996, Goldman Sachs
delivered an oral opinion to the Rykoff-Sexton Board of Directors, which was
subsequently confirmed in a written opinion dated February 2, 1996, to the
effect that as of such date, the aggregate number of Rykoff-Sexton Common
Shares to be paid by Rykoff-Sexton for the outstanding US Foodservice Common
Stock pursuant to the Merger Agreement is fair to Rykoff-Sexton. Goldman Sachs
has confirmed such opinion by delivery of a written opinion dated as of the
date of this Proxy Statement/Prospectus. The full text of the written opinion
of Goldman Sachs dated as of the date of this Proxy Statement/Prospectus is
set forth as Appendix B to this Proxy Statement/Prospectus and describes the
assumptions made, matters considered and limits on the review undertaken.
Rykoff-Sexton stockholders are urged to read the opinion in its entirety.
Goldman Sachs' opinion was directed to the Rykoff-Sexton Board of Directors in
connection with and for the purposes of their evaluation of the Merger
Agreement, and does not constitute a recommendation to any stockholder of
Rykoff-Sexton as to how such stockholder should vote with respect to the
approval of the issuance of Rykoff-Sexton Common Shares in connection with the
Merger Agreement.
In connection with its opinion, Goldman Sachs reviewed, among other things:
the Merger Agreement; the Registration Statement on Form S-4, including this
Proxy Statement/Prospectus; Annual Reports to Stockholders and Annual Reports
on Form 10-K of Rykoff-Sexton for the five fiscal years ended April 29, 1995;
certain interim reports to stockholders of Rykoff-Sexton and Quarterly Reports
on Form 10-Q of Rykoff-Sexton; certain other communications from Rykoff-Sexton
to its stockholders; audited financial statements of US Foodservice for the
three fiscal years ended December 30, 1995 and the twenty-seven weeks ended
January 2, 1993; certain
33
<PAGE>
internal financial analyses and forecasts for Rykoff-Sexton and US Foodservice
prepared by their respective managements; and certain internal forecasts for
Rykoff-Sexton and US Foodservice on a combined basis, after giving effect to
the Merger, prepared by the respective managements of Rykoff-Sexton and US
Foodservice. Goldman Sachs also held discussions with members of the senior
managements of Rykoff-Sexton and US Foodservice regarding the past and current
business operations, financial condition, future prospects of their respective
companies and the potential future prospects of their respective companies on
a combined basis, after giving effect to the Merger. In addition, Goldman
Sachs reviewed the reported price and trading activity for the Rykoff-Sexton
Common Shares, compared certain financial and stock market information for
Rykoff-Sexton with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the foodservice distribution industry
specifically and in other industries generally and performed such other
studies and analyses as it considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by it for
purposes of its opinion, and any inaccuracy in or lack of completeness of such
information might or might not affect Goldman Sachs' evaluation of the
fairness of the Rykoff-Sexton Common Shares to be issued to US Foodservice
stockholders in the Merger. Goldman Sachs relied on the managements of Rykoff-
Sexton and US Foodservice as to the reasonableness and achievability of the
financial and operating forecasts (and the assumptions and bases therefor)
provided to it, and with the consent of the Rykoff-Sexton Board of Directors,
Goldman Sachs assumed that such forecasts, including without limitation
projected cost savings and operating synergies resulting from the Merger,
reflect the best then available estimates and judgements of such respective
managements and that such projections and forecasts will be realized in the
amounts and time periods then estimated by the managements of Rykoff-Sexton
and US Foodservice. Further, in its evaluation of the fairness of the Rykoff-
Sexton Common Shares to be issued to US Foodservice stockholders in the
Merger, Goldman Sachs assumed, with the permission of the Rykoff-Sexton Board
of Directors, that the consummation of the Merger would not result in a change
of control of Rykoff-Sexton. In addition, Goldman Sachs has not made an
independent evaluation or appraisal of the assets and liabilities of Rykoff-
Sexton or US Foodservice or any of their subsidiaries, and Goldman Sachs has
not been furnished with any such evaluation or appraisal.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its opinion to the Board of
Directors of Rykoff-Sexton on February 2, 1996. Certain financial data
contained in the summary has been restated to account for a savings of
approximately $15 million resulting from the redemption in March 1996 of the
10% Preferred Stock of US Foodservice pursuant to the terms of the Sara Lee
Redemption Agreement and the redemption of the Exchangeable Preferred Stock of
US Foodservice pursuant to the terms of the ML Redemption Agreement. See "--
Redemption or Purchase of Preferred Stock." This summary does not purport to
be a complete description of Goldman Sachs' written analyses or its
presentations to the Rykoff-Sexton Board of Directors.
Selected Companies Analysis--Public Market Observations, Comparison of
Selected Food Distribution Companies. Goldman Sachs reviewed and compared
certain financial information relating to Rykoff-Sexton to corresponding
financial information for three foodservice distributors: JP Foodservice Inc.,
Performance Food Group, and Sysco Corp. (the "Distributors"); and five food
wholesalers: Fleming Company Inc., Nash Finch Co., Richfood Holdings, Inc.,
Super Food Services and Supervalu Inc. (the "Wholesalers" and, together with
the Distributors, the "Selected Companies"). In its analysis, Goldman Sachs
calculated and compared various financial multiples and ratios with respect to
Rykoff-Sexton and the Selected Companies based on stock prices as of January
26, 1996 (except in the case of JP Foodservice Inc., as to which such
multiples and ratios were based on the stock price as of November 30, 1995).
Goldman Sachs considered enterprise value (equity market capitalization plus
debt, minority interests and preferred stock less cash) as a multiple of
latest twelve months ("LTM") sales, EBITDA and EBIT. Goldman Sachs' analysis
indicated enterprise value as a multiple of (i) LTM sales ranging from 0.30x
to 0.50x for the Distributors and from 0.10x to 0.49x for the Wholesalers, as
compared to a multiple of 0.25x for Rykoff-Sexton; (ii) LTM EBITDA ranging
from 8.4x to 10.4x for the Distributors and from 4.2x to 13.0x for the
Wholesalers, as compared to a multiple of 11.1x for Rykoff-Sexton;
34
<PAGE>
and (iii) LTM EBIT ranging from 11.2x to 13.9x for the Distributors and from
7.4x to 17.1x for the Wholesalers, as compared to a multiple of 20.7x for
Rykoff-Sexton.
Goldman Sachs also compared the price/earnings ratios for the Selected
Companies and Rykoff-Sexton based on LTM earnings ("LTM Earnings") and
estimated calendar year earnings for 1995 ("1995E Earnings") and 1996 ("1996E
Earnings"). This analysis indicated price/earnings ratios (i) based on LTM
Earnings, ranging from 16.1x to 22.2x for the Distributors and from 10.9x to
53.0x for the Wholesalers, as compared to 47.3x for Rykoff-Sexton; (ii) based
on 1995E Earnings, ranging from 18.8x to 21.3x for the Distributors and 12.7x
to 21.3x for the Wholesalers, as compared to 21.1x for Rykoff-Sexton; and
(iii) based on 1996E Earnings, ranging from 15.3x to 18.6x for the
Distributors and from 11.9x to 18.6x for the Wholesalers, as compared to 13.7x
for Rykoff-Sexton. The 1995E Earnings and 1996E Earnings reflect medians
derived from an aggregation of estimates, as reported by the Institutional
Broker Estimate Service ("IBES") as of January 24, 1996, of financial analysts
covering Rykoff-Sexton and the Selected Companies, based on each analyst's
financial model for the respective companies. Goldman Sachs also reviewed the
estimated IBES Long Term EPS Growth Rates for Rykoff-Sexton and the Selected
Companies, which indicated estimated five-year growth rates ranging from 11.5%
to 20% for the Distributors and from 6.0% to 14.0% for the Wholesalers, as
compared to an estimated rate of 13.0% for Rykoff-Sexton.
Selected Transactions. Goldman Sachs reviewed and compared to the Merger the
consideration paid in certain other selected merger and acquisition
transactions in the foodservice industry (the "Selected Transactions"). The
transactions reviewed (and the respective closing dates thereof) were: Rykoff-
Sexton/H&O Foods (11/95); ProSource Distribution Service (Onex Corp.)/Martin-
Brower Co. (3/95); Clayton Dubilier & Rice/Kraft Foodservice (2/95); Rykoff-
Sexton/Continental Foods (2/95); Unifax/White Swan (9/93); SUPERVALU/Wetterau
(10/92); Wal-Mart/McLane (12/90); Kraft/3 Branches of PYA (7/89); Chase
Manhattan Bank/PYA North and Midwest (J.P. Foodservice) (7/89);
Management/White Swan (division of Fleming Companies) (10/88); Sysco Corp./CFS
Continental (10/88); Management/IU Foodservice (Biggers) (8/88); Marriott
Corp./Saga Corp. (8/86); ARA Holding Company/ARA Services Inc. (12/84); and
Staley Manufacturing/CFS Continental Inc. (11/84). Goldman Sachs calculated
the aggregate consideration paid in the Selected Transactions as multiples of
LTM sales, EBITDA and EBIT of the acquired entities. This analysis resulted in
multiples ranging as follows: (i) from 0.19x to.44x for LTM sales; (ii) from
4.5x to 10.1x for LTM EBITDA; and (iii) from 7.9x to 18.2x for LTM EBIT.
Goldman Sachs also calculated the equity consideration paid in the Selected
Transactions as a multiple of net income. This calculation indicated a range
of 12.8x to 26.8x.
Implied Multiples Analysis. Goldman Sachs reviewed certain implied multiples
for the Merger based on US Foodservice's LTM results and also computed
multiples for the Merger based on US Foodservice's results for the calendar
year 1994 ("CY 1994") and its estimated results for the calendar years 1995
("CY 1995E") and 1996 ("CY 1996E"). This analysis indicated aggregate
consideration to be paid in the Merger as a multiple of LTM sales of 0.39x,
EBITDA of 9.9x and EBIT of 13.3x; CY 1994 sales of 0.43x, EBITDA of 10.6x and
EBIT of 14.0x; CY 1995E sales of 0.37x, EBITDA of 9.1x and EBIT of 12.7x; and
CY 1996E sales of 0.36x, EBITDA of 8.0x and EBIT of 10.7x. Goldman Sachs also
calculated the foregoing multiples for the Merger assuming annual pre-tax
synergies ("APS") resulting from the transaction (based on Rykoff-Sexton and
US Foodservice management estimates of potential synergies) ranging from $10
million to $30 million. These calculations resulted in total consideration to
be paid in the Merger as a multiple of EBITDA ranging from 5.8x (based on CY
1996E and an assumption of $30 million in APS) to 9.1x (based on CY 1994 and
an assumption of $10 million in APS) and EBIT ranging from 7.1x (based on CY
1996E and an assumption of $30 million in APS) to 11.5x (based on CY 1994 and
an assumption of $10 million in APS). Goldman Sachs also calculated the equity
consideration to be paid in the Merger as a multiple of net income available
to common stock. This analysis resulted in multiples for the Merger ranging
from 79.4x (based on LTM net income and no assumed APS) to 10.0x (based on CY
1996E net income and an assumption of $30 million in APS).
Historical Stock Trading Analysis. Goldman Sachs reviewed historical trading
prices and volumes for the Rykoff-Sexton Common Shares. Such review included,
among other things, an analysis of the weighted average
35
<PAGE>
market price of the Rykoff-Sexton Common Shares and the total volume of
Rykoff-Sexton Common Shares traded as a percentage of Rykoff-Sexton Common
Shares outstanding during the period of January 25, 1991 to January 25, 1996.
Such analysis indicated a weighted average market price of $16.27 per share
with 190.7% of the total outstanding Rykoff-Sexton Common Shares traded in
such period. Such review also included an analysis of the weighted average
market price of the Rykoff-Sexton Common Shares outstanding during the LTM
period preceding January 25, 1996. Such analysis indicated an LTM weighted
average market price of $20.08 per share (based on daily closing prices for
the Rykoff-Sexton Common Shares during such period) with 55.0% of the total
outstanding shares of Rykoff-Sexton traded in such period.
Discounted Cash Flow Analysis. Goldman Sachs performed a discounted cash
flow analysis based on US Foodservice management's projected free cash flow of
US Foodservice for the fiscal years 1997 through 2004 using discount rates
ranging from 9% to 13%. Goldman Sachs calculated the terminal value of US
Foodservice at 2004 based on assumed perpetual growth rates in free cash flow
ranging from 3% to 7% and discounted such terminal values to present value
using discount rates ranging from 9% to 13%. The above values and rates
produced implied per share values ranging from $7 to $157.
Pro Forma Contribution Analysis. Goldman Sachs reviewed certain historical
and estimated financial information (including sales, EBITDA, EBIT and net
income) for Rykoff-Sexton, US Foodservice and the pro forma combined entity
resulting from the Merger and analyzed the relative contributions of Rykoff-
Sexton and US Foodservice to the combined entity based on this review. Based
on the foregoing information, Goldman Sachs calculated a contribution by US
Foodservice to: (i) combined entity sales of 49.7% (based on LTM sales), 47.3%
(based on estimated fiscal year 1997 sales ("FY 1997E")) and 46.7% (based on
estimated fiscal year 1998 sales ("FY 1998E")); (ii) combined entity EBITDA of
59.4% (based on LTM EBITDA), 51.9% (based on FY 1997E EBITDA) and 50.5% (based
on FY 1998E EBITDA); (iii) combined entity EBIT of 64.5% (based on LTM EBIT),
54.4% (based on FY 1997E EBIT) and 52.7% (based on FY 1998E EBIT); and (iv)
net income of the combined entity of 55.6% (based on LTM net income), 46.9%
(based on FY 1997E net income) and 45.6% (based on FY 1998E net income).
Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses of the
financial impact of the Merger using estimates of earnings per share ("EPS")
for Rykoff-Sexton and US Foodservice prepared by their respective managements
for the LTM, the fiscal year ended April 30, 1996, and the 1997, 1998 and 1999
fiscal years. Goldman Sachs performed these analyses assuming an Exchange
Ratio of 1.457 and a 40-year amortization period for goodwill. Goldman Sachs
compared the stand-alone estimated EPS of Rykoff-Sexton for the LTM and the
fiscal year ended April 30, 1996 to the pro forma estimated EPS of the
combined companies (with no assumed APS). This analysis indicated that, with
no APS, the estimated EPS of the combined companies would be 86.9% and 62.4%
lower than estimated EPS for Rykoff-Sexton on a stand-alone basis for the same
periods. Goldman Sachs also compared the estimated stand-alone EPS data for
the 1997, 1998 and 1999 fiscal years to the corresponding pro forma estimated
EPS of the combined companies assuming no APS and assuming APS of (i) $10
million, $20 million and $30 million ("Case I Synergies") and (ii) $15
million, $28.8 million and $42.7 million ("Case II Synergies"), in each case
for the 1997, 1998 and 1999 fiscal years, respectively. Goldman Sachs'
calculation indicated that, assuming Case I Synergies, estimated EPS of the
combined companies would be 7.7% lower than estimated stand-alone EPS data for
1997, and 4.8% and 29.9% accretive for 1998 and 1999 respectively. Goldman
Sachs' calculation also indicated that estimated EPS of the combined companies
would range from being 27.9% lower than estimated stand-alone EPS data for
1997 (assuming no APS) to being 48.1% accretive for 1999 (assuming Case II
Synergies).
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analysis or of the summary set forth above, without
considering the analysis as a whole, could create an incomplete view of the
processes underlying Goldman Sachs' opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses and
did not rely exclusively on any single analyses, and did not exclude any of
the analyses summarized above in reaching its opinion that the Rykoff-Sexton
Common Shares to be issued to US Foodservice
36
<PAGE>
stockholders for the outstanding US Foodservice Common Stock pursuant to the
Merger Agreement is fair to Rykoff-Sexton. No factor was assigned a greater
weight by Goldman Sachs in reaching its opinion; rather Goldman Sachs
considered all of the analyses together in coming to the determination of
fairness. No company or transaction used in the above analysis as a comparison
is identical to Rykoff-Sexton or US Foodservice or the contemplated
transaction. The analyses were prepared solely for purposes of Goldman Sachs'
providing its opinion as to the fairness to Rykoff-Sexton of the Rykoff-Sexton
Common Shares consideration to be paid pursuant to the Merger Agreement and do
not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts
of future results are not necessarily indicative of actual future results,
which may be significantly more or less favorable than suggested by such
analyses. As described above, Goldman Sachs' opinion and presentation to the
Rykoff-Sexton Board of Directors were one of many factors taken into
consideration by the Rykoff-Sexton Board in making its determination to
approve the Merger. The foregoing summary does not purport to be a complete
description of the analysis performed by Goldman Sachs and is qualified by
reference to the written opinion of Goldman Sachs attached as Appendix B to
this Proxy Statement/Prospectus.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. Rykoff-Sexton
selected Goldman Sachs as its financial advisor because it is a nationally
recognized investment banking firm that has substantial experience in
transactions similar to the Merger. Goldman Sachs is familiar with Rykoff-
Sexton, having acted as its financial advisor in connection with the Merger
Agreement. Goldman Sachs provides a full range of financial, advisory and
brokerage services and in the course of its normal trading activities may from
time to time effect transactions and hold positions in the securities or
options on securities of Rykoff-Sexton for its own account and for the account
of customers.
Pursuant to a letter agreement dated December 14, 1995 (the "Engagement
Letter"), Rykoff-Sexton has agreed to pay to Goldman Sachs a non-refundable
fee of $100,000 ("Minimum Fee") which will be credited against any other fees
payable pursuant to the Engagement Letter. In addition, if at least 50% of the
outstanding common stock of US Foodservice, or at least 50% of the assets
(based on the book value thereof) of US Foodservice is acquired in one or more
transactions, Rykoff-Sexton has agreed to pay Goldman Sachs a transaction fee
equal to $1,500,000, less the Minimum Fee already paid. If less than 50% of
the outstanding common stock or assets (based on the book value thereof) of US
Foodservice is acquired, Rykoff-Sexton has agreed to pay Goldman Sachs a
transaction fee to be mutually agreed upon by Rykoff-Sexton and Goldman Sachs.
In addition, if the Merger is not consummated and Rykoff-Sexton receives a
break-up fee, topping fee or other similar payment from US Foodservice or its
stockholders (such fee or payment, less any out-of-pocket expenses incurred by
Rykoff-Sexton in connection therewith and not reimbursed, "Break-up Fee"),
Rykoff-Sexton has agreed to pay Goldman Sachs 5% of such Break-up Fee (less
any fees already paid pursuant to the Engagement Letter), in cash upon receipt
thereof by Rykoff-Sexton. The Merger Agreement does not provide for the
payment of any such Break-up Fee by US Foodservice or its stockholders.
Pursuant to the Engagement Letter, Rykoff-Sexton has also offered Goldman
Sachs the right to act as lead manager or agent (with BA Securities as co-
manager or co-agent) in any offering or placement of debt securities relating
to any refinancing of any indebtedness incurred or refinanced in connection
with the transactions contemplated by the Merger Agreement.
In addition, pursuant to the Engagement Letter, whether or not a transaction
is consummated, Rykoff-Sexton will pay Goldman Sachs reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of its attorneys,
plus any Illinois sales, use or similar taxes (including additions to such
taxes, if any) in connection with any matter referred to in the Engagement
Letter. Rykoff-Sexton has also agreed to indemnify Goldman Sachs against
certain liabilities, including certain liabilities arising under the Federal
securities laws.
Pursuant to a letter agreement dated November 20, 1995 (the "BA Engagement
Letter"), Rykoff-Sexton engaged BA Partners, a division of BA Securities, to
act as its financial advisor. Pursuant to the terms of the BA Engagement
Letter, Rykoff-Sexton agreed to pay to BA Partners a non-refundable fee of
$100,000 (the "BA
37
<PAGE>
Minimum Fee"), which will be credited against any other fees payable pursuant
to the BA Engagement Letter. In addition, if Rykoff-Sexton acquires at least
50% of the capital stock of US Foodservice or at least 50% of the business and
properties (based on the book value thereof) of US Foodservice, then Rykoff-
Sexton has agreed to pay BA Partners a success fee equal to $1,500,000, less
the BA Minimum Fee already paid. If less than 50% of capital stock or the
business and properties (based on the book value thereof) of US Foodservice is
acquired, Rykoff-Sexton has agreed to pay BA Partners a transaction fee to be
mutually agreed upon by Rykoff-Sexton and BA Partners. In addition, if the
Merger is not consummated and Rykoff-Sexton receives a break-up fee, topping
fee or other similar payment from US Foodservice or its stockholders, Rykoff-
Sexton agrees to pay BA Partners 5% of such break-up fee (less any fees
already paid pursuant to the BA Engagement Letter), in cash upon receipt by
Rykoff-Sexton. The Merger Agreement does not provide for the payment of any
such break-up fee by US Foodservice or its stockholders. The BA Engagement
Letter also provides that it is Rykoff-Sexton's intention to engage BA
Securities as an underwriter of any underwritten public debt offering or Rule
144A debt offering the proceeds of which are used to finance, or refinance
other debt incurred to finance, the transactions contemplated by the Merger.
In addition, pursuant to the BA Engagement Letter, whether or not a
transaction is consummated, Rykoff-Sexton will pay BA Partners reasonable out-
of-pocket expenses, including reasonable fees and expenses of its attorneys.
Rykoff-Sexton has also agreed to indemnify BA Partners against certain
liabilities, including certain liabilities arising under the Federal
securities laws.
BA Partners was not requested to, and did not provide, a fairness opinion to
the Rykoff-Sexton Board of Directors.
REDEMPTION OR PURCHASE OF PREFERRED STOCK
It is a condition precedent to the Merger that (i) all shares of US
Foodservice's Exchangeable Preferred Stock shall have been purchased by
Rykoff-Sexton or Merger Sub pursuant to the terms of the ML Redemption
Agreement or otherwise in accordance with the terms of the Merger Agreement,
and (ii) all shares of US Foodservice's 10% Preferred Stock shall have been
redeemed pursuant to the terms of the Sara Lee Redemption Agreement or
otherwise in accordance with the terms of the Merger Agreement. The Stock
Redemption Agreements provide for redemption prices at a discount from the
redemption prices payable pursuant to the US Foodservice Restated Certificate
of Incorporation, as amended (the "US Foodservice Charter"). The Sara Lee
Redemption Agreement contained a termination date of March 15, 1996. The
Merger Agreement required US Foodservice to use its best efforts to negotiate
and arrange committed bank loan financing to enable US Foodservice to fund,
prior to March 15, 1996, the full purchase price for the purchase of the 10%
Preferred Stock as set forth in the Sara Lee Redemption Agreement ("Sara Lee
Bridge Financing").
On February 15, 1996, US Foodservice entered into amendments to its existing
bank credit agreement dated as of September 23, 1993, among US Foodservice,
certain of US Foodservice's subsidiaries, as guarantors, and the lenders
parties thereto (the "Existing Credit Facility"), to increase by $20 million
the principal amount available under the revolving credit portion of the
Existing Credit Facility and modified certain financial covenants to reflect
additional borrowings necessary to effect the Sara Lee Bridge Financing. On
March 1, 1996, US Foodservice completed the Sara Lee Bridge Financing and
effected the purchase of the 10% Preferred Stock for a total price of
$21,261,916.
ML IBK and MBIV, each of which is an affiliate of ML & Co., currently hold
all of the issued and outstanding shares of Exchangeable Preferred Stock. Upon
redemption of the Exchangeable Preferred Stock pursuant to the ML Redemption
Agreement, ML IBK and MBIV will receive a total of approximately $24.4 million
(representing approximately $16.8 million in redemption price plus
approximately $7.6 million in accrued but unpaid dividends) plus accrued
interest at the rate of 15% per annum from October 15, 1995 to the date of
redemption. Such interest would total approximately $2.3 million as of May 31,
1996, resulting in a total redemption price on such date of approximately
$26.7 million pursuant to the ML Redemption Agreement.
38
<PAGE>
The ML Redemption Agreement provides that it may be terminated by either
party (i) on the earlier to occur of (a) the closing of the Merger and (b)
July 31, 1996 or (ii) if the Merger Agreement is earlier terminated, at any
time after the later of (a) May 31, 1996 and (b) the date of such termination.
Any redemption of the Exchangeable Preferred Stock pursuant to the Merger
Agreement will be deemed to occur immediately prior to the Effective Time. If
the Exchangeable Preferred Stock is redeemed on the closing of the Merger and
in connection with the consummation of the transactions contemplated by the
Merger Agreement, Rykoff-Sexton will make, on behalf of US Foodservice, all
the required payments under the ML Redemption Agreement directly to the
respective holders of the Exchangeable Preferred Stock.
Pursuant to the Merger Agreement, except as otherwise expressly provided for
therein, US Foodservice has agreed not to amend the ML Redemption Agreement or
redeem the Exchangeable Preferred Stock prior to the earlier of the closing of
the Merger and July 31, 1996 without the prior written consent of Rykoff-
Sexton.
RYKOFF-SEXTON FINANCING AND RECEIVABLES SECURITIZATION
Pursuant to the Commitment Letter, BofA and Chase each have committed
severally to provide funding of (i) up to $242.5 million toward the New Credit
Facility and (ii) up to $55 million toward the Receivables Securitization,
subject to the terms and conditions set forth in the Commitment Letter. BofA
will serve as the administrative agent, BA Securities will serve as
syndication agent and Chase will serve as an agent under the New Credit
Facility. In addition, BA Securities and Chase Securities will act as co-
arrangers in the syndication of the New Credit Facility to other financial
institutions acceptable to BofA, Chase and Rykoff-Sexton. The obligations of
Rykoff-Sexton, Merger Sub and US Foodservice to effect the Merger are subject
to the condition that all conditions precedent to the closing of the financing
described in the Commitment Letter shall have been satisfied and that the
transactions contemplated by the Commitment Letter shall have been
consummated. There are no specific plans for alternative sources of financing
the transaction if the conditions precedent described in the Commitment Letter
are unable to be satisfied. There can be no assurance as to whether, or the
definitive terms on which, the New Credit Facility and the Receivables
Securitization actually will be available to Rykoff-Sexton.
New Credit Facility. The Commitment Letter contemplates a New Credit
Facility providing for a $485 million financing comprised of three term loan
facilities, Tranche A, Tranche B and Tranche C, in an aggregate principal
amount of $335 million and the Revolver, a $150 million revolving credit
facility. The term loans will be in the following principal amounts: $150
million for the Tranche A Term Loan, $125 million for the Tranche B Term Loan,
and $60 million for the Tranche C Term Loan, with BA Securities and Chase
Securities reserving the right to shift up to $25 million of the Term Loan
Facilities among Tranches A, B and C and to adjust the amortization schedule
accordingly. The amount available under the Revolver will include a letter of
credit sublimit of $45 million and a swingline facility of up to $15 million.
The Tranche A Term Loan, the Tranche B Term Loan, the Tranche C Term Loan and
the Revolver will mature on October 31, 2001, October 31, 2002, April 30,
2003, and October 31, 2001, respectively.
Under the New Credit Facility, Rykoff-Sexton may elect to have the principal
amount of outstanding loans bear interest at rates per annum based on either
the "Base Rate" or "LIBOR," plus the "Applicable Margin." The Base Rate is
defined as the higher of (i) the Federal Funds Rate, plus 1/2 of 1% or (ii)
the average of the rates publicly announced from time to time by BofA and
Chase as their "reference rate." LIBOR is defined as the London Interbank
Offered Rate for the corresponding deposits of U.S. Dollars.
The Applicable Margins for the Revolver and the Tranche A Term Loan on the
Closing Date and for six months following the Closing Date will be 1 1/4% in
the case of Base Rate loans and 2 1/2% in the case of LIBOR loans. Thereafter,
the Applicable Margins for the Revolver and the Tranche A Term will be subject
to adjustment. The Applicable Margins for the Tranche B Term Loan will be 1
3/4% in the case of Base Rate loans and 3% in the case of LIBOR loans. The
Applicable Margins for the Tranche C Term Loan will be 2% in the case of Base
Rate loans and 3 1/4% in the case of LIBOR loans.
39
<PAGE>
Under the structure of the New Credit Facility contemplated by the
Commitment Letter, each of Rykoff-Sexton's subsidiaries (other than the SPC,
as hereinafter defined) will guaranty Rykoff-Sexton's obligations under the
New Credit Facility. Each such subsidiary will also guaranty Rykoff-Sexton's
obligations with respect to the $130 million 8 7/8% Senior Subordinated Notes
due 2003 (the "8 7/8% Notes") issued under an Indenture dated as of November
1, 1993, between Rykoff-Sexton and Norwest Bank Minnesota, N.A. as Trustee,
which will remain outstanding after the closing of the Merger. The
subsidiaries' obligations under their guaranties of Rykoff-Sexton's
obligations with respect to the 8 7/8% Notes will be subordinated to the
subsidiaries' obligations under their guaranties of Rykoff-Sexton's
obligations under the New Credit Agreement to the same extent as Rykoff-
Sexton's obligations with respect to the 8 7/8% Notes are subordinated to
Rykoff-Sexton's obligations under the New Credit Agreement. The New Credit
Facility will be secured by liens on substantially all of the assets of
Rykoff-Sexton and its subsidiaries, other than accounts receivable that will
be sold pursuant to the Receivables Securitization and any US Foodservice
receivables financing facility.
Consummation of the transactions contemplated by the Commitment Letter is
subject to the satisfaction or waiver of a number of conditions precedent,
including: (i) finalizing the structure, terms and documentation for the New
Credit Facility; (ii) satisfaction of all conditions precedent to the Merger;
(iii) the 8 7/8% Notes and US Foodservice's $90 million receivables
securitization program remaining outstanding; (iv) receipt of at least $110
million in initial cash proceeds from the SPC in connection with the
Receivables Securitization; (v) no litigation (a) with respect to the Merger
or the New Credit Facility, or (b) which could be reasonably expected to have
a material adverse effect on Rykoff-Sexton after giving effect to the Merger;
(vi) satisfactory outcome of pending arbitration claims (see "DESCRIPTION OF
RYKOFF-SEXTON--Litigation"); (vii) satisfactory legal due diligence; and
(viii) no material adverse change in the market for senior debt financing or
the financial markets generally. Accordingly, there can be no assurance as to
whether, or the definitive terms on which, the New Credit Facility actually
will be available to Rykoff-Sexton.
Receivables Securitization. The Receivables Securitization will consist of a
$110 million program for Rykoff-Sexton. The Receivables Securitization will be
structured as sales of certain accounts receivable of Rykoff-Sexton and its
subsidiaries to a bankruptcy-remote, special-purpose, wholly owned subsidiary
of Rykoff-Sexton (the "SPC"). The SPC, in turn, will sell the receivables it
purchases, or undivided interests therein, to an unaffiliated financing
vehicle for cash or cash equivalents. US Foodservice intends to restructure or
refinance the present US Foodservice receivables facility. In connection with
such restructuring or refinancing, BofA may acquire part of the existing
facility, or BofA and Chase will consider increasing the size of the
Receivables Securitization to $200 million, but Chase and BofA have made no
commitment to do so in the Commitment Letter.
Use of Proceeds. Rykoff-Sexton will use the proceeds of the New Credit
Facility to: (i) refinance indebtedness incurred by US Foodservice in
connection with the redemption or repurchase of the 10% Preferred Stock and
the Exchangeable Preferred Stock under the Stock Redemption Agreements; (ii)
refinance US Foodservice's currently outstanding debt, including the 14.25%
Senior Subordinated Debentures due 2000 (the "14.25% Debentures") and the
Existing Credit Facility; (iii) refinance Rykoff-Sexton's outstanding debt
under the Credit Agreement dated as of October 25, 1993, among Rykoff-Sexton
and BofA, as amended; (iv) provide financing for on-going working capital
needs; and (v) pay related fees and expenses, including certain prepayment
premiums payable in connection with the restructuring of US Foodservice's $90
million receivables securitization program. The proceeds from the Receivables
Securitization will be used for the same purposes as the New Credit Facility.
See "CAPITALIZATION" and "UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION."
RESALE OF RYKOFF-SEXTON COMMON SHARES
All Rykoff-Sexton Common Shares received by US Foodservice stockholders in
the Merger will be freely transferable except that (i) Rykoff-Sexton Common
Shares received by persons who are deemed to be "affiliates" (as such term is
used in Rules 144 and 145 under the Securities Act) of US Foodservice prior to
the Merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 promulgated under the Securities Act (or Rule 144 in
case of such persons who become affiliates of Rykoff-Sexton) or as
40
<PAGE>
otherwise permitted under the Securities Act, (ii) Rykoff-Sexton Common Shares
issued in exchange for US Foodservice Common Stock acquired by certain US
Foodservice management employees in connection with the forgiveness of certain
management loans may not be resold prior to one year from the Effective Time
or such earlier date on which such individual ceases to be an employee due to
resignation, retirement or termination, and (iii) to provide assurances in
connection with the qualification of the Merger as a tax-free reorganization
for federal income tax purposes, certain stockholders of US Foodservice,
including all of the ML Investors, will enter into the Tax Agreement with
Rykoff-Sexton at the Effective Time, pursuant to which each such stockholder
will be prohibited from selling, exchanging, distributing or otherwise
disposing of in any manner, during the two-year period following the Effective
Time, more than a certain percentage of the Rykoff-Sexton Common Shares
received in the Merger by such stockholder, with such percentage to be
determined by a formula at the Effective Time. For purposes, however, of
applying the transfer restrictions in the Tax Agreement to the ML Investors,
all of the Rykoff-Sexton Common Shares received in the Merger by the ML
Investors will be aggregated, and the ML Investors will be treated as a single
stockholder. See "--Interests of Certain Persons in the Merger--US Foodservice
Management Loans" and "OTHER AGREEMENTS--The Tax Agreement." Persons who may
be deemed to be affiliates of Rykoff-Sexton or US Foodservice generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party. The Merger
Agreement requires US Foodservice to use its reasonable efforts to cause each
person (other than Rykoff-Sexton and the ML Entities) who may be deemed to be
an affiliate of US Foodservice to deliver to Rykoff-Sexton on or prior to the
Effective Time a written agreement to the effect that such person will not
offer or sell or otherwise dispose of any of the Rykoff-Sexton Common Shares
issued to such person pursuant to the Merger except pursuant to an effective
registration statement or in compliance with Rule 145 or an exemption from
registration under the Securities Act. The ML Entities have also agreed to
execute such written agreement pursuant to the ML Agreement.
RISK FACTORS
Leverage and Debt Service
Following the consummation of the Merger, Rykoff-Sexton will have
substantial indebtedness. Giving effect to the Merger, the other acquisitions
described in "UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION," the New
Credit Facility, the Receivables Securitization and the use of proceeds in
connection therewith, and assuming such transactions had occurred on January
27, 1996, Rykoff-Sexton's total indebtedness (excluding current maturities)
would have been approximately $487.7 million. Rykoff-Sexton may incur
additional indebtedness in the future, subject to certain limitations
contained in the instruments governing its indebtedness. Although the New
Credit Facility will result in indebtedness with lower average interest rates
than the indebtedness that is being repaid, Rykoff-Sexton will have
substantial debt service obligations following the Merger. Rykoff-Sexton's
scheduled principal payments on its outstanding indebtedness under the term
loan facilities of the New Credit Facility will be approximately $3.25 million
in 1996, $11.5 million in 1997, $21.5 million in 1998, $31.5 million in 1999,
$41.5 million in 2000, $49.0 million in 2001, $124.8 million in 2002 and $51.9
million in 2003. See "CAPITALIZATION" and "UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION."
Based upon the current level of operations and anticipated cost savings,
Rykoff-Sexton believes that after the Merger its cash flow from operations,
together with borrowings under the New Credit Facility and its other sources
of liquidity, will be adequate to meet its anticipated requirements for
working capital, capital expenditures, interest payments, dividends and
scheduled principal payments over the next several years. There can be no
assurance, however, that Rykoff-Sexton's business will continue to generate
cash flow at or above current levels or that anticipated cost savings can be
fully achieved. If Rykoff-Sexton is unable to generate sufficient cash flow
from operations in the future to service its debt and make necessary capital
expenditures, or if its future earnings growth is insufficient to amortize
required principal payments out of internally generated funds, Rykoff-Sexton
may be required to restrict or terminate the payment of dividends to
stockholders, refinance all or a portion of its existing debt, sell assets or
obtain additional financing. There can be no assurance that any such
refinancing or asset sales would be possible or that any additional financing
could be obtained, particularly
41
<PAGE>
in view of Rykoff-Sexton's high level of debt following the Merger and that
substantially all of its assets will be pledged to secure its obligations
under the New Credit Facility.
Rykoff-Sexton's level of debt will have several important effects on its
future operations, including the following: (i) Rykoff-Sexton will have
significant cash requirements to service debt, reducing funds available for
operations and future business opportunities and increasing Rykoff-Sexton's
vulnerability to adverse general economic and industry conditions; (ii) the
financial covenants and other restrictions contained in the New Credit
Facility and other agreements relating to the indebtedness of Rykoff-Sexton
will require it to meet certain financial tests and will restrict its ability
to borrow additional funds, to dispose of assets and to pay cash dividends;
(iii) the failure to comply with such financial covenants and other
restrictions may result in an event of default under the New Credit Facility
which, if not cured or waived, could have a material adverse effect on Rykoff-
Sexton; (iv) funds available for working capital, capital expenditures,
acquisitions and general corporate purposes may be limited; and (v) certain of
Rykoff-Sexton's borrowings will be at variable rates of interest, which could
result in higher interest expense if interest rates increase generally.
Rykoff-Sexton's leveraged position may also increase its vulnerability to
competitive pressures. Rykoff-Sexton's continued growth depends, in part, on
its ability to continue its expansion and, therefore, its inability to finance
capital expenditures through borrowed funds could have a material adverse
effect on its ability to expand. Moreover, any default under the documents
governing the indebtedness of Rykoff-Sexton could have a significant adverse
effect on the market value of the Rykoff-Sexton Common Shares.
Uncertainties in Integrating Business Operations and Achieving Cost Savings
In determining that the Merger is in the best interests of its stockholders,
the Rykoff-Sexton Board of Directors considered the cost savings, operating
efficiencies and other synergies expected to result from the integration of
the Rykoff-Sexton and US Foodservice businesses. Management of Rykoff-Sexton
has estimated that an acquisition by Rykoff-Sexton of US Foodservice could
create opportunities for cost savings of approximately $10 million during the
first twelve-month period following the Effective Time, $20 million during the
second twelve-month period following the Effective Time, and $30 million
annually thereafter. The cost savings estimates were developed solely for
purposes of evaluating the Merger, do not include non-recurring adjustments
that will be recorded in conjunction with the Merger, and should not be relied
upon as an estimate of actual cost savings that may be achieved. These
estimates are based upon assumptions and operating synergies that are
inherently uncertain, though considered reasonable by Rykoff-Sexton, and are
subject to significant business, economic and competitive uncertainties which
are difficult to predict and often beyond the control of management. See "--
Potential Cost Savings and Operating Synergies." Several of the cost savings
estimates are premised on the assumption that certain levels of efficiency
presently maintained by either Rykoff-Sexton or US Foodservice can be achieved
by Rykoff-Sexton following the Merger. Other estimates are based on
management's opinion as to what levels of enhanced purchasing leverage and
operating efficiencies should be achievable by an entity the size of Rykoff-
Sexton giving effect to the Merger.
The consolidation of functions, the integration of operations, systems,
marketing methods and procedures and the relocation of staff present
significant management challenges. There can be no assurance that such actions
will be accomplished successfully or as rapidly as currently expected.
Moreover, although the primary purpose of such actions will be to realize
direct cost savings and other operating efficiencies, there can be no
assurance of the extent to which such cost savings and efficiencies will be
achieved or that unforeseen costs and expenses or other factors will not
offset the projected cost savings in whole or in part. To the extent such cost
savings and efficiencies are not accomplished successfully or on a timely
basis, Rykoff-Sexton's earnings will be negatively affected and the Merger
could continue to be dilutive to current holders of Rykoff-Sexton Common
Shares.
Sale of Shares by ML Investors
Following the Merger, assuming the maximum number of Rykoff-Sexton Common
Shares are issued in the Merger, the ML Investors will beneficially own
approximately 36.4% of the outstanding Rykoff-Sexton Common
42
<PAGE>
Shares. The ML Investors may not sell their Rykoff-Sexton Common Shares
acquired in connection with the Merger except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 promulgated under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
The ML Investors have the right, following the Merger, pursuant to the
Registration Rights Agreement, to require Rykoff-Sexton, subject to certain
qualifications, to effect the registration under the Securities Act of their
Rykoff-Sexton Common Shares. See "OTHER AGREEMENTS--The Registration Rights
Agreement." No predictions can be made as to the effect, if any, that market
sales of such shares, or the availability of such shares for future sales,
will have on the market price of Rykoff-Sexton Common Shares prevailing from
time to time. Sales of substantial amounts of Rykoff-Sexton Common Shares, or
the perception that such sales could occur, could adversely affect prevailing
market prices for the Rykoff-Sexton Common Shares and could impair Rykoff-
Sexton's future ability to raise capital through an offering of its equity
securities. During the two-year period following the Effective Time, however,
the ML Investors will be prohibited under the Tax Agreement, which the ML
Investors and certain other stockholders of US Foodservice will enter into
with Rykoff-Sexton at the Effective Time, from selling, exchanging,
distributing or otherwise disposing of in any manner a number of Rykoff-Sexton
Common Shares that exceeds in the aggregate a certain percentage of the
Rykoff-Sexton Common Shares received by the ML Investors collectively in the
Merger, with such percentage to be determined by a formula at the Effective
Time. See "OTHER AGREEMENTS--The Tax Agreement."
Concentration of Ownership
Upon completion of the Merger, assuming the maximum number of Rykoff-Sexton
Common Shares are issued in the Merger, the ML Investors will beneficially own
approximately 36.4% of the outstanding Rykoff-Sexton Common Shares (34.6% if
all Assumed Options and Assumed Warrants are exercised). At the Effective
Time, the ML Entities will enter into the Standstill Agreement with Rykoff-
Sexton pursuant to which they will be entitled to designate four nominees to
the Rykoff-Sexton Board of Directors, with such number of nominees and Board
members decreasing if the percentage of outstanding Rykoff-Sexton Common
Shares beneficially owned by the ML Entities falls below certain levels. In
addition, pursuant to the Standstill Agreement, the ML Entities will vote the
Rykoff-Sexton Common Shares and other voting securities owned by them and
their affiliates for Rykoff-Sexton's nominees to the Rykoff-Sexton Board of
Directors, in accordance with the recommendation of the Nominating Committee
of the Rykoff-Sexton Board of Directors, subject to certain exceptions. The ML
Entities will also agree that neither they nor any of their affiliates will
(subject to certain exceptions) participate in proxy solicitations, acquire
additional Rykoff-Sexton Common Shares or otherwise engage in transactions, or
take actions involving a change of control of Rykoff-Sexton. The Rykoff-Sexton
Common Shares and other voting securities owned by the ML Investors will be
subject to certain restrictions on sale or transfer. The ML Entities will not
be prohibited from soliciting, offering, seeking to effect and negotiating
with any person with respect to sales or transfers of Rykoff-Sexton Common
Shares and other voting securities held by the ML Entities if otherwise
permitted by the Standstill Agreement. See "OTHER AGREEMENTS--The Standstill
Agreement" and "--The Tax Agreement."
The Rykoff-Sexton Common Shares to be received by the ML Investors in the
Merger will constitute a significant block of the voting power of the Rykoff-
Sexton Common Shares. The favorable vote of such shares, as required by the
Standstill Agreement, will make it easier to obtain the approval of Rykoff-
Sexton stockholders for the election of Rykoff-Sexton's nominees for the
Rykoff-Sexton Board of Directors. Such a voting block could also facilitate or
impede the approval of any other matter requiring approval of Rykoff-Sexton
stockholders, including a merger, consolidation or other business combination
involving Rykoff-Sexton, or discourage a potential acquiror from making a
tender offer or otherwise attempting to obtain control of Rykoff-Sexton.
Factors Relating to Future Acquisitions
A significant portion of the historical growth of Rykoff-Sexton's and US
Foodservice's revenues has resulted from acquisitions. An important part of
Rykoff-Sexton's growth strategy is the acquisition of other
43
<PAGE>
foodservice companies. See "--Background of the Merger--Foodservice Industry
Trends." The success of this strategy will depend upon Rykoff-Sexton's ability
to integrate and manage acquired businesses, and to realize economies of scale
and control costs.
Acquisitions involve risks, including difficulties in integrating acquired
operations, diversion of management resources and unanticipated problems and
liabilities. Future acquisitions by Rykoff-Sexton may result in potentially
dilutive issuances of equity securities, increased interest and amortization
expense, increased depreciation expense and decreased operating income, any of
which could have a material adverse effect on its operating results. There can
be no assurance that Rykoff-Sexton will be able to acquire companies on terms
favorable to it or that Rykoff-Sexton's existing financial resources,
including cash flow from operations and amounts available under the New Credit
Facility, will be sufficient to fund such acquisitions. If Rykoff-Sexton does
not have sufficient cash resources, its growth could be limited unless it is
able to obtain additional capital through subsequent debt or equity
financings. There can be no assurance that Rykoff-Sexton will be able to
obtain such financings or that, if available, such financings will be on terms
acceptable to Rykoff-Sexton. As a result, there can be no assurance that
Rykoff-Sexton will be able to implement its acquisition strategy successfully.
Exchange Ratio
The Exchange Ratio is derived by dividing $25 by the Closing Date Market
Price of one Rykoff-Sexton Common Share, subject to the limitation that (i) if
the foregoing would result in an Exchange Ratio greater than 1.457 (which
would occur if such price is less than $17.16 per share), the Exchange Ratio
shall be 1.457 or (ii) if the foregoing would result in an Exchange Ratio of
less than 1.244 (which would occur if such price is greater than $20.10 per
share), the Exchange Ratio shall be 1.244. Thus, subject to the $17.16 per
share limit, the lower the Closing Date Market Price of Rykoff-Sexton Common
Shares, the greater the number of Rykoff-Sexton Common Shares that will be
issued in the Merger. In addition, the price of Rykoff-Sexton Common Shares at
the Effective Time can be expected to vary from the Closing Date Market Price
and the prices as of the date of this Proxy Statement/Prospectus and the date
on which the Special Meeting is held due to changes in the business,
operations or prospects of Rykoff-Sexton, market assessments of the likelihood
that the Merger will be consummated and the timing thereof, general market and
economic conditions, and other factors. See "DIVIDENDS AND MARKET PRICES OF
RYKOFF-SEXTON COMMON SHARES."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employment, Change in Control and Severance Agreements. In connection with
the execution of the Merger Agreement, Rykoff-Sexton entered into an amended
and restated employment agreement and a second amended and restated change in
control agreement with Mark Van Stekelenburg, the Chairman, President and
Chief Executive Officer of Rykoff-Sexton, effective as of the date of the
Merger Agreement. In connection with the execution of the Merger Agreement and
the execution of certain amended and restated change in control agreements,
Rykoff-Sexton also entered into individual severance agreements as of the date
of the Merger Agreement with certain members of its senior management (other
than Mr. Van Stekelenburg). The amended and restated change in control
agreements, as well as certain other Rykoff-Sexton compensation arrangements,
provide that, under the specified circumstances, the completion of the Merger
and certain other transactions in the future will not constitute a "change in
control" of Rykoff-Sexton. In addition, the Merger Agreement provides that as
a condition to the closing of the Merger, Rykoff-Sexton will enter into
employment agreements as of the Effective Time with certain of the senior
management executives of US Foodservice, including Frank H. Bevevino, who is
expected to become President of Rykoff-Sexton and Chief Executive Officer of
US Foodservice and Thomas G. McMullen, who is expected to become President of
US Foodservice. See "MANAGEMENT OF RYKOFF-SEXTON AFTER THE MERGER--Executive
Compensation."
US Foodservice Management Loans. Pursuant to the Merger Agreement, an
aggregate of $4.9 million currently outstanding in respect of loans made by US
Foodservice in 1992 to certain key employees to enable
44
<PAGE>
them to purchase shares of US Foodservice Common Stock will be forgiven,
subject to each such employee's agreement that the shares of US Foodservice
Common Stock purchased with the proceeds of such loans and the Rykoff-Sexton
Common Shares issuable in respect thereof in connection with the Merger will
not be sold for a period of one year from the Effective Time or such earlier
date on which such individual ceases to be an employee of Rykoff-Sexton and
its subsidiaries due to resignation, retirement or termination. In addition,
after the Effective Time, Rykoff-Sexton will extend loans to such employees in
amounts sufficient to cover the federal and state income tax due from such
employees as a result of such forgiveness that by their terms must be repaid
within fifteen months of the Effective Time or within three months of
resignation, retirement or termination.
Preferred Stock and Subordinated Debt Holders. Certain affiliates of US
Foodservice hold the 14.25% Debentures and the Exchangeable Preferred Stock,
all of which will be redeemed or purchased in connection with the Merger. All
$70.9 million principal amount of the 14.25% Debentures is held by Equitable
Deal Flow Fund, L.P. (the "Equitable Fund"), the Equitable Life Assurance
Society of the United States ("Equitable Life") and the Chase Manhattan Bank,
N.A., as trustee for E.Q. Asset Trust 1993 (the "Equitable Trust"). Each of
the Equitable Fund, Equitable Life and the Equitable Trust are affiliates of
each other, and of Equitable Variable Life Insurance Company ("Equitable
Variable Life"), which together with the Equitable Fund and Equitable Life
(the "Equitable Entities"), holds approximately 9.3% of US Foodservice Common
Stock (4.3% of the Rykoff-Sexton Common Shares upon completion of the Merger
assuming the maximum number of Rykoff-Sexton Common Shares are issued in the
Merger). The Equitable Fund, Equitable Life and the Equitable Trust will
receive an aggregate of $76.0 million pursuant to the redemption of the 14.25%
Debentures in the refinancing, which represents a redemption price of 107.13%
of the principal amount thereof. ML IBK and MBIV, each of which is controlled
by ML & Co., currently hold all of the Exchangeable Preferred Stock, the
redemption or purchase of which is a condition to the Merger. See "--
Redemption or Purchase of Preferred Stock."
MLPF&S Engagement Letter. US Foodservice retained MLPF&S to act as US
Foodservice's exclusive financial advisor in connection with a proposed
business combination involving Rykoff-Sexton pursuant to a letter agreement
dated December 5, 1995 between MLPF&S and US Foodservice (the "ML Engagement
Letter"). Pursuant to the ML Engagement Letter, MLPF&S agreed to assist US
Foodservice in analyzing, structuring, negotiating and effecting the proposed
business combination with Rykoff-Sexton, and to issue a fairness opinion, as
necessary or required. Pursuant to the terms of the ML Engagement Letter, US
Foodservice agreed to pay to MLPF&S a fee of $500,000, contingent upon and
payable in cash upon the execution of a letter of intent to effect a business
combination with Rykoff-Sexton to be credited against any other fees payable
pursuant to the ML Engagement Letter. In addition, if during the period MLPF&S
is retained by US Foodservice or within one year thereafter, a business
combination with Rykoff-Sexton is consummated, US Foodservice has agreed to
pay MLPF&S a fee of $3,000,000 in cash upon the closing of such business
combination. In addition, pursuant to the ML Engagement Letter, whether or not
a transaction is consummated, US Foodservice will reimburse MLPF&S, upon
request made from time to time, for its reasonable out of pocket expenses
incurred in connection with MLPF&S's activities under this letter agreement,
including reasonable fees and disbursements of its legal counsel. US
Foodservice has also agreed to indemnify MLPF&S against certain liabilities,
including certain liabilities arising under the Federal securities laws.
ML Entities Board Designations. Rykoff-Sexton has agreed in the Standstill
Agreement that at the Effective Time Rykoff-Sexton will take such action as
may be necessary to increase the size of its Board of Directors to 12 persons
and will use its best efforts to fill four of the vacancies existing in the
three classes of directors of Rykoff-Sexton with directors designated by the
ML Entities. Of the four initial designees of the ML Entities, one shall be
appointed to Class A with a current term expiring in 1996, one shall be
appointed to Class B with a current term expiring in 1998, and two shall be
appointed to Class C with current terms expiring in 1997. See "OTHER
AGREEMENTS--The Standstill Agreement."
Registration Rights Agreement. As a condition to US Foodservice's obligation
to effect the Merger, Rykoff-Sexton is required to execute the Registration
Rights Agreement, which provides that the ML Investors will have certain
"demand" and "piggyback" rights, and that the Equitable Entities and Frank H.
Bevevino will have
45
<PAGE>
certain "piggyback" rights, to require Rykoff-Sexton to register all or a
portion of the Rykoff-Sexton Common Shares owned by them. See "OTHER
AGREEMENTS--The Registration Rights Agreement."
Stock Options. In connection with the Merger, an aggregate of approximately
442,307 of the Assumed Options will, pursuant to the terms and conditions
applicable thereto, become exercisable at the Effective Time. In addition,
with respect to those Assumed Options the exercisability of which depends in
part on the attainment by US Foodservice of certain financial performance
targets, and that are not otherwise vested in accordance with their terms, the
performance criteria shall be deemed satisfied on the first anniversary of the
Effective Time. Approximately 139,349 of the Assumed Options are held by
senior management employees of US Foodservice.
Indemnification; Insurance. If waivers and releases are delivered by the ML
Entities and by any officer or director of US Foodservice who is also a
stockholder of US Foodservice of any and all claims, rights, causes of actions
and suits, whether known or unknown, against present or former directors and
officers of US Foodservice arising from or relating to acts or omissions of
such present or former directors and officers occurring prior to the Effective
Time, to the extent that such former directors and officers would be entitled
to indemnification from and against liability arising from such acts or
omissions under the US Foodservice By-laws, then Rykoff-Sexton will, and will
cause US Foodservice to, indemnify and hold harmless, from and after the
Effective Time, each current and former officer or director of US Foodservice
with respect to acts or omissions occurring prior to the Effective Time to the
same extent as would have been required by US Foodservice's By-laws. After the
Effective Time, Rykoff-Sexton will cause the directors and officers of US
Foodservice and its subsidiaries to be covered by directors' and officers'
liability insurance maintained by Rykoff-Sexton on terms and conditions no
less favorable to such directors and officers as are applicable to similarly
situated directors and officers of other subsidiaries of Rykoff-Sexton. Such
insurance will not include coverage for any acts or omissions of such officers
and directors occurring prior to the Effective Time.
Sara Lee Commitment Agreements. Two subsidiaries of US Foodservice entered
into Commitment Agreements, dated as of August 10, 1992, as amended as of
September 27, 1995, with Sara Lee, the former holder of all of the 10%
Preferred Stock, whereby such subsidiaries agreed to cause their respective
subsidiaries, comprising all of the US Foodservice operating companies, to
purchase food and other products from Sara Lee totaling $16.1 million each
during the 12-month period ending September 11, 1993 and to increase the
amount of such purchases by 10% per year each year for six years and by 4% per
year for the next three years. If the target purchases are not met after an
initial three-year period and two subsequent three-year periods, such
subsidiaries are required to make liquidated payments to Sara Lee, not to
exceed an aggregate of $0.5 million each at the end of three years, $1.0
million each at the end of six years (less the amount of any such payment made
after three years) and approximately $1.9 million each at the end of nine
years (less the amount of any such payment made after three and six years). To
the extent a subsidiary's purchases exceed the three-, six- and nine-year
targets in its respective agreement, such excess amounts can be applied to its
respective yearly purchase commitments to reach its three-, six- and nine-year
targets and to the other subsidiary's purchase commitments to reach its three-
, six- and nine-year targets, thereby potentially reducing each subsidiary's
respective obligation to make the liquidated payments referred to above. The
September 1995 amendments provide a guarantee by US Foodservice on behalf of
its subsidiaries under each of the respective Commitment Agreements. The
amount of purchases under the terms of the agreement for 1995, 1994 and 1993
were approximately $40.7 million, $33.2 million and $30.4 million,
respectively, for such subsidiaries combined. All products were purchased on
terms and conditions competitive with those obtained through other suppliers
of US Foodservice.
Real Estate Matters. On February 28, 1996, US Foodservice entered into a
twelve-year lease (commencing on the date the premises are delivered with
certain improvements substantially completed) for approximately 25,000 square
feet of office space located in Plains Township, Pennsylvania. The lease
provides for a base rental rate of $12.50 per square foot, subject to certain
increases, plus payment of the tenant's pro rata share of building expenses,
including utilities, real estate taxes and insurance. The owner and lessor of
the office building is Paul-Francis Realty, L.P. ("PFR"), a Pennsylvania
limited partnership whose principals include entities controlled by Paul S.
Siegel and Frank H. Bevevino, the current Chairman of the Board and Chief
Executive Officer of US Foodservice, who will become President and a director
of Rykoff-Sexton following the Merger. PFR has engaged
46
<PAGE>
Mericle Development Corporation ("Mericle") to manage and lease the facility.
The lease will become a commitment of Merger Sub following the Merger.
LISTING OF THE RYKOFF-SEXTON COMMON SHARES ON THE NYSE
It is a condition to each party's obligation to consummate the Merger that
the Rykoff-Sexton Common Shares to be issued in connection with the Merger
(including shares issuable upon exercise of Assumed Options and Assumed
Warrants) be approved for listing on the NYSE, subject only to official notice
of issuance. Rykoff-Sexton has agreed to use all reasonable efforts to cause
such shares to be so approved for listing, subject only to official notice of
issuance, prior to the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General. The following is a summary description of the material federal
income tax consequences of the Merger. The discussion is based upon the
provisions of the Code, applicable Treasury Regulations promulgated thereunder,
judicial decisions and administrative rulings and practices, all as in effect
on the date of this Proxy Statement/Prospectus, and does not address any state,
local or foreign income or other tax consequences of the Merger.
The consummation of the Merger is conditioned, among other things, upon the
receipt by Rykoff-Sexton of an opinion of Jones, Day, Reavis & Pogue, special
counsel for Rykoff-Sexton, to the effect that the Merger should be treated for
federal income tax purposes as a tax-free reorganization under Section 368(a)
of the Code. Such opinion, which will be dated the date of the closing of the
Merger, will be based upon certain customary representations that are expected
to be made at the Effective Time by executives of Rykoff-Sexton and US
Foodservice and by certain holders of US Foodservice Common Stock, and will be
subject to certain assumptions and limitations set forth therein. It should be
noted that a ruling will not be sought from the IRS regarding the Merger. The
opinion of counsel referred to above will not be binding on the IRS, and the
IRS may disagree with the conclusions expressed in such opinion.
Treatment of Rykoff-Sexton and Its Stockholders. Jones, Day, Reavis & Pogue,
special counsel for Rykoff-Sexton, has advised Rykoff-Sexton that, in
accordance with its opinion referred to above, neither Rykoff-Sexton nor the
existing stockholders of Rykoff-Sexton will recognize any gain or loss as a
result of the Merger. In addition, neither Merger Sub nor US Foodservice should
recognize any gain or loss as a result of the Merger.
Treatment of Holders of US Foodservice Common Stock. The following discussion
is not a complete description of all of the federal income tax consequences of
the Merger to holders of US Foodservice Common Stock, and, in particular, does
not address all aspects of federal income taxation that may be relevant to a
particular holder of US Foodservice Common Stock in light of such holder's
personal investment or tax circumstances, or to a holder of US Foodservice
Common Stock that is subject to special treatment under the federal income tax
laws (including life insurance companies, foreign persons, tax-exempt entities,
financial institutions, broker-dealers, or holders who acquired US Foodservice
Common Stock pursuant to the exercise of employee stock options or otherwise as
compensation). In addition, no information is provided herein as to the tax
consequences of the Merger to any holder of US Foodservice Common Stock who
exercises appraisal rights under Section 262 or to any holder of US Foodservice
Common Stock who also owns Preferred Stock and who receives cash as a result of
the redemption or purchase of such Preferred Stock. See "--Redemption or
Purchase of Preferred Stock." The discussion also assumes that the US
Foodservice Common Stock will be held as capital assets by the holders thereof
at the Effective Time of the Merger. EACH HOLDER OF US FOODSERVICE COMMON STOCK
IS ADVISED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES TO SUCH HOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT
OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Jones, Day, Reavis & Pogue, special counsel for Rykoff-Sexton, has advised
Rykoff-Sexton that, in accordance with its opinion referred to above, the
material federal income tax consequences of the Merger to holders of US
Foodservice Common Stock who do not own Preferred Stock will be as follows:
47
<PAGE>
(i) No gain or loss should be recognized by a holder of US Foodservice
Common Stock upon the conversion of such holder's shares of US Foodservice
Common Stock into Rykoff-Sexton Common Shares pursuant to the Merger. A
holder of US Foodservice Common Stock that receives cash in lieu of a
fractional interest in a Rykoff-Sexton Common Share will recognize gain or
loss, which will be capital gain or loss, equal to the difference between
the amount of cash received and the ratable portion of the holder's tax
basis in the shares of US Foodservice Common Stock being converted pursuant
to the Merger that is allocated to such fractional interest;
(ii) The tax basis of the Rykoff-Sexton Common Shares received by a
former holder of US Foodservice Common Stock pursuant to the Merger in the
aggregate should be the same as the holder's tax basis in the shares of US
Foodservice Common Stock being converted pursuant to the Merger, reduced by
the ratable portion of such tax basis that is allocable to any fractional
interest in a Rykoff-Sexton Common Share with respect to which cash is
being received; and
(iii) The holding period of the Rykoff-Sexton Common Shares received by a
former holder of US Foodservice Common Stock pursuant to the Merger should
include the holder's holding period with respect to the shares of US
Foodservice Common Stock being converted pursuant to the Merger.
AMENDMENTS TO RIGHTS AGREEMENT
Rykoff-Sexton and Chemical Bank, as successor Rights Agent (the "Rights
Agent"), are party to a Rights Agreement dated as of December 8, 1986 (as
amended, the "Rights Agreement"). In connection with the execution of the
Letter of Intent and the Merger Agreement, the Rykoff-Sexton Board of
Directors approved amendments to the Rights Agreement to provide that the
Merger and the transactions entered into in connection therewith would not
trigger the dilution provisions of the Rights Agreement. See "DESCRIPTION OF
RYKOFF-SEXTON CAPITAL STOCK--Common Shares, Rights and Series A Preferred
Stock."
REGULATORY MATTERS
The Merger is subject to the requirements of the HSR Act, which provides
that certain acquisition transactions (including the Merger) may not be
consummated until certain information has been furnished to the Antitrust
Division and the FTC and certain waiting period requirements have been
satisfied. Rykoff-Sexton and US Foodservice filed the required information and
material with respect to the Merger with the Antitrust Division and the FTC on
or about December 22, 1995. The required waiting period under the HSR Act
expired on January 21, 1996. ML & Co., Merrill Lynch Capital Appreciation
Partnership No. B-XVIII, L.P. and Merrill Lynch Capital Appreciation
Partnership No. XIII L.P. filed the required information with the Antitrust
Division and the FTC on January 17, 1996 and Merrill Lynch Capital
Appreciation Company Limited II filed such information on January 25, 1996.
Early termination of the waiting period for ML & Co., Merrill Lynch Capital
Appreciation Partnership No. B-XVIII, L.P. and Merrill Lynch Capital
Appreciation Partnership No. XIII, L.P. was granted on January 29, 1996, and
such early termination was granted for Merrill Lynch Capital Appreciation
Company Limited II on February 7, 1996. Satisfaction or termination of the
waiting period requirement does not preclude the Antitrust Division, the FTC
or any other party either before or after the Effective Time from challenging
or seeking to delay or enjoin the Merger on antitrust or other grounds. There
can be no assurance that such a challenge, if made, would not be successful.
ACCOUNTING TREATMENT
The Merger will be accounted for by Rykoff-Sexton under the purchase method
of accounting in accordance with generally accepted accounting principles.
APPRAISAL RIGHTS
Stockholders of Rykoff-Sexton have no dissenters' or appraisal rights with
respect to the Merger or the issuance of Rykoff-Sexton Common Shares pursuant
to the Merger Agreement.
48
<PAGE>
If the Merger is consummated, a holder of record of US Foodservice Common
Stock on the date of making a demand for appraisal, as described below, who
continues to hold such shares through the Effective Time, who has not voted
such shares in favor of the Merger and who strictly complies with the
procedures set forth under Section 262 of the DGCL ("Section 262") will be
entitled to have such shares appraised by the Delaware Court of Chancery under
Section 262 and to receive payment of the "fair value" of such shares in lieu
of the consideration provided for in the Merger Agreement. THE STATUTORY RIGHT
OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT COMPLIANCE WITH THE
PROCEDURES SET FORTH IN SECTION 262. FAILURE TO FOLLOW ANY OF SUCH PROCEDURES
MAY RESULT IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS UNDER SECTION 262.
The following is a summary of certain of the provisions of Section 262 and
is qualified in its entirety by reference to the full text of Section 262, a
copy of which is attached to this Proxy Statement/Prospectus as Appendix C.
Under Section 262, if the Merger is approved by the requisite votes, US
Foodservice has advised Rykoff-Sexton that it will, either before the
Effective Time or within 10 days thereafter, notify each of the stockholders
entitled to appraisal rights of the Effective Time and that appraisal rights
are available for any or all of such stockholder's shares of US Foodservice
Common Stock (the "Notice"). The Notice will include a copy of Section 262. A
holder of US Foodservice Common Stock electing to exercise appraisal rights
under Section 262 must deliver a written demand for appraisal of such
stockholder's shares to US Foodservice within 20 days after the date of
mailing of the Notice. Such written demand must reasonably inform US
Foodservice of the identity of the stockholder of record and of such
stockholder's intention to demand appraisal of such stockholder's shares. All
such demands should be delivered to US Foodservice Inc., 1065 Highway 315,
Cross Creek Pointe, Wilkes-Barre, Pennsylvania 18702, Attention: General
Counsel.
Holders of shares of US Foodservice Common Stock on the date of making such
written demand for appraisal who continuously hold such shares through the
Effective Time are entitled to seek appraisal. Demand for appraisal must be
executed by or for the holder of record, fully and correctly, as such holder's
name appears on the holder's stock certificates representing shares of US
Foodservice Common Stock. If US Foodservice Common Stock is owned of record in
a fiduciary capacity, such as by a trustee, guardian or custodian, the demand
should be made in that capacity, and if US Foodservice Common Stock is owned
of record by more than one person, as in a joint tenancy or tenancy in common,
the demand should be made by or for all owners of record. An authorized agent,
including one or more joint owners, may execute the demand for appraisal for a
holder of record; however, such agent must identify the record owner or owners
and expressly disclose in such demand that the agent is acting as agent for
the record owner or owners of such shares. Similarly, a person having a
beneficial interest in shares of US Foodservice Common Stock held of record in
the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized herein properly and in
a timely manner to perfect such rights.
Within 120 days after the Effective Time, US Foodservice or any stockholder
who has complied with the requirements of Section 262 may file a petition in
the Delaware Court of Chancery demanding a determination of the fair value of
the shares of US Foodservice Common Stock held by all stockholders seeking
appraisal. A petitioning stockholder must serve a copy of such petition on US
Foodservice. If no petition is filed by either US Foodservice or a dissenting
stockholder within such 120-day period, the rights of all dissenting
stockholders to appraisal shall cease. US Foodservice stockholders seeking to
exercise appraisal rights should not assume that US Foodservice will file a
petition with respect to the appraisal of the fair value of their shares or
that US Foodservice will initiate any negotiations with respect to the fair
value of such shares. US Foodservice is under no obligation to and has no
present intention to take any action in this regard. Accordingly, US
Foodservice stockholders who wish to seek appraisal of their shares should
initiate all necessary action with respect to the perfection of their
appraisal rights within the time periods and in the manner prescribed in
Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS WILL CAUSE THE
STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
49
<PAGE>
Within 120 days after the Effective Time, any holder of shares of US
Foodservice Common Stock who has complied with Section 262 is entitled, upon
written request, to receive from US Foodservice a statement setting forth the
aggregate number of shares of US Foodservice Common Stock not voted in favor
of the Merger and with respect to which demands for appraisal have been
received by US Foodservice and the number of holders of such shares. Such
statement must be mailed within 10 days after the written request therefor has
been received by US Foodservice or within 10 days after expiration of the time
for delivery of demands for appraisal under Section 262, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court of Chancery will determine which stockholders are
entitled to appraisal rights and will appraise the shares of US Foodservice
Common Stock owned by such stockholders, determining the fair value of such
shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest to be paid,
if any, upon the amount determined to be the fair value. In determining fair
value, the court is to take into account all relevant factors. The Delaware
Supreme Court has stated that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in the appraisal
proceedings. The Delaware Supreme Court has also held that "elements of future
value, including the nature of the enterprise, which are known or susceptible
of proof as of the date of the merger and not the product of speculation, may
be considered."
Stockholders considering seeking appraisal should consider that the fair
value of their shares determined under Section 262 could be more, the same, or
less than the value of the consideration to be received pursuant to the Merger
Agreement without the exercise of appraisal rights, and an investment banking
opinion as to fairness from a financial point of view are not necessarily
opinions as to fair value as determined under Section 262. The cost of the
appraisal proceeding may be determined by the Court of Chancery and assessed
against the parties as such court deems equitable in the circumstances. Upon
application of a stockholder, such court may order that all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding (including without limitation reasonable attorney's fees and the
fees and expenses of experts) be charged pro rata against the value of all
shares of the US Foodservice Common Stock entitled to appraisal. In the
absence of such a determination or assessment, each party bears its own
expenses.
Any stockholder who has fully demanded appraisal in compliance with Section
262 will not, after the Effective Time, be entitled to vote such US
Foodservice Common Stock for any purpose or receive payment of dividends or
other distributions on such stock, except for dividends or distributions, if
any, payable to US Foodservice stockholders of record on a date prior to the
Effective Time.
A US Foodservice stockholder may withdraw a demand for appraisal and accept
the terms of the Merger at any time within 60 days after the Effective Time,
or thereafter may withdraw such demand with the written approval of US
Foodservice. In the event an appraisal proceeding is properly instituted in
the Delaware Court of Chancery, such proceeding may not be dismissed as to any
stockholder without the approval of the Court of Chancery, and any such
approval may be conditioned on the terms the Court of Chancery deems just.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF DELAWARE LAW, ANY
STOCKHOLDER OF US FOODSERVICE WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS
SHOULD CONSULT HIS, HER OR ITS LEGAL ADVISOR.
THE MERGER AGREEMENT
This section of the Proxy Statement/Prospectus describes all material terms
of the Merger Agreement. The following description, however, does not purport
to be complete and is qualified in its entirety by reference to the Merger
Agreement, which is attached hereto as Appendix A and is incorporated herein
by reference. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed thereto in the Merger Agreement.
50
<PAGE>
GENERAL
Subject to the terms and conditions of the Merger Agreement, US Foodservice
will merge with and into Merger Sub at the Effective Time. The separate
corporate existence of US Foodservice will then cease, and Merger Sub will be
the surviving corporation (the "Surviving Corporation") and will continue to
be governed by the laws of the State of Delaware.
Certificate of Incorporation and By-Laws. The Merger Agreement provides that
the certificate of incorporation of Merger Sub as in effect immediately prior
to the Effective Time will become the certificate of incorporation of the
Surviving Corporation, except that Article FIRST of such certificate of
incorporation will be amended to change the name of Merger Sub to US
Foodservice Inc. The by-laws of Merger Sub in effect at the Effective Time
will become the by-laws of the Surviving Corporation.
Directors and Officers. The directors of Merger Sub at the Effective Time
will become the directors of the Surviving Corporation until their successors
have been duly elected or appointed and qualified or until their earlier
death, resignation or removal. The officers of US Foodservice at the Effective
Time will become the officers of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal. See "MANAGEMENT OF RYKOFF-SEXTON AFTER
THE MERGER--Directors and Executive Officers after the Merger."
Conversion of US Foodservice Common Stock in the Merger. At the Effective
Time, each issued and outstanding share of US Foodservice Common Stock (other
than shares, if any, owned by Rykoff-Sexton, Merger Sub or any other
subsidiary of Rykoff-Sexton, shares held in treasury by US Foodservice, and
shares held by holders who have properly perfected their appraisal rights
under Delaware law) will be converted into that number of Rykoff-Sexton Common
Shares equal to the Exchange Ratio (the "Share Consideration"), with a maximum
Exchange Ratio of 1.457 (which corresponds to a Closing Date Market Price of
less than $17.16) and a minimum Exchange Ratio of 1.244 (which corresponds to
a Closing Date Market Price of more than $20.10). If, prior to the Effective
Time, Rykoff-Sexton should split, reclassify or combine the Rykoff-Sexton
Common Shares, or pay a stock dividend or other stock distribution in Rykoff-
Sexton Common Shares, or otherwise change the Rykoff-Sexton Common Shares into
any other securities, or make any other dividend or distribution on the
Rykoff-Sexton Common Shares (other than normal cash dividends), or if a record
date with respect to any of the foregoing shall have been set, then the
Exchange Ratio will be appropriately adjusted to reflect such split,
reclassification, combination, dividend or other distribution or change.
In addition, (i) each outstanding option to purchase shares of US
Foodservice Common Stock listed in the US Foodservice Disclosure Statement
(each, an "Option") issued pursuant to US Foodservice's stock option plans
(collectively, the "Option Plans"), whether or not vested or exercisable, will
be assumed by Rykoff-Sexton and will constitute an Assumed Option to acquire,
on the same terms and conditions as were applicable under such Option, a
number of Rykoff-Sexton Common Shares equal to the product of the Exchange
Ratio and the number of shares of US Foodservice's Common Stock subject to
such Option immediately prior to the Effective Time, at a price per share
equal to the aggregate exercise price for the shares of US Foodservice's
Common Stock subject to such Option divided by the number of full Rykoff-
Sexton Common Shares deemed to be purchasable pursuant to such Option;
provided, that the performance criteria for those Options which are
performance options, not vested in accordance with their terms, will, however,
be deemed satisfied on the first anniversary of the Effective Time; and the
conversion of any Option into an Assumed Option with an exercise price less
than $.10 per Rykoff-Sexton Common Share will be subject to the optionee's
agreement that upon exercise, (a) to the extent Rykoff-Sexton is holding
Rykoff-Sexton Common Shares as treasury shares that are not reserved for any
other purpose, Rykoff-Sexton will issue the appropriate number of such
treasury shares to the optionee and (b) to the extent that no such treasury
shares are available, such optionee will pay an exercise price of $.10 per
Rykoff-Sexton Common Share; and (ii) each Warrant will be assumed by Rykoff-
Sexton and will constitute an Assumed Warrant to acquire, on the same terms
and conditions as were applicable under such Warrant, a number of Rykoff-
Sexton Common Shares equal to the product of the Exchange Ratio and the number
of shares of US Foodservice Common Stock subject to such Warrant at a price
per share equal to the aggregate
51
<PAGE>
exercise price for such shares subject to such Warrant divided by the number
of full Rykoff-Sexton Common Shares deemed to be purchasable pursuant to such
Warrant. At the Effective Time, Rykoff-Sexton will deliver to holders of
Assumed Options and Assumed Warrants appropriate option and warrant agreements
representing the right to acquire Rykoff-Sexton Common Shares on the same
terms and conditions as contained in the Assumed Options and Assumed Warrants
(subject to any adjustments required by the preceding sentence), upon
surrender of the outstanding Options and Warrants. Rykoff-Sexton will comply
with the terms of the Option Plans as they apply to the Assumed Options and
will take all corporate action necessary to reserve for issuance a sufficient
number of Rykoff-Sexton Common Shares for delivery upon exercise of the
Assumed Options and Assumed Warrants.
Rykoff-Sexton will file a registration statement on Form S-8 (or any
successor form) or another appropriate form, effective as of the Effective
Time, with respect to Rykoff-Sexton Common Shares subject to Assumed Options
and will use commercially reasonable efforts to maintain the effectiveness of
such registration statement or registration statements (and the prospectus or
prospectuses contained therein) for so long as the Assumed Options remain
outstanding.
Based upon the number of shares of US Foodservice Common Stock outstanding
on March 31, 1996, assuming the exercise of all outstanding Assumed Options
and Assumed Warrants (whether or not currently exercisable), and based upon
the maximum Exchange Ratio permitted by the Merger Agreement, a maximum of
14,294,457 Rykoff-Sexton Common Shares may be issued in connection with the
Merger.
Fractional Shares. No fractional Rykoff-Sexton Common Shares will be issued
in the Merger. In lieu of any such fractional shares, each holder of US
Foodservice Common Stock pursuant to the Merger will be paid an amount in cash
(without interest) determined by multiplying (i) the Closing Date Market Price
by (ii) the fractional interest to which such holder otherwise would be
entitled. As soon as practicable after the determination of the amount of cash
to be paid to former stockholders of US Foodservice in lieu of any fractional
interests, Rykoff-Sexton will deposit with the Exchange Agent the cash
necessary for such purpose.
EFFECTIVE TIME OF THE MERGER
The Merger will be consummated and become effective on the date and at the
time at which the certificate of merger to be filed pursuant to the DGCL is
accepted for filing by the Secretary of State of the State of Delaware (or
such later date and time as may be specified in such certificate of merger as
may be permitted by such Secretary of State), which will be the Closing Date
or as soon as practicable thereafter. See "--Conditions; Waivers."
Promptly after the Effective Time, the Exchange Agent will mail a
transmittal form and instructions to each holder of record (other than Rykoff-
Sexton, Merger Sub or any other subsidiary of Rykoff-Sexton) of a Certificate
or Certificates which form and instructions are to be used in forwarding the
Certificates for surrender and exchange for payment therefor. US FOODSERVICE
STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE
UNTIL SUCH TRANSMITTAL FORM AND INSTRUCTIONS ARE RECEIVED. At and after the
Effective Time and until surrendered as provided above, Certificates will
represent solely the right to receive the Share Consideration and a cash
payment in lieu of any fractional shares with respect to each share of US
Foodservice Common Stock represented thereby. The holders of Certificates will
not be entitled to receive dividends or any other distributions from Rykoff-
Sexton after the Effective Time in respect of Rykoff-Sexton Common Shares
until such Certificates are so surrendered. Upon surrender of a Certificate,
there will be paid to the person in whose name such Rykoff-Sexton Common
Shares are issued any dividends or other distributions which have a record
date after the Effective Time and which became payable prior to surrender with
respect to such Rykoff-Sexton Common Shares. After such surrender, there will
be paid to the person in whose name the Rykoff-Sexton Common Shares are issued
any dividends or other distributions on such shares which have a record date
after the Effective Time and prior to such surrender and a payment date after
such surrender, and such payment will be made on the payment date. In no event
will the persons entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions.
52
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. The Merger Agreement includes representations and warranties
by US Foodservice as to, among other things, (A) the corporate organization,
standing and power of US Foodservice and its subsidiaries, (B) the
authorization of the Merger Agreement, (C) US Foodservice's capitalization,
(D) certain business interests and investments, (E) pending or threatened
litigation, (F) the Merger Agreement's noncontravention of any agreement, law,
order or charter or by-law provision and the absence of the need (except as
specified) for governmental or third-party consents to the Merger, (G) the
terms, existence, operations, liabilities and compliance with applicable laws
of employee plans of US Foodservice and its subsidiaries, and certain other
matters relating to the Employee Retirement Income Security Act of 1974, as
amended, (H) certain labor matters, (I) payment of taxes, (J) ownership of and
rights to use certain intellectual property, (K) ownership of and encumbrances
affecting certain properties and assets, (L) certain environmental matters,
(M) the accuracy of US Foodservice's S-1 Registration Statement and financial
statements, (N) the conduct of US Foodservice's business in the ordinary
course and the absence of any material adverse change in the business,
financial condition, results of operations, properties, assets or liabilities
of US Foodservice and its subsidiaries, (O) certain contracts and leases of US
Foodservice, (P) certain transactions with affiliates, (Q) brokers and finders
employed by US Foodservice, (R) the accuracy of information to be supplied by
US Foodservice for inclusion in this Proxy Statement/Prospectus and in the
Registration Statement, (S) certain tax matters, (T) termination of the US
Foodservice stockholders agreement (the "Stockholders Agreement"), and (U) the
fairness opinion received by US Foodservice.
The Merger Agreement also includes representations and warranties by Rykoff-
Sexton and Merger Sub as to, among other things, (A) the corporate
organization, standing and power of Rykoff-Sexton and its subsidiaries, (B)
the authorization of the Merger Agreement, (C) Rykoff-Sexton's capitalization,
(D) the Rykoff-Sexton Common Shares to be issued pursuant to the Merger
Agreement, (E) certain business interests and investments, (F) pending or
threatened litigation, (G) the Merger Agreement's noncontravention of any
agreement, law, order or charter or by-law provision and the absence of the
need (except as specified) for governmental or third-party consents to the
Merger, (H) the terms, existence, operations, liabilities and compliance with
applicable laws of employee plans of Rykoff-Sexton and its subsidiaries, and
certain other matters relating to the Employee Retirement Income Security Act
of 1974, as amended, (I) certain labor matters, (J) payment of taxes, (K)
ownership of and rights to use certain intellectual property, (L) ownership of
and encumbrances affecting certain properties and assets, (M) certain
environmental matters, (N) the accuracy of Rykoff-Sexton's financial
statements and periodic reports filed with the SEC, (O) the absence of any
change in the business, financial condition, results of operations,
properties, assets or liabilities of Rykoff-Sexton and its subsidiaries, (P)
certain contracts and leases of Rykoff-Sexton and its subsidiaries, (Q)
certain transactions with affiliates, (R) the ownership, activities and assets
of Merger Sub, (S) brokers and finders employed by Rykoff-Sexton, (T) the
accuracy of information to be supplied by Rykoff-Sexton for inclusion in this
Proxy Statement/Prospectus and in the Registration Statement, (U) certain tax
matters, (V) forgiveness of certain loans to key management employees of US
Foodservice, and (W) the fairness opinion received by Rykoff-Sexton.
The representations and warranties of each of the parties contain various
customary exceptions for materiality, knowledge and previously disclosed
information. The representations and warranties of each of the parties are
deemed to be conditions to the Merger to the extent provided for in the Merger
Agreement, but will not survive the Merger.
The Merger Agreement provides that each party thereto agrees that neither it
nor any affiliate or stockholder thereof, nor any of their respective
partners, officers, directors, employees or representatives makes, has made or
will be deemed to have made, any representation or warranty, express or
implied, to any other party or to any affiliate or stockholder thereof or any
of their respective partners, officers, directors, employees or
representatives with respect to (a) the execution and delivery of the Merger
Agreement or the transactions contemplated thereby; (b) any financial
projections delivered to or made available to any such persons or their
counsel, accountants, advisors, representatives or affiliates, whether before
or after the execution of the Merger Agreement, and agrees that it has not and
will not rely on such financial projections in connection with its evaluation
of any other party
53
<PAGE>
or the Merger; or (c) any information, statement or document delivered to or
made available to any such persons or their counsel, accountants, advisors,
representatives or affiliates, whether before or after the execution of the
Merger Agreement, with respect to any other party or the business, operations
or affairs of any other party, except (with respect to clauses (a) and (c)
only), to the extent and as expressly covered by a representation and warranty
contained in the Merger Agreement or in the ML Agreement or the other
agreements expressly referred to in the Merger Agreement or the ML Agreement.
BUSINESS OF US FOODSERVICE PENDING THE MERGER
US Foodservice has agreed that, among other things, prior to the Effective
Time, except as contemplated by the Merger Agreement or the Commitment Letter,
as set forth in US Foodservice's Disclosure Statement or as otherwise
permitted by the prior written consent of Rykoff-Sexton, (i) US Foodservice
and its subsidiaries will each conduct its operations according to its
ordinary course of business consistent with past practice, and (ii) it and its
subsidiaries will not enter into any material transaction other than in the
ordinary course of business consistent with past practice. US Foodservice has
agreed that, unless Rykoff-Sexton agrees in writing or except as previously
disclosed to Rykoff-Sexton or otherwise permitted pursuant to the Merger
Agreement or as contemplated by the Commitment Letter, prior to the Effective
Time neither US Foodservice nor any of its subsidiaries will:
(A) except for (1) shares issued upon exercise of Options outstanding as
of February 2, 1996 and (2) the issuance of Class A Common Stock or Class B
Common Stock, as the case may be, upon conversion of Class A Common Stock
or Class B Common Stock as required by the US Foodservice Charter, 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 its capital stock of any class (including
shares of US Foodservice Common Stock), or any securities or rights
convertible into, exchangeable for, or evidencing the right to subscribe
for any shares of its capital stock, or any rights, warrants, options,
calls, commitments or any other agreements of any character to purchase or
acquire any shares of its capital stock or any securities or rights
convertible into, exchangeable for, or evidencing the right to subscribe
for, any shares of its capital stock, or (b) any other securities in
respect of, in lieu of, or in substitution for, shares of US Foodservice
Common Stock outstanding on February 2, 1996;
(B) redeem, purchase or otherwise acquire, or propose to redeem, purchase
or otherwise acquire, any of its outstanding securities (including shares
of US Foodservice Common Stock), except for redemption of the Preferred
Stock in accordance with the ML Redemption Agreement or Sara Lee Redemption
Agreement or as otherwise contemplated by the Merger Agreement;
(C) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or make any
other actual, constructive or deemed distribution in respect of any shares
of its capital stock or otherwise make any payments to stockholders in
their capacity as such;
(D) (1) other than in the ordinary course of business consistent with
past practices, and as approved by the US Foodservice Board of Directors,
(a) grant any increases in the base compensation of any of its directors,
officers or key employees, or (b) pay or agree to pay any material pension,
retirement allowance or other employee benefit not required by any of the
US Foodservice employee plans or benefit arrangements as in effect on
February 2, 1996 to any such director, officer or key employee, whether
past or present, (2) (a) enter into any new or amend any existing
employment or severance agreement with any such director, officer or key
employee of US Foodservice or any of its subsidiaries, except as permitted
in US Foodservice's Disclosure Statement or (b) except as may be required
to comply with applicable law, become obligated under any US Foodservice
employee plan or benefit arrangement which was not in existence on February
2, 1996, or amend any such plan or arrangement in existence on February 2,
1996 if such amendment would have the effect of enhancing or accelerating
any benefits thereunder;
(E) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
US Foodservice or any of its subsidiaries (other than the Merger);
(F) other than as disclosed in US Foodservice's current capital budget,
make any acquisition or disposition, by means of merger, consolidation or
otherwise, of any material assets (other than sales of
54
<PAGE>
inventory in the ordinary course of business and the disposition of
obsolete assets or assets no longer used in the business) or other business
enterprise or operation;
(G) adopt any amendments to the US Foodservice Charter or its By-laws or
alter through merger, liquidation, reorganization, restructuring or in any
other fashion the corporate structure or ownership of any of its
subsidiaries;
(H) other than (1) borrowings under existing credit facilities, (2) other
borrowings in the ordinary course at any time outstanding up to $10 million
after February 2, 1996, (3) borrowings in connection with the redemption of
Preferred Stock to the extent permitted by the Merger Agreement, and (4)
borrowings of up to $35 million to be used for construction of a new
operating facility for Biggers Brothers, Inc. ("Biggers Brothers"), incur
any indebtedness for borrowed money or guarantee any such indebtedness or,
except in the ordinary course consistent with past practice, make any
loans, advances or capital contributions to, or investments in, any other
person (other than to US Foodservice or any wholly-owned subsidiary of US
Foodservice);
(I) enter into any agreement providing for acceleration of payment of any
material obligation or performance of any material benefit or payment or
other consequence as a result of a change of control of US Foodservice or
its subsidiaries;
(J) except as disclosed in US Foodservice's current capital budget, enter
into any contract, arrangement or understanding requiring the lease or
purchase of equipment, materials, supplies or services over a period
greater the 12 months which is not cancelable without penalty on 30 days'
or less notice;
(K) take any actions, which would, or would be reasonably likely to
adversely affect the qualification of the Merger as a reorganization within
the meaning of Section 368(a) of the Code, and US Foodservice will use all
reasonable efforts to achieve such result; or
(L) enter into any contract, agreement, commitment or arrangement to do
any of the foregoing.
BUSINESS OF RYKOFF-SEXTON PENDING THE MERGER
Rykoff-Sexton has agreed that, among other things, prior to the Effective
Time, except as contemplated by the Merger Agreement or the Commitment Letter,
as set forth in the Rykoff-Sexton Disclosure Statement or as otherwise
permitted by the prior written consent of US Foodservice, (i) Rykoff-Sexton
and its subsidiaries will each conduct its operations according to its
ordinary course of business consistent with past practice, and (ii) it and its
subsidiaries will not enter into any material transaction other than in the
ordinary course of business consistent with past practice. Rykoff-Sexton has
agreed that, unless US Foodservice agrees in writing or except as previously
disclosed to US Foodservice or otherwise permitted by the Merger Agreement or
as contemplated by the Commitment Letter, prior to the Effective Time neither
Rykoff-Sexton nor any of its subsidiaries will:
(A) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, sale, disposition or pledge or other
encumbrance of (1) any shares of its capital stock of any class, or any
securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for any shares of its capital stock, or any rights,
warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of its capital stock, or (2) any other
securities in respect of, in lieu of, or in substitution for, shares of
capital stock outstanding on the date hereof;
(B) redeem, purchase or otherwise acquire, or propose to redeem, purchase
or otherwise acquire, any of its outstanding securities;
(C) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend (other than
normal cash dividends in the ordinary course, but not in an amount to
exceed $.03 per share semi-annually, and other than dividends of
subsidiaries of Rykoff-Sexton to Rykoff-Sexton), or make any other actual,
constructive or deemed distribution in respect of any shares of its capital
stock or otherwise make any payments to stockholders in their capacity as
such;
55
<PAGE>
(D) (1) other than in the ordinary course of business consistent with
past practices, and as approved by the Rykoff-Sexton Board of Directors,
(a) grant any increases in the base compensation of any of its directors,
officers or key employees, or (b) pay or agree to pay any material pension,
retirement allowance or other employee benefit not required by any of the
Rykoff-Sexton employee plans or benefit arrangements as in effect on
February 2, 1996 to any such director, officer or key employees, whether
past or present, or (2)(a) enter into any new or amend any existing
employment or severance agreement with any such director, officer or key
employee, except as contemplated in the Merger Agreement or as permitted in
the Rykoff-Sexton Disclosure Statement, or (b) except as may be required to
comply with applicable law, become obligated under any new Rykoff-Sexton
employee plan or benefit arrangement which was not in existence on February
2, 1996, or amend any such Rykoff-Sexton employee plan or benefit
arrangement in existence on February 2, 1996 if such amendment would have
the effect of accelerating or materially enhancing any benefits thereunder;
(E) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
Rykoff-Sexton or any of its subsidiaries (other than the Merger);
(F) other than as disclosed in Rykoff-Sexton's current capital budget,
make, engage in negotiations with any third party respecting, or directly
or indirectly solicit or initiate any inquiry, proposal or offer
respecting, the acquisition or disposition, by means of merger,
consolidation, business combination or otherwise, all or a material amount
of assets of, or any securities of, Rykoff-Sexton or any subsidiary of
Rykoff-Sexton (other than sales of inventory in the ordinary course of
business or the disposition of obsolete assets or assets no longer used in
the business or the sale of U.S. Lace Paperworks); provided, however, that
nothing contained in such provision will require the Board of Directors of
Rykoff-Sexton to act or refrain from acting in connection with taking and
disclosing to Rykoff-Sexton's stockholders a position contemplated by Rules
14d-9 and 14e-2 under the Exchange Act;
(G) adopt any amendments to the Rykoff-Sexton Charter or By-laws (except
for By-law amendments which are required in connection with the performance
by Rykoff-Sexton of its obligations under the Merger Agreement or under any
other agreement contemplated under the Merger Agreement) or alter through
merger, liquidation, reorganization, restructuring or in any other fashion
the corporate structure or ownership of any of its subsidiaries;
(H) other than (1) borrowings under existing credit facilities and (2)
other borrowings in the ordinary course in the aggregate at any time
outstanding up to $10 million after February 2, 1996, incur any
indebtedness for borrowed money or guarantee any such indebtedness or,
except in the ordinary course consistent with past practice, make any
loans, advances or capital contributions to, or investments in, any other
person (other than to Rykoff-Sexton or any wholly owned subsidiary of
Rykoff-Sexton);
(I) except in connection with modifications to Rykoff-Sexton's Change in
Control Agreements as contemplated in the Merger Agreement, enter into any
agreement providing for acceleration of payment of any material obligation
or performance of any material benefit or obligation or other consequence
as a result of a change of control of Rykoff-Sexton or its subsidiaries;
(J) except as disclosed in Rykoff-Sexton's current capital budget, enter
into any contract, arrangement or understanding requiring the lease or
purchase of equipment, materials, supplies or services over a period
greater than 12 months, which is not cancelable without penalty on 30 days'
or less notice;
(K) take any actions, which would, or would be reasonably likely to,
adversely affect the qualification of the Merger as a reorganization within
the meaning of Section 368(a) of the Code, and Rykoff-Sexton will use all
reasonable efforts to achieve such result; or
(L) enter into any contract, agreement, commitment or arrangement to do
any of the foregoing.
NO SOLICITATION
Under the Merger Agreement, US Foodservice has agreed that, prior to the
Effective Time, neither it nor any of its subsidiaries, employees, officers,
agents or representatives will, directly or indirectly, (i) solicit or
56
<PAGE>
initiate any inquiry, proposal or offer from any person relating to any
acquisition or purchase of all or a material amount of the assets of, or any
securities of, or any merger, consolidation or business combination with, US
Foodservice or any of its subsidiaries (any such inquiry, proposal or offer
hereinafter a "US Foodservice Alternative Proposal"), or (ii)(1) participate
in any negotiations with respect to a US Foodservice Alternative Proposal, (2)
furnish to any other person any confidential information with respect to US
Foodservice or its business, or (3) otherwise cooperate in any way with, or
assist or participate in, or facilitate any US Foodservice Alternative
Proposal. US Foodservice must promptly notify Rykoff-Sexton if any US
Foodservice Alternative Proposal is made.
CERTAIN OTHER COVENANTS
Under the Merger Agreement, both Rykoff-Sexton and US Foodservice have
agreed: (A) to promptly make all filings and seek to obtain all authorizations
required under all applicable laws with respect to the Merger and the other
transactions contemplated by the Merger Agreement; (B) to promptly take, or
cause to be taken, all other actions and do, or cause to be done, all other
things necessary, proper or appropriate to satisfy the conditions to the
Merger and to consummate and make effective the transactions contemplated by
the Merger Agreement on the terms and conditions set forth in the Merger
Agreement as soon as practicable, subject to certain qualifications; (C) to
afford access to officers, employees, counsel, accountants and other
authorized representatives of the other party, during the period prior to the
Effective Time, to their respective properties, books and records (including,
without limitation, the work papers of independent accountants) and, during
such period, to furnish promptly to such representatives all information
concerning their respective businesses, properties and personnel as may
reasonably be requested; (D) that US Foodservice will use reasonable efforts
to cause each party (other than Rykoff-Sexton and the ML Entities) to the
Registration Rights Agreement or who may otherwise be deemed to be an
affiliate of US Foodservice to deliver to Rykoff-Sexton on or prior to the
Effective Time, an affiliate letter with respect to Rule 145 under the
Securities Act, in the form attached to the Merger Agreement; (E) to cooperate
in the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding certain transfer, recording,
registration and similar taxes and fees payable in connection with the
transactions contemplated by the Merger Agreement; and (F) that Rykoff-Sexton
will assume liability for and hold stockholders of US Foodservice harmless
against liability for real property transfer or gain tax imposed on such
stockholders by the State of New York as a result of the Merger.
Under the Merger Agreement, US Foodservice has agreed to take or cause to be
taken all stockholder action necessary in accordance with applicable law, US
Foodservice's Charter and Bylaws and the Stockholders Agreement to approve the
Merger Agreement and the Merger. Rykoff-Sexton has agreed to take all action
necessary in accordance with applicable law, Rykoff-Sexton's Restated
Certificate of Incorporation and Bylaws to convene the Special Meeting. In
addition, the Merger Agreement provides that the Boards of Directors of both
US Foodservice and Rykoff-Sexton will recommend and declare advisable such
approval. See "THE SPECIAL MEETING--Vote Required." Under the Merger
Agreement, Rykoff-Sexton and US Foodservice have also agreed to cooperate and
promptly prepare the Registration Statement which Rykoff-Sexton has agreed to
promptly file with the SEC.
Under the Merger Agreement, Rykoff-Sexton and US Foodservice have agreed to
take certain actions with respect to the redemption or purchase of the
Preferred Stock. See "THE MERGER--Redemption or Purchase of Preferred Stock."
In addition, Rykoff-Sexton and US Foodservice have agreed to use their
reasonable best efforts to consummate the transactions set forth in the
Commitment Letter. See "THE MERGER--Rykoff-Sexton Financing and Receivables
Securitization."
Under the Merger Agreement, Rykoff-Sexton has agreed that, subject to the
delivery of certain waivers and releases by the ML Entities and certain other
stockholders of US Foodservice, from and after the Effective Time, to (and to
cause US Foodservice to) indemnify and hold harmless each person who is now,
or has been at any time prior to the date of the Merger Agreement, an officer
or director of US Foodservice with respect to acts or omissions occurring
prior to the Effective Time to the extent required by the Bylaws of US
Foodservice. In addition, Rykoff-Sexton has agreed to cause the directors and
officers of US Foodservice and its subsidiaries to
57
<PAGE>
be covered by directors' and officers' liability insurance maintained by
Rykoff-Sexton from and after the Effective Time, provided, that such insurance
will not include coverage for any acts or omissions occurring prior to the
Effective Time. See "THE MERGER--Interests of Certain Persons in the Merger."
The Merger Agreement also provides that with respect to certain payments
required to be made by US Foodservice which may constitute a "parachute
payment" under the Code, US Foodservice agrees to (A) in consultation with
Rykoff-Sexton, obtain stockholder approval of such payments in accordance with
the Code and regulations thereunder and (B) at least 15 days prior to the
closing of the Merger, provide evidence satisfactory to Rykoff-Sexton that
such approval has been obtained.
Under the Merger Agreement, Rykoff-Sexton has agreed to extend loans to
those management employees of US Foodservice for whom US Foodservice
management loans were forgiven at the Effective Time and whose Rykoff-Sexton
Common Shares are subject to restrictions on transfer specified in the Merger
Agreement, in an amount sufficient to cover the federal and state income tax
due from such management employees as a result of such forgiveness. See "THE
MERGER--Interests of Certain Persons in the Merger."
CONDITIONS; WAIVERS
Conditions to Each Party's Obligations to Effect the Merger. The respective
obligations of US Foodservice, Rykoff-Sexton and Merger Sub to effect the
Merger are subject to the fulfillment at or prior to the Effective Time of
each of the following conditions (any of which may be waived in whole or in
part under the Merger Agreement by the party benefitting thereby, to the
extent permitted by applicable law): (A) the Merger Agreement and the
transactions contemplated thereby shall have been duly approved by the
requisite holders of shares of US Foodservice Common Stock in accordance with
applicable law, the US Foodservice Charter and By-laws and the Stockholders
Agreement, and the issuance of Rykoff-Sexton Common Shares in connection with
the Merger shall have been duly approved by requisite holders of Rykoff-Sexton
Common Shares in accordance with the rules of the NYSE; (B) except for the
filing of a certificate of merger in accordance with the DGCL, all
authorizations required in connection with the execution and delivery of the
Merger Agreement and the performance of the obligations under the Merger
Agreement shall have been made or obtained, except where the failure to have
made or obtained any such authorizations would not have a material adverse
effect on the business, properties, operations or financial condition of
Rykoff-Sexton and its subsidiaries (including the Surviving Corporation)
following the Effective Time; (C) there shall not be in effect any judgment,
writ, order, injunction or decree of any court or governmental body of
competent jurisdiction, restraining, enjoining or otherwise preventing
consummation of the transactions contemplated by the Merger Agreement; (D) the
Registration Statement shall have been declared effective by the SEC under the
Securities Act and shall be effective at the Effective Time, and no stop order
suspending effectiveness shall have been issued, no action, suit, proceeding
or investigation by the SEC to suspend the effectiveness thereof shall have
been initiated and be continuing, and all necessary approvals under state
securities laws or the Securities Act or Exchange Act relating to the issuance
or trading of the Rykoff-Sexton Common Shares to be issued in the Merger shall
have been received; (E) the Rykoff-Sexton Common Shares required to be issued
under the Merger Agreement (including upon exercise of Assumed Options and
Assumed Warrants) shall have been approved for listing on the NYSE, subject
only to official notice of issuance; (F) all conditions precedent to the
closing of the financing described in the Commitment Letter shall have been
satisfied, and the transactions contemplated by the Commitment Letter shall
have been consummated; (G) all shares of Exchangeable Preferred Stock shall
have been purchased by Rykoff-Sexton or Merger Sub pursuant to the ML
Redemption Agreement or as otherwise contemplated by the Merger Agreement, and
all shares of 10% Preferred Stock shall have been redeemed in accordance with
the terms and conditions set forth in the Sara Lee Redemption Agreement or as
otherwise contemplated by the Merger Agreement; (H) US Foodservice shall have
received an opinion of Morgan, Lewis & Bockius LLP, dated the Closing Date, to
the effect that the Merger will be treated for federal income tax purposes as
a reorganization within the meaning of Section 368(a) of the Code; and (I)
Rykoff-Sexton shall have received an opinion of (1) Jones, Day, Reavis & Pogue
(addressed to Rykoff-Sexton), dated the Closing Date, to the effect that the
Merger should be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and (2) Shearman & Sterling
(addressed to the ML Entities), dated the Closing Date, to the effect that
58
<PAGE>
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
Conditions to the Obligations of Rykoff-Sexton and Merger Sub. The
respective obligations of Rykoff-Sexton and Merger Sub to effect the Merger
are subject to the fulfillment at or prior to the Effective Time of each of
the following conditions (any and all of which may be waived in whole or in
part under the Merger Agreement by Rykoff-Sexton or Merger Sub, as the case
may be, to the extent permitted by applicable law): (A)(1) each of the
representations and warranties of US Foodservice contained in the Merger
Agreement or otherwise required by the Merger Agreement to be made after the
date thereof in a writing expressly referred to in the Merger Agreement by or
on behalf of US Foodservice shall have been true in all material respects when
made and, except for certain specified exceptions, at the time of the closing
of the Merger with the same effect as though such representations and
warranties had been made at such time, and (2) each of the representations and
warranties of each of the ML Entities contained in the ML Agreement or
otherwise required under the Merger Agreement or the ML Agreement to be made
by any ML Entity after the date of the Merger Agreement in a writing expressly
referred to in the Merger Agreement or in the ML Agreement by or on behalf of
any ML Entity pursuant to the Merger Agreement or the ML Agreement shall have
been true in all material respects when made and, except for certain specified
exceptions, at the time of the closing of the Merger with the same effect as
though such representations and warranties had been made at such time; (B)(1)
at or prior to the closing of the Merger, US Foodservice shall have performed
or complied in all material respects with all agreements and conditions
contained in the Merger Agreement required to be performed or complied with by
it prior to or at the time of the closing of the Merger, and (2) at or prior
to the closing of the Merger, each ML Entity shall have performed or complied
in all material respects with all agreements and conditions contained in the
ML Agreement required to be performed or complied with by it prior to or at
the time of the closing of the Merger; (C) Rykoff-Sexton shall have received
from Morgan, Lewis & Bockius LLP or other counsel for US Foodservice
satisfactory to Rykoff-Sexton an opinion covering the items specified in an
exhibit to the Merger Agreement; (D) Rykoff-Sexton shall have received the
Standstill Agreement executed by each ML Entity, together with the opinion of
Shearman & Sterling or other counsel for the ML Entities satisfactory to
Rykoff-Sexton, dated the Closing Date, covering the items specified in an
exhibit to the Merger Agreement; (E) the opinion of Goldman Sachs dated the
date of the Merger Agreement shall not have been withdrawn, or materially
modified or amended, on or prior to the date of the Proxy
Statement/Prospectus; (F) the Stockholders Agreement shall have been
terminated and be of no further force and effect; (G) Rykoff-Sexton shall have
received a Tax Agreement executed by each ML Entity and the other parties
thereto; and (H) with respect to any action, suit, arbitration or other
proceeding pending against US Foodservice or any subsidiary thereof as of the
date of the Merger Agreement where the amount in controversy exceeds $10
million ("Covered US Foodservice Proceeding"), (1) a final non-appealable
judgment or award shall have been entered in such Covered US Foodservice
Proceeding, or a binding settlement agreement of such Covered US Foodservice
Proceeding shall have been executed and delivered, providing in each such case
for (a) a judgment or award in favor of US Foodservice or such subsidiary, or
(b) payment by US Foodservice or such subsidiary of, or the imposition of
fines or other remedies against US Foodservice or such subsidiary involving,
an amount (i) not in excess of the range specified in any letter or opinion of
US Foodservice's counsel in such Covered US Foodservice Proceeding to the US
Foodservice's auditors during the 12 months preceding the date of the Merger
Agreement ("Previous US Foodservice Auditor's Letter") or (ii) if such amount
is in excess of such range, the payment of such amount does not have, or would
not reasonably be expected to have (so far as can be foreseen at the time), a
material adverse effect on the business, properties, operation or financial
condition of US Foodservice and its subsidiaries, taken as a whole (a "US
Foodservice Material Adverse Effect"), or (2) if such Covered US Foodservice
Proceeding has not been finally resolved, (a) the US Foodservice shall have
received an update ("US Foodservice Update Letter") to the Previous US
Foodservice Auditor's Letter which specifies a range above which an award or
judgment is not favored by the balance of probabilities, and (b) (i) such
range shall not exceed that specified in the Previous US Foodservice Auditor's
Letter, or (ii) if such range as set forth in the US Foodservice Update Letter
exceeds the range set forth in the Previous US Foodservice Auditor's Letter,
an award or judgment in such range would not have, or would not reasonably be
expected to have so far as can be foreseen at the time, a US Foodservice
Material Adverse Effect.
59
<PAGE>
Conditions to the Obligations of US Foodservice. The obligations of US
Foodservice to effect the Merger are subject to the fulfillment at or prior to
the Effective Time of each of the following conditions (any and all of which
may be waived in whole or in part under the Merger Agreement by US Foodservice
to the extent permitted by applicable law): (A) each of the representations
and warranties of Rykoff-Sexton and Merger Sub contained in the Merger
Agreement or otherwise required by the Merger Agreement to be made after the
date thereof in a writing expressly referred to in the Merger Agreement by or
on behalf of Rykoff-Sexton and Merger Sub pursuant to the Merger Agreement
shall have been true in all material respects when made and, except for
certain specified exceptions, at the time of the closing of the Merger with
the same effect as though such representations and warranties had been made at
such time; (B) at or prior to the closing of the Merger, Rykoff-Sexton and
Merger Sub shall have each performed or complied in all material respects with
all agreements and conditions contained in the Merger Agreement required to be
performed or complied with by it prior to or at the time of the closing of the
Merger; (C) US Foodservice shall have received from Jones, Day, Reavis & Pogue
and Maslon Edelman Borman & Brand LLP, or other counsel for Rykoff-Sexton
satisfactory to US Foodservice, opinions, dated the Closing Date, covering the
items specified in an exhibit to the Merger Agreement; (D) the Registration
Rights Agreement, duly executed by Rykoff-Sexton, shall have been received by
the other parties thereto; (E) the individuals listed on the employment
agreements included as an exhibit to the Merger Agreement shall have received
executed employment agreements from Rykoff-Sexton in the respective forms of
such exhibit; (F) with respect to any action, suit, arbitration or other
proceeding pending against Rykoff-Sexton or any of its subsidiaries as of the
date of the Merger Agreement where the amount in controversy exceeds $10
million ("Covered Rykoff-Sexton Proceeding"), (1) a final non-appealable
judgment or award shall have been entered in such Covered Rykoff-Sexton
Proceeding, or a binding settlement agreement of such Covered Rykoff-Sexton
Proceeding shall have been executed and delivered, providing in each such case
for (a) a judgment or award in favor of Rykoff-Sexton or such subsidiary, or
(b) payment by Rykoff-Sexton or such subsidiary of, or the imposition of fines
or other remedies against Rykoff-Sexton or such subsidiary involving, an
amount (i) not in excess of the range specified in any letter or opinion of
Rykoff-Sexton's counsel in such Covered Rykoff-Sexton Proceeding to Rykoff-
Sexton's auditors during the 12 months preceding the date of the Merger
Agreement ("Previous Rykoff-Sexton Auditor's Letter") or (ii) if such amount
is in excess of such range, the payment of such amount does not have, or would
not reasonably be expected to have (so far as can be foreseen at the time), a
material adverse effect on the business, properties, operation or financial
condition of Rykoff-Sexton and its subsidiaries, taken as a whole (a "Rykoff-
Sexton Material Adverse Effect"), or (2) if such Covered Rykoff-Sexton
Proceeding has not been finally resolved, (a) Rykoff-Sexton shall have
received an update ("Rykoff-Sexton Update Letter") to the Previous Rykoff-
Sexton Auditor's Letter which specifies a range above which an award or
judgment is not favored by the balance of probabilities, and (b) (i) such
range shall not exceed that specified in the Previous Rykoff-Sexton Auditor's
Letter, or (ii) if such range as set forth in the Rykoff-Sexton Update Letter
exceeds the range set forth in the Previous Rykoff-Sexton Auditor's Letter, an
award or judgment in such range would not have, or would not reasonably be
expected to have so far as can be foreseen at the time, a Rykoff-Sexton
Material Adverse Effect.
AMENDMENT; TERMINATION
Amendment. The parties to the Merger Agreement may not amend, change,
supplement, waive or otherwise modify the Merger Agreement except by an
instrument in writing signed by all the parties to the Merger Agreement. The
Merger Agreement may be amended by the parties thereto, by action taken by
their respective Board of Directors, at any time before or after approval of
matters presented in connection with the Merger by the stockholders of US
Foodservice, Rykoff-Sexton and Merger Sub, but after any such stockholder
approval, no amendment may be made which by law requires the further approval
of stockholders without obtaining such approval.
Termination by Mutual Consent. The Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of matters presented in connection with the Merger by
holders of Rykoff-Sexton Common Shares or holders of shares of US Foodservice
Common Stock, by the mutual written consent of the Boards of Directors of each
of Rykoff-Sexton and US Foodservice.
60
<PAGE>
Termination by Either Rykoff-Sexton or US Foodservice. The Merger Agreement
may also be terminated (upon notice from the terminating party to the other
parties) and the Merger may be abandoned by action of the Board of Directors
of either Rykoff-Sexton or US Foodservice at any time prior to the Effective
Time, before or after approval of the issuance of Rykoff-Sexton Common Shares
in connection with the Merger by holders of the shares of US Foodservice or
holders of the Rykoff-Sexton Common Shares, if (A) the Merger is not
consummated by July 31, 1996 (provided that the right to terminate the Merger
Agreement under such provision shall not be available to any party whose
failure to perform its covenants set forth in the Merger Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before
such date), (B) any court of competent jurisdiction in the United States or
governmental body in the United States issued an order, decree or ruling or
taken any other action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall
have become final and nonappealable (provided that the party seeking to
terminate the Merger Agreement pursuant to such provision shall have used all
reasonable efforts to remove such order, decree, ruling or other action), or
(C) the approval of Rykoff-Sexton's stockholders required under the Merger
Agreement shall not have been obtained at the Special Meeting.
Termination by Rykoff-Sexton. The Merger Agreement may be terminated (upon
notice from Rykoff-Sexton to US Foodservice) and the Merger may be abandoned
at any time prior to the Effective Time, before or after the approval of the
issuance of Rykoff-Sexton Common Shares in connection with the Merger by
holders of Rykoff-Sexton Common Shares, by action of the Rykoff-Sexton Board
of Directors, if (A) US Foodservice shall have failed to comply in any
material respect with any of the covenants, conditions or agreements contained
in the Merger Agreement to be complied with or performed by US Foodservice at
or prior to such date of termination, which failure to comply has not been
cured within 30 Business Days following receipt by US Foodservice of notice of
such failure to comply, (B) any of the ML Entities shall have failed to comply
in any material respect with any of the covenants, conditions or agreements
contained in the ML Agreement to be complied with or performed by any of the
ML Entities at or prior to the such date of termination, which failure to
comply has not been cured by such ML Entity within 30 Business Days following
receipt by such ML Entity of notice of such failure to comply, (C) any
representation or warranty of US Foodservice contained in the Merger Agreement
shall not be true in all material respects when made (provided such breach has
not been cured within 30 Business Days following receipt by US Foodservice of
notice of the breach) or on and as of the Effective Time as if made on and as
of the Effective Time, except that those representations and warranties which
address matters only as of a particular date shall remain true in all material
respects as of such date, or (D) any representation or warranty of any ML
Entity contained in the ML Agreement shall not be true in all material
respects when made (provided such breach has not been cured within 30 Business
Days following receipt by such ML Entity of notice of the breach) or on and as
of the Effective Time as if made on and as of the Effective Time, except that
those representations and warranties which address matters only as of a
particular date shall remain true in all material respects as of such date.
Termination by US Foodservice. The Merger Agreement may be terminated (upon
notice from US Foodservice to Rykoff-Sexton) and the Merger may be abandoned
at any time prior to the Effective Time, before or after the approval of the
Merger Agreement by holders of the shares of US Foodservice Common Stock, by
action of the US Foodservice Board of Directors, if (A) Rykoff-Sexton or
Merger Sub shall have failed to comply in any material respect with any of the
covenants, conditions or agreements contained in the Merger Agreement to be
complied with or performed by Rykoff-Sexton or Merger Sub at or prior to such
date of termination, which failure to comply has not been cured within 30
Business Days following receipt by the breaching party of notice of such
failure to comply, or (B) any representation or warranty of Rykoff-Sexton or
Merger Sub contained in the Merger Agreement shall not be true in all material
respects when made (provided such breach has not been cured within 30 Business
Days following receipt by the breaching party of notice of the breach) or on
and as of the Effective Time as if made on and as of the Effective Time,
except that those representations and warranties which address matters only as
of a particular date shall remain true in all material respects as of such
date. Notwithstanding anything to the contrary contained in this paragraph, US
Foodservice may terminate the Merger Agreement if (A) as permitted pursuant to
the proviso to Section 7.5 of the Merger Agreement, Rykoff-Sexton has refused
to consent to any divestiture, hold separate or similar transaction on the
part of US Foodservice, or
61
<PAGE>
Rykoff-Sexton refuses to take or commit to take any action referred to in such
proviso, in each case that is required, in the reasonable opinion of US
Foodservice, for the consummation of the transactions contemplated by the
Merger Agreement, and (B) Rykoff-Sexton has failed to make such consent or
take or commit to be taken such action, within 10 Business Days following
receipt by Rykoff-Sexton of notice of US Foodservice's intention to terminate
the Merger Agreement on that basis.
Certain Consequences of Termination. In the event of termination of the
Merger Agreement and abandonment of the Merger as provided above, no party to
the Merger Agreement (or any of its respective directors or officers) shall
have any liability or further obligation under the Merger Agreement, except
the obligations of the parties pursuant to the provisions of the Merger
Agreement dealing with access to information, confidentiality, publicity,
expenses and certain miscellaneous matters, except that nothing in the Merger
Agreement will relieve any party from liability for any wilful breach of any
of its representations and warranties, covenants or other agreements set forth
in the Merger Agreement. The failure of Rykoff-Sexton or US Foodservice to
close the transactions contemplated by the Commitment Letter will not be
deemed to be a wilful breach of any of its representations and warranties,
covenants or other agreements set forth in the Merger Agreement.
EXPENSES; TERMINATION FEE
Except as provided below, each party to the Merger Agreement will bear its
own expenses, except that in the event of a dispute concerning the terms or
enforcement of the Merger Agreement, the prevailing party will be entitled to
reimbursement of reasonable legal fees and disbursements from the other party
or parties to such dispute.
Rykoff-Sexton agrees that if (A) an RSI Alternative Proposal (as defined in
the Merger Agreement) shall have been publicly announced or sent to holders of
Rykoff-Sexton Common Shares after the date of the Merger Agreement and prior
to the Special Meeting, and (B) the issuance of Rykoff-Sexton Common Shares in
connection with the Merger shall not have been approved by the requisite
holders of Rykoff-Sexton Common Shares in accordance with the rules of the
NYSE at the Special Meeting, and (C) within 12 months of the date on which
such meeting is held a definitive agreement with respect to such RSI
Alternative Proposal is executed by Rykoff-Sexton, then simultaneous with the
execution of such definitive agreement, unless Rykoff-Sexton shall have
properly terminated the Merger Agreement as described above in clauses (A) and
(B) of the section entitled "--Termination by Either Rykoff-Sexton or US
Foodservice," or otherwise as described above under the section entitled "--
Termination by Rykoff-Sexton," Rykoff-Sexton shall pay to US Foodservice an
amount equal to $4,500,000 plus all Expenses (not to exceed $1,000,000)
incurred by US Foodservice. The payment by Rykoff-Sexton of such amounts will
be liquidated damages and following the payment of such amounts, Rykoff-Sexton
will have no liability or further obligation under the Merger Agreement except
pursuant to provisions of the Merger Agreement that expressly survive
termination of the Merger Agreement.
OTHER AGREEMENTS
THE ML AGREEMENT
Pursuant to the ML Agreement among Rykoff-Sexton and the ML Entities entered
into simultaneously with the Merger Agreement, each of the ML Entities has
agreed that, during the term of the ML Agreement, it will not (i) sell,
transfer, pledge, assign or otherwise dispose of, or enter into any contract,
option or other agreement with respect to the transfer, pledge, assignment or
other disposition of, any US Foodservice Class A Common Stock owned by any of
the ML Entities ("ML Entities Shares"); (ii) acquire any additional shares of
US Foodservice Class A Common Stock without the prior written consent of
Rykoff-Sexton; (iii) enter into a voting agreement (other than the Standstill
Agreement, which is described below) with respect to any ML Entities Shares;
or (iv) solicit or initiate any US Foodservice Alternative Proposal,
participate in any negotiations with respect to any US Foodservice Alternative
Proposal, furnish to any other person any confidential information with
respect to US Foodservice or its business, or otherwise cooperate in any way
with or assist or participate in,
62
<PAGE>
or facilitate any US Foodservice Alternative Proposal. MLCP has also agreed
promptly to notify Rykoff-Sexton if any US Foodservice Alternative Proposal is
made to any ML Entity.
Each of the ML Entities has also agreed that, at all times prior to the
Effective Time, the ML Entities will collectively continue to own and exercise
voting rights with respect to the ML Entities Shares. In addition, each ML
Entity has agreed that at any meeting of the stockholders of US Foodservice,
and in any action by written consent of the stockholders of US Foodservice, it
will (i) vote the ML Entities Shares in favor of the Merger and the Merger
Agreement, and (ii) vote the ML Entities Shares against any action or
agreement which would result in a breach of any covenant, representation or
warranty of US Foodservice under the Merger Agreement. Each of the ML Entities
has also agreed to revoke any previous proxies or consents with respect to the
ML Entities Shares or any other voting securities of US Foodservice.
In accordance with the ML Agreement, at the Effective Time, (i) Rykoff-
Sexton and the ML Entities will enter into the Standstill Agreement, the
Registration Rights Agreement and the Tax Agreement (all of which are
described below), and (ii) the ML Entities will execute a waiver and release
relating to any claims the ML Entities may have against any directors or
officers of US Foodservice to the extent such directors and officers would be
entitled to indemnification by US Foodservice under its by-laws.
The ML Agreement will terminate at the earlier of the Effective Time or the
termination of the Merger Agreement.
THE STANDSTILL AGREEMENT
Pursuant to the ML Agreement, at the Effective Time, Rykoff-Sexton and the
ML Entities will enter into the Standstill Agreement, which provides for
certain standstill, voting and transfer restrictions on the ML Entities, and
provides for representation on the Rykoff-Sexton Board of Directors and
certain committees thereof by individuals selected by the ML Entities.
Standstill Provisions. During the term of the Standstill Agreement, except
as otherwise expressly provided therein or as approved by the prior
affirmative vote of a majority of the directors of Rykoff-Sexton who are not
affiliated with the ML Entities, the ML Entities will not, and will not permit
any of their respective affiliates to, directly or indirectly, (i) acquire,
propose to acquire (or publicly announce or otherwise disclose an intention to
propose to acquire) or offer to acquire, by purchase or otherwise, any
securities entitled to vote generally for the election of directors ("Rykoff-
Sexton Voting Securities") of Rykoff-Sexton if the effect of such acquisition
would be to increase the number of shares of Rykoff-Sexton Voting Securities
beneficially owned by the ML Entities and their affiliates to an amount
representing more than 36.4% of the aggregate number of votes which may be
cast by holders of outstanding shares of Rykoff-Sexton Voting Securities
("Total Voting Power") (such percentage to be automatically reduced to reflect
the actual percentage of Rykoff-Sexton Voting Securities owned by the ML
Entities and their affiliates from time to time); (ii) propose (or publicly
announce or otherwise disclose an intention to propose), solicit, offer, seek
to direct, negotiate with or provide any confidential information relating to
Rykoff-Sexton or its business to any other person with respect to, any tender
or exchange offer, merger, consolidation, share exchange, business
combination, restructuring, recapitalization or similar transaction involving
Rykoff-Sexton; provided that the ML Entities will not be prohibited from
soliciting, offering, seeking to effect and negotiating with any person with
respect to sales or transfers of Rykoff-Sexton Voting Securities held by the
ML Entities if otherwise permitted by the Standstill Agreement; (iii) make, or
in any way participate in, any solicitation of proxies to vote, solicit any
consent with respect to the voting of any Rykoff-Sexton Voting Securities or
become a participant in any election contest with respect to Rykoff-Sexton;
(iv) form, participate in or join any person or group with respect to any
Rykoff-Sexton Voting Securities, or otherwise act in concert with any third
person (other than an ML Entity) for the purpose of acquiring any Rykoff-
Sexton Voting Securities or holding or disposing of Rykoff-Sexton Voting
Securities for any purpose otherwise prohibited by the Standstill Agreement;
(v) deposit any Rykoff-Sexton Voting Securities into a voting trust or similar
arrangement; (vi) initiate, propose or otherwise solicit stockholders for the
approval of one or more stockholder proposals with respect to Rykoff-Sexton,
or induce or attempt to induce any other person to initiate any
63
<PAGE>
stockholder proposal; (vii) except as specifically provided for in the
Standstill Agreement, seek election to or seek to place a representative on
the Board of Directors of Rykoff-Sexton, or seek the removal of any member of
the Board of Directors of Rykoff-Sexton; (viii) call or seek to have called
any meeting of the stockholders of Rykoff-Sexton for any purpose otherwise
prohibited by the Standstill Agreement; (ix) take any other action to seek to
control Rykoff-Sexton; (x) demand, request or propose to amend, waive or
terminate the foregoing provisions; or (xi) agree to do any of the foregoing,
or advise, assist, encourage or persuade any third party to take any action
with respect to any of the foregoing.
In addition, each of the ML Entities will notify Rykoff-Sexton promptly if
any inquiries or proposals are received by, or any negotiations or discussions
are initiated or continued regarding any of the foregoing matters with, any ML
Entity or, to its knowledge (subject to applicable confidentiality policies),
any of their respective affiliates.
Notwithstanding the above restrictions, the Standstill Agreement provides
that MLPF&S and its affiliates (other than the ML Entities) may effect or
recommend transactions in the ordinary course of its or their business, in,
relating to or involving Rykoff-Sexton Voting Securities provided that MLPF&S
and its affiliates (other than the ML Entities) do not acquire beneficial
ownership of Rykoff-Sexton Voting Securities representing more than 2% of the
Total Voting Power, subject to increase to (i) 3% in the event that the ML
Entities beneficially own Rykoff-Sexton Voting Securities representing less
than 30%, but at least 22%, of the Total Voting Power; (ii) 4% in the event
that the ML Entities beneficially own Rykoff-Sexton Voting Securities
representing less than 22%, but at least 16%, of the Total Voting Power; and
(iii) 5% in the event that the ML Entities beneficially own Rykoff-Sexton
Voting Securities representing less than 16%, but at least 10%, of the Total
Voting Power. Such permitted activities may include transactions in which
MLPF&S or its affiliates are acting as an investment banking organization
providing advisory services, an investment advisor, an investment company, a
broker or dealer in securities, as an underwriter or placement agent of
securities, a market maker, a specialist, an arbitrageur or a block
positioner. Such permitted activities may not, however, include any activities
or transactions which have the purpose or effect of seeking to control or
influence the management, policies or affairs of Rykoff-Sexton, including,
without limitation, through advising any person with respect to any
unsolicited bid for control of, or any other offer for securities of or any
business combination involving, Rykoff-Sexton.
Board Representation. The Standstill Agreement provides that, at the
Effective Time of the Merger, Rykoff-Sexton will increase the size of its
Board of Directors to 12 and will use its best efforts to fill four of the
vacancies thereby created with directors designated by a representative of the
ML Entities ("ML Directors"). Of the four initial ML Directors, one will be
appointed to Class A (current term expiring in 1996), one will be appointed to
Class B (current term expiring in 1998) and two will be appointed to Class C
(current terms expiring in 1997). Any designees of ML Directors who are not
employees of either an ML Entity which is controlled by ML & Co. or an
affiliate of an ML Entity which is controlled by ML & Co. must be reasonably
acceptable to the Rykoff-Sexton directors other than the ML Directors.
Until such time as the ML Entities no longer beneficially own Rykoff-Sexton
Voting Securities representing at least 10% of the Total Voting Power, except
as contemplated by the Standstill Agreement or otherwise agreed to by a
majority of ML Directors, Rykoff-Sexton will not take or recommend to its
stockholders any action which would (i) cause the Rykoff-Sexton Board of
Directors to consist of any number of directors other than 12 directors
divided into three classes of four directors each, or (ii) result in any
amendment to the by-laws of Rykoff-Sexton or the by-laws or regulations of any
subsidiary of Rykoff-Sexton in effect at the Effective Time of the Merger that
would impose any qualifications to the eligibility of directors of Rykoff-
Sexton or any subsidiary of Rykoff-Sexton to serve on any committee of the
Board of Directors of Rykoff-Sexton or on the Board of Directors (or any
committee thereof) of any subsidiary of Rykoff-Sexton, except as may be
required by applicable law.
In addition, Rykoff-Sexton will use its best efforts to cause the Nominating
Committee of its Board of Directors (or if the Nominating Committee makes no
such recommendation, the Rykoff-Sexton Board of
64
<PAGE>
Directors) to recommend for election in the applicable year in which the
respective class term expires, in each case as designated by the ML Entities,
(i) four ML Directors, consisting of one ML Director in each of Class A and
Class B and two ML Directors in Class C, so long as the ML Entities
beneficially own Rykoff-Sexton Voting Securities representing at least 34% of
the Total Voting Power; (ii) three ML Directors, consisting of one ML Director
in each of Class A, Class B and Class C, so long as the ML Entities
beneficially own Rykoff-Sexton Voting Securities representing less than 34%,
but at least 27%, of the Total Voting Power; (iii) two ML Directors,
consisting of one ML Director in Class A and one ML Director in Class B or
Class C, so long as the ML Entities beneficially own Rykoff-Sexton Voting
Securities representing less than 27%, but at least 16%, of the Total Voting
Power; and (iv) one ML Director in Class A, so long as the ML Entities
beneficially own Rykoff-Sexton Voting Securities representing less than 16%,
but at least 10%, of the Total Voting Power.
Until such time as the ML Entities no longer beneficially own Rykoff-Sexton
Voting Securities representing at least 16% of the Total Voting Power, to the
extent that, and for so long as, any of the ML Directors is qualified under
the then-current rules of the NYSE, the rules and regulations under the Code,
the rules and regulations under Section 16(b) of the Exchange Act and Rykoff-
Sexton's by-laws, Rykoff-Sexton will use its best efforts to cause the Rykoff-
Sexton Board of Directors to designate one of the ML Directors to serve on
each of the committees of the Rykoff-Sexton Board of Directors to the same
extent, and on the same basis, as the other members of the Rykoff-Sexton Board
of Directors. In addition, subject to the same director qualification
requirements, in the event that, and for so long as, the ML Entities own
Rykoff-Sexton Voting Securities representing less than 16% but at least 10% of
the Total Voting Power, Rykoff-Sexton will use its best efforts to cause the
Rykoff-Sexton Board of Directors to designate one of the ML Directors to serve
on the Nominating Committee and the Management Development--Compensation and
Stock Option Committee of the Rykoff-Sexton Board of Directors to the same
extent, and on the same basis, as the other members of the Board of Directors.
The Standstill Agreement also provides that, so long as the ML Entities
beneficially own Rykoff-Sexton Voting Securities representing at least 10% of
the Total Voting Power, the ML Directors will have representation on the board
of directors (and any committees thereof) of any subsidiaries of Rykoff-Sexton
in a manner similar to their rights to representation on the Rykoff-Sexton
Board of Directors, but only to the extent that any directors of Rykoff-Sexton
who are not officers or employees of Rykoff-Sexton are members of the board of
directors of any such subsidiary of Rykoff-Sexton.
The ML Entities will have the right, with cause, to request the removal of
any ML Director from the Rykoff-Sexton Board of Directors, subject to the
applicable provisions of the Rykoff-Sexton Charter and By-Laws as well as
applicable statutory provisions, and Rykoff-Sexton will use its best efforts
to have such removal approved by the Rykoff-Sexton Board of Directors. The ML
Entities will also have the right to designate nominees for vacancies caused
by a ML Director ceasing to serve as a member of the Board of Directors,
subject to certain restrictions, provided that the filling of the vacancy is
to be made by action of the Rykoff-Sexton Board of Directors in accordance
with the terms of the Rykoff-Sexton Charter. In addition, in the event that
the percentage of Total Voting Power represented by the Rykoff-Sexton Voting
Securities beneficially owned in the aggregate by the ML Entities at any time
decreases below any of the minimum percentages specified above entitling the
ML Entities to board and committee representation, the ML Entities will cause
such number of ML Directors to resign as is necessary to adjust the number of
remaining ML Directors to the number (if any) to which the ML Entities would
have otherwise been entitled under the Standstill Agreement if the nominations
to the Board or Directors (or any committee thereof) of Rykoff-Sexton or any
subsidiary of Rykoff-Sexton were made at such time. Any subsequent increase in
the percentage of the Total Voting Power represented in the aggregate by the
Rykoff-Sexton Voting Securities beneficially owned by the ML Entities above
any such minimum percentage will not entitle the ML Entities to have any
additional ML Directors named or elected.
Nothing in the Standstill Agreement requires the ML Entities to designate
any ML Directors or requires an ML Director to serve in office. Until such
time as the ML Entities no longer beneficially own Rykoff-Sexton Voting
Securities representing in the aggregate at least 10% of the Total Voting
Power, in the event there is a vacancy created on the Rykoff-Sexton Board of
Directors by the resignation or removal of an ML Director or
65
<PAGE>
the failure of the ML Entities to designate an ML Director (other than a
resignation as a result of a decrease in the percentage of the aggregate
number of votes of all outstanding Rykoff-Sexton Voting Securities represented
by Rykoff-Sexton Voting Securities owned by the ML Entities below the minimum
percentages specified above for representation on the Rykoff-Sexton Board of
Directors) upon the written request of the ML Entities, Rykoff-Sexton will
reduce the size of the Rykoff-Sexton Board of Directors by the number of such
vacancies and thereafter, the ML Entities will have no right to designate any
ML Directors to the extent of such reduction.
The Standstill Agreement provides that the rights to board and committee
representation described above will extend only to those ML Entities which are
controlled by ML & Co., and in the event of any transaction resulting in ML &
Co. no longer controlling such ML Entity, such ML Entity will no longer have
any rights to such board and committee representation, but will be bound by
the other terms of the Standstill Agreement.
Rykoff-Sexton's obligations described above regarding board and committee
representation are subject to compliance with the provisions of the Rykoff-
Sexton Charter and Bylaws and the fiduciary duties of Rykoff-Sexton's Board of
Directors and Nominating Committee to the stockholders of Rykoff-Sexton.
Nothing set forth in such provisions will require Rykoff-Sexton to violate any
such provisions or require any director of Rykoff-Sexton to breach any such
fiduciary duty.
Voting Provisions. During the term of the Standstill Agreement, until such
time as the ML Entities no longer beneficially own Rykoff-Sexton Voting
Securities representing at least 10% of the Total Voting Power, the ML
Entities will take all such action as may be required so that all Rykoff-
Sexton Voting Securities owned by the ML Entities and their affiliates, as a
group, are (i) voted for Rykoff-Sexton's nominees to the Rykoff-Sexton Board
of Directors, in accordance with the recommendation of the Nominating
Committee of the Rykoff-Sexton Board of Directors, and (ii) voted on all
matters to be voted on by holders of Rykoff-Sexton Voting Securities. The
foregoing obligation referred to in clause (i) is subject to (i) Rykoff-Sexton
having performed its obligations under the Standstill Agreement to use its
best efforts to cause the Rykoff-Sexton Board of Directors to designate one of
the ML Directors to serve on such Nominating Committee as long as the ML
Entities own Rykoff-Sexton Voting Securities representing at least 10% of the
Total Voting Power, if the ML Entities have requested such representation on
the Nominating Committee; and (ii) the right of the ML Entities to abstain
from, or to vote against, any one (and only one) nominee for election to the
Rykoff-Sexton Board of Directors at an annual meeting of stockholders (other
than any nominee who was a member of the Rykoff-Sexton Board of Directors as
of the date of the Merger Agreement) if the ML Entities have a reasonable,
good faith objection to any such nominee based on such nominee's personal
qualifications to serve as a member of the Rykoff-Sexton Board of Directors.
In addition, the ML Entities agree to be present, in person or by proxy, at
all duly held meetings of stockholders of Rykoff-Sexton so that all Rykoff-
Sexton Voting Securities held by the ML Entities may be counted for
determining the presence of a quorum at such meetings.
Transfer Restrictions and Right of First Refusal. During the term of the
Standstill Agreement, except as described below, the ML Entities will agree
not to, directly or indirectly, sell, transfer or assign any Rykoff-Sexton
Voting Securities, except (i) to Rykoff-Sexton, (ii) pursuant to a merger or
consolidation of Rykoff-Sexton which has been approved by the affirmative vote
of a majority of the members of the Rykoff-Sexton Board of Directors then in
office, (iii) pursuant to a bona fide public offering registered under the
Securities Act, in which the ML Entities will use commercially reasonable
efforts to effect as wide a distribution of such Rykoff-Sexton Voting
Securities as is reasonably practicable and to prevent any person or group
from acquiring pursuant to such offering beneficial ownership of Rykoff-Sexton
Voting Securities representing more than 5% of the Total Voting Power, (iv)
pursuant to Rule 144 under the Securities Act, (v) pursuant to a pro rata
distribution (including any such distribution pursuant to any liquidation or
dissolution of any ML Entity) by any ML Entity to its partners or
stockholders, if no ultimate successor or distributee, as the case may be, and
no person who controls such ultimate successor or distributee, acquires from
any ML Entity in such distribution beneficial ownership of Rykoff-Sexton
Voting Securities representing more than 3% of the Total Voting Power, (vi)
transfers of Rykoff-Sexton Voting Securities to any person or group which,
after giving effect to such transfer, would beneficially own Rykoff-Sexton
Voting Securities representing less than 5% of the Total Voting Power, (vii)
transfers of Rykoff-Sexton Voting Securities representing less than 10% of the
Total Voting Power to any
66
<PAGE>
person or group eligible to file a short-form statement on Schedule 13G under
Rule 13d-1 under the Exchange Act based on its ownership of Rykoff-Sexton
Voting Securities, (viii) transfers of Rykoff-Sexton Voting Securities made on
or after January 1, 2000, in connection with the required dissolution of any
ML Entity, to any person or group (A) which, after giving effect to such
transfer, would beneficially own Rykoff-Sexton Voting Securities representing
in the aggregate less than the greater of (x) 15% of the Total Voting Power or
(y) such other percentage of the Total Voting Power as would make such person
or group an "Acquiring Person" under Rykoff-Sexton's shareholders' rights plan
or (B) approved by the prior affirmative vote of a majority of the members of
the Rykoff-Sexton Board of Directors other than the ML Directors, (ix)
pursuant to a tender offer or exchange offer that the Rykoff-Sexton Board of
Directors, by action taken by the affirmative vote of a majority of the
members of the Board of Directors then in office, has determined not to
oppose, or (x) following compliance with procedures with respect to the right
of first refusal described below.
Pursuant to the right of first refusal, except as otherwise permitted under
the Standstill Agreement, if any ML Entity (the "Selling ML Entity") receives
an offer from, or enters into any agreement or understanding with, a third
party to purchase or otherwise acquire Rykoff-Sexton Voting Securities from
the Selling ML Entity, the Selling ML Entity will have the right, provided
that the rights of the Selling ML Entity under the Standstill Agreement will
not transfer to such third party, to sell or otherwise transfer the amount of
Rykoff-Sexton Voting Securities which are the subject of such offer by, or
agreement or understanding with, such third party if, prior to such transfer,
Rykoff-Sexton has been given the opportunity to purchase such Rykoff-Sexton
Voting Securities pursuant to the following procedures. The Selling ML Entity
must give written notice of such proposed transfer to Rykoff-Sexton specifying
the amount of Rykoff-Sexton Voting Securities proposed to be transferred, the
proposed price therefor (the "Transfer Consideration"), the identity of the
offeror and other material terms of the proposed transfer. Rykoff-Sexton will
thereafter have a period of 15 business days to provide the Selling ML Entity
with written notice of the exercise of its right to purchase all such Rykoff-
Sexton Voting Securities for cash in an amount equivalent to the Transfer
Consideration. Rykoff-Sexton may also specify a designee as purchaser under
the right of first refusal. The closing of the purchase pursuant to the
exercise of the right of first refusal must take place within 60 days after
Rykoff-Sexton gives notice of such exercise (such period to be extended for up
to an additional 60 days, if necessary, to comply with applicable laws and
regulations). If Rykoff-Sexton elects not to exercise its right of first
refusal, the Selling ML Entity will be free, during the following 60-day
period (such period to be extended for up to an additional 60 days, if
necessary, to comply with applicable laws and regulations), to transfer the
Rykoff-Sexton Voting Securities in accordance with the terms of the original
offer.
Term. The Standstill Agreement will continue in effect until the earlier of
(i) the tenth anniversary of the Effective Date and (ii) the date on which the
ML Entities and their affiliates beneficially own Rykoff-Sexton Voting
Securities representing less than 10% of the Total Voting Power. The
Standstill Agreement will be reinstated, however, if, after termination of the
Standstill Agreement due to a reduction in beneficial ownership below such 10%
threshold and prior to the tenth anniversary of the Effective Date, (i) the ML
Entities subsequently become the beneficial owners of Rykoff-Sexton Voting
Securities representing 10% or more of the Total Voting Power or (ii) the ML
Entities and their affiliates subsequently become the beneficial owner of 5%
or more of all outstanding Rykoff-Sexton Voting Securities in a manner which
requires the filing of a Schedule 13D under the Exchange Act.
THE REGISTRATION RIGHTS AGREEMENT
It is a condition to US Foodservice's obligation to effect the Merger that
Rykoff-Sexton execute and deliver the Registration Rights Agreement, which
provides for certain rights to the ML Investors, the Equitable Entities and
Frank H. Bevevino (collectively, the "Holders") with respect to the Rykoff-
Sexton Common Shares owned by them (the "Registrable Securities").
The ML Investors may make a written demand of Rykoff-Sexton to effect the
registration of all or part of the ML Investors' Registrable Securities.
Rykoff-Sexton will not be required to take any action if, among other things,
(i) four demand registrations have been previously effected, or (ii) the
Registrable Securities requested to
67
<PAGE>
be registered have a then current market value of less than $50 million,
unless such demand is for registration of all remaining Registrable Securities
held by the ML Investors. Rykoff-Sexton will be required to file the
registration statement within 30 business days of exercise of any demand
right. Rykoff-Sexton will not be required to effect a registration during
certain "blackout periods" during which Rykoff-Sexton has determined in good
faith that such registration (i) could materially impair or delay a pending
transaction (up to 180 days) or (ii) would require disclosure of confidential
information (up to 90 days).
If Rykoff-Sexton seeks to register, in a proposed public offering for its
own account or for the account of any holder of Rykoff-Sexton Common Shares
(other than pursuant to a registration statement on Form S-4 or Form S-8 or
any successor form under the Securities Act, or filed in connection with an
exchange offer or an offering of securities solely to existing stockholders or
employees of Rykoff-Sexton), any Rykoff-Sexton Common Shares while the
Registration Rights Agreement is in effect, the Holders will have the right to
request that Rykoff-Sexton include any or all of their Registrable Securities
in the proposed offering. Rykoff-Sexton must provide each Holder with at least
20 business days' notice prior to the filing of the registration statement.
Such notice must specify the approximate date on which Rykoff-Sexton proposes
to file such registration statement and advise the Holder of his or its right
to have any or all of his or its Registrable Securities included in the
registration. A Holder, in a written request given to Rykoff-Sexton within 15
days after such Holder's receipt of written notice from Rykoff-Sexton, may
include his or its Registrable Securities in such registration statement,
subject to constraints of marketability of the proposed offering, as
determined in good faith by the lead managing underwriter. In the event that
marketing constraints prevent the registration of all Registrable Securities
requested to be registered, such Registrable Securities shall be registered,
to the extent marketable, on a pro rata basis.
In registering Registrable Securities, Rykoff-Sexton will use its reasonable
best efforts to, among other things, make relevant filings with the SEC,
provide appropriate notices and necessary disclosures to requesting parties,
and customarily required warranties and representations to underwriters.
Each Holder will pay all underwriting discounts, commissions, transfer taxes
and documentary stamp taxes related to the Registrable Securities offered for
sale by such Holder as well as the fees and disbursements of its counsel
(other than counsel representing the Holders as a group). All other fees and
expenses in connection with the registration of Registrable Securities,
including those of counsel representing the Holders as a group, will be borne
by Rykoff-Sexton.
Rykoff-Sexton will agree to indemnify the Holders and the prospective
underwriters of registrations of Registrable Securities for liabilities for
material misstatements and omissions, other than any material misstatements or
omissions based on information provided by the Holders, included in the
registration statement. Likewise, each Holder will agree to indemnify Rykoff-
Sexton, all other Holders or any underwriter for liabilities for material
misstatements and omissions made in the registration statement in reliance on
information provided to Rykoff-Sexton by such Holders, subject to certain
limitations. To the extent that indemnification from an indemnifying party is
unavailable, contribution will also be available, with certain limitations, to
any of the above parties in relation to relative fault.
THE TAX AGREEMENT
To provide assurances in connection with the qualification of the Merger as
a tax-free reorganization for federal income tax purposes, Rykoff-Sexton and
certain of the stockholders of US Foodservice, including all of the ML
Investors, will enter into the Tax Agreement at the Effective Time. It is a
condition to the respective obligations of Rykoff-Sexton and Merger Sub to
effect the Merger that each of the ML Investors execute and deliver to Rykoff-
Sexton the Tax Agreement.
Transfer Restrictions. Each stockholder of US Foodservice that is a party to
the Tax Agreement will agree, for the two-year period following the Effective
Time, not to (i) sell, exchange, distribute or otherwise dispose of in any
manner, or enter into one or more transactions whereby such stockholder gives
up substantially all of the
68
<PAGE>
benefits and burdens of ownership in, or (ii) enter into one or more contracts
or other agreements to so transfer, or that would by its or their terms
require a transfer of, more than a certain percentage (referred to as the
"Permitted Sales Factor") of the Rykoff-Sexton Common Shares received by such
stockholder in the Merger. The Permitted Sales Factor will be determined at
the Effective Time by a formula set forth in the Tax Agreement, and will
depend on, among other things, the total number of shares of US Foodservice
Common Stock converted into Rykoff-Sexton Common Shares in the Merger, the
total number of shares of US Foodservice Common Stock held by stockholders
that exercise appraisal rights under Section 262, the fair market value of one
Rykoff-Sexton Common Share at the Effective Time, the total amount paid as
consideration by Rykoff-Sexton and/or US Foodservice to purchase or redeem the
Preferred Stock (including any amount paid as consideration to purchase or
redeem the Preferred Stock even if such purchase or redemption occurs prior to
the Effective Time), the total amount of cash paid to holders of shares of US
Foodservice Common Stock in lieu of the receipt of fractional Rykoff-Sexton
Common Shares, and the number of Rykoff-Sexton Common Shares that will be
owned at the Effective Time by former stockholders of US Foodservice that are
parties to the Tax Agreement.
The Permitted Sales Factor is intended to provide that, at all times during
the two-year period following the Merger, the stockholders of US Foodservice
that are parties to the Tax Agreement will in the aggregate continue to own a
number of Rykoff-Sexton Common Shares having a value, determined as of the
Effective Time, equal to at least 40% of the value of the formerly outstanding
US Foodservice Common Stock and Preferred Stock, determined as of the same
time. For purposes of measuring the value of the formerly outstanding US
Foodservice Common Stock and Preferred Stock, however, any US Foodservice
Common Stock that is exchanged for cash as a result of the exercise of
appraisal rights under Section 262 or in lieu of the receipt of fractional
Rykoff-Sexton Common Shares (and certain shares of US Foodservice Common Stock
that would be issued upon exercise of certain options) will be treated as
being outstanding US Foodservice Common Stock at the Effective Time.
Furthermore, US Foodservice's Preferred Stock will also be treated for such
purposes as being outstanding at the Effective Time even if the Preferred
Stock is in fact purchased or redeemed prior to the Effective Time, and the
value of such Preferred Stock will be deemed to be equal to the total amount
paid by Rykoff-Sexton and/or US Foodservice, as the case may be, to purchase
or redeem such Preferred Stock, either pursuant to the terms of the ML
Redemption Agreement and the Sara Lee Redemption Agreement or otherwise in
accordance with the terms of the Merger Agreement. See "THE MERGER--Redemption
or Purchase of Preferred Stock." As a consequence, the Permitted Sales Factor
could be significantly lower than 60%, which would be the resulting percentage
if all of the US Foodservice Common Stock and Preferred Stock were to be
exchanged solely for Rykoff-Sexton Common Shares pursuant to the Merger and
all of the Rykoff-Sexton Common Shares issued in the Merger were owned at the
Effective Time by former stockholders of US Foodservice that were parties to
the Tax Agreement.
The transfer restrictions in the Tax Agreement will not apply to any
transfers of Rykoff-Sexton Common Shares during the two-year restricted period
that are incident to an extraordinary business transaction involving Rykoff-
Sexton (such as a merger, consolidation, tender or exchange offer,
restructuring, recapitalization or other similar transaction) so long as any
such transaction is not arranged as part of an overall plan to which the
transferring stockholder is a party and pursuant to which the Merger is also
being consummated.
In addition, notwithstanding the transfer restrictions in the Tax Agreement,
Equitable Deal Flow Fund, L.P., a stockholder of US Foodservice, may be
permitted to distribute to its partners Rykoff-Sexton Common Shares it
receives in the Merger if it becomes required to do so by the terms of its
partnership agreement, provided that each of such partners shall have first
agreed in writing to be bound by and to comply with the transfer restrictions
in the Tax Agreement and certain other conditions are satisfied.
All of the Rykoff-Sexton Common Shares received by the ML Investors pursuant
to the Merger will be aggregated for purposes of applying the transfer
restrictions in the Tax Agreement to the ML Investors. As a result, during the
two-year restricted period, any particular ML Investor will be able to sell a
number of Rykoff-Sexton Common Shares that exceeds the total number of Rykoff-
Sexton Common Shares received by such ML Investor in the Merger multiplied by
the Permitted Sales Factor so long as the ML Investors do not sell in the
69
<PAGE>
aggregate a number of Rykoff-Sexton Common Shares that exceeds the total
number of Rykoff-Sexton Common Shares received by the ML Investors
collectively in the Merger multiplied by the Permitted Sales Factor.
Tax Representation. Each stockholder of US Foodservice that is a party to
the Tax Agreement will represent and warrant to Rykoff-Sexton that, as of the
Effective Time, such stockholder has no plan or intention to sell, exchange,
distribute or otherwise dispose of in any manner, or enter into one or more
transactions whereby such stockholder gives up substantially all of the
benefits and burdens of ownership in, a number of Rykoff-Sexton Common Shares
received by such stockholder in the Merger that would exceed the total number
of Rykoff-Sexton Common Shares so received multiplied by the Permitted Sales
Factor.
Reliance. Jones, Day, Reavis & Pogue, special counsel for Rykoff-Sexton,
Morgan, Lewis & Bockius LLP, special counsel for US Foodservice, and Shearman
& Sterling, counsel for the ML Investors, will each rely on the transfer
restrictions relating to Rykoff-Sexton Common Shares issued pursuant to the
Merger and the tax representations contained in the Tax Agreement in rendering
their tax opinions at the closing of the Merger to Rykoff-Sexton, US
Foodservice and the ML Investors, respectively, with regard to the treatment
of the Merger as a tax-free reorganization for federal income tax purposes.
See "THE MERGER AGREEMENT--Conditions; Waivers."
Waiver of Claims. In the case solely of a stockholder of US Foodservice that
is a party to the Tax Agreement and that (i) has complied with the transfer
restrictions in the Tax Agreement relating to Rykoff-Sexton Common Shares
issued pursuant to the Merger, and (ii) has not breached any of its general
representations and warranties contained in the Tax Agreement (for example,
with respect to due authorization, execution and delivery, enforceability, the
absence of any conflicts with laws or other agreements, and beneficial
ownership for federal income tax purposes of such stockholder's shares of US
Foodservice Common Stock immediately prior to the Effective Time), Rykoff-
Sexton and each other stockholder of US Foodservice that is a party to the Tax
Agreement will waive and release any and all claims, rights, causes of action,
and suits, whether known or unknown, that any of them could have asserted as
of the Effective Time or might assert in the future against such stockholder
under the Tax Agreement or otherwise resulting from or relating to the failure
of the Merger to qualify as a tax-free reorganization for federal income tax
purposes.
Parties. At the discretion of MLCP, stockholders of US Foodservice owning
fewer than 25,000 shares of Class A Common Stock of US Foodservice immediately
prior to the Effective Time will not be required to become parties to the Tax
Agreement, provided that each such stockholder makes the tax representation
described above in a written certificate that is delivered to Rykoff-Sexton
prior to the Effective Time.
70
<PAGE>
OWNERSHIP OF RYKOFF-SEXTON COMMON SHARES
The following table sets forth certain information regarding the beneficial
ownership of Rykoff-Sexton Common Shares as of March 31, 1996, and as adjusted
to reflect the issuance by Rykoff-Sexton of up to 12,880,552 Rykoff-Sexton
Common Shares in connection with the Merger (assuming the maximum Exchange
Ratio), by (i) each person or entity known by Rykoff-Sexton to be the
beneficial owner of more than 5% of Rykoff-Sexton Common Shares, (ii) each
director of Rykoff-Sexton, (iii) certain executive officers of Rykoff-Sexton,
(iv) certain proposed executive officers who are expected to serve as
executive officers of Rykoff-Sexton following consummation of the Merger and
(v) all executive officers and directors of Rykoff-Sexton and such proposed
executive officers as a group:
<TABLE>
<CAPTION>
SHARES PERCENTAGE PERCENTAGE
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) THE MERGER THE MERGER
- ------------------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
State Farm Mutual Automobile 1,429,985(3) 9.66% 5.17%
Insurance Company and related
entities (2)........................
One State Farm Plaza
Bloomington, Illinois 61701
FMR Corp. and related entities (2).. 1,334,875(4) 9.02% 4.82%
82 Devonshire Street
Boston, Massachusetts 02109-3605
Putnam Investments, Inc. and related 957,900(5) 6.47% 3.46%
entities (2)........................
One Post Office Square
Boston, Massachusetts 02109
The Prudential Insurance Company of 823,700(6) 5.57% 2.98%
America (2).........................
Prudential Plaza
Newark, New Jersey 07102-3777
David L. Babson & Co., Inc. (2)..... 1,011,250(7) 6.83% 3.65%
One Memorial Drive
Cambridge, Massachusetts 02142
ML Investors (8).................... 0 0 36.40%
c/o Merrill Lynch Capital Partners,
Inc.
225 Liberty Street
New York, New York 10080
Mark Van Stekelenburg............... 260,828(9) 1.74% *
Harold E. Feather................... 100,828(10) * *
R. Burt Gookin...................... 8,697(11) * *
Alan V. Giuliani.................... 50,896(12) * *
Robert J. Harter, Jr................ 62,848(13) * *
Richard J. Martin................... 32,509(14) * *
Donald E. Willis, Jr................ 15,918(24) * *
James I. Maslon..................... 371,728(15) 2.51% 1.34%
James P. Miscoll.................... 9,167(16) * *
Neil I. Sell........................ 9,580(17) * *
Bernard Sweet....................... 12,837(18) * *
Jan W. Jeurgens..................... 0 0 0
Frank H. Bevevino................... 0 0 2.18%(19)
Thomas G. McMullen.................. 0 0 *(20)
All directors and executive officers
as a group (12 persons before the
Merger; 14 persons after the
Merger)(21)........................ 935,836(22) 6.13% 6.15%(22)(23)
</TABLE>
- --------
*Less than 1%.
(1) Except as otherwise noted, all persons have sole voting and investment
power with respect to their shares.
71
<PAGE>
(2) Based on the most recent Schedule 13D or 13G on file with the SEC.
(3) State Farm Mutual Automobile Insurance Company and related entities have
sole voting power as to 1,429,985 shares (9.66% before the Merger, 5.17%
after the Merger) and sole dispositive power as to 1,429,985 shares
(9.66% before the Merger, 5.17% after the Merger).
(4) As reported in a Schedule 13G filed by FMR Corp. on February 15, 1996
(the "Schedule 13G"), Fidelity Management & Research Company ("Fidelity
Research"), a wholly-owned subsidiary of FMR Corp. and an investment
adviser registered under the Investment Advisers Act of 1940,
beneficially owns 1,334,875 shares (9.02% before the Merger, 4.82% after
the Merger). Fidelity Contrafund, an investment company registered under
the Investment Company Act of 1940, beneficially owns 1,105,375 shares
(7.47% before the Merger, 3.99% after the Merger). In addition, the
Schedule 13G reports that each of Edward C. Johnson 3d, the Chairman of
FMR Corp., FMR Corp., through its control of Fidelity Research, and
certain related funds claim to have sole dispositive power as to
1,334,875 shares (9.02% before the Merger, 4.82% after the Merger) owned
by such funds. The sole voting power of such shares resides in the
respective Board of Trustees for each of the various funds.
(5) Putnam Investments, Inc. and related entities have shared voting power
over 372,300 shares (2.52% before the Merger, 1.35% after the Merger) and
shared dispositive power over 957,900 (6.47% before the Merger, 3.46%
after the Merger).
(6) The Prudential Insurance Company of America has sole voting power as to
335,300 shares (2.27% before the Merger, 1.21% after the Merger), shared
voting power as to 485,700 shares (3.28% before the Merger, 1.75% after
the Merger), sole dispositive power as to 335,300 shares (2.27% before
the Merger, 1.21% after the Merger) and shared dispositive power as to
488,400 shares (3.30% before the Merger, 1.76% after the Merger).
(7) David L. Babson & Co., Inc. has sole voting power as to 583,200 shares
(3.94% before the Merger, 2.11% after the Merger), shared voting power as
to 428,050 shares (2.89% before the Merger, 1.55% after the Merger) and
sole dispositive power as to 1,011,250 shares (6.83% before the Merger,
3.65% after the Merger).
(8) The ML Investors consist of the following entities, each of which after
the consummation of the Merger, will beneficially own the percentage of
outstanding Rykoff-Sexton Common Shares indicated after its name: Merrill
Lynch Capital Appreciation Partnership No. B-XVIII, L.P. (15.74%), ML
Offshore LBO Partnership No. B-XVIII (7.92%), ML IBK Positions, Inc.
(5.20%), MLCP Associates L.P. No. II (*), MLCP Associates L.P. No. IV
(*), Merrill Lynch KECALP L.P. 1994 (*), Merrill Lynch KECALP L.P. 1991
(*), Merrill Lynch Capital Appreciation Partnership No. XIII, L.P.
(5.85%), ML Offshore LBO Partnership No. XIII, L.P. (*), ML Employees LBO
Partnership No. I, L.P. (*), Merrill Lynch KECALP L.P. 1987 (*) and
Merchant Banking L.P. No. II (*). The ML Investors are affiliates of ML &
Co., and ML & Co. disclaims beneficial ownership of all such shares for
all purposes.
(9) Includes options exercisable within 60 days to purchase 233,437 shares
pursuant to the Rykoff-Sexton, Inc. 1988 Stock Option and Compensation
Plan (the "1988 Plan"). Also includes 62 shares owned by one of his
children.
(10) Includes options exercisable within 60 days to purchase 84,375 shares
pursuant to the Rykoff-Sexton, Inc. 1980 Stock Option Plan and the 1988
Plan.
(11) Includes options exercisable within 60 days to purchase 6,667 shares
pursuant to the Rykoff-Sexton, Inc. 1993 Director Stock Option Plan (the
"1993 Plan"). Also includes 1,718 shares owned by his spouse.
(12) Includes options exercisable within 60 days to purchase 42,969 shares
pursuant to the 1988 Plan.
(13) Includes options exercisable within 60 days to purchase 31,250 shares
pursuant to the 1988 Plan. Also includes 2,576 shares owned by his
spouse.
(14) Includes options exercisable within 60 days to purchase 31,719 shares
pursuant to the 1988 Plan.
(15) Includes 23,515 shares held of record by Mr. Maslon as trustee for his
children, 203,460 shares held of record by Mr. Maslon as co-trustee for
his mother and 125 shares owned by his spouse. Includes options
exercisable within 60 days to purchase 6,667 shares pursuant to the 1993
Plan.
72
<PAGE>
(16) Includes options exercisable within 60 days to purchase 6,667 shares
pursuant to the 1993 Plan.
(17) Includes options exercisable within 60 days to purchase 6,667 shares
pursuant to the 1993 Plan.
(18) Includes options exercisable within 60 days to purchase 6,667 shares
pursuant to the Rykoff-Sexton, Inc. 1989 Director Stock Option Plan and
the 1993 Plan. Also includes 1,406 shares owned by his spouse.
(19) Includes Assumed Options to purchase 64,490 shares (assuming the maximum
Exchange Ratio) that are not otherwise exercisable but will become
immediately exercisable as of the Effective Time. Also includes 135,757
shares (assuming the maximum Exchange Ratio) to be issued in the Merger
to a charitable trust of which Mr. Bevevino is the trustee with the right
to vote.
(20) Includes Assumed Options to purchase 15,291 shares (assuming the maximum
Exchange Ratio) that are not otherwise exercisable but will become
immediately exercisable as of the Effective Time.
(21) Pursuant to the Standstill Agreement, the ML Entities will be entitled to
designate up to four nominees to the Rykoff-Sexton Board of Directors.
Because such nominees have not yet been identified, the beneficial
ownership of Rykoff-Sexton Common Shares of all directors and executive
officers as a group after the Merger does not give effect to the share
holdings of such nominees.
(22) Includes options exercisable within 60 days to purchase an aggregate of
467,397 shares pursuant to various stock-based option plans of Rykoff-
Sexton.
(23) Includes Assumed Options to purchase 79,781 shares (assuming the maximum
Exchange Ratio) that are not otherwise exercisable but will become
immediately exercisable as of the Effective Time.
(24) Includes options exercisable within 60 days to purchase 10,312 shares
pursuant to the 1988 Plan.
The information contained in the foregoing footnotes is for explanatory
purposes only and each of the persons named therein disclaims beneficial
ownership of shares designated as beneficially owned by or held in trust for
any other person, including family members.
MANAGEMENT OF RYKOFF-SEXTON AFTER THE MERGER
After the Merger, US Foodservice will be a wholly-owned subsidiary of
Rykoff-Sexton and will operate under the direction and guidance of Rykoff-
Sexton's senior management and Board of Directors. US Foodservice will operate
as the distribution division of Rykoff-Sexton and will include the current
Rykoff-Sexton distribution operations.
DIRECTORS AND EXECUTIVE OFFICERS AFTER THE MERGER
Mark Van Stekelenburg, presently Chairman, President and Chief Executive
Officer of Rykoff-Sexton, will be Chairman and Chief Executive Officer of
Rykoff-Sexton following the Effective Time. Frank H. Bevevino, the current
Chairman of the Board of Directors and Chief Executive Officer of US
Foodservice, will become President of Rykoff-Sexton and a member of Rykoff-
Sexton's Board of Directors as of the Effective Time. Mr. Bevevino will also
be Chief Executive Officer of US Foodservice and in that capacity will be
responsible for all foodservice distribution operations of Rykoff-Sexton.
Pursuant to the Standstill Agreement, Rykoff-Sexton will use its best efforts
to cause to be appointed four additional directors to be designated by the ML
Entities effective as of the Effective Time, but the ML Entities have not yet
determined who such designees shall be. Upon the appointment of such persons,
the Rykoff-Sexton Board of Directors will consist of 12 directors, seven of
whom were directors of Rykoff-Sexton as of the date of the Merger Agreement.
73
<PAGE>
Set forth below is certain information about each person who is expected to
be a member of the Board of Directors or an executive officer of Rykoff-Sexton
as of the Effective Time.
<TABLE>
<CAPTION>
YEAR
TERM AS BECAME
YEAR BECAME DIRECTOR EXECUTIVE
NAME A DIRECTOR EXPIRES OFFICER AGE
- ---- ----------- -------- --------- ---
<S> <C> <C> <C> <C>
Mark Van Stekelenburg...................... 1992 1998 1991 45
(Chairman of the Board of Directors since
December 1995, Chief Executive Officer
since December 1992 and President of
Rykoff-Sexton from December 1992 to the
Effective Time. Mr. Van Stekelenburg joined
Rykoff-Sexton in 1991 and was Executive
Vice President until December 1992. He was
previously President and Chief Executive
Officer of Grootverbruik Ahold, the
foodservice division of Royal Ahold, N.V.,
The Netherlands.)
Frank H. Bevevino.......................... 1996 1996 1996 55
(President of Rykoff-Sexton as of the
Effective Time. Chairman of the Board,
President and Chief Executive Officer of US
Foodservice and its predecessor from August
1988 to the Effective Time. From April 1977
to August 1988, Mr. Bevevino was the
President of F.H. Bevevino & Co., Inc., now
a subsidiary of US Foodservice, which he
founded in 1977. From January 1971 to March
1977, Mr. Bevevino was a principal and
Executive Vice President of Custom
Management Corporation, a contract
foodservice management company.)
R. Burt Gookin............................. 1985 1997 -- 81
(Retired since 1979. Mr. Gookin was
previously Vice Chairman of the Board and
chief Executive Officer of H. J. Heinz
Company.)
Jan W. Jeurgens............................ 1995 1997 -- 74
(Retired since 1983. From 1968-1983, Mr.
Jeurgens served as Chief Executive Officer
of Netherlands-based Makro International, a
world-wide wholesaler of food and non-food
products. Mr. Jeurgens continues an active
involvement in the international
distribution industry.)
James I. Maslon............................ 1962 1996 -- 69
(Retired since 1992. Mr. Maslon was
previously Vice President--Manufacturing of
Rykoff-Sexton's S.E. Rykoff & Co.
division.)
James P. Miscoll........................... 1992 1998 -- 61
(Retired since 1992. Mr. Miscoll was
previously Vice Chairman of BankAmerica
Corporation. He is a director of Coast
Federal Financial, Inc., Montgomery-Watson,
Inc., Winkler McManus and CHELA (California
Higher Education Loan Authority).)
Neil I. Sell............................... 1982 1996 -- 54
(Partner since 1972 in the law firm of
Maslon Edelman Borman & Brand, a
Professional Limited Liability Partnership.
Mr. Sell is a director of Grand Casinos,
Inc. and Stratosphere Corporation.)
Bernard Sweet.............................. 1978 1998 -- 72
(Retired since 1985. Mr. Sweet was
previously President and Chief Executive
Officer of Republic Airlines, Inc. He is a
director of G&K Services, Inc.)
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
YEAR
TERM AS BECAME
YEAR BECAME DIRECTOR EXECUTIVE
NAME A DIRECTOR EXPIRES OFFICER AGE
- ---- ----------- -------- --------- ---
<S> <C> <C> <C> <C>
Harold E. Feather.......................... -- -- 1992 57
(Executive Vice President, Corporate
Planning since 1994. Mr. Feather joined
Rykoff-Sexton in 1983 and served as
President, Rykoff-Sexton Distribution
Division, from 1992 until 1994. Before
then, he worked for John Sexton & Co. for
over 28 years.)
Alan V. Giuliani........................... -- -- 1990 50
(President, Rykoff-Sexton Manufacturing
Division since 1992. Mr. Giuliani joined
Rykoff-Sexton in August 1990 and served as
Vice President from 1990 until 1992. He was
previously Vice President-Research and
Development/Engineering for the Dove
International Division, and Vice President-
New Business Development and Vice
President-Plant Manager for the M&M/Mars
Division.)
Robert J. Harter, Jr....................... -- -- 1989 50
(Senior Vice President, Human Resources and
General Counsel since 1993 and Secretary
since 1995. Mr. Harter joined Rykoff-Sexton
in October 1989 and served as Vice
President and General Counsel from 1989
until 1993. He was previously Senior Vice
President and General Counsel for Tiger
International, Inc.)
Richard J. Martin.......................... -- -- 1988 50
(Senior Vice President and Chief Financial
Officer since 1993. Mr. Martin joined
Rykoff-Sexton in August 1988 and served as
Vice President from 1988 until 1993. He was
previously a partner with the accounting
firm of Arthur Andersen LLP and was
associated with that firm for twenty-one
years.)
Thomas G. McMullen......................... -- -- 1996 55
(President of Rykoff-Sexton's foodservice
distribution division as of the Effective
Time. Mr. McMullen served as President,
Chief Operating Officer and Director of US
Foodservice since January 1992. Mr.
McMullen joined US Foodservice in January
1992. He previously served as President and
a director of Bevaco from August 1988.)
Donald E. Willis, Jr....................... -- -- 1994 44
(Senior Vice President and Chief
Information Officer since 1994. From
January 1986 to January 1994, he served as
Senior Vice President Information Systems,
at HomeBase, a division of Waban, Inc.)
</TABLE>
Additional information about Messrs. Van Stekelenburg, Miscoll, Sweet,
Jeurgens, Maslon, Gookin and Sell is contained in Rykoff-Sexton's Proxy
Statement for its 1995 Annual Meeting of Stockholders, relevant portions of
which are incorporated by reference in this Proxy Statement/Prospectus from
the Annual Report on Form 10-K. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "AVAILABLE INFORMATION."
EXECUTIVE COMPENSATION
Employment Agreements
In connection with the signing of the Merger Agreement, Rykoff-Sexton
entered into an amended and restated employment agreement with Mark Van
Stekelenburg that became effective on the date of signing of the Merger
Agreement. If the Merger is not completed by July 31, 1996, however, Mr. Van
Stekelenburg's prior
75
<PAGE>
employment agreement with Rykoff-Sexton will be reinstated in place of his
amended and restated agreement. The amended and restated employment agreement
generally parallels Mr. Van Stekelenburg's prior employment agreement. It
provides a minimum annual base salary of $450,000 for a five-year term
beginning on the date of signing (with automatic one-year renewals commencing
at the end of the fifth year unless either party gives advance notice to the
contrary), with a guaranteed minimum bonus of 50% of annual base salary for
Rykoff-Sexton's 1997 fiscal year and 25% of annual base salary for Rykoff-
Sexton's 1998 fiscal year. The agreement provides term life insurance of not
less than $1,000,000 and a corresponding tax reimbursement. If Mr. Van
Stekelenburg's employment is involuntarily terminated without cause during the
term of the amended and restated agreement, he will receive termination
payments for the greater of two years or the remaining term of the agreement.
Termination benefits include salary and welfare benefit continuation, bonus
(equal to the average amount of his incentive bonus during the three years
preceding termination), immediate exercisability of any outstanding stock
options, the lapse of any restrictions on other equity awards, and if
termination occurs before July 20, 1999, two additional years of service credit
added to Mr. Van Stekelenburg's Supplemental Executive Retirement Plan. See "--
Executive Compensation--Supplemental Executive Retirement Plans (SERPs)."
Termination payments will be offset by any payments (other than tax
reimbursements) made under his change in control agreement. See "--Executive
Compensation--Change in Control Agreements and Golden Parachute Tax Exemption."
In general, "cause" is defined as a willful and continued failure to perform
assigned duties after notice of such failure, willful misconduct that is
materially injurious to Rykoff-Sexton or a material breach of the agreement's
confidentiality/nondisclosure provisions. Mr. Van Stekelenburg will be deemed
to have been involuntarily terminated if he terminates employment after any of
the following events: Rykoff-Sexton's breach of any material provision of the
employment agreement (unless cured within a specified time); notice to Mr. Van
Stekelenburg of Rykoff-Sexton's intent to terminate the agreement and his
employment; Mr. Van Stekelenburg's disability, failure to be reappointed Chief
Executive Officer and Chairman of the Board, or failure to be reelected to the
Board of Directors; failure by a successor or assign of Rykoff-Sexton to assume
liability under the employment agreement or Mr. Van Stekelenburg's Supplemental
Executive Retirement Plan; or the Board of Directors' failure to approve Mr.
Van Stekelenburg's strategic plans for Rykoff-Sexton as a result of
irreconcilable differences with respect to the future direction of Rykoff-
Sexton.
The Merger Agreement provides that, as a condition to the closing of the
Merger, Rykoff-Sexton will enter into employment agreements as of the Effective
Time with certain of the senior executives of US Foodservice, including Frank
H. Bevevino, expected to become President of Rykoff-Sexton and Chief Executive
Officer of US Foodservice, and Thomas G. McMullen, expected to become President
of US Foodservice. The proposed employment agreements with Messrs. Bevevino and
McMullen generally parallel Mr. Van Stekelenburg's amended and restated
employment agreement. Each agreement provides an annual base salary ($400,000
for Mr. Bevevino and $230,000 for Mr. McMullen) for a specified term (five
years for Mr. Bevevino and three years for Mr. McMullen, with automatic one-
year renewals commencing at the end of the initial term unless either party
gives advance notice to the contrary), with a guaranteed minimum bonus of 50%
of annual base salary for Rykoff-Sexton's 1997 fiscal year and 25% of annual
base salary for Rykoff-Sexton's 1998 fiscal year. The agreements also guarantee
for each of Messrs. Bevevino and McMullen no later than three months from the
Effective Time a grant of an option to purchase a specified minimum number of
Rykoff-Sexton's Common Shares (25,000 shares for Mr. Bevevino and 10,000 shares
for Mr. McMullen). Rykoff-Sexton agrees to provide term life insurance in the
amount of $1,000,000 and a corresponding tax reimbursement for Mr. Bevevino. In
the event that Mr. Bevevino or Mr. McMullen is involuntarily terminated by
Rykoff-Sexton without "cause" during the term of the agreement, he will receive
termination payments for the greater of two years or the period remaining in
the term. "Cause" is defined in each agreement in the same manner as it is
defined in Mr. Van Stekelenburg's amended and restated employment agreement.
Events constituting involuntary termination for Mr. Bevevino are generally
comparable to those for Mr. Van Stekelenburg, but include a material reduction
in Mr. Bevevino's authority and responsibilities or relocation without Mr.
Bevevino's consent from Wilkes-Barre, Pennsylvania. For Mr. McMullen,
involuntary termination includes disability, notice from Rykoff-Sexton that it
intends to terminate the agreement and his employment, reduction in base salary
(unless the reduction is part of a general reduction applicable to senior
executives of Rykoff-Sexton), or relocation without consent from Wilkes-Barre,
Pennsylvania. Termination benefits for Messrs. Bevevino and McMullen include
salary and
76
<PAGE>
welfare benefit continuation, bonus (equal to the average amount of the
executive's incentive bonus during the three years preceding termination),
immediate exercisability of any outstanding stock options and the lapse of any
restrictions on other equity awards. Salary and bonus termination payments for
Mr. Bevevino are guaranteed to total at least $1,000,000.
Change in Control Agreements and Golden Parachute Tax Exemption
As of the date of signing of the Merger Agreement, Rykoff-Sexton entered into
a second amended and restated change in control agreement with Mr. Van
Stekelenburg and amended and restated change in control agreements with certain
other of Rykoff-Sexton's senior executives (Harold E. Feather, Alan V.
Giuliani, Robert J. Harter, Jr. and Richard J. Martin). Each such agreement
generally parallels the executive's prior change in control agreement, and
provides for the payment of specified benefits under the circumstances
described below after a "change in control". In general, a "change in control"
is deemed to occur under the amended and restated change in control agreements
if any person becomes the beneficial owner of 25% or more of the combined
voting power of Rykoff-Sexton's outstanding securities, or upon a change in the
membership of Rykoff-Sexton's Board of Directors within any 12-month period,
with the result that the incumbent members do not constitute a majority of the
Board of Directors.
Under the amended and restated change in control agreements, (1) the Merger
will not constitute a change in control if the ML Entities have executed a
written agreement (such as the Standstill Agreement) approved by Rykoff-
Sexton's Board of Directors that imposes one or more limitations on the amount
of the ML Entities' beneficial ownership of Rykoff-Sexton Common Shares, and
such agreement (and any amendment thereto approved by at least a majority of
the members of the Rykoff-Sexton Board of Directors who are not ML Directors
(the "Present Directors")) continues to be in effect and binding on the ML
Entities and the ML Entities remain in compliance with such agreement, as
determined by at least a majority of the Present Directors, and (2) certain
acquisitions of Rykoff-Sexton Common Shares from an ML Entity will not
constitute a change in control if so determined by the Present Directors;
provided, however, that the foregoing transactions will not be excluded from a
change in control if either (A) Mr. Van Stekelenburg ceases to be the Chief
Executive Officer of Rykoff-Sexton immediately following the consummation of
the Merger and throughout the 12-month period thereafter, unless due to his
death, to "disability" or termination for "cause" (as "disability" and "cause"
are defined in Mr. Van Stekelenburg's amended and restated employment
agreement), or to a voluntary termination of Mr. Van Stekelenburg's employment
that is not treated as an involuntary termination of employment under Mr. Van
Stekelenburg's amended and restated employment agreement, or (B) the Rykoff-
Sexton Directors as of December 5, 1995, together with their successors who are
Present Directors, cease to constitute at least a majority of the Rykoff-Sexton
Board of Directors immediately following the consummation of the Merger and
throughout the 12-month period thereafter. See "--Executive Compensation--
Employment Agreements." The amended and restated change in control agreements
also exclude certain other future transactions that might be initiated by
Rykoff-Sexton and in which the Chief Executive Officer and the majority of the
Board of Directors remain the same.
If a change in control occurs, the agreements (other than Mr. Van
Stekelenburg's) will provide an executive with an amount equal to 2.99 times
the sum of his base salary plus the amount that would otherwise be earned under
any executive compensation plan if within two years subsequent to the change in
control, the executive's employment is involuntarily terminated by Rykoff-
Sexton other than for death, disability or "cause" (defined generally as the
executive's willful and continued failure to substantially perform his duties,
after specific demand for substantial performance has been made by Rykoff-
Sexton, or the executive's willful engaging in misconduct that is materially
injurious to Rykoff-Sexton) or if the executive terminates his employment for
"good reason" (defined as (1) certain changes to the executive's duties,
titles, offices or positions, (2) a salary reduction or a failure to increase
salary by certain amounts, (3) failure to maintain, or certain adverse effects
on the executive's participation in, certain benefit, incentive or stock option
plans, (4) certain relocations of the offices of Rykoff-Sexton or the
executive, (5) a reduction in the executive's vacation days, (6) a material
breach of, or failure by a successor or assign of Rykoff-Sexton to assume, the
executive's change in control agreement, or (7) a purported termination of the
executive's employment that is not implemented pursuant to the terms of
77
<PAGE>
the executive's change in control agreement). Mr. Van Stekelenburg will receive
an amount equal to 2.99 times the sum of his base salary plus the amount that
would otherwise be earned under any executive compensation plan if, within two
years subsequent to a change in control, his employment is terminated by
Rykoff-Sexton for any or no reason (other than death) or if Mr. Van
Stekelenburg elects to terminate his employment for any or no reason.
Termination benefits for each of the executives also include outplacement
expense reimbursement and welfare benefit continuation for two years after the
executive's termination of employment. The agreements with Messrs. Van
Stekelenburg and Feather also provide for payment of an amount necessary to
restore any benefit diminution if the 20% excise tax imposed under Section 4999
of the Code is applicable to their agreements. Prior to a change in control,
each of the amended and restated change in control agreements provides for a
base term of three years, with automatic one-year renewals unless Rykoff-Sexton
gives advance notice to the contrary. Rykoff-Sexton has previously entered into
change in control agreements with Donald E. Willis, Jr. and four other Rykoff-
Sexton executives, the terms of which are generally the same as the amended and
restated agreements with Messrs. Giuliani, Harter and Martin, except for the
term and the definition of "change in control"; under these agreements, the
Merger will constitute a change in control and entitle the executive to
compensation if his employment is terminated as described above.
In connection with the Merger, US Foodservice has agreed that it will
undertake such actions as may be necessary to ensure that payments made under,
or the cancellation of, any employment, severance, supplemental retirement,
stock option or loan agreement between US Foodservice and certain of its
employees are excluded from the excise tax and deduction disallowance
provisions of Sections 280G and 4999 of the Code.
Severance Agreements
In connection with the negotiation and execution of the amended and restated
change in control agreements, Rykoff-Sexton entered into individual severance
agreements as of the date of signing of the Merger Agreement with Messrs.
Feather, Giuliani, Harter and Martin. The individual severance agreements
provide for termination benefits if an executive is involuntarily terminated by
Rykoff-Sexton other than for death, disability or "cause" (or terminates
voluntarily after a reduction in pay, other than a general reduction, or notice
of non-renewal of the agreement) during a three-year term (with automatic one-
year renewals unless either party gives advance notice to the contrary).
"Cause" for the severance agreements is defined as a failure by the executive
consistently to meet applicable performance appraisal standards; an intentional
act of fraud, embezzlement or theft; intentional wrongful damage to Rykoff-
Sexton's property; intentional misconduct that is materially injurious to
Rykoff-Sexton; or a breach of the confidentiality/nonsolicitation provisions of
the severance agreement. Termination benefits include salary and welfare
benefit continuation for two years, bonus (based on actual performance results
during the applicable performance period and calculated as though the executive
had remained employed throughout the period, but prorated to reflect the period
of actual service), full vesting in any stock options and in each individual's
Supplemental Executive Retirement Plan and crediting of benefits under Rykoff-
Sexton's Deferred Compensation Plan at a "preferred" rate. Termination payments
will be offset by any payments made under an individual's employment agreement
or change in control agreement.
Supplemental Executive Retirement Plans (SERPs)
As of the date of the Merger Agreement, Rykoff-Sexton amended and restated
SERPs previously established for Messrs. Feather, Giuliani, Harter, Martin and
Willis. Except for the definition of "change in control," discussed below, the
amended SERPs are identical to the prior SERPs. The amended SERPs generally
provide an executive who retires at or after age 62 and who has at least 15
years of service with an annual lifetime benefit after retirement of 50% of his
final average pay, reduced by any benefits the executive is entitled to receive
under Rykoff-Sexton's qualified pension plan or certain retirement-type
nonqualified deferred compensation plans sponsored by Rykoff-Sexton, retirement
benefits under a prior employer's qualified or nonqualified plans, and any
Social Security retirement benefits received by the executive. If an executive
terminates employment with less than 15 years of service, the executive's
annual benefit is calculated by multiplying his final average pay by a
percentage that equals 2 1/2% times years of service up to 20, subject to the
same reductions as discussed above.
78
<PAGE>
Benefits under the SERP are also reduced to take into account early retirement
(early retirement is defined as retirement after attainment of age 55 with 10
years of service). Final average pay under the SERP means an executive's
highest average annual base salary plus bonus paid during any consecutive
three-year period within the five-year period ending on the date the executive
terminates employment. The SERP also provides disability benefits, calculated
for an executive with at least one year but less than 10 years of service as
25% of final average pay, with the same reductions as noted above except that
no reduction is made for early commencement of benefits. For an executive with
at least 10 years of service, the disability annual benefit is calculated by
multiplying his final average pay by a percentage that equals 2 1/2% times
years of service up to 20, again with the same reductions as noted above except
that no reduction is made for early commencement of benefits. After an
executive's death, the SERP also provides a lifetime benefit for his surviving
spouse in an amount equal
to 50% of the executive's benefit, reduced by any survivor benefits paid under
the Rykoff-Sexton qualified pension plan. The amendments to the SERPs have
revised the definition of "change in control" under such SERPs to be identical
to such definition contained in the amended and restated change in control
agreements. See "--Executive Compensation--Change in Control Agreements and
Golden Parachute Tax Exemption." If a change in control occurs, an executive
becomes 100% vested in his benefits under the SERP and is entitled to receive
benefits equal to the retirement benefit payable at age 62, with reduction for
any early commencement of benefits. If a change in control does not occur, an
executive becomes 100% vested only after attaining age 55 with at least five
years of participation in the SERP (or after becoming disabled or dying with a
surviving spouse prior to termination of employment).
Rykoff-Sexton previously entered into a SERP with Mr. Van Stekelenburg. His
accrued SERP benefits are fully vested after five years of Rykoff-Sexton
service or upon disability. If Mr. Van Stekelenburg retires on or after age 60
with at least five years of service, his SERP and the Rykoff-Sexton qualified
pension plan together provide an annual lifetime benefit equal to 60% of his
final average pay, reduced by 3% for each year of Rykoff-Sexton service less
than 20 years. If he retires before age 60 but after 55 with at least five
years of service, his annual benefit is reduced by 0.5% for each month before
age 60. If he terminates employment before age 55 with at least five years of
service, he will receive an annual benefit beginning after age 55 that is
actuarially reduced from the benefit payable at age 60. The SERP also provides
disability benefits, calculated as 30% of final average pay if Mr. Van
Stekelenburg becomes disabled with at least one year but less than 10 years of
service and calculated as his normal retirement benefit at age 60 if he becomes
disabled with at least 10 years of service. Annual SERP benefits are reduced by
any Social Security retirement benefits received by Mr. Van Stekelenburg. Final
average pay under the SERP means the average of Mr. Van Stekelenburg's cash
compensation (plus certain deferred amounts) during the last three years of his
Rykoff-Sexton employment. After Mr. Van Stekelenburg's death, the SERP provides
a lifetime benefit for his surviving spouse in an amount generally equal to 60%
of Mr. Van Stekelenburg's retirement benefits under the SERP, reduced by any
survivor benefits paid under Rykoff-Sexton's qualified pension plan.
Deferred Compensation Plan and Master Trust Agreement
The Rykoff-Sexton Deferred Compensation Plan permits specified Rykoff-Sexton
executives and members of Rykoff-Sexton's Board of Directors to elect to defer
portions of annual base salary, annual bonus and/or directors' fees. The
minimum deferral for any year is $2,000 of base salary, bonus or fees, and the
maximum annual deferral is 50% of annual base salary and 100% of each of annual
bonus and director's fees. Interest is credited to an individual's account on
the amount deferred at specified rates. A higher interest rate is generally
applied for payments due to death, disability or retirement after age 62 (or
for employees only, after age 55 with five years of service), or for payments
made to a participant with at least five years of participation in the Plan.
The higher interest rate is also applied after a change in control occurs. The
Master Trust Agreement for Executive Deferral Plans provides a means of
securing payment for various of Rykoff-Sexton's deferred compensation plans for
executives, including the Deferred Compensation Plan and the SERPs. Certain
provisions of the Master Trust Agreement take effect only after a change in
control occurs.
Between the date of signing of the Merger Agreement and the Effective Time,
Rykoff-Sexton has agreed to amend the Deferred Compensation Plan and the Master
Trust Agreement to conform the definition of change in
79
<PAGE>
control under both documents to the definition set forth in the amended and
restated change in control agreements. See "--Executive Compensation--Change
in Control Agreements and Golden Parachute Tax Exemption." The amendment to
the Master Trust Agreement also requires the consent of the trustee.
US Foodservice Management Loans
In connection with the Merger, an aggregate of approximately $4.9 million in
loans made by US Foodservice in 1992 to certain key management employees to
enable them to purchase shares of US Foodservice Common Stock will be
forgiven. In addition, after the Effective Time, Rykoff-Sexton will extend
loans to such employees in amounts sufficient to cover the federal and state
income tax due from such employees as a result of such forgiveness that by
their terms must be repaid within 15 months, or, if sooner, within three
months of resignation, retirement or termination. See "THE MERGER--Interests
of Certain Persons in the Merger--US Foodservice Management Loans."
Stock Options and Other Stock-Based Compensation Plans
At the Effective Time, each Assumed Option, whether or not vested or
exercisable, shall be assumed by Rykoff-Sexton and shall constitute an option
to acquire, on the same terms and conditions as were applicable under such
Assumed Option, a number of Rykoff-Sexton Common Shares equal to the product
of the Exchange Ratio and the number of shares of US Foodservice Common Stock
subject to such Assumed Option immediately prior to the Effective Time, at a
price per share equal to the aggregate exercise price for the shares of US
Foodservice Common Stock subject to such Assumed Option divided by the number
of Rykoff-Sexton Common Shares deemed to be purchasable pursuant to such
Assumed Option; provided, however, that any Assumed Option with an exercise
price of less than $.10 per Rykoff-Sexton Common Share shall be subject to the
optionee's agreement that upon exercise, (i) to the extent Rykoff-Sexton has
treasury Rykoff-Sexton Common Shares available, Rykoff-Sexton shall issue the
appropriate number of such treasury shares to the optionee and (ii) to the
extent that no such treasury shares are available, such optionee shall pay an
exercise price of $.10 per Rykoff-Sexton Common Share.
Outstanding US Foodservice options consist of both "performance options,"
the exercisability of which depends in part on the attainment by US
Foodservice of certain financial performance targets, and "normal options,"
the exercisability of which does not depend on the attainment by US
Foodservice of certain financial targets. With respect to the approximately
462,292 normal options outstanding as of March 31, 1996, a total of
approximately 340,029 will, pursuant to the terms and conditions applicable
thereto, become exercisable upon consummation of the Merger. With respect to
the approximately 280,429 performance options outstanding as of March 31,
1996, a total of approximately 102,278 will, pursuant to the terms and
conditions applicable thereto, become exercisable upon consummation of the
Merger. In addition, with respect to those performance options not vested in
accordance with their terms, the performance criteria shall be deemed
satisfied on the first anniversary of the Effective Time.
Certain Rykoff-Sexton stock based compensation plans provide for the
acceleration of benefits thereunder upon a change in control of Rykoff-Sexton
(as defined in such plans). The Rykoff-Sexton Board of Directors, immediately
prior to the execution of the Merger Agreement, took action under each such
plan to provide that the Merger would not be deemed a change in control for
purposes of such plan.
Additional information regarding the compensation of directors and executive
officers of Rykoff-Sexton is contained in Rykoff-Sexton's Proxy Statement for
its 1995 Annual Meeting of Stockholders, relevant portions of which are
incorporated by reference in this Proxy Statement/Prospectus from the Annual
Report on Form 10-K. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"AVAILABLE INFORMATION."
80
<PAGE>
DESCRIPTION OF RYKOFF-SEXTON
GENERAL
Established in 1911, Rykoff-Sexton is a leading manufacturer and distributor
of high-quality foods and related non-food products and services for the
foodservice industry throughout the United States. Rykoff-Sexton's products
and services are sold wherever food is prepared and consumed away from home.
Rykoff-Sexton distributes its product line of approximately 41,000 items to
restaurants, industrial cafeterias, health care facilities, schools and
colleges, hotels, airlines, supermarket service delicatessen departments and
other segments of the travel and leisure markets. It also offers design and
engineering services for all types of foodservice operations through its
contract/design group. Rykoff-Sexton's products consist of a broad line of
private label and national branded food and foodservice equipment and
supplies. Rykoff-Sexton's proprietary private label products accounted for
approximately 56% of its net sales in fiscal 1995. Rykoff-Sexton develops and
manufactures many of its private label products, and also manufactures other
products for certain customers under the customers' own brand labels.
Rykoff-Sexton's principal operations are conducted through the Rykoff-Sexton
Distribution Division (the "Distribution Division"), the Rykoff-Sexton
Manufacturing Division (the "Manufacturing Division") and San Francisco
International Cheese Imports. The Distribution Division is comprised of 26
distribution branches and eight additional sales offices that are largely
located in major metropolitan areas throughout the United States. The
Distribution Division also offers design and engineering services for all
types of foodservice operations through its 10 contract/design offices. In
fiscal 1995, sales of the Distribution Division (including products sold
through this division by the Manufacturing Division and San Francisco
International Cheese Imports) generated approximately 99% of Rykoff-Sexton's
net sales.
The Manufacturing Division manufactures products primarily under Rykoff-
Sexton's proprietary private labels and also manufactures products for other
manufacturers, distributors, restaurant chains and other large users under
their own brand labels at its four manufacturing plants. Approximately 90% of
the Manufacturing Division's products are sold through the Distribution
Division and the remainder are sold directly to customers.
Rykoff-Sexton's smaller division, San Francisco International Cheese
Imports, distributes domestic and imported cheeses and specialty and gourmet
products both through the Distribution Division and directly to customers.
On November 1, 1995, Rykoff-Sexton acquired substantially all of the assets
of H&O Foods, a privately owned Nevada corporation. H&O Foods is a regional,
full-line institutional foodservice distributor serving Nevada, California and
Arizona. Rykoff-Sexton intends to continue the business of H&O Foods within
such states. Rykoff-Sexton paid approximately $30,700,000 for the assets
acquired, subject to certain post-closing purchase price adjustments. The
aggregate consideration consisted of approximately $5,500,000 in cash, Rykoff-
Sexton's issuance of unsecured promissory notes in the amounts of $5,305,000
and $21,350,000, and its assumption of certain H&O Foods liabilities.
Rykoff-Sexton, which was organized under the laws of the state of Delaware
in 1961, is the successor to a business founded in 1911. Rykoff-Sexton's
principal executive offices are located at 1050 Warrenville Road, Lisle,
Illinois 60532-5201, and its telephone number is (708) 964-1414.
Additional information concerning Rykoff-Sexton is included in certain
documents incorporated by reference herein. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
LITIGATION
In October 1994, Rykoff-Sexton sold all of the stock of its then wholly-
owned subsidiary, Tone Brothers, to Burns Philp Food Inc. ("Burns Philp"). The
sale agreement provides for arbitration in the case of a dispute and Burns
Philp has filed a notice of arbitration in which it claims contract and fraud
damages in excess of $57 million in connection with its purchase of Tone
Brothers. In management's opinion, based on consultation with
81
<PAGE>
legal counsel, the sale agreement should limit any claims for breach of
representations under the sale agreement to a maximum of $25 million.
Rykoff-Sexton believes it has substantial legal and factual defenses to the
Burns Philp claims and is defending itself vigorously in the matter. The
evidentiary hearing was concluded on February 13, 1996, and Rykoff-Sexton and
Burns Philp are briefing the issues addressed during the evidentiary hearing.
Final arguments have been set for April 5, 1996 by the arbitration panel. The
outcome of this matter is currently uncertain; however, in management's
opinion, based on consultation with legal counsel, the resolution of this
matter will not have a material adverse effect on Rykoff-Sexton's consolidated
financial position or its results of operations.
Rykoff-Sexton and its subsidiary, John Sexton & Co., are defendants in a
number of cases currently in litigation or potential claims encountered in the
normal course of business which are being vigorously defended. In the opinion
of management, the resolution of these matters will not have a material
adverse effect on Rykoff-Sexton's consolidated financial position or results
of operations.
DESCRIPTION OF US FOODSERVICE
GENERAL
US Foodservice, which was formed by MLCP in 1992, is the result of the
combination of two regional broadline foodservice distributors, Unifax, Inc.
("Unifax") and WS Holdings, the parent company of White Swan.
Unifax was formed in 1988 when an investment group led by Frank H. Bevevino,
US Foodservice's current Chairman and Chief Executive Officer, acquired
Roanoke Restaurant Service, Inc., Biggers Brothers and F.H. Bevevino &
Company, Inc. ("Bevaco") from I.U. International Corporation ("IU"). Bevaco
had been acquired from Frank H. Bevevino and Bevaco's other shareholders by IU
in 1987. In 1992, US Foodservice, which was then named Unifax Holdings,
acquired all of the outstanding capital stock of Unifax. As part of the
acquisition, certain members of management of Unifax received Common Stock of
US Foodservice in exchange for common stock of Unifax. The ML Entities owned
the remaining 81% of the Common Stock of US Foodservice.
White Swan is a regional broadline foodservice company that was acquired by
WS Holdings in 1988. In September 1993, US Foodservice and WS Holdings, each
of which was at the time controlled by ML & Co., completed the 1993
Foodservice Merger whereby WS Holdings became a wholly-owned subsidiary of US
Foodservice. At the time of the 1993 Foodservice Merger, the ML Investors
owned 93% of the Class A common stock of WS Holdings. US Foodservice is
currently wholly-owned by the ML Investors, the Equitable Entities, management
and employees of US Foodservice and other stockholders. The ML Investors
currently own 78.2% of the Common Stock of US Foodservice.
In 1994, US Foodservice acquired the assets of four distribution centers,
one in Georgia and three in Florida (the "1994 Foodservice Acquisitions"), for
a total of $36.2 million. The 1994 Foodservice Acquisitions were funded, in
part, with an equity contribution of $25.0 million from the ML Investors. In
1995, US Foodservice completed two more acquisitions by acquiring the assets
of Fort Myers Meat & Seafood Company, Inc. in Fort Myers, Florida and the
assets of City Provisioners, Inc. in Ormond Beach, Florida (the "1995
Foodservice Acquisitions" and, collectively with the 1994 Foodservice
Acquisitions, the "Foodservice Acquisitions"). The purchase price for the
assets of the 1995 Foodservice Acquisitions was a total of $38.7 million,
which US Foodservice financed with borrowings.
On January 15, 1996, Biggers Brothers purchased substantially all of the
operating assets of Brigman Food Distributors, Inc., a small, local
distributor located in Charleston, South Carolina. The business has been
integrated into the ongoing operations of Biggers Brothers.
US Foodservice's principal executive office is located at 1065 Highway 315,
Cross Creek Pointe, Wilkes-Barre, Pennsylvania 18702, and its telephone number
is (717) 831-7500.
82
<PAGE>
BUSINESS
GENERAL
US Foodservice is a leading provider of high-quality food and related non-
food products throughout its marketing regions, and is the fifth largest
broadline foodservice distributor in the United States. US Foodservice serves
more than 40,000 customers in over 30 states, primarily in the Southeastern,
Southwestern and the Mid-Atlantic regions of the United States. Through 17
decentralized distribution centers, US Foodservice supplies over 20,000
foodservice products to customers of various sizes operating in a wide variety
of formats, including independent and chain restaurants, healthcare
institutions, schools and universities, hotels and motels, and business
foodservice facilities. US Foodservice markets an extensive array of national
brands, as well as private label and exclusive brands designed to complement
the national brands in meeting the demands of a diverse customer base. US
Foodservice's product line includes canned and dry groceries, meat, seafood,
poultry, fresh produce, frozen foods, dairy products and non-food items such
as paper products, janitorial supplies and light and heavy restaurant
equipment and supplies.
COMPETITIVE STRENGTHS
US Foodservice's 1995 net sales were approximately $1.7 billion. US
Foodservice believes its position as a leader in the foodservice distribution
industry is attributable to a number of competitive strengths, including the
following:
Diverse Customer Base. US Foodservice distributes food and related non-food
products to over 40,000 customers in more than 30 states. Restaurants and
healthcare institutions represent 56% and 17%, respectively, of US
Foodservice's current sales mix. US Foodservice's accounts include "street"
accounts, which are typically independently owned units that represent stable,
long-term customer relationships, and "chain" accounts, which include
franchised or corporate-owned units of a national or regional restaurant
chain, hotel and healthcare management group. Street accounts contribute 52%
of US Foodservice's current sales, while chain accounts contribute 41%. The
size and diverse nature of US Foodservice's customer base reduces its
dependence on any individual customer or chain account. For the fifty-two
weeks ended December 30, 1995, US Foodservice's largest customer accounted for
approximately 5% of net sales.
Decentralized Management Structure. US Foodservice employs a decentralized
operating strategy whereby each of the distribution centers formulates and
executes its own business plan to better serve the needs of its customers,
subject to overall corporate management controls and guidelines. US
Foodservice believes this encourages entrepreneurial management at the local
level, which enhances customer relationships through more personalized
service, enables quick reaction to local competition and provides US
Foodservice with stronger controls over working capital. With distribution
center management in control of the day-to-day business activities, corporate
management can focus on longer-term business strategies. Further, certain
functions are centralized at US Foodservice's corporate headquarters to
provide for better financial controls and improve overall profitability,
including large-scale marketing programs, personnel benefits coordination,
risk management, tax and treasury functions, and high level vendor
negotiations. US Foodservice also employs a sophisticated process for
benchmarking operational activities between the distribution centers in order
to establish best practices for all distribution centers.
Strong Customer Relationships. US Foodservice has established strong
customer relationships as a result of its local market presence, superior
customer service and diverse, high-quality product line. US Foodservice
benefits from long-standing local market presence in each of its operating
regions, primarily as a result of the acquisition of established, independent,
family-owned foodservice distributors. US Foodservice, recognizing the
benefits of strong local management, has allowed the distribution centers to
retain responsibility in such areas as customer support, marketing and sales
activities, and warehousing and distribution functions. The distribution
centers market products based on regional tastes and preferences and deliver
efficient service as a result of their local presence. The distribution
centers enlist larger street customers as "program" accounts, which are
accorded additional services in return for purchasing a majority of their
products from the distribution center. The services
83
<PAGE>
include market information on commodity items, vendor and manufacturer visits
to introduce new products, analysis of menu profitability and preferential
treatment at marketing functions such as food shows. Establishing a program
with a street customer allows the customer to obtain many of the benefits
available to, and thereby compete more effectively with, the chain accounts.
US Foodservice typically receives consistent order size and delivery day
commitments from program customers, which reduces operating costs. Finally, US
Foodservice's broad, high-quality product line allows US Foodservice to become
its customers' primary supplier by meeting all of their foodservice needs.
Value-Added Services. US Foodservice provides a wide range of value-added
services to its customers, including advice and assistance on product
selection, computerized menu planning and recipes, nutritional information,
inventory control, marketing strategies and training of customer personnel. US
Foodservice's approximately 700 highly skilled salespersons, in addition to
soliciting purchase orders, advise customers on menu options, food preparation
and serving methods, as well as merchandising techniques and unit cost
controls. Consistent with US Foodservice's decentralized management strategy,
each distribution center develops vendor supported, value-added services for
its specific customer base. Successful marketing services and programs are
disseminated to other distribution centers, which implement them as
appropriate, helping to reduce duplicative efforts and costs.
Strong Vendor Relationships. US Foodservice enjoys strong vendor
relationships as a result of concentrating its purchasing power among a select
group of vendors, as well as its emphasis on marketing national brand
products. As a result, US Foodservice believes it receives more attractive
pricing terms, incentive programs and additional marketing support such as
sales training, food show participation and advertising support in US
Foodservice publications. While US Foodservice's corporate product directors
negotiate with vendors in order to take advantage of the aggregate purchasing
power of all distribution centers, each distribution center employs purchasing
agents to meet regional customer demands for product, as well as to achieve
efficient, localized management of inventory.
Diverse Product Line and Support of National Brand Products. By distributing
more than 20,000 national brand, private label and exclusive brand products,
US Foodservice seeks to ensure that each of its over 40,000 customers has the
ability to choose the product which meets the customer's selection criteria of
quality, price or consistency. US Foodservice focuses on the marketing of
national brands, and currently approximately 85% of sales are of national
brand products. The marketing of national brands ensures consistency of
product for the customer and an improved level of partnership with the vendor.
US Foodservice's private label items are typically products such as canned and
frozen fruits and vegetables purchased from a number of suppliers. The private
label indicates to the customer that the product meets specific quality
standards dictated by US Foodservice. US Foodservice also has several
exclusive brands, many of which are trademarked, that are used to market the
highest quality products available. By managing the mix of national brands,
private labels and exclusive brands, US Foodservice believes it can optimize
the margins on product sales.
Geographic Diversification. US Foodservice distributes products in more than
30 states. Several of US Foodservice's operating regions are characterized by
strong local economies and favorable demographics. These favorable
demographics include growing populations in certain states, such as Florida,
the Carolinas and Texas, as well as increasing numbers of dual income
households and high net worth retirees. In addition, the marketing regions of
the distribution centers are substantially contiguous, with little overlap.
This allows US Foodservice to solicit business from organizations that have
operations in multiple regions, which would not otherwise be available to the
distribution centers on an individual basis. US Foodservice's size, as well as
its geographic diversity, mitigate the adverse effects that a downturn in the
business of any one distribution center would have on US Foodservice as a
whole.
Management Team. US Foodservice is led by an experienced management team at
both the corporate and distribution center levels. Many of US Foodservice's
corporate staff are former division executives with extensive operating
experience. In addition, US Foodservice's decentralized management structure
promotes the recruitment, development and retention of qualified managers, who
are given the opportunity to move throughout
84
<PAGE>
the organization to satisfy both the manager's career ambitions and US
Foodservice's staffing requirements. The current management team has overseen
the formation of US Foodservice by the combination of Unifax and White Swan in
1993, at the time the seventh and eighth largest foodservice distribution
companies, respectively, in the United States. Additionally, current
management has integrated seven acquisitions of foodservice distribution
centers in 1994, 1995 and 1996.
PRODUCTS
US Foodservice offers a broad and diverse line of products consisting of
more than 20,000 items. These products include a wide array of canned and dry
groceries (approximately 28% of net sales), fresh and frozen meats (21%),
frozen foods (16%), refrigerated and dairy products (7%), poultry (7%), fresh
and frozen seafood (5%) and fresh produce (5%). US Foodservice also offers a
variety of non-food items, including paper products, such as disposable
napkins, plates and cups, as well as a full line of janitorial and cleaning
supplies (8%). In addition, US Foodservice offers tableware, such as
glassware, china and silverware, along with a comprehensive line of light and
heavy restaurant and kitchen equipment (3%).
National brands currently represent approximately 85% of US Foodservice's
sales. US Foodservice believes its commitment to national brands provides it
with a competitive advantage over distributors who stress the marketing of
products under private labels. The marketing of a national brand ensures
consistency of product for the customer and an improved level of partnership
with vendors, which results in competitive pricing and significant sales and
marketing support.
In addition to national brands, US Foodservice selectively markets commodity
products, such as frozen and canned fruits and vegetables, and chicken and
pork products, under its US Foodservice label and additional products under US
Foodservice brand names, many of which are trademarked. US Foodservice's
policy is to pack only the finest quality product available under its labels
and exclusive brands. This strategy is designed to effectively compete with
competitors' private labels on price-sensitive items, and the exclusive brands
build customer confidence and loyalty for these products and to US
Foodservice. Examples of US Foodservice brands include "Cross Valley Farms(R)"
for deli and dairy products, "Pine Ridge Farms" for turkey products, "Arctic
Harvest(R)" and "Asian Harvest(R)" for seafood products, "La Comida(R)" for
Mexican and snack food products, "La Bella Villa(R)" for Italian and tomato
products, and "Gold N Clear" for shortenings and oils.
Several of the distribution centers also provide extended product lines
based on processing conducted in their facilities. Distribution centers in
Ormond Beach, Florida and Pittston, Pennsylvania are United States Department
of Agriculture ("USDA") approved processors of meat. These facilities are
therefore allowed to cut and pack meat into customer-requested portion sizes.
CUSTOMERS
US Foodservice classifies its foodservice customers as "street," "program"
(a category within street), "chain" and "other."
Street accounts, which contributed approximately 52% of net sales for the
fifty-two weeks ended December 30, 1995, are typically single-unit facilities,
locally owned and operated, that purchase products on a weekly basis from
several broadline and specialty distributors. Street accounts may include
restaurants, diners, taverns, schools and hotels. US Foodservice assigns a
geographical territory to a salesperson who contacts the street accounts
weekly to take orders, collect receivables and provide professional services,
such as menu planning, wait-staff training and coordinating meetings with
product specialists and manufacturers' sales representatives.
Recognizing that operational costs are best controlled when they are
consistent and when the sale involves a minimal amount of product handling,
salespersons establish "program" accounts by means of distribution agreements
that provide for structured distribution delivery days, delivery times and
product volume. Program accounts purchase a majority of their product
requirements from US Foodservice and are rewarded with
85
<PAGE>
preferential treatment at marketing events, such as food shows, information
regarding market trends and expanded vendor support. Approximately 42% of
street account volume is derived from program accounts.
Chain accounts, which contributed approximately 41% of net sales for the
fifty-two weeks ended December 30, 1995, include franchised or corporate owned
units of a national or regional restaurant chain, hotel or healthcare
management group. They are serviced by US Foodservice with fewer salespersons
than a street or program account, and although gross margins are generally
lower for chain accounts than for street or program accounts, the order sizes
are typically larger, reducing warehousing and delivery costs per order, and
resulting in operating margins similar to street and program sales.
Other sales include those to schools and other institutions on a bid basis,
as well as retail sales and sales to other distributors. Accounts classified
as "other" accounted for approximately 7% of net sales for the fifty-two weeks
ended December 30, 1995.
US Foodservice distributes food and related products to five primary types
of institutions: restaurants (56% of net sales for the fifty-two weeks ended
December 30, 1995), healthcare institutions (17%), schools and universities
(11%), business and industrial facilities (8%), and hotels and motels (3%),
with other customers comprising the remaining sales.
SALES AND MARKETING
US Foodservice relies on its highly skilled and motivated sales force to
increase account penetration and establish new customer relationships. US
Foodservice currently employs over 600 salespersons for street accounts in
either commissioned sales, supervisory or customer representative roles, and
over 100 salespersons to service its chain accounts. Salespersons assist
customers in reviewing new product offerings, evaluating current product lines
and market trends, and ensuring that all facets of the distribution centers'
operations are providing the level of service demanded by customers. US
Foodservice equips its sales force with sales and promotional materials,
including videos, to assist customers in marketing their products and training
their staff. Salespersons also participate in ServSafe(R) training, the
National Restaurant Association's certification program on food safety and
sanitation. Salespersons have an average tenure of 6.5 years with US
Foodservice and receive extensive training from the distribution centers and
vendors. A salesperson's compensation is based on a commission structure
designed by each distribution center according to sales volume, account
profitability, new account origination and collection of accounts receivable.
More than 85% of the sales force use laptop computers that provide access to
sales history data for each customer, as well as extensive information
concerning inventory and product availability. Timely access to such data
reduces the clerical effort involved in a sales call, and allows the
salesperson to act in an advisory capacity to the customer. As a result, US
Foodservice's current service level, defined as the percentage of items
shipped to items ordered, is approximately 99%.
Another value-added marketing tool is the Cygnet menu management program,
which assists in the management of foodservice departments in long term
healthcare facilities and hospitals. Every six months, each Cygnet customer is
provided with four-week cycle menus, designed by registered dieticians. The
customer is then able to control portion sizes, inventory and product
purchases.
VENDORS
US Foodservice employs product directors and local purchasing agents with
specific product expertise who purchase goods from over 3,500 independent
vendors. These suppliers include both large national multi-line and smaller
local specialty processors and packagers. As one of the largest customers of
most of its suppliers, US Foodservice is able to secure competitive prices and
marketing support. US Foodservice purchases products from a diverse group of
suppliers and believes it has adequate alternative sources of supply for
substantially all of its products. Orders to the vendors for products are
initiated at each distribution center based upon customer purchase history,
vendor performance, warehouse restrictions and working capital goals.
86
<PAGE>
The quality of the products sold to customers is one of the most important
aspects of US Foodservice's business. Quality control is a constant focus
within US Foodservice for all employees. Members of the corporate and
distribution center purchasing staffs visit canners and growers regularly to
assure that they meet US Foodservice's high standards. US Foodservice also
monitors quality by product sampling. US Foodservice has developed a
comprehensive product specification manual for all private label products
which is given to vendors.
To mitigate US Foodservice's risk from adulterated products, US Foodservice
requires its vendors of both nationally branded and private label products to
provide indemnification agreements and maintain specified levels of insurance.
DISTRIBUTION
US Foodservice distributes its products from its 17 distribution centers
located in Florida, Georgia, North Carolina, Ohio, Oklahoma, Pennsylvania,
Tennessee, Texas, Virginia and West Virginia. Twelve of these distribution
centers are broadline, four are system and one is a specialty center. These
distribution centers contain dry, refrigerated and frozen storage areas as
well as office space for the sales, purchasing, marketing and financial
personnel. Products may be delivered directly by the vendor, via common
carrier or backhauled on one of US Foodservice's delivery vehicles.
Customers place orders with distribution centers either through salespersons
or directly via telephone, facsimile machine, or direct computer access
between the customer's and the distribution centers' computers. Once an order
is received, it is usually processed and shipped to ensure delivery to the
customer within 24 hours. US Foodservice's fleet of trucks consists of more
than 900 vehicles. The majority of the delivery routes are mapped by a
computer system measuring variables such as desired customer delivery time,
number of cases, mileage, route alternatives, backhaul opportunities and
governmental regulations regarding allowable driving hours. This system allows
US Foodservice to monitor the efficiency of its deliveries to customers.
PROPERTIES
As of December 30, 1995, US Foodservice leased its corporate headquarters
and operated 17 distribution centers, consisting of office and warehouse space
with a total floor area of approximately 2.6 million square feet. The
following table describes the principal properties of US Foodservice as of
December 30, 1995:
<TABLE>
<CAPTION>
FACILITY LOCATION SQUARE FEET OWNED OR LEASED
-------- -------- ----------- ---------------
<C> <S> <C> <C>
Corporate Headquarters Wilkes-Barre, PA........... 12,000 Leased
Distribution Centers:
Biggers Charlotte, NC.............. 397,000 Owned
Dallas Mesquite, TX............... 247,000 Owned
Austin Austin, TX................. 244,000 Leased
Davis Oklahoma City, OK.......... 218,000 Owned
Kings Knoxville, TN.............. 180,000 Owned
Roanoke Salem, VA.................. 175,000 Owned
Lubbock Lubbock, TX................ 153,000 Owned
CP Ormond Beach, FL........... 142,000 Owned
Watson Dallas, TX................. 130,000 Leased
Ohio Columbus, OH............... 126,000 Leased
Bevaco Pittston, PA............... 119,000 Owned
Standard Hurricane, WV.............. 115,000 Owned
Riviera Beach Riviera Beach, FL.......... 95,000 Owned
Mom's Dallas, TX................. 74,000 Leased
Atlanta Atlanta, GA................ 69,000 Owned
Orlando Orlando, FL................ 59,000 Owned
Fort Myers Fort Myers, FL............. 47,000 Owned
</TABLE>
87
<PAGE>
The corporate headquarters and Watson leases expire in 1996; the Ohio lease
expires in 1997; the Mom's lease expires in 2000; and the Austin lease expires
in 2007. US Foodservice is currently planning to enter into a long-term lease
for new corporate headquarters in Luzerne County, Pennsylvania with a term
beginning in August 1996. Expansions have been recently completed at Davis,
Bevaco, Austin and Lubbock. US Foodservice is currently planning to construct
a new, technologically advanced distribution center for Biggers Brothers
beginning in 1996. This project is expected to be completed in 14 months at an
estimated cost of $35.0 million. US Foodservice believes that its existing
warehouse facilities and the planned Biggers Brothers distribution center will
be sufficient to satisfy its warehouse requirements for the foreseeable
future.
COMPETITION
US Foodservice operates throughout the Southeastern, Southwestern and Mid-
Atlantic regions of the United States and encounters significant competition
in each of its marketing areas. US Foodservice competes with the several
national distributors, including Rykoff-Sexton, as well as numerous regional
and local distributors.
US Foodservice believes that although price is a consideration, competition
in the foodservice distribution industry is generally based on product
quality, customer relations and service. As one of the leading broadline
distributors in its marketing regions, US Foodservice believes that it carries
a wider selection of food products of superior quality and value than most of
its competitors. US Foodservice believes that its extensive product line,
maintenance of consistent product quality, commitment to vendor partnerships,
highly motivated sales force and decentralized management philosophy
contribute to its ability to compete effectively in its regional markets.
EMPLOYEES
US Foodservice has approximately 3,700 full-time employees, of which
approximately 100 are covered by a collective bargaining agreement.
Approximately 65% of the employees of US Foodservice receive a portion of
their compensation based on performance criteria. US Foodservice believes that
its relationship with its employees is satisfactory.
LEGAL PROCEEDINGS
On April 28, 1993, the United States of America filed a one-count Department
of Justice ("DOJ") information against White Swan (which became a subsidiary
of US Foodservice on September 22, 1993) in the U.S. District Court for the
Southern District of Texas. The DOJ proceeding concerned activities of the
White Swan-Houston Division (now consolidated with Austin) involving the
submission of bids for the supply of wholesale grocery products to public
schools and other public entities in southeastern Texas from 1985 through
early 1990. On June 10, 1993, White Swan entered a plea of guilty and paid a
fine of $650,000.
White Swan also paid $60,000 to the State of Texas in September 1993 in
settlement of claims brought by the State of Texas for alleged violations of
the Texas Free Enterprise and Antitrust Act of 1983 relating to the same
activities investigated by the DOJ.
On June 1, 1994, in connection with the same matter, White Swan received a
written Notice of a Proposed Debarment by the USDA, Food and Nutrition Service
("FNS"). Appropriate documentation was sent to the FNS and a meeting was held
in August 1994. On January 20, 1995, White Swan received a proposed Compliance
Agreement in Lieu of Debarment ("Compliance Agreement") from the USDA. Various
drafts of the Compliance Agreement have been exchanged and negotiations are
ongoing.
US Foodservice is involved in various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any
of these legal proceedings will have a material adverse effect on the
financial condition or results of operations of US Foodservice.
88
<PAGE>
DESCRIPTION OF MERGER SUB
Merger Sub, a Delaware corporation and a wholly-owned subsidiary of Rykoff-
Sexton, was incorporated on December 20, 1995 solely for the purpose of
effecting the Merger. Merger Sub engages in no other business. The mailing
address of Merger Sub's principal executive offices is c/o Rykoff-Sexton,
Inc., 1050 Warrenville Road, Lisle, Illinois 60532-5201, and its telephone
number is (708) 964-1414.
US FOODSERVICE SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data as of December
31, 1994 and December 30, 1995 and for the fiscal years ended January 1, 1994,
December 31, 1994 and December 30, 1995, respectively, have been derived from
the consolidated financial statements of US Foodservice audited by Arthur
Andersen LLP, independent public accountants, included elsewhere herein.
The financial data for periods prior to January 3, 1993 are presented as set
forth due to the circumstances of the 1993 Foodservice Merger. See
"DESCRIPTION OF US FOODSERVICE--General." The 1993 Foodservice Merger has been
accounted for as a combination of companies under common control. As such, the
assets and liabilities of the merged entities have been reflected at their
historical carrying values in the consolidated financial statements of US
Foodservice. The results of operations have been presented as if the 1993
Foodservice Merger had occurred as of September 4, 1992, the date both Unifax
Holdings and WS Holdings came under the common control of ML & Co. Prior to
September 4, 1992, the results of operations represent those of WS Holdings
only. In addition, effective January 2, 1993, WS Holdings changed its fiscal
year end from the last Saturday in June to the Saturday following the Friday
nearest to December 31 to conform to US Foodservice's fiscal year end. As a
result, the financial data as set forth below include (i) data as of and for
the fifty-two week periods ended June 29, 1991 and June 27, 1992,
respectively, which have been derived from the audited consolidated financial
statements of WS Holdings, not included herein, (ii) data as of and for the
twenty-seven week period ended January 2, 1993 (which includes the results of
WS Holdings for the entire twenty-seven week period and the results of Unifax
Holdings from September 4, 1992 through January 2, 1993), which have been
derived from the audited consolidated financial statements of US Foodservice,
not included herein and (iii) data as of January 1, 1994, which have been
derived from the audited consolidated financial statements of US Foodservice,
not included herein.
The selected historical consolidated financial data should be read in
conjunction with the US Foodservice consolidated financial statements and
notes thereto and "--US Foodservice Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein.
89
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
JANUARY 1, 1994(1) DECEMBER 31, 1994(1)(2) DECEMBER 30, 1995(3)
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------------ ----------------------- --------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............. $1,439,409 $1,470,061 $1,676,007
Cost of goods sold.... 1,195,556 1,209,941 1,382,213
---------- ---------- ----------
Gross profit.......... 243,853 260,120 293,794
Operating expenses.... 188,501 200,387 225,189
Depreciation and
amortization......... 21,322 14,523 16,379
Forgiveness of notes
receivable from stock
sale................. 1,005 1,012 980
Write-off of goodwill
and related
intangible assets.... 14,274 -- --
Restructuring and
other charges
(credits)............ 36,669 (3,425) --
---------- ---------- ----------
Income (loss) from
operations........... (17,918) 47,623 51,246
Interest expense, net. 30,694 31,690 35,727
Other expense
(income), net........ 252 110 1,031
---------- ---------- ----------
Income (loss) before
income taxes and
extraordinary item... (48,864) 15,823 14,488
Income tax provision
(benefit)............ (2,882) 2,912 6,691
---------- ---------- ----------
Income (loss) before
extraordinary item... (45,982) 12,911 7,797
Extraordinary loss(4). 8,686 -- --
---------- ---------- ----------
Net income (loss)..... $ (54,668) $ 12,911 $ 7,797
========== ========== ==========
Net income (loss) per
share attributable to
common stockholders.. $ (7.93) $ 0.68 $ 0.02
Income (loss) per
share before
extraordinary item
attributable to
common stockholders.. $ (6.81) $ 0.68 $ 0.02
========== ========== ==========
Cash dividend per
share................ -- -- --
========== ========== ==========
Weighted average
shares outstanding... 7,729,227 8,241,211 9,147,639
BALANCE SHEET DATA (AT
PERIOD END):
Total assets.......... $ 516,835 $ 554,509 $ 610,535
Long-term debt........ 294,102 294,388 343,334
Mandatory redeemable
preferred stock...... 54,772 57,137 53,196
Stockholders' equity
(deficit)............ (2,564) 28,678 30,791
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
JUNE 29, 1991 JUNE 27, 1992 27 WEEKS ENDED
(52 WEEKS) (52 WEEKS) JANUARY 2, 1993
------------- ------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 650,984 $ 697,983 $ 627,955
Cost of goods sold............... 529,629 571,509 520,136
--------- --------- ---------
Gross profit..................... 121,355 126,474 107,819
Operating expenses............... 83,378 90,200 82,820
Depreciation and amortization.... 14,115 14,668 10,426
Forgiveness of notes receivable
from stock sale................. -- -- 994
Write-off of goodwill and related
intangible assets............... -- -- --
Restructuring and other charges
(credits)....................... -- -- --
--------- --------- ---------
Income from operations........... 23,862 21,606 13,579
Interest expense (net)........... 23,576 20,991 14,421
Other expense (income), net...... 806 275 (39)
--------- --------- ---------
Income (loss) before income taxes
and extraordinary item.......... (520) 340 (803)
Income tax provision (benefit)... 1,282 1,916 1,221
--------- --------- ---------
Income (loss) before
extraordinary item.............. (1,802) (1,576) (2,024)
Extraordinary loss(4)............ -- -- 5,081
--------- --------- ---------
Net income (loss)................ $ (1,802) $ (1,576) $ (7,105)
--------- --------- ---------
Net income (loss) per share
attributable to common
stockholders.................... $ (2.68) $ (2.33) $ (1.67)
Income (loss) per share before
extraordinary item attributable
to common stockholders.......... $ (2.68) $ (2.33) $ (0.81)
========= ========= =========
Cash dividend per share.......... $ -- $ -- $ --
========= ========= =========
Weighted average shares
outstanding..................... 1,814,496 2,198,717 5,899,177
BALANCE SHEET DATA (AT PERIOD END):
Total assets..................... $ 243,530 $ 247,664 $ 553,425
Long-term debt................... 159,816 158,006 290,100
Mandatory redeemable preferred
stock........................... 22,338 25,882 49,388
Stockholders' equity (deficit)... (10,344) (15,511) 58,018
</TABLE>
- --------
(1) Income (loss) before extraordinary item includes nonrecurring charges of
approximately $50.9 million in the fiscal year ended January 1, 1994 and
nonrecurring credits of $3.4 million in the fiscal year ended December 31,
1994. The charges and credits relate to nonrecurring transactions
including the write-off of unamortized goodwill and related intangible
assets attributable to three of White Swan's distribution centers, and
restructuring and other charges. See "--US Foodservice Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 14 to the consolidated financial statements of US Foodservice
included elsewhere herein for a further explanation of such charges and
credits.
(2) Statement of operations data for the fiscal year ended December 31, 1994
include the results of the Atlanta Distribution Center from September 9,
1994, the date of its acquisition, and of the Fort Myers, Orlando and
Riviera Beach distribution centers from September 16, 1994, the date of
their acquisition.
(3) Statement of operations data for the fiscal year ended December 30, 1995
include the results of the Fort Myers Meat & Seafood distribution center
from January 20, 1995, the date of its acquisition, and of the CP
Distribution Center from April 1, 1995, the date of its acquisition.
(4) For the fiscal year ended January 1, 1994, US Foodservice recorded an
extraordinary item of approximately $8.7 million net of related tax
benefit of approximately $3.2 million, related to the early extinguishment
of indebtedness, and recorded a similar charge of approximately $5.1
million net of related tax benefit of $3.1 million for the twenty-seven
week period ended January 2, 1993.
91
<PAGE>
US FOODSERVICE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The foodservice industry is characterized primarily by small and medium-size
(less than $100.0 million in net sales) independent distributors serving local
and regional markets. In recent years the industry has experienced significant
consolidation as the services required by customers (such as product
diversity, geographic coverage, competitive pricing, accurate on-time
delivery, and auxiliary services such as menu planning) have increased,
requiring substantial capital and operational resources. This has created a
significant competitive advantage for the relatively small number of large
distributors that have the resources to satisfy these customer requirements.
Such distributors are better able to deploy working capital to carry broader
product lines, develop stronger vendor relationships and make greater
investments in technology.
In September 1993, US Foodservice completed the 1993 Foodservice Merger,
thereby creating the fourth largest broadline foodservice distributor in the
United States. As a result of the 1993 Foodservice Merger, US Foodservice:
(i) doubled its net sales, thereby further enhancing its relationships and
leverage with its vendors and obtaining more competitive pricing and
enhanced marketing and merchandising support;
(ii) expanded its geographic diversity, thereby achieving the capability to
service a larger chain account base while reducing its exposure to
regional economic downturns;
(iii) realized synergies through consolidation and rationalization of
certain distribution centers and corporate functions;
(iv) expanded the diversity of its customer base, product line and
services; and
(v) enhanced its pool of management resources.
US Foodservice's historical growth has depended, in part, on its ability to
acquire, integrate and operate new businesses within existing and contiguous
geographical markets. Since the 1993 Foodservice Merger, US Foodservice has
completed the Foodservice Acquisitions. US Foodservice believes that its
success in integrating these acquired businesses is primarily the result of
its entrepreneurial, decentralized management structure and the application of
its management information systems. Most acquired businesses generate margins
lower than those of existing distribution centers until fully integrated into
the purchasing, merchandising and operational systems of US Foodservice. The
time necessary to integrate acquired businesses depends upon the size and
operating sophistication of such businesses, but the benefits of integration
do not typically begin to be fully realized until after one year. As an
example of integration benefits, the gross margins of the 1994 Foodservice
Acquisitions have increased from 14.1% for the 13 weeks ended December 31,
1994 to 15.6% for the 13 weeks ended December 30, 1995.
US Foodservice continually evaluates the level of profitability of
individual customer accounts. This has allowed US Foodservice to successfully
focus its resources towards its more profitable accounts and to modify less
profitable relationships. As a result of this review process, US Foodservice
selectively discontinues relationships with less profitable accounts, which
results in lower net sales but allows for improved operating margins and more
efficient use of US Foodservice's distribution infrastructure.
The following table sets forth US Foodservice's income (loss) from
operations for the periods indicated:
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30,
1994 1994 1995
---------- ------------ ------------
<S> <C> <C> <C>
Net sales.................................. 100.00% 100.00% 100.00%
Gross profit............................... 16.94 17.69 17.53
Operating expenses......................... 13.10 13.63 13.44
Depreciation and amortization.............. 1.48 0.99 0.98
Nonrecurring charges (credits)............. 3.54 (0.23) --
Income (loss) from operations.............. (1.24) 3.24 3.06
</TABLE>
92
<PAGE>
RESULTS OF OPERATIONS
Fiscal 1995 Compared to Fiscal 1994
Net Sales. Net sales increased 14.0% to $1,676.0 million in fiscal 1995 from
$1,470.1 million in fiscal 1994. The Foodservice Acquisitions contributed
$169.9 million to this increase in net sales, which offset sales decreases
resulting from US Foodservice's decision to terminate its relationship with a
large, low-margin, multi-unit customer as part of its efforts to continually
review customer profitability and optimize resource allocation. Excluding the
effect of this decision, existing distribution centers experienced $60.0
million in net sales increases primarily due to the addition of new customers
and increased sales to existing customers. Price inflation did not have a
measurable effect on net sales.
Gross Profit. Gross profit increased 13.0% to $293.8 million in fiscal 1995
from $260.1 million in fiscal 1994. Despite an increase in gross profit, gross
margin for fiscal 1995 declined to 17.5% from 17.7% for fiscal 1994. The
Foodservice Acquisitions attained gross margins of 15.7%, while the existing
distribution centers had gross margins of 17.8%. The Foodservice Acquisitions'
lower gross margins were primarily attributable to the nature of their
customer mix, as well as to the Foodservice Acquisitions' not having completed
the implementation of US Foodservice's merchandising, marketing and
operational programs.
Operating Expenses. Operating expenses increased 12.4% to $225.2 million in
fiscal 1995 from $200.4 million in fiscal 1994. The Foodservice Acquisitions
accounted for $21.9 million of this increase. Operating expenses as a
percentage of net sales decreased to 13.4% in fiscal 1995 from 13.6% in fiscal
1994.
Depreciation and Amortization. Depreciation and amortization expense
increased 12.8% to $16.4 million in fiscal 1995 from $14.5 million in fiscal
1994. The Foodservice Acquisitions accounted for substantially all of the
increase.
Income from Operations. Income from operations decreased 7.6% to $51.2
million in fiscal 1995 from $47.6 million in fiscal 1994. Excluding the
nonrecurring credit in fiscal 1994, US Foodservice's income from operations
increased 15.9%, or $7.0 million, in fiscal 1995 compared to fiscal 1994. The
increase in net sales accounted for most of the improvement.
Interest Expense. Interest expense increased 12.7% to $35.7 million in
fiscal 1995 from $31.7 million in fiscal 1994. The increase in interest
expense resulted from higher debt levels incurred to finance the 1995
Foodservice Acquisitions, as well as the impact of higher interest rates.
Provision for Income Taxes. Provision for income taxes of $6.7 million in
fiscal 1995 reflected an effective tax rate of approximately 46.2%. The
effective rate in fiscal 1995 is greater than the Federal statutory rate of
34% primarily due to the non-deductibility of goodwill amortization and the
effect of state taxes. Provision for income taxes of $2.9 million in fiscal
1994 reflected an effective rate of 18.4%, which is lower than the Federal
statutory rate of 34% primarily due to the reduction in valuation allowances
against deferred tax assets of approximately $10.3 million.
Fiscal 1994 Compared to Fiscal 1993
Net Sales. Net sales increased 2.1% to $1,470.0 million in fiscal 1994 from
$1,439.4 million in fiscal 1993. The 1994 Foodservice Acquisitions contributed
$41.0 million to net sales in fiscal 1994 which offset sales decreases
resulting from US Foodservice's decision to discontinue its relationships with
several low-margin customers, including one significant account in mid-fiscal
1994 which resulted in a $24.0 million reduction in sales. The decision to
discontinue the business with these customers was the result of an overall
review of all significant customer relationships in connection with the 1993
Foodservice Merger. In addition, in 1993 US Foodservice consolidated its
Houston and Corpus Christi, Texas operations into its Austin, Texas facility.
This consolidation resulted in the elimination of $42.0 million of business in
the Houston and Corpus Christi markets. Excluding the effects of these
actions, existing distribution centers experienced $56.7 million in net sales
93
<PAGE>
increases primarily due to the addition of new customers and increased sales
to existing customers. Sales growth was adversely affected during fiscal 1994
by the inclement weather which impacted certain of the distribution centers.
Price inflation did not have a measurable effect on net sales.
Gross Profit. Gross profit increased 6.7% to $260.1 million in fiscal 1994
from $243.9 million in fiscal 1993. The gross margin increased to 17.7% in
fiscal 1994 from 16.9% in fiscal 1993. The 1994 Foodservice Acquisitions
provided $5.9 million of the increase in gross profit. The increase in gross
margin is a direct result of the benefits derived from US Foodservice's
purchasing leverage and strong vendor relationships that resulted from the
additional sales volume generated by the 1993 Foodservice Merger. Gross
margins also benefited in fiscal 1994 as a result of US Foodservice's decision
to terminate relationships with several low margin customers.
Operating Expenses. Operating expenses increased 6.3% to $200.4 million in
fiscal 1994 from $188.5 million in fiscal 1993. The 1994 Foodservice
Acquisitions accounted for $4.9 million of the increase in operating expenses.
Operating expenses, as a percentage of sales, increased to 13.6% in fiscal
1994 as compared to 13.1% in fiscal 1993. The increase is due, in part, to
expenses associated with expansion into new sales regions and, to a lesser
extent, the inclement weather experienced in fiscal 1994.
Depreciation and Amortization. Depreciation and amortization expense
decreased 31.9% to $14.5 million in fiscal 1994 from $21.3 million in fiscal
1993. The decrease is primarily attributable to the full amortization of
amounts paid under a non-compete agreement between White Swan and its former
owner in fiscal 1993.
Nonrecurring Charges (Credits). In connection with the 1993 Foodservice
Merger, and as a result of the decision to consolidate three distribution
centers, certain nonrecurring expenses were incurred in fiscal 1993 which were
classified as restructuring and other charges in the amount of $36.7 million.
These costs include lease termination, severance and other costs associated
with the consolidation of distribution centers and the costs relating to
financial integration and elimination of duplicative tasks. In addition,
during fiscal 1994, a credit of $3.4 million resulted from US Foodservice's
termination of a lease relating to the consolidation of a Distribution Center
on terms more favorable than originally estimated. During fiscal 1993, WS
Holdings wrote off $14.3 million of unamortized goodwill and related
intangible assets attributable to three distribution centers. The three
distribution centers operated at a loss before interest and amortization
during 1993 and projections of future results indicated that such losses would
continue. See Note 14 to the consolidated financial statements of US
Foodservice included elsewhere herein.
Income From Operations. Income from operations was $47.6 million in fiscal
1994 compared to a loss from operations of $17.9 million in fiscal 1993. This
was partially attributable to nonrecurring charges of $50.9 million in fiscal
1993. Excluding the nonrecurring charges, income from operations increased
33.8% to $44.2 million in fiscal 1994 from $33.0 million in fiscal 1993. This
increase was a result of an increase in net sales, improved gross margins, and
the decrease in amortization associated with the White Swan non-compete
agreement.
Interest Expense. Interest expense increased from $30.7 million in fiscal
1993 to $31.7 million in fiscal 1994. The increase reflects higher interest
rates.
Extraordinary Item. An extraordinary loss was recorded in fiscal 1993
totaling $8.7 million due to the write-off of debt issuance costs associated
with the refinancing of the debt of US Foodservice and WS Holdings in the 1993
Foodservice Merger.
Provision for Income Taxes. Provision for income taxes amounted to $2.9
million in fiscal 1994 versus a benefit of $2.9 million in fiscal 1993. The
effective rate of 18.4% in fiscal 1994 is lower than the Federal statutory
rate of 34% due to the reduction in valuation allowances against deferred tax
assets of approximately $10.3 million. This reduction is the result of US
Foodservice's evaluation that the tax assets reserved for in fiscal 1993 will
be realized.This reduction was partially offset by an Internal Revenue Service
audit assessment and other reserves of $4.4 million, nondeductible goodwill
amortization of $1.7 million and state and other taxes of $1.2 million.
94
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
US Foodservice's liquidity requirements arise primarily from the funding of
its working capital needs, obligations on indebtedness and capital
expenditures. Historically, these requirements have been met with operating
cash flows and borrowings under the Existing Credit Facility. Working capital
needs are driven primarily by the needs of the individual distribution centers
and correlate closely with sales levels. Capital expenditures are also based
on the requirements of the individual distribution centers.
During fiscal 1995, US Foodservice generated cash flows from operations of
$26.0 million. The primary sources of cash included a decrease in inventories
of $2.9 million and increases in accrued expenses of $0.2 million and bank
overdrafts (outstanding disbursements) of $8.5 million which, together with
net income, depreciation and amortization, deferred income taxes and other
items, produced total sources of $46.4 million. These sources were partially
offset by increases in accounts receivable of $8.7 million and prepaid
expenses and other assets of $1.3 million and decreases in accounts payable of
$5.7 million, income taxes payable of $2.0 million and noncurrent liabilities
of $2.7 million. This cash, together with borrowings of $50.0 million under
the Existing Credit Facility and proceeds of $15.0 million from the sale of
receivables, was used to fund payments of $38.7 million for the 1995
Foodservice Acquisitions, repay $16.6 million of long-term debt, fund capital
expenditures of $16.3 million and purchase certain outstanding US Foodservice
preferred stock for $6.7 million. Other net uses of cash amounted to $1.2
million. Overall, US Foodservice had a net increase in cash of $11.5 million
in fiscal 1995.
During fiscal 1994, US Foodservice generated cash flows from operations of
$27.3 million. This operating cash was provided primarily from net income of
$12.9 million, depreciation and amortization of $17.0 million and an increase
in bank overdrafts (outstanding disbursements) of $17.3 million, offset by
decreases in accounts payable of $13.6 million and other noncurrent
liabilities of $10.6 million. The decrease in other noncurrent liabilities is
primarily the result of the payment of the various costs previously accrued in
the 1993 restructuring charge. US Foodservice used $36.2 million of cash for
the 1994 Foodservice Acquisitions and $11.8 million of cash for capital
expenditures, which included over $2.0 million in facilities expansions and
improvements and $1.0 million for development of US Foodservice's proprietary
software package. US Foodservice issued additional equity for net proceeds of
$24.9 million, which, along with cash from operations, was used to fund the
1994 Foodservice Acquisitions. US Foodservice also sold $15.0 million of
receivables and repaid $14.5 million of long-term debt. These factors
contributed to a net increase in cash of $2.8 million for fiscal 1994.
During fiscal 1993, US Foodservice and WS Holdings completed the 1993
Foodservice Merger, whereby WS Holdings became a wholly owned subsidiary of US
Foodservice. The 1993 Foodservice Merger required the complete refinancing of
both WS Holdings' and US Foodservice's pre-1993 Foodservice Merger debt. This
was effectively completed by the issuance of new long-term debt under US
Foodservice's Existing Credit Facility, as well as the exchange of the 14.25%
Debentures and the Exchangeable Preferred Stock to replace the then existing
WS Holdings senior subordinated debt and preferred stock. US Foodservice also
recorded $60.0 million of proceeds from the sale of receivables. On a combined
basis, US Foodservice generated $33.4 million in cash flows from operations in
fiscal 1993, a large portion of which was provided as the result of a
concentrated effort on managing working capital after the 1993 Foodservice
Merger, increasing accounts payable by $23.1 million and accrued expenses by
$7.7 million. Capital expenditures for fiscal 1993 were $8.1 million.
Combining these various items, cash increased $2.0 million in fiscal 1993.
In connection with the 1993 Foodservice Merger, US Foodservice entered into
a Receivable Purchase Agreement and a Pooling and Servicing Agreement (the
"Agreements"). The Agreements allow US Foodservice to borrow at substantially
lower rates than might otherwise be available. In October 1994, US Foodservice
completed the Series 1994-1 Accounts Receivable Securitization, which produced
proceeds of $75.0 million, of which $60.0 million was used to replace the 1993
securitization. This securitization has since been modified and increased by
an additional $15.0 million to $90.0 million, with the addition of certain
other distribution centers' accounts receivable. See Note 4 to the
consolidated financial statements of US Foodservice included elsewhere herein.
US Foodservice intends to restructure its present receivables financing
facility as an off-balance sheet
95
<PAGE>
sale of assets. If, however, the present US Foodservice receivables facility
cannot be restructured in a manner satisfactory to Rykoff-Sexton and US
Foodservice, US Foodservice intends to refinance the present US Foodservice
receivables facility. In such event, BofA and Chase will consider increasing
the size of the Receivables Securitization to $200 million, but Chase and BofA
have made no commitment to do so in the Commitment Letter. See "THE MERGER--
Rykoff-Sexton Financing and Receivables Securitization."
US Foodservice anticipates $14.1 million of capital expenditures in 1996,
excluding the Biggers Brothers facility described below. Annual maintenance
capital expenditures range from $8.0 million to $10.0 million each year. As
discussed above, US Foodservice funds capital expenditures through operating
cash flows and bank borrowings.
US Foodservice began construction, in 1996, of a new, technologically
advanced distribution center for Biggers Brothers. This project is expected to
take 14 months to complete at an estimated total cost of $35.0 million, and to
be financed by industrial bonds or other long-term mortgage-based financing.
Interim financing, if necessary, will be drawn from the available credit
facilities.
96
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statements of operations and unaudited pro
forma combined balance sheet give effect to (i) the acquisitions of
Continental and H&O Foods, (ii) the Merger and (iii) the New Credit Facility,
the Receivables Securitization and the application of the net proceeds
therefrom. The unaudited pro forma combined statement of operations for the
fifty-two weeks ended April 29, 1995 is comprised of the results of Rykoff-
Sexton for the fifty-two weeks ended April 29, 1995, the results of
Continental (acquired on February 21, 1995) for the period May 1, 1994 to
February 20, 1995, the results of H&O Foods for the year ended April 30, 1995,
and the results of US Foodservice for the fifty-two weeks ended April 1, 1995.
The unaudited pro forma combined statement of operations for the thirty-nine
weeks ended January 27, 1996 is comprised of the results of Rykoff-Sexton for
the thirty-nine weeks ended January 27, 1996, the results of H&O Foods
(acquired on November 1, 1995) for the six-months ended October 31, 1995, and
the results of US Foodservice for the thirty-nine weeks ended December 30,
1995. The unaudited pro forma combined balance sheet as of January 27, 1996
has been prepared by combining the consolidated balance sheet of Rykoff-Sexton
as of January 27, 1996 and the balance sheet of US Foodservice as of December
30, 1995.
The unaudited pro forma combined statements of operations for the fifty-two
weeks ended April 29, 1995 and the thirty-nine weeks ended January 27, 1996
assume that the Merger, the acquisitions of Continental and H&O Foods, the New
Credit Facility and the Receivables Securitization occurred on May 1, 1994.
The unaudited pro forma combined balance sheet as of January 27, 1996 assumes
that the Merger, the New Credit Facility and the Receivables Securitization
occurred on January 27, 1996. The pro forma combined statements of operations
and balance sheet do not purport to represent the results of operations or
financial position of Rykoff-Sexton had the transactions and events assumed
therein occurred on the dates specified, nor are they necessarily indicative
of the results of operations that may be achieved in the future. The pro forma
adjustments are based on management's preliminary assumptions regarding
purchase accounting adjustments. The actual allocation of the purchase price
will be adjusted to the extent that actual amounts differ from management's
estimates.
The pro forma financial information is based upon certain assumptions and
adjustments described in the notes to the pro forma financial statements. The
pro forma combined financial information should be read in conjunction with
the historical financial statements, and related notes thereto, of Rykoff-
Sexton and US Foodservice incorporated by reference or contained elsewhere
herein.
97
<PAGE>
RYKOFF-SEXTON
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FIFTY-TWO WEEKS ENDED APRIL 29, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO-FORMA
FOR
PRO-FORMA CONTINENTAL
RYKOFF- CONTINENTAL FOR H&O FOODS AND H&O
SEXTON (UNAUDITED) PRO-FORMA CONTINENTAL (UNAUDITED) PRO-FORMA FOODS
(AUDITED) (5/1/94-2/20/95) ADJUSTMENTS ACQUISITION (5/1/94-4/30/95) ADJUSTMENTS ACQUISITIONS
---------- ---------------- ----------- ----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales........... $1,569,019 $83,841 $ -- $1,652,860 $119,565 $ -- $1,772,425
Cost Of Sales... 1,241,291 69,808 1,311,099 104,480 1,415,579
---------- ------- ------- ---------- -------- ------- ----------
Gross Profit.... 327,728 14,033 341,761 15,085 356,846
Warehouse,
Selling, General
and
Administrative.. 301,235 11,492 617 (2) 312,353 11,927 433 (2) 324,713
(991)(3)
---------- ------- ------- ---------- -------- ------- ----------
Net Operating
Expenses........ 301,235 11,492 (374) 312,353 11,927 433 324,713
---------- ------- ------- ---------- -------- ------- ----------
Operating
Profit.......... 26,493 2,541 374 29,408 3,158 (433) 32,133
Interest
Expense, net.... 10,867 (78) 1,757 (4) 12,624 421 2,524 (4) 15,055
78 (3) (514)(4)
Other Expense...
---------- ------- ------- ---------- -------- ------- ----------
Income From
Continuing
Operations
Before Income
Taxes........... 15,626 2,619 (1,461) 16,784 2,737 (2,443) 17,078
Provision For
Income Taxes.... 6,250 464 (7) 6,714 117 (7) 6,831
---------- ------- ------- ---------- -------- ------- ----------
Income From
Continuing
Operations...... $ 9,376 $ 2,619 $(1,925) $ 10,070 $ 2,737 $(2,560) $ 10,247
========== ======= ======= ========== ======== ======= ==========
Weighted Average
Shares
Outstanding--
Historical...... 14,730 14,730 14,730
========== ========== ==========
Weighted Average
Shares
Outstanding--
Minimum Shares..
Weighted Average
Shares
Outstanding--
Maximum Shares..
Earnings per
Share Data:
Income from
continuing
operations per
share--
Historical...... $ 0.64 $ 0.68 $ 0.69
========== ========== ==========
Income from
continuing
operations per
share--Minimum
Shares..........
Income from
continuing
operations per
share--Maximum
Shares..........
<CAPTION>
PRO FORMA FOR
CONTINENTAL,
H&O FOODS,
MERGER, NEW
CREDIT
FACILITY AND
US FOODSERVICE RECEIVABLES
(UNAUDITED) PRO-FORMA SECURITIZATION
(4/3/94-4/1/95) ADJUSTMENTS (1)(9)
--------------- -------------- ---------------
<S> <C> <C> <C>
Sales........... $1,508,988 $ -- $3,281,413
Cost Of Sales... 1,241,472 2,657,051
--------------- -------------- ---------------
Gross Profit.... 267,516 624,362
Warehouse,
Selling, General
and
Administrative.. 219,217 5,159 (2) 549,089
--------------- -------------- ---------------
Net Operating
Expenses........ 219,217 5,159 549,089
--------------- -------------- ---------------
Operating
Profit.......... 48,299 (5,159) 75,273
Interest
Expense, net.... 32,346 27,667 (4) 42,570
(31,563)(4)
1,833 (5)
(2,768)(5)
Other Expense... 14,075 (6) 14,075
--------------- -------------- ---------------
Income From
Continuing
Operations
Before Income
Taxes........... 15,953 (14,403) 18,628
Provision For
Income Taxes.... 2,769 (3,698)(7) 5,902
--------------- -------------- ---------------
Income From
Continuing
Operations...... $ 13,184 $(10,705) $ 12,726
=============== ============== ===============
Weighted Average
Shares
Outstanding--
Historical......
Weighted Average
Shares
Outstanding--
Minimum Shares.. 26,168(8)
===============
Weighted Average
Shares
Outstanding--
Maximum Shares.. 28,127(8)
===============
Earnings per
Share Data:
Income from
continuing
operations per
share--
Historical......
Income from
continuing
operations per
share--Minimum
Shares.......... $ 0.49(8)
===============
Income from
continuing
operations per
share--Maximum
Shares.......... $ 0.45(8)
===============
</TABLE>
98
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE
FIFTY-TWO WEEKS ENDED APRIL 29, 1995:
(1) Rykoff-Sexton has begun to identify cost savings resulting from a business
integration plan, which is expected to be implemented following the
Merger. The business integration plan contemplates, among other things,
(i) elimination of duplicative executive and distribution functions and
(ii) closing and consolidating of certain facilities. Rykoff-Sexton's
business integration plan provides for the events generating the cost
savings to occur in phases. Management has not completed its assessment
and thus has not included the impact of any special charges or cost
savings in the pro forma combined statement of operations for the fifty-
two weeks ended April 29, 1995. See "THE MERGER--Potential Cost Savings
and Operating Synergies."
(2) Reflects adjustments to depreciation and amortization based on the
preliminary purchase accounting allocations related to property, plant and
equipment and intangible assets acquired in connection with the
acquisitions of Continental and H&O Foods and the Merger as more fully
described in Note (2) to the unaudited pro forma combined balance sheet.
Buildings are being depreciated over 30 years and goodwill is being
amortized over 40 years.
(3) Represents the elimination of rental income, lease expense, interest
income and owners salaries that ceased as a result of the acquisition of
Continental.
(4) Represents the elimination of historical interest expense on debt which
was refinanced or not assumed, offset by the additional interest expense
that would have been incurred had the acquisitions of H&O Foods and
Continental, the Merger and the New Credit Facility occurred on May 1,
1994. For purposes of the unaudited pro forma combined statement of
income, the interest rate was assumed to be LIBOR plus the Applicable
Margin as further described in "THE MERGER--Rykoff-Sexton Financing and
Receivables Securitization." The weighted average rate assumed was 8.26%.
The proceeds from the New Credit Facility will be used to refinance
substantially all of the outstanding debt of US Foodservice and to
refinance Rykoff-Sexton's Credit Agreement dated as of October 25, 1993,
among Rykoff-Sexton and BofA, as amended. The weighted average interest
rate on the debt expected to be retired ranged from 7.58% to 8.13% for US
Foodservice's revolver and term loans and 14.25% on the 14.25% Debentures
and 5.54% for Rykoff-Sexton. See Note 6 to the consolidated financial
statements of US Foodservice included elsewhere herein for further
information regarding the historical indebtedness of US Foodservice. See
Note 5 to the consolidated financial statements of Rykoff-Sexton
incorporated by reference herein for further information with respect to
the historical indebtedness of Rykoff-Sexton.
(5) Represents the elimination of historical amortization of deferred
financing costs on debt which was refinanced, offset by the amortization
of deferred financing costs on debt that would have been incurred had the
New Credit Facility been in place on May 1, 1994. The deferred financing
costs associated with the New Credit Facility are amortized over the terms
of the related debt, approximately six years.
(6) Represents the loss on the sale of accounts receivable under the asset
securitization program that would have been incurred had the Receivables
Securitization program been in place on May 1, 1994. The loss related to
the sale of receivables represents the yield on the aggregate receivables
sold. The yield under the Receivables Securitization is based on either a
certain base rate plus an applicable margin or LIBOR plus an applicable
margin as determined by the SPC. The computed yield rate for purposes of
the unaudited pro forma combined statement of income was 7.0%, assuming a
constant level of receivables secured of $200 million. To the extent that
the amount of receivables secured or the interest rate changes, the amount
of the loss could change.
(7) Adjustments to reflect income tax effects assuming a combined state and
federal statutory income tax rate of 40%, excluding nondeductible goodwill
amortization. The difference between the Rykoff-Sexton historical
effective tax rate of 40.0% and the effective tax rate of the unaudited
pro forma combined statement of income of 31.7% is due to (i) the
nondeductible goodwill amortization resulting from the Merger which
increased the combined effective rate by 11.1% offset by (ii) the
historical effective tax rate of US Foodservice of 17.4% which decreased
the combined effective rate by 19.4%. See Note 11 to the
99
<PAGE>
consolidated financial statements of US Foodservice included elsewhere
herein for further information regarding the effective tax rate of US
Foodservice.
(8) As part of the Merger, Rykoff-Sexton will issue Rykoff-Sexton Common Shares
to US Foodservice stockholders based on the Exchange Ratio as described in
"THE MERGER--Conversion of Shares; Exchange of Certificates" and will
assume the Assumed Options and the Assumed Warrants as described in "THE
MERGER AGREEMENT--General--Conversion of US Foodservice Common Stock in the
Merger." The weighted average shares outstanding has been computed using
both the minimum possible number of shares issuable in the Merger and the
maximum possible number of shares issuable in the Merger. The minimum
number of shares represents Rykoff-Sexton's historical weighted average
shares plus 10,997,534 shares issued as part of the Merger plus the
dilutive effect of shares issuable pursuant to the Assumed Options and
Assumed Warrants, assuming the Minimum Exchange Ratio. The maximum number
of shares represents Rykoff-Sexton's historical weighted average shares
plus 12,880,552 shares issued as part of the Merger plus the dilutive
effect of shares issuable pursuant to the Assumed Options and Assumed
Warrants, assuming the Maximum Exchange Ratio.
(9) Material nonrecurring charges which result directly from the transaction
which are not considered in the pro forma combined statement of operations
for the fifty-two weeks ended April 29, 1995 include the forgiveness of
notes receivable from the sale of stock to management of $1.0 million, fees
relating to the Receivables Securitization of $2.0 million, and related tax
effects of $2.8 million.
100
<PAGE>
RYKOFF-SEXTON
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THIRTY-NINE WEEKS ENDED JANUARY 27, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR
H&O FOODS,
MERGER, NEW
CREDIT
RYKOFF- PRO FORMA US FACILITY AND
SEXTON H&O FOODS FOR H&O FOODSERVICE RECEIVABLES
(UNAUDITED) (UNAUDITED) PRO FORMA FOODS (UNAUDITED) PRO FORMA SECURITIZATION
(1/27/96) (4/1/95-10/31/95) ADJUSTMENTS ACQUISITION (12/30/95) ADJUSTMENTS (1)(8)
----------- ----------------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $1,314,695 $66,875 $ -- $1,381,570 $1,284,858 $ -- $2,666,428
Cost Of Sales........... 1,053,727 58,411 1,112,138 1,058,967 2,171,105
---------- ------- ------- ---------- ---------- -------- ----------
Gross Profit............ 260,968 8,464 269,432 225,891 495,323
Warehouse, Selling,
General and
Administrative......... 244,863 6,682 217(2) 251,762 184,973 3,869 (2) 440,604
Reversal Of
Restructuring Reserves. (6,441) (6,441) (6,441)
---------- ------- ------- ---------- ---------- -------- ----------
Net Operating Expenses.. 238,422 6,682 217 245,321 184,973 3,869 434,163
---------- ------- ------- ---------- ---------- -------- ----------
Operating Profit........ 22,546 1,782 (217) 24,111 40,918 (3,869) 61,160
Interest Expense, net... 12,452 259 1,262 (3) 13,712 27,647 20,357 (3) 31,514
(261)(3) (29,390)(3)
(2,187)(4)
1,375 (4)
Other Expense........... 10,506 (5) 10,506
---------- ------- ------- ---------- ---------- -------- ----------
Income Before Income
Taxes.................. 10,094 1,523 (1,218) 10,399 13,271 (4,530) 19,140
Provision For Income
Taxes.................. 4,028 122 (6) 4,150 5,794 (264)(6) 9,680
---------- ------- ------- ---------- ---------- -------- ----------
Net Income.............. $ 6,066 $ 1,523 $(1,340) $ 6,249 $ 7,477 $ (4,266) $ 9,460
========== ======= ======= ========== ========== ======== ==========
Weighted Average Shares
Outstanding--
Historical............. 14,965 14,965
========== ==========
Weighted Average Shares
Outstanding--Minimum
Shares................. 26,403 (7)
==========
Weighted Average Shares
Outstanding--Maximum
Shares................. 28,362 (7)
==========
Earnings per Share Data:
Net Income per share--
Historical............ $ 0.41 $ 0.42
========== ==========
Net Income per share--
Minimum Shares........ $ 0.36 (7)
==========
Net Income per share--
Maximum Shares........ $ 0.33 (7)
==========
</TABLE>
101
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE
THIRTY-NINE WEEKS ENDED JANUARY 27, 1996:
(1) Rykoff-Sexton has begun to identify cost savings resulting from a business
integration plan which is expected to be implemented following the Merger.
The business integration plan contemplates, among other things, (i)
elimination of duplicative executive and distribution functions and (ii)
closing and consolidation of certain facilities. Rykoff-Sexton's business
integration plan provides for the events generating the cost savings to
occur in phases. Management has not completed its assessment and thus has
not included the impact of any special charges or cost savings in the pro
forma combined statement of operations for the thirty-nine weeks ended
January 27, 1996. See "THE MERGER--Potential Cost Savings and Operating
Synergies."
(2) Reflects adjustments to depreciation and amortization based on the
preliminary purchase accounting allocations related to property, plant and
equipment and intangible assets acquired in connection with the
acquisition of H&O Foods and the Merger as more fully described in Note
(2) to the unaudited pro forma combined balance sheet. Buildings are being
depreciated over 30 years and goodwill is being amortized over 40 years.
(3) Represents the elimination of historical interest expense on debt which
was refinanced or not assumed, offset by the additional interest expense
that would have been incurred had the acquisition of H&O Foods, the Merger
and the New Credit Facility occurred on May 1, 1994. For purposes of the
unaudited pro forma combined statement of income, the interest rate was
assumed to be LIBOR plus the Applicable Margin as further described in
"THE MERGER--Rykoff-Sexton Financing and Receivables Securitization." The
weighted average rate assumed was 8.26%. The proceeds from the New Credit
Facility will be used to refinance substantially all of the outstanding
debt of US Foodservice and to refinance Rykoff-Sexton's Credit Agreement
dated as of October 25, 1993, among Rykoff-Sexton and BofA, as amended.
The weighted average interest rate on the debt expected to be retired
ranged from 8.61% to 9.11% for US Foodservice's revolver and term loans
and 14.25% on the 14.25% Debentures and 6.98% for Rykoff-Sexton. See Note
6 to the consolidated financial statements of US Foodservice included
elsewhere herein for further information regarding the historical
indebtedness of US Foodservice. See Note 5 to the consolidated financial
statements of Rykoff-Sexton incorporated by reference herein for further
information with respect to the historical indebtedness of Rykoff-Sexton.
(4) Represents the elimination of historical amortization of deferred
financing costs on debt which was refinanced, offset by the amortization
of deferred financing costs on debt that would have been incurred had the
New Credit Facility been in place on May 1, 1994. The deferred financing
costs associated with the New Credit Facility are amortized over the terms
of the related debt, approximately six years.
(5) Represents the loss on the sale of accounts receivable under the asset
securitization program that would have been incurred had the Receivables
Securitization program been in place on May 1, 1994. The loss related to
the sale of receivables represents the yield on the aggregate receivables
sold. The yield under the Receivables Securitization is based on either a
certain base rate plus an applicable margin or LIBOR plus an applicable
margin as determined by the SPC. The computed yield rate for both
securitization programs for purposes of the unaudited pro forma combined
statement of income was 7.0%, assuming a constant level of receivables
secured of $200 million. To the extent that the amount of receivables
secured or the interest rate changes, the amount of the loss could change.
(6) Adjustments to reflect income tax effects assuming a combined state and
federal statutory income tax rate of 40%, excluding nondeductible goodwill
amortization. The difference between the Rykoff-Sexton historical
effective tax rate of 40.0% and the effective tax rate of the unaudited
pro forma combined statement of income of 50.6% is due to (i) the
nondeductible goodwill amortization resulting from the Merger which
increased the combined effective rate by 8.1% and (ii) the historical
effective tax rate of US Foodservice of 43.7% which increased the combined
effective rate by 2.5%. See Note 11 to the consolidated financial
statements of US Foodservice included elsewhere herein for further
information regarding the effective tax rate of US Foodservice.
(7) See Note (8) to Unaudited Pro Forma Combined Statement of Operations for
Fifty-Two Weeks Ended April 29, 1995.
(8) Material nonrecurring charges which result directly from the transaction
which are not considered in the pro forma combined statement of operations
for the thirty-nine weeks ended January 27, 1996 include the forgiveness
of notes receivable from the sale of stock to management of $1.0 million,
fees relating to the Receivables Securitization of $2.0 million, and
related tax effects of $2.8 million.
102
<PAGE>
RYKOFF-SEXTON
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 27, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RYKOFF-
SEXTON US
(UNAUDITED) FOODSERVICE PRO-FORMA
ASSETS 1/27/96 12/30/95 ADJUSTMENTS PRO FORMA
------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Cash And Cash Equivalents... $ 6,628 $ 22,182 $ 13,730 (1) $ 42,540
Accounts Receivable, Net.... 176,785 151,147 (266,667)(3) 61,265
Inventories................. 161,642 88,449 250,091
Prepaid Expenses............ 27,692 10,655 38,347
-------- -------- --------- ----------
Total Current Assets..... 372,747 272,433 (252,937) 392,243
-------- -------- --------- ----------
Property, Plant And
Equipment, Net............. 208,939 109,665 318,604
Goodwill.................... 42,185 213,907 206,340 (2h) 462,432
Other Assets, Net........... 7,860 14,530 66,667 (3) 91,822
11,000 (5)
(8,235)(2d)
-------- -------- --------- ----------
Total Assets............. $631,731 $610,535 $ 22,835 $1,265,101
======== ======== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C>
Short-Term Debt............. 115,888 15,466 (112,094)(1) 19,260
Accounts Payable............ 104,517 114,623 219,140
Accrued Liabilities......... 45,674 29,824 (7,374)(2f) 65,324
(800)(4)
(2,000)(7)
-------- -------- --------- ----------
Total Current
Liabilities............. 266,079 159,913 (122,268) 303,724
Long-Term Debt, Less Current
Portion.................... 137,891 343,334 335,000 (1) 487,729
(338,696)(1)
10,200 (2e)
Deferred Income Taxes....... 11,073 9,251 20,324
Other Long-Term Liabilities. 1,676 14,050 (9,087)(2g) 7,639
1,000 (6)
-------- -------- --------- ----------
Total Liabilities........ 416,719 526,548 (123,851) 819,416
Mandatory Redeemable
Preferred Stock............ 53,196 (5,216)(2g)
(47,980)(2g)
Shareholders' Equity
Common Stock, At Stated
Value...................... 1,513 89 (89)(2c) 2,801
1,288 (2a)
Additional Paid-In Capital.. 95,136 124,020 (124,020)(2c) 323,721
219,712 (2a)
8,873 (2b)
Retained Earnings........... 122,343 (91,797) 91,797 (2c) 123,143
(1,200)(4)
2,000 (7)
Notes Receivable from Sale
of Stock................... (980) 980 (7)
-------- -------- --------- ----------
218,992 31,332 199,341 449,665
Less: Treasury Stock, At
Cost....................... 3,980 541 (541)(2c) 3,980
-------- -------- --------- ----------
Total Shareholders'
Equity.................. 215,012 30,791 199,882 445,685
-------- -------- --------- ----------
Total Liabilities and
Shareholders' Equity.... $631,731 $610,535 $ 22,835 $1,265,101
======== ======== ========= ==========
</TABLE>
103
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JANUARY 27,
1996:
(1) Gives effect to the New Credit Facility with the incurrence of debt
pursuant thereto as contemplated by the Merger, the Receivables
Securitization, and the application of the net proceeds therefrom (after
payment of the debt, Merger related fees, and mandatory redeemable
preferred stock) as follows (in thousands):
<TABLE>
<S> <C>
Proceeds from New Credit Facility............................. $ 335,000
Proceeds from the Receivables Securitization (see Note (3)
below)....................................................... 200,000
Repayment of bank borrowings.................................. (450,790)
Merger related fees (see Notes (4)(5)(6) below)............... (22,500)
Payment of Preferred Stock (see Note (2) below)............... (47,980)
---------
Net Cash.................................................. $ 13,730
=========
</TABLE>
(2) Rykoff-Sexton acquired substantially all of the assets of Continental in
February 1995. The aggregate purchase price was $27.0 million, which was
financed through available cash resources and issuance of a promissory
note. See Note 2 of Rykoff-Sexton's Annual Report on Form 10-K
incorporated by reference herein for further description. Continental is
included in the historical Rykoff-Sexton balance sheet as of January 27,
1996.
Rykoff-Sexton acquired substantially all of the assets of H&O Foods in
November 1995. Rykoff-Sexton paid approximately $30.7 million, which
consisted of cash and the issuance of unsecured promissory notes.
Additionally, Rykoff-Sexton agreed to assume certain H&O Foods liabilities.
The final purchase price is subject to certain post-closing purchase price
adjustments. See Rykoff-Sexton's Current Report on Form 8-K dated November
1, 1995, as amended, incorporated by reference herein for further
description. H&O Foods is included in the historical Rykoff-Sexton balance
sheet as of January 27, 1996.
Consideration for the Merger will consist of issuance of Rykoff-Sexton
Common Shares based on the Exchange Ratio as described in "THE MERGER--
Conversion of Shares; Exchange of Certificates." Rykoff-Sexton will assume
the Assumed Options and the Assumed Warrants, which will be exercisable for
a number of Rykoff-Sexton Common Shares based on the Exchange Ratio as
described in "THE MERGER AGREEMENT--General--Conversion of US Foodservice
Common Stock in the Merger."
The acquisitions of Continental and H&O Foods and the Merger will each be
accounted for as a purchase pursuant to APB Opinion No. 16, "Business
Combinations." Accordingly, the purchase cost will be allocated to the
assets and the liabilities based on their relative fair values. Such
allocations are subject to final determination based on valuations, reviews
of conformity of accounting policies and other studies to be performed. The
final values may differ from those set forth below for US Foodservice.
<TABLE>
<CAPTION>
US FOODSERVICE
--------------
(IN THOUSANDS)
<S> <C>
Purchase cost:
Equity issued:
Common Stock........................................... $ 1,288
Additional paid-in capital............................. 219,712
Stock options and warrants assumed....................... 8,873
Acquisition costs (see Note (6) below)................... 10,500
Less estimated book value of net assets acquired......... (30,791)
--------
Excess of purchase cost over book value................ $209,582
========
Allocation of excess of purchase cost over book value to
assets of Rykoff-Sexton:
Long-term deferred assets.............................. $ (8,235)
Long-term debt......................................... (10,200)
Income taxes payable................................... 7,374
Estimated discount on redemption of Preferred Stock.... 14,303
Goodwill............................................... 206,340
--------
$209,582
========
</TABLE>
104
<PAGE>
The following are the pro forma adjustments on the unaudited pro forma
combined balance sheet as they relate to the excess of purchase price over
book value:
(2a) Common stock and additional paid-in capital have been computed using the
number of shares to be issued assuming an Exchange Ratio of 1.457 (the
maximum Exchange Ratio, which results in the maximum number of Rykoff-
Sexton Common Shares that may be issued in connection with the Merger)
and a Closing Date Market Price of $17.16. If a Closing Date Market Price
of $15.75 (the closing price of one Rykoff-Sexton Common Share as
reported by the NYSE Composite Tape on February 2, 1996) is assumed,
equity issued would decrease by approximately $18 million. Under the
terms of the Merger Agreement, Rykoff-Sexton will value the transaction
based on the Closing Date Market Price at the time the transaction is
consummated.
(2b) Represents the value of the stock options and warrants assumed as part of
the Merger as described in "The MERGER AGREEMENT--General--Conversion of
US Foodservice Common Stock in the Merger." The value of these assumed
stock options and warrants was computed using a Closing Date Market Price
of $17.16. Rykoff-Sexton is undertaking a study to value these assumed
stock options and warrants. Final value may be different than that
computed above.
(2c) Represents the elimination of the historical equity components of US
Foodservice (including the minimum pension liability classified within
retained earnings).
(2d) Certain long-term deferred assets were determined to have zero value.
(2e) Long-term debt of US Foodservice has been written up to the value to be
paid with the proceeds from the New Credit Facility.
(2f) Adjustments 2d and 2e decrease income taxes payable.
(2g) The Exchangeable Preferred Stock and the 10% Preferred Stock of US
Foodservice will be redeemed at a discount. On October 15, 1995, the
total redemption price under the redemption agreements was $44.0 million.
The book value of the Preferred Stock and accrued dividends on said date
was $60.8 million, resulting in a discount of $16.8 million. The discount
has been reduced by estimated dividends payable of $2.5 million (as
provided in the redemption agreements) from October 15, 1995 to the
anticipated redemption dates. The 10% Preferred Stock was redeemed on
March 1, 1996 for approximately $21.3 million and it is anticipated that
the Exchangeable Preferred Stock will be redeemed for approximately $26.7
million, assuming a redemption date of May 31, 1996, for a total
redemption of $48.0 million.
(2h) The difference in the excess of purchase cost over book value and the
amounts allocated to assets was assigned to goodwill.
Management has not completed its assessment of its business integration plan,
as discussed in Note (1) of the unaudited pro forma combined statement of
operations, and thus has not included the costs associated with the business
integration plan in the balance sheet as of January 27, 1996.
(3) Represents the effects of the Receivables Securitization, as follows (in
thousands):
<TABLE>
<S> <C>
Gross receivables sold.......................................... $266,667
Less: Overcollateralization..................................... (66,667)
--------
$200,000
========
</TABLE>
As part of the Receivables Securitization, Rykoff-Sexton will sell
undivided interests in a pool of receivables. The overcollateralization
represents Rykoff-Sexton's residual interest in the pool of receivables
based on historical loss factors and effective yield rates. See "THE
MERGER--Rykoff-Sexton Financing and Receivables Securitization" for a
further description of the New Credit Facility and the Receivables
Securitization.
105
<PAGE>
(4) Fees relating to the Receivables Securitization of $2.0 million, net of
applicable tax effects of $0.8 million, have been expensed.
(5) Fees relating to the New Credit Facility of $11.0 million have been
capitalized as a long-term asset.
(6) Acquisition costs of $10.5 million relating to the Merger have been
allocated to the purchase price. Of the $10.5 million acquisition costs,
$9.5 million are paid concurrent with the Merger and $1.0 million would be
paid upon future registration of the Rykoff-Sexton Common Shares under the
Registration Rights Agreement.
(7) Represents the forgiveness of notes receivable from the sale of stock to
management of $1.0 million and applicable income taxes of $2.0 million.
106
<PAGE>
DESCRIPTION OF RYKOFF-SEXTON CAPITAL STOCK
GENERAL
Rykoff-Sexton's authorized capital stock consists of 40,000,000 Common
Shares, of which 14,798,820 shares were outstanding as of March 31, 1996, and
10,000,000 shares of preferred stock ("Rykoff-Sexton Preferred Stock"), no
shares of which are outstanding. No series of Rykoff-Sexton Preferred Stock
has been designated other than 50,000 shares of Series A Junior Participating
Preferred Stock, par value $.10 per share (the "Series A Preferred Stock").
The maximum number of Rykoff-Sexton Common Shares to be issued in connection
with the Merger (including Rykoff-Sexton Common Shares reserved for issuance
upon exercise of the Assumed Warrants and Assumed Options) is 14,294,457. The
following description is a summary of the material provisions of Rykoff-
Sexton's capital stock and is qualified in its entirety by reference to the
provisions of the Rykoff-Sexton Charter, its By-laws (the "Rykoff-Sexton By-
laws") and the Rights Agreement, copies of which have been filed as exhibits
to the Registration Statement of which the Proxy Statement/Prospectus forms a
part.
COMMON SHARES, RIGHTS AND SERIES A PREFERRED STOCK
The following description of Rykoff-Sexton Common Shares and certain
associated rights should be read carefully by the holders of US Foodservice
Common Stock, because, at the Effective Time, each issued and outstanding
share of US Foodservice Common Stock will be converted into Rykoff-Sexton
Common Shares based on the Exchange Ratio as set forth in the Merger Agreement
and described herein.
Rykoff-Sexton Common Shares
Subject to any prior rights of any Rykoff-Sexton Preferred Stock then
outstanding, holders of Rykoff-Sexton Common Shares are entitled to such
dividends as may be declared from time to time by the Rykoff-Sexton Board of
Directors out of funds legally available therefor. Each holder of Rykoff-
Sexton Common Shares is entitled to one vote for each share owned by such
holder on all matters submitted to a vote of the stockholders of Rykoff-
Sexton. Such shares are not entitled to any cumulative voting rights. In the
event of any liquidation, dissolution or winding up of Rykoff-Sexton, holders
of Rykoff-Sexton Common Shares are entitled to share equally and ratably in
any assets remaining after the payment of all debt and liabilities, subject to
the prior rights, if any, of holders of Rykoff-Sexton Preferred Stock. Holders
of Rykoff-Sexton Common Shares have no preemptive or other subscription or
conversion rights. Rykoff-Sexton Common Shares are not subject to redemption
and the outstanding Rykoff-Sexton Common Shares are, and the Rykoff-Sexton
Common Shares to be issued in connection with the Merger will be, fully paid
and nonassessable.
Rights
Under the Rights Agreement, each outstanding Rykoff-Sexton Common Share is
accompanied by 0.64 preferred share purchase rights (each, a "Right"), and
0.64 Rights will be attached to each Rykoff-Sexton Common Share to be issued
in connection with the Merger or pursuant to Assumed Options or Assumed
Warrants. Except as described below, each Right entitles the registered holder
to purchase from Rykoff-Sexton a unit (a "Unit") consisting of one two-
hundredth of a share of Series A Preferred Stock at a purchase price of $100
per Unit (the "Purchase Price"), subject to adjustment. The description and
terms of the Rights are set forth in the Rights Agreement.
From the date of the Rights Agreement, the Rights attach implicitly to all
Rykoff-Sexton Common Share certificates outstanding. No separate Right
certificates have been distributed. A "Distribution Date" for the Rights will
occur upon the earlier of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person")
has acquired beneficial ownership of 15% or more of the then outstanding
Rykoff-Sexton Common Shares, excluding Rykoff-Sexton, any subsidiary of
Rykoff-Sexton, any employee benefit plan of Rykoff-Sexton or of any subsidiary
of Rykoff-Sexton, any entity organized,
107
<PAGE>
appointed or established by Rykoff-Sexton for or pursuant to the terms of any
such plan, or the ML Entities if the ML Entities shall have executed a written
agreement with Rykoff-Sexton (and approved by the Rykoff-Sexton Board of
Directors) on or prior to the date on which the ML Entities (together with its
affiliates) became the beneficial owner of 15% or more of the Rykoff-Sexton
Common Shares then outstanding, which agreement imposes one or more
limitations on the ML Entities' beneficial ownership of Rykoff-Sexton Common
Shares and if, and so long as, such written agreement (a "Written Agreement")
(or any amendment thereto approved by at least a majority of the members of
the Rykoff-Sexton Board of Directors who are not affiliates or associates of
an ML Entity or representatives or nominees of an ML Entity or any such
affiliate or associate (the "ML Entity Directors")) continues to be in effect
and bind the ML Entities and the ML Entities are in compliance (as determined
by the Rykoff-Sexton Board of Directors in its discretion by at least a
majority of the members who are not ML Entity Directors) with the terms of
such Written Agreement (including any such amendment), provided that no
amendment of any such Written Agreement shall cure any prior breach of such
Written Agreement or any amendment thereto or (ii) 10 days following the
commencement of (or first public announcement of the intent to commence) a
tender offer or exchange offer if, upon consummation thereof, the person or
group proposing such offer would be the beneficial owner of 30% or more of the
outstanding Rykoff-Sexton Common Shares. The Standstill Agreement would
qualify as a Written Agreement that would exclude the ML Entities from being
an Acquiring Person, so long as the conditions described above are satisfied.
Until the Distribution Date, the Rights will be transferred with and only
with Rykoff-Sexton Common Share certificates. Until the Distribution Date (or
earlier redemption or expiration of the Rights), certificates for Rykoff-
Sexton Common Shares issued since December 18, 1986 (the record date for the
initial distribution of Rights) upon transfer or new issuance of Rykoff-Sexton
Common Shares contain or will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date, the surrender for
transfer of any certificates for Rykoff-Sexton Common Shares will also
constitute the transfer of the Rights associated with the Rykoff-Sexton Common
Shares represented by such certificate.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on December 18, 1996, unless earlier redeemed by Rykoff-Sexton. As
described below, Rykoff-Sexton contemplates amending the Rights Agreement
prior to the Effective Time to, among other things, extend the expiration date
of the Rights.
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of Rykoff-Sexton Common Shares as of the close of business
on the Distribution Date. From and after a Distribution Date, such separate
Right Certificates alone will evidence the Rights.
In the event that, at any time following the Distribution Date, (i) Rykoff-
Sexton is the surviving corporation in a merger with an Acquiring Person and
Rykoff-Sexton Common Shares are not changed or exchanged, (ii) any person
becomes the beneficial owner of 15% or more of the then outstanding Rykoff-
Sexton Common Shares, unless the event causing the 15% threshold to be crossed
is (a) an acquisition of Rykoff-Sexton Common Shares by the ML Entities, if
the ML Entities shall have executed a Written Agreement and if, and so long
as, such Written Agreement (or any amendment thereto approved by at least a
majority of the members of the Rykoff-Sexton Board of Directors who are not ML
Entity Directors) continues to be in effect and bind the ML Entities and the
ML Entities are in compliance (as determined by the Rykoff-Sexton Board of
Directors in its discretion by at least a majority of the members who are not
ML Entity Directors) with the terms of such Written Agreement (including any
such amendment), provided that no amendment of any such Written Agreement
shall cure any prior breach of such Written Agreement or any amendment
thereto, (b) a transaction in which the holders of Rights have the right to
receive common stock of the acquiring entity, as described below, or (c) an
acquisition of Rykoff-Sexton Common Shares pursuant to a tender offer or
exchange offer of all outstanding Rykoff-Sexton Common Shares at a price and
on terms determined by a majority of "disinterested" members of the Rykoff-
Sexton Board of Directors to be fair and otherwise in the best interests of
Rykoff-Sexton and its stockholders, or (iii) an Acquiring Person engages in
one or more "self-dealing" transactions as set forth in the Rights Agreement
(each a "Flip-In Event"), then each holder of a Right will thereafter have the
right to receive,
108
<PAGE>
upon exercise thereof at the then current Purchase Price of the Right, Rykoff-
Sexton Common Shares (or, in certain circumstances, a combination of cash,
other property, Rykoff-Sexton Common Shares or other securities) that have a
value of two times the Purchase Price of the Right. The Standstill Agreement
would qualify as a Written Agreement that would exclude the acquisition of
Rykoff-Sexton Common Shares by the ML Entities from being a triggering event
under the foregoing provisions, so long as the conditions described above are
satisfied. In the event that, at any time following the Distribution Date,
Rykoff-Sexton is acquired in a merger or other business combination transaction
or 50% or more of its assets or earning power are sold, provision shall be made
so that each holder of a Right will thereafter have the right to receive, upon
the exercise thereof at the then current Purchase Price of the Right, common
stock of the acquiring entity which has a value of two times the Purchase Price
of the Right. Notwithstanding any of the foregoing, following the occurrence of
any of the events described above in this paragraph, any Rights that are or
were beneficially owned by an Acquiring Person or affiliates or associates of
an Acquiring Person will be null and void.
The Purchase Price payable and the number of Units of Series A Preferred
Stock or other securities or property issuable upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of the
Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for Series A
Preferred Stock or convertible securities at less than the current market price
of the Series A Preferred Stock or (iii) upon the distribution to holders of
the Series A Preferred Stock of evidences of indebtedness or assets (excluding
regular quarterly cash dividends) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least 1% in the
Purchase Price. No fractional Units will be issued and, in lieu thereof, an
adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise.
At any time until 30 days following the public announcement that a person or
group of affiliated or associated persons has acquired beneficial ownership of
15% or more of the outstanding Rykoff-Sexton Common Shares, Rykoff-Sexton may
redeem the Rights in whole, but not in part, at a price of $.01 per Right (the
"Redemption Price"). The Rykoff-Sexton Board of Directors may from time to
time, in its discretion, extend the period for redemption. Immediately upon
action of the Rykoff-Sexton Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of Rykoff-Sexton (other than those as an existing stockholder),
including, without limitation, the right to vote or to receive dividends.
The Series A Preferred Stock purchasable upon exercise of the Rights will be
nonredeemable and will be subordinate to any other series of Rykoff-Sexton
Preferred Stock that may be issued in the future unless such series is
specifically stated to be junior. Each whole share of Series A Preferred Stock
will have a minimum preferential quarterly dividend of either $20 per share or
200 times the dividend per share declared on Rykoff-Sexton Common Shares,
whichever is greater. In the event of liquidation, the holders of Series A
Preferred Stock will receive a preferred liquidation payment of either $200 per
share or 200 times the payment made per share of Rykoff-Sexton Common Shares,
whichever is greater. Each whole share of Preferred Stock will have 200 votes,
voting together with the Rykoff-Sexton Common Shares. In the event of any
merger, consolidation or other transaction in which Rykoff-Sexton Common Shares
are exchanged, each share of Series A Preferred Stock will be entitled to
receive 200 times the amount received per Rykoff-Sexton Common Share. The
rights of the Series A Preferred Stock are protected by customary antidilution
provisions. Because of the nature of the Series A Preferred Stock's dividend,
liquidation and voting rights, Rykoff-Sexton expects that the value of the one
two-hundredth of a share of Series A Preferred Stock purchasable (as described
above) upon the exercise of each Right would approximate the value of one
Rykoff-Sexton Common Share.
109
<PAGE>
The Rights Agreement and the Rights have certain anti-takeover effects. The
Rights will cause substantial dilution to a person or group that attempts to
acquire Rykoff-Sexton on terms not approved by the Rykoff-Sexton Board of
Directors. The Rights should not interfere with any merger or other business
combination approved by the Rykoff-Sexton Board of Directors, including the
Merger, because of the ability of the Rykoff-Sexton Board of Directors and the
Rights Agent to amend the Rights Agreement and because the Rights may be
redeemed by the Rykoff-Sexton Board of Directors at the Redemption Price until
30 days following the public announcement that a person or group of affiliated
and associated persons has acquired beneficial ownership of 15% or more of the
outstanding Rykoff-Sexton Common Shares.
The terms of the Rights Agreement may be amended by Rykoff-Sexton and the
Rights Agent, but following a Distribution Date no amendment may adversely
affect the interests of holders of the Rights.
Amendments to Rights Agreement
In connection with the Merger negotiations, the Rights Agreement was amended
twice. Rykoff-Sexton and the then Rights Agent entered into a Second Amendment
to Rights Agreement as of December 4, 1995 (the "Second Amendment"). The Second
Amendment provided that the negotiation and execution of the Letter of Intent,
and the preliminary negotiations with respect to the Merger would not cause any
person to be deemed an Acquiring Person or to beneficially own any Rykoff-
Sexton Common Shares.
Rykoff-Sexton and the Rights Agent entered into the Third Amendment to the
Rights Agreement dated as of January 31, 1996 to provide that the ML Entities
would not be considered an Acquiring Person or cause a Flip-In Event to occur,
notwithstanding beneficial ownership by the ML Entities of 15% or more of the
outstanding Rykoff-Sexton Common Shares, if the ML Entities shall have executed
a Written Agreement and if, and so long as, such Written Agreement (or any
amendment thereto approved by at least a majority of the members of the Rykoff-
Sexton Board of Directors who are not ML Entity Directors) continues to be in
effect and bind the ML Entities and the ML Entities are in compliance (as
determined by the Rykoff-Sexton Board of Directors in its discretion by at
least a majority of the members who are not ML Entity Directors) with the terms
of such Written Agreement (including any such amendment), provided that no
amendment of any such Written Agreement shall cure any prior breach of such
Written Agreement or any amendment thereto. As noted above, the Standstill
Agreement would qualify as a Written Agreement that would exclude the ML
Entities from being considered an Acquiring Person and exclude the acquisition
by the ML Entities of Rykoff-Sexton Common Shares from constituting a Flip-In
Event, so long as the conditions described above are satisfied.
The Third Amendment also reduced from 25% to 15% the percentage of beneficial
ownership of Rykoff-Sexton Common Shares by a person (other than certain
affiliates of Rykoff-Sexton) that will result in a person or group of
affiliated or associated persons constituting an Acquiring Person or a Flip-In
Event occurring.
Rykoff-Sexton anticipates amending and restating the Rights Agreement prior
to the Effective Time to extend the termination date of the Rights for an
additional 10-year period and to effect certain technical changes.
PREFERRED STOCK
Under the Rykoff-Sexton Charter, the Rykoff-Sexton Board of Directors has the
authority, without further action by the stockholders, to issue up to 10
million shares of Rykoff-Sexton Preferred Stock in one or more series and to
fix the voting powers, designations, preferences and the relative participating
optional or other special rights and qualifications, limitations and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series. To date, the Rykoff-Sexton Board of Directors has so
fixed only the Series A Preferred Stock. Because Rykoff-Sexton's Board of
Directors has the power to establish the preferences and rights of the shares
of any additional series of Rykoff-Sexton Preferred Stock, it may afford
holders of any such Rykoff-Sexton Preferred Stock preferences, powers and
rights (including voting rights), senior to the rights of holders of Rykoff-
Sexton Common Shares, which could adversely affect the holders of Rykoff-Sexton
Common Shares.
110
<PAGE>
THE WARRANTS
Pursuant to the Merger Agreement, Rykoff-Sexton will assume the obligations
of US Foodservice under the Common Stock Purchase Warrants of US Foodservice
(the "US Foodservice Warrants"). The US Foodservice Warrants evidence the
right to acquire a total of 227,700 shares of US Foodservice Common Stock at a
purchase price of $15.35 per share.
Under the terms of the US Foodservice Warrants, US Foodservice may not
effect the Merger unless, prior to the consummation of the Merger, Rykoff-
Sexton has assumed the obligations of US Foodservice under the US Foodservice
Warrants by a written instrument delivered to, and reasonably satisfactory to,
the holders of at least a majority of the shares of US Foodservice Common
Stock issuable upon exercise of the outstanding US Foodservice Warrants, and
has provided such holders with an opinion of counsel reasonably satisfactory
to such holders to the effect that the US Foodservice Warrants will continue
in full force and effect after the Merger. To satisfy this condition, it is
anticipated that Rykoff-Sexton will issue Common Stock Purchase Warrants of
Rykoff-Sexton (the "New Warrants") to the holders of the US Foodservice
Warrants at the Effective Time in replacement of the Assumed Warrants. The
terms of the New Warrants will be identical to the terms of the US Foodservice
Warrants required to be assumed by Rykoff-Sexton under the terms of the Merger
Agreement, except for adjustments to the purchase price and the number of
shares issuable to reflect the Exchange Ratio and certain changes to reflect
the status of Rykoff-Sexton as a public company and the termination of the
Stockholders Agreement.
Giving effect to the Merger, and assuming the maximum Exchange Ratio, the
New Warrants will evidence the right to acquire approximately 331,761 Rykoff-
Sexton Common Shares (representing approximately 2.3% of the Rykoff-Sexton
Common Shares on a fully diluted basis) at a purchase price of $10.54 per
share. The purchase price of the New Warrants, and the number of Rykoff-Sexton
Common Shares for which the New Warrants will be exercisable, are subject to
adjustment in the event of certain issuances of Rykoff-Sexton Common Shares
without consideration or for consideration below market prices, stock
dividends, stock splits, share combinations, recapitalizations and similarly
dilutive events.
Each New Warrant will be exercisable until September 30, 2005. The holders
of New Warrants will not have any voting rights until, and to the extent that,
the New Warrants are exercised for Rykoff-Sexton Common Shares. The holders of
the New Warrants will be entitled to certain "demand" and "piggyback"
registration rights with respect to the Rykoff-Sexton Common Shares issued or
issuable upon exercise of the New Warrants.
DESCRIPTION OF US FOODSERVICE CAPITAL STOCK
The authorized capital stock of US Foodservice consists of 50,000,000 shares
of Class A Common Stock, 50,000,000 shares of Class B Common Stock and two
million shares of preferred stock, $.01 par value ("US Foodservice Preferred
Stock"). As of January 31, 1996, all outstanding US Foodservice Common Stock
was subject to a .396-for-1 reverse stock split. As of March 31, 1996,
8,019,254.8759 shares of US Foodservice Class A Common Stock were issued and
outstanding and 37,152.5119 shares were held as treasury stock, and
821,206.2466 shares of US Foodservice Class B Common Stock were issued and
outstanding. As of March 31, 1996, 33,564.35 shares of US Foodservice
Preferred Stock were designated as 10% Preferred Stock, of which no shares
were issued and outstanding. As of March 31, 1996, 314,000 shares of US
Foodservice Preferred Stock were designated as Exchangeable Preferred Stock,
of which 246,179 shares were issued and outstanding. The following description
is a summary of the material provisions of US Foodservice's capital stock.
COMMON STOCK
Subject to the voting rights of holders of any then outstanding US
Foodservice Preferred Stock, holders of US Foodservice Class A Common Stock
are entitled to one vote for each share held of record and holders of US
111
<PAGE>
Foodservice Class B Common Stock are entitled to one-sixth ( 1/6) of a vote
per share held of record voting as a single class with the Class A Common
Stock on all matters submitted to a vote of the stockholders, except that
holders of Class B Common Stock are entitled to one vote per share held of
record and vote as a single class with the Class A Common Stock on any
consolidation or merger of US Foodservice with or into any other corporation
or corporations, any sale, lease or exchange of all or substantially all of US
Foodservice's property and assets, and any liquidation, dissolution or winding
up of US Foodservice voted on by US Foodservice stockholders. Shares of US
Foodservice Common Stock do not have cumulative voting rights. Holders of a
majority of the shares of the US Foodservice Common Stock represented at a
meeting can elect all of the directors. Subject to preferences that may be
applicable to any then outstanding US Foodservice Preferred Stock, holders of
US Foodservice Common Stock are entitled to receive ratably such dividends as
may be declared by the US Foodservice Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up
of US Foodservice, holders of the US Foodservice Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding US Foodservice Preferred Stock.
Except as provided in the Stockholders Agreement, which will terminate as of
the Effective Time, holders of US Foodservice Common Stock have no preemptive
rights and have no right to convert their US Foodservice Common Stock into any
other securities. There are no redemption or sinking fund provisions
applicable to the US Foodservice Common Stock. All outstanding shares of US
Foodservice Common Stock are, and the US Foodservice Common Stock to be
outstanding immediately prior to the Effective Time will be, fully paid and
nonassessable.
PREFERRED STOCK
The US Foodservice Board of Directors has the authority, without further
action by the stockholders, to issue up to two million shares of US
Foodservice Preferred Stock in one or more series and to fix the voting
powers, designations, preferences, and relative, participating, optional, or
other special rights, and qualifications, limitations, and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any
series. Because the US Foodservice Board of Directors has the power to
establish the preferences and rights of the shares of any such series of US
Foodservice Preferred Stock, it may afford holders of any US Foodservice
Preferred Stock preferences, powers, and rights (including voting rights,
senior to the rights of holders of US Foodservice Common Stock, which could
adversely affect the rights of holders of US Foodservice Common Stock).
The US Foodservice Board of Directors has created two classes of Preferred
Stock. The 10% Preferred Stock consists of 33,564.35 authorized shares, having
the stated value of $10.00 per share of which no shares are issued and
outstanding.
The Exchangeable Preferred Stock is limited to 314,000 shares and ranks on
parity with the 10% Preferred Stock. The holders of Exchangeable Preferred
Stock are entitled to receive cumulative dividends at the initial annual rate
of $15 per share. Restrictions under the Existing Credit Agreement have
limited US Foodservice's ability to pay cash dividends and such dividends have
been accruing since January 15, 1994. In the event of any dissolution,
liquidation or winding up of US Foodservice, the holders of Exchangeable
Preferred Stock then outstanding are entitled to be paid out of the assets of
US Foodservice, an amount in cash equal to $100 for each share outstanding,
together with an amount in cash equal to all accrued and unpaid dividends.
Mandatory redemption begins on October 15, 2001, and continues on October 15,
2002 and October 15, 2003. US Foodservice may, at its sole option, exchange,
on any dividend payment date, shares of Exchangeable Preferred Stock then
outstanding, in whole for US Foodservice's 15% Junior Subordinated Exchange
Debentures due 2003. This option has not been exercised by US Foodservice. US
Foodservice may redeem the Exchangeable Preferred Stock at a discount pursuant
to the ML Redemption Agreement. See "THE MERGER--Redemption or Purchase of
Preferred Stock."
DIRECTORS' LIABILITY
The US Foodservice Charter includes provisions to eliminate the personal
liability of its directors for monetary damages resulting from breaches of
their fiduciary duty. This provision does not eliminate liability for
112
<PAGE>
breaches of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, violations under
Section 174 of the DGCL concerning the unlawful payment of dividends or stock
redemption or repurchases, or any transaction from which the director derives
an improper personal benefit. In addition, these provisions will not limit the
liability of US Foodservice directors under Federal securities laws. US
Foodservice believes that these provisions are necessary to attract and retain
qualified persons as directors.
COMPARATIVE RIGHTS OF RYKOFF-SEXTON STOCKHOLDERS AND
US FOODSERVICE STOCKHOLDERS
US Foodservice is a closely held Delaware corporation, with a small number
of institutional stockholders that exercise control of the corporation. Such
persons' rights as stockholders have been governed by the Stockholders
Agreement as well as the US Foodservice Charter and US Foodservice's By-laws
(the "US Foodservice By-laws"). Following the Merger, the Stockholders
Agreement will have been terminated and the US Foodservice stockholders will
hold shares in Rykoff-Sexton, a Delaware corporation and a public company, and
their rights will be governed by Delaware law, the Rykoff-Sexton Charter, the
Rykoff-Sexton By-laws and the Rights Agreement. Accordingly, the material
difference between the present rights of US Foodservice stockholders and their
rights as holders of Rykoff-Sexton securities is that following the Merger
they will be stockholders in a public company governed by the Rykoff-Sexton
Charter and By-laws as well as the Rights Agreement rather than the US
Foodservice Charter and By-laws and the Stockholders Agreement.
Other significant differences between the rights of US Foodservice
stockholders and Rykoff-Sexton stockholders are set forth below. This summary
is not intended to be relied upon as an exhaustive list or detailed
description of the provisions discussed and is qualified in its entirety by
the Rykoff-Sexton Charter and By-laws and the Rights Agreement and by the US
Foodservice Charter and By-laws and the Stockholders Agreement, to which US
Foodservice stockholders are referred. The Standstill Agreement also contains
provisions relating to, among other things, the right of the ML Entities to
designate representatives to serve on the Rykoff-Sexton Board of Directors,
removal of such representatives and the filling of vacancies. See "OTHER
AGREEMENTS--The Standstill Agreement."
AUTHORIZED SHARES OF CAPITAL STOCK; DIVIDEND RIGHTS
US Foodservice. The US Foodservice Charter authorizes the issuance of
50,000,000 shares of Class A Common Stock, 50,000,000 shares of Class B Common
Stock and 2,000,000 shares of US Foodservice Preferred Stock. The US
Foodservice Board of Directors may issue US Foodservice Preferred Stock from
time to time in one or more series, and may fix the voting powers,
designations, preferences, and relative, participating, optional, or other
special rights, and qualifications, limitations and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series.
The US Foodservice Charter provides the Class A Common Stock and Class B
Common Stock with exchange rights. Subject to certain restrictions set forth
in the US Foodservice Charter and the Stockholders Agreement, each record
holder of US Foodservice Common Stock is entitled at any time to exchange any
or all of the shares of Class A Common Stock or Class B Common Stock held by
such holder for the same number of shares of Class B Common Stock or Class A
Common Stock, as the case may be. The US Foodservice Charter also provides for
automatic conversion of Class B Common Stock, with the exception of such stock
owned by the Equitable Entities, into Class A Common Stock in the event that
US Foodservice attempts to list any shares of US Foodservice Common Stock on a
national securities exchange or on the over-the-counter market, and such
exchange informed US Foodservice of its unwillingness to authorize the shares
for listing because of the outstanding shares of Class B Common Stock. In the
event that any shares of Class B Common Stock are registered under the
Securities Act and US Foodservice has simultaneously registered an equal
number of shares of Class A Common Stock, then immediately upon the sale of
registered shares of Class B Common Stock, such stock shall automatically
convert into an equal number of shares of registered Class A Common Stock.
113
<PAGE>
Subject to preferences that may be applicable to any then outstanding US
Foodservice Preferred Stock, holders of US Foodservice Common Stock are
entitled to receive ratably such dividends as may be declared by the US
Foodservice Board of Directors.
Rykoff-Sexton. The Rykoff-Sexton Charter authorizes the issuance of
40,000,000 Common Shares and 10,000,000 shares of Rykoff-Sexton Preferred
Stock, 50,000 of which have been designated as Series A Preferred Stock. As of
March 31, 1996, 15,131,516 Rykoff-Sexton Common Shares were issued, of which
14,798,820 were outstanding, and no shares of Preferred Stock were issued and
outstanding. The shares of Rykoff-Sexton Preferred Stock may be issued from
time to time by the Rykoff-Sexton Board of Directors in one or more series,
and the variations, relative rights and preferences as between different
series of each class may be fixed and determined by resolution of the Rykoff-
Sexton Board of Directors with respect to voting rights, the rate of dividend,
redemption, liquidation payments, sinking fund provisions, conversion and the
number of shares constituting any series.
During the time that any series of Rykoff-Sexton Preferred Stock is
outstanding, no dividends may be declared or paid by the Rykoff-Sexton Board
of Directors on the Rykoff-Sexton Common Shares, unless dividends on all
outstanding shares of Rykoff-Sexton Preferred Stock for the current and all
past dividend periods have been declared and paid or provision made for the
payment thereof.
REDEMPTION AND REPURCHASE OF CAPITAL STOCK
Under the DGCL, subject to certain limitations, a corporation's stock may be
made subject to redemption by the corporation at its option, at the option of
the holders of such stock or upon the happening of a specified event. The DGCL
also provides that a corporation may repurchase its own shares with certain
exceptions.
US Foodservice. As previously described, the US Foodservice Board of
Directors may fix the terms of redemption of US Foodservice Preferred Stock.
The Stockholders Agreement requires, with certain exceptions, that a
redemption or offer to purchase made by US Foodservice for equity securities
of US Foodservice must be approved by the affirmative vote of the holders of
at least two-thirds of the US Foodservice Class A Common Stock. The
Stockholders Agreement also provides that any such redemption or offers to
purchase US Foodservice Common Stock must be made available to each party to
the Stockholders Agreement on a pro rata basis and at the same consideration
per share.
Rykoff-Sexton. As previously described, the Rykoff-Sexton Charter provides
the Rykoff-Sexton Board of Directors with the power to fix redemption and
repurchase rights, preferences and limitations of Rykoff-Sexton Preferred
Stock.
LIQUIDATION RIGHTS
The rights of holders of shares of US Foodservice Common Stock upon the
liquidation or dissolution of US Foodservice are substantially the same as
those of the holders of Rykoff-Sexton Common Shares.
VOTING RIGHTS
US Foodservice. Subject to the voting rights of holders of any then
outstanding US Foodservice Preferred Stock, holders of Class A Common Stock
are entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders, and the holders of Class B Common
Stock are entitled to one-sixth of one vote per share and shall vote as a
single class with the Class A Common Stock on all matters submitted to a vote
of the stockholders. Holders of Class B Common Stock are entitled to one vote
for each share, however, and shall vote as a single class with the Class A
Common Stock, with respect to any consolidation or merger of US Foodservice,
any sale, lease or exchange of all or substantially all of the property and
assets of US Foodservice, and any liquidation, dissolution or winding up of US
Foodservice to be voted on by the stockholders. Neither the US Foodservice
Charter nor By-laws provide for cumulative voting for the election of
directors.
114
<PAGE>
Rykoff-Sexton. Subject to the voting rights of holders of any then
outstanding Rykoff-Sexton Preferred Stock, each Rykoff-Sexton Common Share is
entitled to one vote on each matter submitted to a vote of the stockholders of
Rykoff-Sexton. Rykoff-Sexton Common Shares are not entitled to any cumulative
voting rights.
SUPERMAJORITY VOTING REQUIREMENTS; BUSINESS COMBINATIONS
US Foodservice. The US Foodservice Charter and By-laws do not have
supermajority voting requirements for business combinations or other matters.
The Stockholders Agreement, however, requires the affirmative vote of the
holders of at least two-thirds of the US Foodservice Class A Common Stock to
approve the following transactions, among others: (i) any merger or
consolidation involving US Foodservice or any subsidiary of US Foodservice;
(ii) any sale, purchase, lease, exchange or other disposition of all or
substantially all of the assets of US Foodservice; (iii) any sale, purchase,
lease, exchange or other disposition of assets of US Foodservice or any
subsidiary having a fair market value or acquired for consideration which
exceeds 10% of the consolidated capitalization of US Foodservice and its
subsidiaries; and (iv) any increase or reduction of the authorized capital or
the creation of any additional class of capital stock of US Foodservice.
Rykoff-Sexton. The DGCL generally requires the affirmative vote of the
holders of a majority of the outstanding stock of a corporation entitled to
vote on the matter to approve a merger, consolidation or dissolution of the
corporation or a disposition of all or substantially all of the corporation's
assets. The Rykoff-Sexton Charter, however, contains provisions regarding the
vote required to approve certain business combinations or other significant
corporate transactions involving Rykoff-Sexton and an individual, corporation
or other entity with beneficial ownership of a number of Rykoff-Sexton Common
Shares which exceeds 5% of the outstanding Rykoff-Sexton Common Shares (a
"Related Person").
The Rykoff-Sexton Charter requires the affirmative vote or consent of the
holders of not less than 80% of the outstanding shares of stock of Rykoff-
Sexton entitled to vote on the matter: (i) to adopt any agreement for, or to
approve, the merger or consolidation of Rykoff-Sexton or any subsidiary
(within the meaning of the Rykoff-Sexton Charter), with or into any Related
Person; (ii) to authorize any sale, lease, transfer, exchange or other
disposition to any Related Person of all or substantially all of the assets of
Rykoff-Sexton or any such subsidiary; (iii) to authorize the issuance or
transfer by Rykoff-Sexton or any such subsidiary of any Rykoff-Sexton voting
securities or voting securities of any such subsidiary in exchange or payment
for securities or assets of any Related Person, if such authorization is
otherwise required by law or by any agreement between Rykoff-Sexton and any
national securities exchange or by any other agreement to which Rykoff-Sexton
or any such subsidiary is a party; (iv) to adopt any plan for the dissolution
of Rykoff-Sexton; or (v) to adopt any amendment, change or repeal of the
foregoing provisions. Such 80% affirmative vote will not be required, however,
if the Rykoff-Sexton Board of Directors by resolution approves a memorandum of
understanding with such Related Person setting forth the principal terms of
the transaction and if such transaction is substantially consistent therewith.
Such resolution must be adopted by 80% of the directors who were elected and
acting members of the Rykoff-Sexton Board of Directors prior to the time such
Related Person became the beneficial owner of 5% or more of the outstanding
Rykoff-Sexton Common Shares entitled to vote in elections of directors. The
DGCL applies to the approval of the transactions listed above notwithstanding
any such resolution.
A separate provision of the Rykoff-Sexton Charter requires the affirmative
vote of the holders of at least 80% of the outstanding Rykoff-Sexton Common
Shares not beneficially owned by any Related Person that is a party or
beneficiary of or has proposed the transaction or matter to be voted upon to
approve the following transactions (each a "Business Combination"): (i) any
merger or consolidation of Rykoff-Sexton with or into a Related Person or
affiliate or associate of a Related Person; (ii) any sale, lease, exchange,
transfer or other disposition of at least 10% of the assets of Rykoff-Sexton
or any such subsidiary; (iii) a merger into or consolidation with Rykoff-
Sexton or a subsidiary, of a Related Person or an affiliate or associate of a
Related Person; (iv) any sale, lease, exchange, transfer or other disposition
to Rykoff-Sexton or a subsidiary of all or any part of the assets of a Related
Person or affiliate or associate of a Related Person; (v) any reclassification
or recapitalization of Rykoff-Sexton Common Shares consummated within three
years after a Related Person becomes a Related Person that would have the
effect of increasing the voting power of such Related Person or
115
<PAGE>
an affiliate or associate of such Related Person; and (vi) any agreement,
contract or other arrangement providing for any of the transactions described
above. A Business Combination does not include, however, a parent-subsidiary
merger pursuant to Section 253 of the DGCL or any transaction involving a
Related Person who has been a Related Person for at least three years or
involving an affiliate or associate of such Related Person. Such 80%
affirmative vote will not be required to approve a Business Combination,
however, (i) if certain price criteria and procedural requirements are
satisfied or (ii) a majority of the "Continuing Directors" of the Rykoff-
Sexton Board of Directors adopt a resolution approving the Business
Combination. "Continuing Directors" mean all members of the Rykoff-Sexton
Board of Directors except any director who (i) while serving as a member of
the Rykoff-Sexton Board of Directors is a Related Person who is a party to or
beneficiary of or has proposed the transaction or matter to be voted upon, or
is an affiliate or associate of such Related Person, or any representative of
such persons, or (ii) became a member of the Rykoff-Sexton Board of Directors
following the date upon which such a Related Person became a Related Person,
unless such director is recommended or elected to succeed a Continuing
Director by a majority of the Continuing Directors.
PREEMPTIVE RIGHTS
US Foodservice. The US Foodservice Charter does not provide for preemptive
rights for stockholders. Under the Stockholders Agreement, however, in the
event that US Foodservice issues shares of US Foodservice Common Stock or
equivalents, each party to the Stockholders Agreement, except certain
Management Investors (as defined in the Stockholders Agreement) that the US
Foodservice Board of Directors has not designated as participating, has the
right to acquire its pro rata portion of such shares of US Foodservice Common
Stock or equivalents so that each party's percentage ownership interest in US
Foodservice's capital stock remains unchanged. Preemptive rights are not
provided for shares issued in connection with (i) an acquisition of a
business, (ii) any stock split, stock dividend or reclassification, (iii) the
exercise of the Warrants or (iv) the exercise of stock options or pursuant to
a stock purchase agreement or other incentive plans approved by the US
Foodservice Board of Directors.
Rykoff-Sexton. The Rykoff-Sexton Charter does not provide for preemptive
rights for stockholders.
APPRAISAL RIGHTS
US Foodservice. The DGCL provides for appraisal rights only in the case of
certain mergers or consolidations and not (unless the certificate of
incorporation of a corporation so provides) in the case of other mergers, a
sale or transfer of all or substantially all of its assets or an amendment to
its certificate of incorporation. In addition, the DGCL does not provide
appraisal rights in connection with a merger or consolidation (unless the
certificate of incorporation of a corporation so provides) to the holders of
shares of a constituent corporation listed on a national securities exchange
(or designated as a national market system security by the National
Association of Securities Dealers, Inc.) or held of record by more than 2,000
stockholders, unless the applicable agreement of merger or consolidation
requires the holders of such shares to receive, in exchange for such shares,
any property other than shares of stock of the resulting or surviving
corporation, shares of stock of any other corporation listed on a national
securities exchange (or designated as described above) or held of record by
more than 2,000 holders, cash in lieu of fractional shares or any combination
of the foregoing. The DGCL also denies appraisal rights to the stockholders of
the surviving corporation in a merger if such merger did not require for its
approval the vote of the stockholders of such surviving corporation.
The US Foodservice Charter does not provide for appraisal rights other than
those rights designated by the DGCL. Because US Foodservice stockholders must
approve the Merger and are not stockholders of the type denied appraisal
rights under the DGCL, US Foodservice stockholders will have appraisal rights
pursuant to the Merger.
Rykoff-Sexton. In addition to the appraisal rights provided for by the DGCL,
the Rykoff-Sexton Charter provides for appraisal rights in the event of a
merger under Section 253 of the DGCL of Rykoff-Sexton into
116
<PAGE>
another corporation that has been a Related Person or an affiliate or
associate of a Related Person for less than three years, provided that the
DGCL does not give voting rights to the Rykoff-Sexton stockholders with
respect to such merger.
SPECIAL MEETINGS OF STOCKHOLDERS
US Foodservice. The US Foodservice By-laws provide that special meetings may
be called (i) by the Chairman, the President, any Vice President, the
Secretary or any Assistant Secretary, (ii) at the request of a majority of the
US Foodservice Board of Directors or (iii) at the written request of the
holders of a majority of the outstanding shares of US Foodservice entitled to
vote at the meeting.
Rykoff-Sexton. The Rykoff-Sexton By-laws provide that special meetings of
stockholders may be called by the Chairman of the Board, or at the written
request of a majority of the directors then in office. The stockholders of
Rykoff-Sexton do not have the right to request or call a special meeting of
stockholders.
STOCKHOLDER ACTION WITHOUT A MEETING
US Foodservice. The US Foodservice By-laws provide that any action required
or permitted to be taken at any annual or special meeting of stockholders, may
be taken without a meeting, provided that a written consent is signed by the
holders of outstanding stock representing the minimum number of votes that
would be necessary to take such action at a meeting.
Rykoff-Sexton. The Rykoff-Sexton Charter specifically prohibits stockholder
action by written consent.
STOCKHOLDER PROPOSAL PROCEDURES
None of the DGCL, the US Foodservice Charter and By-laws and the Rykoff-
Sexton Charter and By-laws limit the ability of US Foodservice and Rykoff-
Sexton stockholders, respectively, to bring any business (other than
nominations for the election of directors) before a meeting of stockholders.
See "--Nominations of Directors."
STOCKHOLDER RIGHTS PLAN
US Foodservice. US Foodservice does not have a stockholder rights plan.
Rykoff-Sexton. Rykoff-Sexton is party to the Rights Agreement. See
"DESCRIPTION OF RYKOFF-SEXTON CAPITAL STOCK--Common Shares, Rights and Series
A Preferred Stock--Rights."
CLASSIFIED BOARD OF DIRECTORS
US Foodservice. The US Foodservice Charter and By-laws do not provide for a
classified board of directors.
Rykoff-Sexton. The Rykoff-Sexton Charter and By-laws provide for a
classified board of directors divided into three classes, with directors
serving staggered three-year terms.
NOMINATIONS OF DIRECTORS
US Foodservice. The US Foodservice By-laws do not limit the ability of
stockholders to nominate directors for election. The Stockholders Agreement
entitles (i) the Management Investors (as defined in the Stockholders
Agreement) to designate two nominees for director, (ii) the Equitable Fund to
designate one nominee for director and (iii) the ML Investors to designate up
to seven nominees or, if the Equitable Fund has designated a nominee, up to
eight nominees for director.
Rykoff-Sexton. The Rykoff-Sexton By-laws provide that nominations for the
election of directors can be made by the Rykoff-Sexton Board of Directors, a
proxy committee appointed by the Rykoff-Sexton Board of
117
<PAGE>
Directors or any stockholder entitled to vote in the election of directors.
The Rykoff-Sexton By-laws require that stockholders entitled to vote in the
election of directors generally may nominate one or more persons for election
as directors if written notice of intent to make a nomination at a meeting of
stockholders is delivered to Rykoff-Sexton's Secretary (i) with respect to an
election to be held at an annual meeting of stockholders, not less than 90
days prior to such annual meeting, and (ii) with respect to an election to be
held at a special meeting of stockholders, not later than the close of
business on the seventh day following the date on which notice of such special
meeting is first given to stockholders. Such stockholder's notice must set
forth: (i) the name and address of the stockholder; (ii) a representation that
the stockholder is a holder of record of stock of Rykoff-Sexton entitled to
vote at such meeting and intends to appear in person or by proxy at the
meeting; (iii) a description of all arrangements or understandings between the
stockholder and each nominee or other person or persons pursuant to which each
nomination is to be made by the stockholder; (iv) such other information
regarding each nominee that would have been required to be included in a proxy
statement filed pursuant to the proxy rules of the SEC; and (v) the consent of
each nominee to serve as a director if elected.
REMOVAL OF DIRECTORS
US Foodservice. Under the DGCL, US Foodservice directors may be removed with
or without cause by the holders of a majority of shares entitled to vote at an
election of directors. The Stockholders Agreement provides that, if a majority
of interest of any party who has nominated a director proposes that such
director be removed from the US Foodservice Board of Directors, with or
without cause, the other parties to the Stockholders Agreement will vote their
shares or consent in writing to effect the director's removal. Pursuant to the
Stockholders Agreement, directors of US Foodservice may not otherwise be
removed without cause. The Stockholders Agreement further provides that any
director may be removed with cause if the holders of a majority of the
outstanding shares of Class A Common Stock consent in writing to such removal.
Rykoff-Sexton. The Rykoff-Sexton Charter and By-laws provide that any
director may be removed at any time, for cause, by the vote of a majority of
the outstanding stock of Rykoff-Sexton entitled to vote at an election of
directors.
VACANCIES IN THE BOARD OF DIRECTORS
US Foodservice. The US Foodservice By-laws provide that when any vacancy
occurs in the US Foodservice Board of Directors, whether by reason of increase
in the number of members composing the US Foodservice Board of Directors, or
otherwise, a majority of the remaining members of the US Foodservice Board of
Directors may appoint a director or directors to fill such vacancy or
vacancies. The Stockholders Agreement provides that when any vacancy occurs in
the US Foodservice Board of Directors, each party to the Stockholders
Agreement will cause the directors designated by it to vote for the individual
designated to fill such vacancy by the party who designated the director who
caused the vacancy.
Rykoff-Sexton. The Rykoff-Sexton Charter and By-laws provide that any
vacancy in the Rykoff-Sexton Board of Directors, whether by reason of increase
in the number of members composing the Rykoff-Sexton Board of Directors, or
otherwise, shall be filled by the affirmative vote of a majority of the
Continuing Directors.
INDEMNIFICATION
US Foodservice. The US Foodservice By-laws provide for indemnification by US
Foodservice, to the fullest extent permitted by the DGCL, of officers,
directors, employees and agents for expenses, judgments, fines and amounts
paid in settlement by such persons (including attorneys' fees).
Rykoff-Sexton. The Rykoff-Sexton Charter also provides for indemnification
by Rykoff-Sexton of officers, directors, employees and agents, to the fullest
extent permitted by the DGCL.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
US Foodservice. The US Foodservice Charter eliminates the personal liability
of US Foodservice directors for monetary damages resulting from breaches of
their fiduciary duty. It does not, however, eliminate liability
118
<PAGE>
for breaches of a director's duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
violations under Section 174 of the DGCL concerning the unlawful payment of
dividends or stock redemption or repurchases, or any transaction from which
the director derives an improper benefit.
Rykoff-Sexton. The Rykoff-Sexton Charter eliminates the personal liability
of Rykoff-Sexton directors in the same way as the US Foodservice Charter does.
AMENDMENT OF CHARTER DOCUMENTS
US Foodservice. The US Foodservice Charter may be amended pursuant to the
DGCL by a majority vote of the total number of shares outstanding and entitled
to vote thereon. If any such amendment would adversely affect the rights of
any holders of shares of a class or series of stock, the vote of the holders
of a majority of all outstanding shares of the class or series, voting as a
class, is also necessary to authorize such amendment. In addition, the
Stockholders Agreement provides that the US Foodservice Charter may be amended
only upon the affirmative vote of the holders of at least two-thirds of the US
Foodservice Class A Common Stock.
Rykoff-Sexton. Under the Rykoff-Sexton Charter, the amendment, repeal or
adoption of provisions of such document relating to (i) the removal of
directors or the filling of director vacancies or the classification of the
Rykoff-Sexton Board of Directors, (ii) restrictions on stockholders taking
action by written consent and (iii) special meetings of stockholders requires
the affirmative vote of the holders of at least 80% of the outstanding Rykoff-
Sexton Common Shares. Such 80% affirmative vote is not required, however, if a
majority of the Continuing Directors adopt a resolution approving such
amendment or repeal proposal and such proposal receives the affirmative vote
of the holders of at least a majority of the Rykoff-Sexton Common Shares.
The amendment, repeal or adoption of provisions of the Rykoff-Sexton Charter
relating to Business Combinations requires the affirmative vote of the holders
of at least 80% of the outstanding Rykoff-Sexton Common Shares not
beneficially owned by any Related Person who is a beneficiary of or has
proposed the transaction. Such 80% affirmative vote, however, is not required
if a majority of the Continuing Directors adopt a resolution approving such
amendment or repeal proposal and the holders of at least a majority of the
outstanding Rykoff-Sexton Common Shares affirmatively approve such proposal.
Under the DGCL all other amendments to the Rykoff-Sexton Charter must be
approved by the affirmative vote of holders of a majority of shares of capital
stock of Rykoff-Sexton entitled to vote generally in the election of
directors, unless a class vote is required under the DGCL.
AMENDMENT OF BY-LAWS
US Foodservice. The US Foodservice Charter and By-laws provide that the
stockholders or the Board of Directors may adopt, alter, amend or repeal the
US Foodservice By-laws. The Stockholders Agreement provides, however, that the
US Foodservice By-laws may be amended only upon the affirmative vote of the
holders of at least two-thirds of the US Foodservice Class A Common Stock.
Rykoff-Sexton. The Rykoff-Sexton Charter provides that the Board of
Directors is authorized to make, alter or repeal the Rykoff-Sexton By-laws.
The Rykoff-Sexton By-laws further provide that they may be altered, amended or
repealed or new by-laws adopted by the stockholders or by the affirmative vote
of a majority of the directors then in office.
VALIDITY OF COMMON SHARES
A legal opinion to the effect that the Rykoff-Sexton Common Shares offered
hereby, when issued in accordance with the Merger Agreement, will be validly
issued and fully paid and nonassessable, has been rendered by Jones, Day,
Reavis & Pogue, special counsel to Rykoff-Sexton.
119
<PAGE>
EXPERTS
Rykoff-Sexton. The audited consolidated financial statements of Rykoff-
Sexton and subsidiaries as of April 29, 1995 and April 30, 1994 and for each
of the three years in the three-year period ended April 29, 1995, incorporated
by reference herein, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in giving said reports.
Continental. The audited consolidated financial statements of Continental as
of April 30, 1994 and 1993, and the related statements of income and retained
earnings and cash flows for the years then ended, incorporated by reference
herein, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in giving said report.
H&O Foods. The audited consolidated financial statements of H&O Foods as of
October 31, 1995 and December 31, 1994 and for the ten months ended October
31, 1995 and the year ended December 31, 1995 incorporated by reference
herein, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in giving said report.
US Foodservice. The audited consolidated balance sheets as of December 31,
1994 and December 30, 1995 and the consolidated statements of operations,
mandatory redeemable preferred stock and stockholders' equity (deficit) and
cash flows for the fiscal years ended January 1, 1994, December 31, 1994 and
December 30, 1995 included in this Proxy Statement/Prospectus and the related
financial statement schedule included elsewhere in the Registration Statement
of which this Proxy Statement/Prospectus forms a part have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
STOCKHOLDER PROPOSALS FOR 1996 ANNUAL MEETING
Proposals by stockholders intended to be presented at the 1996 Annual
Meeting of Stockholders must have been received by the Secretary of Rykoff-
Sexton no later than March 29, 1996, to be included in Rykoff-Sexton's proxy,
notice of meeting and proxy statement relating to such meeting and should have
been mailed to Rykoff-Sexton, Inc., 1050 Warrenville Road, Lisle, Illinois
60532-5201, Attention: Secretary.
OTHER BUSINESS
The Board of Directors of Rykoff-Sexton is aware of no other matter that
will be presented for action at the Special Meeting. If any other matter
requiring a vote of the stockholders arising from the conduct of the meeting
properly comes before the Special Meeting, the persons authorized under
management proxies will vote and act according to their best judgments in
light of the conditions then prevailing.
120
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
RYKOFF-SEXTON, INC.,
USF ACQUISITION CORPORATION
AND
US FOODSERVICE INC.
DATED FEBRUARY 2, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I DEFINITIONS................................................. A-1
ARTICLE II THE MERGER; EFFECTIVE TIME; CLOSING......................... A-6
2.1. The Merger.................................................. A-6
2.2. Effective Time.............................................. A-6
2.3. Closing..................................................... A-6
ARTICLE III TERMS OF MERGER............................................. A-6
3.1. Certificate of Incorporation................................ A-6
3.2. The By-Laws................................................. A-6
3.3. Directors................................................... A-6
3.4. Officers.................................................... A-6
ARTICLE IV MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES
IN THE MERGER............................................... A-7
Share Consideration; Conversion or Cancellation of Shares in
4.1. the Merger.................................................. A-7
4.2. Payment for Shares in the Merger............................ A-8
4.3. Fractional Shares........................................... A-9
4.4. Transfer of Shares after the Effective Time................. A-9
4.5. Dissenting Shares........................................... A-9
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-10
5.1. Organization, Etc. of the Company........................... A-10
5.2. Subsidiaries................................................ A-10
5.3. Agreement................................................... A-11
5.4. Capital Stock............................................... A-11
5.5. Other Interests............................................. A-12
5.6. Litigation.................................................. A-12
5.7. Compliance with Other Instruments, Etc...................... A-12
5.8. Employee Benefit Plans...................................... A-12
5.9. Labor Matters............................................... A-14
5.10. Taxes....................................................... A-14
5.11. Intellectual Property....................................... A-15
5.12. Properties.................................................. A-16
5.13. Environmental Matters....................................... A-16
5.14. Registration Statement and Financial Statements............. A-16
5.15. Absence of Certain Changes or Events........................ A-17
5.16. Contracts and Leases........................................ A-17
5.17. Affiliated Transactions..................................... A-17
5.18. Brokers and Finders......................................... A-18
5.19. S-4 Registration Statement and Proxy Statement/ Prospectus.. A-18
5.20. Tax Matters................................................. A-18
5.21. Stockholders Agreement...................................... A-18
5.22. Opinion of Financial Advisor................................ A-18
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF RSI AND MERGER SUB........ A-18
6.1. Organization, Etc. of RSI................................... A-18
6.2. Subsidiaries................................................ A-19
6.3. Agreement................................................... A-19
6.4. Capital Stock............................................... A-20
6.5. Authorization for RSI Common Shares......................... A-20
</TABLE>
A-i
<PAGE>
<TABLE>
<S> <C> <C>
6.6. Other Interests................................................................... A-20
6.7. Litigation........................................................................ A-20
6.8. Compliance with Other Instruments, Etc............................................ A-20
6.9. Employee Benefit Plans............................................................ A-21
6.10. Labor Matters..................................................................... A-22
6.11. Taxes............................................................................. A-23
6.12. Intellectual Property............................................................. A-23
6.13. Properties........................................................................ A-24
6.14. Environmental Matters............................................................. A-24
6.15. Reports and Financial Statements.................................................. A-24
6.16. Absence of Certain Changes or Events.............................................. A-25
6.17. Contracts and Leases.............................................................. A-25
6.18. Affiliated Transactions........................................................... A-25
6.19. Ownership of Merger Sub; No Prior Activities; Assets of Merger Sub................ A-25
6.20. Brokers and Finders............................................................... A-26
6.21. S-4 Registration Statement and Proxy Statement/ Prospectus........................ A-26
6.22. Tax Matters....................................................................... A-26
6.23. Company Management Loans.......................................................... A-26
6.24. Opinion of Financial Advisor...................................................... A-26
ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS............................................... A-27
7.1. Conduct of Business of the Company................................................ A-27
7.2. Other Transactions................................................................ A-28
7.3. Stockholder Votes................................................................. A-28
7.4. Registration Statement............................................................ A-29
7.5. Reasonable Efforts................................................................ A-29
7.6. Access to Information; Confidentiality............................................ A-30
7.7. Listing of RSI Common Shares...................................................... A-30
7.8. Rule 145 Affiliates............................................................... A-30
7.9. Conduct of Business of RSI........................................................ A-30
7.10. Preferred Stock Redemption; Withdrawal of S-1 Registration Statement; USDA Matter. A-32
7.11. Commitment Letter................................................................. A-33
7.12. Publicity......................................................................... A-33
7.13. Director and Officer Indemnification.............................................. A-33
7.14. Conveyance Taxes.................................................................. A-33
7.15. Parachute Payments................................................................ A-34
7.16. RSI Loans......................................................................... A-34
7.17. RSI Change in Control Arrangements................................................ A-34
ARTICLE VIII CONDITIONS........................................................................ A-34
8.1. Conditions to Each Party's Obligations............................................ A-34
8.2. Conditions to Obligations of RSI and Merger Sub................................... A-35
8.3. Conditions to Obligations of the Company.......................................... A-36
ARTICLE IX TERMINATION....................................................................... A-37
9.1. Termination by Mutual Consent..................................................... A-37
9.2. Termination by Either RSI or the Company.......................................... A-38
9.3. Termination by RSI................................................................ A-38
9.4. Termination by the Company........................................................ A-38
9.5. Effect of Termination and Abandonment............................................. A-39
</TABLE>
A-ii
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE X MISCELLANEOUS AND GENERAL...................................... A-39
10.1. Expenses....................................................... A-39
10.2. Notices, Etc................................................... A-39
10.3. Amendments, Waivers, Etc....................................... A-40
10.4. No Assignment.................................................. A-40
10.5. Entire Agreement............................................... A-40
10.6. Specific Performance........................................... A-40
10.7. Remedies Cumulative............................................ A-40
10.8. No Waiver...................................................... A-41
10.9. No Third Party Beneficiaries................................... A-41
10.10. Jurisdiction................................................... A-41
10.11. Governing Law................................................. A-41
10.12. Name, Captions, Etc........................................... A-41
10.13. Counterparts.................................................. A-41
10.14. Knowledge..................................................... A-41
10.15. Nonsurvival of Representations and Warranties................. A-41
10.16. No Other Representations and Warranties....................... A-41
</TABLE>
Exhibits [omitted]
Disclosure Statements [omitted]
Company Disclosure Statement [omitted]
RSI Disclosure Statement [omitted]
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (hereinafter called this "Agreement"), dated
February 2, 1996, among Rykoff-Sexton, Inc., a Delaware corporation ("RSI"),
USF Acquisition Corporation, a Delaware corporation, and a direct Wholly-Owned
Subsidiary of RSI ("Merger Sub"), and US Foodservice Inc., a Delaware
corporation (the "Company").
Witnesseth:
Whereas, the Boards of Directors of RSI, Merger Sub and the Company each
have determined that it is in the best interests of their respective
stockholders for the Company to merge with and into Merger Sub, upon the terms
and subject to the conditions of this Agreement;
Whereas, as a condition to its willingness to enter into this Agreement, RSI
has required that, simultaneously with the execution hereof, the ML Entities
(as hereinafter defined) enter into the Agreement, dated as of the date hereof
(the "ML Agreement") with RSI pursuant to which the ML Entities are agreeing
to vote all of their Shares (as hereinafter defined) for approval and adoption
of this Agreement and the Merger (as hereinafter defined), and certain other
matters;
Whereas, RSI, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger; 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
Code (as hereinafter defined).
Now, Therefore, in consideration of the mutual representations, warranties,
covenants and agreements set forth herein, RSI, Merger Sub and the Company
hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
"Affiliate Letter": As defined in Section 7.8.
"Alternative Sara Lee Bridge Financing": As defined in Section 7.10(a).
"Associate": As defined in Rule 12b-2 under the Exchange Act.
"Assumed Options": As defined in Section 4.1(e).
"Assumed Warrants": As defined in Section 4.1(e).
"Authorization": Any consent, approval or authorization of, expiration or
termination of any waiting period requirement (including pursuant to the HSR
Act) by, or filing, registration, qualification, declaration or designation
with, any Governmental Body.
"Benefit Arrangement": As defined in Section 5.8(a).
"Bridge Financing": As defined in Section 7.10(a).
A-1
<PAGE>
"Business Day": A day on which the principal offices of the SEC in
Washington, D.C. are open to accept filings, or in the case of determining a
date on which any payment is due, a day other than Saturday, Sunday or any day
on which banks located in New York City are authorized or obligated by law to
close.
"Certificate of Merger": The certificate of merger with respect to the
merger of the Company with and into Merger Sub, containing the provisions
required by, and executed in accordance with, Section 251 of the DGCL.
"Certificates": As defined in Section 4.2(b).
"Class A Common Stock": Class A Common Stock, par value $.01 per share, of
the Company.
"Class B Common Stock": Class B Common Stock, par value $.01 per share, of
the Company.
"Closing": The closing of the Merger.
"Closing Date": The date on which the Closing occurs.
"Closing Date Market Price": With respect to one RSI Common Share, the
arithmetic average of the Closing Prices for such a share during the period of
the 20 most recent trading days ending on the third Business Day prior to the
Closing Date.
"Closing Price": On any day, the last reported sale price of one RSI Common
Share on the NYSE, as reported in the New York Stock Exchange Composite Tape.
"Code": The Internal Revenue Code of 1986, as amended, and all regulations
promulgated thereunder, as in effect from time to time.
"Commitment Letter": As defined in Section 7.11.
"Common Stock": The Class A Common Stock and Class B Common Stock.
"Company": US Foodservice Inc., a Delaware corporation.
"Company Alternative Proposal": As defined in Section 7.2.
"Company Charter": As defined in Section 7.10(d).
"Company Disclosure Statement": The disclosure statement dated the date of
this Agreement delivered by the Company to RSI.
"Company Management Loans": The loans made by the Company to certain members
of management of the Company or any of its Subsidiaries to enable them to the
purchase Shares, pursuant to the Non-Recourse Promissory Notes in the amounts
and to the individuals described in the Company Disclosure Statement.
"Company Material Adverse Effect": A material adverse effect on the
business, properties, operations or financial condition of the Company and its
Subsidiaries taken as a whole.
"Company Tax Matters Certificate": As defined in Section 5.20.
"Company Update Letter": As defined in Section 8.2(i).
"Continuing Director": As defined in Article Thirteenth of the Restated
Certificate of Incorporation of RSI, as amended from time to time.
"Controlled Group Liability": As defined in Section 5.8(e).
"Covered Company Proceeding": As defined in Section 8.2(i).
"Covered RSI Proceeding": As defined in Section 8.3(g).
"Dissenting Shares": As defined in Section 4.5.
"DGCL": The Delaware General Corporation Law.
A-2
<PAGE>
"Effective Time": As defined in Section 2.2.
"Employee Plan": As defined in Section 5.8(a).
"Employees": As defined in Section 5.8(a).
"Environmental Laws": As defined in Section 5.13.
"Equitable Entities": Equitable Deal Flow Fund, L.P., the Equitable Life
Assurance Society of the United States and Equitable Variable Life Insurance
Company.
"ERISA": The Employee Retirement Income Security Act of 1974, as amended,
and all regulations promulgated thereunder, as in effect from time to time.
"ERISA Affiliate": Any trade or business, whether or not incorporated, that
is now or has at any time in the past been treated as a single employer with
the Company or RSI (as applicable) or any of their respective Subsidiaries
under Section 414(b), (c), (m) or (o) of the Code and the Treasury Regulations
thereunder.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"Exchange Agent": As defined in Section 4.2(a).
"Exchange Fund": As defined in Section 4.2(a).
"Exchange Ratio": As defined in Section 4.1(a).
"Exchangeable Preferred Stock": Preferred Stock, par value $.01 per share,
designated as $15.00 Cumulative Exchangeable Redeemable Preferred Stock,
Series A, in Article Fourth B.3. of the Company's Restated Certificate of
Incorporation.
"Expenses": All out-of-pocket expenses (including, without limitation, all
fees and expenses of counsel, accountants, investment bankers, experts and
consultants to a party hereto) incurred in connection with or related to the
authorization, preparation, negotiation, execution and performance of this
Agreement and the transactions contemplated hereby.
"Goldman Sachs": As defined in Section 6.20.
"Governmental Body": Any Federal, state, municipal, political subdivision or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.
"HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"Indemnified Party": As defined in Section 7.13(a).
"Intellectual Property": All industrial and intellectual property rights
including, but not limited to, Proprietary Technology, patents, patent
applications, trademarks, trademark applications and registrations, service
marks, service mark applications and registrations, copyrights, know-how,
licenses, trade secrets, proprietary processes, formulae and customer lists.
"Proprietary Technology" means all proprietary processes, formulae,
inventions, trade secrets, know-how, development tools and other proprietary
rights used by the Company and its Subsidiaries or RSI and its Subsidiaries,
as the case may be, pertaining to any product or service manufactured,
marketed, licensed or sold by the Company and its Subsidiaries or RSI and its
Subsidiaries, as the case may be, in the conduct of their business or used,
employed or exploited in the development, license, sale, marketing,
distribution or maintenance thereof, and all documentation and media
constituting, describing or relating to the above, including, but not limited
to, manuals, memoranda, know-how, notebooks, software, records and
disclosures.
"Liens": As defined in Section 5.12.
"Merger": The merger of the Company with and into Merger Sub as contemplated
by Section 2.1.
"Merger Sub": USF Acquisition Corporation, a Delaware corporation.
"Merrill Lynch": As defined in Section 5.18.
"ML Agreement": As defined in the second recital.
A-3
<PAGE>
"ML Entities": Merrill Lynch Capital Appreciation Partnership No. B-XVIII,
L.P., a Delaware limited partnership, ML Offshore LBO Partnership No. B-XVIII,
a Cayman Islands limited partnership, Merrill Lynch Capital Appreciation
Partnership No. XIII, L.P., a Delaware limited partnership, ML IBK Positions,
Inc., a Delaware corporation, Merrill Lynch KECALP L.P. 1991, a Delaware
limited partnership, Merrill Lynch KECALP L.P. 1994, a Delaware limited
partnership, MLCP Associates L.P. No. II, a Delaware limited partnership, MLCP
Associates L.P. No. IV, a Delaware limited partnership, ML Offshore LBO
Partnership No. XIII, a Cayman Islands limited partnership, ML Employees LBO
Partnership No. I, L.P., a Delaware limited partnership, Merchant Banking L.P.
No. II, a Delaware limited partnership, Merrill Lynch KECALP L.P. 1987, a
Delaware limited partnership, and MLCP.
"MLCP": Merrill Lynch Capital Partners, Inc., a Delaware corporation.
"NYSE": The New York Stock Exchange, Inc.
"Option": As defined in Section 4.1(e).
"Option Plans": As defined in Section 4.1(e).
"Person": Any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of
any kind.
"Preferred Stock": The 10% Preferred Stock and Exchangeable Preferred Stock.
"Preferred Stock Redemption Agreements": The Redemption Agreement dated as
of September 26, 1995 between Sara Lee Corporation and the Company, as amended
by the Amendment to Redemption Agreement dated November 20, 1995 and by the
Sara Lee Amendment (if executed), the Redemption Agreement dated as of
September 8, 1995 among ML IBK Positions, Inc., Merchant Banking L.P. No. IV
and the Company, as amended as of December 29, 1995 and February 2, 1996 and
the Redemption Agreement dated as of September 11, 1995 between Bankamerica
Capital Corporation and the Company.
"10% Preferred Stock": Preferred Stock, par value $.01 per share, designated
as "10.0% Preferred Stock" in Article Fourth B.2. of the Company's Restated
Certificate of Incorporation.
"Preliminary Prospectus": The Company's Preliminary Prospectus dated
November 21, 1995 relating to the Company's proposed Common Stock offering and
filed as a part of the Amendment No. 3 to the S-1 Registration Statement.
"Previous Company Auditor's Letter": As defined in Section 8.2(i).
"Previous RSI Auditor's Letter": As defined in Section 8.3(g).
"Proxy Statement/Prospectus": As defined in Section 7.4.
"Respective Representatives": As defined in Section 7.6.
"Registration Rights Agreement": The Registration Rights Agreement among RSI
and the other parties thereto in the form attached to the ML Agreement as
Exhibit A.
"Rights Agreement": The Rights Agreement, dated as of December 8, 1986, as
amended, between RSI and Bank of America National Trust and Savings
Association, as Rights Agent.
"RSI": Rykoff-Sexton, Inc., a Delaware corporation.
"RSI Alternative Proposal": A bona fide written offer submitted to RSI or
the holders of RSI Common Shares from any Person (other than the Company or
any Affiliate of the Company), unsolicited by RSI, for the acquisition or
purchase of all or a material amount of the assets or securities of, or any
merger, consolidation or business combination with, RSI or any Subsidiary of
RSI.
"RSI Benefit Arrangement": As defined in Section 6.09(a).
"RSI Common Shares": Shares of common stock, par value of $.10 per share, of
RSI.
"RSI Disclosure Statement": The disclosure statement dated the date of this
Agreement delivered by RSI to the Company.
A-4
<PAGE>
"RSI Employee Plan": As defined in Section 6.09(a).
"RSI Employees": As defined in Section 6.09(a).
"RSI Material Adverse Effect": A material adverse effect on the business,
properties, operations or financial condition of RSI and its Subsidiaries
taken as a whole.
"RSI SEC Reports": As defined in Section 6.15.
"RSI Stockholders Meeting": As defined in Section 7.3(b).
"RSI Tax Matters Certificate": As defined in Section 6.22.
"RSI Update Letter": As defined in Section 8.3(g).
"Rule 145 Affiliate": As defined in Section 7.8.
"S-1 Registration Statement": The Registration Statement of the Company on
Form S-1 (No. 33-96704) filed with the SEC on September 8, 1995 as amended by
Amendment No. 1 filed with the SEC on October 2, 1995, Amendment No. 2 filed
with the SEC on October 30, 1995 and Amendment No. 3 filed with the SEC on
November 21, 1995.
"S-4 Registration Statement": As defined in Section 7.4.
"Sara Lee": As defined in Section 7.10(a).
"Sara Lee Amendment": As defined in Section 7.10(a).
"Sara Lee Bridge Financing": As defined in Section 7.10(a).
"Sara Lee Redemption Agreement": As defined in Section 7.10(a).
"SEC": The Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended.
"Share Consideration": As defined in Section 4.1(b).
"Shares": Collectively, the shares of Common Stock.
"Significant Subsidiary": As defined under Rule 12b-l of the Exchange Act.
"Standstill Agreement": The Standstill Agreement between RSI and the ML
Entities in the form attached to the ML Agreement as Exhibit B.
"Stock Split": The .396-for-1 reverse stock split of the Common Stock,
effective January 31, 1996.
"Stockholders Agreement": The Amended and Restated Stockholders Agreement,
dated September 22, 1993, among the Company, certain of the ML Entities, the
Equitable Entities, and the other signatories thereto.
"Subsidiary": As to any Person, any other Person of which at least 50% of
the equity or voting interests are owned, directly or indirectly, by such
first Person.
"Surviving Corporation": The surviving corporation in the Merger.
"Tax Agreement": The Agreement between RSI and each ML Entity and certain
other stockholders of the Company in the form attached as Exhibit C to the ML
Agreement.
"Tax Returns": As defined in Section 5.10.
"Termination Agreement": As defined in Section 5.21.
"Warrants": Warrants each dated September 4, 1992, for the purchase of an
aggregate of 227,700 shares of Common Stock exercisable at $15.35 per share
held by the Warrantholders.
"Warrantholders": Nippon Credit Bank, Ltd., Teachers Insurance and Annuity
Association of America, Dresdner Bank AG, New York Branch and Dresdner Bank
AG, Grand Cayman Branch.
"Wholly-Owned Subsidiary": A Subsidiary of which 100% of the equity interest
is owned directly or indirectly by the relevant parent company.
A-5
<PAGE>
ARTICLE II
THE MERGER; EFFECTIVE TIME; CLOSING
2.1. The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time, the Company shall be merged with and into Merger Sub in
accordance with the provisions of Section 251 of the DGCL and with the effect
provided in Sections 259 and 261 of the DGCL. The separate corporate existence
of the Company shall thereupon cease and Merger Sub shall be the Surviving
Corporation and shall continue its corporate existence under the laws of the
State of Delaware.
2.2. Effective Time. The Merger shall become effective on the date and at
the time (the "Effective Time") that the Certificate of Merger shall have been
accepted for filing by the Secretary of State of the State of Delaware (or
such later date and time as may be specified in the Certificate of Merger as
may be permitted by such Secretary of State), which shall be the Closing Date
or as soon as practicable thereafter.
2.3. Closing. Subject to the fulfillment or waiver of the conditions set
forth in Article VIII, the Closing shall take place (i) at the offices of
Jones, Day, Reavis & Pogue, Chicago, Illinois, at 10:00 a.m. on the third
Business Day following the date of the RSI Stockholders Meeting or (ii) at
such other place and/or time and/or on such other date as RSI and the Company
may agree or as may be necessary to permit the fulfillment or waiver of the
conditions set forth in Article VIII.
ARTICLE III
TERMS OF MERGER
3.1. Certificate of Incorporation. The Certificate of Incorporation of
Merger Sub as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, until duly amended
in accordance with the terms thereof and of the DGCL, except that Article
FIRST thereof shall be amended to read as follows:
"The name of the Corporation (which is hereinafter called the
"Corporation") is US Foodservice Inc."
3.2. The By-Laws. The By-Laws of Merger Sub in effect at the Effective Time
shall be the By-Laws of the Surviving Corporation, until duly amended in
accordance with the terms thereof, and in accordance with the Certificate of
Incorporation of the Surviving Corporation and the DGCL.
3.3. Directors. The directors of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Certificate of Incorporation and By-Laws.
3.4. Officers. The officers of the Company at the Effective Time shall, from
and after the Effective Time, be the officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and By-Laws.
A-6
<PAGE>
ARTICLE IV
MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER
4.1. Share Consideration; Conversion or Cancellation of Shares in the
Merger. Subject to the provisions of this Article IV, at the Effective Time,
by virtue of the Merger and without any action on the part of the holders
thereof, the shares of the constituent corporations shall be converted as
follows:
(a) Each Share issued and outstanding immediately prior to the Effective
Time (other than Shares, if any, held by RSI, Merger Sub or any other
Subsidiary of RSI) shall be converted into that number of RSI Common
Shares, rounded to the nearest thousandth of a share, or if there shall not
be a nearest thousandth of a share, to the next higher thousandth of a
share, equal to the quotient (the "Exchange Ratio") derived by dividing $25
by the Closing Date Market Price of one RSI Common Share; provided,
however, that (i) if the foregoing would result in an Exchange Ratio
greater than 1.457, the Exchange Ratio shall be deemed to be 1.457, and
(ii) if the foregoing would result in an Exchange Ratio less than 1.244 the
Exchange Ratio shall be deemed to be 1.244. If, prior to the Effective
Time, RSI should split, reclassify or combine the RSI Common Shares, or pay
a stock dividend or other stock distribution in RSI Common Shares, or
otherwise change or convert the RSI Common Shares into any other
securities, or make any other dividend or distribution on the RSI Common
Shares (other than normal cash dividends, subject to Section 7.9(c)), or if
a record date with respect to any of the foregoing shall have been set,
then the Exchange Ratio will be appropriately adjusted to reflect such
split, reclassification, combination, dividend or other distribution or
change.
(b) All Shares to be converted into RSI Common Shares pursuant to this
Section 4.1 shall cease to be outstanding, shall be canceled and retired
and shall cease to exist, and each holder of a certificate representing any
such Shares shall thereafter cease to have any rights with respect to such
Shares, except the right to receive for each of the Shares, upon the
surrender of such certificate in accordance with Section 4.2, the amount of
RSI Common Shares specified in accordance with Section 4.1(a) (the "Share
Consideration") and cash in lieu of fractional RSI Common Shares as
contemplated by Section 4.3.
(c) Shares, if any, held by RSI, Merger Sub or any other Subsidiary of
RSI and each Share held by the Company as treasury stock immediately prior
to the Effective Time shall cease to be outstanding, shall be canceled and
retired without payment of any consideration therefor, and shall cease to
exist.
(d) Each share of common stock, par value of $.01 per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time shall
continue to be one share of common stock of the Surviving Corporation, with
the same rights, powers and privileges as such share of common stock of
Merger Sub immediately prior to the Effective Time.
(e) (i) Each outstanding option to purchase Shares listed on Schedule
4.1(e) in the Company Disclosure Statement (each, an "Option") issued
pursuant to the Company's stock option plans (collectively, the "Option
Plans") filed as an exhibit to the S-1 Registration Statement, whether or
not vested or exercisable, shall be assumed by RSI and shall constitute an
option to acquire, on the same terms and conditions as were applicable
under such Option, a number of RSI Common Shares, rounded up or down to the
nearest thousandth of a share, or if there shall not be a nearest
thousandth of a share, to the next higher thousandth of a share, equal to
the product of the Exchange Ratio and the number of Shares subject to such
Option immediately prior to the Effective Time, at a price per share equal
to the aggregate exercise price for the Shares subject to such Option
divided by the number of RSI Common Shares deemed to be purchasable
pursuant to such Option ("Assumed Options"); provided that with respect to
those Options which are performance options, not vested in accordance with
their terms, the performance criteria shall be deemed satisfied on the
first anniversary of the Effective Time; provided further, that the
conversion of any Option into an Assumed Option with an exercise price less
than $.10 per RSI Common Share shall be subject to the optionee's agreement
that upon exercise, (x) to the extent RSI is holding RSI Common Shares as
treasury shares that are not reserved for any other purpose, RSI shall
issue the appropriate number of such treasury shares to the optionee and
(y) to the extent that no such treasury shares are available, such optionee
A-7
<PAGE>
shall pay an exercise price of $.10 per RSI Common Share; and (ii) each
Warrant shall be assumed by RSI and shall constitute a warrant to acquire,
on the same terms and conditions as were applicable under such Warrant, a
number of RSI Common Shares equal to the product of the Exchange Ratio and
the number of Shares subject to such Warrant at a price per share equal to
the aggregate exercise price for the Shares subject to such Warrant divided
by the number of RSI Common Shares deemed to be purchasable pursuant to
such Warrant ("Assumed Warrants"). At the Effective Time, RSI shall deliver
to holders of Assumed Options and Assumed Warrants appropriate option and
warrant agreements representing the right to acquire RSI Common Shares on
the same terms and conditions as contained in the Options and Warrants
(subject to any adjustments required by the preceding sentence), upon
surrender of the outstanding Options and Warrants. RSI shall comply with
the terms of the Option Plans as they apply to the Options assumed as set
forth above. RSI shall take all corporate action necessary to reserve for
issuance a sufficient number of RSI Common Shares for delivery upon
exercise of the Assumed Options and Assumed Warrants in accordance with
this Section 4.1(e). RSI shall file a registration statement on Form S-8
(or any successor form) or another appropriate form, effective as of the
Effective Time, with respect to RSI Common Shares subject to Assumed
Options and shall use commercially reasonable efforts to maintain the
effectiveness of such registration statement or registration statements
(and maintain the current status of the prospectus or prospectuses
contained therein) for so long as the Assumed Options remain outstanding.
RSI shall cause the Assumed Options to be administered by RSI's Management
Development--Compensation and Stock Option Committee or any successor
committee.
4.2. Payment for Shares in the Merger. The manner of making payment for
Shares in the Merger shall be as follows:
(a) At the Effective Time, RSI shall make available to an exchange agent
selected by RSI and reasonably acceptable to the Company (the "Exchange
Agent"), for the benefit of those Persons who immediately prior to the
Effective Time were the holders of Shares, for exchange in accordance with
this Article IV, a sufficient number of certificates representing RSI
Common Shares required to effect the delivery of the aggregate Share
Consideration required to be issued pursuant to Section 4.1 (the
certificates representing RSI Common Shares comprising such aggregate Share
Consideration being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions to be given by
RSI at or prior to the Effective Time following approval thereof by the
Company, such approval not to be unreasonably withheld, deliver the RSI
Common Shares contemplated to be issued pursuant to Section 4.1 out of the
Exchange Fund. Except as provided in Section 4.3, the Exchange Fund shall
not be used for any other purpose.
(b) Promptly after the Effective Time, the Exchange Agent shall mail to
each holder of record (other than holders of certificates for Shares
referred to in Section 4.1(c)) of a certificate or certificates which
immediately prior to the Effective Time represented outstanding Shares (the
"Certificates") (i) a form of 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 (ii) instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender of
Certificates for cancellation to the Exchange Agent, together with such
letter of transmittal duly executed and any other documents as may be
reasonably required, the holder of such Certificates shall be entitled to
receive for each of the Shares represented by such Certificates the Share
Consideration and the Certificates so surrendered shall forthwith be
canceled. Until so surrendered, Certificates shall represent solely the
right to receive the Share Consideration and any cash in lieu of fractional
RSI Common Shares as contemplated by Section 4.3 with respect to each of
the Shares represented thereby. No dividends or other distributions that
are declared after the Effective Time on RSI Common Shares and payable to
the holders of record thereof after the Effective Time will be paid to
Persons entitled by reason of the Merger to receive RSI Common Shares until
such Persons surrender their Certificates. Upon such surrender, there shall
be paid to the Person in whose name the RSI Common Shares are issued any
dividends or other distributions having a record date after the Effective
Time and payable with respect to such RSI Common Shares between the
Effective Time and the time of such surrender. After such surrender there
shall be paid to the Person in
A-8
<PAGE>
whose name the RSI Common Shares are issued any dividends or other
distributions on such RSI Common Shares which shall have a record date
after the Effective Time and prior to such surrender and a payment date
after such surrender and such payment shall be made on such payment date.
In no event shall the Persons entitled to receive such dividends or other
distributions be entitled to receive interest on such dividends or other
distributions. If any cash or any certificate representing RSI Common
Shares is to be paid to or issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the
Person requesting such exchange shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates
for such RSI Common Shares in a name other than that of the registered
holder of the Certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor
any party hereto shall be liable to a holder of Shares for any RSI Common
Shares or dividends thereon or, in accordance with Section 4.3, cash in
lieu of fractional interests, delivered to a public official pursuant to
applicable escheat law. The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the RSI Common Shares held
by it from time to time hereunder, except that it shall receive and hold
all dividends or other distributions paid or distributed with respect to
such RSI Common Shares for the account of the Persons entitled thereto.
(c) Certificates surrendered for exchange by any Person constituting a
Rule 145 Affiliate of the Company shall not be exchanged for certificates
representing RSI Common Shares until RSI has received an Affiliate Letter
from such Person as provided in Section 7.8.
(d) Any portion of the Exchange Fund which remains unclaimed by the
former stockholders of the Company for one year after the Effective Time
shall be delivered to RSI, upon demand of RSI, and any former stockholders
of the Company shall thereafter look only to RSI for payment of their claim
for the Share Consideration for the Shares or for any cash in lieu of
fractional RSI Common Shares.
(e) In the event any certificates representing Shares shall have been
lost, stolen or destroyed, the Exchange Agent shall issue in exchange for
such lost, stolen or destroyed certificates, upon the making of such
affidavit of that fact by the holder thereof or the delivery of such other
documents and instruments (including, without limitation, any indemnity
bond) as the Exchange Agent shall require, such RSI Common Shares as may be
required pursuant to Section 4.2.
4.3. Fractional Shares. No fractional RSI Common Shares shall be issued in
the Merger. In lieu of any such fractional securities, each holder of Shares
who would otherwise have been entitled to a fraction of an RSI Common Share
upon surrender of Certificates for exchange pursuant to this Article IV will
be paid an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (a) the Closing Date Market Price by (b) the
fractional interest to which such holder otherwise would be entitled. As soon
as practicable after the determination of the amount of cash to be paid to
former stockholders of the Company in lieu of any fractional interests, RSI
shall deposit with the Exchange Agent the cash necessary for this purpose.
4.4. Transfer of Shares after the Effective Time. No transfers of Shares
shall be made on the stock transfer books of the Company after the close of
business on the day prior to the date of the Effective Time.
4.5. Dissenting Shares. (a) Notwithstanding the provisions of Section 4.1 or
any other provision of this Agreement to the contrary, Shares that are issued
and outstanding immediately prior to the Effective Time and are held by
stockholders who have not voted such Shares in favor of the adoption of this
Agreement or consented thereto in writing and who properly demand appraisal of
such Shares in accordance with Section 262 of the DGCL (the "Dissenting
Shares") will not be converted as provided in Section 4.1(a) at or after the
Effective Date unless and until the holder of such Dissenting Shares fails to
perfect or effectively withdraws or loses such right to appraisal and payment
under the DGCL. If a holder of Dissenting Shares so fails to perfect or
effectively withdraws or loses such right to appraisal and payment, then, as
of the Effective Time or the occurrence of such event, whichever last occurs,
such holder's Dissenting Shares will be converted into and represent solely
the right provided in Section 4.1(a).
A-9
<PAGE>
(b) The Company will give RSI (i) prompt written notice of any written
demands for appraisal, withdrawals of demands for appraisal and any other
instruments served pursuant to Section 262 of the DGCL and received by the
Company and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under Section 262 of the DGCL. The
Company will not voluntarily make any payment with respect to any demands for
appraisals and will not, except with the prior written consent of RSI, settle
or offer to settle any such demands.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to RSI and Merger Sub that,
except as set forth in the S-1 Registration Statement or the Company
Disclosure Statement:
5.1. Organization, Etc. of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own and
operate its properties, to carry on its business as now conducted and proposed
by the Company to be conducted, to enter into this Agreement and to carry out
the provisions of this Agreement and consummate the transactions contemplated
hereby. The Company is duly qualified and in good standing in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary and
where the failure to be so qualified has or would be reasonably expected (so
far as can be foreseen at the time) to have a Company Material Adverse Effect.
The Company has obtained from the appropriate Governmental Bodies all
approvals and licenses necessary for the conduct of its business and
operations as currently conducted, which approvals and licenses are valid and
remain in full force and effect, except where the failure to have obtained
such approvals or licenses or the failure of such licenses and approvals to be
valid and in full force and effect does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a Company Material
Adverse Effect. The Company is not subject to any order, complaint, proceeding
or investigation pending or, to the knowledge of the Company, threatened,
which affects or would reasonably be expected (so far as can be foreseen at
the time) to affect the validity of any such approvals or licenses or impair
the renewal thereof, except where the invalidity of any such approvals or
licenses or the non-renewal thereof does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have a Company Material
Adverse Effect.
5.2. Subsidiaries. Each Subsidiary of the Company (a) is a corporation or
other legal entity duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization and has the full corporate
power and authority to own its properties and conduct its business and
operations as currently conducted, except where the failure to be duly
organized, validly existing and in good standing does not have, and would not
be reasonably expected (so far as can be foreseen at the time) to have, a
Company Material Adverse Effect, (b) is duly qualified and in good standing in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have a Company
Material Adverse Effect, (c) has obtained from the appropriate Governmental
Bodies all approvals and licenses necessary for the conduct of its business
and operations as currently conducted, which licenses and approvals are valid
and remain in full force and effect, except where the failure to have obtained
such approvals and licenses or the failure of such licenses and approvals to
be valid and in full force and effect does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have a Company
Material Adverse Effect, and (d) is subject to no order, complaint, proceeding
or investigation pending or, to the knowledge of the Company or such
Subsidiary, threatened, which would be reasonably expected (so far as can be
foreseen at the time) to affect the validity of any such approvals or licenses
or impair the renewal thereof, except where the invalidity of any such
approvals or licenses or the non-renewal thereof does not have and would not
be reasonably expected (so far as can be foreseen at the time) to have a
Company Material Adverse Effect. Exhibit 22 to the S-1 Registration Statement
sets forth an accurate and complete list of all Subsidiaries of the Company.
A-10
<PAGE>
5.3. Agreement. The Board of Directors of the Company has approved, by the
unanimous vote of those directors present, the Merger, this Agreement and the
transactions contemplated hereby and have approved recommending approval of
the Merger, this Agreement and the transactions contemplated hereby to the
stockholders of the Company. This Agreement has been duly executed and
delivered by a duly authorized officer of the Company and constitutes a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
application which may affect the enforcement of creditors' rights generally
and by general equitable principles. The Company has delivered to RSI true and
correct copies of resolutions adopted by the Board of Directors of the Company
approving this Agreement.
5.4. Capital Stock. The authorized capital stock of the Company consists of
(a) 50,000,000 shares of Class A Common Stock, of which 8,019,037 shares are
issued and outstanding and 37,152 shares are held as treasury stock as of the
date hereof, (b) 50,000,000 shares of Class B Common Stock, of which 821,206
shares are issued and outstanding as of the date hereof and no shares are held
as treasury stock, (c) 2,000,000 shares of Preferred Stock, of which (i)
33,564.35 shares are designated as 10% Preferred Stock, of which 27,934 shares
are issued and outstanding as of the date hereof and no shares are held as
treasury stock, and (ii) 314,000 shares are designated as Exchangeable
Preferred Stock, of which 246,179 shares are issued and outstanding as of the
date hereof and no shares are held as treasury stock. Schedule 4.1(e) in the
Company Disclosure Statement sets forth a true, accurate and complete list of
(a) each holder of record of shares of Class A Common Stock and Class B Common
Stock and the number of such shares held of record by each such holder, (b)
each optionee under the Options and the number of shares of Class A Common
Stock or Class B Common Stock issuable upon exercise of such Options and (c)
each holder of record of Warrants, and the number of shares of Class A Common
Stock and Class B Common Stock issuable upon exercise of such Warrants. All of
the outstanding shares of Class A Common Stock and Class B Common Stock are
duly authorized, validly issued, fully paid and nonassessable. As of the date
hereof, the 64,952 shares of Exchangeable Preferred Stock formerly held by
Bankamerica Capital Corporation have been redeemed by the Company at a total
redemption price (including interest to the date of redemption) of
$6,677,395.09, and such redemption was made in accordance with the terms of
the Preferred Stock Redemption Agreement with Bankamerica Capital Corporation.
Schedule 7.10 in the Company Disclosure Statement sets forth true and accurate
redemption amounts for the 10% Preferred Stock and the Exchangeable Preferred
Stock as of the respective redemption dates set forth therein calculated in
accordance with the terms of the Company's Restated Certificate of
Incorporation. Other then pursuant to the Stockholders Agreement, no class of
capital stock of the Company is entitled to preemptive rights. No options,
warrants or other rights to acquire capital stock from the Company or any
stockholder of the Company are outstanding, other than (a) the right to
convert shares of Class B Common Stock into Class A Common Stock and the right
to convert Class A Common Stock into Class B Common Stock pursuant to the
Restated Certificate of Incorporation of the Company, (b) Options and Warrants
described on Schedule 4.1(e) in the Company Disclosure Statement representing
in the aggregate the right to purchase up to 973,290 shares of Common Stock
and (c) pursuant to Section VII of the Stockholders Agreement. Except as
described under the heading "Capitalization" as the Company's actual
capitalization in the Preliminary Prospectus, there are no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote or which are convertible into or exercisable for securities having the
right to vote with stockholders of the Company on any matter. All outstanding
shares of capital stock of the Subsidiaries of the Company are owned by the
Company or a direct or indirect Wholly-Owned Subsidiary of the Company, free
and clear of all liens, charges, encumbrances, claims and options of any
nature. The Company Disclosure Statement or the S-1 Registration Statement
list, and the Company has delivered to RSI true and complete copies of, all
agreements and contracts, whether oral or written, relating to shares of
capital stock of the Company or options, warrants or other rights to acquire
capital stock of the Company (including, without limitation, any rights of
first refusal), including the Preferred Stock Redemption Agreements and all
amendments thereto, and all such agreements and contracts are in full force in
effect. Subject to the redemption of the Preferred Stock in accordance with
the Preferred Stock Redemption Agreements or as otherwise contemplated by
Section 7.10, no approval or consent of securityholders of the Company is
required under the Company's Restated Certificate of Incorporation or Bylaws,
the DGCL, the Stockholders Agreement
A-11
<PAGE>
or any other agreement, with respect to this Agreement, the Merger and the
transactions contemplated hereby, other than (i) the execution by each party
to the Stockholders Agreement of the Termination Agreement, which has been
effected, (ii) the affirmative vote of 66 2/3% of the outstanding shares of
Class A Common Stock and Class B Common Stock voting together as a class and
(iii) the affirmative vote of a majority of the votes represented by the
outstanding shares of Class A Common Stock, Class B Common Stock and
Exchangeable Preferred Stock, voting together as a class. The ML Entities
collectively hold of record a sufficient number of shares of Class A Common
Stock to approve this Agreement, the Merger and the transactions contemplated
hereby in accordance with the Company's Restated Certificate of Incorporation
and Bylaws, the Stockholders Agreement and the DGCL. The Stock Split was
effective on January 31, 1996, and effected in accordance with the Company's
Restated Certificate of Incorporation and Bylaws, the Stockholders Agreement
and the DGCL.
5.5. Other Interests. Except for interests in the Company's Subsidiaries,
neither the Company nor any of the Company's Subsidiaries owns, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust or entity (other than
(i) non-controlling investments in the ordinary course of business and
cooperative marketing and similar undertakings and arrangements entered into
in the ordinary course of business (ii) other investments, consisting of cash
equivalents and equity interests in former customers in settlement of
indebtedness, of less than $3,000,000 in the aggregate and (iii) Company
Management Loans and other loans to employees described in the Company
Disclosure Statement.
5.6. Litigation. There are no actions, suits, investigations or proceedings
pending or, to the knowledge of the Company, threatened against the Company or
any of its Subsidiaries, or any property of the Company or any such Subsidiary
in any court or before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, investigations or proceedings which,
in the aggregate, do not have and would not be reasonably expected (so far as
can be foreseen at the time) to (a) have a Company Material Adverse Effect or
(b) have the effect of preventing or materially delaying the performance by
the Company of its obligations under this Agreement.
5.7. Compliance with Other Instruments, Etc. Neither the Company nor any
Subsidiary of the Company is in violation of any term of (a) its charter,
bylaws or other organizational documents, (b) any agreement or instrument
related to indebtedness for borrowed money or any other agreement to which it
is a party or by which it is bound, (c) any applicable law, ordinance, rule or
regulation of any Governmental Body, or (d) any applicable order, judgment or
decree of any court, arbitrator or Governmental Body, the consequences of
which violation, whether individually or in the aggregate, have or would be
reasonably expected (so far as can be foreseen at the time) to (i) have a
Company Material Adverse Effect or (ii) have the effect of preventing or
materially delaying the performance by the Company of its obligations under
this Agreement. The execution, delivery and performance of this Agreement by
the Company will not result in any violation of or conflict with, constitute a
default under, or require any consent under any terms of the charter, by-laws
or other organizational document of the Company (or any of its Subsidiaries)
or any such agreement, instrument, law, ordinance, rule, regulation, order,
judgment or decree or result in the creation of (or impose any obligation on
the Company or any of its Subsidiaries to create) any mortgage, lien, charge,
security interest or other encumbrance upon any of the properties or assets of
the Company or any of its Subsidiaries pursuant to any such term, except where
such violation, conflict or default, or the failure to obtain such consent,
individually or in the aggregate, does not have and would not be reasonably
expected (so far as can be foreseen at the time) to (i) have a Company
Material Adverse Effect or (ii) have the effect of preventing or materially
delaying the performance by the Company of its obligations under this
Agreement.
5.8. Employee Benefit Plans. (a) The Preliminary Prospectus, the "Exhibit
Index" to the S-1 Registration Statement or the Company Disclosure Statement
sets forth a true and complete list of all the following: (x) each "employee
benefit plan," as such term is defined in Section 3(3) of ERISA, pursuant to
which the Company or any of its Subsidiaries has (A) any liability in respect
of current or former employees, agents, directors, or independent contractors
of the Company or its Subsidiaries ("Employees") or any beneficiaries or
dependents of any Employees or (B) any obligation to issue capital stock of
the Company or any of its Subsidiaries (each,
A-12
<PAGE>
an "Employee Plan"), and (y) each other plan, program, policy, contract or
arrangement providing for bonuses, pensions, deferred pay, stock or stock
related awards, severance pay, salary continuation or similar benefits,
hospitalization, medical, dental or disability benefits, life insurance or
other employee benefits, or compensation to or for any Employees or any
beneficiaries or dependents of any Employees (other than directors' and
officers' liability policies), whether or not insured or funded, (A) pursuant
to which the Company or any of its Subsidiaries has any material liability or
(B) constituting an employment or severance agreement or arrangement with any
officer or director of the Company or any Subsidiary or with any holder of
Shares (each, a "Benefit Arrangement"). The Company has used its reasonable
efforts to provide to RSI with respect to each Employee Plan and Benefit
Arrangement: (i) a true and complete copy of all written documents comprising
such Employee Plan or Benefit Arrangement and any related trust agreement,
insurance contract or other funding vehicle (including amendments and
individual agreements relating thereto, or, if there is no such written
document, an accurate and complete description of such Employee Plan or
Benefit Arrangement); (ii) the most recent Form 5500 or Form 5500-C/R
(including all schedules thereto), if applicable; (iii) the most recent
financial statements and actuarial reports or valuations, if any; (iv) the
summary plan description currently in effect and all material modifications
thereof, if any; and (v) the most recent Internal Revenue Service
determination letter, if any. Any such Employee Plans and Benefit Arrangements
for which the Company has not so provided such documents after using its
reasonable efforts are not in the aggregate material to the Company and its
Subsidiaries taken as a whole.
(b) Each Employee Plan and Benefit Arrangement has been established,
operated and maintained in all material respects in accordance with its terms
and in material compliance with all applicable laws and the rules and
regulations thereunder, including, but not limited to, ERISA and the Code.
Neither the Company nor any of its Subsidiaries or former Subsidiaries nor any
of their respective current or former directors, officers, or employees, nor,
to the best knowledge of the Company, any other disqualified person or party-
in-interest with respect to any Employee Plan, have engaged directly or
indirectly in any "prohibited transaction," as such term is defined in Section
4975 of the Code or Section 406 of ERISA, with respect to which the Company or
its Subsidiaries could have or has any material liability. All contributions
and other payments required to be made for any period through the date to
which this representation speaks to the Employee Plans and Benefit
Arrangements (or to any person pursuant to the terms thereof) have been made
or paid in a timely fashion, or, to the extent not required to be made or paid
on or before the date to which this representation speaks, have been reflected
in the Company's financial statements. Each Employee Plan that is intended to
be qualified under Section 401(a) of the Code has, as amended or proposed to
be amended to comply with the Tax Reform Act of 1986 and subsequent
legislation, been determined by the Internal Revenue Service to be so
qualified or an application for such a determination, which was filed before
the expiration of the applicable remedial amendment period, is pending, and,
to the best knowledge of the Company, no circumstances exist that are
reasonably expected by the Company to result in the revocation of any such
determination.
(c) With respect to each Employee Plan that is subject to Title IV of ERISA:
(i) as of the last applicable annual valuation date, the present value of all
benefits under such Employee Plan did not exceed the value of the assets of
such Employee Plan allocable to such benefits, on a projected benefits basis,
using the actuarial methods, factors and assumptions used for the most recent
actuarial report with respect to such Employee Plan; and (ii) there has been
no termination, partial termination or "reportable event" (as defined in
Section 4043 of ERISA) with respect to any such Employee Plan. No Employee
Plan that is subject to Section 412 of the Code has incurred any "accumulated
funding deficiency" (as defined in Section 412 of the Code), whether or not
waived. No event has occurred, and, to the best knowledge of the Company,
there do not exist any circumstances, that could subject the Company or any
Subsidiary of the Company to any material liability arising under ERISA. With
respect to the Employee Plans and Benefit Arrangements, individually and in
the aggregate, no event has occurred, and, to the best knowledge of the
Company, there do not exist any circumstances, that could subject the Company
or any Subsidiary of the Company to any material liability under the Code or
other applicable law, or under any indemnity agreement to which the Company or
any Subsidiary of the Company is a party, excluding liability for benefit
claims, administrative expenses and funding obligations payable in the
ordinary course.
A-13
<PAGE>
(d) No Employee Plan is a "multiemployer plan" as that term is defined in
Section 3(37) of ERISA or a "multiple employer plan" described in Section
4063(a) of ERISA, nor has the Company or any ERISA Affiliate of the Company at
any time since January 1, 1992, contributed to or been obligated to contribute
to such a multiemployer plan or multiple employer plan.
(e) Except with respect to an Employee Plan, neither the Company nor any
ERISA Affiliate of the Company has any Controlled Group Liability, nor do any
circumstances exist that could result in any of them having any Controlled
Group Liability. "Controlled Group Liability" means any and all liabilities
under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and
4971 of the Code and (iv) the continuation coverage requirements of Section
601 et seq. of ERISA and Section 4980B of the Code.
(f) Neither the execution or delivery of this Agreement, nor the
consummation of the transactions contemplated hereby (either alone or together
with any additional or subsequent events), constitutes an event under any
Employee Plan, Benefit Arrangement, loan to, or individual agreement or
contract with, an Employee that may result in any payment (whether of
severance pay or otherwise), restriction or limitation upon the assets of any
Employee Plan or Benefit Arrangement, acceleration of payment or vesting,
increase in benefits or compensation, or required funding, with respect to any
Employee, or the forgiveness of any loan or other commitment of any Employees.
(g) There are no actions, suits, arbitrations, inquiries, investigations or
other proceedings (other than routine claims for benefits) pending or, to the
Company's knowledge, threatened, with respect to any Employee Plan or Benefit
Arrangement.
(h) No Employees and no beneficiaries or dependents of Employees are or may
become entitled under any Employee Plan or Benefit Arrangement to post-
employment or retiree welfare benefits of any kind, including without
limitation death or medical benefits, other than coverage mandated by Part 6
of Title I of ERISA or Section 4980B of the Code or other applicable law.
5.9. Labor Matters. There are no agreements with, or pending petitions for
recognition of, a labor union or association as the exclusive bargaining agent
for any of the employees of the Company or any of its Subsidiaries; no such
petitions have been pending at any time within two years of the date of this
Agreement and, to the best knowledge of the Company, there has not been any
organizing effort by any union or other group seeking to represent any
employees of the Company or any of its Subsidiaries as their exclusive
bargaining agent at any time within two years of the date of this Agreement.
There are no labor strikes, work stoppages or other labor troubles, other than
routine grievance matters, now pending, or, to the Company's knowledge,
threatened, against the Company or any of its Subsidiaries, nor have there
been any such labor strikes, work stoppages or other labor troubles, other
than routine grievance matters, with respect to the Company or any of its
Subsidiaries at any time within two years of the date of this Agreement.
5.10. Taxes. (a) The Company and its Subsidiaries have timely filed all
federal, state, county, local and foreign tax returns, reports, declarations
and forms ("Tax Returns") required to be filed by them, or requests for
extensions to file such Tax Returns have been timely filed and granted and
have not expired, and all Tax Returns are complete and accurate in all
respects, except to the extent that such failures to file or be complete and
accurate in all respects, as applicable, individually or in the aggregate do
not have and would not reasonably be expected (so far as can be foreseen at
the time) to have a Company Material Adverse Effect. The Company and each of
its Subsidiaries has paid (or the Company has paid on its behalf) or made
adequate provision for all taxes shown as due on such Tax Returns. The Company
and each of its Subsidiaries have paid or made adequate provision for all
taxes required to be paid without the filing of any Tax Returns which have
become due and payable. The most recent financial statements contained in the
Preliminary Prospectus reflect adequate reserves for all taxes payable by the
Company and its Subsidiaries for all taxable periods and portions thereof
accrued through the date of such financial statements, and no deficiencies for
any taxes have been proposed, asserted or assessed against the Company or any
of its Subsidiaries that are not adequately reserved for, except for
inadequately reserved taxes and inadequately reserved deficiencies that,
individually or in the aggregate, do not have and
A-14
<PAGE>
would not reasonably be expected (so far as can be foreseen at the time) to
have a Company Material Adverse Effect. Neither the Company nor any of its
Subsidiaries has any reasonable basis to believe that any such deficiencies
exist in excess of such established reserves. The consolidated federal income
tax returns of the Company have been audited by the Internal Revenue Service
(or closed by applicable statute of limitations), and all liabilities in
respect thereof have been finally determined, for all taxable years up to and
including the taxable year ended December 31, 1991. Neither the Company nor
any of its Subsidiaries is a party to any pending or has knowledge of any
threatened action or proceeding by any taxing authority for the determination,
assessment or collection of any taxes of the Company or any of its
Subsidiaries or relating to their respective businesses and operations. There
are no liens for taxes (other than for current taxes not yet due and payable)
on the assets of the Company or its Subsidiaries. No requests for waivers of
the time to assess any taxes against the Company or any of its Subsidiaries
have been granted or are pending, except for requests with respect to such
taxes that have been adequately reserved for in the most recent financial
statements contained in the Preliminary Prospectus, or, to the extent not
adequately reserved, the assessment of which, individually or in the
aggregate, do not have and would not reasonably be expected (so far as can be
foreseen at the time) to have a Company Material Adverse Effect. Neither the
Company nor any of its Subsidiaries is a party to or bound by any agreement
providing for the allocation or sharing of taxes. Neither the Company nor any
of its Subsidiaries has filed a consent pursuant to or agreed to the
application of Section 341(f) of the Code. Each of the Company and its
Subsidiaries has disclosed on its federal income tax returns all positions
taken therein that could give rise to a substantial understatement of federal
income tax within the meaning of Section 6662 of the Code. All taxes that are
required by the laws of the United States, any state or political subdivision
thereof, or any foreign country to be withheld or collected by the Company or
any of its Subsidiaries have been duly withheld or collected and, to the
extent required, have been paid to the proper governmental authorities or
properly deposited as required by applicable laws. None of the Company and its
Subsidiaries (i) has been a member of an affiliated group filing a
consolidated federal income tax return (other than a group the common parent
of which was the Company), or (ii) has any liability for the taxes of any
Person (other than any of the Company and its Subsidiaries) under Treas. Reg.
(S) 1.1502-6 (or any similar provision of state, local, or foreign law), as a
transferee or successor, by contract or otherwise. Neither the Company nor any
of its Subsidiaries will be required, as a result of a change in method of
accounting for a taxable year beginning on or before the Closing Date, to
include any adjustment under Section 481(a) of the Code in its taxable income
for any taxable year beginning after the Closing Date. Neither the Company nor
any of its Subsidiaries is or has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code. For purposes
of this Agreement, the term tax (including, with correlative meaning, the
terms "taxes" and "taxable") shall include all federal, state, local, and
foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, and other taxes, duties, or
assessments of any nature whatsoever, together with all interest, penalties,
and additions imposed with respect to such amounts.
(b) The Company Disclosure Statement sets forth each state in which the
Company and its Subsidiaries (i) filed an income or franchise tax return,
whether on a consolidated, combined or separate return basis, for the taxable
year ended December 31, 1995, and (ii) collected or remitted any sales and/or
use taxes as of December 31, 1995.
(c) Neither the Company nor any of its Subsidiaries owns any real property
in the State of New York. The only real property leased by the Company or any
of its Subsidiaries in the State of New York consists of three offices,
designated as Office #100, Office #101B and Office #105, located in the
Pickard Office Building, 5858 East Molloy Road, Syracuse, New York 13211.
(d) Neither the Company nor any of its Subsidiaries has taken or agreed to
take any action that would prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
5.11. Intellectual Property. The Company and its Subsidiaries own, or
possess valid licenses or other valid rights to use, the Intellectual Property
used in the Company's business, except where the failure to own or have the
right to use such Intellectual Property, in the aggregate, does not have and
would not be reasonably expected (so far as can be foreseen at the time) to
have a Company Material Adverse Effect.
A-15
<PAGE>
5.12. Properties. Except as disclosed or reserved against in the most recent
financial statements contained in the Preliminary Prospectus, the Company and
each of its Subsidiaries have good and marketable title to all of the material
properties and assets, tangible or intangible, reflected in such financial
statements as being owned by the Company and each of its Subsidiaries as of
the dates thereof, free and clear of all liens, encumbrances, charges,
defaults or equities of whatever character except such imperfections or
irregularities of title, liens, encumbrances, charges or defaults that do not
affect the use thereof in any material respect and statutory liens securing
payments not yet due ("Liens"). All leased buildings and all leased fixtures,
equipment and other property and assets that are material to the Company's
business on a consolidated basis are held under leases or subleases that are
valid and binding instruments enforceable in accordance with their respective
terms, and there is not under any of such leases, any existing material
default or event of default (or event which with notice or lapse of time, or
both, would constitute a material default), except where the lack of such
validity and binding nature or the existence of such default or event of
default does not have and would not reasonably be expected (so far as can be
foreseen at the time) to have a Company Material Adverse Effect.
5.13. Environmental Matters. Except in all cases that, in the aggregate,
have not had and would not reasonably be expected (so far as can be foreseen
at the time) to have a Company Material Adverse Effect, the Company and each
of its Subsidiaries (i) have obtained all applicable permits, licenses and
other authorizations which are required to be obtained under all applicable
federal, state, local or foreign laws or any regulation, code, plan, order,
decree, judgment, notice or demand letter issued, entered, promulgated or
approved thereunder relating to pollution or protection of the environment
("Environmental Laws"), including laws relating to emissions, discharges,
releases or threatened releases of pollutants, contaminants, or hazardous or
toxic materials or wastes into ambient air, surface water, ground water, or
land or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants or hazardous or toxic materials or wastes by the Company or its
Subsidiaries (or their respective agents); (ii) are in compliance with all
terms and conditions of such required permits, licenses and authorization, and
also are in compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in applicable Environmental Laws; (iii) as of the date hereof, are
not aware of nor have received notice of any past or present violations of
Environmental Laws, or any event, condition, circumstance, activity, practice,
incident, action or plan which is reasonably likely to interfere with or
prevent continued compliance with or which would give rise to any common law
or statutory liability, or otherwise form the basis of any claim, action, suit
or proceeding, against the Company or any of its Subsidiaries based on or
resulting from the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling, or the emission, discharge or
release into the environment, of any pollutant, contaminant or hazardous or
toxic material or waste; and (iv) have taken all actions necessary under
applicable Environmental Laws to register any products or materials required
to be registered by the Company or its Subsidiaries (or any of their
respective agents) thereunder.
5.14. Registration Statement and Financial Statements. The Company has
previously furnished or made available to RSI a true and complete copy of the
S-1 Registration Statement and all exhibits thereto that were filed with the
SEC. The S-1 Registration Statement, as of the date of the Preliminary
Prospectus, contained no untrue statement of material fact nor omitted 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 RSI acknowledges that (i) the
Company's recapitalization, refinancing, initial public offering, new stock
option plan, option vesting and forgiveness of the Company Management Loans as
described in the S-1 Registration Statement have not been consummated, and
(ii) the descriptions of the amended and restated Stockholders Agreement, the
Company's Restated Certificate of Incorporation and the Company's Bylaws
contained in the S-1 Registration Statement reflect amendments which have not
been implemented. Each of the balance sheets (including the related notes)
included in the S-1 Registration Statement presents fairly, in all material
respects, the consolidated financial position of the Company and its
Subsidiaries as of the respective dates thereof, and the other related
statements (including the related notes) included therein present fairly, in
all material respects, the results of operations, changes in shareholders
equity and cash flows of the Company and its Subsidiaries for the respective
periods or as of the respective dates set forth therein, all in conformity
with
A-16
<PAGE>
generally accepted accounting principles consistently applied during the
periods involved, except as otherwise noted therein, and subject, in the case
of the unaudited interim financial statements, to normal year-end adjustments
and any other adjustments described therein. The Company has provided to RSI
true and correct copies of the Company's unaudited consolidated financial
statements as of, and for the year ended, December 31, 1995. Such unaudited
financial statements present fairly in all material respects, the results of
operations and cash flows of the Company and its Subsidiaries as of, and for
the year ended, December 31, 1995, all in conformity with general accepted
accounting principles consistently applied during the period involved except
as otherwise noted therein and except for the absence of footnote disclosure,
and subject to normal audit adjustments and any other adjustments described
therein. The S-1 Registration Statement, as of its date, complied in all
material respects with the disclosure requirements of Form S-1 and Regulation
S-K under the Securities Act.
5.15. Absence of Certain Changes or Events. During the period since December
31, 1995, the business of the Company and its Subsidiaries has been conducted
only in the ordinary course, consistent with past practice, and neither the
Company nor any Subsidiary of the Company has entered into any material
transaction other than in the ordinary course, consistent with past practice,
and there has not been (a) any change in the business, financial condition,
results of operations, properties, assets or liabilities of the Company and
its Subsidiaries taken as a whole that, individually or in the aggregate, has
or would reasonably be expected to have (so far as can be foreseen at the
time) a Company Material Adverse Effect, (b) any damage, destruction or loss
(whether or not covered by insurance) with respect to any property or asset of
the Company or any of its Subsidiaries which, individually or in the
aggregate, has or would reasonably be expected (so far as can be foreseen at
the time) to have a Company Material Adverse Effect, (c) any change by the
Company in its accounting, methods, principles or practices, other than
immaterial changes consistent with generally accepted accounting principles,
(d) any declaration, setting aside or payment of any dividend or distribution
in respect of any capital stock of the Company or any of its Subsidiaries or
any redemption, purchase or other acquisition of any of their respective
securities other than dividends by any Subsidiary of the Company to the
Company and other than the redemption of the Preferred Stock held by
Bankamerica Capital Corporation for the amount of $6,677,395.09 which occurred
on December 15, 1995 in accordance with the Preferred Stock Redemption
Agreement with Bankamerica Capital Corporation, (e) except after the date
hereof as permitted by Section 7.1(d), any entering into, establishment or
amendment of, any Employee Plan or Benefit Arrangement (including, without
limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), or any other increase (other
than ordinary course increases) in the compensation payable or to become
payable to any officers or key employees of the Company or any Subsidiary of
the Company, except for immaterial severance payments to departing employees
consistent with past practice.
5.16. Contracts and Leases. The S-1 Registration Statement and the Company
Disclosure Statement contain an accurate and complete listing of all
contracts, leases, agreements or understandings, whether written or oral,
required to be described in, or filed as exhibits to, the S-1 Registration
Statement pursuant to the Securities Act and the applicable rules and
regulations thereunder, or which are otherwise material to the business,
properties, operations or financial condition of the Company and its
Subsidiaries taken as a whole. Each of such contracts, leases, agreements and
understandings is in full force and effect and (a) none of the Company or its
Subsidiaries or, to the Company's best knowledge, any other party thereto, has
breached or is in default thereunder, (b) no event has occurred which, with
the passage of time or the giving of notice would constitute such a breach or
default, (c) no claim of default thereunder has, to the Company's best
knowledge, been asserted or threatened and (d) none of the Company or its
Subsidiaries or, to the Company's best knowledge, any other party thereto is
seeking the renegotiation thereof or substitute performance thereunder, except
where such breach or default, or attempted renegotiation or substitute
performance, individually or in the aggregate, does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have a Company
Material Adverse Effect. The Company has provided RSI or its representative
with accurate and complete copies of all such contracts, leases, agreements
and understandings.
5.17. Affiliated Transactions. The S-1 Registration Statement contains an
accurate and complete description of all contracts, leases, agreements or
understandings, whether written or oral, with or on behalf of any Affiliate
A-17
<PAGE>
of the Company, to which the Company or any of its Subsidiaries is a party or
is otherwise bound and which is required to be described in the S-1
Registration Statement pursuant to the Securities Act and the applicable rules
and regulations thereunder.
5.18. Brokers and Finders. Except for the fees and expenses payable to
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), which
fees and expenses are reflected in its agreement with the Company, a true and
complete copy of which has been furnished to RSI, the Company has not employed
any investment banker, broker, finder or intermediary in connection with the
transactions contemplated by this Agreement or any other transactions which
would be entitled to any investment banking, brokerage, finder's or similar
fee or commission in connection with this Agreement, the transactions
contemplated hereby or any other transactions.
5.19. S-4 Registration Statement and Proxy Statement/ Prospectus. None of
the information supplied or to be supplied by the Company for inclusion in the
S-4 Registration Statement or the Proxy Statement/Prospectus will (a) in the
case of the S-4 Registration Statement, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading or (b) in the case of the Proxy
Statement/Prospectus, at the time of the mailing of the Proxy
Statement/Prospectus and at the time of the RSI Stockholders 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. If at any time prior to the Effective Time any event with respect
to the Company, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement
to, the Proxy Statement/Prospectus or the S-4 Registration Statement, the
Company shall notify RSI thereof by reference to this Section 5.19 and such
event shall be so described to RSI.
5.20. Tax Matters. The representations set forth in the numbered paragraphs
of the form of Tax Matters Certificate of the Company attached to the Company
Disclosure Statement (the "Company Tax Matters Certificate") are true and
correct in all respects, and such representations are hereby incorporated
herein by reference with the same effect as if set forth herein in their
entirety.
5.21. Stockholders Agreement. The Company has delivered to RSI a true and
complete copy of an amendment to the Stockholders Agreement executed by each
stockholder of the Company and providing that immediately prior to the
Effective Time all terms and provisions of the Stockholders Agreement shall be
terminated and of no further force and effect (the "Termination Agreement").
As of the Effective Time, the Termination Agreement shall be in full force and
effect, and shall not have been amended or modified in any respect.
5.22. Opinion of Financial Advisor. Merrill Lynch has delivered to the Board
of Directors of the Company its written opinion to the effect that, as of the
date of such opinion, the Exchange Ratio was fair, from a financial point of
view, to the Company's stockholders.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF RSI AND MERGER SUB
RSI and Merger Sub each represents and warrants to the Company that, except
as set forth in the RSI SEC Reports or the RSI Disclosure Statement:
6.1. Organization, Etc. of RSI. RSI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to own and operate its properties,
to carry on its business as now conducted and proposed by RSI to be conducted,
to enter into this Agreement and to carry out the provisions of this Agreement
and consummate the transactions contemplated hereby. RSI is duly qualified and
in good standing in each jurisdiction in which the property owned, leased or
A-18
<PAGE>
operated by it or the nature of the business conducted by it makes such
qualification necessary and where the failure to be so qualified has or would
be reasonably expected (so far as can be foreseen at the time) to have an RSI
Material Adverse Effect. RSI has obtained from the appropriate Governmental
Bodies all approvals and licenses necessary for the conduct of its business
and operations as currently conducted, which approvals and licenses are valid
and remain in full force and effect, except where the failure to have obtained
such approvals or licenses or the failure of such licenses and approvals to be
valid and in full force and effect does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have an RSI Material
Adverse Effect. RSI is not subject to any order, complaint, proceeding or
investigation pending or, to the knowledge of RSI, threatened, which affects
or would be reasonably expected (so far as can be foreseen at the time) to
affect the validity of any such approvals or licenses or impair the renewal
thereof, except where the invalidity of any such approvals or licenses or the
non-renewal thereof does not have and would not be reasonably expected (so far
as can be foreseen at the time) to have an RSI Material Adverse Effect.
6.2. Subsidiaries. Each Subsidiary of RSI (a) is a corporation or other
legal entity duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization and has the full corporate power
and authority to own its properties and conduct its business and operations as
currently conducted, except where the failure to be duly organized, validly
existing and in good standing does not have, and would not be reasonably
expected (so far as can be foreseen at the time) to have, an RSI Material
Adverse Effect, (b) is duly qualified and in good standing in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where the failure to be so qualified does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have an RSI
Material Adverse Effect (c) has obtained from the appropriate Governmental
Bodies all approvals and licenses necessary for the conduct of its business
and operations as currently conducted, which licenses and approvals are valid
and remain in full force and effect, except where the failure to have obtained
such approvals and licenses or the failure of such licenses and approvals to
be valid and in full force and effect does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have an RSI
Material Adverse Effect, and (d) is subject to no order, complaint, proceeding
or investigation pending or, to the knowledge of RSI or such Subsidiary,
threatened, which would be reasonably expected (so far as can be foreseen at
the time) to affect the validity of any such approvals or licenses or impair
the renewal thereof, except where the invalidity of any such approvals or
licenses or the non-renewal thereof does not have and would not be reasonably
expected (so far as can be foreseen at the time) to have an RSI Material
Adverse Effect. RSI has no Subsidiaries other than Merger Sub, RSI, Inc., John
Sexton & Co. and Duke Associates.
6.3. Agreement. On February 2, 1996, the Board of Directors of RSI and
Merger Sub approved, by the unanimous vote of those directors present, the
Merger, this Agreement and the transactions contemplated hereby, and on such
date the Board of Directors of RSI approved recommending approval of the
issuance of RSI Common Shares in connection with the Merger to the
stockholders of RSI. RSI as sole stockholder of Merger Sub has approved the
Merger, this Agreement and the transactions contemplated hereby. This
Agreement has been duly executed and delivered by a duly authorized officer of
each of RSI and Merger Sub and constitutes a valid and binding agreement of
RSI and Merger Sub, enforceable against RSI and Merger Sub in accordance with
its terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general application which
may affect the enforcement of creditors' rights generally and by general
equitable principles. RSI has delivered to the Company true and correct copies
of resolutions adopted by the Board of Directors of each of RSI and Merger Sub
approving this Agreement. The Board of Directors of RSI has taken all
necessary action to cause the supermajority vote provisions of Section 203 of
the DGCL and Articles Twelfth and Fourteenth of RSI's Amended and Restated
Certificate of Incorporation to be inapplicable to the transactions
contemplated and authorized by this Agreement. The Board of Directors of RSI
has taken all necessary action to cause the dilution provisions of the Rights
Agreement to be inapplicable to the transactions contemplated and authorized
by this Agreement, without any payment to the holders of the rights issued
pursuant thereto. RSI has executed and delivered the Second Amendment and
Third Amendment to the Rights Agreement, true and complete copies of which
have been furnished to the Company. The Second Amendment to the Rights
Agreement is in full force and effect, and upon execution of the Third
Amendment to the Rights Agreement by
A-19
<PAGE>
the Rights Agent, will be superseded by the Third Amendment to the Rights
Agreement. No approval or consent of securityholders of RSI is required under
RSI's Amended and Restated Certificate of Incorporation or Bylaws, the DGCL,
RSI's NYSE listing agreement or any other agreement, with respect to this
Agreement, the Merger and the transactions contemplated and authorized hereby,
other than such vote required by NYSE Rule 312.05.
6.4. Capital Stock. The authorized capital stock of RSI consists of (a)
40,000,000,000 RSI Common Shares and (ii) 10,000,000 shares of preferred
stock, of the par value of $.10 per share, 50,000 of which have been
designated as Series A Junior Participating Preferred Stock. All of the
outstanding shares of capital stock of RSI are duly authorized, validly
issued, fully paid and nonassessable. As of the close of business on January
26, 1996, 14,796,516 RSI Common Shares and no shares of preferred stock were
issued and outstanding. No class of capital stock of RSI is entitled to
preemptive rights. No options, warrants or other rights to acquire capital
stock from RSI are outstanding, other than as set forth in the RSI SEC Reports
or as heretofore otherwise disclosed in writing to the Company. Except as set
forth in the RSI SEC Reports, there are no outstanding bonds, debentures,
notes or other obligations the holders of which have the right to vote or
which are convertible into or exercisable for securities having the right to
vote with stockholders of RSI on any matter. Except as disclosed in the RSI
SEC Reports, all outstanding shares of capital stock of the Subsidiaries of
RSI are owned by RSI, free and clear of all liens, charges, encumbrances,
claims and options of any nature. The RSI Disclosure Statement or the RSI SEC
Reports list, and RSI has delivered to the Company true and complete copies
of, all agreements, contracts or understandings, whether oral or written,
relating to shares of capital stock of RSI or options, warrants or other
rights to acquire capital stock of RSI (including, without limitation, any
rights of first refusal), and all such agreements, contracts and
understandings are in full force and effect.
6.5. Authorization for RSI Common Shares. Prior to the Effective Time, RSI
will have taken all necessary action to permit it to issue the number of RSI
Common Shares required to be issued pursuant to Article IV. The RSI Common
Shares issued pursuant to Article IV will, when issued, be duly authorized,
validly issued, fully paid and nonassessable and no stockholder of RSI will
have any preemptive right of subscription or purchase in respect thereof. The
RSI Common Shares will, when issued, be registered under the Securities Act
and the Exchange Act, and registered or exempt from registration under any
applicable state securities laws and listed on the New York Stock Exchange.
6.6. Other Interests. Except for interests in RSI's Subsidiaries, neither
RSI nor any of RSI's Subsidiaries owns, directly or indirectly, any interest
or investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than (i) non-controlling investments
in the ordinary course of business and cooperative marketing and similar
undertakings and arrangements entered into in the ordinary course of business
and (ii) other investments, consisting of cash equivalents and equity
interests in former customers in settlement of indebtedness, of less than
$3,000,000 in the aggregate).
6.7. Litigation. The RSI Disclosure Statement lists all actions, suits,
investigations or proceedings pending or, to the knowledge of RSI, threatened
against RSI or any of its Subsidiaries, or any property of RSI or any such
Subsidiary, in any court or before any arbitrator of any kind or before or by
any Governmental Body, except actions, suits, investigations or proceedings
which, in the aggregate, do not have and would not be reasonably expected (so
far as can be foreseen at the time) to (a) have an RSI Material Adverse Effect
or (b) have the effect of preventing or materially delaying the performance by
RSI of its obligations under this Agreement.
6.8. Compliance with Other Instruments, Etc. Neither RSI nor any Subsidiary
of RSI is in violation of any terms of (a) its charter, by-laws or other
organizational documents, (b) any agreement or instrument related to
indebtedness for borrowed money or any other agreement to which it is a party
or by which it is bound, (c) any applicable law, ordinance, rule or regulation
of any Governmental Body, or (d) any applicable order, judgment or decree of
any court, arbitrator or Governmental Body, the consequences of which
violation, whether individually or in the aggregate, have or would be
reasonably expected (so far as can be foreseen at the time) to (i) have an RSI
Material Adverse Effect or (ii) have the effect of preventing or materially
delaying the performance by RSI of its obligations under this Agreement. The
execution, delivery and performance of this Agreement by each of RSI and
Merger Sub will not result in any violation of or conflict with, constitute a
default
A-20
<PAGE>
under, or require any consent under any terms of the charter or by-laws of RSI
(or any of its Subsidiaries) or any such agreement, instrument, law,
ordinance, rule, regulation, order, judgment or decree or result in the
creation of (or impose any obligation on RSI or any of its Subsidiaries to
create) any mortgage, lien, charge, security interest or other encumbrance
upon any of the properties or assets of RSI or any of its Subsidiaries
pursuant to any such term, except where such violation, conflict or default,
or the failure to obtain such consent, individually or in the aggregate, does
not have and would not be reasonably expected (so far as can be foreseen at
the time) to (i) have an RSI Material Adverse Effect or (ii) have the effect
of preventing or materially delaying the performance by RSI of its obligations
under this Agreement.
6.9. Employee Benefit Plans. (a) The RSI SEC Reports or the RSI Disclosure
Statement sets forth a true and complete list of all the following: (x) each
"employee benefit plan," as such term is defined in Section 3(3) of ERISA,
pursuant to which RSI or any of its Subsidiaries has (A) any liability in
respect of current or former employees, agents, directors, or independent
contractors of RSI or its Subsidiaries ("RSI Employees") or any beneficiaries
or dependents of any RSI Employees or (B) any obligation to issue capital
stock of RSI or any of its Subsidiaries (each, an "RSI Employee Plan"), and
(y) each other plan, program, policy, contract or arrangement providing for
bonuses, pensions, deferred pay, stock or stock related awards, severance pay,
salary continuation or similar benefits, hospitalization, medical, dental or
disability benefits, life insurance or other employee benefits, or
compensation to or for any RSI Employees or any beneficiaries or dependents of
any RSI Employees (other than directors' and officers' liability policies),
whether or not insured or funded, (A) pursuant to which RSI or any of its
Subsidiaries has any material liability or (B) constituting an employment or
severance agreement or arrangement with any officer or director of RSI or any
Subsidiary or with any holder of RSI Common Shares (each, an "RSI Benefit
Arrangement"). RSI has used its reasonable efforts to provide to the Company
with respect to each RSI Employee Plan and RSI Benefit Arrangement: (i) a true
and complete copy of all written documents comprising such RSI Employee Plan
or RSI Benefit Arrangement and any related trust agreement, insurance contract
or other funding vehicle (including amendments and individual agreements
relating thereto, or, if there is no such written document, an accurate and
complete description of such RSI Employee Plan or RSI Benefit Arrangement);
(ii) the most recent Form 5500 or Form 5500-C/R (including all schedules
thereto), if applicable; (iii) the most recent financial statements and
actuarial reports or valuations, if any; (iv) the summary plan description
currently in effect and all material modifications thereof, if any; and (v)
the most recent Internal Revenue Service determination letter, if any. Any
such RSI Employee Plans and RSI Benefit Arrangements for which RSI has not so
provided such documents after using its reasonable efforts are not in the
aggregate material to RSI and its Subsidiaries taken as a whole.
(b) Each RSI Employee Plan and RSI Benefit Arrangement has been established,
operated and maintained in all material respects in accordance with its terms
and in material compliance with all applicable laws and the rules and
regulations thereunder, including, but not limited to, ERISA and the Code.
Neither RSI nor any of its Subsidiaries or former Subsidiaries nor any of
their respective current or former directors, officers, or employees, nor, to
the best knowledge of RSI, any other disqualified person or party-in-interest
with respect to any RSI Employee Plan, have engaged directly or indirectly in
any "prohibited transaction," as such term is defined in Section 4975 of the
Code or Section 406 of ERISA, with respect to which RSI or its Subsidiaries
could have or has any material liability. All contributions and other payments
required to be made for any period through the date to which this
representation speaks to the RSI Employee Plans and RSI Benefit Arrangements
(or to any person pursuant to the terms thereof) have been made or paid in a
timely fashion, or, to the extent not required to be made or paid on or before
the date to which this representation speaks, have been reflected in the RSI's
financial statements. Each RSI Employee Plan that is intended to be qualified
under Section 401(a) of the Code has, as amended or proposed to be amended to
comply with the Tax Reform Act of 1986 and subsequent legislation, been
determined by the Internal Revenue Service to be so qualified or an
application for such a determination, which was filed before the expiration of
the applicable remedial amendment period, is pending, and, to the best
knowledge of RSI, no circumstances exist that are reasonably expected by RSI
to result in the revocation of any such determination.
(c) With respect to each RSI Employee Plan that is subject to Title IV of
ERISA: (i) as of the last applicable annual valuation date, the present value
of all benefits under such RSI Employee Plan did not exceed the value
A-21
<PAGE>
of the assets of such RSI Employee Plan allocable to such benefits, on a
projected benefits basis, using the actuarial methods, factors and assumptions
used for the most recent actuarial report with respect to such RSI Employee
Plan; and (ii) there has been no termination, partial termination or
"reportable event" (as defined in Section 4043 of ERISA) with respect to any
such RSI Employee Plan. No RSI Employee Plan that is subject to Section 412 of
the Code has incurred any "accumulated funding deficiency" (as defined in
Section 412 of the Code), whether or not waived. No event has occurred, and,
to the best knowledge of RSI there do not exist any circumstances, that could
subject RSI or any Subsidiary of RSI to any material liability arising under
ERISA. With respect to the RSI Employee Plans and RSI Benefit Arrangements,
individually and in the aggregate, no event has occurred, and, to the best
knowledge of RSI there do not exist any circumstances, that could subject RSI
or any Subsidiary of RSI to any material liability arising under the Code or
other applicable law, or under any indemnity agreement to which RSI or any
Subsidiary of RSI is a party, excluding liabilities for benefit claims,
administrative expenses and funding obligations payable in the ordinary
course.
(d) No RSI Employee Plan is a "multiple employer plan" described in Section
4063(a) of ERISA, nor has RSI or any ERISA Affiliate of RSI at any time since
January 1, 1994, contributed to or been obligated to contribute to such a
multiple employer plan. With respect to any "multiemployer plan" as defined in
Section 3(37) of ERISA contributed to by RSI or any ERISA Affiliate, to the
best knowledge of RSI, after due inquiry, if RSI or any Subsidiary of RSI were
to have withdrawn from all such multiemployer plans during 1995, any
withdrawal liability that would have been assessed against RSI with respect to
such withdrawal would not have an RSI Material Adverse Effect.
(e) Except with respect to an RSI Employee Plan, neither RSI nor any ERISA
Affiliate of RSI has any Controlled Group Liability, nor do any circumstances
exist that could result in any of them having any Controlled Group Liability.
(f) Neither the execution or delivery of this Agreement, nor the
consummation of the transactions contemplated hereby (either alone or together
with any additional or subsequent events), constitutes an event under any RSI
Employee Plan, RSI Benefit Arrangement, loan to, or individual agreement or
contract with, an RSI Employee that may result in any payment (whether of
severance pay or otherwise), restriction or limitation upon the assets of any
RSI Employee Plan or RSI Benefit Arrangement, acceleration of payment or
vesting, increase in benefits or compensation, or required funding, with
respect to any RSI Employee, or the forgiveness of any loan or other
commitment of any RSI Employees.
(g) There are no actions, suits, arbitrations, inquiries, investigations or
other proceedings (other than routine claims for benefits) pending or, to
RSI's knowledge, threatened, with respect to any RSI Employee Plan or RSI
Benefit Arrangement.
(h) No RSI Employees and no beneficiaries or dependents of RSI Employees are
or may become entitled under any RSI Employee Plan or RSI Benefit Arrangement
to post-employment or retiree welfare benefits of any kind, including without
limitation death or medical benefits, other than coverage mandated by Part 6
of Title I of ERISA or Section 4980B of the Code or other applicable law.
6.10. Labor Matters. There are no agreements with, or pending petitions for
recognition of, a labor union or association as the exclusive bargaining agent
for any of the employees of RSI or any of its Subsidiaries; no such petitions
have been pending at any time within two years of the date of this Agreement
and, to the best knowledge of RSI, there has not been any organizing effort by
any union or other group seeking to represent any employees of RSI or any of
its Subsidiaries as their exclusive bargaining agent at any time within two
years of the date of this Agreement. There are no labor strikes, work
stoppages or other labor troubles, other than routine grievance matters, now
pending, or, to RSI's knowledge, threatened, against RSI or any of its
Subsidiaries, nor have there been any such labor strikes, work stoppages or
other labor troubles, other than routine grievance matters, with respect to
RSI or any of its Subsidiaries at any time within two years of the date of
this Agreement.
A-22
<PAGE>
6.11. Taxes. (a) RSI and its Subsidiaries have timely filed all Tax Returns
required to be filed by them, or requests for extensions to file such Tax
Returns have been timely filed and granted and have not expired, and all Tax
Returns are complete and accurate in all respects, except to the extent that
such failures to file or be complete and accurate in all respects, as
applicable, individually or in the aggregate, do not have and would not
reasonably be expected (so far as can be foreseen at the time) to have an RSI
Material Adverse Effect. RSI and each of its Subsidiaries has paid (or RSI has
paid on its behalf) or made adequate provision for all taxes shown as due on
such Tax Returns. RSI and each of its Subsidiaries have paid or made adequate
provision for all taxes required to be paid without the filing of any Tax
Return which have become due and payable. The most recent financial statements
contained in the RSI SEC Reports reflect adequate reserves for all taxes
payable by RSI and its Subsidiaries for all taxable periods and portions
thereof accrued through the date of such financial statements, and no
deficiencies for any taxes have been proposed, asserted or assessed against
RSI or any of its Subsidiaries that are not adequately reserved for, except
for inadequately reserved taxes and inadequately reserved deficiencies that,
individually or in the aggregate, do not have and would not reasonably be
expected (so far as can be foreseen at the time) to have an RSI Material
Adverse Effect. Neither RSI nor any of its Subsidiaries has any reasonable
basis to believe that any such deficiencies exist in excess of such
established reserves. The consolidated federal income tax returns of RSI have
been audited by the Internal Revenue Service (or closed by applicable statute
of limitations), and all liabilities in respect thereof have been finally
determined, for all taxable years up to and including the taxable year ended
May 2, 1992. Neither RSI nor any of its Subsidiaries is a party to any pending
or has knowledge of any threatened action or proceeding by any taxing
authority for the determination, assessment or collection of any taxes of RSI
or any of its Subsidiaries or relating to their respective businesses and
operations. There are no liens for taxes (other than for current taxes not yet
due and payable) on the assets of RSI or its Subsidiaries. No requests for
waivers of the time to assess any taxes against RSI or any of its Subsidiaries
have been granted or are pending, except for requests with respect to such
taxes that have been adequately reserved for in the most recent financial
statements contained in the RSI SEC Reports, or, to the extent not adequately
reserved, the assessment of which, individually or in the aggregate, do not
have and would not reasonably be expected (so far as can be foreseen at the
time) to have an RSI Material Adverse Effect. Neither RSI nor any of its
Subsidiaries is a party to or bound by any agreements providing for the
allocation or sharing of taxes. Neither RSI nor any of its Subsidiaries has
filed a consent pursuant to or agreed to the application of Section 341(f) of
the Code. Each of RSI and its Subsidiaries has disclosed on its federal income
tax returns all positions taken therein that could give rise to a substantial
understatement of federal income tax within the meaning of Section 6662 of the
Code. All taxes that are required by the laws of the United States, any state
or political subdivision thereof, or any foreign country to be withheld or
collected by RSI or any of its Subsidiaries have been duly withheld or
collected and, to the extent required, have been paid to the proper
governmental authorities or properly deposited as required by applicable laws.
None of RSI and its Subsidiaries (i) has been a member of an affiliated group
filing a consolidated federal income tax return (other than a group the common
parent of which was RSI), or (ii) has any liability for the taxes of any
Person (other than any of RSI and its Subsidiaries) under Treas. Reg.
(S)1.1502-6 (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise. Neither RSI nor any of its
Subsidiaries will be required, as a result of a change in method of accounting
for a taxable year beginning on or before the Closing Date, to include any
adjustment under Section 481(a) of the Code in its taxable income for any
taxable year beginning after the Closing Date.
(b) The RSI Disclosure Statement sets forth each state in which RSI and its
Subsidiaries (i) filed an income or franchise tax return, whether on a
consolidated, combined or separate return basis, for the taxable year ended
April 29, 1995, and (ii) collected or remitted any sales and/or use taxes as
of December 31, 1995.
(c) None of RSI, Merger Sub or any other Subsidiary of RSI has taken or
agreed to take any action that would prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
6.12. Intellectual Property. RSI and its Subsidiaries own, or possess valid
licenses or other valid rights to use, the Intellectual Property used in RSI's
business, except where the failure to own or have the right to use such
Intellectual Property, in the aggregate, does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have an RSI
Material Adverse Effect.
A-23
<PAGE>
6.13. Properties. Except as disclosed or reserved against in the most recent
financial statements contained in the RSI SEC Reports, RSI and each of its
Subsidiaries have good and marketable title to all of the material properties
and assets, tangible or intangible, reflected in such financial statements as
being owned by RSI and each of its Subsidiaries as of the dates thereof, free
and clear of all Liens. All leased buildings and all leased fixtures, equipment
and other property and assets that are material to RSI's business on a
consolidated basis are held under leases or subleases that are valid and
binding instruments enforceable in accordance with their respective terms, and
there is not, under any of such leases, any existing material default or event
of default (or event which with notice or lapse of time, or both, would
constitute a material default), except where the lack of such validity and
binding nature or the existence of such default or event of default does not
have and would not reasonably be expected (so far as can be foreseen at the
time), to have an RSI Material Adverse Effect.
6.14. Environmental Matters. Except in all cases that, in the aggregate, have
not had and would not reasonably be expected (so far as can be foreseen at the
time) to have an RSI Material Adverse Effect, RSI and each of its Subsidiaries
(i) have obtained all applicable permits, licenses and other authorizations
which are required to be obtained under all applicable Environmental Laws,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic materials or wastes
into ambient air, surface water, ground water, or land or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes by RSI or its Subsidiaries (or their respective agents);
(ii) are in compliance with all terms and conditions of such required permits,
licenses and authorization, and also are in compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in applicable Environmental
Laws; (iii) as of the date hereof, are not aware of nor have received notice of
any past or present violations of Environmental Laws, or any event, condition,
circumstance, activity, practice, incident, action or plan which is reasonably
likely to interfere with or prevent continued compliance with or which would
give rise to any common law or statutory liability, or otherwise form the basis
of any claim, action, suit or proceeding, against RSI or any of its
Subsidiaries based on or resulting from the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge or release into the environment, of any pollutant,
contaminant or hazardous or toxic material or waste; and (iv) have taken all
actions necessary under applicable Environmental Laws to register any products
or materials required to be registered by RSI or its Subsidiaries (or any of
their respective agents) thereunder.
6.15. Reports and Financial Statements. RSI has filed all reports required to
be filed with the SEC since May 1, 1995 through the date hereof (collectively,
the "RSI SEC Reports"), and has previously furnished or made available to the
Company true and complete copies of all RSI SEC Reports. None of the RSI SEC
Reports, as of their respective dates (as amended through the date hereof),
contained any untrue statement of material fact or omitted 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. Each
of the balance sheets (including the related notes) included in the RSI SEC
Reports presents fairly, in all material respects, the consolidated financial
position of RSI and its Subsidiaries as of the respective dates thereof, and
the other related statements (including the related notes) included therein
present fairly, in all material respects, the results of operations, the
changes in shareholders equity and cash flows of RSI and its Subsidiaries for
the respective periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted therein and subject, in
the case of the unaudited interim financial statements, to normal year-end
adjustments and any other adjustments described therein. RSI has provided to
the Company true and correct copies of RSI's unaudited consolidated statement
of operations and statement of cash flows for the eight months ended, and RSI's
consolidated balance sheet as of, December 30, 1995 (the "RSI Unaudited
Financial Statements"). Such RSI Unaudited Financial Statements present fairly
in all material respects the results of operations and cash flows for the eight
months ended, and the financial position of RSI and its Subsidiaries as of,
December 30, 1995, all in conformity with generally accepted accounting
principles consistently applied during the period involved except as otherwise
noted therein and except for the absence of footnote disclosure, and subject to
(x) normal year-end adjustments, (y) any adjustments required to reflect a
physical inventory for the months of November and December, 1995, and (z)
A-24
<PAGE>
any other adjustments described therein. All of the RSI SEC Reports, as of
their respective dates (as amended through the date hereof), complied in all
material respects with the requirements of the Exchange Act.
6.16. Absence of Certain Changes or Events. During the period since December
30, 1995, the business of RSI and its Subsidiaries has been conducted only in
the ordinary course, consistent with past practice, and neither RSI nor any
Subsidiary of RSI has entered into any material transaction other than in the
ordinary course, consistent with past practice, and there has not been (a) any
change in the business, financial condition, results of operations,
properties, assets or liabilities of RSI and its Subsidiaries taken as a whole
that, individually or in the aggregate, has or would reasonably be expected to
have (so far as can be foreseen at the time) an RSI Material Adverse Effect,
(b) any damage, destruction or loss, (whether or not covered by insurance)
with respect to any property or asset of RSI or any of its Subsidiaries which,
individually or in the aggregate, has or would reasonably be expected to have
(so far as can be foreseen at the time) an RSI Material Adverse Effect, (c)
any change by RSI in its accounting methods, principles or practices, other
than immaterial changes consistent with generally accepted accounting
principles, (d) any declaration, setting aside or payment of any dividend or
distribution in respect of any capital stock of RSI or any of its
Subsidiaries, or any redemption, purchase or other acquisition of any of their
respective securities, other than regular semi-annual dividends on RSI Common
Shares not in excess of $.03 per share and dividends by any Subsidiary of RSI
to RSI, (e) except after the date hereof as permitted by Section 7.9(d), any
entering into, establishment or amendment of, any RSI Employee Plan or RSI
Benefit Arrangement (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), or any other increase in the compensation payable or to become
payable to any officers or key employees of RSI or any Subsidiary of RSI,
except for immaterial severance payments to departing employees consistent
with past practice.
6.17. Contracts and Leases. The RSI SEC Reports and the RSI Disclosure
Statement contain an accurate and complete listing of all contracts, leases,
agreements or understandings, whether written or oral, required to be
described in, or filed as exhibits to, the RSI SEC Reports pursuant to the
Exchange Act and the applicable rules and regulations thereunder, or which are
otherwise material to the business, properties, operations, financial
condition of RSI and its Subsidiaries taken as a whole. Each of such
contracts, leases, agreements and understandings is in full force and effect
and (a) none of RSI or its Subsidiaries or, to RSI's best knowledge, any other
party thereto, has breached or is in default thereunder, (b) no event has
occurred which, with the passage of time or the giving of notice, would
constitute such a breach or default, (c) no claim of default thereunder has,
to RSI's best knowledge, been asserted or threatened and (d) none of RSI or
its Subsidiaries or, to RSI's best knowledge, any other party thereto is
seeking the renegotiation thereof or substitute performance thereunder, except
where such breach or default, or attempted renegotiation or substitute
performance, individually or in the aggregate, does not have and would not be
reasonably expected so far as can be foreseen at the time) to have an RSI
Material Adverse Effect. RSI has provided the Company or its representatives
with accurate and complete copies of all such contracts, leases, agreements
and understandings.
6.18. Affiliated Transactions. The RSI SEC Reports contain an accurate and
complete description of all contracts, leases, agreements or understandings,
whether written or oral, with or on behalf of any Affiliate of RSI, to which
RSI or any of its Subsidiaries is a party or is otherwise bound and which is
required to be described in any RSI SEC Report pursuant to the Exchange Act
and the applicable rules and regulations thereunder.
6.19. Ownership of Merger Sub; No Prior Activities; Assets of Merger Sub.
(a) Merger Sub was formed by RSI solely for the purpose of engaging in the
transactions contemplated hereby.
(b) As of the date hereof and the Effective Time, the capital stock of
Merger Sub is and will be owned 100% by RSI directly. Further, there are not
as of the date hereof and there will not be at the Effective Time any
outstanding or authorized options, warrants, calls, rights, commitments or any
other agreements of any character which Merger Sub is a party to, or may be
bound by, requiring it to issue, transfer, sell, purchase, redeem or acquire
any shares of capital stock or any securities or rights convertible into,
exchangeable for, or evidencing the right to subscribe for or acquire, any
shares of capital stock of Merger Sub.
A-25
<PAGE>
(c) As of the date hereof and the Effective Time, except for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated thereby and hereby (including the refinancing of
all or any portion of the debt of the Company and its Subsidiaries), Merger
Sub has not and will not have incurred, directly or indirectly through any
Subsidiary or Affiliate, any obligations or liabilities or engaged in any
business or activities of any type or kind whatsoever or entered into any
arrangements or arrangements with any Person.
6.20. Brokers and Finders. Except for the fees and expenses payable to
Goldman, Sachs & Co. ("Goldman Sachs") and BA Partners, which fees and
expenses will be paid by RSI and are reflected in RSI's respective agreements
with each of Goldman Sachs and BA Partners, true and complete copies of which
have been furnished to the Company, RSI has not employed any investment
banker, broker, finder or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to any investment
banking, brokerage, finder's or similar fee or commission in connection with
this Agreement or the transactions contemplated hereby.
6.21. S-4 Registration Statement and Proxy Statement/ Prospectus. Neither
the S-4 Registration Statement nor the Proxy Statement/Prospectus (including,
without limitation, unless otherwise modified in the S-4 Registration
Statement, the information contained in the RSI SEC Reports), will (a) in the
case of the S-4 Registration Statement, at the time it becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading or (b) in the case of the Proxy
Statement/Prospectus, at the time the stockholders of the Company take action
to approve this Agreement and the Merger as contemplated by Section 7.3(a) and
at the time of the mailing of the Proxy Statement/Prospectus and at the time
of the RSI Stockholders 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; provided, however,
that RSI makes no representation with respect to information supplied in
writing by the Company for inclusion in the S-4 Registration Statement or the
Proxy Statement/Prospectus. If at any time prior to the Effective Time any
event with respect to RSI, its officers and directors or any of its
Subsidiaries shall occur which is required to be described in the Proxy
Statement/Prospectus or the S-4 Registration Statement, such event shall be so
described, and an amendment or supplement shall be promptly filed with the SEC
and, as required by law, disseminated to the stockholders of RSI and such
amendment or supplement shall comply with all provisions of applicable law.
The S-4 Registration Statement will, at the time it becomes effective, comply
as to form in all material respects with the provisions of the Securities Act.
6.22. Tax Matters. The representations set forth in the numbered paragraphs
of the form of Tax Matters Certificate of RSI attached to the RSI Disclosure
Statement (the "RSI Tax Matters Certificate") are true and correct in all
respects, and such representations are hereby incorporated herein by reference
with the same effect as if set forth herein in their entirety.
6.23. Company Management Loans. RSI acknowledges that the Company Management
Loans shall be forgiven in their entirety immediately prior to the Effective
Time, and consents to the forgiveness thereof, provided, that each management
employee of the Company subject to a Company Management Loan agrees that,
provided RSI complies with Section 7.16 hereof, the shares of Common Stock
purchased by management employees with the proceeds of the Company Management
Loans (and the RSI Common Shares issuable to such employee upon conversion of
such shares of Common Stock in the Merger) will not be sold for a period of
one year from the Effective Time or such earlier date on which such individual
ceases to be an employee due to resignation, retirement or termination.
6.24. Opinion of Financial Advisor. Goldman Sachs has delivered to the Board
of Directors of RSI its written opinion to the effect that, as of the date of
this Agreement, the aggregate number of RSI Common Shares to be issued as
consideration for the outstanding shares of Common Stock pursuant to this
Agreement is fair to RSI.
A-26
<PAGE>
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS
7.1. Conduct of Business of the Company. Except as contemplated by this
Agreement or the Commitment Letter, as set forth in the Company Disclosure
Statement or as otherwise permitted by the prior written consent of RSI,
during the period from the date of this Agreement to the Effective Time (i)
the Company will, and will cause each of its Subsidiaries to, conduct its
operations in the ordinary course of business consistent with past practice,
and (ii) the Company will not, and will cause each of its Subsidiaries not to,
enter into any material transaction other than in the ordinary course of
business consistent with past practice. Without limiting the generality of the
foregoing, and except as otherwise permitted in this Agreement or as
contemplated in the Commitment Letter, prior to the Effective Time, the
Company will not, and will not permit any of its Subsidiaries to, without the
prior written consent of RSI (except to the extent set forth in the Company
Disclosure Statement):
(a) except for Shares issued upon exercise of Options and Warrants
outstanding as of the date hereof and the issuance of Class A or Class B
Common Stock, as the case may be, upon the conversion of Class B or Class A
Common Stock as required by the Company's Restated Certificate of
Incorporation, 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 shares of its capital stock of any class (including the
Shares), or any securities or rights convertible into, exchangeable for, or
evidencing the right to subscribe for any shares of its capital stock, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of its capital stock, or (B) any other
securities in respect of, in lieu of, or in substitution for, Shares
outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Shares),
except for redemption of the Preferred Stock in accordance with the Preferred
Stock Redemption Agreements or as otherwise contemplated by Section 7.10;
(c) split, combine, subdivide or reclassify any shares of its capital stock
or declare, set aside for payment or pay any dividend, or make any other
actual, constructive or deemed distribution in respect of any shares of its
capital stock or otherwise make any payments to stockholders in their capacity
as such;
(d) (A) other than in the ordinary course of business consistent with past
practices, and as approved by the Board of Directors of the Company, (i) grant
any increases in the base compensation of any of its directors, officers or
key employees, or (ii) pay or agree to pay any material pension, retirement
allowance or other employee benefit not required by any of the Employee Plans
or Benefit Arrangements as in effect on the date hereof to any such director,
officer or key employees, whether past or present, or (B) (i) enter into any
new or amend any existing employment or severance agreement with any director,
officer or key employee of the Company or any Subsidiary of the Company,
except as permitted in the Company Disclosure Statement, or (ii) except as may
be required to comply with applicable law, become obligated under any new
Employee Plan or Benefit Arrangement which was not in existence on the date
hereof, or amend any such Employee Plan or Benefit Arrangement in existence on
the date hereof if such amendment would have the effect of accelerating or
materially enhancing any benefits thereunder;
(e) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company or any of its Subsidiaries (other than the Merger);
(f) other than as disclosed in the Company's current capital budget, make
any acquisition or disposition, by means of merger, consolidation or
otherwise, of any material assets (other than sales of inventory in the
ordinary course of business, and the disposition of obsolete assets or assets
no longer used in the business) or other business enterprise or operation;
(g) adopt any amendments to its Restated Certificate of Incorporation or
Bylaws or alter through merger, liquidation, reorganization, restructuring or
in any other fashion the corporate structure or ownership of any Subsidiary;
A-27
<PAGE>
(h) other than (i) borrowings under existing credit facilities, (ii) other
borrowings in the ordinary course in the aggregate at any time outstanding up
to $10 million after the date hereof, (iii) borrowings in connection with the
redemption of Preferred Stock to the extent permitted by Section 7.10 hereof,
and (iv) borrowings of up to $35 million to be used for construction of a new
operating facility for Biggers Brothers, Inc., incur any indebtedness for
borrowed money or guarantee any such indebtedness or, except in the ordinary
course consistent with past practice, make any loans, advances or capital
contributions to, or investments in, any other Person (other than to the
Company or any Wholly-Owned Subsidiary of the Company);
(i) enter into any agreement providing for acceleration of payment of any
material obligation or performance of any material benefit or payment or other
consequence as a result of a change of control of the Company or its
Subsidiaries;
(j) except as disclosed in the Company's current capital budget, a true and
complete copy of which has been delivered to RSI, enter into any contract,
arrangement or understanding requiring the lease or purchase of equipment,
materials, supplies or services over a period greater than 12 months, which is
not cancelable without penalty on 30 days' or less notice;
(k) take any actions, which would, or would be reasonably likely to,
adversely affect the qualification of the Merger as a reorganization within
the meaning of Section 368(a) of the Code, and the Company shall use all
reasonable efforts to achieve such result; or
(l) enter into any contract, agreement, commitment or arrangement to do any
of the foregoing.
7.2. Other Transactions. From the date hereof until the Effective Time,
neither the Company nor any of its Subsidiaries, employees, officers, agents
or representatives, shall, directly or indirectly (a) solicit or initiate any
inquiry, proposal or offer from any Person relating to any acquisition or
purchase of all or a material amount of the assets of, or any securities of,
or any merger, consolidation or business combination with, the Company or any
Subsidiary (any such inquiry, proposal or offer being hereinafter referred to
as a "Company Alternative Proposal"), or (b)(i) participate in any
negotiations with respect to a Company Alternative Proposal, (ii) furnish to
any other Person any confidential information with respect to the Company or
its business, or (iii) otherwise cooperate in any way with, or assist or
participate in, or facilitate any Company Alternative Proposal. The Company
shall promptly notify RSI if any Company Alternative Proposal is made.
7.3. Stockholder Votes. (a) As soon as practicable, and in any case within
ten Business Days after RSI has delivered to the Company copies of the Proxy
Statement/Prospectus in the form mailed to RSI stockholders and copies of the
RSI SEC Reports incorporated by reference into the Proxy Statement/Prospectus,
the Company will cause to be taken all stockholder action necessary in
accordance with applicable law, the Company's Restated Certificate of
Incorporation and Bylaws, the Stockholders Agreement and the DGCL to approve
this Agreement and the Merger. If such action is taken by less than unanimous
written consent of the stockholders of the Company, the Company will deliver
prompt notice of the taking of such action to all stockholders of the Company
who did not consent to such action, in accordance with DGCL Section 228. The
Board of Directors of the Company will recommend and declare advisable such
approval. Pursuant to the ML Agreement, each of the ML Entities have agreed to
vote all Shares owned by them or which they have the right to vote in support
and in favor of approval of the Merger and this Agreement, which vote the
Company represents and warrants shall be sufficient to obtain the requisite
approval of the Merger and this Agreement. The Company shall promptly provide
to RSI copies of all notices, letters and other materials delivered to the
stockholders of the Company (other than the Proxy Statement/Prospectus and the
RSI SEC Reports incorporated therein by reference) in connection with such
stockholder action, and will keep RSI apprised of the status of such
stockholder action.
(b) As soon as practicable after the effectiveness of the S-4 Registration
Statement, and following an appropriate notice period in accordance with
applicable law, RSI's Restated Certificate of Incorporation or RSI's Bylaws,
RSI will take all action necessary in accordance with applicable law and its
Restated Certificate of Incorporation and Bylaws to convene a meeting of its
stockholders (the "RSI Stockholders Meeting") to
A-28
<PAGE>
consider and vote upon the approval of the issuance of the RSI Common Shares
in connection with the Merger. The Board of Directors of RSI shall recommend
and declare advisable such approval and RSI shall take all lawful action to
solicit, and use all reasonable efforts to obtain, such approval. RSI, as the
sole stockholder of Merger Sub, has consented to the adoption of this
Agreement by Merger Sub and agrees that such consent shall be treated for all
purposes as a vote duly adopted at a meeting of the stockholders of Merger Sub
held for this purpose.
7.4. Registration Statement. RSI and the Company shall cooperate and
promptly prepare and RSI shall file with the SEC as soon as practicable a
Registration Statement on Form S-4 under the Securities Act with respect to
the RSI Common Stock issuable in the Merger (the "S-4 Registration
Statement"), a portion of which Registration Statement shall also serve as the
proxy statement with respect to the RSI Stockholder Meeting (such proxy
statement/prospectus, together with any amendments thereof or supplements
thereto, in each case in the form or forms mailed to stockholders, is herein
called the "Proxy Statement/Prospectus"). RSI will cause the Proxy
Statement/Prospectus and the S-4 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. RSI shall use all
reasonable efforts, and the Company will cooperate with RSI, to have the S-4
Registration Statement declared effective by the SEC as promptly as
practicable and to keep the S-4 Registration Statement effective as long as is
necessary to consummate the Merger. RSI shall, as promptly as practicable,
provide the Company copies of any written, and will inform the Company of any
oral, comments on the S-4 Registration Statement received from the SEC. RSI
shall use its best efforts to obtain, prior to the effective date of the S-4
Registration Statement, all necessary state securities law or "Blue Sky"
permits or approvals required to carry out the transactions contemplated by
this Agreement and will pay all expenses incident thereto. RSI agrees that the
Proxy Statement/Prospectus and each amendment or supplement thereto at the
time of mailing thereof and at the time of the RSI Stockholders Meeting, or,
in the case of the S-4 Registration Statement, at the time it becomes
effective, as it may be amended or supplemented, 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
RSI in reliance upon and in conformity with written information concerning the
Company furnished to RSI by the Company for inclusion in the Proxy
Statement/Prospectus and the S-4 Registration Statement, as it may be amended
or supplemented. The Company agrees that the written information concerning
the Company, its Subsidiaries, and its officers and directors provided by it
for inclusion in the Proxy Statement/Prospectus and each amendment or
supplement thereto, at the time of mailing thereof and at the time of the RSI
Stockholders Meeting, or, in the case of written information concerning the
Company provided by the Company for inclusion in the S-4 Registration
Statement or any amendment or supplement thereto, at the time it is filed or
becomes effective, 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. No amendment or supplement to the Proxy
Statement/Prospectus that amends or supplements information relating to the
Company will be made by RSI without the approval of the Company, such approval
not to be unreasonably withheld. RSI will advise the Company, promptly after
it receives notice thereof, of the time when the S-4 Registration Statement
has become effective or any supplement or amendment has been filed, the
issuance of any stop order, the suspension of a qualification of the RSI
Common Shares issuable in connection with the Merger for offering or sale in
any jurisdiction, or any written request by the SEC for amendment of the Proxy
Statement/Prospectus or the S-4 Registration Statement or for additional
information. As soon as practicable after the S-4 Registration Statement has
become effective, RSI will provide the Company with sufficient copies of the
Proxy Statement/Prospectus in the form mailed to RSI stockholders, as well as
sufficient copies of the RSI SEC Reports incorporated by reference into the
Proxy Statement/Prospectus, to enable the Company to deliver a copy to each
stockholder of record of the Company.
7.5. Reasonable Efforts. The Company and RSI shall and shall use reasonable
best efforts to cause their respective Subsidiaries to: (i) promptly make all
filings and seek to obtain all Authorizations required under all applicable
laws with respect to the Merger and the other transactions contemplated hereby
and will cooperate
A-29
<PAGE>
with each other with respect thereto; and (ii) promptly take, or cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to satisfy the conditions set forth in
Article VIII and to consummate and make effective the transactions
contemplated by this Agreement on the terms and conditions set forth herein as
soon as practicable (including, without limitation, using their respective
reasonable best efforts to avoid the entry of (or, if entered, to have lifted,
vacated or reversed) any order, decree, judgment or ruling of any court or
Governmental Body restraining or preventing the consummation of the
transactions contemplated by this Agreement on the basis of any federal or
state antitrust laws or regulations; provided, however, that in connection
with any filing or submission required or action to be taken by either the
Company or RSI or any of their Subsidiaries to effect the Merger and to
consummate the other transactions contemplated hereby, (A) neither the Company
nor any of its Subsidiaries shall, without RSI's prior written consent, commit
to any divestiture or hold separate or similar transaction and (B) neither RSI
nor any of its Subsidiaries shall be required to divest or hold separate or
otherwise take or commit to take any action, in each case, that materially
limits its freedom of action with respect to, or its ability to retain, the
Company or any of its Subsidiaries or any material portion of the assets of
the Company and its Subsidiaries or any existing (as of the date hereof) and
material business, product line or asset of RSI or any of its Subsidiaries.
7.6. Access to Information; Confidentiality. (a) Upon reasonable notice,
each of the Company and RSI shall (and shall cause each of its Subsidiaries
to) afford to officers, employees, counsel, accountants and other authorized
representatives of the other party ("Respective Representatives") access,
during normal business hours throughout the period prior to the Effective
Time, to its properties, books and records (including, without limitation, the
work papers of independent accountants) and, during such period, shall (and
shall cause each of its Subsidiaries to) furnish promptly to such Respective
Representatives all information concerning its business, properties and
personnel as may reasonably be requested, provided that no investigation
pursuant to this Section 7.6 shall affect or be deemed to modify any of the
respective representations or warranties made by RSI or the Company.
(b) All confidential information obtained by the Company respecting RSI and
its Subsidiaries pursuant to this Section 7.6 or prior to the date hereof
shall be kept confidential in accordance with the Confidentiality Agreement
dated as of November 20, 1995 between RSI and the Company.
(c) All confidential information respecting the Company and its Subsidiaries
obtained by RSI pursuant to this Section 7.6 or prior to the date hereof shall
be kept confidential in accordance with the Confidentiality Agreement dated as
of December 11, 1995 between the Company and RSI.
7.7. Listing of RSI Common Shares. RSI will use its reasonable best efforts
to cause the RSI Common Shares to be issued pursuant to this Agreement, and
upon exercise of Assumed Options and Assumed Warrants, to be listed for
trading on the NYSE.
7.8. Rule 145 Affiliates. The Company shall use reasonable efforts to cause
each party (other than RSI and the ML Entities) to the Registration Rights
Agreement (the "Rule 145 Affiliates") or who may otherwise be deemed to be an
Affiliate of the Company to deliver to RSI on or prior to the Effective Time,
a written agreement, in the form attached as Exhibit A hereto, providing,
inter alia, that such Rule 145 Affiliate will not sell, pledge, transfer or
otherwise dispose of any shares of RSI Common Shares issued to such Rule 145
Affiliate pursuant to the Merger, except pursuant to an effective registration
statement or in compliance with Rule 145 or an exemption from the registration
requirements of the Securities Act ("Affiliate Letter"). Concurrently with the
execution of this Agreement, each of the ML Entities have agreed to execute
such Affiliate Letters.
7.9. Conduct of Business of RSI. Except as contemplated by this Agreement or
the Commitment Letter, as set forth in the RSI Disclosure Statement or as
otherwise permitted by the prior written consent of the Company, during the
period from the date of this Agreement to the Effective Time, (i) RSI will,
and will cause each of its Subsidiaries to, conduct its operations in the
ordinary course of business consistent with past practice, and (ii) RSI will
not, and will cause each of its Subsidiaries not to, enter into any material
transaction other than in the ordinary course of business consistent with past
practice. Without limiting the generality of the foregoing, and except as
otherwise permitted in this Agreement or as contemplated by the Commitment
Letter, prior to the
A-30
<PAGE>
Effective Time, RSI will not, and will not permit any of its Subsidiaries to,
without the prior written consent of the Company (except to the extent set
forth in the RSI Disclosure Statement):
(a) 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 shares of its capital stock of any class, or any
securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for any shares of its capital stock, or any rights,
warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any shares of its capital stock or any
securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of its capital stock, or (B) any other
securities in respect of, in lieu of, or in substitution for, shares of
capital stock outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase
or otherwise acquire, any of its outstanding securities;
(c) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend (other than
normal cash dividends in the ordinary course, but not in an amount to
exceed $.03 per share semi-annually, and other than dividends of
Subsidiaries of RSI to RSI), or make any other actual, constructive or
deemed distribution in respect of any shares of its capital stock or
otherwise make any payments to stockholders in their capacity as such;
(d) (A) other than in the ordinary course of business consistent with
past practices and as approved by the Board of Directors of RSI, (i) grant
any increases in the base compensation of any of its directors, officers or
key employees, or (ii) pay or agree to pay any material pension, retirement
allowance or other employee benefit not required by any of the RSI Employee
Plans or RSI Benefit Arrangements as in effect on the date hereof to any
such director, officer or key employees, whether past or present, or (B)
(i) enter into any new or amend any existing employment or severance
agreement with any such director, officer or key employee, except as
contemplated by Section 7.17 or as permitted in the RSI Disclosure
Statement, or (ii) except as may be required to comply with applicable law,
become obligated under any new RSI Employee Plan or RSI Benefit Arrangement
which was not in existence on the date hereof, or amend any such RSI
Employee Plan or RSI Benefit Arrangement in existence on the date hereof if
such amendment would have the effect of accelerating or materially
enhancing any benefits thereunder;
(e) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
RSI or any of its Subsidiaries (other than the Merger);
(f) other than as disclosed in RSI's current capital budget, make, engage
in negotiations with any third party respecting, or directly or indirectly
solicit or initiate any inquiry, proposal or offer respecting, the
acquisition or disposition, by means of merger, consolidation, business
combination or otherwise, all or a material amount of assets of, or any
securities of, RSI or any Subsidiary thereof (other than sales of inventory
in the ordinary course of business, the disposition of obsolete assets or
assets no longer used in the business or the sale of U.S. Lace Paperworks);
provided, however, that nothing contained in this Section 7.9(f) shall
require the Board of Directors of RSI to act or refrain from acting in
connection with taking and disclosing to RSI's stockholders a position
contemplated by Rules 14d-9 and 14e-2 under the Exchange Act;
(g) adopt any amendments to its Restated Certificate of Incorporation or
Bylaws (except for Bylaw amendments which are required in connection with
the performance by RSI of its obligations hereunder or under any other
agreement contemplated hereunder) or alter through merger, liquidation,
reorganization, restructuring or in any other fashion the corporate
structure or ownership of any Subsidiary;
(h) other than (i) borrowings under existing credit facilities, (ii)
other borrowings in the ordinary course in the aggregate at any time
outstanding up to $10 million after the date hereof, incur any indebtedness
for borrowed money or guarantee any such indebtedness or, except in the
ordinary course consistent with past practice, make any loans, advances or
capital contributions to, or investments in, any other Person (other than
to RSI or any Wholly-Owned Subsidiary of RSI);
A-31
<PAGE>
(i) except in connection with modifications to RSI's Change in Control
Agreements as contemplated by Section 7.17 or otherwise on terms no more
favorable than contemplated by Section 7.17 for those executives not named
in such Section, enter into any agreement providing for acceleration of
payment of any material obligation or performance of any material benefit
or obligation or other consequence as a result of a change of control of
RSI or its Subsidiaries;
(j) except as disclosed in RSI's current budget, a true and complete copy
of which has been delivered to the Company, enter into any contract,
arrangement or understanding requiring the lease or purchase of equipment,
materials, supplies or services over a period greater than 12 months, which
is not cancelable without penalty on thirty (30) days or less notice;
(k) take any actions, which would, or would be reasonably likely to,
adversely affect the qualification of the Merger as a reorganization within
the meaning of Section 368(a) of the Code, and RSI shall use all reasonable
efforts to achieve such result; or
(l) enter into any contract, agreement, commitment or arrangement to do
any of the foregoing.
7.10. Preferred Stock Redemption; Withdrawal of S-1 Registration Statement;
USDA Matter. (a) The Company shall use its best efforts prior to February 16,
1996 (i) to obtain an amendment to the Redemption Agreement dated as of
September 26, 1995 between Sara Lee Corporation ("Sara Lee") and the Company,
as amended by the Amendment to Redemption Agreement dated November 20, 1995
(the "Sara Lee Redemption Agreement") to (x) extend the termination date set
forth in Section 7.1(b) thereof to at least the earlier of the Closing or July
31, 1996 ("Sara Lee Amendment"), and (y) acknowledge and agree that RSI or
Merger Sub shall be entitled to purchase the 10% Preferred Stock upon payment
of the purchase price therefor as set forth in the Sara Lee Redemption
Agreement and Sara Lee Amendment, and (ii) negotiate and arrange committed
bank loan financing (and any necessary consents) to enable the Company to fund
prior to March 15, 1996 the full purchase price for the purchase of the 10%
Preferred Stock as set forth in Section 1.2 of the Sara Lee Redemption
Agreement ("Sara Lee Bridge Financing"). "Best efforts" shall not require the
Company to make or agree to make any material payments to, or to be bound by
any material commitment with respect to, Sara Lee. If by February 16, 1996,
the Company shall not have obtained either the Sara Lee Amendment or Sara Lee
Bridge Financing on terms and conditions reasonably acceptable to RSI, RSI
shall be entitled to arrange for the Sara Lee Bridge Financing with such
Persons and on such terms as RSI may negotiate and which are as a whole more
favorable to the Company than the Sara Lee Bridge Financing and which are
reasonably acceptable to the Company ("Alternative Sara Lee Bridge Financing")
on the Company's behalf.
(b) If by March 10, 1996 the Company shall not have obtained the Sara Lee
Amendment, the Company shall execute and deliver such documents and perform
such acts as may be necessary to effect the Sara Lee Bridge Financing or the
Alternative Sara Lee Bridge Financing ("Bridge Financing") and shall effect
the purchase of the 10% Preferred Stock in accordance with the terms of the
Sara Lee Redemption Agreement. The Company shall have complied with its
obligations under subsections (a) and (b) of this Section 7.10 if by March 15,
1996 it shall have either (a) obtained the Sara Lee Amendment, or (b) redeemed
the 10% Preferred Stock in accordance with the Sara Lee Redemption Agreement.
(c) Except as expressly provided by this Section 7.10, the Company shall not
amend any of the Preferred Stock Redemption Agreements or redeem the Preferred
Stock prior to the earlier of the Closing Date or July 31, 1996 without the
prior written consent of RSI.
(d) If prior to March 15, 1996 the Company shall not have obtained the Sara
Lee Amendment or effected the Bridge Financing and purchased the 10% Preferred
Stock, at the Closing (i) the 10% Preferred Stock shall be redeemed in
accordance with Article Fourth, Paragraph (B)(2)(4) of the Company's Restated
Certificate of Incorporation ("Company Charter"), and (ii) the Exchangeable
Preferred Stock shall be acquired by RSI or Merger Sub for a price equal to
the price payable upon redemption by the Company in accordance with Article
Fourth, Paragraph (B)(3)(5) of the Company Charter; provided, however, that in
no event shall the redemption amount or the price payable for such Preferred
Stock exceed the amounts set forth on Schedule 7.10. Nothing set forth in this
Section 7.10(d) shall be deemed to have had a Company Material Adverse Effect.
A-32
<PAGE>
(e) Any redemption of Preferred Stock after March 15, 1996 pursuant to this
Agreement shall be deemed to occur immediately prior to the Effective Time.
(f) In the event that the Preferred Stock is redeemed on the Closing Date
and in connection with the consummation of the transactions contemplated by
this Agreement, RSI and the Company agree that RSI shall make, on behalf of
the Company, all the required payments under the Preferred Stock Redemption
Agreements directly to the respective holders of the Preferred Stock.
(g) No later than one Business Day after the date of this Agreement, the
Company shall request the withdrawal of the S-1 Registration Statement from
the SEC in accordance with the Securities Act.
(h) The Company shall keep RSI apprised of the status of, and new
developments concerning, the USDA matter referred to in the S-1 Registration
Statement, including, without limitation, promptly providing copies of all
notices, orders, proposals or other material correspondence to or from the
USDA regarding such matter and promptly providing RSI with prior notice of,
and a reasonable opportunity to comment on, any proposed settlement of such
matter.
7.11. Commitment Letter. RSI and the Company shall use their respective
reasonable best efforts to consummate the transactions set forth in the
commitment letter dated February 2, 1996 from Bank of America National Trust
and Savings Association, BA Securities, Inc., The Chase Manhattan Bank, N.A.,
and Chase Securities, Inc. to RSI and the Company (the "Commitment Letter")
which has been executed and delivered by RSI and which, to the best knowledge
of each of RSI and the Company, remains in full force and effect.
7.12. Publicity. The initial press release relating to this Agreement shall
be a joint press release and thereafter the Company and RSI shall, subject to
their respective legal obligations, consult with each other, and use
reasonable efforts to agree upon the text of any press release, before issuing
any such press release or otherwise making public statements with respect to
the transactions contemplated hereby and in making any filings with any
federal or state governmental or regulatory agency or with any national
securities exchange with respect to the transactions contemplated hereby.
7.13. Director and Officer Indemnification. (a) Subject to the receipt by
RSI of a waiver and release by the ML Entities, in the form attached to the ML
Agreement, and by any officer or director of the Company who is also a
stockholder of the Company, in substantially the same form, of any claims
against present or former directors and officers of the Company arising from
or pertaining to acts or omissions, or alleged acts or omissions, occurring
prior to the Effective Time, from and after the Effective Time, RSI will, and
will cause the Surviving Corporation to, indemnify and hold harmless each
person who is now, or has been at any time prior to the date hereof, an
officer or director of the Company (individually, an "Indemnified Party", and
collectively, the "Indemnified Parties") with respect to acts or omissions
occurring prior to the Effective Time to the extent required by Article VIII
of the Company's By-Laws as filed as Exhibit 3.12 to the S-1 Registration
Statement.
(b) After the Effective Time, RSI shall cause the directors and officers of
the Surviving Corporation and its Subsidiaries to be covered by directors' and
officers' liability insurance maintained by RSI on terms and conditions no
less favorable to such directors and officers as are applicable to similarly
situated directors and officers of Subsidiaries of RSI; provided that such
insurance shall not include coverage for any acts or omissions occurring prior
to the Effective Time.
7.14. Conveyance Taxes. RSI and the Company will cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees and any similar taxes which become
payable in connection with the transactions contemplated by this Agreement
that are required or permitted to be filed on or before the Effective Time and
each party will pay any such tax or fee which becomes payable by it on or
before the Effective Time. RSI agrees to assume liability for and hold
stockholders of the Company harmless against liability for real property
transfer or gain tax imposed on such stockholders by the State of New York as
a result of the Merger.
A-33
<PAGE>
7.15. Parachute Payments. With respect to any "payments" required to be made
by the Company to "disqualified persons" pursuant to any employment,
severance, supplemental retirement, stock option or loan agreement or in
connection with the cancellation thereof which may constitute a "parachute
payment" with respect to the transactions contemplated by this Agreement (as
such terms are defined by Section 280G of the Code), the Company shall (i) in
consultation with RSI, obtain stockholder approval of such payments in
accordance with Section 280G (b)(5)(B) of the Code and the regulations
(including any proposed or temporary regulations) thereunder and (ii) at least
15 days prior to the Closing Date, provide evidence satisfactory to RSI that
such approval has been obtained.
7.16. RSI Loans. After the Effective Time, RSI shall extend loans to those
management employees of the Company for whom Company Management Loans were
forgiven at the Effective Time and whose RSI Common Shares are subject to
restriction as provided in Section 6.23, in an amount sufficient to cover the
federal and state income tax due from such management employees as a result of
such forgiveness. Such loans shall be made pursuant to terms and documentation
reasonably satisfactory to RSI, shall bear interest at a rate not less than
that prescribed by Section 7872 of the Code and shall be due and payable in
full ninety days after the expiration of the restrictions on the RSI Common
Shares referred to in Section 6.23 (whether such expiration occurs because of
the passage of one year from the Effective Time or because of the resignation,
retirement or termination of such employee).
7.17. RSI Change in Control Arrangements. Pursuant to Amended and Restated
Change in Control Agreements in the form of Schedule 7.17 hereto, RSI has
taken such action as may be necessary so that the consummation of the
transactions contemplated by this Agreement does not result in a "Change in
Control", as such term is defined in individual agreements with Messrs. Van
Stekelenburg, Harter, Martin, Feather and Giuliani, subject to the
satisfaction of the terms of such Amended and Restated Change in Control
Agreements.
ARTICLE VIII
CONDITIONS
8.1. Conditions to Each Party's Obligations. The respective obligations of
each party to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or in part by
the party being benefitted thereby, to the extent permitted by applicable law:
(a) Stockholder Approval. This Agreement and the transactions contemplated
hereby shall have been duly approved by the requisite holders of Shares in
accordance with applicable law, the Restated Certificate of Incorporation and
Bylaws of the Company, and the Stockholders Agreement; and the issuance of RSI
Common Shares in connection with the Merger shall have been duly approved by
the requisite holders of RSI Common Shares in accordance with the rules of the
NYSE.
(b) Government Consents, Etc. Except for the filing of a certificate of
merger in accordance with the DGCL, all Authorizations required in connection
with the execution and delivery of this Agreement and the performance of the
obligations hereunder shall have been made or obtained, except where the
failure to have made or obtained any such Authorizations would not have a
material adverse effect on the business, properties, operations or financial
condition of RSI and its Subsidiaries (including the Surviving Corporation)
following the Effective Time.
(c) No Injunction. There shall not be in effect any judgment, writ, order,
injunction or decree of any court of Governmental Body of competent
jurisdiction, restraining, enjoining or otherwise preventing consummation of
the transactions contemplated by this Agreement.
(d) Registration Statement. The S-4 Registration Statement shall have been
declared effective by the SEC under the Securities Act and shall be effective
at the Effective Time, and no stop order suspending effectiveness shall have
been issued, no action, suit, proceeding or investigation by the SEC to
suspend the effectiveness thereof shall have been initiated and be continuing,
and all necessary approvals under state securities laws or the Securities Act
or Exchange Act relating to the issuance or trading of the RSI Common Shares
to be issued in the Merger shall have been received.
A-34
<PAGE>
(e) Listing of RSI Common Shares on NYSE. The RSI Common Shares required to
be issued hereunder (including upon exercise of Options and Warrants as
provided in Section 4.1(e)) shall have been approved for listing on the NYSE,
subject only to official notice of issuance.
(f) Financing. All conditions precedent to the closing of the financing
described to in the Commitment Letter shall have been satisfied, and the
transactions contemplated by such commitment letter shall have been
consummated.
(g) Redemption of Preferred Stock. (i) All shares of Exchangeable Preferred
Stock shall have been purchased by RSI or Merger Sub pursuant to the
Redemption Agreement dated as of September 8, 1995 among ML IBK Positions,
Inc., Merchant Banking L.P. No. IV and the Company, as amended as of December
29, 1995 and February 2, 1996 or otherwise in accordance with the terms of
Section 7.10; and (ii) all shares of 10% Preferred Stock shall have been
redeemed in accordance with the terms and conditions set forth in the Sara Lee
Redemption Agreement or otherwise in accordance with the terms of Section
7.10, or redeemed by the Company or purchased by RSI or Merger Sub pursuant to
the Sara Lee Amendment.
(h) Tax Opinion. The Company shall have received an opinion of Morgan, Lewis
& Bockius LLP, dated the Closing Date, in substantially the form attached
hereto as Exhibit E-1, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code. In rendering such opinion, Morgan, Lewis & Bockius LLP may
receive and rely upon the representations of certain stockholders of the
Company contained in the Tax Agreement and representations contained in
certificates of the Company, stockholders of the Company, RSI, Merger Sub and
others, including without limitation the Company Tax Matters Certificate and
the RSI Tax Matters Certificate.
(i) Tax Opinions. RSI shall have received an opinion of Jones, Day, Reavis &
Pogue (addressed to RSI) in substantially the form attached hereto as Exhibit
E-2, dated the Closing Date, to the effect that the Merger should be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. RSI shall have received an opinion of Shearman &
Sterling (addressed to the ML Entities) in substantially the form attached
hereto as Exhibit E-3, dated the Closing Date, to the effect that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code. In rendering such opinions, Jones, Day,
Reavis & Pogue and Shearman & Sterling may receive and rely upon the
representations of certain stockholders of the Company contained in the Tax
Agreement and representations contained in certificates of the Company,
stockholders of the Company, RSI, Merger Sub and others, including without
limitation the Company Tax Matters Certificate and the RSI Tax Matters
Certificate.
8.2. Conditions to Obligations of RSI and Merger Sub. The respective
obligations of RSI and Merger Sub to consummate the transactions contemplated
by this Agreement are subject to the fulfillment at or prior to the Effective
Time of each of the following conditions, any or all of which may be waived in
whole or part by RSI and Merger Sub, as the case may be, to the extent
permitted by applicable law:
(a) Representations and Warranties True. (i) The representations and
warranties of the Company contained in Article V or otherwise required hereby
to be made after the date hereof in a writing expressly referred to herein by
or on behalf of the Company pursuant to this Agreement shall have been true in
all material respects when made and at the time of the Closing with the same
effect as though such representations and warranties had been made at such
time, except (x) for changes specifically permitted by this Agreement or
resulting from the consummation of the transactions contemplated hereby, and
(y) that those representations and warranties which address matters only as of
a particular date shall remain true and correct in all material respects as of
such date, and (ii) the representations and warranties of each of the ML
Entities contained in the ML Agreement or otherwise required hereby or thereby
to be made by any ML Entity after the date hereof in a writing expressly
referred to herein or in the ML Agreement by or on behalf of any ML Entity
pursuant to this Agreement or the ML Agreement shall have been true in all
material respects when made and at the time of the Closing with the same
effect as though such representations and warranties had been made at such
time, except for changes specifically permitted by this Agreement or the ML
Agreement or resulting from the consummation of the transactions contemplated
hereby or by the ML Agreement.
A-35
<PAGE>
(b) Performance. (i) The Company shall have performed or complied in all
material respects with all agreements and conditions contained herein required
to be performed or complied with by it prior to or at the time of the Closing,
and (ii) each ML Entity shall have performed or complied in all material
respects with all agreements and conditions contained in the ML Agreement
required to be performed or complied with by it prior to or at the time of the
Closing.
(c) Compliance Certificate. (i) The Company shall have delivered to RSI a
certificate, dated the date of the Closing, signed by the President or any
Vice President of the Company, certifying as to the fulfillment of the
conditions specified in Section 8.2(a)(i) and (b)(i) and (ii) each ML Entity
shall have delivered to RSI a certificate, dated the date of the Closing,
signed by a duly authorized representative of such ML Entity, certifying as to
the fulfillment of the conditions specified in Section 8.2(a)(ii) and (b)(ii).
(d) Opinion of Counsel for the Company. RSI shall have received from Morgan,
Lewis & Bockius LLP and/or other counsel for the Company satisfactory to RSI
an opinion, dated the Closing Date, covering the items specified in Exhibit B
attached hereto.
(e) Standstill Agreement. RSI shall have received the Standstill Agreement
executed by each ML Entity, together with the opinion of Shearman & Sterling
or other counsel for the ML Entities satisfactory to RSI, dated the Closing
Date, covering the items specified in Exhibit E attached to the ML Agreement.
(f) Fairness Opinion. The opinion of Goldman Sachs dated the date of this
Agreement shall not have been withdrawn, or materially modified or amended, on
or prior to the date of the Proxy Statement/Prospectus.
(g) Stockholders Agreement. The Stockholders Agreement shall have been
terminated and be of no further force and effect.
(h) Tax Agreement. RSI shall have received a Tax Agreement executed by each
ML Entity and the other parties thereto.
(i) Legal Proceedings. With respect to any action, suit, arbitration or
other proceeding pending against the Company or any Subsidiary thereof as of
the date of this Agreement where the amount in controversy exceeds $10.0
million ("Covered Company Proceeding"), (i) a final non-appealable judgment or
award shall have been entered in such Covered Company Proceeding, or a binding
settlement agreement of such Covered Company Proceeding shall have been
executed and delivered, providing in each such case for (A) a judgment or
award in favor of the Company or such Subsidiary, or (B) payment by the
Company or such Subsidiary of, or the imposition of fines or other remedies
against the Company or such Subsidiary involving, an amount (I) not in excess
of the range specified in any letter or opinion of the Company's counsel in
such Covered Company Proceeding to the Company's auditors during the 12 months
preceding the date of this Agreement ("Previous Company Auditor's Letter") or
(II) if such amount is in excess of such range, the payment of such amount
does not have, or would not reasonably be expected to have (so far as can be
foreseen at the time), a Company Material Adverse Effect, or (ii) if such
Covered Company Proceeding has not been finally resolved, (x) the Company
shall have received an update ("Company Update Letter") to the Previous
Company Auditor's Letter which specifies a range above which an award or
judgment is not favored by the balance of probabilities, and (y) (A) such
range shall not exceed that specified in the Previous Company Auditor's
Letter, or (B) if such range as set forth in the Company Update Letter exceeds
the range set forth in the Previous Company Auditor's Letter, an award or
judgment in such range would not have, or would not reasonably be expected to
have so far as can be foreseen at the time, a Company Material Adverse Effect.
8.3. Conditions to Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of
A-36
<PAGE>
each of the following conditions, any or all of which may be waived in whole
or in part by the Company to the extent permitted by applicable law:
(a) Representations and Warranties True. The representations and warranties
of RSI and Merger Sub contained in Article VI or otherwise required hereby to
be made after the date hereof in a writing expressly referred to herein by or
on behalf of RSI and Merger Sub pursuant to this Agreement shall have been
true in all material respects when made and at the time of the Closing with
the same effect as though such representations and warranties had been made at
such time, except (i) for changes specifically permitted by this Agreement or
resulting from the consummation of the transactions contemplated hereby and
(ii) that those representations and warranties which address matters only as
of a particular date shall remain true and correct in all material respects as
of such date.
(b) Performance. RSI and Merger Sub shall have performed or complied in all
material respects with all agreements and conditions contained herein required
to be performed or complied with by them prior to or at the time of the
Closing.
(c) Compliance Certificate. RSI shall have delivered to the Company a
certificate, dated the date of the Closing, signed by the President or any
Vice President of RSI, certifying as to the fulfillment of the conditions
specified in Section 8.3(a) and (b).
(d) Opinions of Counsel for RSI. The Company shall have received from Jones,
Day, Reavis & Pogue and Maslon Edelman Borman & Brand, or other counsel for
RSI satisfactory to the Company, opinions, dated the Closing Date, covering
the items specified in Exhibit C attached to this Agreement.
(e) Registration Rights Agreement. The Registration Rights Agreement, duly
executed by RSI, shall have been received by the other parties thereto.
(f) Employment Agreements. The individuals listed on the employment
agreements included as Exhibit D hereto shall have received executed
employment agreements from RSI in the respective forms of such exhibit.
(g) Legal Proceedings. With respect to any action, suit, arbitration or
other proceeding pending against RSI or any Subsidiary thereof as of the date
of this Agreement where the amount in controversy exceeds $10.0 million
("Covered RSI Proceeding"), (i) a final non-appealable judgment or award shall
have been entered in such Covered RSI Proceeding, or a binding settlement
agreement of such Covered RSI Proceeding shall have been executed and
delivered, providing in each such case for (A) a judgment or award in favor of
RSI or such Subsidiary, or (B) payment by RSI or such Subsidiary of, or the
imposition of fines or other remedies against RSI or such Subsidiary
involving, an amount (I) not in excess of the range specified in any letter or
opinion of RSI's counsel in such Covered RSI Proceeding to RSI's auditors
during the 12 months preceding the date of this Agreement ("Previous RSI
Auditor's Letter") or (II) if such amount is in excess of such range, the
payment of such amount does not have, or would not reasonably be expected to
have (so far as can be foreseen at the time), an RSI Material Adverse Effect,
or (ii) if such Covered RSI Proceeding has not been finally resolved, (x) RSI
shall have received an update ("RSI Update Letter") to the Previous RSI
Auditor's Letter which specifies a range above which an award or judgment is
not favored by the balance of probabilities, and (y) (A) such range shall not
exceed that specified in the Previous RSI Auditor's Letter, or (B) if such
range as set forth in the RSI Update Letter exceeds the range set forth in the
Previous RSI Auditor's Letter, an award or judgment in such range would not
have, or would not reasonably be expected to have so far as can be foreseen at
the time, an RSI Material Adverse Effect.
ARTICLE IX
TERMINATION
9.1. Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after approval of matters presented in connection with the Merger by holders
of RSI Common Shares or holders of the Shares, by the mutual written consent
of the Boards of Directors of each of RSI and the Company.
A-37
<PAGE>
9.2. Termination by Either RSI or the Company. This Agreement may be
terminated (upon notice from the terminating party to the other parties) and
the Merger may be abandoned by action of the Board of Directors of either RSI
or the Company at any time prior to the Effective Time, before or after
approval of the issuance of RSI Common Shares in connection with the Merger by
holders of the Shares or holders of the RSI Common Shares, if (a) the Merger
shall not have been consummated by July 31, 1996 (provided that the right to
terminate this Agreement under this clause (a) shall not be available to any
party whose failure to perform its covenants set forth in this Agreement has
been the cause of or resulted in the failure of the Merger to occur on or
before such date), (b) any court of competent jurisdiction in the United
States or Governmental Body in the United States shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining
or otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable; provided, that the party
seeking to terminate this Agreement pursuant to this clause (b) shall have
used all reasonable efforts to remove such order, decree, ruling or other
action, or (c) the approval of RSI's stockholders required by Section 8.1(a)
is not obtained at the RSI Stockholders Meeting or at any adjournment thereof.
9.3. Termination by RSI. This Agreement may be terminated (upon notice from
RSI to the Company) and the Merger may be abandoned at any time prior to the
Effective Time, before or after approval of the issuance of RSI Common Shares
in connection with the Merger by holders of RSI Common Shares, by action of
the Board of Directors of RSI, if (i) the Company shall have failed to comply
in any material respect with any of the covenants, conditions or agreements
contained in this Agreement to be complied with or performed by the Company at
or prior to such date of termination, which failure to comply has not been
cured within thirty Business Days following receipt by the Company of notice
of such failure to comply, (ii) any of the ML Entities shall have failed to
comply in any material respect with any of the covenants, conditions or
agreements contained in the ML Agreement to be complied with or performed by
any of the ML Entities at or prior to the such date of termination, which
failure to comply has not been cured by such ML Entity within thirty Business
Days following receipt by such ML Entity of notice of such failure to comply,
(iii) any representation or warranty of the Company contained in this
Agreement shall not be true in all material respects when made (provided such
breach has not been cured within thirty Business Days following receipt by the
Company of notice of the breach) or on and as of the Effective Time as if made
on and as of the Effective Time, except that those representations and
warranties which address matters only as of a particular date shall remain
true in all material respects as of such date, or (iv) any representation or
warranty of any ML Entity contained in the ML Agreement shall not be true in
all material respects when made (provided such breach has not been cured
within thirty Business Days following receipt by such ML Entity of notice of
the breach) or on and as of the Effective Time as if made on and as of the
Effective Time, except that those representations and warranties which address
matters only as of a particular date shall remain true in all material
respects as of such date.
9.4. Termination by the Company. This Agreement may be terminated (upon
notice from the Company to RSI) and the Merger may be abandoned at any time
prior to the Effective Time, before or after the approval by holders of the
Shares, by action of the Board of Directors of the Company, if (i) RSI or
Merger Sub shall have failed to comply in any material respect with any of the
covenants, conditions or agreements contained in this Agreement to be complied
with or performed by RSI or Merger Sub at or prior to such date of
termination, which failure to comply has not been cured with thirty Business
Days following receipt by the breaching party of notice of such failure to
comply, or (ii) any representation or warranty of RSI or Merger Sub contained
in this Agreement shall not be true in all material respects when made
(provided such breach has not been cured within thirty Business Days following
receipt by the breaching party of notice of the breach) or on and as of the
Effective Time as if made on and as of the Effective Time, except that those
representations and warranties which address matters only as of a particular
date shall remain true in all material respects as of such date.
Notwithstanding anything to the contrary contained in this Section 9.4, the
Company may terminate this Agreement if, (x) as permitted pursuant to the
proviso to Section 7.5, RSI has refused to consent to any divestiture, hold
separate or similar transaction on the part of the Company, or RSI refuses to
take or commit to take any action referred to in such proviso, in each case
that is required, in the reasonable opinion of the Company, for the
consummation of the transactions contemplated by this Agreement, and (y) RSI
has failed to
A-38
<PAGE>
make such consent or to take or commit to be taken such action, within ten
Business Days following receipt by RSI of notice of the Company's intention to
terminate this Agreement on that basis.
9.5. Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article IX, no
party hereto (or any of its directors or officers) shall have any liability or
further obligation under this Agreement, except the obligations of the parties
pursuant to Sections 7.6(b) and (c), 7.12, 10.1, 10.2, 10.4, 10.5, 10.6, 10.7,
10.9, 10.10, 10.11, 10.12 and 10.13, except that nothing herein will relieve
any party from liability for any wilful breach of any of its representations
and warranties, covenants or other agreements set forth in this Agreement;
provided, however, that the failure of RSI or the Company to close the
transactions contemplated by the Commitment Letter shall not be deemed to be a
wilful breach of any of its representations and warranties, covenants or other
agreements set forth in this Agreement; provided, further, however, that the
payment by RSI of the amounts referred to in Section 10.1(b) shall be
liquidated damages and following the payment of such amounts, RSI shall have
no liability or further obligation under this Agreement except pursuant to
Section 7.6(c), 7.12, 10.1, 10.2, 10.4, 10.5, 10.6, 10.7, 10.9, 10.10, 10.11,
10.12 and 10.13.
ARTICLE X
MISCELLANEOUS AND GENERAL
10.1. Expenses. (a) Except as set forth in this Section 10.1, each party
shall bear its own Expenses, except that in the event of a dispute concerning
the terms or enforcement of this Agreement, the prevailing party in any such
dispute shall be entitled to reimbursement of reasonable legal fees and
disbursements from the other party or parties to such dispute.
(b) RSI agrees that if (i) an RSI Alternative Proposal shall have been
publicly announced or sent to holders of RSI Common Shares after the date of
this Agreement and prior to the RSI Stockholders Meeting, and (ii) the
issuance of the RSI Common Shares in connection with the Merger shall not have
been approved by the requisite holders of RSI Common Shares in accordance with
the rules of the NYSE at the RSI Stockholders Meeting and (iii) within 12
months of the date on which such meeting is held a definitive agreement with
respect to such RSI Alternative Proposal is executed by RSI, then simultaneous
with the execution of such definitive agreement, unless RSI shall have
properly terminated this Agreement pursuant to Section 9.2(a) or (b), or
Section 9.3, RSI shall pay to the Company an amount equal to $4,500,000 plus
all Expenses (not to exceed $1,000,000) incurred by the Company.
10.2. Notices, Etc. All notices, requests, demands or other communications
required by or otherwise with respect to this Agreement shall be in writing
and shall be deemed to have been duly given to any party when delivered
personally (by courier service or otherwise), when delivered by telecopy and
confirmed by return telecopy, or seven days after being mailed by first-class
mail, postage prepaid and return receipt requested in each case to the
applicable addresses set forth below:
If to the Company:
US Foodservice Inc.
1065 Highway 315
Crosscreek Pointe
Wilkes-Barre, PA 18702
Attn: Frank H. Bevevino, Chairman of the Board
and Chief Executive Officer
Telecopy: (717) 822-0909
with a copy to:
Philip H. Werner, Esq.
A-39
<PAGE>
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Telecopy: (212) 309-6273
If to RSI:
Rykoff-Sexton, Inc.
1050 Warrenville Road
Lisle, IL 60532-5201
Attn: Mark Van Stekelenburg, Chairman,
President and Chief Executive
Officer
Telecopy: (708) 971-6588
with a copy to:
Elizabeth C. Kitslaar, Esq.
Jones, Day, Reavis & Pogue
77 W. Wacker
Chicago, IL 60601-1692
Telecopy: (312) 782-8585
or to such other address as such party shall have designated by notice so
given to each other party.
10.3. Amendments, Waivers, Etc. This Agreement may not be amended, changed,
supplemented, waived or otherwise modified except by an instrument in writing
signed by all the parties hereto. This Agreement may be amended by the parties
hereto, by action taken by their respective Board of Directors, at any time
before or after approval of matters presented in connection with the Merger by
the stockholders of the Company, Merger Sub and RSI, but after any such
stockholder approval, no amendment shall be made which by law requires the
further approval of stockholders without obtaining such further approval.
10.4. No Assignment. This Agreement shall be binding upon and shall inure to
the benefit of and be enforceable by the parties and their respective
successors and assigns; provided that, except as otherwise expressly set forth
in this Agreement, neither the rights nor the obligations of any party may be
assigned or delegated without the prior written consent of the other party.
10.5. Entire Agreement. This Agreement (together with the ML Agreement, the
Exhibits and Schedules hereto and thereto, the Company Disclosure Statement,
the RSI Disclosure Statement and the Confidentiality Agreements dated as of
November 20, 1995 and December 11, 1995, between RSI and the Company) embodies
the entire agreement and understanding between the parties relating to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter. There are no representations, warranties or
covenants by the parties hereto relating to such subject matter other than
those expressly set forth in this Agreement (including the Company Disclosure
Statement and the RSI Disclosure Statement) and any writings expressly
required hereby.
10.6. Specific Performance. The parties acknowledge that money damages are
not an adequate remedy for violations of this Agreement and that any party
may, in its sole discretion, apply to a court of competent jurisdiction for
specific performance or injunctive or such other relief as such court may deem
just and proper in order to enforce this Agreement or prevent any violation
hereof and, to the extent permitted by applicable law, each party waives any
objection to the imposition of such relief.
10.7. Remedies Cumulative. All rights, powers and remedies provided under
this Agreement or otherwise available in respect hereof at law or in equity
shall be cumulative and not alternative, and the exercise or beginning of the
exercise of any thereof by any party shall not preclude the simultaneous or
later exercise of any other such right, power or remedy by such party.
A-40
<PAGE>
10.8. No Waiver. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof, shall not constitute a waiver by
such party of its right to exercise any such or other right, power or remedy
or to demand such compliance.
10.9. No Third Party Beneficiaries. Except as provided in Sections 7.13,
7.14 and 7.16, the provisions of which may be enforced by the intended
beneficiaries thereof, this Agreement is not intended to be for the benefit of
and shall not be enforceable by any Person who or which is not a party hereto.
10.10. Jurisdiction. Each party hereby irrevocably submits to the exclusive
jurisdiction of the Court of Chancery in the State of Delaware in any action,
suit or proceeding arising in connection with this Agreement, and agrees that
any such action, suit or proceeding shall be brought only in such court (and
waives any objection based on forum non conveniens or any other objection to
venue therein); provided, however, that such consent to jurisdiction is solely
for the purpose referred to in this Section 10.10 and shall not be deemed to
be a general submission to the jurisdiction of said Court other than for such
purpose. RSI and the Company hereby waive any right to a trial by jury in
connection with any such action, suit or proceeding.
10.11. Governing Law. This Agreement and all disputes hereunder shall be
governed by and construed and enforced in accordance with the internal laws of
the State of Delaware, without regard to principles of conflict of laws that
would apply the laws of any other jurisdiction.
10.12. Name, Captions, Etc. The name assigned this Agreement and the section
captions used herein are for convenience of reference only and shall not
affect the interpretation or construction hereof. Unless otherwise specified,
(a) the terms "hereof", "herein" and similar terms refer to this Agreement as
a whole and (b) references herein to Articles or Sections refer to articles or
sections of this Agreement.
10.13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one instrument. Each counterpart may consist
of a number of copies each signed by less than all, but together signed by
all, the parties hereto.
10.14. Knowledge. The term "knowledge" or "best knowledge" and any
derivatives thereof when applied to any party to this Agreement shall refer
only to the actual knowledge of that party (or in the case of a corporation,
partnership or other entity, the actual knowledge of its executive officers),
but no information known by any other employee, or any attorney, accountant or
other representative, of such party shall be imputed to such party.
10.15. Nonsurvival of Representations and Warranties. All representations
and warranties and agreements in this Agreement or in any certificate
delivered pursuant to this Agreement (a) shall be deemed to the extent
expressly provided herein to be conditions to the Merger and (b) shall not
survive the Merger, provided, however, that the agreements contained in
Article IV, this Article X and Sections 7.13, 7.14 and 7.16 shall survive the
Merger and Section 9.5 shall survive termination.
10.16. No Other Representations and Warranties. Without limiting the
generality of Section 10.5, each party agrees that neither it nor any
Affiliate or stockholder thereof, nor any of their respective partners,
officers, directors, employees or representatives makes, has made or shall be
deemed to have made, any representation or warranty, express or implied, to
any other party or to any Affiliate or stockholder thereof or any of their
respective partners, officers, directors, employees or representatives with
respect to (a) the execution and delivery of this Agreement or the
transactions contemplated hereby; (b) any financial projections heretofore or
hereafter delivered to or made available to any such Persons or their counsel,
accountants, advisors, representatives or Affiliates, and agrees that it has
not and will not rely on such financial projections in connection with its
evaluation of any other party or the Merger; or (c) any information, statement
or document heretofore or hereafter delivered to or made available to any such
Persons or their counsel, accountants, advisors, representatives or Affiliates
with respect to any other party or the businesses, operations or affairs of
any other party, except (with respect to clauses (a) and (c) only), to the
extent and as expressly covered by a representation and warranty contained in
Articles V or VI hereof or contained in the ML Agreement or the other
agreements expressly referred to herein or therein.
A-41
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties set forth below.
US Foodservice Inc.
/s/ Frank H. Bevevino
By: _________________________________
Name: Frank H. Bevevino
Title:Chairman and Chief
Executive Officer
Rykoff-Sexton, Inc.
/s/ Mark Van Stekelenburg
By: _________________________________
Name: Mark Van Stekelenburg
Title:Chairman, President and
Chief Executive Officer
USF Acquisition Corporation
/s/ Mark Van Stekelenburg
By: _________________________________
Name: Mark Van Stekelenburg
Title:President
A-42
<PAGE>
- --------------------------------------------------------------------------------
Goldman, Sachs & Co. | 85 Broad Street | New York, New York 10004
Tel: 212-902-1000
APPENDIX B
[LOGO OF GOLDMAN SACHS]
- --------------------------------------------------------------------------------
April 3, 1996
Board of Directors
Rykoff-Sexton, Inc.
1050 Warrenville Road
Lisle, IL 60532
Gentlemen:
You have requested our opinion as to the fairness to Rykoff-Sexton, Inc. (the
"Company") of the aggregate number of shares of the Common Stock, par value
$.10 per share (the "Shares"), of the Company to be paid as consideration (the
"Common Stock Consideration") for the outstanding Common Stock, par value $.01
per share ("US Foodservice Common Stock"), of US Foodservice Inc. ("US
Foodservice") pursuant to the merger (the "Merger") contemplated by the
Agreement and Plan of Merger dated as of February 2, 1996 among the Company,
USF Acquisition Corporation, a wholly-owned subsidiary of the Company, and US
Foodservice (the "Agreement"). Pursuant to the Agreement, the aggregate number
of shares to be included in the Common Stock Consideration will be determined
by reference to the ratio (the "Exchange Ratio") of Shares to be paid by the
Company for each issued and outstanding share of US Foodservice Common Stock.
The Exchange Ratio will be determined by dividing $25.00 by the average of the
closing prices of the Shares as reported in the New York Stock Exchange
Composite Tape during the period of the twenty most recent trading days ending
on the third business day prior to the Merger, provided that in no event will
the Exchange Ratio be less than 1.244 or greater than 1.457.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with the Agreement.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-4, including the Proxy
Statement/Prospectus relating to the Special Meeting of Stockholders of the
Company to be held in connection with the Agreement; Annual Reports to
Stockholders and Annual Reports on Form 10-K of the Company for the five fiscal
years ended April 30, 1995; certain interim reports to stockholders and
Quarterly Reports on Form 10-Q of the Company; certain other communications
from the Company to its stockholders; audited financial statements of US
Foodservice for the three fiscal years ended December 30, 1995 and the twenty-
seven weeks ended
B-1
<PAGE>
Rykoff-Sexton, Inc.
April 3, 1996
Page Two
January 2, 1993; certain internal financial analyses and forecasts for the
Company and US Foodservice prepared by their respective managements; and
certain internal forecasts for the Company and US Foodservice on a combined
basis, after giving effect to the Merger, prepared by management of the
Company and US Foodservice. We also have held discussions with members of the
senior managements of the Company and US Foodservice regarding the past and
current business operations, financial condition, future prospects of their
respective companies and the potential future prospects of their respective
companies on a combined basis, after giving effect to the Merger. In addition,
we have reviewed the reported price and trading activity for the Shares,
compared certain financial and stock market information for the Company with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the food service distribution industry specifically and in
other industries generally and performed such other studies and analyses as we
considered appropriate.
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. In that regard, we have relied on the managements of
the Company and US Foodservice as to the reasonableness and achievability of
the financial and operating forecasts (and the assumptions and bases
therefore) provided to us, and with your consent we have assumed that such
forecasts, including without limitation projected cost savings and operating
synergies resulting from the Merger, reflect the best currently available
estimates and judgments of such respective managements and that such
projections and forecasts will be realized in the amounts and time periods
currently estimated by the managements of the Company and US Foodservice.
Further, in our evaluation of the fairness of the Common Stock Consideration,
we have assumed, with your permission, that the consummation of the Merger
will not result in a change of control of the Company. In addition, we have
not made an independent evaluation or appraisal of the assets and liabilities
of the Company or US Foodservice or any of their subsidiaries and we have not
been furnished with any such evaluation or appraisal.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the Common
Stock Consideration to be paid by the Company pursuant to the Agreement is
fair to the Company.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
- ------------------------
GOLDMAN, SACHS & CO.
B-2
<PAGE>
APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 Appraisal Rights--(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S) 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S) 251 (other than a merger effected pursuant to
subsection (g) of (S) 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares of fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all
C-1
<PAGE>
or substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the County of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition
C-2
<PAGE>
by registered or certified mail to the surviving or resulting corporation and
to the stockholders shown on the list at the addresses therein stated. Such
notice shall also be given by 1 or more publications at least 1 week before
the day of the hearing, in a newspaper of general circulation published in the
City of Wilmington, Delaware or such publication as the Court deems advisable.
The forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholder entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expense incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
written approval of the corporation, then the right of such stockholder to an
appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
C-3
<PAGE>
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
C-4
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To US FOODSERVICE INC.:
We have audited the accompanying consolidated balance sheets of US FOODSERVICE,
INC. (a Delaware Corporation) and subsidiaries as of December 31, 1994 and
December 30, 1995, and the related consolidated statements of operations,
mandatory redeemable preferred stock and stockholders' equity (deficit), and
cash flows for each of the three fiscal years in the period ended December 30,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of US FOODSERVICE INC.
and subsidiaries as of December 31, 1994 and December 30, 1995, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 30, 1995, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 1, 1996
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To US Foodservice Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated balance sheets as of December 31, 1994 and December 30, 1995 and
the consolidated statements of operations, mandatory redeemable preferred stock
and stockholders' equity (deficit) and cash flows for the fiscal years ended
January 1, 1994, December 31, 1994 and December 30, 1995 of US Foodservice Inc.
included in this Registration Statement and have issued our report thereon dated
March 1, 1996. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in Item 21(b) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 1, 1996
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of H&O Foods, Inc.:
We have audited the accompanying balance sheets of H&O Foods, Inc. (a Nevada
corporation) as of October 31, 1995 and December 31, 1994, and the related
statements of income, stockholders' equity and cash flows for the ten month
period ended October 31, 1995 and the year ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of H&O Foods, Inc. as of October
31, 1995 and December 31, 1994, and the results of its operations and its cash
flows for the ten month period ended October 31, 1995 and the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Las Vegas, Nevada
November 29, 1995
<PAGE>
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Continental Foods, Inc.:
We have audited the accompanying balance sheets of Continental Foods, Inc. (a
Maryland corporation) as of April 30, 1994 and 1993, and the related statements
of income and retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Continental Foods, Inc. as of
April 30, 1994 and 1993, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
June 7, 1994
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Rykoff-Sexton, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Rykoff-Sexton, Inc.'s Form 10-K
and have issued our report thereon dated June 9, 1995. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedules listed in Item 14. (a)(2) are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic consolidated financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
June 9, 1995
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Rykoff-Sexton, Inc:
We have audited the accompanying consolidated balance sheets of Rykoff-Sexton,
Inc. (a Delaware corporation) and its subsidiaries as of April 29, 1995 and
April 30, 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three fiscal years in the
period ending April 29, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rykoff-Sexton, Inc. and its
subsidiaries as of April 29, 1995 and April 30, 1994, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 29, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to financial statements, the Company changed its method
of accounting for income taxes in 1993.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
June 9, 1995
<PAGE>
APPENDIX TO THE ELECTRONIC FILING
PROXY
RYKOFF-SEXTON, INC.
1050 WARRENVILLE ROAD
LISLE, ILLINOIS 60532-5201
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Mark Van Stekelenburg, Robert J. Harter, Jr.
and Richard J. Martin as proxies, each with the power to appoint his substi-
tute, and hereby authorizes each of them to represent and vote, as designated
on the other side, all the shares of Common Stock of Rykoff-Sexton, Inc. held
of record by the undersigned on April 2, 1996, at the Special Meeting of
Stockholders of Rykoff-Sexton, Inc. to be held at One Sexton Drive, Glendale
Heights, Illinois on May 8, 1996, at 10:00 a.m. local time, and any adjourn-
ments or postponements thereof.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
<PAGE>
Please mark your votes as indicated in this example [X]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
1. Proposal to approve the issuance of shares of Common Stock of Rykoff-
Sexton, Inc., par value $.10 per share, in connection with an Agreement and
Plan of Merger, dated February 2, 1996, among Rykoff-Sexton, Inc., US
Foodservice Inc. and USF Acquisition Corporation, a wholly-owned subsidiary
of Rykoff-Sexton, Inc., the provisions of which are described in the enclosed
Proxy Statement/Prospectus.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In their discretion, the Proxies are authorized to transact such other
matters as may arise relating to the conduct of the Special Meeting of
Stockholders of Rykoff-Sexton, Inc. or any adjournments or postponements
thereof.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1, AND IN THE DISCRETION OF THE PROXIES ON THE MATTERS
DESCRIBED IN PROPOSAL 2.
Do you plan to attend this meeting? YES NO
[_] [_]
PLEASE MARK, DATE, SIGN AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Signature(s) ___________________________ Date ______________________________
NOTE: Please sign exactly as your name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, administrator,
trustee or guardian, please give your full title as such. If a
corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership, please sign the partnership's name
by an authorized person.
