<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997
REGISTRATION NO. 333-37869
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SUIZA FOODS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2026 75-2559681
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
3811 TURTLE CREEK BLVD.
SUITE 1300
DALLAS, TEXAS 75219
(214) 528-0939
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
GREGG L. ENGLES
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
3811 TURTLE CREEK BLVD.
SUITE 1300
DALLAS, TEXAS 75219
(214) 528-0939
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
WILLIAM A. MCCORMACK R. SCOTT COHEN
Hughes & Luce, L.L.P. Weil, Gotshal & Manges LLP
1717 Main Street 100 Crescent Court
Suite 2800 Suite 1300
Dallas, Texas 75201 Dallas, Texas 75201
(214) 939-5500 (214) 746-7700
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- -------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- -------------
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
BECOMES EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
S-4 ITEM PROSPECTUS CAPTION OR LOCATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C> <C>
Part I
A. Information About the Transaction
Item 1. Forepart of Registration Statement and Forepart of Registration Statement and Outside Front
Outside Front Cover Page of Prospectus Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus;
Prospectus Available Information; Incorporation of Certain
Information by Reference; Table of Contents
Item 3. Risk Factors, Ratio of Earnings to Fixed Summary; Risk Factors
Charges, and Other Information
Item 4. Terms of the Transaction The Merger--Reasons for the Merger; Recommendations of
the Boards; The Merger-- Anticipated Accounting
Treatment; The Merger Agreement; Certain U.S. Federal
Income Tax Consequences of the Merger; Comparison of
the Rights of Suiza Stockholders and Morningstar
Stockholders
Item 5. Pro Forma Financial Information Summary; Pro Forma Financial Data
Item 6. Material Contacts with the Company Being The Merger--Background of the Merger
Acquired
Item 7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed to
be Underwriters
Item 8. Interests of Named Experts and Counsel Legal Matters; Experts
Item 9. Disclosure of Commission Position on Comparison of the Rights of Suiza Stockholders and
Indemnification for Securities Act Morningstar Stockholders--Indemnification of Directors
Liabilities and Officers
B. Information About the Registrant
Item 10. Information with Respect to S-3 Registrants Summary; Incorporation of Certain Information by
Reference; Selected Financial Data of Suiza Foods; Pro
Forma Financial Data; The Companies--Recent
Developments
Item 11. Incorporation of Certain Information by Incorporation of Certain Information by Reference
Reference
Item 12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
Item 13. Incorporation of Certain Information by Not Applicable
Reference
Item 14. Information with Respect to Registrants Not Applicable
Other Than S-3 or S-2 Registrants
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S-4 ITEM PROSPECTUS CAPTION OR LOCATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C> <C>
C. Information About the Company Being
Acquired
Item 15. Information with Respect to S-3 Companies Summary; Incorporation of Certain Information by
Reference; Selected Financial Data of Morningstar; Pro
Forma Financial Data
Item 16. Information with Respect to S-2 or S-3 Not Applicable
Companies
Item 17. Information with Respect to Companies Other Not Applicable
Than S-2 or S-3 Companies
D. Voting and Management Information
Item 18. Information if Proxies, Consents or Forepart of Registration Statement and Outside Front
Authorizations Are to be Solicited Cover Page of Prospectus; The Special
Meetings--General; The Special Meetings-- Voting
Securities and Record Dates; The Special
Meetings--Proxies; The Merger-- Interests of Certain
Persons in the Merger; The Merger--Absence of
Appraisal Rights
Item 19. Information if Proxies, Consents or Not Applicable
Authorizations Are Not to be Solicited, or
in an Exchange Offer
</TABLE>
<PAGE>
SUIZA FOODS CORPORATION
3811 TURTLE CREEK BOULEVARD
SUITE 1300
DALLAS, TEXAS 75219
OCTOBER 28, 1997
Dear Fellow Stockholders:
You are cordially invited to attend a special meeting (the "Special
Meeting") of the stockholders (the "Stockholders") of Suiza Foods Corporation
("Suiza Foods"), to be held on Wednesday, November 26, 1997, at 9:00 a.m., local
time, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs,
Dallas, Texas 75201.
At the Special Meeting, Stockholders will be asked to vote upon a proposal
to approve the issuance of Suiza Foods common stock in connection with the
combination of Suiza Foods and The Morningstar Group Inc. ("Morningstar") as
contemplated by the Agreement and Plan of Merger dated as of September 28, 1997
(the "Merger Agreement"). Subject to the terms and conditions of the Merger
Agreement, SF Acquisition Corporation, a wholly owned subsidiary of Suiza Foods
("Sub"), will be merged (the "Merger") with and into Morningstar, and
Morningstar will become a wholly owned subsidiary of Suiza Foods. Pursuant to
the Merger, each share of Morningstar common stock outstanding immediately prior
to the effective time of the Merger will be converted (the "Share Conversion")
into the right to receive 0.85 shares (the "Exchange Ratio") of Suiza Foods
common stock (with cash being paid in lieu of any fractional shares of Suiza
Foods common stock). In addition, Suiza Foods will assume each of Morningstar's
stock option plans and each option to acquire shares of Morningstar common stock
outstanding thereunder, and each such option will become an option to acquire
Suiza Foods common stock (the "Option Conversion" and, together with the Share
Conversion, the "Stock Issuance").
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER
AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT BY A UNANIMOUS VOTE
AND HAS CONCLUDED THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" THE STOCK ISSUANCE.
Your Board of Directors has retained as financial advisor Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ"), which has delivered to the Board of
Directors its written opinion dated as of September 28, 1997, to the effect that
the Exchange Ratio is fair from a financial point of view to the holders of
Suiza Foods common stock. A copy of the DLJ opinion letter, which sets forth the
assumptions made, matters considered and the scope of review undertaken in
connection therewith, is attached as Appendix B to the accompanying Joint Proxy
Statement/Prospectus and should be read carefully in its entirety.
At the Special Meeting, Stockholders will also be asked to vote upon a
proposal to increase the number of authorized shares of common stock reserved
for issuance under the Suiza Foods Corporation 1997 Stock Option and Restricted
Stock Plan (the "1997 Plan") from 1,150,000 shares to 3,000,000 shares (the
"Plan Amendment").
In the material accompanying this letter, you will find a formal Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by Stockholders at the Special Meeting and a proxy card.
The Joint Proxy Statement/Prospectus more fully describes the proposed Merger
and includes information about Suiza Foods and Morningstar and the reasons for
the Merger.
<PAGE>
Your vote is important, regardless of the number of shares you own. Approval
of the Stock Issuance and the Plan Amendment requires an affirmative vote of
holders of a majority of the shares of Suiza Foods common stock present and
entitled to vote at the Special Meeting (assuming a quorum is present). I
RESPECTFULLY URGE YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND
RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. This will not prevent
you from attending the Special Meeting or voting in person, but will assure that
your vote is counted if you are unable to attend the Special Meeting.
If you have any questions or require additional information with respect to
the proposed business combination or the Plan Amendment, please contact Tracy L.
Noll at (214) 528-0939.
On behalf of your Board of Directors, I thank you for your support and urge
you to vote FOR approval of the Stock Issuance and the Plan Amendment.
Sincerely,
/s/ Gregg L. Engles
--------------------------------------
Gregg L. Engles
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
ii
<PAGE>
THE MORNINGSTAR GROUP INC.
5956 SHERRY LANE, SUITE 1500
DALLAS, TEXAS 75225
OCTOBER 28, 1997
Dear Fellow Stockholders:
You are cordially invited to attend a special meeting (the "Special
Meeting") of the stockholders (the "Stockholders") of The Morningstar Group Inc.
("Morningstar") to be held on Wednesday, November 26, 1997 at 9:00 a.m., local
time, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs,
Dallas, Texas 75201.
At the Special Meeting, Stockholders will be asked to vote upon a proposal
to combine Morningstar and Suiza Foods Corporation ("Suiza Foods") as
contemplated by the Agreement and Plan of Merger dated as of September 28, 1997
(the "Merger Agreement"). Subject to the terms and conditions of the Merger
Agreement, SF Acquisition Corporation, a wholly owned subsidiary of Suiza Foods
("Sub"), will be merged (the "Merger") with and into Morningstar, and
Morningstar will become a wholly owned subsidiary of Suiza Foods. Pursuant to
the Merger, each share of Morningstar common stock outstanding immediately prior
to the effective time of the Merger will be converted into 0.85 shares (the
"Exchange Ratio") of Suiza Foods common stock (with cash being paid in lieu of
any fractional shares of Suiza Foods common stock). In addition, Suiza Foods
will assume each of Morningstar's stock option plans and each option to acquire
shares of Morningstar common stock outstanding thereunder, and each such option
will become an option to acquire Suiza Foods common stock.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT
AND HAS CONCLUDED THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE "FOR" THE MERGER, THE MERGER AGREEMENT AND TRANSACTIONS
CONTEMPLATED THEREBY.
Your Board of Directors retained as financial advisor Goldman, Sachs & Co.
("Goldman Sachs"), which has delivered to the Board of Directors its written
opinion, dated as of September 28, 1997, to the effect that as of such date the
Exchange Ratio pursuant to the Merger Agreement was fair from a financial point
of view to the holders of Morningstar common stock. A copy of the Goldman Sachs
opinion letter, which sets forth the assumptions made, matters considered and
the scope of the review undertaken in connection therewith, is attached as
Appendix C to the accompanying Joint Proxy Statement/Prospectus and should be
read carefully in its entirety.
In the material accompanying this letter, you will find a formal Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by Stockholders at the Special Meeting and a proxy card.
The Joint Proxy Statement/Prospectus more fully describes the proposed Merger
and includes information about Suiza Foods and Morningstar and the reasons for
the Merger.
Your vote is important, regardless of the number of shares you own. Approval
of the Merger, the Merger Agreement and transactions contemplated thereby
requires an affirmative vote of holders of a majority of the authorized and
outstanding shares of Morningstar common stock entitled to vote thereon. I
RESPECTFULLY URGE YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND
RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. This will not prevent
you from attending the Special Meeting or voting in person, but will assure that
your vote is counted if you are unable to attend the Special Meeting.
<PAGE>
PLEASE DO NOT SEND YOUR SHARE CERTIFICATES WITH THE ENCLOSED PROXY CARD AT
THIS TIME. Promptly after the Merger is consummated, you will be sent a letter
of transmittal which will include instructions as to the procedures to be used
in exchanging your certificates representing shares of Morningstar common stock
for certificates representing shares of Suiza Foods common stock.
If you have any questions or require additional information with respect to
the proposed business combination, please contact Darron K. Ash at (214)
360-4700.
On behalf of your Board of Directors, I thank you for your support and urge
you to vote FOR approval of the Merger, the Merger Agreement and transactions
contemplated thereby.
Sincerely,
/s/ C. Dean Metropoulos
--------------------------------------
C. Dean Metropoulos
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
ii
<PAGE>
SUIZA FOODS CORPORATION
3811 TURTLE CREEK BLVD.
SUITE 1300
DALLAS, TEXAS 75219
------------------------
NOTICE OF SPECIAL MEETING OF THE STOCKHOLDERS
TO BE HELD ON NOVEMBER 26, 1997
------------------------
To the Stockholders of
Suiza Foods Corporation
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Suiza Foods
Corporation, a Delaware corporation ("Suiza Foods"), will be held on Wednesday,
November 26, 1997 at 9:00 a.m. local time, at the Hotel Crescent Court, 400
Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201 (the "Special Meeting")
for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of
shares of Suiza Foods common stock in connection with the merger (the
"Merger") of SF Acquisition Corporation, a Delaware corporation and wholly
owned subsidiary of Suiza Foods ("Sub"), with and into The Morningstar Group
Inc. ("Morningstar"), in accordance with the Agreement and Plan of Merger,
dated as of September 28, 1997, among Suiza Foods, Sub and Morningstar (the
"Merger Agreement"). Pursuant to the Merger Agreement (a) each share of
Morningstar common stock issued and outstanding immediately prior to the
Merger will be converted into the right to receive 0.85 shares of Suiza
Foods common stock and (b) Suiza Foods will assume each of Morningstar's
stock option plans and each option to acquire shares of Morningstar common
stock outstanding thereunder, and each such option will become an option to
acquire Suiza Foods common stock (collectively, the "Stock Issuance").
2. To consider and vote upon a proposal to approve an increase in the
number of shares of Suiza Foods common stock authorized for issuance under
the Suiza Foods Corporation 1997 Stock Option and Restricted Stock Plan from
1,150,000 shares to 3,000,000 shares (the "Plan Amendment").
3. To transact such other business as may properly come before the
Special Meeting and any and all adjournments or postponements thereof.
The close of business on October 27, 1997 has been fixed as the record date
for the determination of the stockholders entitled to notice of and to vote at
the Special Meeting.
The affirmative vote of the holders of Suiza Foods common stock holding a
majority of the shares of Suiza Foods common stock present and entitled to vote
at the Special Meeting is required to approve the Stock Issuance and the Plan
Amendment. Holders of Suiza Foods common stock will not have rights of appraisal
in connection with the Merger.
Stockholders are invited to attend the Special Meeting. Whether or not you
expect to attend, WE URGE YOU TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If you attend the meeting, you
may vote your shares in person, and thereby revoke any previously executed
proxy.
If your shares of Suiza Foods common stock are held of record by a broker,
bank or other nominee and you wish to attend the Special Meeting, you must
obtain a letter from the broker, bank or other nominee confirming your
beneficial ownership of the shares and bring it to the Special Meeting. In order
to vote your shares at the Special Meeting, you must obtain from the record
holder a proxy issued in your name.
<PAGE>
Regardless of how many shares you own, your vote is very important. PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD TODAY.
By Order of the Board of Directors
/s/ Tracy L. Noll
--------------------------------------
Tracy L. Noll
SECRETARY
Dallas, Texas
October 28, 1997
ii
<PAGE>
THE MORNINGSTAR GROUP INC.
5956 SHERRY LANE, SUITE 1500
DALLAS, TEXAS 75225-6522
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 26, 1997
------------------------
To the Stockholders of
The Morningstar Group Inc.
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of The
Morningstar Group Inc., a Delaware corporation ("Morningstar"), will be held on
Wednesday, November 26, 1997 at 9:00 a.m. local time, at the Hotel Crescent
Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201 (the "Special
Meeting") for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of September 28, 1997 (the "Merger
Agreement"), by and among Morningstar, Suiza Foods Corporation, a Delaware
corporation ("Suiza Foods"), and SF Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of Suiza Foods ("Sub"), the Merger
(as hereinafter defined) and the other transactions contemplated by the
Merger Agreement. Upon the terms and subject to the conditions of the Merger
Agreement, Sub will be merged (the "Merger") with and into Morningstar and
Morningstar will become a wholly owned subsidiary of Suiza Foods. At the
effective time of the Merger, and as more fully described in the
accompanying Joint Proxy Statement and Prospectus and in the Merger
Agreement included as Appendix A thereto, each share of common stock, par
value $0.01 per share, of Morningstar ("Morningstar Common Stock") issued
and outstanding immediately prior to the effective time of the Merger will
be converted into the right to receive 0.85 shares of common stock of Suiza
Foods.
2. To transact such other business as may properly come before the
Special Meeting and any and all adjournments or postponements thereof.
The close of business on October 27, 1997 has been fixed as the record date
for the determination of the stockholders entitled to notice of and to vote at
the Special Meeting.
The affirmative vote of a majority of the outstanding shares of Morningstar
Common Stock entitled to vote at the Special Meeting is required to approve the
Merger, the Merger Agreement and the transactions contemplated thereby. Holders
of Morningstar Common Stock will not have rights of appraisal in connection with
the Merger.
Stockholders are invited to attend the Special Meeting. Whether or not you
expect to attend, WE URGE YOU TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED
PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If you attend the meeting, you
may vote your shares in person, and thereby revoke any previously executed
proxy.
If your shares of Morningstar Common Stock are held of record by a broker,
bank or other nominee and you wish to attend the Special Meeting, you must
obtain a letter from the broker, bank or other nominee confirming your
beneficial ownership of the shares and bring it to the Special Meeting. In order
to vote your shares at the Special Meeting, you must obtain from the record
holder a proxy issued in your name.
<PAGE>
Regardless of how many shares you own, your vote is very important. PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD TODAY.
By Order of the Board of Directors
/s/ Michael J. Cramer
--------------------------------------
Michael J. Cramer
SECRETARY
Dallas, Texas
October 28, 1997
ii
<PAGE>
SUIZA FOODS CORPORATION
AND
THE MORNINGSTAR GROUP INC.
------------------
JOINT PROXY STATEMENT
------------------
PROSPECTUS OF
SUIZA FOODS CORPORATION
This Joint Proxy Statement/Prospectus constitutes the proxy statement of
each of Suiza Foods Corporation, a Delaware corporation ("Suiza Foods"), and The
Morningstar Group Inc., a Delaware corporation ("Morningstar"), relating to the
solicitation of proxies for use at the special meetings of stockholders of each
of Suiza Foods ("Suiza Stockholders") and Morningstar ("Morningstar
Stockholders"), each of which is scheduled to be held on Wednesday, November 26,
1997, and at any adjournments or postponements thereof (respectively, the "Suiza
Special Meeting" and the "Morningstar Special Meeting" and, collectively, the
"Special Meetings"). This Joint Proxy Statement/Prospectus relates to the
Agreement and Plan of Merger (the "Merger Agreement"), dated as of September 28,
1997, among Suiza Foods, SF Acquisition Corporation, a Delaware corporation and
wholly owned subsidiary of Suiza Foods ("Sub"), and Morningstar, pursuant to
which Sub will merge (the "Merger") with and into Morningstar (such combined
company after the Merger is referred to herein as "New Morningstar") and each
outstanding share of the common stock, $0.01 par value per share, of Morningstar
("Morningstar Common Stock") will be converted into the right to receive 0.85
shares (the "Exchange Ratio") of common stock, par value $0.01 per share, of
Suiza Foods ("Suiza Common Stock"). Cash will be paid in lieu of any fractional
shares of Suiza Common Stock. As a result of the Merger, Morningstar will become
a wholly owned subsidiary of Suiza Foods.
The consummation of the Merger is subject to (i) the approval of the
issuance in the Merger of shares of Suiza Common Stock upon conversion of
outstanding shares of Morningstar Common Stock (the "Stock Conversion") and of
the assumption by Suiza Foods of Morningstar's stock option plans and each
option to purchase shares of Morningstar Common Stock (each a "Morningstar
Option") outstanding thereunder and the conversion of each Morningstar Option
into a Substitute Option (as hereinafter defined) (the "Option Conversion" and,
collectively with the Stock Conversion, the "Stock Issuance") by the affirmative
vote of Suiza Stockholders holding a majority of the shares of Suiza Common
Stock present and entitled to vote at the Suiza Special Meeting; (ii) the
approval of the Merger, the Merger Agreement and the transactions contemplated
thereby by the affirmative vote of Morningstar Stockholders holding a majority
of the shares of Morningstar Common Stock outstanding and entitled to vote at
the Morningstar Special Meeting; and (iii) certain other conditions set forth in
the Merger Agreement. A copy of the Merger Agreement is attached to this Joint
Proxy Statement/Prospectus as Appendix A and is incorporated herein by
reference.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Suiza Foods with respect to the shares of Suiza Common Stock to be issued to
Morningstar Stockholders in connection with the Stock Conversion, which
prospectus is a part of the registration statement on Form S-4 (the "Suiza
Registration Statement") that has been filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Suiza Common Stock to be issued
in the Stock Conversion. Based on the number of shares of Morningstar Common
Stock outstanding on October 27, 1997, Suiza Foods will issue approximately
12,562,096 shares of Suiza Common Stock in the aggregate to the Morningstar
Stockholders in connection with the Stock Conversion, and as a result of the
Stock Conversion, Morningstar Stockholders will hold approximately 44.3% of the
shares of Suiza Common Stock outstanding after the Merger. In addition, each
Morningstar Option will be assumed by Suiza Foods and converted into an option
(a "Substitute Option") to purchase a number of shares of Suiza Common Stock
equal to the number of shares of Morningstar Common Stock subject to such
Morningstar Option multiplied by the Exchange Ratio (rounded down to the nearest
whole share) at a per share price equal to the per share exercise price of the
Morningstar Option immediately prior to the Merger divided by the Exchange Ratio
(rounded up to the nearest full cent). As of October 27, 1997, there were
outstanding Morningstar Options to purchase approximately 3,479,985 shares of
Morningstar Common Stock, which options will be converted into Substitute
Options to purchase an aggregate of approximately 2,957,987 shares of Suiza
Common Stock. Any shares of Suiza Common Stock that may be issued pursuant to
the Stock Conversion or upon exercise of Substitute Options will be authorized
for listing, subject to official notice of issuance, on the New York Stock
Exchange (the "NYSE") prior to the effective time of the Merger.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS JOINT PROXY
STATEMENT/PROSPECTUS FOR A DISCUSSION OF CERTAIN MATTERS WITH RESPECT TO AN
INVESTMENT IN SUIZA COMMON STOCK UPON CONSUMMATION OF THE MERGER.
This Joint Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to Suiza Stockholders and Morningstar Stockholders on or
about October 28, 1997.
THE SHARES OF SUIZA COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/ PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR A SOLICITATION
OF A PROXY FROM ANY PERSON, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES MADE UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF SUIZA FOODS OR MORNINGSTAR AT ANY TIME SUBSEQUENT TO
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
------------------------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS OCTOBER 28, 1997.
<PAGE>
AVAILABLE INFORMATION
Suiza Foods and Morningstar are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
Suiza Foods and Morningstar with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission located at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy statements and other information regarding registrants that file
electronically with the Commission. Suiza Common Stock is listed on the NYSE and
traded under the symbol "SZA" and Morningstar Common Stock is authorized for
trading on the Nasdaq Stock Market, National Market System ("Nasdaq") and traded
under the symbol "MSTR". Reports and other information concerning Suiza Foods
can also be inspected at the offices of the New York Stock Exchange, 30 Broad
Street, New York, New York 10005 and reports and other information concerning
Morningstar can also be inspected at the offices of the Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006. Upon consummation of the Merger,
the Morningstar Common Stock will cease to be authorized for trading on Nasdaq.
This Joint Proxy Statement/Prospectus, which constitutes a part of the Suiza
Registration Statement, does not contain all of the information set forth in the
Suiza Registration Statement, certain items of which are contained in schedules
and exhibits to the Suiza Registration Statement as permitted by the rules and
regulations of the Commission. For further information, reference is made to the
Suiza Registration Statement, including the schedules and exhibits filed as a
part thereof or incorporated by reference therein. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each such statement is qualified in its entirety by reference to
the copy of the applicable document filed as an appendix hereto or as otherwise
filed with the Commission. The Suiza Registration Statement and the exhibits and
schedules thereto may be inspected, and copies thereof may be obtained, as set
forth above.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents previously filed with the Commission pursuant to the
Securities Act and the Exchange Act are incorporated herein by reference and
shall be deemed a part hereof:
SUIZA FOODS CORPORATION FILINGS
1. The audited financial statements of Garrido & Compania, Inc. and
subsidiaries, Swiss Dairy, a Corporation and Model Dairy, Inc. included in
the Suiza Foods Final Prospectus dated January 22, 1997 and filed with the
Commission pursuant to Rule 424(b) on January 23, 1997 (File No. 333-18263).
2. Suiza Foods' Annual Report on Form 10-K for the fiscal year ended December
31, 1996 (File No. 1-12755).
3. Suiza Foods' Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 and Suiza Foods' Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (as amended on October 24, 1997) (File No. 1-12755).
4. Suiza Foods' Current Reports on Form 8-K filed July 14, 1997 (as amended on
August 22, 1997), which includes the audited financial statements of Dairy
Fresh L.P. and The Garelick Companies, and Suiza Foods' Current Report on
Form 8-K filed September 29, 1997 (File No. 1-12755).
5. The description of the Suiza Common Stock contained in Suiza Foods'
Registration Statement on Form 8-A filed on February 19, 1997 (File No.
1-12755).
THE MORNINGSTAR GROUP INC. FILINGS
1. Morningstar's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 (File No. 0-19075).
2. Morningstar's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1997 and June 30, 1997 (File No. 0-19934).
ii
<PAGE>
3. Morningstar's Current Report on Form 8-K filed September 29, 1997 (File No.
0-19075).
4. Morningstar's Current Report on Form 8-K filed December 3, 1996 (as amended
February 18, 1997), which includes the audited financial statements of
Presto Foods Products, Inc. ("Presto") and affiliates (File No. 0-19075).
All reports and other documents filed by either Suiza Foods or Morningstar
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Joint Proxy Statement/Prospectus and prior to the date of its
Special Meeting shall be deemed to be incorporated by reference herein and to be
a part hereof from the dates of filing of such reports and documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Joint Proxy Statement/Prospectus to the extent that a statement contained
herein, or in any other subsequently filed document that also is incorporated or
deemed to be incorporated by reference herein, modifies or supersedes the
earlier statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS
(OTHER THAN EXHIBITS THERETO WHICH ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER OF SHARES OF SUIZA COMMON STOCK OR MORNINGSTAR COMMON STOCK TO
WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS SENT, UPON WRITTEN OR ORAL
REQUEST, IN THE CASE OF DOCUMENTS RELATING TO SUIZA FOODS, TO THE CORPORATE
SECRETARY OF SUIZA FOODS AT 3811 TURTLE CREEK BLVD., SUITE 1300, DALLAS, TEXAS
75219, TELEPHONE (214) 528-0939 AND, IN THE CASE OF DOCUMENTS RELATING TO
MORNINGSTAR, TO THE GENERAL COUNSEL OF MORNINGSTAR AT 5956 SHERRY LANE, SUITE
1500, DALLAS, TEXAS 75225-6522, TELEPHONE (214) 360-4700. IN ORDER TO ENSURE
DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE SPECIAL MEETING, ANY SUCH REQUEST
SHOULD BE MADE NOT LATER THAN WEDNESDAY, NOVEMBER 19, 1997.
All information contained in this Joint Proxy Statement/Prospectus relating
to Suiza Foods and its subsidiaries has been supplied by Suiza Foods and all
information relating to Morningstar and its subsidiaries has been supplied by
Morningstar.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AVAILABLE INFORMATION...................................................................................... ii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... ii
SUMMARY.................................................................................................... 1
The Companies............................................................................................ 1
Recent Developments...................................................................................... 1
The Special Meetings..................................................................................... 2
The Merger and the Merger Agreement...................................................................... 3
Risk Factors............................................................................................. 7
Cautionary Statement Concerning Forward-Looking Statements............................................... 7
Market Price and Dividend Information.................................................................... 8
Comparative Per Share Data............................................................................... 10
Summary Pro Forma Financial Data......................................................................... 11
Summary Financial Data of Suiza Foods.................................................................... 12
Summary Financial Data of Morningstar.................................................................... 13
Summary Financial Data of Country Fresh.................................................................. 14
RISK FACTORS............................................................................................... 15
Risks Associated with Acquisition Strategy............................................................... 15
Competition.............................................................................................. 15
Substantial Indebtedness................................................................................. 16
Government Regulation; Raw Material Costs................................................................ 16
Dependence on Key Personnel.............................................................................. 17
Limitations on Favorable Tax Treatment................................................................... 17
Antitakeover Provisions.................................................................................. 17
Expected Benefits of Combined Business May Not Be Achieved............................................... 17
Anticipated Accounting Treatment......................................................................... 17
THE COMPANIES.............................................................................................. 18
General.................................................................................................. 18
Recent Developments...................................................................................... 18
PRO FORMA FINANCIAL DATA................................................................................... 20
SELECTED FINANCIAL DATA OF SUIZA FOODS..................................................................... 30
SELECTED FINANCIAL DATA OF MORNINGSTAR..................................................................... 32
SELECTED FINANCIAL DATA OF COUNTRY FRESH................................................................... 33
THE SPECIAL MEETINGS....................................................................................... 34
General.................................................................................................. 34
Voting Securities and Record Dates....................................................................... 34
Purpose of Special Meetings.............................................................................. 34
Proxies.................................................................................................. 35
THE MERGER................................................................................................. 36
General.................................................................................................. 36
Background of the Merger................................................................................. 36
Reasons for the Merger; Recommendations of the Boards.................................................... 37
Opinion of Suiza Foods' Financial Advisor................................................................ 40
Opinion of Morningstar's Financial Advisor............................................................... 43
Anticipated Accounting Treatment......................................................................... 48
Restrictions on Resale by Affiliates..................................................................... 48
New Morningstar Board and Management Following the Merger................................................ 49
Board of Directors of Suiza Foods Following the Merger................................................... 49
Governmental Approvals................................................................................... 49
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
Interests of Certain Persons in the Merger............................................................... 50
<S> <C>
Absence of Appraisal Rights.............................................................................. 52
Stock Exchange Listing................................................................................... 52
Treatment of Stock Certificates.......................................................................... 52
THE MERGER AGREEMENT....................................................................................... 53
General.................................................................................................. 53
Consideration to Be Received in the Merger............................................................... 53
Effective Time of the Merger............................................................................. 53
Exchange of Shares....................................................................................... 53
Corporate Organization and Governance.................................................................... 54
Stockholders' Meetings................................................................................... 54
Representations and Warranties........................................................................... 55
Conduct of Business Pending the Merger................................................................... 55
Additional Agreements.................................................................................... 57
Employee Matters......................................................................................... 58
Indemnification.......................................................................................... 58
No Shop.................................................................................................. 59
Conditions Precedent..................................................................................... 60
Termination.............................................................................................. 61
Fees and Expenses........................................................................................ 62
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER................................................. 62
General.................................................................................................. 62
Tax Consequences to Suiza Foods, Sub and Morningstar..................................................... 63
Tax Consequences to Morningstar Stockholders............................................................. 63
COMPARISON OF THE RIGHTS OF SUIZA STOCKHOLDERS AND MORNINGSTAR STOCKHOLDERS................................ 63
Authorized Capital....................................................................................... 64
Number of Directors; Election of Directors; Removal; Vacancies........................................... 64
Charter Amendments....................................................................................... 64
Bylaw Amendments......................................................................................... 65
Special Stockholder Meetings............................................................................. 65
Business Combinations.................................................................................... 65
State Takeover Legislation............................................................................... 65
Indemnification of Directors and Officers................................................................ 66
Limitation of Personal Liability of Directors............................................................ 66
Suiza Preferred Stock.................................................................................... 67
STOCK OPTION INCREASE...................................................................................... 68
The 1997 Plan............................................................................................ 68
Federal Income Tax Consequences.......................................................................... 69
Reasons for Proposal..................................................................................... 70
Interests of Certain Persons in Matters to be Acted Upon................................................. 70
LEGAL MATTERS.............................................................................................. 71
EXPERTS.................................................................................................... 71
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDICES:................................................................................................
A--Merger Agreement
B--Fairness Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
C--Fairness Opinion of Goldman, Sachs & Co.
</TABLE>
v
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/ PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND IN THE
APPENDICES HERETO INCLUDING, BUT NOT LIMITED TO, THE MERGER AGREEMENT SET FORTH
AS APPENDIX A HERETO. CAPITALIZED TERMS WHICH ARE USED BUT NOT DEFINED IN THIS
SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS JOINT
PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS OF SUIZA FOODS AND MORNINGSTAR ARE
URGED TO READ CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES
HERETO, AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, IN THEIR ENTIRETY.
UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED HEREIN REFERENCES TO "SUIZA
FOODS" MEAN SUIZA FOODS AND ITS SUBSIDIARIES, ON A CONSOLIDATED BASIS,
REFERENCES TO "MORNINGSTAR" MEAN MORNINGSTAR AND ITS SUBSIDIARIES, ON A
CONSOLIDATED BASIS, AND REFERENCES TO "COUNTRY FRESH" MEAN COUNTRY FRESH, INC.
AND ITS SUBSIDIARIES, ON A CONSOLIDATED BASIS.
THE COMPANIES
SUIZA FOODS AND SUB
Suiza Foods is a leading manufacturer and distributor of fresh milk and
related dairy products, plastic containers and packaged ice in the United
States. Each of Suiza Foods' operating subsidiaries is a strong competitor with
an established reputation for customer service and product quality. Suiza Foods'
dairy and ice subsidiaries market their products through extensive distribution
networks to a diverse group of customers, including convenience stores, grocery
stores, schools and institutional food service customers. Suiza Foods' customers
in the plastic container business include regional dairy manufacturers, bottled
water processors and other beverage manufacturers. Suiza Foods has grown
primarily through a successful acquisition strategy, having consummated 54
acquisitions since its inception in 1988, including 27 acquisitions since its
initial public offering in April 1996. See "The Companies--General--Suiza
Foods."
Sub is a newly formed Delaware corporation and a wholly owned subsidiary of
Suiza Foods. Sub was organized for the purpose of effecting the Merger pursuant
to the Merger Agreement. Sub has no material assets and has not engaged in any
activities except in connection with the Merger. The principal executive offices
of Suiza Foods and Sub are located at 3811 Turtle Creek Blvd., Suite 1300,
Dallas, Texas 75219, telephone number (214) 528-0939.
MORNINGSTAR
Morningstar is a nationally prominent manufacturer, distributor and marketer
of refrigerated, shelf-stable and frozen food products. Its established branded
products include: International Delight-Registered Trademark-, a
gourmet-flavored and non-flavored coffee creamer; Second
Nature-Registered Trademark-, a refrigerated no-cholesterol egg substitute;
Mocha Mix-Registered Trademark-, non-dairy coffee creamers; Naturally Yours-TM-,
fat-free and regular, real dairy sour cream; Jon Donaire-Registered Trademark-,
cheesecakes and desserts; Wacky Willie-TM-, flavored shakes; and, in the western
two-thirds of the United States, Lactaid-Registered Trademark-, lactose-free and
lactose-reduced milks produced under license from McNeil Consumer Products
Company, a subsidiary of Johnson & Johnson. Morningstar also specializes in
providing private label refrigerated, shelf-stable and frozen products to
grocery warehouses, bakery/ industrial companies, club stores and dairy
companies. Branded products are sold primarily to grocery warehouses serving the
major supermarket chains through Morningstar's network of independent food
brokers and nationwide sales force. Morningstar's other specialty products are
marketed directly to dairy companies, supermarket wholesalers, grocery
warehouses, food service outlets and food manufacturers. Morningstar's products
are distributed to more than 3,200 customers in fifty states and to more than
twenty foreign countries. The principal executive offices of Morningstar are
located at 5956 Sherry Lane, Suite 1500, Dallas, Texas 75225, telephone number
(214) 360-4700.
RECENT DEVELOPMENTS
SUIZA FOODS. On September 18, 1997, Suiza Foods entered into a merger
agreement with Country Fresh, Inc. ("Country Fresh"). Pursuant to the merger
agreement, upon satisfaction of certain closing
1
<PAGE>
conditions, Country Fresh stockholders would receive approximately 1.9 million
shares of Suiza Common Stock upon conversion of their common stock in Country
Fresh, and Country Fresh would become a wholly owned subsidiary of Suiza Foods
(the "Country Fresh Merger"). Country Fresh recorded net sales of approximately
$353 million during its fiscal year ended March 1, 1997. Country Fresh has
called a special meeting of its shareholders for November 25, 1997 at which
approval of the Country Fresh Merger will be considered.
CONSUMMATION OF THE MERGER IS NOT CONDITIONED UPON OR SUBJECT TO THE
CONSUMMATION OF THE COUNTRY FRESH MERGER.
In connection with the Merger, Suiza Foods has received a commitment letter
from its senior lenders to enter into new credit facilities that would increase
Suiza Foods' total borrowing capacity to approximately $1.25 billion. See "The
Companies--Recent Developments--Suiza Foods."
THE SPECIAL MEETINGS
DATE, TIME AND PLACE
SUIZA FOODS. The Suiza Foods Special Meeting will be held on Wednesday,
November 26, 1997, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar
Springs, Dallas, Texas, 75201, commencing at 9:00 a.m. local time. See "The
Special Meetings--General."
MORNINGSTAR. The Morningstar Special Meeting will be held on Wednesday,
November 26, 1997, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar
Springs, Dallas, Texas, 75201, commencing at 9:00 a.m. local time. See "The
Special Meetings--General."
PURPOSE OF THE SPECIAL MEETINGS
SUIZA FOODS. The purpose of the Suiza Foods Special Meeting is to (i)
consider and vote upon a proposal to approve the Stock Issuance in accordance
with the Merger Agreement, (ii) consider and vote upon a proposal to increase
the number of authorized shares of Suiza Common Stock reserved for issuance
under the Suiza Foods Corporation 1997 Stock Option and Restricted Stock Plan
(the "1997 Plan") from 1,150,000 shares to 3,000,000 shares (the "Plan
Amendment" and, together with the Stock Issuance, the "Suiza Proposals") and
(iii) transact such other business as may properly come before the Suiza Special
Meeting and at any and all adjournments or postponements thereof. See "The
Special Meetings--Purpose of Special Meetings--Suiza Foods."
MORNINGSTAR. The purpose of the Morningstar Special Meeting is to (i)
consider and vote upon a proposal (the "Morningstar Proposal") to approve the
Merger, the Merger Agreement and the transactions contemplated thereby and (ii)
transact such other business as may properly come before the Morningstar Special
Meeting and at any and all adjournments or postponements thereof. See "The
Special Meetings--Purpose of Special Meetings--Morningstar."
RECORD DATES; SHARES ENTITLED TO VOTE
SUIZA FOODS. Only holders of record of shares of Suiza Common Stock at the
close of business on October 27, 1997 (the "Suiza Record Date") are entitled to
notice of and to vote at the Suiza Special Meeting. On such date, there were
15,810,800 shares of Suiza Common Stock outstanding. Each share of Suiza Common
Stock will be entitled to one vote on each matter to be acted upon at the Suiza
Special Meeting. See "The Special Meetings--Voting Securities and Record
Dates--Suiza Foods."
MORNINGSTAR. Only holders of record of shares of Morningstar Common Stock
at the close of business on October 27, 1997 (the "Morningstar Record Date") are
entitled to notice of and to vote at the Morningstar Special Meeting. On such
date, there were 14,778,936 shares of Morningstar Common Stock outstanding. Each
share of Morningstar Common Stock will be entitled to one vote on each matter to
be acted upon at the Morningstar Special Meeting. See "The Special
Meetings--Voting Securities and Record Dates--Morningstar."
2
<PAGE>
VOTE REQUIRED
SUIZA FOODS. The affirmative vote of the holders of a majority of the
shares of Suiza Common Stock present at the Suiza Special Meeting and entitled
to vote is required to approve the Suiza Proposals; provided, however, that the
total number of votes cast on the Suiza Proposals represents more than 50% of
the outstanding shares of Suiza Common Stock. Brokers who hold shares of Suiza
Common Stock as nominees will not have discretionary authority to vote such
shares in the absence of instructions from the beneficial owners thereof.
Abstentions and broker non-votes are counted for purposes of determining the
presence or absence of a quorum for transaction of business. Otherwise,
abstention and broker non-votes will have no effect on the outcome of the vote
on the Suiza Proposals. See "The Special Meetings--Voting Securities and Record
Dates--Suiza Foods" and "--Proxies."
MORNINGSTAR. The affirmative vote of the holders of a majority of the
shares of Morningstar Common Stock outstanding and entitled to vote is required
to approve the Morningstar Proposal. Accordingly, an abstention with respect to
the Morningstar Proposal will have the same effect as a vote cast against the
Morningstar Proposal. Brokers who hold shares of Morningstar Common Stock as
nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners thereof. Any votes which are
not cast by a nominee-broker will have the same effect as votes cast against the
Morningstar Proposal. See "The Special Meetings--Voting Securities and Record
Dates-- Morningstar" and "--Proxies."
SECURITY OWNERSHIP OF MANAGEMENT
SUIZA FOODS. As of the close of business on the Suiza Record Date, the
directors and executive officers of Suiza Foods owned approximately 15.2% of the
outstanding shares of Suiza Common Stock entitled to be voted at the Suiza
Special Meeting. Each of the directors and executive officers of Suiza Foods are
expected to vote, or cause to be voted, all shares of Suiza Common Stock over
which they exercise voting control "FOR" the approval and adoption of the Stock
Issuance and the Plan Amendment. See "The Special Meetings--Voting Securities
and Record Dates--Suiza Foods."
MORNINGSTAR. As of the close of business on the Morningstar Record Date,
the directors and executive officers of Morningstar owned approximately 1.7% of
the shares of Morningstar Common Stock outstanding and entitled to be voted at
the Morningstar Special Meeting. All directors and executive officers of
Morningstar are expected to vote, or cause to be voted, all shares of
Morningstar Common Stock over which they exercise voting control "FOR" the
approval and adoption of the Merger, the Merger Agreement and the transactions
contemplated thereby. See "The Special Meetings--Voting Securities and Record
Dates--Morningstar."
THE MERGER AND THE MERGER AGREEMENT
GENERAL
Upon the terms and subject to the conditions of the Merger Agreement, Sub
will be merged with and into Morningstar, and Morningstar will become a wholly
owned subsidiary of Suiza Foods. See "The Merger--General."
A copy of the Merger Agreement is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference.
EFFECTIVE TIME
The Merger will become effective at the date and time (the "Effective Time")
when a properly executed certificate of merger (the "Certificate of Merger") is
filed with the Secretary of State of the State of Delaware in accordance with
applicable provisions of the Delaware General Corporation Law (the "DGCL"). The
Certificate of Merger will be filed as soon as practicable following the
fulfillment of the conditions set forth in the Merger Agreement. See "The
Merger--General."
3
<PAGE>
CONVERSION OF SHARES
In the Merger, each share of Morningstar Common Stock issued and outstanding
immediately prior to the Effective Time (excluding those held in the treasury of
Morningstar and those owned by Suiza Foods, Sub or any other subsidiary of Suiza
Foods), without any action on the part of the holder thereof, will be converted
into the right to receive 0.85 shares of Suiza Common Stock. Cash will be paid
in lieu of any fractional share of Suiza Common Stock. See "The Merger
Agreement--Consideration to be Received in the Merger."
OPTION CONVERSION
In the Merger, each outstanding and unexercised Morningstar Option will be
assumed by Suiza Foods and converted into a Substitute Option to purchase a
number of shares of Suiza Common Stock equal to the number of shares of
Morningstar Common Stock subject to such Morningstar Option multiplied by the
Exchange Ratio (rounded down to the nearest whole share) at a per share price
equal to the per share exercise price of the Morningstar Option immediately
prior to the Merger divided by the Exchange Ratio (rounded up to the nearest
full cent).
BACKGROUND AND REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARDS
SUIZA FOODS. The Board of Directors of Suiza Foods (the "Suiza Board") has
reviewed the Merger Agreement and the transactions contemplated thereby, and has
considered, among other things, that Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") has delivered its written opinion, dated September 28, 1997
(the "DLJ Opinion"), to the Suiza Board to the effect that, based upon and
subject to certain matters stated therein, as of the date of such opinion, the
Exchange Ratio pursuant to the Merger Agreement is fair to Suiza Stockholders
from a financial point of view. The full text of the DLJ Opinion, which sets
forth a description of the assumptions made, matters considered and limitations
on the review undertaken, is attached to this Joint Proxy Statement/Prospectus
as Appendix B and should be read carefully in its entirety. The Suiza Board has
reviewed the terms and conditions of the Merger Agreement and considered a range
of factors, including the opinion of DLJ. After consideration of these factors
the Suiza Board concluded that the Merger is in the best interests of Suiza
Stockholders. THE SUIZA BOARD UNANIMOUSLY RECOMMENDS THAT THE SUIZA STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE STOCK ISSUANCE. For a more detailed discussion of the
factors considered by the Suiza Board in reaching its decision and the
background and reasons for the Merger, see "The Merger--Background of the
Merger" and "--Reasons for the Merger; Recommendations of the Boards--Suiza
Foods."
MORNINGSTAR. The Board of Directors of Morningstar (the "Morningstar
Board") has reviewed the Merger Agreement and the transactions contemplated
thereby, and has considered, among other things, that Goldman, Sachs & Co.
("Goldman Sachs") has delivered its written opinion, dated as of September 28,
1997 (the "Goldman Sachs Opinion"), to the Morningstar Board to the effect that
as of such date, the Exchange Ratio pursuant to the Merger Agreement was fair
from a financial point of view to the holders of Morningstar Common Stock. The
Morningstar Board has reviewed the terms and conditions of the Merger Agreement
and considered a range of factors. After consideration of these factors, the
Morningstar Board unanimously concluded that the Merger is fair to and in the
best interests of the Morningstar Stockholders and unanimously approved the
Merger Agreement. THE MORNINGSTAR BOARD UNANIMOUSLY RECOMMENDS THAT THE
MORNINGSTAR STOCKHOLDERS VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE
MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. See "The
Merger--Background of the Merger" and "--Reasons for the Merger; Recommendations
of the Boards--Morningstar."
OPINIONS OF FINANCIAL ADVISORS
In deciding to approve the Merger, each of the Suiza Board and the
Morningstar Board (together, the "Boards") considered opinions from their
respective financial advisors as to the fairness of the Exchange Ratio from a
financial point of view.
4
<PAGE>
DLJ has delivered to the Suiza Board the DLJ Opinion to the effect that,
based upon and subject to certain matters stated therein, as of the date of such
opinion, the Exchange Ratio is fair from a financial point of view to the Suiza
Stockholders. The full text of the DLJ Opinion which sets forth assumptions
made, matters considered and limitations on the review undertaken in connection
with the opinion is attached to this Joint Proxy Statement/Prospectus as
Appendix B and is incorporated herein by reference. The DLJ Opinion was provided
for the information and assistance of the Suiza Board in connection with its
consideration of the transactions contemplated by the Merger Agreement, and such
opinion does not constitute a recommendation as to how any Suiza Stockholder
should vote with respect to such transaction. SUIZA STOCKHOLDERS ARE URGED TO,
AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY.
Goldman Sachs delivered its oral opinion on September 28, 1997, which was
subsequently confirmed in writing, to the Morningstar Board to the effect that
as of the date of such opinion the Exchange Ratio pursuant to the Merger
Agreement was fair from a financial point of view to the holders of Morningstar
Common Stock. The full text of the Goldman Sachs Opinion, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion is attached to this Joint Proxy Statement/Prospectus
as Appendix C and is incorporated herein by reference. The Goldman Sachs Opinion
was provided for the information and assistance of the Morningstar Board in
connection with its consideration of the transactions contemplated by the Merger
Agreement, and such opinion does not constitute a recommendation as to how any
holder of Morningstar Common Stock should vote with respect to such transaction.
MORNINGSTAR STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS
ENTIRETY. See "The Merger--Opinion of Suiza Foods' Financial Advisor" and
"--Opinion of Morningstar's Financial Advisor."
OWNERSHIP OF SUIZA FOODS FOLLOWING THE MERGER
Based on the number of shares of Suiza Common Stock and Morningstar Common
Stock outstanding on October 27, 1997, the shares of Suiza Common Stock issued
to Morningstar Stockholders in the Merger will constitute approximately 44.3% of
the Suiza Common Stock outstanding after the Merger. On the same basis but also
assuming that 1,911,075 additional shares of Suiza Common Stock are issued in
the Country Fresh Merger, Morningstar Stockholders will hold approximately 41.5%
of the Suiza Common Stock outstanding after the Merger.
Each outstanding and unexercised Morningstar Option will be assumed by Suiza
Foods in the Merger and converted into a Substitute Option. Following the
Merger, approximately 2,957,987 shares of Suiza Common Stock will be issuable
upon the exercise of Substitute Options, based on the number of shares of
Morningstar Common Stock subject to Morningstar Options as of October 27, 1997,
multiplied by the Exchange Ratio. The per share exercise price of the Substitute
Options will equal the per share exercise price of the Morningstar Options
divided by the Exchange Ratio.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is intended to qualify for "pooling of interests" accounting
treatment under generally accepted accounting principles. Receipt by Suiza Foods
and Sub of advice in writing from Deloitte & Touche, LLP, and receipt by
Morningstar of advice in writing from Arthur Andersen LLP, in each case, that
the merger will qualify for pooling of interests accounting treatment is a
condition to the consummation of the Merger. See "Risk Factors--Anticipated
Accounting Treatment" and "The Merger--Anticipated Accounting Treatment."
5
<PAGE>
CERTAIN TAX CONSEQUENCES
Consummation of the Merger is conditioned upon, among other things, receipt
by Morningstar of an opinion of its tax counsel, Weil, Gotshal & Manges LLP, and
by Suiza Foods of an opinion of its tax counsel, Hughes & Luce, L.L.P, in each
case, that the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, Morningstar Stockholders are not expected to recognize any gain or
loss on the exchange of shares of Morningstar Common Stock for shares of Suiza
Common Stock pursuant to the Merger, except to the extent that any Morningstar
Stockholder receives cash in lieu of fractional shares of Suiza Common Stock.
All stockholders should read carefully the discussion under the caption
"Certain U.S. Federal Income Tax Consequences of the Merger" and other sections
of this Joint Proxy Statement/Prospectus. Stockholders are also urged to consult
their own tax advisors as to the specific consequences to them of the Merger
under U.S. federal, state, local or any other applicable tax laws. See "Certain
U.S. Federal Income Tax Consequences of the Merger."
NEW MORNINGSTAR BOARD AND MANAGEMENT FOLLOWING THE MERGER
If the proposed Merger is approved and consummated, Morningstar Stockholders
will become stockholders of Suiza Foods, which will conduct its business under
the direction of the Board of Directors and management of Suiza Foods. The
directors of Sub immediately prior to the Effective Time will be the initial
directors of New Morningstar and the officers of Sub immediately prior to the
Effective Time will be the initial officers of New Morningstar.
BOARD OF DIRECTORS OF SUIZA FOODS FOLLOWING THE MERGER
Following the Merger, the Board of Directors of Suiza Foods (the "New Suiza
Board") will consist of 12 members. Two members of the New Suiza Board will be
present members of the Morningstar Board, and the remainder of the New Suiza
Board will be Suiza Foods' current directors. For information about the two
nominees, see "The Merger--Board of Directors of Suiza Foods Following the
Merger." Suiza Foods has also agreed to add a thirteenth member to its Board of
Directors upon completion of the Country Fresh Merger.
GOVERNMENTAL APPROVALS
Pursuant to the Merger Agreement, on October 21, 1997 Suiza Foods and
Morningstar each filed with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "DOJ") a notification and
report, together with requests for early termination of the applicable waiting
period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), with respect to the Merger. Expiration or early
termination of the applicable waiting period under the HSR Act is a condition to
the obligations of Suiza Foods and Morningstar to consummate the Merger. The
applicable waiting period under the HSR Act is scheduled to expire at 11:59 p.m.
on November 20, 1997. Neither Suiza Foods nor Morningstar is aware of any other
governmental or regulatory approval required for consummation of the Merger,
other than compliance with applicable securities laws. See "The
Merger--Governmental Approvals."
ABSENCE OF APPRAISAL RIGHTS
Under the DGCL, the Suiza Stockholders are not entitled to appraisal rights
with respect to the Stock Issuance and the Morningstar Stockholders are not
entitled to appraisal rights with respect to the Merger. See "The
Merger--Absence of Appraisal Rights."
6
<PAGE>
CONDITIONS PRECEDENT TO THE MERGER
The obligations of Suiza Foods, Morningstar and Sub to effect the Merger are
subject, among other things, to the fulfillment or, where permissible, waiver of
certain conditions, including without limitation: (i) the approval of the
Merger, the Merger Agreement and the transactions contemplated thereby by the
requisite vote of the Morningstar Stockholders and the approval of the Stock
Issuance by the requisite vote of the Suiza Stockholders; (ii) the expiration or
termination of any waiting period applicable to the consummation of the Merger
under the HSR Act; (iii) the effectiveness of the Registration Statement and the
absence of a stop order suspending such effectiveness; (iv) there not having
been issued or in effect any preliminary or permanent injunction or order by any
federal or state court in the United States of competent jurisdiction
prohibiting the consummation of the Merger; (v) the listing on the NYSE, subject
only to official notice of issuance, of the shares of Suiza Common Stock to be
issued pursuant to the Stock Issuance; (vi) Morningstar having received an
opinion of Weil, Gotshal & Manges LLP, and Suiza Foods having received an
opinion of Hughes & Luce, L.L.P, in each case, that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code and (vii)
Morningstar having received a letter from Arthur Andersen LLP, and Suiza Foods
and Sub having received a letter from Deloitte & Touche LLP, in each case, dated
as of the closing date, to the effect that the Merger will qualify for pooling
of interest accounting treatment if consummated in accordance with the Merger
Agreement. See "Risk Factors--Anticipated Accounting Treatment" and "The Merger
Agreement--Conditions Precedent."
TERMINATION OF THE MERGER
Under certain circumstances the Merger Agreement may be terminated and the
Merger abandoned prior to the Effective Time. Under certain circumstances in
connection with the termination of the Merger Agreement, one party may be
required to reimburse the other party for its expenses up to $2,000,000 and to
pay the other party a termination fee of $20,000,000. See "The Merger
Agreement--Termination."
COMPARATIVE RIGHTS OF HOLDERS OF SUIZA COMMON STOCK AND MORNINGSTAR COMMON STOCK
The rights of holders of Morningstar Common Stock are currently governed by
Delaware law and by Morningstar's Restated Certificate of Incorporation (the
"Morningstar Charter") and Bylaws (the "Morningstar Bylaws"). If the Merger is
consummated, the rights of former Morningstar Stockholders who become Suiza
Stockholders pursuant to the Merger will thereafter be governed by Delaware law
and by Suiza Foods' Certificate of Incorporation (the "Suiza Charter") and
Bylaws (the "Suiza Bylaws"). The rights of Suiza Stockholders differ in certain
respects from those of the Morningstar Stockholders. See "Comparison of the
Rights of Suiza Stockholders and Morningstar Stockholders" for a description of
such differences.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
For information regarding interests of certain officers and directors of
Morningstar separate from and in addition to their interests as stockholders of
Morningstar generally, see "The Merger--Interests of Certain Persons in the
Merger."
RISK FACTORS
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED BY THE MORNINGSTAR STOCKHOLDERS IN CONNECTION WITH AN INVESTMENT IN
SUIZA FOODS UPON CONSUMMATION OF THE MERGER.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains or incorporates by reference
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act that are subject to risks and
uncertainties. All statements other than statements of historical fact included
in
7
<PAGE>
this Joint Proxy Statement/Prospectus, including, without limitation, statements
under "The Merger-- Background of the Merger," "--Reasons for the Merger;
Recommendations of the Boards," "--Opinion of Suiza Foods' Financial Advisor"
and "--Opinion of Morningstar's Financial Advisor" regarding the financial
position, business strategy and plans and objectives of management of Suiza
Foods and Morningstar are forward-looking statements. Although Suiza Foods and
Morningstar believe that the expectations reflected in such forward-looking
statements, to the extent applicable to each of them, are reasonable, neither
can give any assurance that such expectations will prove to be correct.
Important factors that could cause actual results to differ materially from
expectations ("Cautionary Statements") are disclosed under "Risk Factors" and
elsewhere in this Joint Proxy Statement/Prospectus, including, without
limitation, in conjunction with the forward-looking statements included herein.
All subsequent written and oral forward-looking statements attributable to Suiza
Foods, Morningstar or persons acting on their behalf are expressly qualified in
their entirety by the Cautionary Statements.
MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICE
The Suiza Common Stock began trading on Nasdaq on April 17, 1996. Effective
March 5, 1997, the Suiza Common Stock began trading on the NYSE. The Morningstar
Common Stock began trading on Nasdaq on April 24, 1992. The following table sets
forth, for the periods from April 17, 1996 to October 27, 1997, the high and low
sales prices of the Suiza Common Stock as quoted on Nasdaq and the NYSE, as
applicable, and for the periods from January 1, 1995 to October 27, 1997, the
high and low sales price of the Morningstar Common Stock as quoted on Nasdaq. On
October 27, 1997, the last reported sales price of the Suiza Common Stock on the
NYSE was $47.00 per share and the last reported sales price of the Morningstar
Common Stock on Nasdaq was $38.50 per share. At September 30, 1997, there were
approximately 77 record holders of Suiza Common Stock and 124 record holders of
Morningstar Common Stock.
<TABLE>
<CAPTION>
SUIZA MORNINGSTAR
COMMON STOCK COMMON STOCK
PRICES PRICES
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1995
First Quarter....................................... N/A N/A $ 7.50 $ 5.50
Second Quarter...................................... N/A N/A 8.00 6.38
Third Quarter....................................... N/A N/A 9.25 6.38
Fourth Quarter...................................... N/A N/A 9.00 7.50
1996
First Quarter....................................... N/A N/A 10.00 7.88
Second Quarter...................................... $ 18.75 $ 14.00 12.25 9.13
Third Quarter....................................... 17.75 15.75 11.88 10.25
Fourth Quarter...................................... 20.75 16.75 20.00 11.88
1997
First Quarter....................................... 29.25 19.50 25.50 17.25
Second Quarter...................................... 42.00 24.75 29.50 19.00
Third Quarter....................................... 57.50 39.13 45.00 27.13
Fourth Quarter (through October 27, 1997)........... 55.00 46.88 44.38 38.50
</TABLE>
On September 26, 1997, the last full trading day prior to the first public
announcement of the execution of the Merger Agreement, and on October 27, 1997,
the last full trading day prior to the date of
8
<PAGE>
this Joint Proxy Statement/Prospectus, the reported high and low sale prices per
share and closing price per share of Suiza Common Stock on the NYSE and
Morningstar Common Stock on Nasdaq were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 26, 1997 OCTOBER 27, 1997
------------------------------- -------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Suiza Foods........................ $ 54.63 $ 53.50 $ 53.94 $ 50.13 $ 46.88 $ 47.00
Morningstar........................ 41.00 39.75 40.00 41.44 37.13 38.50
</TABLE>
EQUIVALENT PER SHARE PRICES
The following table sets forth the last reported sale price of the Suiza
Common Stock on September 26, 1997, the last full trading day prior to the first
public announcement of the execution of the Merger Agreement, and on October 27,
1997, the last practicable day prior to the mailing of this Joint Proxy
Statement/Prospectus. The equivalent per share price of the Morningstar Common
Stock was determined by multiplying the last reported sale price of a share of
Suiza Common Stock at each specified date by the Exchange Ratio. These
assumptions are made solely for the purpose of calculating the pro forma data
presented below and are not intended to be, nor should they be, interpreted as a
representation or an approximation of the actual value of the Suiza Common Stock
to be issued in the Merger. For a discussion of the terms upon which Morningstar
Common Stock will be converted into Suiza Common Stock in the Merger, see "The
Merger--General."
<TABLE>
<CAPTION>
EQUIVALENT PRICE PER
PRICE OF SUIZA SHARE OF MORNINGSTAR
COMMON STOCK COMMON STOCK
--------------- ---------------------
<S> <C> <C>
September 26, 1997...................................... $ 53.94 $ 45.85
October 27, 1997........................................ 47.00 39.95
</TABLE>
THE MARKET PRICE OF THE SUIZA COMMON STOCK AND MORNINGSTAR COMMON STOCK WILL
FLUCTUATE BETWEEN THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE
EFFECTIVE DATE. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
SHARES OF SUIZA COMMON STOCK AND MORNINGSTAR COMMON STOCK.
DIVIDENDS
SUIZA FOODS. Suiza Foods has never declared or paid a cash dividend on the
Suiza Common Stock. Management intends to retain all earnings to cover working
capital fluctuations and to fund capital expenditures, scheduled debt repayments
and acquisitions, and does not anticipate paying cash dividends on the Suiza
Common Stock in the foreseeable future. In addition, Suiza Foods' senior credit
facilities prohibit the payment of dividends by Suiza Foods on any shares of
Suiza Common Stock, other than dividends payable solely in shares of Suiza
Common Stock.
MORNINGSTAR. Morningstar last declared and paid a cash dividend on the
Morningstar Common Stock in the first quarter of 1994 to holders of record as of
December 31, 1993. Management intends to retain all earnings to cover working
capital fluctuations and to fund capital expenditures, scheduled debt repayments
and acquisitions, and does not anticipate paying cash dividends on the
Morningstar Common Stock in the foreseeable future. In addition, Morningstar's
senior credit facilities prohibit the payment of dividends by Morningstar on any
shares of Morningstar Common Stock, other than dividends payable solely in
shares of Morningstar Common Stock.
9
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data for Suiza
Foods and Morningstar and unaudited pro forma and equivalent pro forma per share
data. See "Pro Forma Financial Data." Earnings (loss) per common share are
presented for the six months ended June 30, 1997 and for each of the three years
in the period ended December 31, 1996. Book value per share is presented as of
June 30, 1997 and December 31, 1996. These data should be read in conjunction
with the selected financial data and the pro forma financial data included in
this Joint Proxy Statement/Prospectus and the separate financial statements of
Suiza Foods, Morningstar and Country Fresh and the respective notes thereto. The
pro forma financial data is not necessarily indicative of the operating results
or financial position that would have occurred had the mergers been consummated
at the beginning of the earliest period presented and should not be construed as
indicative of future operations.
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ---------------
1994 1995 1996 1997
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
HISTORICAL--SUIZA FOODS
Earnings (loss) per common share(a)................................... $ 0.66 $ (1.64) $ 2.59 $ 1.36
Book value per common share at the end of period(b)................... 1.80 1.50 8.71 13.65
HISTORICAL--MORNINGSTAR
Earnings per common share(a).......................................... $ 0.71 $ 0.76 $ 0.96 $ 0.64
Book value per common share at the end of period(b)................... 4.48 5.07 5.80 6.46
UNAUDITED PRO FORMA DATA PER SHARE OF SUIZA COMMON STOCK
Earnings per share(c)................................................. $ 0.76 $ 0.64 $ 2.45 $ 1.48
Book value per share at the end of period............................. N/A N/A 7.59 10.76
UNAUDITED EQUIVALENT PRO FORMA DATA PER SHARE OF MORNINGSTAR COMMON
STOCK(D)
Earnings per share.................................................... $ 0.65 $ 0.54 $ 2.08 $ 1.26
Book value per share at the end of period............................. N/A N/A 6.45 9.15
</TABLE>
- ------------------------
(a) The historical earnings per common share are based upon the weighted average
number of common shares outstanding, as adjusted for the Suiza Foods' stock
split, for each period indicated.
(b) The historical book value per common share is computed by dividing
stockholders' equity by the number of shares of common stock outstanding at
the end of each period indicated.
(c) The unaudited pro forma earnings per common share is based upon the pro
forma weighted average number of common shares outstanding for each period
indicated.
(d) The unaudited equivalent pro forma per common share data is calculated by
multiplying the unaudited pro forma per common share data by 0.85.
10
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following summary pro forma financial data are based on adjustments to
the historical consolidated balance sheets and related consolidated statements
of income of Suiza Foods to give effect to the Merger and the Country Fresh
Merger using the pooling of interests method of accounting and, for the year
ended December 31, 1996 and the six-month period ended June 30, 1997, the
business combinations completed by Suiza Foods and Morningstar during 1996 and
1997 on a purchase accounting basis.
Country Fresh's consolidated financial statements are based on a fiscal year
ending on the Saturday nearest to the end of February, while the fiscal years of
Suiza Foods and Morningstar end on December 31. As a result, the unaudited pro
forma financial information combines different fiscal periods. The unaudited pro
forma balance sheet as of June 30, 1997 assumes that the above described
transactions occurred as of such date and reflects the combination of the
historical balance sheets of Suiza Foods and Morningstar as of June 30, 1997
with the historical balance sheet of Country Fresh as of July 19, 1997.
The pro forma statements of income for the years ended December 31, 1994,
1995 and 1996 and the six month period ended June 30, 1997 (i) assume that the
merger with Country Fresh and the merger with Morningstar had been consummated
as of January 1, 1994, and combine the historical results of operations of Suiza
Foods and Morningstar for those periods with the historical results of
operations of Country Fresh for the fiscal years ended February 25, 1995, March
2, 1996 and March 1, 1997, and the six-month period (26 weeks) ended July 19,
1997, respectively and (ii) assume that the business combinations completed by
Suiza Foods and Morningstar in 1996 and 1997 on a purchase accounting basis had
been consummated as of January 1, 1996. For ease of reference, all column
headings used in the table below refer to the period-ended dates for Suiza
Foods.
The summary pro forma data presented below should be read in conjunction
with the selected financial data of Suiza Foods, Country Fresh and Morningstar,
the unaudited pro forma financial data and notes thereto, "Recent Developments"
and the financial statements and other financial information included elsewhere
in this Joint Proxy Statement/Prospectus and in the documents incorporated
herein by reference. The unaudited pro forma income statement data are not
necessarily indicative of the operating results that would have occurred had the
Merger and the Country Fresh Merger occurred on January 1, 1994, nor are they
necessarily indicative of future operating results of the combined companies.
<TABLE>
<CAPTION>
UNAUDITED SIX
UNAUDITED MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- -------------
1994 1995 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRO FORMA INCOME STATEMENT DATA:
Net Sales......................................... $ 938,866 $ 1,065,433 $ 2,014,626 $ 1,022,064
Operating income.................................. 49,470 57,910 135,171 80,118
Interest expense, net............................. 23,817 25,615 66,439 28,579
Net income from continuing operations............. 17,534 13,833 61,607 46,196
Net income from continuing operations applicable
to common shares................................ 17,534 13,529 61,308 46,046
Net earnings per common share..................... .76 .64 2.45 1.48
Weighted average common shares outstanding........ 23,106,841 21,036,608 25,066,383 31,113,819
</TABLE>
<TABLE>
<S> <C>
PRO FORMA BALANCE SHEET DATA (AT END OF PERIOD):
Total assets........................................................ $1,312,265
Long term debt, excluding current portion........................... 729,825
Preferred Stock..................................................... 3,741
Total common stockholders' equity................................... 321,851
</TABLE>
11
<PAGE>
SUMMARY FINANCIAL DATA OF SUIZA FOODS
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth selected historical consolidated financial
data for Suiza Foods for each of the three years in the period ended December
31, 1996 and for the unaudited six-month periods ended June 30, 1996 and 1997.
Such data have been derived from, and should be read in conjunction with, the
audited consolidated financial statements and unaudited interim financial
statements and other financial information contained elsewhere in this Joint
Proxy Statement/Prospectus or incorporated by reference herein. See "Available
Information" and "Incorporation of Certain Information by Reference."
<TABLE>
<CAPTION>
UNAUDITED SIX
MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -------------------------
1994 1995 1996 1996 1997
----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................... $ 341,108 $ 430,466 $ 520,916 $ 225,307 $ 336,819
Income from operations.................................. 25,760 30,564 35,122 14,943 23,149
Interest expense, net................................... 19,279 19,921 17,470 8,488 6,580
Income (loss) before extraordinary losses............... 4,245 (1,576) 27,929 4,936 24,399
Net income (loss)(1).................................... 4,048 (10,038) 25,714 2,721 21,129
Earnings (loss) per share:
Income (loss) before extraordinary loss............... .69 (.26) 2.81 .58 1.57
Extraordinary loss.................................... (.03) (1.38) (.22) (.26) (.21)
Net income (loss)(1).................................. .66 (1.64) 2.59 .32 1.36
Weighted average shares outstanding..................... 6,156,387 6,109,398 9,921,822 8,455,332 15,509,388
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................................ $ 238,952 $ 232,522 $ 384,148 $ 237,973 $ 402,306
Long term debt, excluding current portion............... 173,327 171,745 226,693 134,334 128,150
Total stockholders' equity.............................. 9,887 9,460 93,532 60,789 208,633
</TABLE>
- --------------------------
(1) Net income (loss) and related per share amounts include the following
nonrecurring and extraordinary charges and benefits:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Merger, financing and other costs (a).................... $ (1,602) $ (9,554) $ (354) $ -- $ --
Tax benefits (b)......................................... -- -- 13,950 -- 11,500
Extraordinary loss from early extinguishment of debt
(c).................................................... (197) (8,462) (2,215) (2,215) (3,270)
--------- --------- --------- --------- ---------
$ (1,799) $ (18,016) $ 11,381 $ (2,215) 8,230
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(a) Consists of costs incurred in connection with the corporate combination
pursuant to which Suiza Foods was formed as a holding company for certain
pre-existing operations, an uncompleted public offering of shares of
Suiza Common Stock, an uncompleted debt offering, uncompleted
acquisitions and debt refinancing costs, net of associated income taxes
of $58 in 1994, $684 in 1995 and $217 in 1996.
(b) For 1996, includes the sale of Puerto Rico tax credits of $3,400 (net of
related expenses), reflected in other income, and the recognition of
$11,750 in deferred income tax benefits recorded as a credit to tax
expense, both effects related to tax credits generated by Suiza-Puerto
Rico, partially offset by additional income tax expense of $1,200 related
to the sale of the tax credits. For the six months ended June 30, 1997,
includes a nonrecurring gain of $18,100, net of discounts and related
expenses, resulting from additional tax credits generated by Suiza-Puerto
Rico that Suiza Foods subsequently sold to third parties, partially
offset by additional income tax expense of $6,600 related to the sale of
tax credits.
(c) Net of associated income taxes of approximately $700 in 1995, $900 in
1996 and $2,000 for the six months ended June 30, 1997.
12
<PAGE>
SUMMARY FINANCIAL DATA OF MORNINGSTAR
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth selected historical consolidated financial
data for Morningstar for each of the three years in the period ended December
31, 1996 and for the unaudited six-month periods ended June 30, 1996 and 1997.
Such data have been derived from, and should be read in conjunction with, the
audited consolidated financial statements and unaudited interim financial
statement and other financial information contained elsewhere in this Joint
Proxy Statement/Prospectus or incorporated by reference herein. See "Available
Information" and "Incorporation of Certain Information by Reference."
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................................... $ 292,314 $ 304,730 $ 394,306 $ 167,417 $ 270,672
Income from operations.................................. 18,407 20,428 26,160 10,644 23,427
Interest expense, net................................... 4,797 4,302 4,026 1,532 6,798
Income from continuing operations (1)................... 9,321 11,340 14,576 6,294 9,961
Net income.............................................. 10,647 11,524 14,576 6,294 9,961
Earnings per share:
Income from continuing operations (1)................. .62 .74 .96 .42 .64
Income from discontinued operations................... .09 .02 -- -- --
Net Income............................................ .71 .76 .96 .42 .64
Weighted average shares outstanding..................... 15,050,538 15,245,562 15,133,887 14,778,316 15,643,651
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................................... $ 165,265 $ 162,709 $ 355,991 $ 170,042 $ 352,323
Long-term debt, excluding current portion............. 53,892 36,000 177,349 30,463 169,200
Total common stockholders' equity..................... 66,802 77,323 88,788 79,748 99,443
</TABLE>
- --------------------------
(1) Represents income before income from discontinued operations of $1,326 in
1994 and $184 in 1995.
13
<PAGE>
SUMMARY FINANCIAL DATA OF COUNTRY FRESH
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth selected historical consolidated financial
data for Country Fresh for each of the three years in the period ended March 1,
1997 and for the unaudited 20 weeks ended June 20, 1996 and July 19, 1997. Such
data has been derived from, and should be read in conjunction with, the audited
and unaudited consolidated financial statements and financial information
contained elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
YEARS ENDED 20 WEEKS ENDED
-------------------------------------- ------------------------
FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19,
1995 1996 1997 1996 1997
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............................................. $ 310,164 $ 336,055 $ 353,037 $ 135,328 $ 136,154
Operating income....................................... 5,303 6,918 10,841 6,028 6,451
Interest expense (income), net......................... (259) 1,392 1,219 613 597
Earnings from continuing operations (1)................ 3,968 4,069 6,673 3,642 4,029
Net earnings........................................... 1,696 4,069 6,673 3,642 4,029
Net earnings applicable to common shares............... 1,696 3,765 6,371 3,566 3,954
Net earnings per common share:
Earnings from continuing operations.................. .52 1.04 1.75 .97 1.07
Cumulative effect of change in accounting............ (.30) -- -- -- --
Net earnings......................................... .22 1.04 1.75 .97 1.07
Weighted average common shares outstanding............. 7,622,840 3,609,245 3,636,519 3,631,758 3,685,236
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets........................................... $ 98,870 $ 94,765 $ 99,206 $ 105,565 $ 101,942
Long term debt, excluding current portion.............. 14,217 32,152 28,571 36,318 26,523
Preferred stock........................................ -- 3,800 3,741 3,800 3,741
Total common stockholders' equity...................... 51,265 21,326 27,793 25,002 31,775
</TABLE>
- --------------------------
(1) Represents earnings before cumulative effect of change in accounting for
post-retirement benefits other than pensions.
14
<PAGE>
RISK FACTORS
IN CONSIDERING THE MATTERS SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, MORNINGSTAR STOCKHOLDERS SHOULD CAREFULLY CONSIDER, AMONG
OTHER THINGS, THE SIGNIFICANT RISKS AND SPECULATIVE FACTORS DESCRIBED BELOW,
WHICH ARE ASSOCIATED WITH AN INVESTMENT IN SUIZA COMMON STOCK UPON CONSUMMATION
OF THE MERGER.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
Suiza Foods' strategy is to continue to expand its dairy, ice, food
distribution and related food businesses primarily through acquisitions of
strong regional operators in new markets and consolidating or add-on
acquisitions in its existing markets. Suiza Foods will evaluate specific
acquisition opportunities based on market conditions and economic factors
existing at the time and intends to pursue favorable opportunities as they
arise. Suiza Foods may encounter increased competition for acquisitions in the
future, which could result in acquisition prices Suiza Foods does not consider
acceptable. There can be no assurance that Suiza Foods will find suitable
acquisition candidates at acceptable prices or succeed in integrating acquired
businesses into Suiza Foods' existing business or in retaining key customers of
acquired businesses. There can also be no assurance that Suiza Foods will have
sufficient available capital resources to realize its acquisition strategy. See
"--Substantial Indebtedness."
Although Suiza Foods often acquires operations in new markets requiring
minimal integration, the success of Suiza Foods' acquisition strategy is also
dependent on the ability of Suiza Foods to integrate add-on acquisitions into
Suiza Foods' existing operations in established markets. In addition, Suiza
Food's recent growth has placed, and is expected to continue to place, a
significant strain on its management, operational and financial resources. The
Merger will significantly expand, and will require integration of Morningstar's
operations into, Suiza Foods' operations. There can be no assurance that the
integration and management of Morningstar's operations and future acquired
operations will not result in unforeseen difficulties, or require the investment
of capital or absorb significant management resources at levels higher than that
anticipated by management, or that Suiza Foods will realize meaningful economies
of scale or operating efficiencies from its acquisitions. The failure of Suiza
Foods to successfully integrate and manage acquired operations (including,
without limitation, Morningstar's operations) could have a material adverse
effect on Suiza Foods.
COMPETITION
Suiza Foods' regional dairy businesses are subject to significant
competition from regional dairy operations and large national food service
distributors that operate in Suiza Foods' markets. Competition in the dairy
processing, fruit drink and food distribution businesses is based primarily on
service, price, brand recognition, quality and breadth of product line. Certain
of Suiza Foods' competitors are large, well capitalized and may have greater
financial, operational and marketing resources than Suiza Foods.
The dairy industry has excess capacity and has been in the process of
consolidation for many years. Excess capacity has resulted from the development
of more efficient manufacturing techniques, the establishment of captive dairy
manufacturing operations by large grocery retailers and relatively little growth
in the demand for fresh milk products. Any expansion of production capacity in
one of Suiza Foods' regional markets could have an adverse effect on Suiza
Foods' operations.
The plastic container manufacturing industry is also subject to significant
competition. Suiza Foods competes with larger independent manufacturing
companies and vertically integrated food and industrial companies that operate
captive plastic container manufacturing facilities. The primary competitive
factors in the plastic container manufacturing industry are price, quality and
service. Many of the Suiza Foods' competitors are larger and better capitalized
than Suiza Foods, and have greater resources than Suiza Foods.
The packaged ice business is also highly competitive. Suiza Foods faces a
number of competitors in the packaged ice business, including smaller
independent ice manufacturers, convenience and grocery retailers that operate
captive commercial ice plants and retailers that manufacture and package ice at
store locations. Competition exists primarily on a regional basis, with service,
price and quality as the principal
15
<PAGE>
competitive factors. A significant increase in the utilization of captive
commercial ice plants or on-site manufacturing by operators of large retail
chains served by Suiza Foods could have an adverse effect on Suiza Foods'
operations.
SUBSTANTIAL INDEBTEDNESS
On June 30, 1997 (as adjusted to reflect the July 1997 acquisitions of Dairy
Fresh, Garelick Dairy and Franklin Plastics), Suiza Foods' total indebtedness
and long-term debt (excluding current portion) were $551.4 million and $534.1
million, respectively, with long-term indebtedness (excluding current portion)
representing 71% of total capitalization. In connection with its acquisition of
Garelick Dairy and Franklin Plastics in July 1997, Suiza Foods increased the
size of its existing senior credit facilities from $300.0 million to $700.0
million in the aggregate. Suiza Foods' total indebtedness and long-term debt
(excluding current portion), on a pro forma basis as of June 30, 1997, after
giving effect to the Merger and the Country Fresh Merger would be $762.4 million
and $729.8 million, respectively, with long-term indebtedness (excluding current
portion) representing 69% of total capitalization.
Prior to the Effective Date, Suiza Foods intends to enter into the New
Credit Facility (as defined), in order to increase its total borrowing capacity
to approximately $1.25 billion. For a description of the New Credit Facility see
"The Companies--Recent Developments--Suiza Foods." As a result, Suiza Foods
would be able to incur substantial amounts of additional indebtedness in the
future. The New Credit Facility and related debt service obligations are
expected to (i) limit Suiza Foods' ability to obtain additional financing in the
future; (ii) require Suiza Foods to dedicate a significant portion of its cash
flow to the payment of principal and interest on its indebtedness, thereby
reducing the funds available to Suiza Foods for other purposes; (iii) limit
Suiza Foods' flexibility in planning for, or reacting to, changes in its
business and market conditions; and (iv) impose additional financial and
operational restrictions on Suiza Foods, including restrictions on dividends.
See "The Companies--Recent Developments--Suiza Foods" and "Pro Forma Financial
Data."
Suiza Foods' ability to make scheduled payments on its indebtedness depends
on its financial and operating performance, which is subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond Suiza Foods' control. Under its existing senior credit facilities,
Suiza Foods has pledged substantially all of its assets to secure its
indebtedness. Although the lenders would release such security interests under
the proposed terms of the New Credit Facility, Suiza Foods would pledge the
stock of most of its direct and indirect subsidiaries. The failure of Suiza
Foods to comply with the financial and other restrictive covenants under its
existing senior credit facilities or the New Credit Facility may result in an
event of default which, if not cured or waived, could have a material adverse
effect on Suiza Foods. Suiza Foods has entered into various interest rate
agreements to reduce its exposure to interest rate fluctuations under the senior
credit facilities, which agreements have the effect of fixing Suiza Foods'
interest rate with respect to a portion of its indebtedness under the senior
credit facilities. Suiza Foods remains subject to interest rate risk, however,
with respect to a substantial portion of its indebtedness.
GOVERNMENT REGULATION; RAW MATERIAL COSTS
The supply and price of milk in Puerto Rico are regulated under Puerto Rico
law. The government of Puerto Rico establishes an industry-wide production
ceiling and sets the prices that may be charged for milk at the dairy farm level
and the maximum prices that may be charged at the processor and retail levels.
These prices are reviewed, typically on an annual basis, and remain fixed unless
changed by the government. The price controls in Puerto Rico make Suiza Foods
vulnerable to increases in the costs of manufacturing, packaging and
distributing its products. There can be no assurance that Suiza Foods' operating
results will not be adversely affected by price levels set by the government of
Puerto Rico.
The price of raw milk in the United States fluctuates based on supply and
demand, with minimum support prices established monthly on a regional basis by
federal or state government agencies. In 1996, Congress passed legislation to
phase out support prices over a specified period. There can be no assurance
16
<PAGE>
that a material increase in milk prices in the United States will not occur or
that any such increase would not reduce the profitability of Suiza Foods'
operations.
As a manufacturer and distributor of food products, Suiza Foods is subject
to federal, state and local laws and regulations governing the manufacture
(including composition and ingredients), labeling, packaging and safety of food.
The Federal Food and Drug Administration and various state and local agencies
are authorized to enforce these laws and regulations by inspecting Suiza Foods'
facilities and requiring remedial action where necessary. Although Suiza Foods
maintains quality control programs designed to address these issues, an actual
or perceived problem with the quality or safety of products at any of Suiza
Foods' facilities could lead to product withdrawals, product recalls,
remediation expenses, temporary plant closings and related negative publicity,
any of which could have a material adverse effect on Suiza Foods. Suiza Foods'
operations are also subject to other federal, Puerto Rico, state and local
governmental regulation.
DEPENDENCE ON KEY PERSONNEL
The future success of Suiza Foods' business operations is dependent in part
on the efforts and skills of certain key members of management, including Gregg
L. Engles, Chairman and Chief Executive Officer of Suiza Foods. The loss of any
of its key members of management could have an adverse effect on Suiza Foods.
LIMITATIONS ON FAVORABLE TAX TREATMENT
Under Section 936 of the Code, a portion of Suiza Foods' income derived from
its dairy, fruit drink and plastic container manufacturing operations in Puerto
Rico qualifies for a tax credit that has the effect of reducing or eliminating
United States income taxes on income derived from these operations. In the
Revenue Reconciliation Act of 1993, the United States Congress imposed certain
limitations on the availability of the Section 936 credit. In August 1996,
Congress passed the Small Business Job Protection Act of 1996 which contains
further restrictions on the availability of Section 936 credits and eliminates
Section 936 altogether by December 31, 2005. These limitations, combined with
certain other provisions in the Code that govern the allocation among affiliated
corporations of credits under Section 936, may limit the amount of tax credits
available to Suiza Foods prior to the expiration of Section 936.
ANTITAKEOVER PROVISIONS
The Suiza Charter and Suiza Bylaws contain provisions that may delay, defer
or prevent a change in control of Suiza Foods. Among other things, these
provisions: (i) authorize the Suiza Board to issue preferred stock in series
with the terms of each series to be fixed by the Suiza Board; (ii) divide the
Suiza Board into three classes so that only approximately one-third of the total
number of directors will be elected each year; (iii) permit directors to be
removed only for cause; and (iv) specify advance notice requirements for
stockholder proposals and director nominations. See "Comparison of the Rights of
Suiza Stockholders and Morningstar Stockholders."
EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED
There can be no assurance that the expected benefits of the Merger as
described under "The Merger--Reasons for the Merger; Recommendations of the
Boards" will be achieved. The integration of departments, systems and procedures
will present significant management challenges and there can be no assurance
that such actions will be successfully accomplished within a specified time
period or at all. For additional information concerning the risks associated
with Morningstar's business, see Morningstar's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, which report is incorporated by
reference herein.
ANTICIPATED ACCOUNTING TREATMENT
Suiza Foods and Morningstar anticipate that the Merger will be accounted for
using the "pooling of interests" method of accounting pursuant to Opinion No. 16
of the Accounting Principles Board. The pooling of interests method of
accounting assumes that the combining companies have been merged from
17
<PAGE>
inception, and the historical consolidated financial statements for periods
prior to consummation of the Merger are restated as though the companies had
been combined from inception. One of the conditions to the Merger is that Suiza
Foods and Sub will have been advised in writing by Deloitte & Touche, LLP, on
the closing date of the Merger, and Morningstar will have been advised in
writing by Arthur Andersen LLP on the closing date of the Merger, in each case,
that the Merger will be treated as a pooling of interests for accounting
purposes. However, such opinions will not be binding on the Commission.
THE COMPANIES
GENERAL
SUIZA FOODS. Suiza Foods is a leading manufacturer and distributor of fresh
milk and related dairy products, plastic containers and packaged ice in the
United States. Each of Suiza Foods' operating subsidiaries is a strong
competitor with an established reputation for customer service and product
quality. Suiza Foods' dairy and ice subsidiaries market their products through
extensive distribution networks to a diverse group of customers, including
convenience stores, grocery stores, schools and institutional food service
customers. Suiza Foods' customers in the plastic container business include
regional dairy manufacturers, bottled water processors and other beverage
manufacturers. Suiza Foods has grown primarily through a successful acquisition
strategy, having consummated 54 acquisitions since its inception in 1988,
including 27 acquisitions since its initial public offering in April 1996.
This Joint Proxy Statement/Prospectus should be read in conjunction with the
more detailed information on Suiza Foods and its business contained in Suiza
Foods' Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
which Annual Report is incorporated herein by reference.
SUB. Sub is a wholly owned subsidiary of Suiza Foods that was incorporated
in Delaware on September 25, 1997 for the purpose of effectuating the Merger and
the other transactions contemplated by the Merger Agreement. Prior to the
consummation of the Merger, Sub will not engage in any activity other than
activities related to the transactions contemplated by the Merger Agreement.
MORNINGSTAR. Morningstar is a nationally prominent manufacturer,
distributor and marketer of refrigerated, shelf-stable and frozen food products.
Its established branded products include: International
Delight-Registered Trademark-, a gourmet-flavored and non-flavored coffee
creamer; Second Nature-Registered Trademark-, a refrigerated no-cholesterol egg
substitute; Mocha Mix-Registered Trademark-, non-dairy coffee creamers;
Naturally Yours-TM-, fat-free and regular, real dairy sour cream; Jon
Donaire-Registered Trademark-, cheesecakes and desserts; Wacky Willie-TM-,
flavored shakes; and, in the western two-thirds of the United States,
Lactaid-Registered Trademark-, lactose-free and lactose-reduced milks produced
under license from McNeil Consumer Products Company, a subsidiary of Johnson &
Johnson. Morningstar also specializes in providing private label refrigerated,
shelf-stable and frozen products to grocery warehouses, bakery/industrial
companies, club stores and dairy companies. Branded products are sold primarily
to grocery warehouses serving the major supermarket chains through Morningstar's
network of independent food brokers and nationwide sales force. Morningstar's
other specialty products are marketed directly to dairy companies, supermarket
wholesalers, grocery warehouses, food service outlets and food manufacturers.
Morningstar's products are distributed to more than 3,200 customers in fifty
states and to more than twenty foreign countries.
This Joint Proxy Statement/Prospectus should be read in conjunction with the
more detailed information on Morningstar and its business contained in
Morningstar's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, which Annual Report is incorporated herein by reference.
RECENT DEVELOPMENTS
SUIZA FOODS. On September 18, 1997, Suiza Foods entered into a merger
agreement with Country Fresh, a processor of milk, juice and ice cream products
based in Grand Rapids, Michigan. Upon consummation of the proposed Country Fresh
Merger, (i) Country Fresh stockholders would receive approximately 1.9 million
shares of Suiza Common Stock upon conversion of their shares of Country Fresh
common stock, and Country Fresh would become a wholly owned subsidiary of Suiza
Foods, (ii) Suiza Foods would assume all of the outstanding options to purchase
shares of Country Fresh common stock,
18
<PAGE>
which would be converted into options to purchase a total of 229,068 shares of
Suiza Common Stock, and (iii) holders of Country Fresh's outstanding preferred
stock would receive shares of a new series of Suiza Foods preferred stock with
an aggregate stated value (on a pro forma basis, as of June 30, 1997) of
approximately $3.7 million. As of June 30, 1997, Country Fresh had approximately
$30.3 million of indebtedness, which Suiza Foods would either assume or
refinance in connection with the Country Fresh Merger. Country Fresh reported
net sales of approximately $353 million in its fiscal year ended March 1, 1997.
The Country Fresh Merger is subject to approval by holders of a majority of
Country Fresh's outstanding common stock and preferred stock, as well as certain
regulatory approvals and other closing conditions. Country Fresh has called a
special meeting of its shareholders for November 25, 1997 at which approval of
the Country Fresh Merger will be considered. There can be no assurance that the
Country Fresh Merger will be completed as currently contemplated or at all. The
Merger and the Country Fresh Merger are separate transactions and the closing of
one merger is not in any way contingent on the closing of the other. For
additional information regarding the pro forma effect of the Country Fresh
Merger, see "Pro Forma Financial Data."
In connection with the Merger, Suiza Foods has received a commitment letter
from its senior lenders to replace its existing $700 million senior credit
facilities with replacement facilities in the aggregate amount of $1.25 billion,
consisting of a $550 million term loan and a $700 million revolving credit
facility (collectively, the "New Credit Facility"). The term loan would be
amortized over six years beginning in 1998, and the revolving credit facility
would expire on December 31, 2003. Amounts outstanding under the New Credit
Facility would bear interest at a rate per annum equal to one of the following
rates, at Suiza Foods' option: (i) a specified base rate or (ii) The London
Interbank Offered Rate ("LIBOR") plus a margin that would vary from 40 to 100
basis points depending on Suiza Foods' leverage ratio (defined as the ratio of
aggregate funded debt to EBITDA). Suiza Foods would pay a commitment fee on
unused amounts of the revolving facility that ranges from 15 to 25 basis points
depending on the leverage ratio.
The New Credit Facility would require Suiza Foods to comply with certain
financial covenants, including the following: (i) the leverage ratio will not
exceed 3.90 to 1 during 1998, 3.75 to 1 during 1999 and 3.50 to 1 thereafter;
(ii) net worth will not be less than $300 million, plus 50% of positive net
income, plus 75% of the proceeds of new equity offerings; (iii) the interest
coverage ratio (defined as the ratio of EBITDA to interest expense) will not be
less than 3.00 to 1; and (iv) the fixed charge coverage ratio (defined as the
ratio of EBITDA to the sum of scheduled principal repayments, interest, taxes,
capital expenditures and dividends) will not be less than 1.00 to 1 during 1998
and 1.10 to 1 thereafter.
The New Credit Facility would also include usual and customary covenants,
including limitations on material acquisitions or dispositions of assets, lines
of business, the incurrence of additional indebtedness and transactions with
affiliates, subject to specified exceptions. Suiza Foods would pledge all of the
capital stock of its direct and indirect subsidiaries (except for 35% of the
capital stock of Garrido) to secure the New Credit Facility, and Suiza Foods
would agree not to grant a security interest in its remaining assets to any
other person (subject to certain exceptions). In addition, each of Suiza Foods'
direct and indirect subsidiaries (other than Garrido) would guarantee the debt
incurred under the New Credit Facility. The New Credit Facility would include
various events of default customary for similar senior credit facilities,
including defaults resulting from a change in control of Suiza Foods (including
certain changes in the Suiza Board and certain acquisitions of Suiza Common
Stock by third parties).
Suiza Foods currently anticipates that it will be able to finalize the New
Credit Facility prior to completion of the Merger. There can be no assurance,
however, that the New Credit Facility will be finalized on the terms contained
in the commitment letter or that Suiza Foods will ultimately be able to amend or
replace its existing senior credit facilities.
19
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data is based on adjustments to
the historical consolidated balance sheet and related consolidated statements of
income of Suiza Foods to give effect to (i) the Merger and the Country Fresh
Merger, expected to be accounted for using the pooling of interests method of
accounting (the "Combined Companies") and (ii) the completed acquisitions by
Suiza Foods of Garrido on July 1, 1996, Swiss Dairy on September 9, 1996, Model
Dairy on December 16, 1996, Dairy Fresh on July 1, 1997 and Garelick Farms and
Franklin Plastics on July 31, 1997 and the completed acquisition by Morningstar
of Presto on December 3, 1996, all of which have been accounted for using the
purchase method of accounting (the "Acquired Businesses").
The unaudited pro forma consolidated statements of earnings for the years
ended December 31, 1994, 1995 and 1996 and the six month period ended June 30,
1997 give effect to (i) the proposed mergers of the Combined Companies as if
they had been consummated on January 1, 1994 and (ii) the completed acquisitions
of the Acquired Businesses as if they had been consummated on January 1, 1996.
There is no unaudited pro forma consolidated statement of earnings effect during
the six month period ended June 30, 1997 of the acquisitions by Suiza Foods of
Garrido, Swiss Dairy and Model Dairy or of the acquisition by Morningstar of
Presto since these acquisitions were completed prior to January 1, 1997 and, as
a result, their results of operations are already included in the historical
consolidated results of operations of Suiza Foods or Morningstar. The unaudited
pro forma consolidated balance sheet as of June 30, 1997 gives effect to (i) the
proposed mergers of the Combined Companies and (ii) the completed acquisitions
by Suiza Foods of Dairy Fresh, Garelick Farms and Franklin Plastics, as if they
had all been consummated on June 30, 1997. There is no pro forma consolidated
balance sheet effect of the acquisitions by Suiza Foods of Garrido, Swiss Dairy
and Model Dairy or of the acquisition by Morningstar of Presto since these
acquisitions were completed prior to December 31, 1996 and, as a result, their
balance sheets are already included in the historical consolidated balance
sheets of Suiza Foods or Morningstar.
Country Fresh's consolidated financial statements are based on its fiscal
year which ends on the Saturday nearest to February 28, as compared to Suiza
Foods' and Morningstars' fiscal year ends of December 31. As a result, the
unaudited pro forma consolidated financial data for the years ended December 31,
1994, 1995 and 1996 combines the different fiscal year end of Country Fresh with
the calendar year ends of Suiza Foods and Morningstar. Similarly, the unaudited
pro forma consolidated financial data as of and for the six month period ended
June 30, 1997, combines the six month information as of and for the period ended
June 30, 1997 for Suiza Foods and Morningstar with the financial information for
Country Fresh as of the end of its four week period ended July 19, 1997 and for
the 26 weeks ended July 19, 1997, which includes 6 weeks of operations already
included in the Country Fresh financial statements for the year ended March 1,
1997. For ease of reference, all headings used in the unaudited pro forma
consolidated financial data refer to the period ended date of Suiza Foods.
In connection with the Merger and the Country Fresh Merger, Suiza Foods
expects to expense approximately $28 million as merger costs, which represent
transaction related expenses that are expected to be incurred on the consumation
dates of the mergers. These transaction related costs include approximately $16
million of investment banking fees, legal fees, accounting fees, and filing and
printing fees, along with approximately $12 million of employee costs related to
the payments of retention bonuses and excise and other taxes to certain Country
Fresh and Morningstar employees pursuant to existing contractual agreements and
the payments pursuant to existing contractual agreements of severance costs and
excise and other taxes for certain Morningstar employees whose employment will
be terminated at the Effective Time of the Merger.
After the consummation of the Merger and the Country Fresh Merger, Suiza
expects to achieve at least $10 million of savings from eliminating redundant
administrative and financial aspects of the Combined Companies, including the
elimination of certain Morningstar employee costs related to employees
terminated at the consummation date and reduced interest costs from the lower
interest rates on the
20
<PAGE>
new credit facility for the Combined Company currently being negotiated. In
addition, Suiza expects to realize significant additional annual cost savings
within the first year from combined purchasing and rationalized manufacturing
and distribution.
The unaudited pro forma financial data should be read in conjunction with
the separate audited and unaudited financial statements of the Combined
Companies and of the Acquired Businesses, including the notes thereto, either
included elsewhere or incorporated by reference in this Joint Proxy Statement/
Prospectus. The unaudited pro forma consolidated income statement data are not
necessarily indicative of the operating results that would have occurred had the
proposed mergers of the Combined Companies and the completed acquisitions of the
Acquired Businesses occurred on the pro forma dates indicated, nor are they
necessarily indicative of the future operating results of the Combined
Companies.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL COMBINED COMPANIES
--------------------------------------
SUIZA COMBINING COMBINED
FOODS COUNTRY FRESH MORNINGSTAR ADJUSTMENTS COMPANIES
--------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
NET SALES................................................... $ 341,108 $ 310,164 $ 292,314 $(4,720)(a) $ 938,866
COST OF SALES............................................... 240,468 268,500 222,145 (4,720)(a) 726,393
--------- ------------- ----------- ----------
Gross profit.............................................. 100,640 41,664 70,169 212,473
OPERATING EXPENSES:
Selling and distribution.................................. 54,248 21,225 39,984 115,457
General and administrative................................ 16,935 15,036 9,497 41,468
Amortization of intangibles............................... 3,697 100 2,281 6,078
--------- ------------- ----------- ----------
Total operating expenses................................ 74,880 36,361 51,762 163,003
--------- ------------- ----------- ----------
OPERATING INCOME............................................ 25,760 5,303 18,407 49,470
OTHER:
Interest expense, net..................................... 19,279 (259) 4,797 23,817
Merger and other costs.................................... 1,660 -- -- 1,660
Other (income) expense.................................... (268) (551) (1,244) (2,063)
--------- ------------- ----------- ----------
Total other............................................. 20,671 (810) 3,553 23,414
--------- ------------- ----------- ----------
INCOME BEFORE INCOME TAXES.................................. 5,089 6,113 14,854 26,056
INCOME TAXES................................................ 844 2,145 5,533 8,522
--------- ------------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS........................... $ 4,245 $ 3,968 $ 9,321 $ 17,534
--------- ------------- ----------- ----------
--------- ------------- ----------- ----------
INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS.......... $ 0.69 $ 0.52 $ 0.62 $ 0.76
--------- ------------- ----------- ----------
--------- ------------- ----------- ----------
WEIGHTED AVERAGE SHARES
OUTSTANDING................................................ 6,156,387 7,622,840 15,050,538 23,106,841
--------- ------------- ----------- ----------
--------- ------------- ----------- ----------
</TABLE>
- ------------------------------
(a) Elimination of sales and cost of sales for transactions between Morningstar
and Suiza Foods.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL COMBINED COMPANIES
----------------------------------------- COMBINING COMBINED
SUIZA FOODS COUNTRY FRESH MORNINGSTAR ADJUSTMENTS COMPANIES
----------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
NET SALES................................................... $ 430,466 $ 336,055 $ 304,730 $(5,818)(a) $1,065,433
COST OF SALES............................................... 312,633 291,722 232,948 (5,818)(a) 831,485
----------- ------------- ----------- ----------
Gross profit.............................................. 117,833 44,333 71,782 233,948
OPERATING EXPENSES:
Selling and distribution.................................. 64,289 21,633 38,353 124,275
General and administrative................................ 19,277 15,700 10,682 45,659
Amortization of intangibles............................... 3,703 82 2,319 6,104
----------- ------------- ----------- ----------
Total operating expenses................................ 87,269 37,415 51,354 176,038
----------- ------------- ----------- ----------
OPERATING INCOME............................................ 30,564 6,918 20,428 57,910
OTHER:
Interest expense, net..................................... 19,921 1,392 4,302 25,615
Merger and other costs.................................... 10,238 -- -- 10,238
Other (income) expense.................................... (469) (633) (1,276) (2,378)
----------- ------------- ----------- ----------
Total other............................................. 29,690 759 3,026 33,475
----------- ------------- ----------- ----------
INCOME BEFORE
INCOME TAXES............................................... 874 6,159 17,402 24,435
INCOME TAXES................................................ 2,450 2,090 6,062 10,602
----------- ------------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS........................... $ (1,576) $ 4,069 $ 11,340 $ 13,833
----------- ------------- ----------- ----------
----------- ------------- ----------- ----------
INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS.......... $ (0.26) $ 1.04 $ 0.74 $ 0.64
----------- ------------- ----------- ----------
----------- ------------- ----------- ----------
WEIGHTED AVERAGE SHARES
OUTSTANDING................................................ 6,109,398 3,609,245 15,245,562 21,036,608
----------- ------------- ----------- ----------
----------- ------------- ----------- ----------
</TABLE>
- ------------------------------
(a) Elimination of sales and cost of sales for transactions between Morningstar
and Suiza Foods.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL COMBINED COMPANIES
-------------------------------- HISTORICAL ACQUIRED
SUIZA COUNTRY MORNING- COMBINING COMBINED ACQUIRED BUSINESSES
FOODS FRESH STAR ADJUSTMENTS COMPANIES BUSINESSES(A) ADJUSTMENTS PRO FORMA
--------- --------- ---------- ----------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES................ $ 520,916 $ 353,037 $ 394,306 $(7,910)(b) $1,260,349 $754,277 $ -- $2,014,626
COST OF SALES............ 388,548 305,614 302,801 (7,910)(b) 989,053 586,167 (2,624)(c)(d) 1,572,596
--------- --------- ---------- ---------- ------------- -----------
Gross profit........... 132,368 47,423 91,505 271,296 168,110 442,030
OPERATING EXPENSES:
Selling and
distribution......... 70,709 19,916 49,895 140,520 79,847 (4,202)(c)(d) 216,165
General and
administrative....... 21,913 16,010 12,538 50,461 29,693 (9,411)(c)(d) 70,743
Amortization of
intangibles.......... 4,624 656 2,912 8,192 2,217 9,542(e) 19,951
--------- --------- ---------- ---------- ------------- -----------
Total operating
expenses........... 97,246 36,582 65,345 199,173 111,757 306,859
--------- --------- ---------- ---------- ------------- -----------
OPERATING INCOME......... 35,122 10,841 26,160 72,123 56,353 135,171
OTHER:
Interest expense,
net.................. 17,470 1,219 4,026 22,715 5,600 38,124(f) 66,439
Merger and other
costs................ 571 -- -- 571 -- 571
Other (income)
expense.............. (4,012) (436) (286) (4,734 ) (495) (5,229)
--------- --------- ---------- ---------- ------------- -----------
Total other.......... 14,029 783 3,740 18,552 5,105 61,781
--------- --------- ---------- ---------- ------------- -----------
INCOME BEFORE
INCOME TAXES........... 21,093 10,058 22,420 53,571 51,248 73,390
INCOME TAXES............. (6,836) 3,385 7,844 4,393 1,280 6,110(g) 11,783
--------- --------- ---------- ---------- ------------- -----------
INCOME FROM
CONTINUING
OPERATIONS........... $ 27,929 $ 6,673 $ 14,576 $ 49,178 $ 49,968 $ 61,607
--------- --------- ---------- ---------- ------------- -----------
--------- --------- ---------- ---------- ------------- -----------
INCOME PER COMMON SHARE
FROM CONTINUING
OPERATIONS............. $ 2.81 $ 1.75 $ 0.96 $ 1.97 $ 2.45
--------- --------- ---------- ---------- -----------
--------- --------- ---------- ---------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 9,921,822 3,636,519 15,133,887 24,768,983 25,066,383
--------- --------- ---------- ---------- -----------
--------- --------- ---------- ---------- -----------
</TABLE>
- ------------------------------
(a) Includes the pre-acquisition results of operations of Suiza Foods' 1996
acquisitions of Garrido through June 30, 1996, Swiss Dairy through August
31, 1996 and Model Dairy through November 30, 1996; the pre-acquisition
results of operations of Morningstars' 1996 acquisition of Presto through
November 30, 1996; and the pre-acquisition results of operations of Suiza
Foods' 1997 acquisitions of Dairy Fresh for the year ended December 31,
1996, and Garelick for its most recent fiscal year ended September 30, 1996.
(b) Elimination of sales and cost of sales for transactions between Morningstar
and Suiza Foods.
(c) Excess of historical depreciation expense over the depreciation of the fair
value of property and equipment acquired in the Suiza Foods acquisitions,
which resulted in a decrease of $2,107, $708 and $121 in amounts charged to
cost of sales, selling and distribution expense and general and
administrative expense, respectively. There was no material difference
between the historical depreciation expense and the depreciation of the fair
value of property and equipment acquired in the Morningstar acquisition.
24
<PAGE>
(d) Elimination of salaries and benefits paid primarily to former shareholders
of the acquired businesses whose employment was either terminated or
salaries were reduced as part of the purchase agreement, along with the
elimination of certain related party expenses of the acquired businesses,
pursuant to an agreement with such related parties at acquisition date,
resulting in a reduction of historical costs of sales, selling and
distribution and general administrative costs, as follows:
<TABLE>
<CAPTION>
SUIZA MORNING-
FOODS STAR
ACQUISITIONS ACQUISITION TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
Cost of sales................................................. $ (517) $ -- $ (517)
Selling and distribution...................................... (968) (2,526) (968)
General and administration.................................... (4,816) (4,474) (11,816)
------------- ----------- ---------
$ (6,301) $ (7,000) $ (13,301)
------------- ----------- ---------
------------- ----------- ---------
</TABLE>
(e) Amortization of goodwill and other intangibles, over the following
amortization periods, in excess of historical amounts, as follows:
<TABLE>
<CAPTION>
SUIZA MORNING-
FOODS STAR
LIFE ACQUISITIONS ACQUISITION TOTAL
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Organization costs................................... 5 $ 22 $ -- $ 22
Tradenames........................................... 25-40 510 1,833 2,343
Customer list........................................ 10 367 -- 367
Goodwill............................................. 40 6,069 741 6,810
------------- ----------- ---------
$ 6,968 $ 2,574 $ 9,542
------------- ----------- ---------
------------- ----------- ---------
</TABLE>
(f) Pro forma interest expense on the average outstanding balance of new
variable rate borrowings used to fund the Suiza Foods and Morningstar
acquisitions at an assumed interest rate of 7.75%, including the
amortization of deferred financing costs, net of the reduction of historical
interest expense related to the historical debt repaid as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Suiza Foods acquisitions...................................... $ 31,346
Morningstar acquisition....................................... 6,778
-------------
Total......................................................... $ 38,124
-------------
-------------
</TABLE>
The effect of a .125% change in the interest rate on the new variable rate
borrowings to fund the Suiza Foods and Morningstar acquisitions, would have
resulted in a change in the proforma interest expense adjustment of $615.
(g) Estimated pro forma adjustment to reflect income taxes at the estimated
effective tax rate for the Suiza Foods acquisitions of 4% for Garrido, 35%
for Model Dairy and 40% for Swiss Dairy, Dairy Fresh and Garelick, and for
Morningstar's Presto acquisition of 42%.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Suiza Foods acquisitions...................................... $ 3,995
Morningstar acquisition....................................... 2,115
-------------
Total......................................................... $ 6,110
-------------
-------------
</TABLE>
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL COMBINED COMPANIES
--------------------------------- HISTORICAL ACQUIRED
SUIZA COUNTRY MORNING- COMBINING COMBINED ACQUIRED BUSINESSES PRO
FOODS FRESH STAR ADJUSTMENTS COMPANIES BUSINESSES(A) ADJUSTMENTS FORMA
---------- --------- ---------- ----------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES................ $ 336,819 $ 172,295 $ 270,672 $(4,699)(b) $ 775,087 $246,977 $ -- $1,022,064
COST OF SALES............ 252,047 147,711 196,022 (4,699)(b) 591,081 192,812 (1,995)(c) 781,898
---------- --------- ---------- ---------- ------------- -----------
Gross profit........... 84,772 24,584 74,650 184,006 54,165 240,166
OPERATING EXPENSES:
Selling and
distribution......... 42,244 9,497 41,785 93,526 22,073 (473)(c) 115,126
General and
administrative....... 16,397 7,775 6,685 30,857 5,674 (1,243)(c)(d) 35,288
Amortization of
intangibles.......... 2,982 25 2,753 5,760 1,251 2,623(e) 9,634
---------- --------- ---------- ---------- ------------- -----------
Total operating
expenses........... 61,623 17,297 51,223 130,143 28,998 160,048
---------- --------- ---------- ---------- ------------- -----------
OPERATING INCOME......... 23,149 7,287 23,427 53,863 25,167 80,118
OTHER:
Interest expense,
net.................. 6,580 803 6,798 14,181 3,410 10,988(f) 28,579
Other (income)
expense.............. (18,575) (230) (249) (19,054 ) (18) (19,072)
---------- --------- ---------- ---------- ------------- -----------
Total other.......... (11,995) 573 6,549 (4,873 ) 3,392 9,507
---------- --------- ---------- ---------- ------------- -----------
INCOME BEFORE
INCOME TAXES............. 35,144 6,714 16,878 58,736 21,775 70,611
INCOME TAXES............. 10,745 2,303 6,917 19,965 715 3,735(g) 24,415
---------- --------- ---------- ---------- ------------- -----------
INCOME FROM
CONTINUING OPERATIONS.... $ 24,399 $ 4,411 $ 9,961 $ 38,771 $ 21,060 $ 46,196
---------- --------- ---------- ---------- ------------- -----------
---------- --------- ---------- ---------- ------------- -----------
INCOME PER COMMON SHARE
FROM
CONTINUING OPERATIONS.... $ 1.57 $ 1.16 $ 0.64 $ 1.25 $ 1.48
---------- --------- ---------- ---------- -----------
---------- --------- ---------- ---------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 15,509,388 3,685,236 15,643,651 30,816,419 31,113,819
---------- --------- ---------- ---------- -----------
---------- --------- ---------- ---------- -----------
</TABLE>
- ------------------------------
(a) Includes the pre-acquisition results of operations Suiza Foods' 1997
acquisitions of Dairy Fresh and Garelick for the six months ended June 30,
1997.
(b) Elimination of sales and cost of sales for transactions between Morningstar
and Suiza Foods.
(c) Excess of historical depreciation expense over the depreciation of the fair
value of property and equipment acquired in the Suiza Foods acquisitions,
which resulted in a decrease of $1,995, $473 and $71 in amounts charged to
cost of sales, selling and distribution expense and general and
administrative expense, respectively.
(d) Elimination of salaries and benefits paid primarily to former shareholders
of the Suiza Foods acquired businesses whose employment was either
terminated or salaries were reduced as part of the purchase agreement, along
with the elimination of certain related party expenses of the acquired
businesses, pursuant to an agreement with such related parties at
acquisition date, resulting in a reduction of historical general
administrative costs of $1,172.
26
<PAGE>
(e) Amortization of goodwill and other intangibles for the Suiza Foods
acquisitions, over the following amortization periods, in excess of
historical amounts, as follows:
<TABLE>
<CAPTION>
LIFE
---
<S> <C> <C>
Organization costs........................... 5 $ 5
Tradename.................................... 25 200
Goodwill..................................... 40 2,418
------
$ 2,623
------
------
</TABLE>
(f) Pro forma interest expense to reflect additional interest expense of $10,988
on the average outstanding balance of new variable rate borrowings used to
fund the Suiza Foods acquisitions at an assumed interest rate of 7.75%,
including the amortization of deferred financing costs, net of the reduction
of historical interest expense related to the historical debt repaid. The
effect of a .125% change in the interest rate on the new variable rate
borrowings to fund the Suiza Foods acquisitions, would have resulted in a
change in the proforma interest expense adjustment of $177.
(g) Estimated pro forma adjustment to reflect increased income taxes for the
Suiza Foods acquisitions of $3,735 at the estimated effective tax rate of
40% for Dairy Fresh and Garelick.
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL COMBINED COMPANIES
-------------------------------- HISTORICAL ACQUIRED
SUIZA COUNTRY MORNING- COMBINING COMBINED ACQUIRED BUSINESSES
FOODS FRESH STAR ADJUSTMENTS COMPANIES BUSINESSES ADJUSTMENTS PRO FORMA
-------- --------- ---------- ----------- --------- ---------- ----------- ----------
(A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash........................ $ 7,130 $ 6,697 $ 2,167 $ $ 15,994 $ 291 $ (68)(e) $ 16,217
Accounts receivable......... 50,784 26,084 48,038 124,906 32,948 157,854
Inventories................. 21,536 18,846 25,689 66,071 6,882 72,953
Prepaid expenses and
other..................... 3,369 241 3,229 6,839 2,299 (75)(e) 9,063
Deferred income taxes....... 3,796 1,186 7,339 12,321 -- 12,321
-------- --------- ---------- --------- ---------- ----------
Total current assets...... 86,615 53,054 86,462 226,131 42,420 268,408
PROPERTY AND EQUIPMENT........ 136,281 43,476 100,708 280,465 85,199 26,862(e) 392,526
DEFERRED INCOME TAXES......... 8,319 3,059 -- 11,378 -- 11,378
INTANGIBLE AND OTHER ASSETS... 171,091 2,353 165,153 338,597 42,219 259,137(e) 639,953
-------- --------- ---------- --------- ---------- ----------
TOTAL ASSETS.................. $402,306 $101,942 $352,323 $856,571 $169,838 $1,312,265
-------- --------- ---------- --------- ---------- ----------
-------- --------- ---------- --------- ---------- ----------
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.................. $42,118 $ 30,316 $ 63,466 $ 28,000(c) $163,900 $ 40,122 $ (380)(d) $ 203,642
Income taxes payable........ 1,154 2,262 -- 3,416 -- 3,416
Current portion of long-term
debt...................... 17,323 3,767 11,500 32,590 57,762 (57,762)(d) 32,590
-------- --------- ---------- --------- ---------- ----------
Total current
liabilities............. 60,595 36,345 74,966 199,906 97,884 239,648
LONG-TERM DEBT................ 128,150 26,523 169,200 323,873 32,436 373,516(c) 729,825
OTHER LIABILITIES............. -- 3,558 3,020 6,578 -- 6,578
DEFERRED INCOME TAXES......... 4,928 -- 5,694 10,622 -- 10,622
STOCKHOLDERS' EQUITY:
Preferred stock............. -- 3,741 -- 3,741 3,741
Common stock................ 153 1,898 153 (1,908)(b) 296 3(d) 299
Additional paid-in
capital................... 183,263 -- 67,733 1,908(b) 252,904 9,997(c) 262,901
Retained earnings........... 25,217 29,877 31,557 (28,000)(c) 58,651 58,651
Equity of acquired
businesses................ -- -- -- -- 39,518 (39,518)(e) --
-------- --------- ---------- --------- ---------- ----------
Total stockholders'
equity.................. 208,633 35,516 99,443 315,592 39,518 325,592
-------- --------- ---------- --------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $402,306 $101,942 $352,323 $856,571 $169,838 $1,312,265
-------- --------- ---------- --------- ---------- ----------
-------- --------- ---------- --------- ---------- ----------
</TABLE>
- ------------------------------
(a) Includes the pre-acquisition balance sheets of Suiza Foods' 1997
acquisitions of Dairy Fresh and Garelick as of June 30, 1997.
(b) Pro forma adjustment to common stock and additional paid-in capital to
reflect the par value of the common stock issued to affect the mergers.
(c) Pro forma adjustment to expense $28 million of estimated merger costs which
are expected to be incurred on the consumation date of the mergers. These
estimated transaction related costs include approximately $16 million of
investment banking fees, legal fees, accounting fees, and filing and
printing fees, along with approximately $12 million of employee costs
related to the payments of retention bonuses and excise and other taxes to
certain Country Fresh and Morningstar employees pursuant to existing
contractual agreements and the payments pursuant to existing contractual
agreements of severance costs and excise and other taxes for certain
Morningstar employees whose employment will be terminated at the Effective
Time of the Merger.
(d) On July 1, 1997, Suiza Foods completed the acquisition of substantially all
the net assets of Dairy Fresh and, on July 31, 1997, the acquisition of all
of the outstanding common stock of Garelick. The purchase prices for these
acquisitions were approximately $104.5 million and $306.6 million,
respectively, including acquired cash and including expenses of $1.8 million
and $3.0 million, respectively, which were used to acquired Dairy Fresh and
Garelick and to repay their existing debt. The total purchase prices
28
<PAGE>
were funded primarily with borrowings under Suiza Foods' senior credit
facility and the issuance of 297,400 shares of Suiza Common Stock for $10.0
million to Garelick shareholders, as follows:
<TABLE>
<CAPTION>
<S> <C>
Credit agreement borrowings............................................................. $ 405,952
Issuance of common stock................................................................ 10,000
---------
Total purchase prices................................................................... 415,952
Repayment of existing indebtedness:
Accrued interest...................................................................... (380)
Current portion of long-term debt..................................................... (57,762)
Long-term debt........................................................................ (32,436)
---------
Net purchase price...................................................................... $ 325,374
---------
---------
</TABLE>
(e) The above acquisitions resulted in an excess of the purchase prices over the
historical net assets acquired, which were allocated to the net assets
acquired, as follows:
<TABLE>
<CAPTION>
<S> <C>
Net purchase prices..................................................................... $ 325,374
Historical carrying value of net assets:
Total net assets...................................................................... 39,518
Less net assets not assumed:
Cash................................................................................ (68)
Prepaid expenses.................................................................... (75)
Intangible and other assets......................................................... (38,693)
---------
Historical carrying values of net assets acquired....................................... 682
---------
Excess of net purchase prices over historical carrying values........................... $ 324,692
---------
Allocation of excess purchase price:
Excess fair value of property and equipment........................................... $ 26,862
Intangible assets..................................................................... 297,830
---------
$ 324,692
---------
---------
</TABLE>
29
<PAGE>
SELECTED FINANCIAL DATA OF SUIZA FOODS
(IN THOUSANDS, EXCEPT SHARE DATA)
The following selected financial data of Suiza Foods for each of the five
years in the period ended December 31, 1996 have been derived from Suiza Foods'
audited consolidated financial statements. The selected consolidated financial
data for the six months ended June 30, 1996 and 1997 are unaudited, and in the
opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) that are necessary to present fairly the financial results
for such periods. The selected financial data do not purport to indicate results
of operations as of any future date or for any future period. The selected
financial data of Suiza Foods should be read in conjunction with the
Consolidated Financial Statements and related notes of Suiza Foods incorporated
by reference into or included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales......................................... $ 44,452 $ 51,675 $ 341,108 $ 430,466 $ 520,916 $ 225,307 $ 336,819
Cost of sales..................................... 14,586 20,412 240,468 312,633 388,548 165,917 252,047
--------- --------- --------- --------- --------- --------- ----------
Gross profit...................................... 29,866 31,263 100,640 117,833 132,368 59,390 84,772
Operating costs and expenses:
Selling and distribution........................ 14,483 15,434 54,248 64,289 70,709 32,682 42,244
General and administrative...................... 6,110 6,305 16,935 19,277 21,913 9,805 16,397
Amortization of intangibles and other........... 1,911 822 3,697 3,703 4,624 1,960 2,982
--------- --------- --------- --------- --------- --------- ----------
Total operating costs and expenses.............. 22,504 22,561 74,880 87,269 97,246 44,447 61,623
--------- --------- --------- --------- --------- --------- ----------
Income from operations............................ 7,362 8,702 25,760 30,564 35,122 14,943 23,149
Other (income) expense:
Interest expense, net........................... 8,495 7,697 19,279 19,921 17,470 8,488 6,580
Merger and other costs.......................... 1,199 -- 1,660 10,238 571 -- --
Other income, net............................... (408) (419) (268) (469) (4,012) (252) (18,575)
--------- --------- --------- --------- --------- --------- ----------
Total other (income) expense.................... 9,286 7,278 20,671 29,690 14,029 8,236 (11,995)
--------- --------- --------- --------- --------- --------- ----------
Income (loss) before income taxes and
extraordinary loss.............................. (1,924) 1,424 5,089 874 21,093 6,707 35,144
Income taxes (benefit)............................ -- 4 844 2,450 (6,836) 1,771 10,745
--------- --------- --------- --------- --------- --------- ----------
Income (loss) before extraordinary loss........... (1,924) 1,420 4,245 (1,576) 27,929 4,936 24,399
Extraordinary loss from early extinguishment of
debt............................................ 2,491 -- 197 8,462 2,215 2,215 3,270
--------- --------- --------- --------- --------- --------- ----------
Net income (loss) (1)............................. $ (4,415) $ 1,420 $ 4,048 $ (10,038) $ 25,714 $ 2,721 $ 21,129
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
Weighted average shares outstanding............... 1,763,502 2,487,174 6,156,387 6,109,398 9,921,822 8,455,332 15,509,388
Earnings (loss) per share:
Income (loss) before extraordinary loss......... $ (1.09) $ .57 $ .69 $ (.26) $ 2.81 $ .58 $ 1.57
Extraordinary loss.............................. (1.41) -- (.03) (1.38) (.22) (.26) (.21)
--------- --------- --------- --------- --------- --------- ----------
Net income (loss)(1)............................ $ (2.50) $ .57 $ .66 $ (1.64) $ 2.59 $ .32 $ 1.36
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets...................................... $ 46,991 $ 167,948 $ 238,952 $ 232,522 $ 384,148 $ 237,973 $ 402,306
Long-term debt, net of current portion............ 54,739 132,123 173,327 171,745 226,693 134,334 128,150
Total stockholders' equity (deficit).............. (15,408) 162 9,887 9,460 93,532 60,789 208,633
</TABLE>
30
<PAGE>
- ----------------------------------
(1) Net income (loss) and related per share amounts include the following
nonrecurring and extraordinary charges and benefits:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Merger, financing and other costs (a)............ $ (1,199) $ -- $ (1,602) $ (9,554) $ (354) $ -- $ --
Tax benefits (b)................................. -- -- -- -- 13,950 -- 11,500
Extraordinary loss from early extinguishment of
debt (c)....................................... (2,491) -- (197) (8,462) (2,215) (2,215) (3,270)
--------- --------- --------- --------- --------- --------- ---------
$ (3,690) $ -- $ (1,799) $ (18,016) $ 11,381 $ (2,215) 8,230
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(a) Consists of costs incurred in connection with the corporate combination
pursuant to which Suiza Foods was formed as a holding company for certain
pre-existing operations, an uncompleted public offering of shares of
Suiza Common Stock, an uncompleted debt offering, uncompleted
acquisitions and debt refinancing costs, net of associated income taxes
of $58 in 1994, $684 in 1995 and $217 in 1996.
(b) For 1996, includes the sale of Puerto Rico tax credits of $3,400 (net of
related expenses), reflected in other income, and the recognition of
$11,750 in deferred income tax benefits recorded as a credit to tax
expense, both effects related to tax credits generated by Suiza-Puerto
Rico, partially offset by additional income tax expense of $1,200 related
to the sale of the tax credits. For the six months ended June 30, 1997,
includes a nonrecurring gain of $18,100, net of discounts and related
expenses, resulting from additional tax credits generated by Suiza-Puerto
Rico that Suiza Foods subsequently sold to third parties, partially
offset by additional income tax expense of $6,600 related to the sale of
tax credits.
(c) Net of associated income taxes of approximately $700 in 1995, $900 in
1996 and $2,000 for the six months ended June 30, 1997.
31
<PAGE>
SELECTED FINANCIAL DATA OF MORNINGSTAR
(IN THOUSANDS, EXCEPT SHARE DATA)
The following selected financial data of Morningstar for each of the five
years in the period ended December 31, 1996 have been derived from Morningstar's
audited consolidated financial statements. The selected consolidated financial
data for the six months ended June 30, 1996 and 1997 are unaudited, and in the
opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) that are necessary to present fairly the financial results
for such periods. The selected financial data do not purport to indicate results
of operations as of any future date or for any future period. The selected
financial data of Morningstar should be read in conjunction with the
Consolidated Financial Statements and related notes of Morningstar incorporated
by reference into or included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS
ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------------------- ----------
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales....................................... $ 230,220 $ 273,949 $ 292,314 $ 304,730 $ 394,306 $ 167,417
Cost of sales................................... 174,130 211,418 222,145 232,948 302,801 128,036
---------- ---------- ---------- ---------- ---------- ----------
Gross profit.................................... 56,090 62,531 70,169 71,782 91,505 39,381
Operating costs and expenses:
Selling and distribution...................... 27,100 36,669 39,984 38,353 49,895 22,316
General and administrative.................... 7,579 9,432 9,497 10,682 12,538 5,259
Amortization of intangibles................... 4,825 3,995 2,281 2,319 2,912 1,162
Restructuring and other charges............... 1,093 7,100 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total operating costs and expenses............ 40,597 57,196 51,762 51,354 65,345 28,737
---------- ---------- ---------- ---------- ---------- ----------
Income from operations.......................... 15,493 5,335 18,407 20,428 26,160 10,644
Other (income) expenses:
Interest expense, net......................... 7,875 5,477 4,797 4,302 4,026 1,532
Refinancing charges........................... 9,584 -- -- -- -- --
Other income, net............................. (424) (726) (1,244) (1,276) (286) (382)
---------- ---------- ---------- ---------- ---------- ----------
Total other (income) expense.................. 17,035 4,751 3,553 3,026 3,740 1,150
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, discontinued
operations and extraordinary loss............. (1,542) 584 14,854 17,402 22,420 9,494
Income taxes.................................... 98 841 5,533 6,062 7,844 3,200
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations........ (1,640) (257) 9,321 11,340 14,576 6,294
Income (loss) from discontinued operations...... (3,359) 1,241 1,326 184 -- --
Extraordinary loss from early extinguishment of
debt.......................................... (5,676 (1) (164 (2) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............................... (10,675) 820 10,647 11,524 14,576 6,294
Dividends on Preferred Stock.................... 939 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net Income (loss) to Common..................... $ (11,614) $ 820 $ 10,647 $ 11,524 $ 14,576 $ 6,294
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Weighted average common shares outstanding...... 12,128,343 15,011,607 15,050,538 15,245,562 15,133,887 14,778,316
Earnings (loss) per common share:
Income (loss) from continuing operations...... $ (0.21) $ (0.02) $ 0.62 $ 0.74 $ 0.96 $ 0.42
Income (loss) from discontinued operations.... (0.28) 0.08 0.09 0.02 -- --
Extraordinary loss............................ (0.47) (0.01) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net Income (loss)............................. $ (0.96) $ 0.05 $ 0.71 $ 0.76 $ 0.96 $ 0.42
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Dividends declared per common share............. $ .075 $ .15 $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................... $ 180,786 $ 212,134 $ 165,265 $ 162,709 $ 355,991 $ 170,042
Long-term debt, net of current portion.......... 86,329 105,425 53,892 36,000 177,349 30,463
Total stockholders' equity...................... 55,779 54,533 66,802 77,323 88,788 79,748
<CAPTION>
1997
----------
<S> <C>
OPERATING DATA:
Net sales....................................... $ 270,672
Cost of sales................................... 196,022
----------
Gross profit.................................... 74,650
Operating costs and expenses:
Selling and distribution...................... 41,785
General and administrative.................... 6,685
Amortization of intangibles................... 2,753
Restructuring and other charges............... --
----------
Total operating costs and expenses............ 51,223
----------
Income from operations.......................... 23,427
Other (income) expenses:
Interest expense, net......................... 6,798
Refinancing charges........................... --
Other income, net............................. (249)
----------
Total other (income) expense.................. 6,549
----------
Income (loss) before income taxes, discontinued
operations and extraordinary loss............. 16,878
Income taxes.................................... 6,917
----------
Income (loss) from continuing operations........ 9,961
Income (loss) from discontinued operations...... --
Extraordinary loss from early extinguishment of
debt.......................................... --
----------
Net income (loss)............................... 9,961
Dividends on Preferred Stock.................... --
----------
Net Income (loss) to Common..................... $ 9,961
----------
----------
Weighted average common shares outstanding...... 15,643,651
Earnings (loss) per common share:
Income (loss) from continuing operations...... $ 0.64
Income (loss) from discontinued operations.... --
Extraordinary loss............................ --
----------
Net Income (loss)............................. $ 0.64
----------
----------
Dividends declared per common share............. $ --
----------
----------
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................... $ 352,323
Long-term debt, net of current portion.......... 169,200
Total stockholders' equity...................... 99,443
</TABLE>
- ----------------------------------
(1) Morningstar reported a net loss of $5,676 on the purchase of approximately
$34,000 in subordinated debt at a premium.
(2) Loss on purchase of senior subordinated debentures, net of applicable tax
benefit of $71.
32
<PAGE>
SELECTED FINANCIAL DATA OF COUNTRY FRESH
(IN THOUSANDS, EXCEPT SHARE DATA)
The following selected financial data of Country Fresh for each of the five
fiscal years in the period ended March 1, 1997 have been derived from Country
Fresh's audited consolidated financial statements. The selected consolidated
financial data for the 20 weeks ended July 20, 1996 and July 19, 1997 are
unaudited, and in the opinion of management, reflect all adjustments (consisting
only of normal recurring accruals) that are necessary to present fairly the
financial results for such periods. The selected financial data do not purport
to indicate results of operations as of any future date or for any future
period. The selected financial data of Country Fresh should be read in
conjunction with the Consolidated Financial Statements and related notes of
Country Fresh included elsewhere in this Joint Proxy Statement/ Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
TWENTY WEEKS ENDED
YEAR ENDED
------------------------------------------------------------------ --------------------
FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19,
1993 1994 1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales........................... $ 294,305 $ 298,739 $ 310,164 $ 336,055 $ 353,037 $ 135,328 $ 136,154
Cost of sales....................... 248,081 254,927 268,500 291,722 305,614 115,963 116,233
------------ ------------ ------------ ----------- ----------- --------- ---------
Gross profit........................ 46,224 43,812 41,664 44,333 47,423 19,365 19,921
Operating costs and expenses:
Selling and distribution.......... 24,202 22,638 21,225 21,633 19,916 7,397 7,217
General and administrative........ 12,705 14,123 15,036 15,700 16,010 5,907 6,234
Amortization of intangibles....... 9 37 100 82 656 33 19
------------ ------------ ------------ ----------- ----------- --------- ---------
Total operating costs and
expenses........................ 36,916 36,798 36,361 37,415 36,582 13,337 13,470
------------ ------------ ------------ ----------- ----------- --------- ---------
Income from operations.............. 9,308 7,014 5,303 6,918 10,841 6,028 6,451
Other (income) expenses:
Interest expense, net............. 319 463 (259) 1,392 1,219 613 597
Other income, net................. (411) (572) (551) (633) (436) (111) (254)
------------ ------------ ------------ ----------- ----------- --------- ---------
Total other (income) expense...... (92) (109) (810) 759 783 502 343
------------ ------------ ------------ ----------- ----------- --------- ---------
Income before income taxes and
cumulative effect of accounting
change............................ 9,400 7,123 6,113 6,159 10,058 5,526 6,108
Income taxes........................ 3,347 2,400 2,145 2,090 3,385 1,884 2,079
------------ ------------ ------------ ----------- ----------- --------- ---------
Income before cumulative effect of
accounting change................. 6,053 4,723 3,968 4,069 6,673 3,642 4,029
Cumulative effect of change in
accounting for post-retirement
benefits other than pensions...... -- -- 2,272 -- -- -- --
------------ ------------ ------------ ----------- ----------- --------- ---------
Net income.......................... $ 6,053 $ 4,723 $ 1,696 $ 4,069 $ 6,673 $ 3,642 $ 4,029
------------ ------------ ------------ ----------- ----------- --------- ---------
------------ ------------ ------------ ----------- ----------- --------- ---------
Net income applicable to common
shares............................ $ 6,053 $ 4,723 $ 1,696 $ 3,765 $ 6,371 $ 3,566 $ 3,954
------------ ------------ ------------ ----------- ----------- --------- ---------
------------ ------------ ------------ ----------- ----------- --------- ---------
Weighted average shares
outstanding....................... 7,905,400 7,865,120 7,622,840 3,609,245 3,636,519 3,631,758 3,685,236
Net earnings per common share:
Income before cumulative effect of
accounting change............... $ 0.77 $ 0.60 $ 0.52 $ 1.04 $ 1.75 $ 0.97 $ 1.07
Cumulative effect of change in
accounting for post-retirement
benefits other than pensions.... -- -- (0.30) -- -- -- --
------------ ------------ ------------ ----------- ----------- --------- ---------
Net income........................ $ 0.77 $ 0.60 $ 0.22 $ 1.04 $ 1.75 $ 0.97 $ 1.07
------------ ------------ ------------ ----------- ----------- --------- ---------
------------ ------------ ------------ ----------- ----------- --------- ---------
Balance sheet data (at end of period):
Total assets........................ $ 93,629 $ 95,089 $ 98,870 $ 94,765 $ 99,206 $ 105,565 $ 101,942
Long-term debt, net of current
portion........................... 14,777 13,832 14,217 32,152 28,571 36,318 26,523
Preferred stock..................... -- -- -- 3,800 3,741 3,800 3,741
Total common stockholders' equity... 47,168 49,606 51,265 21,326 27,793 25,002 31,775
</TABLE>
33
<PAGE>
THE SPECIAL MEETINGS
GENERAL
The Suiza Special Meeting will be held at 9:00 a.m., local time, on
Wednesday, November 26, 1997, at the Hotel Crescent Court, 400 Crescent Court,
2200 Cedar Springs, Dallas, Texas 75201 for the purpose set forth in the Notice
of Suiza Special Meeting and as described below. The Morningstar Special Meeting
will be held at 9:00 a.m. local time, on Wednesday, November 26, 1997, at the
Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas
75201 for the purpose set forth in the Notice of Morningstar Special Meeting and
as described below. This Joint Proxy Statement/Prospectus is furnished in
connection with the solicitation by the Suiza Board and Morningstar Board of
proxies to be used at their respective Special Meetings and at any and all
adjournments or postponements of such Special Meetings. Any person executing a
proxy card may revoke it prior to its exercise by filing with the Corporate
Secretary of Suiza Foods or the General Counsel of Morningstar, as the case may
be, prior to or at the applicable Special Meeting, at the address specified
under the caption "Incorporation of Certain Information by Reference" in this
Joint Proxy Statement/Prospectus, either an instrument revoking the proxy or a
duly executed proxy bearing a later date.
VOTING SECURITIES AND RECORD DATES
SUIZA FOODS. Suiza Stockholders of record at the close of business on
October 27, 1997 are entitled to notice of and to vote at the Suiza Special
Meeting. On October 27, 1997, there were 15,810,800 outstanding shares of Suiza
Common Stock. Each share of Suiza Common Stock is entitled to one vote on each
matter to be acted upon at the Suiza Special Meeting. No other shares of Suiza
common stock or preferred stock were outstanding as of the Suiza Record Date.
The presence, in person or by proxy, at the Suiza Special Meeting of the holders
of a majority of the shares of Suiza Common Stock outstanding and entitled to
vote at the Suiza Special Meeting is necessary to constitute a quorum at the
Suiza Special Meeting. In addition, applicable NYSE rules require that the total
vote cast with respect to the Stock Issuance and the Plan Amendment represent
over 50% in interest of all securities entitled to vote on each proposal.
Assuming that these quorum requirements are satisfied, the affirmative vote of
the holders of a majority of the shares of Suiza Common Stock present and
entitled to vote at the Suiza Special Meeting is required to approve each Suiza
Proposal.
MORNINGSTAR. Morningstar Stockholders of record at the close of business on
October 27, 1997 are entitled to notice of and to vote at the Morningstar
Special Meeting. On October 27, 1997, there were 14,778,936 outstanding shares
of Morningstar Common Stock. Each share of Morningstar Common Stock is entitled
to one vote on each matter to be acted upon at the Morningstar Special Meeting.
No other shares of Morningstar common stock or preferred stock were outstanding
as of the record date. The presence, in person or by proxy, at the Morningstar
Special Meeting of the holders of a majority of the shares of Morningstar Common
Stock outstanding and entitled to vote at the Morningstar Special Meeting is
necessary to constitute a quorum at the Morningstar Special Meeting. The
affirmative vote of a majority of the shares of Morningstar Common Stock
outstanding and entitled to vote at the Morningstar Special Meeting is required
to approve the Morningstar Proposal.
PURPOSE OF SPECIAL MEETINGS
SUIZA FOODS. The purpose of the Suiza Special Meeting is to (i) consider
and vote upon the proposal to approve the Stock Issuance, (ii) consider and vote
upon the proposal to approve the Plan Amendment and (iii) transact such other
business as may properly come before the Suiza Special Meeting and at any and
all adjournments or postponements thereof.
MORNINGSTAR. The purpose of the Morningstar Special Meeting is to (i)
consider and vote upon the proposal to approve the Merger Agreement, the Merger
and the transactions contemplated thereby and (ii) transact such other business
as may properly come before the Morningstar Special Meeting and at any
34
<PAGE>
and all adjournments or postponements thereof. A copy of the Merger Agreement is
attached hereto as Appendix A.
PROXIES
All shares of Suiza Common Stock and Morningstar Common Stock represented by
properly executed proxies received prior to or at the Suiza Special Meeting or
Morningstar Special Meeting, as the case may be, and not duly and timely
revoked, will be voted in accordance with the instructions indicated on such
proxies. If no instructions are indicated on a properly executed and returned
proxy, such proxy will be voted "FOR" the approval of the Suiza Proposals or the
Morningstar Proposal, as the case may be. A properly executed proxy marked
"ABSTAIN," although counted for purposes of determining whether there is a
quorum and for purposes of determining the aggregate voting power and number of
shares represented and entitled to vote at the applicable Special Meeting, will
not be voted. Shares represented by "broker non-votes" (i.e., shares held by
brokers or nominees which are represented at a meeting but with respect to which
the broker or nominee is not empowered to vote) will be counted for purposes of
determining whether there is a quorum at a Special Meeting. In accordance with
NYSE and Nasdaq rules, brokers and nominees are precluded from exercising their
voting discretion with respect to the approval and adoption of the Suiza
Proposals and the Morningstar Proposal and thus, absent specific instructions
from the beneficial owner of such shares, are not empowered to vote such shares
with respect to the approval and adoption of the Suiza Proposals or the
Morningstar Proposal. Because the affirmative vote of a majority of the Suiza
Common Stock present and entitled to vote is required to approve the Suiza
Proposals, an abstention, a "broker non-vote" or the failure to be present in
person or by proxy at the Suiza Special Meeting will have no effect upon the
outcome of the vote with respect to the Suiza Proposals, assuming a quorum is
present. Because the affirmative vote of a majority of the Morningstar Common
Stock outstanding and entitled to vote is required to approve the Morningstar
Proposal, an abstention, a "broker non-vote" or the failure to be present in
person or by proxy at the Morningstar Special Meeting will have the same effect
as a vote against the Morningstar Proposal.
The Suiza Board and the Morningstar Board are not currently aware of any
business to be acted upon at their respective Special Meeting other than as
described herein. If, however, other matters are properly brought before either
Special Meeting, or any adjournments or postponements thereof, the persons
appointed as proxies will have discretion to vote or act thereon according to
their judgment. Such adjournments may be for the purpose of soliciting
additional proxies. Neither Suiza Foods nor Morningstar currently intends to
seek an adjournment of its Special Meeting.
Any proxy given pursuant to this solicitation may be revoked at any time
before such proxy is voted. Attendance at the Suiza Special Meeting or the
Morningstar Special Meeting will not in and of itself constitute a revocation of
a proxy.
The cost of soliciting proxies will be borne by Suiza Foods for Suiza Foods
proxies and by Morningstar for Morningstar proxies. In addition to the use of
the mail, arrangements will be made with brokerage houses and other custodians,
nominees and fiduciaries to send proxy material to beneficial owners and Suiza
Foods or Morningstar, as the case may be, will, upon request, reimburse them for
their reasonable expenses. Suiza Foods and Morningstar have retained a proxy
solicitation firm to aid in the solicitation of proxies and to verify certain
records related to the solicitation for a fee of approximately $9,000 plus
expenses. To the extent necessary in order to ensure sufficient representation
at its Special Meeting, Suiza Foods or Morningstar may request by telephone,
telegram or in person the return of proxy cards. The extent to which this will
be necessary depends entirely upon how promptly proxy cards are returned.
Stockholders are urged to send in their proxies without delay.
35
<PAGE>
MORNINGSTAR STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH
THEIR PROXY CARDS. A LETTER OF TRANSMITTAL WITH INSTRUCTIONS FOR THE SURRENDER
OF CERTIFICATES FOR SHARES OF MORNINGSTAR COMMON STOCK WILL BE MAILED TO
MORNINGSTAR STOCKHOLDERS AS SOON AS PRACTICABLE AFTER THE EFFECTIVE TIME.
THE MERGER
GENERAL
At the Effective Time of the Merger, Sub will be merged with and into
Morningstar, with Morningstar surviving the Merger as a wholly owned subsidiary
of Suiza Foods. In the Merger, each share of Morningstar Common Stock issued and
outstanding immediately before the Effective Time (excluding those held in the
treasury of Morningstar and those owned by Suiza Foods, Sub or any other
subsidiary of Suiza Foods), without any action on the part of the holder
thereof, will be converted into the right to receive 0.85 shares of Suiza Common
Stock. Cash will be paid in lieu of fractional shares of Suiza Common Stock. The
Merger will become effective at the date and time the Certificate of Merger is
filed with the Secretary of State of the State of Delaware, which will occur as
soon as practicable after receipt of requisite regulatory and stockholder
approvals and fulfillment of the other conditions set forth in the Merger
Agreement.
Based on the number of shares of Suiza Common Stock and Morningstar Common
Stock outstanding on October 27, 1997, the shares of Suiza Common Stock issued
to Morningstar Stockholders in the Merger will constitute approximately 44.3% of
the Suiza Common Stock outstanding after the Merger and the current Suiza
Stockholders will hold approximately 55.7% of the Suiza Common Stock outstanding
after the Merger. On the same basis, but also assuming that 1,911,075 additional
shares of Suiza Common Stock are issued in the Country Fresh Merger, Morningstar
Stockholders will hold approximately 41.5% of the Suiza Common Stock outstanding
after the Merger.
Each outstanding and unexercised Morningstar Option will be assumed by Suiza
Foods in the Merger and converted into a Substitute Option. Approximately
2,957,987 shares of Suiza Common Stock will be subject to Substitute Options,
based on the number of shares of Morningstar Common Stock subject to the
Morningstar Options as of October 27, 1997. The per share exercise price with
respect to the Substitute Options will equal the exercise price with respect to
the Morningstar Options divided by the Exchange Ratio.
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio of
0.85 shares of Suiza Common Stock for each share of Morningstar Common Stock.
Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the price of Suiza Common Stock or Morningstar Common
Stock. The price of Suiza Common Stock at the Effective Time may vary from its
price at the date of the Special Meetings. These variations may be the result of
changes in the business, operations, or prospects of Suiza Foods or Morningstar,
market assessments of the likelihood that the Merger will be consummated and the
timing thereof, general market and economic conditions, and other factors.
BACKGROUND OF THE MERGER
In April 1994, Morningstar sold its Florida-based fluid milk operation,
Velda Farms Inc., to a predecessor of Suiza Foods for approximately $48 million
in cash (after working capital adjustments) and $3 million in preferred stock
issued by such predecessor of Suiza Foods. This sale concluded the divestiture
of Morningstar's regional dairies, which were considered a distinct segment of
its business. In March 1995, Suiza Foods redeemed the preferred stock issued in
this transaction for its stated value plus accrued dividends.
During the spring of 1995, representatives of Morningstar and
representatives of Hicks, Muse & Co. Incorporated, now known as Hicks, Muse,
Tate & Furst Incorporated ("Hicks Muse"), met with representatives of Suiza
Foods and one other bidder to discuss a possible sale of Morningstar. At that
time, Hicks
36
<PAGE>
Muse controlled a majority of the voting stock of Morningstar through an
investment partnership. In May 1995, Suiza Foods and the other bidder submitted
acquisition proposals to the Morningstar Board. The Morningstar Board rejected
both of these proposals and determined not to pursue a sale of Morningstar.
Following this determination in July 1995, Hicks Muse caused the investment
partnership which held shares in Morningstar to distribute these shares to the
individual partners of the partnership, thereby relinquishing voting control of
Morningstar and terminating any further discussions or activities, with Suiza
Foods or other bidders, related to a possible sale of Morningstar.
In early August of 1997, representatives of the management of Suiza Foods
met with representatives of the management of Morningstar. At that meeting, the
possibility was raised of a business combination between Morningstar and Suiza
Foods in which Morningstar Stockholders would receive Suiza Common Stock having
a current market value representing a significant premium to the then current
market price of the Morningstar Common Stock. On August 14, 1997, the
Morningstar Board authorized Morningstar management to pursue a possible
transaction with Suiza Foods.
From August 15 through September 26, representatives of Morningstar and
Suiza Foods, including their respective legal and financial advisors, conducted
a mutual exchange of business and financial information pursuant to
confidentiality agreements executed on August 18, 1997 and negotiated the terms
and conditions of a possible transaction. The Suiza Board discussed the possible
transaction at a meeting held on August 29, 1997, and the Morningstar Board
again discussed the possible transaction at a meeting held on September 26,
1997. During this time, Suiza Foods was also negotiating a merger transaction
with Country Fresh. Suiza Foods and Country Fresh signed a merger agreement with
respect to the Country Fresh Merger on September 18, 1997.
The discussions and negotiations between Morningstar and Suiza Foods
representatives were centered around the appropriate exchange ratios and
possible "collar" mechanisms for an exchange ratio, the synergies and other
benefits that could arise from a combination of Suiza Foods and Morningstar, and
the terms of the Merger Agreement. Final negotiations were conducted from
September 24 through 26, with agreement being reach on the Exchange Ratio of
0.85 on September 26, 1997, subject to approval by the respective Boards of
Directors of Suiza Foods and Morningstar. On September 27, 1997 the legal
advisors to Suiza Foods and Morningstar met and resolved outstanding issues on
the Merger Agreement.
On September 28, 1997, the respective boards of Suiza Foods and Morningstar
separately met to consider the Merger and the Merger Agreement, and after
receiving fairness opinions from DLJ and Goldman Sachs, respectively, both the
Suiza Board and the Morningstar Board approved the Merger and the Merger
Agreement. Later that day, the parties executed the Merger Agreement, which was
publicly announced on the morning of September 29, 1997 through a joint press
release before the opening of trading of the NYSE and Nasdaq.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS
SUIZA FOODS. The Suiza Board, based upon certain factors listed below,
including the DLJ Opinion, concluded that the Merger is fair to and in the best
interests of Suiza Foods and the Suiza Stockholders and unanimously approved the
Merger and resolved to recommend that the Suiza Stockholders approve the Stock
Issuance. It should be noted that one of the ten members of the Suiza Board was
unable to attend the meeting at which the Suiza Board voted to recommend
approval of the Stock Issuance. Accordingly, all references in this Joint Proxy
Statement/Prospectus to the unanimous approval or recommendation of the Suiza
Board shall mean that all members of the Suiza Board other than such one absent
member concurred in such approval or recommendation.
The Suiza Board believes that the merger will benefit Suiza Foods and the
Suiza Stockholders in a number of respects, including the following: (i) the
combined company will be the largest dairy company in the United States, and its
size, geographic reach and breadth of product offerings will allow it to offer
its customers more products, and to manufacture and deliver such products more
efficiently, than Suiza Foods or Morningstar could independently; (ii) the
branded character of Morningstar's product offerings will
37
<PAGE>
improve the gross margin of Suiza Foods' product offerings; (iii) growth in
sales of Morningstar's branded and value-added product lines complement Suiza
Foods' strategy of growing through acquisition; (iv) Morningstar's national
infrastructure for manufacturing and distributing value-added dairy and
non-dairy products should afford Suiza Foods greater synergies from
rationalizing the manufacturing and distribution of value-added products of
regional dairies acquired in the future; (v) Morningstar's existing corporate
infrastructure should allow Suiza Foods to avoid creating a duplicative
infrastructure of its own to manage its rapidly expanding business; (vi) the
additional cash flow from Morningstar's operations should reduce Suiza Foods'
leverage, expand its borrowing capacity and reduce its borrowing costs and (vii)
the issuance of Suiza Common Stock in the Merger should materially increase the
float and liquidity of the Suiza Common Stock.
In reaching its determination to recommend the Stock Issuance to Suiza
Stockholders, the Suiza Board considered, among other things, the following
factors and information:
1. the judgment, advice and analyses of its management with respect to the
strategic rationale behind the Merger and the financial and operational
benefits and challenges of the Merger, based in part on the business,
financial, accounting and legal due diligence performed with respect to
Morningstar;
2. the financial condition, results of operations, business, operations and
assets of each of Suiza Foods and Morningstar and other financial
information;
3. the operational opportunities and challenges of operating Morningstar as a
subsidiary of Suiza Foods and the management challenges associated with
successfully integrating the businesses of two public companies as well as
the many companies that have been acquired by Suiza Foods and Morningstar
over the last several years;
4. the strategic and competitive benefits of combining the two companies in
the respective markets that Suiza Foods and Morningstar serve;
5. current industry, economic and market conditions;
6. the terms and conditions of the Merger Agreement;
7. the DLJ Opinion (see "The Merger--Opinion of Suiza Foods' Financial
Advisor" and Appendix B);
8. historical market prices and trading information with respect to Suiza
Foods and Morningstar;
9. the advice of Suiza Foods' independent accountants concerning the ability
of Suiza Foods and Morningstar to account for the Merger as a pooling of
interests for accounting purposes; and
10. the advice of Suiza Foods' counsel that the Merger should be treated as a
tax-free reorganization for federal income tax purposes.
The foregoing discussion of the factors and information considered by the
Suiza Board is not intended to be exhaustive. In view of the variety of factors
and information considered by the Suiza Board in connection with its evaluation
of the Merger, the Suiza Board did not find it practicable to assign, and did
not assign, relative weights to the specific factors and information considered
in reaching its conclusion that the Merger is in the best interests of Suiza
Foods and the Suiza Stockholders or its recommendation that the Suiza
Stockholders vote "FOR" the Stock Issuance. In addition, individual members of
the Suiza Board may have given or assigned different weight to the factors and
information listed above as well as any other factors and information considered
in reaching their respective decisions. There can be no assurance that the
expected benefits of the Merger will be achieved. See "Risk Factors--Risks
Associated with Acquisition Strategy" and "--Expected Benefits of the Merger May
Not Be Achieved."
THE SUIZA BOARD UNANIMOUSLY RECOMMENDS THAT THE SUIZA STOCKHOLDERS VOTE
"FOR" APPROVAL OF THE STOCK ISSUANCE.
38
<PAGE>
MORNINGSTAR. The Morningstar Board, based upon, among other things, the
factors listed below concluded that the Merger is fair to, and in the best
interests of, Morningstar and the Morningstar Stockholders, unanimously approved
the Merger, the Merger Agreement and the transactions contemplated thereby, and
resolved to recommend that the Morningstar Stockholders approve the Morningstar
Proposal. It should be noted that two members of the Morningstar Board were
unable to attend the meetings of the Morningstar Board at which the Merger
Agreement was discussed. Accordingly, all references in this Joint Proxy
Statement/Prospectus to the unanimous approval or recommendation of the
Morningstar Board with respect to the Merger, the Merger Agreement and the
transactions contemplated thereby shall mean that all members of the Morningstar
Board other than the two absent members concurred in such approval or
recommendation.
In determining to approve the Merger Agreement and to recommend that the
Morningstar Stockholders approve the Morningstar Proposal, the Morningstar Board
based its opinion as to the transactions contemplated in the Merger Agreement
upon many different factors, including the following:
(i) the judgment, advice and analyses of its management with respect to the
strategic rationale behind the Merger and the financial and operational
benefits and challenges of the Merger, based in part on the business,
financial, accounting and legal due diligence performed with respect to
Suiza Foods;
(ii) current industry, economic, and market conditions;
(iii) the financial condition, results of operations and cash flows of
Morningstar and Suiza Foods on a historical basis and other financial
information;
(iv) the Goldman Sachs Opinion, to the effect that, as of the date of such
opinion the Exchange Ratio pursuant to the Merger Agreement was fair from
a financial point of view to the holders of Morningstar Common Stock. See
"The Merger--Opinion of Morningstar's Financial Advisor" and Appendix C;
(v) the historical market prices and trading information in respect of
Morningstar Common Stock and Suiza Common Stock;
(vi) the terms and conditions of the Merger Agreement, including, without
limitation, the requirement of Morningstar Stockholder approval and the
fees that would be payable upon termination under certain circumstances;
and
(vii) the ability to consummate the Merger as a pooling-of-interests under
generally accepted accounting principles and as a tax-free reorganization
under Section 368(a) of the Code.
The Morningstar Board believes the Merger offers Morningstar Stockholders an
opportunity to participate in an entity that, following the Merger, will have a
greater financial flexibility, better opportunities for growth and better
financial outlook than Morningstar would have if it were to continue on a stand-
alone basis. There can be no assurances, however, that the expected benefits of
the Merger will be realized. See "Risk Factors--Risks Associated with
Acquisition Strategy" and "--Expected Benefits of the Merger May Not Be
Achieved."
The foregoing discussion of the factors and information considered by the
Morningstar Board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the Merger, the
Morningstar Board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination, and individual directors may have given differing weights to
different factors.
THE MORNINGSTAR BOARD UNANIMOUSLY RECOMMENDS THAT THE MORNINGSTAR
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER, THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
39
<PAGE>
OPINION OF SUIZA FOODS' FINANCIAL ADVISOR
Suiza Foods retained DLJ in connection with the Merger based upon DLJ's
qualifications, expertise and reputation, including the fact that DLJ, as part
of its investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
THE FULL TEXT OF THE DLJ OPINION IS SET FORTH AS APPENDIX B TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. SUIZA
STOCKHOLDERS SHOULD READ THE DLJ OPINION CAREFULLY IN ITS ENTIRETY FOR
INFORMATION CONCERNING THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS
CONSIDERED AND LIMITS OF THE REVIEW BY DLJ.
The DLJ Opinion was prepared for the Suiza Board and addresses only the
fairness of the Exchange Ratio to the Suiza Stockholders from a financial point
of view and does not constitute a recommendation to any Suiza Stockholder as to
how such stockholder should vote at the Suiza Special Meeting. The DLJ Opinion
does not constitute an opinion as to the price at which Suiza Common Stock will
actually trade at any time. The type and amount of consideration was determined
in arm's length negotiations between Suiza Foods and Morningstar. No
restrictions or limitations were imposed upon DLJ with respect to the
investigations made or procedures followed by DLJ in rendering its opinion.
In arriving at the DLJ Opinion, DLJ reviewed a draft of the Merger
Agreement, as well as financial and other information that was publicly
available or furnished to it by Suiza Foods and Morningstar, including
information provided during discussions with their respective managements.
Included in the information provided to DLJ were various financial projections
for Suiza Foods and Morningstar for various time periods. In addition, DLJ
compared certain financial and securities data of Suiza Foods and Morningstar
with that of various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of the
Morningstar Common Stock and Suiza Common Stock, reviewed prices and premiums
paid in certain other business combinations and conducted such other financial
studies, analyses and investigations as DLJ deemed appropriate for purposes of
rendering its opinions.
In rendering its opinion, DLJ relied upon, without independent investigation
and assumed the accuracy and completeness of, all of the financial and other
information that was available to it from public sources or that was provided to
it by Suiza Foods and Morningstar or their respective representatives. In
particular, DLJ relied upon the estimates of the management of Suiza Foods of
the operating synergies (the "Synergies") achievable as a result of the Merger
and upon its discussions of the Synergies with the managements of Suiza Foods
and Morningstar. DLJ also assumed that the financial projections regarding Suiza
Foods and Morningstar supplied to DLJ were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
managements of Suiza Foods and Morningstar as to the future operating and
financial performance of Suiza Foods and Morningstar, respectively. DLJ did not
assume any responsibility for making any independent evaluation of any assets or
liabilities, or for making any independent verification of any of the
information that it reviewed.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on information made available to DLJ as
of, the date of the DLJ Opinion. DLJ does not have any obligation to update,
revise or reaffirm the DLJ Opinion.
The following is a summary of the material analyses presented by DLJ to the
Suiza Board at its September 28, 1997 meeting. All analyses discussed below,
unless otherwise indicated, (i) exclude the Synergies estimated by Suiza Foods
management and (ii) assume the Exchange Ratio is calculated using a Suiza Common
Stock price of $53.94, based on the closing price on September 26, 1997.
40
<PAGE>
COMMON STOCK PERFORMANCE ANALYSES. DLJ's analysis of the performance of
Suiza Common Stock consisted of an historical analysis of closing prices and
trading volumes for the period from September 26, 1996 through September 26,
1997. During this time period, Suiza Common Stock outperformed the S&P 500 and a
comparable company index comprised of Dean Foods Co., Michael Foods, Inc.,
Dreyer's Grand Ice Cream, Inc., Flowers Industries, Inc., Hormel Foods
Corporation, International Multifoods Corporation, Lance, Inc., Riviana Foods,
Inc. and J.M. Smucker Company (the "Comparable Companies"). During the above
period, Suiza Common Stock reached a high of $56.00 per share and a low of
$16.75 per share. On September 26, 1997, the closing price of Suiza Common Stock
was $53.94 per share.
DLJ's analysis of the performance of Morningstar Common Stock consisted of
an historical analysis of closing prices and trading volumes for the period from
September 26, 1996 through September 26, 1997. During this time period,
Morningstar Common Stock outperformed the S&P 500 and a comparable company index
comprised of the Comparable Companies. During the above period, Morningstar
Common Stock reached a high of $41.50 per share and a low of $11.25 per share.
On September 26, 1997, the closing price of Morningstar Common Stock was $40.00
per share.
COMPARABLE COMPANY ANALYSIS. To provide contextual data and comparative
market information, DLJ analyzed the operating performance of Morningstar
relative to the Comparable Companies. Historical financial information used in
connection with the ratios provided below with respect to the Comparable
Companies is as of the most recent financial statements publicly available for
each company as of September 26, 1997. DLJ also analyzed pro forma financial
information for Morningstar giving effect to the acquisition of Presto which was
completed on December 3, 1996.
DLJ performed a valuation analysis of Morningstar by applying certain market
trading statistics for the Comparable Companies to Morningstar's historical and
estimated financial results. DLJ examined certain publicly available financial
data of the Comparable Companies, including enterprise value (defined as market
value of common equity plus book value of total debt and preferred stock less
cash) as a multiple of: (a) latest 12 months ("LTM") revenues, earnings before
interest, taxes, depreciation and amortization ("EBITDA") and earnings before
interest and taxes ("EBIT") and (b) price to earnings ratios based on: (x) LTM
earnings per share ("EPS"); and (y) estimated calendar year 1997 EPS and
estimated calendar year 1998 EPS. Based on these valuation multiples for the
Comparable Companies, DLJ derived a summary valuation range for Morningstar
Common Stock of $31.18 to $46.05 per share. Calendar year 1997 and 1998 EPS
estimates for the Comparable Companies were based on estimates provided by First
Call Research Direct. EPS calendar year 1997 and 1998 estimates for Morningstar
were based on estimates developed by Morningstar.
No company utilized in the comparable company analysis is identical to
Morningstar. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of the Comparable Companies and
Morningstar and other factors that could affect the public trading value of the
Comparable Companies. Mathematical analysis such as determining the median is
not in itself a meaningful method of using comparable company data.
COMPARABLE TRANSACTION ANALYSIS. DLJ also performed an analysis of the
implied purchase price and adjusted transaction value multiples of selected
merger and acquisition transactions (the "Comparable Transactions") in the dairy
and broader food industry. Multiples reviewed in the Comparable Transactions
consisted of (i) enterprise value to (where available) LTM revenues, LTM EBITDA,
LTM EBIT, and (ii) equity value of the offer to (where available) LTM net
income. The Comparable Transactions were comprised of eight transactions
announced during the period 1991 to 1997. DLJ noted that the implied multiples
of enterprise value and equity value, as the case may be, for these transactions
were in (i) a range of 0.3x to 1.0x (with a median of 0.4x) LTM revenues; (ii) a
range of 6.6x to 10.5x (with a median of 8.8x) LTM EBITDA; (iii) a range of 8.3x
to 30.9x (with a median of 15.0x) LTM EBIT; and (iv) a range of 14.0x to 27.8x
(with a median of 19.5x) LTM net income. Based on the multiples paid in the
Comparable
41
<PAGE>
Transactions discussed above, DLJ derived a summary valuation range for
Morningstar Common Stock of $29.16 to $42.86 per share. LTM pro forma revenue,
EBITDA, EBIT and net income for Morningstar were based on information provided
by Morningstar.
No transaction utilized in the comparable transaction analysis is identical
to the Merger. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of Morningstar and other factors that
could affect the acquisition value of the companies to which it is being
compared. Mathematical analysis such as determining the average is not itself a
meaningful method of using comparable transaction data.
PREMIUM ANALYSIS. DLJ derived an acquisition valuation for Morningstar
based on premiums offered in stock for stock merger and acquisition transactions
ranging from $700 million to $1.0 billion in size and announced between January
1994 and September 1997. DLJ's analysis indicated that, for the transactions
reviewed, the median premiums offered to the market price of the acquired
company one day, one week and one month prior to announcement were 20.6%, 23.3%
and 34.4%, respectively, and the mean premiums were 25.7%, 30.9% and 40.9%,
respectively. Applying the above premiums to Morningstar's closing stock price
one day, one week and one month prior to September 25, 1997 implies an
acquisition valuation range of approximately $42.10 to $53.84 per share of
Morningstar Common Stock. This analysis did not take into account differing
market and other conditions occurring during the January 1994 to September 1997
period during which these transactions occurred, and no further material
assessments were made by DLJ in respect of such analysis.
DISCOUNTED CASH FLOW ANALYSIS. In addition, DLJ performed a discounted cash
flow ("DCF") analysis for the five-year period commencing January 1, 1998 and
ending December 31, 2002 based on the stand-alone unlevered free cash flows of
Morningstar, without giving effect to the Synergies. Unlevered free cash flows
were calculated as the after-tax operating earnings of Morningstar, plus
depreciation and amortization, plus (or minus) net changes in working capital,
minus projected capital expenditures. DLJ calculated terminal values by applying
a range of estimated EBITDA multiples of 8.0x to 10.0x to the projected EBITDA
of Morningstar in 2002. The unlevered free cash flows and terminal values were
then discounted to the present using a range of discount rates of 9.0% to 11.0%
representing an estimated range of the weighted average cost of capital of
Morningstar. Based on this analysis, DLJ calculated per share equity values of
Morningstar ranging from $40.74 to $55.82.
EPS IMPACT ANALYSIS. DLJ also analyzed the pro forma effects on the
projected EPS of Suiza Foods resulting from the Merger, including, without
independent verification, the Synergies projected by the management of Suiza
Foods, for each of the years ending December 31, 1998, 1999, 2000 and 2001 and
assuming an exchange ratio of 0.85. This analysis was based on a number of
assumptions, including, among other things, estimated amounts and timing of the
Synergies and the projected financial performance of Suiza Foods and
Morningstar. The analysis indicated that the Merger, accounted for as a
pooling-of-interests transaction, with the benefit of the Synergies, would be
accretive to Suiza Foods' stand-alone EPS estimates in 1998, 1999, 2000 and
2001.
RELATIVE CONTRIBUTION ANALYSIS. DLJ analyzed the relative contributions of
Suiza Foods and Morningstar to the revenues, EBITDA, EBIT, pre-tax income and
net income of the pro forma combined entity for the projected calendar years
1997 and 1998, excluding Synergies and transaction adjustments. Based on the
projected financial information for the calendar year 1997, Morningstar's
revenues, EBITDA, EBIT, pre-tax income and net income would represent 31.9%,
40.7%, 42.8%, 46.3% and 42.6%, respectively, of the pro forma combined entity,
assuming the transaction occurred at January 1, 1997. Based on the projected
financial information for the calendar year 1998, Morningstar's net sales,
EBITDA, EBIT, pre-tax income and net income would represent 29.0%, 36.5%, 38.9%,
45.8% and 42.6%, respectively, of the pro forma combined entity. The shares of
Suiza Common Stock to be issued to the holders of Morningstar Common Stock on a
fully diluted basis would represent approximately 42.4% of the outstanding
shares of Suiza Common Stock after giving effect to the Merger at an exchange
ratio of 0.85.
42
<PAGE>
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ, but describes, in summary form, the principal
elements of the analyses contained in the materials presented by DLJ to the
Suiza Board in connection with DLJ rendering its opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by DLJ was
carried out in order to provide a different perspective on the transaction and
add to the total mix of information available. DLJ did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, DLJ considered the results of each analysis in light of
each other and ultimately reached its opinion based on the results of the
analyses taken as a whole. DLJ did not place particular reliance or weight on
any individual factor, but instead concluded that its analyses, taken as a
whole, supported its determination. Accordingly, notwithstanding the separate
factors summarized above, DLJ believes that its analyses must be considered as a
whole and that selecting portions of its analysis and the factors considered by
it, without considering all analyses and factors, could create an incomplete or
misleading view of the evaluation process underlying its opinion. In performing
its analyses, DLJ made numerous assumptions with respect to industry
performance, business and economic conditions and other matters. The analyses
performed by DLJ are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses.
Pursuant to a letter agreement between Suiza Foods and DLJ dated September
10, 1997 (the "DLJ Engagement Letter"), DLJ is entitled to a fee of $500,000 in
connection with the delivery of the DLJ Opinion, irrespective of the conclusion
reached therein, and is entitled to an additional fee of $2,250,000 upon
consummation of the Merger. In addition, Suiza Foods has agreed to reimburse DLJ
for all out-of-pocket expenses (including the reasonable fees and expenses of
its counsel) incurred by DLJ in connection with its engagement thereunder,
whether or not the Merger is consummated, and to indemnify DLJ for certain
liabilities and expenses arising out of the Merger or the transactions in
connection therewith, including liabilities under federal securities laws. The
terms of the fee arrangement with DLJ, which DLJ and Suiza Foods believe are
customary in transactions of this nature, were negotiated at arm's length
between Suiza Foods and DLJ and the Suiza Board was aware of such arrangement.
DLJ 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 the securities
of Morningstar and/or Suiza Foods for its own account and for the account of
customers. In addition, DLJ has performed investment banking services for
Morningstar and its affiliates, including Hicks Muse, in the past and has
received usual and customary compensation for such services.
OPINION OF MORNINGSTAR'S FINANCIAL ADVISOR
On September 28, 1997, Goldman Sachs delivered its oral opinion, which was
subsequently confirmed in writing, to the Morningstar Board to the effect that,
as of the date of such opinion, the Exchange Ratio pursuant to the Merger
Agreement was fair from a financial point of view to the holders of shares of
Morningstar Common Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED AS OF SEPTEMBER
28, 1997, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX
C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. SHAREHOLDERS OF MORNINGSTAR ARE URGED TO, AND SHOULD, READ SUCH
OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(i) the Merger Agreement; (ii) Annual Reports to Stockholders and Annual Reports
on Form 10-K for the five years ended December 31, 1996 of Morningstar and for
the year ended December 31, 1996 of Suiza Foods; (iii) the initial public
offering Prospectus of Suiza Foods, dated April 17, 1996; (iv) certain interim
reports
43
<PAGE>
to stockholders and Quarterly Reports on Form 10-Q of Morningstar and Suiza
Foods; (v) certain other communications from Morningstar and Suiza Foods to
their respective stockholders; (vi) certain internal financial analyses and
forecasts for Morningstar and Suiza Foods that were prepared by their respective
managements. Goldman Sachs held discussions with members of the senior
managements of Morningstar and Suiza Foods regarding the strategic rationale
for, and the potential benefits of, the transaction contemplated by the Merger
Agreement and the past and current business operations, financial condition, and
future prospects of their respective companies. In addition, Goldman Sachs
reviewed the reported price and trading activity for the Morningstar Common
Stock and Suiza Common Stock, compared certain financial and stock market
information for Morningstar and Suiza Foods with similar information for certain
other companies the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the dairy and branded
foods industries specifically and in other industries generally and performed
such other studies and analyses as it considered appropriate. Goldman Sachs
relied upon the accuracy and completeness of all of the financial and other
information reviewed by it and Goldman Sachs assumed such accuracy and
completeness for purposes of rendering its opinion. In addition, Goldman Sachs
did not make any independent evaluation or appraisal of the assets and
liabilities of Morningstar or Suiza Foods or any of their subsidiaries and
Goldman Sachs was not furnished with any such evaluation or appraisal. Goldman
Sachs assumed, with Morningstar's consent, that the transaction contemplated by
the Merger Agreement will be accounted for as a pooling of interests under GAAP.
Goldman Sachs' opinion was provided for the information and assistance of the
Board of Directors of Morningstar in connection with its consideration of the
transaction contemplated by the Merger Agreement, and such opinion does not
constitute a recommendation as to how any holder of shares of Morningstar Common
Stock should vote with respect to such transaction.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its opinion to the Morningstar Board
on September 28, 1997.
(i) HISTORICAL STOCK TRADING ANALYSIS.
(A) MORNINGSTAR. Goldman Sachs reviewed the daily and monthly
historical price and trading volume history for Morningstar Common Stock for
the periods from September 26, 1996 to September 26, 1997 and from September
30, 1992 to September 26, 1997, respectively. Goldman Sachs also reviewed
the volume of shares of Morningstar Common Stock traded at a range of prices
for the three month, six month, one year and two year periods ended
September 26, 1997. Such review indicated weighted average trading prices of
shares of Morningstar Common Stock of $33.45, $29.90, $24.05 and $19.74,
respectively, for the periods reviewed.
(B) SUIZA FOODS. Goldman Sachs reviewed the daily historical stock
price and trading volume history for Suiza Common Stock for the period from
April 17, 1996 (the date of Suiza Foods' initial public offering) to
September 26, 1997. Goldman Sachs also reviewed the volume of shares of
Suiza Common Stock traded at a range of prices for the three month, six
month and one year periods ended September 26, 1997, and for the period from
April 17, 1996 to September 26, 1997. Such review indicated weighted average
trading prices of shares of Suiza Common Stock of $42.46, $36.81, $31.19 and
$28.15, respectively, for the periods reviewed.
(ii) INDEXED STOCK PRICE HISTORIES. Goldman Sachs reviewed the daily
indexed historical prices for shares of Morningstar Common Stock during the
period from April 17, 1996 to September 26, 1997, as compared to Suiza Common
Stock, the S&P 500 and the S&P Foods index (the "S&P Foods"). The S&P Foods is
comprised of the following companies: Archer Daniels Midland, Campbell, Conagra,
CPC International, General Mills, H.J. Heinz, Hershey, Kellogg, Quaker Oats,
Ralston Purina, Sara Lee, Unilever and Wrigley.
(iii) SELECTED COMPANIES ANALYSIS. Goldman Sachs reviewed and compared
certain financial information, ratios and public market multiples relating to
Morningstar and Suiza Foods to corresponding financial information, ratios and
public market multiples for (a) Dean Foods, (b) certain small- and mid-
44
<PAGE>
capitalization food companies comprised of Flowers Industries, Hormel,
International Multifoods, Lance, Riviana Foods and J.M. Smucker (the "Small/Mid
Cap Food Companies"), (c) certain large-capitalization food companies comprised
of Campbell, CPC, General Mills, H.J. Heinz, Hershey, Kellogg and Nabisco (the
"Large Cap Food Companies" and, together with the Small/Mid Cap Food Companies
and Dean Foods, the "Selected Companies"), and (d) in certain circumstances, the
S&P 500 and the S&P Foods. The multiples for Morningstar and Suiza Foods were
calculated using a price of $40.00 per share of Morningstar Common Stock and a
price of $53.94 per share of Suiza Common Stock, the closing prices of such
shares on Nasdaq and the NYSE, respectively, on September 26, 1997. Goldman
Sachs reviewed the following: (i) enterprise value as a multiple of last 12
month ("LTM") (x) sales, (y) earnings before interest, taxes, depreciation and
amortization ("EBITDA") and (z) earnings before interest and taxes ("EBIT");
(ii) price-to-earnings ("P/E") multiples based on 1997 and 1998 Institutional
Brokers Estimate System ("IBES") earnings estimates as of September 26, 1997;
(iii) IBES estimated five year earnings growth rates; and (iv) the P/E multiple
based on 1998 IBES earnings estimates, as a multiple of the IBES estimated five
year earnings growth rate (the "1998 P/E to Five Year Earnings Growth
Multiple").
Goldman Sachs' analyses indicated that (a) enterprise value as a multiple of
LTM sales was .70x for Dean Foods, and a median of 1.01x for the Small/Mid Cap
Food Companies, 2.32x for the Large Cap Food Companies and 1.55x for the
Selected Companies, as compared with 1.71x for Morningstar and 2.62x for Suiza
Foods, (b) enterprise value as a multiple of LTM EBITDA was 8.5x for Dean Foods,
and a median of 10.5x for the Small/Mid Cap Food Companies, 13.0x for the Large
Cap Food Companies and 10.9x for the Selected Companies, as compared with 16.3x
for Morningstar and 26.8x for Suiza Foods, (c) enterprise value as a multiple of
LTM EBIT was 12.4x for Dean Foods, and a median of 16.8x for the Small/Mid Cap
Food Companies, 16.5x for the Large Cap Food Companies and 16.4x for the
Selected Companies, as compared with 22.0x for Morningstar and 38.3x for Suiza
Foods, (d) the P/E multiple based on 1997 IBES earnings estimates was 19.7x for
Dean Foods, a median of 22.5x for the Small/Mid Cap Food Companies, 25.1x for
the Large Cap Food Companies, 22.7x for the Selected Companies, and 22.2x for
the S&P 500 and 23.5x for the S&P Foods, as compared with 27.8x for Morningstar
and 27.2x for Suiza Foods, (e) the
P/E multiple based on 1998 IBES earnings estimates was 17.4x for Dean Foods, a
median of 19.7x for the Small/Mid Cap Companies, 22.1x for the Large Cap Food
Companies, 19.7x for the Selected Companies, and 20.8x for the S&P 500 and 20.7x
for the S&P Foods, as compared with 22.6x for Morningstar and 21.0x for Suiza
Foods, (f) the IBES estimated five year earnings growth rate was 12.0% for Dean
Foods, and a median of 10.5% for the Small/Mid Cap Food Companies, 11.0% for the
Large Cap Food Companies and 11.0% for the Selected Companies, as compared with
17.5% for Morningstar and 23.0% for Suiza Foods, and (g) the 1998 P/E to Five
Year Earnings Growth Multiple was 1.4x for Dean Foods, and a median of 1.7x for
the Small Cap Food Companies, 1.9x for the Large Cap Food Companies and 1.8x for
the Selected Companies, as compared with 1.3x for Morningstar and .9x for Suiza
Foods.
(iv) DISCOUNTED CASH FLOW ANALYSIS--MORNINGSTAR. Goldman Sachs performed
discounted cash flow analyses based on projected unlevered free cash flows from
1998-2002. Goldman Sachs assumed that EBITDA terminal multiples were applied to
trailing 2002 EBITDA and that cash flows were discounted to December 31, 1997 to
arrive at a net present value per share of Morningstar Common Stock.
(A) OPERATING SENSITIVITIES. Goldman Sachs calculated net present
values per share of Morningstar Common Stock based on a range of assumed
average operating margins and average sales growth rates, in each case for
the years 1998-2002 (based on discussions with the management of
Morningstar), assuming a 12.0% discount rate and 9.0x EBITDA terminal
multiple. Goldman Sachs applied such operating margin and sales growth rate
assumptions to a 1997 base case provided by Morningstar management. Such
analysis indicated a range of net present values per share of Morningstar
Common Stock of $24.73 to $58.61.
(B) DISCOUNT RATE AND TERMINAL MULTIPLE SENSITIVITIES. Goldman Sachs
calculated net present values per share of Morningstar Common Stock based on
discount rates of 10% to 15% and EBITDA terminal multiples of 7.0x to 11.0x,
assuming a 1997 base case provided by Morningstar management
45
<PAGE>
and, for the years 1998-2002, an assumed average sales growth rate and
average operating margin (based on discussions with the management of
Morningstar). Such analysis indicated a range of net present values per
share of Morningstar Common Stock of $28.34 to $54.06.
(v) DISCOUNTED CASH FLOW ANALYSIS--SUIZA FOODS. Goldman Sachs performed a
discounted cash flow analysis based on projected unlevered free cash flows from
1998-2006, excluding the impact of any potential acquisitions during such
period. Goldman Sachs assumed that EBITDA terminal multiples were applied to
trailing 2006 EBITDA and that cash flows were discounted to December 31, 1997 to
arrive at a net present value per share of Suiza Common Stock. Goldman Sachs'
analysis was based on various projections prepared by Suiza Foods' management,
which included acquisitions announced through September 26, 1997. Goldman Sachs
calculated net present values per share of Suiza Common Stock based on discount
rates of 10% to 14% and EBITDA terminal multiples of 7.0x to 11.0x. Such
analysis indicated a range of net present values per share of Suiza Common Stock
of $31.22 to $74.40.
(vi) SELECTED TRANSACTIONS ANALYSIS. Goldman Sachs analyzed certain
information relating to 16 selected transactions in the dairy (the "Selected
Dairy Transactions") and 120 selected transactions in the branded foods (the
"Selected Branded Foods Transactions" and, together with the Selected Dairy
Transactions, the "Selected Transactions") industries consummated or announced
since 1990, in the case of the Selected Dairy Transactions, and since 1988, in
the case of the Selected Branded Foods Transactions. Such analyses indicated
that for the Selected Transactions, with certain data points not being publicly
available, levered consideration as a multiple of LTM (a) sales was a median of
.46x for the Dairy Transactions with a mean of .52x, and a median of 1.10x for
the Branded Foods Transactions with a mean of 1.22x, (b) EBITDA was a median of
7.5x for the Dairy Transactions with a mean of 7.8x, and a median of 8.9x for
the Branded Foods Transactions with a mean of 10.1x, and (c) EBIT was a median
of 12.5x for the Dairy Transactions with a mean of 11.6x, and a median of 12.1x
for the Branded Foods Transactions with a mean of 15.8x.
(vii) REVIEW OF IMPLIED TRANSACTION PREMIUMS AND MULTIPLES. Goldman Sachs
reviewed certain implied transaction premiums and multiples, based on the
Exchange Ratio, at a range of prices per share of Suiza Common Stock of $45.00
to $62.50. Goldman Sachs noted that based on a price per share of Suiza Common
Stock of $53.94 (the closing price on September 26, 1997), and a corresponding
implied value of $45.85 per share of Morningstar Common Stock (applying the
Exchange Ratio), the implied premiums per share of Morningstar Common Stock
resulting from the Merger were 14.6%, 55.4%, 37.1% and 57.0%, as compared with
the closing prices of Morningstar Common Stock on September 26, 1997 and August
26, 1997, and the weighted average prices for the three-month and six-months
periods ended September 26, 1997, respectively. Goldman Sachs also noted that,
based on a price per share of Suiza Common Stock of $53.94, and a corresponding
implied value of $45.85 per share of Morningstar Common Stock (applying the
Exchange Ratio), the Merger implies multiples of LTM sales, EBITDA and EBIT of
1.92x, 18.3x and 24.7x, respectively.
(viii) CONTRIBUTION ANALYSIS. Goldman Sachs reviewed certain historical
and estimated future operating and financial information (including, among other
things, sales, EBITDA, EBIT, net income, assets, shareholders' equity, levered
market capitalization and equity market capitalization) for Morningstar, Suiza
Foods and the pro forma combined entity resulting from the Merger, based on
publicly available information and various estimates provided to Goldman Sachs
by management of each of Morningstar and Suiza Foods. Goldman Sachs also
analyzed the relative income statement and balance sheet contribution of
Morningstar and Suiza Foods to the combined entity on a pro forma basis. Such
analysis indicated the following contribution by Morningstar to the combined
entity for the following figures and periods: (a) sales (management estimates):
31.7% and 29.0% in 1997 and 1998, respectively; (b) EBITDA (management
estimates): 39.8% and 36.5% in 1997 and 1998, respectively; (c) EBIT (management
estimates): 41.5% and 38.9% in 1997 and 1998, respectively; (d) net income
(management estimates): 42.1% and 42.6% in 1997 and 1998, respectively; (e) net
income (IBES estimates): 39.3% and 37.3% in 1997 and 1998, respectively; (f)
total assets based on balance sheets as of June 30, 1997: 26.4%;
46
<PAGE>
(g) shareholders' equity based on balance sheets as of June 30, 1997: 29.9%; (h)
levered market capitalization as of September 26, 1997: 33.9%; and (i) equity
market capitalization as of September 26, 1997: 38.9%. Goldman Sachs also
calculated that based on the Exchange Ratio Morningstar stockholders would own
42.4% of the fully diluted outstanding shares of the combined entity after the
Merger.
(ix) HISTORICAL EXCHANGE RATIO ANALYSIS. Goldman Sachs analyzed the
implied historical exchange ratios of Morningstar Common Stock and Suiza Common
Stock (calculated by dividing the price, or weighted average price, of
Morningstar Common Stock by the price, or weighted average price, of Suiza
Common Stock) for the following periods: closing stock prices on September 26,
1997, and weighted average prices for the one week, two weeks, one month, two
months, three months, six months and one year prior to September 26, 1997. Such
analysis indicated implied exchange ratios of .74x, .76x, .78x, .79x, .79x,
.79x, .79x, and .77x, respectively, for the periods reviewed.
(x) PRO FORMA MERGER ANALYSIS. Goldman Sachs prepared pro forma analyses
of the financial impact of the Merger on an earnings-per-share ("EPS") basis to
holders of Suiza Common Stock, based on a price per share of Suiza Common Stock
of $53.94 and the Exchange Ratio, and assuming a range of pre-tax synergies
resulting from the Merger of $0.0 to $16.0 million. Goldman Sachs noted that
based on 1998 (a) earnings estimates provided to Goldman Sachs by the
managements of Suiza Foods and Morningstar, the EPS impact per share of Suiza
Common Stock ranged from 0.1% dilution to 9.6% accretion, and (b) IBES median
EPS estimates the EPS impact per share of Suiza Common Stock ranged from 8.5%
dilution to 2.5% accretion.
(xi) IMPLIED MARKET TRADING PRICES AND IMPLIED PRICES TO HOLDERS OF
MORNINGSTAR COMMON STOCK. Goldman Sachs analyzed implied per share market
trading prices for the common stock of the combined company and implied prices
to holders of Morningstar Common Stock. Goldman Sachs multiplied a range of
potential 1998 P/E multiples for the common stock of the combined company by
estimated pro forma 1998 EPS for the combined company (a) with and without an
assumption of $14.1 million of net synergies and (b) based on 1998 EPS estimates
provided to Goldman Sachs by the managements of Suiza Foods and Morningstar and
based on 1998 IBES median EPS estimates. Based on such assumptions, Goldman
Sachs noted that implied prices ranged from $39.97 to $76.01. Such range of
implied prices indicated a range of values per share of Morningstar Common Stock
(applying the Exchange Ratio) of $33.97 to $64.61.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
Morningstar or Suiza Foods or the contemplated transaction. The analyses were
prepared solely for purposes of Goldman Sachs providing its opinion to the
Morningstar Board as to the fairness of the Exchange Ratio 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. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Morningstar, Suiza Foods, Goldman Sachs or
any other person assumes responsibility if future results are materially
different from those forecast.
As described above, Goldman Sachs' opinion to the Morningstar Board was one
of many factors taken into consideration by the Morningstar Board in making its
determination to approve the Merger Agreement. The foregoing summary does not
purport to be a complete description of the analyses performed by Goldman Sachs
and is qualified by reference to the written opinion of Goldman Sachs set forth
in Appendix C hereto.
47
<PAGE>
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. Goldman Sachs is
familiar with Morningstar, having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Merger Agreement. Morningstar 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
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
Morningstar and/or Suiza Foods for its own account and for the accounts of
customers.
Pursuant to a letter agreement dated May 22, 1997 (the "Engagement Letter"),
Morningstar engaged Goldman Sachs to act as its financial advisor in connection
with the Merger. Pursuant to the terms of the Engagement Letter, Morningstar has
agreed to pay Goldman Sachs, upon consummation of the Merger, a transaction fee
of .51% of the levered consideration paid in the Merger. Morningstar has agreed
to reimburse Goldman Sachs for its reasonable out-of-pocket expenses, including
attorney's fees, and to indemnify Goldman Sachs against certain liabilities,
including certain liabilities under the federal securities laws.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "pooling of interests" in
accordance with generally accepted accounting principles. Under this accounting
method, the historical financial information of Suiza Foods and Morningstar will
be restated to reflect the combined financial position and operations of both
companies. The combined financial position and operations may be adjusted to
conform the accounting practices of the companies. Pursuant to the Merger
Agreement, each of Suiza Foods and Morningstar has agreed to use its
commercially reasonable efforts to cause the Merger to qualify for "pooling of
interests" accounting treatment. Suiza Foods has agreed to use commercially
reasonable efforts to obtain a letter from Deloitte & Touche LLP and Morningstar
has agreed to use commercially reasonable efforts to obtain a letter from Arthur
Andersen LLP, in each case, stating that the Merger will qualify for "pooling of
interests" accounting treatment if consummated in accordance with the Merger
Agreement. Receipt of such written opinions is a condition to the consummation
of the Merger. However, such opinions will not be binding on the Commission.
RESTRICTIONS ON RESALE BY AFFILIATES
The shares of Suiza Common Stock to be received by Morningstar Stockholders
in connection with the Merger will be registered under the Securities Act and,
except as set forth in this paragraph, may be traded without restriction. The
shares of Suiza Common Stock to be issued in connection with the Merger and
received by persons who are deemed to be "affiliates" (as that term is defined
in Rule 145 under the Securities Act) of Morningstar prior to the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act (or, in the case of such persons who become
affiliates of Suiza Foods, Rule 144 under the Securities Act) or as otherwise
permitted under the Securities Act. Under guidelines published by the
Commission, the sale or other disposition of Suiza Common Stock or Morningstar
Common Stock by an affiliate of either Suiza Foods or Morningstar, as the case
may be, during the period commencing 30 days prior to the Effective Time and
ending upon the publication of financial results that include at least 30 days
of post-Merger combined operations of Suiza Foods and Morningstar (the "Pooling
Period") could preclude pooling of interests accounting treatment of the Merger.
Suiza Foods agreed in the Merger Agreement to use its best efforts to publish,
by public filing or announcement, the results of at least 30 days of post-merger
combined operations of Suiza Foods and Morningstar as soon after the Effective
Time as is commercially practicable and thereby minimize the
48
<PAGE>
duration of the Pooling Period. Each of Morningstar and Suiza Foods agreed in
the Merger Agreement to use its reasonable efforts to deliver or cause to be
delivered written agreements of each such "affiliate" to the effect that such
person will not sell, transfer or otherwise dispose of any shares of Morningstar
Common Stock or Suiza Common Stock, as the case may be, during the Pooling
Period and that such person will not sell, transfer or otherwise dispose of
Suiza Common Stock at any time in violation of the Securities Act or the rules
and regulations promulgated thereunder, including Rule 145.
NEW MORNINGSTAR BOARD AND MANAGEMENT FOLLOWING THE MERGER
If the proposed Merger is approved and consummated, Morningstar Stockholders
will become stockholders of Suiza Foods, which will be under the direction of
the Board of Directors and management of Suiza Foods. The directors of Sub
immediately prior to the Effective Time will be the directors of New
Morningstar, and the officers of Sub immediately prior to the Effective Time
will be the officers of New Morningstar.
BOARD OF DIRECTORS OF SUIZA FOODS FOLLOWING THE MERGER
Following the Merger, the New Suiza Board will consist of 12 members. Two
members of the New Suiza Board will be present members of the Morningstar Board,
and the remainder of the New Suiza Board will be Suiza Foods' current directors.
Information about the two Morningstar Board members selected to serve on the New
Suiza Board is set forth below:
JOHN R. MUSE co-founded Hicks, Muse, Tate & Furst Incorporated in 1989 and
has recently been named Chief Operating Officer. Prior to the formation of Hicks
Muse, Mr. Muse headed the investment/ merchant banking activities of Prudential
Securities for the southwestern region of the United States from 1984 to 1989.
Prior to joining Prudential Securities, Mr. Muse served as senior vice president
and a director of Schneider, Bernet & Hickman, Inc. in Dallas from 1979 to 1983
and was responsible for the company's investment banking activities. Prior to
Schneider, Bernet, he was employed by Bateman, Eichler, Hill Richards in Los
Angeles. Mr. Muse is Chairman of Atrium Companies, Inc. and Hat Brands, Inc. and
serves as a director of Morningstar, Crain Holdings Corp., Ghirardelli Chocolate
Company, Olympus Real Estate Corporation, Arnold Palmer Golf Management Co. and
Sunrise Television Corp.
JIM L. TURNER is the Chairman, President and Chief Executive Officer of Dr
Pepper Bottling Holdings, Inc. and Dr Pepper Bottling Company of Texas, and has
served in such capacities since March 1985. Dr Pepper Bottling Company of Texas
is one of the largest independent companies in the United States. Mr. Turner is
a director of Morningstar and All American Bottling Corporation.
Suiza Foods has also agreed to add a thirteenth member to its Board of Directors
upon completion of the Country Fresh Merger.
GOVERNMENTAL APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until the following steps have been taken: (1)
Premerger Notification and Report Forms have been submitted and certain
information has been furnished to the FTC and the DOJ; and (2) applicable
waiting periods have expired or been terminated.
Suiza Foods and Morningstar agreed, pursuant to the Merger Agreement, to use
their respective best efforts to file or cause to be filed with the FTC and the
DOJ such notifications as are required to be filed under the HSR Act and the
rules and regulations promulgated thereunder, and to respond as promptly as
practicable to any requests for additional information made by either the FTC or
the DOJ. Pursuant to such agreement, on October 21, 1997 Suiza Foods and
Morningstar each filed Premerger Notification and Report Forms with the FTC and
the Antitrust Division. The statutory waiting period under the HSR Act is
scheduled to expire at 11:59 p.m. on November 20, 1997.
At any time before or after the consummation of the Merger and
notwithstanding the expiration or termination of the applicable HSR Act waiting
period, any federal or state antitrust authorities could take action under the
antitrust laws as they deem necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or seeking
divestiture of all or part of the assets
49
<PAGE>
of Suiza Foods or Morningstar. Private parties may also seek to take legal
action under the antitrust laws, if circumstances permit.
If the FTC, the DOJ, or any other federal or state antitrust authority, were
to challenge the Merger, the consummation of the Merger could be postponed
beyond February 28, 1998, in which event either Suiza Foods or Morningstar would
be entitled to terminate the Merger Agreement. See "The Merger
Agreement--Termination."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Morningstar Board with respect to
the Merger, Morningstar Stockholders should be aware that certain officers and
directors of Morningstar have the following interests in the Merger separate
from and in addition to their interests as Morningstar Stockholders generally.
The Morningstar Board was aware of these interests and took them into account in
approving the Merger, the Merger Agreement and the transactions contemplated
thereby.
COMPOSITION OF NEW SUIZA BOARD. Immediately after the Effective Time, Suiza
Foods will take action necessary to create two additional seats on the Suiza
Board and to cause two of the current directors of Morningstar to be elected to
the Suiza Board. See "The Merger--Board of Directors of Suiza Foods Following
the Merger."
STOCK OPTIONS. The Merger Agreement provides that, at the Effective Time,
each outstanding and unexercised Morningstar Option, including those held by
directors and executive officers, will be converted into and become a Substitute
Option to acquire shares of Suiza Common Stock as described under "The Merger
Agreement--Consideration to be Received in the Merger." Pursuant to the terms of
the applicable Morningstar option plans, each of the outstanding and unexercised
Morningstar Options will become fully vested upon the consummation of the
Merger.
The following table sets forth, in respect of the directors and executive
officers of Morningstar, (i) the number of shares of Morningstar Common Stock
subject to the Morningstar Options held by such persons as of October 27, 1997,
(ii) the weighted average per share exercise price of the Morningstar Options
held by such persons and (iii) the aggregate value of the Morningstar Options
(i.e., the aggregate market value of the shares of Morningstar Common Stock
underlying the Morningstar Options less the aggregate exercise price with
respect thereto) held by such persons based upon the $38.50 closing price of
Morningstar Common Stock on October 27, 1997.
<TABLE>
<CAPTION>
NUMBER OF OPTION WEIGHTED AVERAGE AGGREGATE VALUE
OPTION HOLDER SHARES(1) EXERCISE PRICE OF OPTION SHARES
- ----------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
C. Dean Metropolous........................................ 1,750,000 $ 14.94 $ 41,230,000.00
John R. Muse............................................... 25,000 17.90 515,000.00
Charles W. Tate............................................ 25,000 17.90 515,000.00
Jim L. Turner.............................................. 44,531 11.17 1,217,032.23
Ray Caldiero............................................... 16,000 23.00 248,000.00
L. Hollis Jones............................................ 360,000 15.47 8,290,800.00
Darron K. Ash.............................................. 116,000 15.69 2,645,960.00
Joseph B. Armes............................................ 65,000 20.06 1,198,600.00
Michael J. Cramer.......................................... 79,000 19.45 1,504,950.00
All directors and executive officers as a group............ 2,480,531 15.37 57,365,342.23
</TABLE>
- ------------------------
(1) The option shares included in the table underlie Morningstar Options that
are presently exercisable or will become immediately exercisable upon
consummation of the Merger.
RETENTION AND EMPLOYMENT AGREEMENTS. Morningstar is party to executive
retention agreements with each of Messrs. Armes, Ash and Jones that require
Morningstar to provide certain severance benefits in the event any of these
executives is terminated by Morningstar without "cause" (as defined in the
applicable executive retention agreement) or voluntarily terminates his
employment with Morningstar for "good reason" (as defined in the applicable
executive retention agreement) in contemplation of or within
50
<PAGE>
180 days preceding a "change of control" (as defined in the applicable executive
retention agreement) or within three years after a change of control. The Merger
will constitute a change in control for purposes of each of the executive
retention agreements.
The value of the severance benefits to be paid to Mr. Armes (in the event he
is terminated or voluntarily terminates his employment under the circumstances
described above) under his executive retention agreement is estimated to be
approximately $330,000. The value of the severance benefits to be paid to Mr.
Ash (in the event he is terminated or voluntarily terminates his employment
under the circumstances described above) under his executive retention agreement
is estimated to be approximately $330,000. The value of the severance benefits
to be paid to Mr. Jones (in the event he is terminated or voluntarily terminates
his employment under the circumstances described above) under his executive
retention agreement is estimated to be approximately $650,000.
In addition to the foregoing severance benefits, the executive retention
agreements for each of Messrs. Armes and Ash provide for the payment of a
retention bonus in the event that such executive remains employed by Morningstar
on the date of the change of control or is terminated by Morningstar without
cause in contemplation of and within 180 days preceding the change of control.
In each case, the amount of such retention bonus is equal to the executive's
highest annual base salary rate plus an amount equal to the higher of the
executive's target bonus for the fiscal year in which the termination occurs or
the immediately preceding fiscal year. The retention bonuses are payable not
later than three days following a change of control. As a result of the
consummation of the Merger, each of Messrs. Armes and Ash will be entitled to
receive a retention bonus in the amount of $217,500.
Each of the aforementioned executive retention agreements requires that
Morningstar "gross-up" the applicable executive with respect to any federal
taxes payable by such executive as a result of the payment to such executive of
the benefits contemplated by his executive retention agreement and with respect
to any excise taxes that become payable by such executive in respect of his
Morningstar Options.
Morningstar is a party to employment agreements with C. Dean Metropolous and
Michael J. Cramer (respectively, the "Metropolous Employment Agreement" and the
"Cramer Employment Agreement") which require Morningstar to provide certain
severance benefits to such executives. Under the Cramer Employment Agreement,
severance benefits in an amount equal to 1.5 times Mr. Cramer's annual
compensation (including salary, bonuses and allowances) for the last full year
of employment, but in no event less than $200,000 shall be payable by
Morningstar in the event Mr. Cramer is terminated by Morningstar "without cause"
(as defined in the Cramer Employment Agreement) or voluntarily terminates his
employment with Morningstar in the event of a "change in control" (as defined in
the Cramer Employment Agreement). The Merger will constitute a change in control
for purposes of the Cramer Employment Agreement. The value of the severance
benefits to be paid to Mr. Cramer under the Cramer Employment Agreement is
estimated to be approximately $200,000, plus the amount of the tax gross-up
required by such agreement. The severance benefits are payable within seven days
of any termination of Mr. Cramer by Morningstar without cause, or on the closing
date of a change in control.
Under the Metropolous Employment Agreement, severance benefits in an amount
equal to Mr. Metropolous' aggregate compensation (current salary and bonus based
on prior year's payment) for the balance of the then existing three-year term
shall be payable by Morningstar in the event of a "triggering event" (as defined
in the Metropolous Employment Agreement) or Mr. Metropolous terminates his
employment with Morningstar for "good reason" (as defined in the Metropolous
Employment Agreement) or Mr. Metropolous' employment is terminated by
Morningstar for any reason other than for "cause" (as defined in the Metropolous
Employment Agreement) or by Mr. Metropolous' resignation or retirement. The
value of the severance payment to be paid to Mr. Metropolous under the
Metropolous Employment Agreement is estimated to be approximately $2,525,000,
plus the amount of the tax gross-up required by such agreement. The severance
benefits are payable by Morningstar on the 14th day following the termination.
REGISTRATION RIGHTS. Suiza Foods has agreed to grant C. Dean Metropoulos
registration rights for a period of one year following the Effective Time with
respect to the shares of Suiza Common Stock to be
51
<PAGE>
received by Mr. Metropoulos in connection with the Stock Issuance. Such
registration rights will be subject to customary terms and conditions.
FINANCIAL ADVISORY FEES. Two of Morningstar's existing directors, Charles
W. Tate and John R. Muse, are principals of Hicks Muse. Pursuant to a letter
agreement dated June 10, 1997, Morningstar engaged Hicks Muse to provide
financial advisory services in connection with the Merger. Pursuant to the terms
of this letter agreement, Morningstar has agreed to pay Hicks Muse, upon
consummation of the Merger, a transaction fee of .34% of the levered
consideration paid in the Merger. Morningstar has agreed to reimburse Hicks Muse
for its reasonable out-of-pocket expenses, including attorney's fees, and to
indemnify Hicks Muse against certain liabilities, including certain liabilities
under the federal securities laws.
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. Pursuant to the
Merger Agreement, New Morningstar and Suiza Foods are obligated to indemnify,
defend and hold harmless officers, directors and employees of Morningstar and
its subsidiaries who were such at any time prior to the Effective Time from and
against all losses, expenses, claims, damages or liabilities arising out of the
transactions contemplated by the Merger Agreement to the fullest extent
permitted or required under applicable law, and advance expenses to such
indemnified parties subject to a customary reimbursement agreement. All
indemnification rights of such officers, directors and employees which exist
prior to the Effective Time will survive the Merger and New Morningstar will
maintain in effect for not less than three years after the Effective Time, the
current policies of directors' and officers' liability insurance with respect to
matters occurring on or prior to the Effective Time. In addition, the Merger
Agreement provides that New Morningstar or Suiza Foods may provide substitute
policies of at least the same coverage, provided that New Morningstar (or Suiza
Foods, if Suiza Foods provides substitute policies) will be required to obtain
only as much coverage as can be obtained by paying an annual premium not in
excess of 200% of the current annual premium paid by Morningstar for its
existing coverage. See "The Merger Agreement--Indemnification."
ABSENCE OF APPRAISAL RIGHTS
Under the DGCL, the Suiza Stockholders are not entitled to appraisal rights
with respect to the Stock Issuance and the Morningstar Stockholders are not
entitled to appraisal rights with respect to the Merger.
STOCK EXCHANGE LISTING
It is a condition to the Merger that the shares of Suiza Common Stock to be
issued by Suiza Foods in connection with the Merger will have been authorized
for listing on the NYSE, subject only to official notice of issuance. Upon
completion of the Merger, the Morningstar Common Stock will cease to be
authorized for trading on Nasdaq.
TREATMENT OF STOCK CERTIFICATES
After the Effective Time, each certificate previously representing shares of
Morningstar Common Stock will automatically represent, with no further action by
the holder thereof, the right to receive 0.85 shares of Suiza Common Stock for
each share of Morningstar Common Stock represented thereby. Harris Trust &
Savings Bank is the transfer agent and registrar (the "Exchange Agent") for the
Suiza Common Stock. As soon as practicable after the Effective Time, the
Exchange Agent will mail a letter of transmittal with instructions to each
holder of record of Morningstar Common Stock outstanding immediately prior to
the Effective Time for use in exchanging certificates formerly representing
shares of Morningstar Common Stock for certificates representing shares of Suiza
Common Stock. Certificates should not be surrendered by any holders of
Morningstar Common Stock until they have received the letter of transmittal from
the Exchange Agent.
THE SUIZA BOARD AND THE MORNINGSTAR BOARD UNANIMOUSLY RECOMMEND A VOTE "FOR"
THE APPROVAL OF THE STOCK ISSUANCE AND THE MORNINGSTAR PROPOSAL, RESPECTIVELY.
52
<PAGE>
THE MERGER AGREEMENT
The following summary of the terms of the Merger Agreement is qualified in
its entirety by reference to the Merger Agreement, which is incorporated by
reference herein and attached as Appendix A to this Joint Proxy
Statement/Prospectus.
GENERAL
The Merger Agreement contemplates the Merger of Sub with and into
Morningstar, with Morningstar surviving the Merger as a wholly owned subsidiary
of Suiza Foods. The Merger will become effective when the Certificate of Merger
is filed with the Secretary of State of the State of Delaware. It is anticipated
that such filing will be made promptly after the closing under the Merger
Agreement, which closing, in turn, should occur as soon as practicable after the
last of the conditions precedent to the Merger set forth in the Merger Agreement
has been satisfied or waived. The Merger Agreement obligates Suiza Foods to have
the shares of Suiza Common Stock to be issued in connection with the Merger
approved for listing on the NYSE, subject only to official notice of issuance,
prior to the Effective Time.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time, (a) each issued and outstanding share of Morningstar
Common Stock (excluding shares held in the treasury of Morningstar or shares
owned by Suiza Foods, Sub or any other subsidiary of Suiza Foods) will be
converted into the right to receive 0.85 shares of Suiza Common Stock, (b) each
share of Morningstar Common Stock held in the treasury of Morningstar or owned
by Suiza Foods, Sub or any other subsidiary of Suiza Foods will be canceled and
retired, (c) all of the issued and outstanding shares of common stock of Sub
will be converted into and become, in the aggregate, 10,000 fully paid and
nonassessable shares of common stock of New Morningstar and (d) each outstanding
and unexercised Morningstar Option will be assumed by Suiza Foods and converted
into a Substitute Option. The number of shares of Suiza Common Stock to be
subject to a Substitute Option will be determined by multiplying the number of
shares of Morningstar Common Stock subject to the related Morningstar Option by
the Exchange Ratio (rounded down to the nearest whole share), and the per share
exercise price with respect thereto will equal the per share exercise price of
the related Morningstar Option divided by the Exchange Ratio (rounded up to the
nearest full cent). Each Substitute Option will be subject to all of the other
terms and conditions of the Morningstar Option to which it relates. No
Morningstar Option will be accelerated by reason of the Merger to the extent the
Morningstar Board has discretion to make a determination to cause such
acceleration.
As soon as practicable after the Effective Time, Suiza Foods will cause to
be included under a registration statement on Form S-8 of Suiza Foods all shares
of Suiza Common Stock that are subject to Substitute Options and will maintain
the effectiveness of such registration statement until all Substitute Options
have been exercised, expired or forfeited.
For a further discussion of the treatment of Morningstar Options and other
employee benefit plans of Morningstar under the Merger Agreement, see "The
Merger--Interests of Certain Persons in the Merger."
EFFECTIVE TIME OF THE MERGER
Subject to the terms and conditions of the Merger Agreement, the Merger will
become effective at the date and time when the Certificate of Merger is filed
with the Secretary of State of the State of Delaware. The Certificate of Merger
will be filed as soon as practicable following fulfillment of the conditions
precedent of the Merger Agreement. See "--Conditions Precedent."
EXCHANGE OF SHARES
Suiza Foods has selected Harris Trust & Savings Bank as the Exchange Agent
for the Merger. As soon as practicable after the Effective Time, Suiza Foods
will make available, and each Morningstar Stockholder
53
<PAGE>
will be entitled to receive, upon surrender to the Exchange Agent of one or more
certificates ("Certificates") representing shares of Morningstar Common Stock
for cancellation, certificates representing the number of shares of Suiza Common
Stock into which such shares were converted in the Merger and cash in
consideration of fractional shares (the "Share Consideration"). Holders of
unexchanged shares of Morningstar Common Stock will not be entitled to receive
any dividends or other distributions payable by Suiza Foods until their
Certificates are surrendered. Upon surrender, however, such holders will receive
accumulated dividends and distributions without interest, together with cash in
lieu of fractional shares. Holders of unexchanged shares of Morningstar Common
Stock will have no further claim upon the Exchange Agent twelve months after the
Effective Time and thereafter will look only to Suiza Foods and New Morningstar
for payment of the Share Consideration in respect of their shares of Morningstar
Common Stock.
Fractional shares of Suiza Common Stock will not be issued to holders of
Morningstar Common Stock. For each fractional share of Suiza Common Stock that
would otherwise be issued, the holder will receive, in lieu thereof, cash in an
amount equal to such fractional part of a share of Suiza Common Stock multiplied
by the average of the daily closing sale prices for the Suiza Common Stock for
the twenty (20) consecutive trading days on which such shares are actually
traded on the NYSE ending at the close of trading on the second trading day
immediately preceding the Effective Date.
CORPORATE ORGANIZATION AND GOVERNANCE
CERTIFICATE OF INCORPORATION. The Morningstar Charter as in effect at the
Effective Time will be the Charter of New Morningstar, and thereafter may be
amended in accordance with its terms and as provided by law and the Merger
Agreement.
BYLAWS. The Morningstar Bylaws as in effect at the Effective Time will be
the Bylaws of New Morningstar, and thereafter may be amended in accordance with
their terms and as provided by law and the Merger Agreement.
BOARD OF DIRECTORS; OFFICERS. The directors of Sub immediately prior to the
Effective Time will be the directors of New Morningstar, and the officers of Sub
immediately prior to the Effective Time will be the officers of New Morningstar,
in each case, until their respective successors are duly elected and qualified.
STOCKHOLDERS' MEETINGS
Each of Suiza Foods and Morningstar will take all action necessary in
accordance with applicable law and its certificate of incorporation and bylaws
to convene a meeting of its stockholders as promptly as practicable to consider
and vote upon (i) in the case of Suiza Foods, the approval of the Stock Issuance
and (ii) in the case of Morningstar, the approval of the Merger, the Merger
Agreement and the transactions contemplated thereby. Suiza Foods will take all
action necessary to authorize Sub to consummate the Merger. Suiza Foods and
Morningstar will coordinate and cooperate with respect to the timing of such
meetings and will use their best efforts to hold such meetings on the same day.
Each of the Suiza Board and the Morningstar Board recommends such approval and
Suiza Foods and Morningstar will each take all lawful action to solicit such
approval, including, without limitation, timely and promptly mailing this Joint
Proxy Statement/Prospectus; provided, however, that such recommendation is
subject to certain rights of the Suiza Board and the Morningstar Board under the
Merger Agreement to (i) withdraw or modify, or propose to modify or withdraw, in
a manner adverse to the other party, the approval or recommendation by such
Board of the Merger Agreement or the Merger and (ii) approve or recommend, or
propose to approve or recommend, an Alternative Proposal (as hereinafter
defined). See "--No Shop" and
"--Termination."
54
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Suiza Foods, Morningstar and Sub, relating, among other things, to the
following: (i) their incorporation, existence, good standing, corporate power
and similar corporate matters; (ii) their capitalization; (iii) their
authorization, execution, delivery and performance and the enforceability of the
Merger Agreement and related matters; (iv) the absence of conflicts, violations
and defaults under their respective certificates of incorporation and bylaws and
certain other agreements and documents; (v) the documents and reports filed with
the Commission and the accuracy and completeness of the information contained
therein; (vi) the absence of certain material changes or events since June 30,
1997; (vii) pending or threatened investigations or litigation; (viii) employee
benefit matters; (ix) the receipt of fairness opinions from their respective
financial advisors; (x) compliance with applicable laws, ordinances and
regulations; (xi) tax matters; (xii) accounting matters relating to the
availability of "pooling of interests" accounting treatment; (xiii)
relationships with their respective customers and suppliers and (xiv)
intellectual property. Morningstar made additional representations and
warranties as to the approval of the Merger by the Morningstar Board, its
recommendation of the Merger and the Merger Agreement to the Morningstar
Stockholders and its determination that the Merger is advisable and fair to and
in the best interests of Morningstar and the Morningstar Stockholders.
All representations and warranties of Suiza Foods, Morningstar and Sub will
expire at the Effective Time.
CONDUCT OF BUSINESS PENDING THE MERGER
SUIZA FOODS. Suiza Foods has agreed that prior to the Effective Time,
unless Morningstar otherwise agrees in writing or except as otherwise required
by the Merger Agreement, it will, and will cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as conducted prior to the date of the Merger
Agreement and will, or will cause its subsidiaries to, use their reasonable
efforts to preserve intact their present business organizations and preserve
their relationships with customers, suppliers and others having business
dealings with them to the end that their goodwill and ongoing businesses will be
unimpaired at the Effective Time, and not propose or agree to (i) sell or pledge
or agree to sell or pledge any capital stock owned by it in any of its
subsidiaries or owned by any of its subsidiaries (except for certain stock
pledged as collateral pursuant to Suiza Foods' existing credit facilities), (ii)
except as contemplated in the merger agreement for the Country Fresh Merger,
amend the Suiza Charter or Suiza Bylaws, (iii) split, combine or reclassify its
outstanding capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
capital stock of Suiza Foods, or declare, set aside, authorize or pay any
dividend or other distribution payable in cash, stock or property or (iv)
directly or indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of Suiza Common Stock.
Suiza Foods has also agreed that, except in connection with acquisitions of
assets or businesses that are primarily engaged in the same businesses as those
conducted by Suiza Foods as of the date of the Merger Agreement and any
financing transactions or issuances of securities related thereto which, in each
case, do not require the approval of Suiza Stockholders, it will not, and will
not permit any of its subsidiaries to, (i) issue, deliver or sell or agree to
issue, deliver or sell any additional shares of, or rights of any kind to
acquire any shares of, its respective capital stock of any class, any
indebtedness having the right to vote on any matter on which the Suiza
Stockholders may vote or any options, rights or warrants to acquire, or
securities convertible into, exercisable for or exchangeable for, shares of
capital stock other than issuances, deliveries or sales of Suiza Foods' stock or
options, rights or warrants, to acquire Suiza Foods' stock under Suiza Foods'
existing benefit plans; (ii) acquire, lease or dispose or agree to acquire,
lease or dispose of any capital assets or any other assets other than in the
ordinary course of business; (iii) incur additional indebtedness or encumber or
grant a security interest in any asset or enter into any other material
transaction other than in each case in the ordinary course of business; (iv)
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial equity interest in, or by any
55
<PAGE>
other manner, any business or any corporation, partnership, association or other
business organization or division thereof; (v) incur any material transaction
fees, costs or expenses in addition to those disclosed to Morningstar prior to
the execution of the Merger Agreement or (vi) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing.
Suiza Foods has further agreed (i) to use its best efforts to not, and not
to permit any of its subsidiaries to, take or cause to be taken any action,
whether before or after the Effective Time, which would disqualify the Merger as
a "pooling of interests" for accounting purposes or as a "reorganization" within
the meaning of Section 368(a) of the Code and (ii) not to, and not to permit any
of its subsidiaries to, amend, modify, terminate, waive or permit to lapse any
material right of first refusal, preferential right, right of first offer, or
any other material right of Suiza Foods, or any of its subsidiaries, except in
the ordinary course of business. Suiza Foods has also agreed that following the
Effective Time, it will file all tax returns on the basis that the Merger
qualifies as a "reorganization" within the meaning of Section 368(a)(1)(A) and
Section 368(a)(2)(E) of the Code and that it will not take any action which is
inconsistent with or contrary to such classification of the Merger for tax
purposes.
SUB. Sub has agreed not to engage, during the period from the date of the
Merger Agreement to the Effective Time, in any activities of any nature except
as provided in or contemplated by the Merger Agreement.
MORNINGSTAR. Morningstar has agreed that prior to the Effective Time,
unless Suiza Foods otherwise agrees in writing or except as otherwise required
by the Merger Agreement, it will, and will cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as conducted prior to the Merger Agreement and
will, and will cause its subsidiaries to, use their reasonable efforts to
preserve intact their present business organizations and preserve their
relationships with customers, suppliers and others having business dealings with
them to the end that their goodwill and on-going businesses will be unimpaired
at the Effective Time, and not propose or agree to (i) sell or pledge or agree
to sell or pledge any capital stock owned by it in any of its subsidiaries or
owned by any of its subsidiaries, (ii) amend the Morningstar Charter or the
Morningstar Bylaws, (iii) split, combine or reclassify its outstanding stock or
issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for shares of Morningstar Common Stock, or
declare, set aside, authorize or pay any dividend or other distribution payable
in cash, stock or property or (iv) directly or indirectly redeem, purchase or
otherwise acquire or agree to redeem, purchase or otherwise acquire any shares
of Morningstar Common Stock.
Morningstar has also agreed that it will not, and will not permit any of its
subsidiaries to, (i) issue, deliver or sell or agree to issue, deliver or sell
any additional shares of, or rights of any kind to acquire any shares of, its
respective stock of any class, any indebtedness having the right to vote on any
matter on which the Morningstar Stockholders may vote or any option, rights or
warrants to acquire, or securities convertible into, exercisable for or
exchangeable for, shares of stock other than issuances, deliveries or sales
pursuant to existing obligations under its option plans; (ii) acquire, lease or
dispose or agree to acquire, lease or dispose of any capital assets or any other
assets other than in the ordinary course of business; (iii) incur additional
indebtedness or encumber or grant a security interest in any asset or enter into
any other material transaction other than in each case in the ordinary course of
business; (iv) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof; (v) incur any material transaction fees, costs
or expenses in addition to those disclosed to Suiza Foods prior to the execution
of the Merger Agreement or (vi) enter into any contract, agreement, commitment
or arrangement with respect to any of the foregoing. Morningstar has also agreed
that except as required to comply with applicable law and except as provided in
the provisions relating to employee matters (see "--Employee Matters"), it will
not enter into any new (or amend any existing) employee benefit plan of
Morningstar or any new (or amend any existing) employment, severance or
consulting agreement, grant any general increase in the compensation of current
or former directors, officers or
56
<PAGE>
employees (including any such increase pursuant to any bonus, pension,
profit-sharing or other plan or commitment) or grant any increase in the
compensation payable or to become payable to any director, officer or employee,
except in any of the foregoing cases in accordance with pre-existing contractual
provisions or in the ordinary course of business consistent with past practice.
Morningstar has further agreed not to, and not to permit any of its
subsidiaries to, take or cause to be taken any action, whether before or after
the Effective Time, which would disqualify the Merger as a "pooling of
interests" for accounting purposes or as a "reorganization" within the meaning
of Section 368(a) of the Code, or amend, modify, terminate, waive or permit to
lapse any material right of first refusal, preferential right, right of first
offer, or any other material right of Morningstar or any of its subsidiaries,
except in the ordinary course of business. Morningstar has also agreed that
following the Effective Time, it will file all tax returns on the basis that the
Merger qualifies as a "reorganization" within the meaning of Section
368(a)(1)(A) and Section 368(a)(2)(E) of the Code and that it will not take any
action which is inconsistent with or contrary to such classification of the
Merger for tax purposes.
ADDITIONAL AGREEMENTS
The Merger Agreement contains certain covenants and agreements of Suiza
Foods and Morningstar customary for transactions such as those contemplated by
the Merger Agreement. These relate to, among other things, (i) each party
allowing the other access, during normal business hours, to its properties,
books, contracts, commitments and records, documents filed pursuant to
requirements of the Commission and such other information to which the other
party may reasonably request access, subject to existing confidentiality
obligations; (ii) the preparation of the Registration Statement and this Joint
Proxy Statement/Prospectus; (iii) each party using its reasonable efforts to
deliver an affiliate letter from each of its affiliates as to the matters
described under the caption "The Merger--Restrictions on Resales by Affiliates"
and using commercially reasonable efforts to cause the Merger to qualify for
"pooling of interests" accounting treatment; (iv) listing of the shares of Suiza
Common Stock to be issued in connection with the Merger by Suiza Foods on the
NYSE, upon official notice of issuance; (v) certain employee matters; (vi)
filing of such notifications as are required to be filed under the HSR Act and
responding to inquiries with respect thereto; (vii) using commercially
reasonable efforts to consummate and make effective the transactions
contemplated by the Merger Agreement, including the use of commercially
reasonable efforts to obtain all necessary waivers, consents and approvals, to
effect all necessary registrations and filings and to lift any injunction to the
Merger; (viii) conducting its business in a manner which would not disqualify
the Merger as a "pooling of interests" for accounting purposes; (ix) filing tax
returns on the basis that the Merger qualifies as a "reorganization" within the
meaning of Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code and taking
no actions inconsistent with or contrary to such classification of the Merger
for tax purposes; (x) advising the other party orally and in writing of any
change or event that has had, or could have, a material adverse effect on such
party and providing copies of all filings made by such party with the Commission
or any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, in connection with the Merger
Agreement and other transactions contemplated thereby and (xi) the appointment
of two of the current directors of Morningstar to the New Suiza Board.
Suiza Foods has agreed to use commercially reasonable efforts to obtain a
letter from Deloitte & Touche LLP and Morningstar has agreed to use commercially
reasonable efforts to obtain a letter from Arthur Andersen LLP, in each case,
stating that the Merger qualifies for "pooling of interests" accounting
treatment if consummated in accordance with the Merger Agreement.
Suiza Foods has agreed to use its best efforts to publish, by public filing
or announcement, the results of at least 30 days of combined operations of Suiza
Foods and Morningstar as soon after the Effective Time as is commercially
practicable.
57
<PAGE>
EMPLOYEE MATTERS
The Merger Agreement provides that, as of the Effective Time, the employees
of Morningstar and each subsidiary will continue employment with New Morningstar
and its subsidiaries, respectively, in the same positions and at the same level
of wages and/or salary and without having incurred a termination of employment
or separation from service; provided, however, that except as may be
specifically required by applicable law or any contract, New Morningstar and its
subsidiaries will not be obligated to continue any employment relationship with
any employee for any specific period of time. Except with respect to the stock
option plans to be assumed by Suiza Foods as provided in the Merger Agreement,
as of the Effective Time, New Morningstar will be the sponsor of the employee
benefit plans sponsored by Morningstar immediately prior to the Effective Time,
and Suiza Foods will cause New Morningstar and its subsidiaries to satisfy all
obligations and liabilities under such employee benefit plans; provided,
however, that, except as contemplated by the Merger Agreement, nothing contained
in the Merger Agreement will limit or restrict New Morningstar's right on or
after the Effective Time to amend, modify or terminate any of such employee
benefit plans. To the extent any employee benefit plan, program or policy of
Suiza Foods, New Morningstar, or their affiliates is made available to any
person who is an employee of Morningstar or any of its subsidiaries immediately
prior to the Effective Time: (i) service with Morningstar and its subsidiaries
by any employee prior to the Effective Time will be credited for eligibility and
vesting purposes and for purposes of qualifying for any additional benefits tied
to periods of service (such as higher rates of matching contributions and
eligibility for early retirement) under such plan, program or policy, but not
for benefit accrual purposes (except for disability, vacation and severance,
with respect to which service with Morningstar and its subsidiaries will be
credited for benefit accrual purposes) and (ii) with respect to any benefit
plans to which such employees may become eligible, Suiza Foods will cause such
plans to provide credit for any co-payments or deductibles by such employees and
waive all pre-existing condition exclusions and waiting periods, other than
limitations or waiting periods that have not been satisfied under any benefit
plans maintained by Morningstar and its subsidiaries for their employees prior
to the Effective Time.
INDEMNIFICATION
From and after the Effective Date, New Morningstar and Suiza Foods will be
required to indemnify, defend and hold harmless the officers, directors and
employees of Morningstar and its subsidiaries who were such at any time prior to
the Effective Time (the "Indemnified Parties") from and against all losses,
expenses, claims, damages or liabilities arising out of the transactions
contemplated by the Merger Agreement to the fullest extent permitted or required
under applicable law, and the Indemnified Parties will be advanced expenses
subject to a customary reimbursement agreement. All rights to indemnification
existing in favor of the directors, officers or employees of Morningstar as
provided in the Morningstar Charter or the Morningstar Bylaws, as in effect on
the date of the Merger Agreement, with respect to matters occurring through the
Effective Time, will survive the Merger and will continue in full force and
effect thereafter. New Morningstar will maintain in effect for not less than
three years after the Effective Time the current policies of directors' and
officers' liability insurance maintained by Morningstar with respect to matters
occurring on or prior to the Effective Time. The Merger Agreement further
provides that New Morningstar or Suiza Foods may substitute therefor policies of
at least the same coverage (with carriers comparable to Morningstar's existing
carriers) containing terms and conditions which are not materially less
advantageous to the Indemnified Parties, that New Morningstar will not be
required, in order to maintain or procure such coverage, to pay an annual
premium in excess of 200% of the current annual premium paid by Morningstar for
its existing coverage (the "Cap") and that if equivalent coverage cannot be
obtained, or can be obtained only by paying an annual premium in excess of the
Cap, New Morningstar will be required only to obtain as much coverage as can be
obtained by paying an annual premium equal to the Cap.
58
<PAGE>
In the event that any action, suit, proceeding or investigation relating to
the Merger Agreement or to the transactions contemplated by the Merger Agreement
is commenced, whether before or after the Effective Time, Suiza Foods,
Morningstar and Sub agree to cooperate and use their respective reasonable
efforts to vigorously defend against and respond to the same.
NO SHOP
Each of Suiza Foods and Morningstar has agreed (i) that neither it nor any
of its subsidiaries will, and it will direct and use its best efforts to cause
its officers, directors, employees, agents and representatives (including,
without limitation, any investment banker, attorney or accountant retained by it
or any of its subsidiaries) not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders)
with respect to a merger, acquisition, consolidation or similar transaction
(other than, in the case of Suiza Foods, any acquisitions of assets or
businesses that are primarily engaged in the same business as that conducted by
Suiza Foods and its subsidiaries as of the date of the Merger Agreement and any
financing transactions or issuances of securities related thereto which, in each
case, do not require approval by the Suiza Stockholders), involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, such party or any of its material subsidiaries (any such proposal
or offer being hereinafter referred to as an "Alternative Proposal"), or engage
in any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any person relating to an Alternative
Proposal, or release any third party from any obligations under any existing
standstill agreement or arrangement, or enter into any agreement with respect to
an Alternative Proposal, or otherwise facilitate any effort or attempt to make
or implement an Alternative Proposal; (ii) that it will immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any parties conducted prior to the date of the Merger Agreement with respect to
any of the foregoing and (iii) that it will notify the other party with
reasonable promptness if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it. Notwithstanding the foregoing, the
Merger Agreement provides that each of Suiza Foods and Morningstar may, directly
or indirectly, furnish information and access to, and may participate in
discussions and negotiate with, any corporation, partnership, person or other
entity, if such corporation, partnership, person or other entity has submitted a
written proposal to the Board of Directors of such party relating to an
Alternative Proposal if (i) the Board of Directors of such party believes, in
its good faith judgment, that such Alternative Proposal is more favorable to
such party's stockholders than the Merger and is reasonably likely to be
consummated or (ii) the Board of Directors of such party, following consultation
with its independent legal counsel relating thereto, determines in its good
faith judgment that failing to take such action would constitute a breach of
such Board of Directors' fiduciary duty to its stockholders imposed by law.
Neither the Morningstar Board nor any committee thereof may (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Suiza Foods,
the approval or recommendation by the Morningstar Board of the Merger Agreement
or the Merger or (ii) approve or recommend, or propose to approve or recommend,
any Alternative Proposal, unless (x) the Morningstar Board believes, in its good
faith judgment, that such Alternative Proposal is more favorable to the
Morningstar Stockholders than the Merger and is reasonably likely to be
consummated or (y) the Morningstar Board, following consultation with its
independent legal counsel relating thereto, determines in its good faith
judgment that failing to take such action in connection with such Alternative
Proposal would constitute a breach of the Morningstar Board's fiduciary duty to
the Morningstar Stockholders imposed by law.
Neither the Suiza Board nor any committee thereof may (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Morningstar,
the approval or recommendation by the Suiza Board of the Merger Agreement or the
issuance of Suiza Common Stock in connection with the Merger or (ii) approve or
recommend, or propose to approve or recommend, any Alternative Proposal, unless
(x) the Suiza Board believes, in its good faith judgment, that such Alternative
Proposal is more favorable to Suiza
59
<PAGE>
Stockholders than the Merger and is reasonably likely to be consummated or (y)
the Suiza Board, following consultation with its independent legal counsel
relating thereto, determines in its good faith judgment that failing to take
such action in connection with such Alternative Proposal would constitute a
breach of the Suiza Board's fiduciary duty to the Suiza Stockholders imposed by
law.
The Merger Agreement provides that nothing contained in the Merger Agreement
will prevent either Board from taking, and disclosing to its stockholders, a
position contemplated by Rule 14e-2(a) promulgated under the Exchange Act,
provided that such Board does not recommend that its stockholders tender their
shares in connection with any such tender offer unless such recommendation is
permitted as described above.
CONDITIONS PRECEDENT
The obligations of Suiza Foods, Morningstar and Sub to effect the Merger are
subject, among other things, to the fulfillment or, where permissible, waiver,
of certain conditions, including without limitation: (i) the approval of the
Merger, the Merger Agreement and the transactions contemplated thereby by the
requisite vote of the Morningstar Stockholders and the approval of the Stock
Issuance by the requisite vote of the Suiza Stockholders; (ii) the expiration or
termination of any waiting period applicable to the consummation of the Merger
under the HSR Act; (iii) the effectiveness of the Registration Statement, the
absence of a stop order suspending such effectiveness and the receipt of all
necessary approvals under state securities laws relating to the issuance of
Suiza Common Stock to be issued to Morningstar Stockholders in connection with
the Merger; (iv) there not having been issued and in effect any preliminary or
permanent injunction or order by any federal or state court in the United States
of competent jurisdiction prohibiting the consummation of the Merger (each of
the parties having agreed to use all commercially reasonable efforts to have any
such injunction lifted); (v) the listing on the NYSE, subject only to official
notice of issuance, of the shares of Suiza Common Stock to be issued pursuant to
the Stock Issuance; (vi) Morningstar having received an opinion of Weil, Gotshal
& Manges LLP and Suiza Foods having received an opinion of Hughes & Luce,
L.L.P., in each case, that the Merger will qualify as a reorganization within
the meaning of Section 368(a) of the Code and (vii) Morningstar having received
a letter from Arthur Andersen LLP, and Suiza Foods and Sub having received a
letter from Deloitte & Touche LLP, in each case, dated as of the closing date,
to the effect that the Merger will qualify for pooling of interest accounting
treatment if consummated in accordance with the Merger Agreement.
The obligation of Morningstar to effect the Merger is also subject to the
fulfillment of certain additional conditions, including (i) the accuracy of the
representations and warranties of Suiza Foods and Sub when made and on and as of
the Effective Time, except as expressly contemplated or permitted by the Merger
Agreement and, with respect to representations and warranties that are not
otherwise subject to a materiality qualifier, where the inaccuracy thereof would
not, alone or in the aggregate with all such inaccuracies, have a material
adverse effect on the business, properties, assets, condition (financial or
otherwise), liabilities or results of operation of Suiza Foods and its
subsidiaries, (ii) the performance in all material respects of the obligations
and covenants of Suiza Foods and Sub under the Merger Agreement and (iii) the
receipt of a certificate of the President and Chief Executive Officer or a Vice
President of each of Suiza Foods and Sub to such effect.
The obligation of Suiza Foods and Sub to effect the Merger is also subject
to the fulfillment of certain additional conditions, including (i) the accuracy
of the representations and warranties of Morningstar when made and on and as of
the Effective Time, except as expressly contemplated or permitted by the Merger
Agreement and, with respect to representations and warranties that are not
otherwise subject to a materiality qualifier, where the inaccuracy thereof would
not, alone or in the aggregate with all such inaccuracies, have a material
adverse effect on the business, properties, assets, condition (financial or
otherwise), liabilities or results of operation of Morningstar and its
subsidiaries, (ii) the performance in all material respects of the obligations
and covenants of Morningstar under the Merger Agreement and (iii) the receipt of
a certificate of the President and Chief Executive Officer or a Vice President
of Morningstar to such effect.
60
<PAGE>
Prior to the Effective Time, the parties to the Merger Agreement may (i)
extend the time for the performance of any of the obligations or other acts of
the other parties thereto, (ii) waive any inaccuracies in the representations
and warranties contained therein or in any documents delivered pursuant thereto
and (iii) waive compliance with any of the agreements or conditions contained
therein.
TERMINATION
The Merger Agreement may be terminated by action of either the Suiza Board
or Morningstar Board and the Merger abandoned under certain circumstances,
including, but not limited to, the occurrence of any of the following: (i) the
Merger has not been consummated by February 28, 1998, provided that the
terminating party has not breached in any material respect its obligations under
the Merger Agreement in any manner that would have proximately contributed to
the failure to consummate the Merger; (ii) the requisite approval of the Merger,
the Merger Agreement and the transactions contemplated thereby by the
Morningstar Stockholders is not obtained; (iii) the requisite approval of the
Stock Issuance by the Suiza Stockholders is not obtained; or (iv) a United
States federal or state court of competent jurisdiction or United States federal
or state governmental, regulatory or administrative agency or commission shall
have issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
the Merger Agreement and such order, decree, ruling or other action has become
final and non-appealable, provided that the party seeking to terminate the
Merger Agreement has used all commercially reasonable efforts to remove such
injunction, order or decree.
The Merger Agreement may be also terminated and the Merger may be abandoned
at any time prior to the Effective Time, by action of (a) the Suiza Board, (i)
if the Morningstar Board has withdrawn or modified in a manner adverse to Suiza
Foods its approval or recommendation of the Merger Agreement or the Merger or
has recommended an Alternative Proposal with respect to Morningstar to
Morningstar's Stockholders or (ii) Suiza Foods shall have received an
Alternative Proposal which the Suiza Board believes, in its good faith judgment,
is more favorable to Suiza Foods' stockholders than the Merger and is reasonably
likely to be consummated or (b) the Morningstar Board, (i) if the Suiza Board
shall have withdrawn or modified in a manner adverse to Morningstar its approval
or recommendation of the Merger Agreement or the issuance of the Suiza Common
Stock in connection with the Merger or shall have recommended an Alternative
Proposal with respect to Suiza Foods to Suiza Stockholders or (ii) Morningstar
shall have received an Alternative Proposal which the Morningstar Board
believes, in its good faith judgment, is more favorable to Morningstar
Stockholders than the Merger and is reasonably likely to be consummated.
The Merger Agreement may also be terminated prior to the Effective Time,
before or after approval of the Suiza Stockholders or Morningstar Stockholders,
by the mutual consent of Suiza Foods and Morningstar.
In the event that (x) Suiza Foods terminates the Merger Agreement as
described in clause (a)(i) of the second preceding paragraph or (y) Morningstar
terminates the Merger Agreement as described in clause (b)(ii) of the second
preceding paragraph, then, in either such case, Morningstar shall concurrently
with such termination pay Suiza Foods a fee of $20,000,000 (a "Termination
Fee"), which amount shall be payable by wire transfer of same day funds, and
shall promptly reimburse Suiza Foods for all substantiated out-of-pocket costs
and expenses incurred by Suiza Foods in connection with the Merger Agreement and
the transactions contemplated thereby, including, without limitation, costs and
expenses of accountants, attorneys and financial advisors, up to an aggregate of
$2,000,000.
In the event that (x) Morningstar terminates the Merger Agreement as
described in clause (b)(i) of the third preceding paragraph or (y) Suiza Foods
terminates the Merger Agreement as described in clause (a)(ii) of the third
preceding paragraph, then, in either such case, Suiza Foods shall concurrently
with such termination pay Morningstar a fee of $20,000,000 (a "Suiza Termination
Fee"), which amount shall be
61
<PAGE>
payable by wire transfer of same day funds, and shall promptly reimburse
Morningstar for all substantiated out-of-pocket costs and expenses incurred by
Morningstar in connection with the Merger Agreement and the transactions
contemplated thereby, including, without limitation, costs and expenses of
accountants, attorneys and financial advisors, up to an aggregate of $2,000,000.
The provisions in the Merger Agreement relating to, among other things, the
effect of termination and abandonment, fees and expenses, specific performance
and assignment will survive the termination of the Merger Agreement.
FEES AND EXPENSES
Whether or not the Merger is consummated, except as otherwise provided in
the Merger Agreement following the exercise of certain termination rights, all
costs and expenses incurred in connection with the Merger Agreement and the
transactions contemplated by the Merger Agreement will be paid by the party
incurring such expenses. Suiza Foods and Sub on the one hand and Morningstar on
the other hand will each be responsible for one half of all expenses relating to
printing, filing and mailing this Joint Proxy Statement/Prospectus and the
Registration Statement and all Commission and other regulatory filing fees
incurred in connection with this Joint Proxy Statement/Prospectus and the
Registration Statement.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a general discussion of the material U.S. federal income
tax consequences of the Merger. The discussion below with respect to holders of
Morningstar Common Stock does not deal with special classes of investors, such
as insurance companies, tax-exempt organizations, financial institutions,
dealers in securities, foreign persons, persons who acquired shares of
Morningstar Common Stock pursuant to an exercise of employee stock options or
rights or otherwise as compensation, persons that hold shares of Morningstar
Common Stock as part of a position in a "straddle" or as part of a "hedging" or
"conversion" transaction for U.S. federal income tax purposes, and persons with
a "functional currency" other than the U.S. dollar. In addition, no information
is provided herein with respect to the tax consequences of the Merger under
applicable foreign, state or local laws.
This discussion is based on current law. Future legislative, judicial or
administrative changes or interpretations, which may be retroactive, could alter
or modify the statements set forth herein. Neither Suiza Foods nor Morningstar
will request any ruling from the Internal Revenue Service ("IRS") as to the U.S.
federal income tax consequences of the Merger. Opinions of counsel are not
binding on the IRS or the courts, and the IRS and the courts are not precluded
from taking contrary positions.
EACH MORNINGSTAR STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE
TRANSACTIONS DESCRIBED HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
GENERAL
It is a condition to the consummation of the Merger that Morningstar receive
an opinion of its tax counsel, Weil, Gotshal & Manges LLP, and that Suiza Foods
receive an opinion of its tax counsel, Hughes & Luce, L.L.P., in each case, that
the Merger will constitute a reorganization within the meaning of Section
368(a)(1) of the Code. In rendering these opinions, each of Weil, Gotshal &
Manges LLP and Hughes & Luce, L.L.P. will assume the accuracy of the facts and
statements concerning the Merger set forth in this Joint Proxy
Statement/Prospectus, and will receive and will rely upon representations of
fact contained in certificates of Suiza Foods and Morningstar, including that
(i) neither Morningstar nor Suiza Foods is aware of any plan, intention or
obligation or commitment on the part of any holder of five percent or more of
the Morningstar Common Stock to sell, exchange or otherwise dispose of (or to
reduce the risk of loss by short sale or otherwise, to enter into any contract
or arrangement with respect to, or to consent to the
62
<PAGE>
sale, exchange or other disposition of) Suiza Common Stock received in the
Merger by such holder in exchange for such Morningstar Common Stock, (ii) Suiza
Foods intends to cause Morningstar to continue Morningstar's historic business
and use a significant portion of Morningstar's historic business assets in a
business and (iii) after the Merger, Morningstar will hold at least 90 percent
of the fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets held immediately prior to the Merger.
TAX CONSEQUENCES TO SUIZA FOODS, SUB AND MORNINGSTAR
Based on the assumption that, at the Effective Time, the Merger will
constitute a reorganization within the meaning of section 368(a)(1) of the Code,
no gain or loss will be recognized by Suiza Foods, Sub or Morningstar as a
result of the Merger.
TAX CONSEQUENCES TO MORNINGSTAR STOCKHOLDERS
Based on the assumption that, at the Effective Time, the Merger will
constitute a reorganization within the meaning of section 368(a)(1) of the Code,
a Morningstar Stockholder will not recognize gain or loss on the exchange of
Morningstar Common Stock for Suiza Common Stock pursuant to the Merger, except
for cash received in lieu of a fractional share interest in Suiza Common Stock.
Such holder's aggregate adjusted tax basis in the shares of Suiza Common Stock
received in the Merger (including any fractional shares deemed received and
exchanged for cash) will equal such holder's adjusted tax basis in the shares of
Morningstar Common Stock surrendered in exchange therefor. The holding period of
the shares of Suiza Common Stock received by each holder of Morningstar Common
Stock in the Merger (including any fractional share interest deemed received and
exchanged for a cash payment) will include the holding period of the Morningstar
Common Stock surrendered in exchange therefor.
No fractional shares of Suiza Common Stock will be issued pursuant to the
Merger. A holder of Morningstar Common Stock who, pursuant to the Merger,
receives cash in lieu of fractional shares of Suiza Common Stock will be treated
as having received such fractional shares of Suiza Common Stock pursuant to the
Merger and then as having received such cash in a redemption of such fractional
shares of Suiza Common Stock. Assuming the fractional shares of Suiza Common
Stock are held as capital assets, the holder generally will recognize capital
gain or loss on such deemed redemption of fractional shares equal to the
difference between the amount of cash received and the holder's adjusted tax
basis in the fractional shares of Suiza Common Stock deemed to have been issued.
In the case of non-corporate holders, capital gains will be mid-term gains
subject to a maximum federal income tax rate of 28% if the holder's holding
period is more than one year but not more than 18 months, and will be long-term
gains subject to a maximum federal income tax rate of 20% if the holder's
holding period is more than 18 months.
COMPARISON OF THE RIGHTS OF SUIZA STOCKHOLDERS AND MORNINGSTAR STOCKHOLDERS
If the Merger is consummated, Morningstar Stockholders will become Suiza
Stockholders, and the rights of the former Morningstar Stockholders will be
governed by the laws of the State of Delaware (as is presently the case), the
Suiza Charter and the Suiza Bylaws. The rights of Suiza Stockholders differ in
certain respects from the rights of Morningstar Stockholders. The following is a
summary of the material differences between the rights of Suiza Stockholders and
Morningstar Stockholders. Because both Suiza Foods and Morningstar are organized
under the DGCL, such differences arise from differences between various
provisions of the Suiza Charter and Suiza Bylaws, on the one hand, and the
Morningstar Charter and Morningstar Bylaws, on the other hand. This summary does
not purport to be complete and is qualified in its entirety by reference to the
relevant provisions of the DGCL, the Suiza Charter, the Suiza Bylaws, the
Morningstar Charter and the Morningstar Bylaws. The Suiza Charter and the Suiza
Bylaws are exhibits to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part and are
63
<PAGE>
incorporated herein by reference. Copies of the Morningstar Charter and the
Morningstar Bylaws are available for inspection at its offices, and copies will
be sent to Morningstar Stockholders upon request in the manner specified under
the caption "Incorporation of Certain Information by Reference".
AUTHORIZED CAPITAL
The authorized capital stock of Suiza Foods consists of 101,000,000 shares,
of which 100,000,000 shares are Common Stock, par value $0.01 per share, and
1,000,000 shares are Preferred Stock, par value $0.01 per share. The authorized
capital stock of Morningstar consists of 50,000,000 shares of Common Stock, par
value $0.01 per share, and 5,000,000 shares of Preferred Stock, par value $0.01
per share.
NUMBER OF DIRECTORS; ELECTION OF DIRECTORS; REMOVAL; VACANCIES
The DGCL permits the certificate of incorporation or the bylaws of a
corporation to contain provisions governing the number and qualifications of
directors. The Suiza Charter states that the number of directors shall be as set
forth in or pursuant to the Suiza Bylaws. The Suiza Bylaws state that the number
of directors shall be fixed from time to time by resolution of the board of
directors. The Morningstar Charter provides that the number of directors
constituting the board of directors shall be as specified in the Morningstar
Bylaws from time to time. The Morningstar Bylaws state that the number of
directors may be increased or decreased from time to time by resolution adopted
by a majority of the board of directors.
Under the DGCL, unless the board of directors is classified or the
certificate of incorporation provides for cumulative voting, any director may be
removed with or without cause, by the holders of a majority of shares entitled
to vote for the election of directors. Although the Suiza Charter does not
permit cumulative voting, the Suiza Board is classified, being divided into
three classes, each of which shall be as nearly equal in number as possible,
with the directors of each class serving three year terms. Therefore, Suiza
Stockholders may remove directors only for cause, as is provided in the Suiza
Charter and the Suiza Bylaws. The Morningstar Board is not classified and the
Morningstar Charter does not provide for cumulative voting. Therefore, directors
of Morningstar may be removed with or without cause by the holders of a majority
of shares entitled to vote for the election of directors.
Under the DGCL, vacancies and newly created directorships may be filled by a
majority of the directors then in office or by a sole remaining director (even
though less than a quorum) unless otherwise provided in the certificate of
incorporation or bylaws. However, the DGCL also provides that if the directors
then in office constitute less than a majority of the whole board, the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least 10% of the total number of shares at the time outstanding entitled to vote
for directors, order an election of directors to be held. The Suiza Bylaws
provide that vacancies and newly created directorships may be filled by a
majority of the remaining or existing directors, though less than a quorum. The
Morningstar Bylaws provide that vacancies and newly created directorships may be
filled by a majority of the directors then in office, though less than a quorum,
or by a sole remaining director.
CHARTER AMENDMENTS
Under the DGCL, a proposed amendment to the certificate of incorporation
requires a resolution adopted by the board of directors and, unless otherwise
provided in the certificate of incorporation, the affirmative vote of the
holders of a majority of the outstanding stock entitled to vote thereon and, if
applicable, the affirmative vote of the holders of a majority of the outstanding
stock of each class entitled to vote thereon as a class. 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. The Suiza Charter, the Suiza Bylaws, the Morningstar Charter, and the
Morningstar Bylaws contain no provisions regarding the amendment of its
corporation's respective certificate of incorporation.
64
<PAGE>
BYLAW AMENDMENTS
Under the DGCL, the power to adopt, alter and repeal the bylaws is vested in
the stockholders, except to the extent that a corporation's certificate of
incorporation vests it in the board of directors. However, the conferral of the
power to adopt, alter and repeal the bylaws upon the directors does not divest
the stockholders of their power to adopt, amend or repeal the bylaws. The Suiza
Charter provides that the Suiza Board has authority to alter, amend or repeal
the Suiza Bylaws or to adopt new bylaws. The Morningstar Charter grants
authority to the Morningstar Board to adopt, amend, and repeal the Morningstar
Bylaws.
SPECIAL STOCKHOLDER MEETINGS
The DGCL provides that a special meeting of stockholders may be called by
the board of directors or by such person or persons as may be authorized by a
corporation's certificate of incorporation or Bylaws. Both the Suiza Charter and
the Suiza Bylaws provide that special meetings of the stockholders may be called
by Suiza Foods' chief executive officer or by a majority of the members of the
board of directors. The Morningstar Bylaws state that special meetings of
stockholders may be called by the chairman of the board of directors (if there
is one), the president, any vice president (if there is one), the secretary, or
any assistant secretary (if there is one) and shall be called by any such
officer at the request in writing of a majority of the board of directors or at
the request in writing of stockholders owning a majority of the capital stock of
Morningstar issued and outstanding and entitled to vote.
BUSINESS COMBINATIONS
Under the DGCL, the approval by the affirmative vote of the holders of a
majority of the outstanding stock of a corporation entitled to vote on the
matter generally is required for a merger, consolidation or sale, lease or
exchange of all or substantially all the corporation's assets to be consummated.
The Suiza Charter, the Suiza Bylaws, the Morningstar Charter, and the
Morningstar Bylaws do not provide for supermajority voting requirements relating
to business combinations.
STATE TAKEOVER LEGISLATION
Section 203 of the DGCL generally prohibits a Delaware corporation from
engaging in a "Business Combination" (defined as a variety of transactions,
including mergers, asset sales, issuance of stock and other transactions
resulting in a financial benefit to the Interested Stockholder) with an
"Interested Stockholder" (defined generally as a person that is the beneficial
owner of 15% or more of a corporation's outstanding voting stock) for a period
of three years following the date that such person became an Interested
Stockholder unless:
(i) prior to the date such person became an Interested Stockholder, the
board of directors of the corporation approved either the Business
Combination or the transaction that resulted in the stockholder becoming an
Interested Stockholder;
(ii) upon consummation of the transaction that resulted in the
stockholder becoming an Interested Stockholder, the Interested Stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding stock held by directors who are
also officers of the corporation and employee stock ownership plans that do
not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
(iii) on or subsequent to the date such person became an Interested
Stockholder, the Business Combination is approved by the board of directors
of the corporation and authorized at a meeting of stockholders, and not by
written consent, by the affirmative vote of the holders of at least 66 2/3%
of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.
65
<PAGE>
A corporation may adopt an amendment to its certificate of incorporation or
Bylaws expressly electing not to be governed by Section 203 of the DGCL if, in
addition to any other vote required by law, such amendment is approved by the
affirmative vote of a majority of the shares entitled to vote. However, such
amendment generally will not be effective until 12 months after adoption of such
amendment and will not apply to a Business Combination with an Interested
Stockholder who was such on or prior to the adoption of the amendment. The Suiza
Charter, the Suiza Bylaws, the Morningstar Charter, and the Morningstar Bylaws
contain no provisions that exempt Suiza Foods or Morningstar from the
prohibitions of Section 203.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the DGCL, a corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
The DGCL permits similar indemnification in the case of derivative actions,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper. A
director or officer who is successful, on the merits or otherwise, in defense of
any proceeding subject to the DGCL's indemnification provisions must be
indemnified by the corporation for reasonable expenses incurred in connection
therewith, including attorneys' fees. Both the Suiza Charter and the Morningstar
Charter provide that their corporation's respective directors and officers
shall, and their respective employees and agents may, be indemnified to the
fullest extent authorized by the DGCL. However, the Morningstar Bylaws provide
that Morningstar shall indemnify its directors, officers, employees, and agents.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
The DGCL provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. However, no such provision can limit the liability of a
director for (i) any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) violation of
certain provisions of the DGCL, (iv) any transaction from which the director
derived an improper personal benefit or (v) any act or omission prior to the
adoption of such a provision in the certificate of incorporation. The Suiza
Charter provides for the limitation of the personal liability of its directors
in accordance with the provisions of the DGCL. However, such provisions do not
limit the availability of equitable relief to Suiza Foods or Suiza Stockholders.
The Morningstar Charter also provides for limitation of the liability of
Morningstar's directors in accordance with the provisions of the DGCL.
66
<PAGE>
SUIZA PREFERRED STOCK
The Suiza Charter authorizes the Suiza Board to issue preferred stock in
classes or series and to establish the designations, preferences,
qualifications, limitations or restrictions of any class or series. Suiza Foods
may issue, without the approval of the holders of Suiza Common Stock, preferred
stock that has voting, dividend or liquidation rights superior to the Suiza
Common Stock and that may adversely affect the rights of holders of Suiza Common
Stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and for other corporate purposes, could,
among other things, adversely affect the voting power of the holders of Suiza
Common Stock and could have the effect of delaying, deferring or preventing a
change in control of Suiza Foods.
If the Country Fresh Merger is completed, Suiza will authorize and issue a
total of 11,691 shares of Series A Preferred Stock (the "Suiza Preferred Stock")
to holders of Country Fresh's outstanding Series A 8% Preferred Stock. A
description of the Suiza Preferred Stock follows:
STATED VALUE. The Suiza Preferred Stock will have a stated value of $320
per share.
DIVIDENDS. The holders of Suiza Preferred Stock, in preference to holders
of the Suiza Common Stock, will be entitled to receive, when, as and if declared
by the Suiza Board out of funds legally available for distribution to
stockholders, cumulative dividends of $25.60 per share per annum, and no more.
So long as any shares of Suiza Preferred Stock are outstanding, no dividend will
be paid or declared, no funds will be set aside for payment of dividends, and no
distribution will be made on the Suiza Common Stock or other preferred stock of
Suiza Foods ranking junior to the Suiza Preferred Stock until all dividends
accrued on the Suiza Preferred Stock have been paid for the current and all
prior dividend periods.
LIQUIDATION PREFERENCE. Upon the liquidation, dissolution or winding up of
the affairs of Suiza Foods, whether voluntary or involuntary, the holders of
Suiza Preferred Stock will be entitled to receive in full out of the assets of
Suiza Foods available for distribution to stockholders, including its capital,
before any amount will be paid to, or distributed among, the holders of Suiza
Common Stock or other preferred stock ranking junior to the Suiza Preferred
Stock, the sum of $320 per share, plus all accrued and unpaid dividends to the
time of payment.
REDEMPTION. Shares of Suiza Preferred Stock may be redeemed, as a whole or
in part, at the option of Suiza Foods by vote of the Suiza Board at any time or
from time to time, upon no less than 30 or more than 120 days' notice. The
redemption price for shares of the Suiza Preferred Stock will be $320 per share
plus accrued and unpaid dividends to the date fixed for redemption. Pro rata
dividends on any shares of Suiza Preferred Stock to be redeemed will be deemed
to accrue as of the date fixed for redemption.
VOTING. Each share of Suiza Preferred Stock will have one vote on all
matters upon which holders of Suiza Common Stock are entitled to vote. Shares of
Suiza Preferred Stock and shares of Suiza Common Stock will be treated as a
single class or series of shares for all voting purposes except to the extent a
class or series vote is provided by law.
LIMITATIONS. In addition to other rights as may be provided under
applicable law, without the affirmative vote of the holders of a majority of the
outstanding Suiza Preferred Stock, Suiza Foods may not authorize or create any
class or series of stock ranking prior to the Suiza Preferred Stock with respect
to dividends or the distribution of assets in liquidation.
67
<PAGE>
STOCK OPTION INCREASE
THE 1997 PLAN
Effective as of February 24, 1997, the Suiza Board adopted the 1997 Plan,
subject to Suiza Stockholder approval. The Suiza Stockholders approved the plan
at the annual meeting of Suiza Stockholders held May 13, 1997.
The 1997 Plan provides for grants of stock options ("Options") and
restricted stock ("Restricted Stock") to certain directors and to officers, key
employees and consultants of Suiza Foods and its subsidiaries. The 1997 Plan is
administered by a committee of non-employee directors designated by the Suiza
Board (the "Stock Option Committee") or by the Suiza Board as a whole.
SHARES ISSUABLE UNDER THE 1997 PLAN. A total of 1,150,000 shares of Suiza
Common Stock are currently authorized and reserved for issuance under the 1997
Plan upon the exercise of Options or grants of Restricted Stock. Proportionate
adjustments will be made to the number of shares of Suiza Common Stock subject
to the 1997 Plan in the event of any recapitalization, stock dividend, stock
split, combination of shares or other change in Suiza Common Stock. The Suiza
Board or the Stock Option Committee may also provide additional anti-dilution
protection to a participant under the terms of such participant's Option or
Restricted Stock agreement. Shares of Suiza Common Stock subject to Options or
Restricted Stock grants that are canceled, terminated or forfeited will again be
available for issuance under the 1997 Plan.
The Stock Option Committee and the Suiza Board have granted 1,100,200 stock
options under the 1997 Plan as of October 27, 1997. Approval of the Plan
Amendment will increase the number of shares of Suiza Common Stock authorized
for issuance under the 1997 Plan from 1,150,000 shares to 3,000,000 shares.
SHARES ISSUABLE UNDER OTHER PLANS. In addition to the shares reserved for
issuance under the 1997 Plan, as of October 27, 1997, a total of 1,021,748
shares of Suiza Common Stock are reserved for issuance upon exercise of options
previously granted or available for future grants under the Suiza Foods 1995
Stock Option and Restricted Plan, and a total of 369,838 shares are reserved for
issuance upon exercise of options granted under the Suiza Foods Exchange Stock
Option and Restricted Stock Plan in connection with Suiza Foods' corporate
reorganization in 1995. Upon consummation of the Merger, Suiza Foods will assume
Morningstar's stock option plans and all of the Morningstar Options outstanding
thereunder, which will be converted into Substitute Options to purchase
2,957,987 shares of Suiza Common Stock, based on the number of Morningstar
Options outstanding on October 27, 1997. In addition, if the Country Fresh
Merger is completed, Suiza Foods will assume Country Fresh's stock option plans
and all of the stock options outstanding thereunder, which will be converted
into options to purchase additional 229,068 shares of Suiza Common Stock, based
on the number of Country Fresh options outstanding on October 27, 1997.
ADMINISTRATION OF THE 1997 PLAN. The Suiza Board or the Stock Option
Committee administers the 1997 Plan and has authority to select the participants
that will be granted Options and Restricted Stock, to terminate the plan or
accelerate vesting of Options and Restricted Stock, to determine the nature,
extent, timing, exercise price, vesting and duration of Options and Restricted
Stock, to prescribe all other terms and conditions consistent with the 1997
Plan, to interpret the 1997 Plan, to establish any rules or regulations relating
to the 1997 Plan that it determines to be appropriate, and to make any other
determination that it believes necessary or advisable for the proper
administration of the 1997 Plan.
STOCK OPTIONS AND RESTRICTED STOCK. From time to time, the Chief Executive
Officer of Suiza Foods will recommend to the Suiza Board or the Stock Option
Committee individuals he or she believes should receive Options or Restricted
Stock grants, the amount of shares of Common Stock he or she believes
68
<PAGE>
should be subject to such Option or Restricted Stock grant, and, with respect to
any recommended Option, whether the Option should be a qualified or nonqualified
option. The Suiza Board or the Stock Option Committee will consider, but need
not accept, the Chief Executive Officer's grant recommendations. Each
non-employee director of Suiza Foods or its subsidiaries will receive
nonqualified options to purchase 7,500 shares of Common Stock on each June 30
that such director serves on the Suiza Board; provided, that such number will be
reduced to the extent (if any) that such director receives options on such date
under an automatic grant pursuant to Suiza Food's 1995 Stock Option and
Restricted Stock Plan. All employees of Suiza Foods, including all officers, are
eligible to participate in the 1997 Plan.
The Suiza Board or the Stock Option Committee may grant nonqualified stock
options ("Nonqualified Options") or incentive stock options under Section 422 of
the Code ("Qualified Option") to purchase shares of Suiza Common Stock. The
Suiza Board or the Stock Option Committee will determine the number and exercise
price of the Options, and the time or times that the Options become exercisable,
provided that an Option exercise price may not be less than the fair market
value of the Suiza Common Stock on the date of grant. The Suiza Board or the
Stock Option Committee may award shares of Restricted Stock without requiring
the payment of cash consideration for such shares. The term of an Option will
also be determined by the Suiza Board or the Stock Option Committee, provided
that the term of a Qualified Option may not exceed 10 years. The 1997 Plan
provides that each grant of Options or Restricted Stock will vest in accordance
with the applicable Option or Restricted Stock agreement. The Option exercise
price may be paid in cash, or, at Suiza Foods' option, in shares of Common
Stock.
TERMINATION OF EMPLOYMENT. If a participant dies or becomes disabled, all
vested Options may be exercised at any time within one year (or their remaining
term of the Option, if less). If a participant ceases to be a Suiza Foods'
employee for any other reason, he or she must exercise any vested Options within
ninety days.
AMENDMENTS TO THE 1997 PLAN. The Suiza Board or the Stock Option Committee
may amend or discontinue the 1997 Plan at any time, subject to certain
restrictions set forth in the 1997 Plan. Except in limited circumstances, no
amendment or discontinuance may adversely affect any previously granted Option
or Restricted Stock award without the consent of the recipient thereof.
FEDERAL INCOME TAX CONSEQUENCES
The following general description of federal income tax consequences is
based upon current statutes, regulations and interpretations and does not
purport to be complete. Reference should be made to the applicable provisions of
the Code. There also may be state, local and foreign income tax consequences
applicable to transactions involving Options or Restricted Stock. In addition,
the following description does not address special rules that may be applicable
to directors and officers.
STOCK OPTIONS. Under existing federal income tax provisions, a participant
who receives stock options will not normally realize any income, nor will Suiza
Foods normally receive any deduction for federal income tax purposes, upon the
grant of an Option.
When a Nonqualified Option granted pursuant to the 1997 Plan is exercised,
the employee generally will realize ordinary income (compensation) measured by
the difference between the aggregate purchase price of the Suiza Common Stock as
to which the option is exercised and the aggregate fair market value of the
Suiza Common Stock on the exercise date, and Suiza Foods generally will be
entitled to a deduction in the year the Option is exercised equal to the amount
the employee is required to treat as ordinary income. Any taxable income
recognized in connection with a Nonqualified Option exercised by an optionee who
is also an employee of Suiza Foods will be subject to tax withholding by Suiza
Foods. The basis for determining gain or loss upon a subsequent disposition of
Common Stock acquired upon the exercise of a Nonqualified Option will be the
purchase price paid to Suiza Foods for the Suiza Common Stock increased by an
amount included in the optionee's taxable income resulting from the exercise of
such option. The
69
<PAGE>
holding period for determining whether gain or loss on such subsequent
disposition is short-term or long-term generally begins on the date on which the
optionee acquires the Suiza Common Stock.
An employee generally will not recognize any income upon the exercise of a
Qualified Option, but the amount by which the fair market value of the Suiza
Common Stock at the time of exercise exceeds the exercise price generally will
be considered part of alternative minimum taxable income to the employee. An
employee will recognize capital gain or loss in the amount of the difference
between the exercise price and the sale price on the sale or exchange of stock
acquired pursuant to the exercise of a Qualified Option, provided that the
employee does not dispose of such stock within two years from the date of grant
and one year from the date of exercise of the Qualified Option (the "Required
Holding Periods"). An employee disposing of such shares before the expiration of
the Required Holding Periods will recognize ordinary income equal to the lesser
of (i) the difference between the option price and the fair market value of the
stock on the date of exercise, or (ii) the total amount of gain realized. The
remaining gain or loss is generally treated as short term or long term gain or
loss depending on how long the shares are held. Suiza Foods will not be entitled
to a federal income tax deduction in connection with the exercise of a Qualified
Option, except where the employee disposes of the shares of Suiza Common Stock
received upon exercise before the expiration of the Required Holding Periods.
RESTRICTED STOCK. A restricted stock award is not currently taxable income
to a participant for so long as the stock is subject to a substantial risk of
forfeiture and cannot be transferred free of forfeiture. The participant will
generally be taxed on compensation income equal to the fair market value of the
stock on the date the restrictions on the shares lapse, i.e., the date the
participant becomes vested with respect to such shares.
The participant may elect under Section 83(b) of the Code, however, to be
taxed immediately on the value of the shares awarded as of the date of grant.
Such an election must be made within 30 days after the award of shares and must
be filed with the Internal Revenue Service. If the participant makes the Section
83(b) election and subsequently forfeits his or her shares, no deduction is
permitted with respect to the forfeiture.
The participant's tax basis in shares acquired through a stock award equals
the amount of compensation income recognized upon vesting (or upon grant, in the
case of a Section 83(b) election). Generally, if the participant subsequently
sells the shares, any gain or loss will be capital.
REASONS FOR PROPOSAL
The 1997 Plan is designed to attract and retain the best available personnel
for positions of substantial responsibility and to provide incentives to such
personnel to promote the success of the business of Suiza Foods.
The Suiza Board is recommending the Plan Amendment in order to ensure that
sufficient shares are available under the 1997 Plan to reward and motivate
existing employees and to attract new employees in the future, particularly in
light of the rapid growth experienced by Suiza Foods since the original adoption
of the 1997 Plan and the substantial additional growth contemplated by the
Merger and the Country Fresh Merger.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
In considering whether to vote for approval of the 1997 Plan, Suiza
Stockholders should be aware that each of the directors and executive officers
of Suiza Foods will be eligible for Option grants and Restricted Stock awards
under the 1997 Plan.
THE SUIZA BOARD UNANIMOUSLY RECOMMENDS THAT THE SUIZA STOCKHOLDERS VOTE
"FOR" APPROVAL OF THE PLAN AMENDMENT.
70
<PAGE>
LEGAL MATTERS
The validity of the Suiza Common Stock to be issued by Suiza Foods pursuant
to the Merger will be passed upon by Hughes & Luce, L.L.P. Certain tax matters
will be passed upon by Weil, Gotshal & Manges LLP for Morningstar and by Hughes
& Luce, L.L.P. for Suiza Foods. A partner with Hughes & Luce, L.L.P.,
beneficially owns 41,795 shares of Suiza Common Stock.
EXPERTS
The consolidated financial statements of Suiza Foods Corporation as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996; the financial statements of Pre-Acquisition Velda Farms as of
April 9, 1994 and December 31, 1994 and for the period from January 1, 1994 to
April 9, 1994 and for the year ended December 31, 1993; the financial statements
of Swiss Dairy, a Corporation, as of December 30, 1995 and December 31, 1994 and
for each of the three years in the period ended December 30, 1995; and the
consolidated financial statements of Country Fresh, Inc. as of March 1, 1997 and
March 2, 1996 and for each of the three years in the period ended March 1, 1997,
included in or incorporated by reference into this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
either appearing herein or which are incorporated herein by reference. The
consolidated financial statements of Garrido & Compania, Inc. as of June 30,
1996 and 1995 and for each of the years in the three year period ended June 30,
1996 incorporated by reference into this Prospectus have been audited by KPMG
Peat Marwick LLP, independent auditors, as stated in their report which is
incorporated herein by reference. The financial statements of Model Dairy, Inc.
as of October 31, 1995 and 1994 and for the years then ended incorporated by
reference into this Prospectus have been audited by Barnard, Vogler & Co.,
independent auditors, as stated in their report which is incorporated herein by
reference. The financial statements of Dairy Fresh, L.P., a Delaware limited
partnership, as of December 31, 1996 and 1995 and for the years then ended and
the period from July 1, 1994 (date of acquisition) to December 31, 1994,
incorporated by reference into this Prospectus have been audited by McGladrey &
Pullen, LLP, independent auditors, as stated in their report which is
incorporated herein by reference. The combined financial statements of The
Garelick Companies, as of September 30, 1996 and 1995 and for each of the three
years in the period ended September 30, 1996, incorporated by reference into
this Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as stated in their report which is incorporated herein by
reference. The consolidated financial statements of Morningstar, as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996 included in or incorporated by reference into this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto. The combined financial statements of Presto
Food Products, Inc. and Affiliate, as of December 31, 1995 and 1994 and for each
of the three years in the period ended December 31, 1995 incorporated by
reference into this Prospectus have been audited by Price Waterhouse LLP,
independent auditors, as stated in their report incorporated herein by
reference. Such financial statements are included herein or incorporated herein
by reference in reliance upon the respective reports of such firms given upon
their authority as experts in accounting and auditing.
Representatives of Deloitte & Touche LLP and Arthur Andersen LLP will be
present at the Suiza Special Meeting and the Morningstar Special Meeting,
respectively, and will have the opportunity to make a statement if they desire
to do so and to respond to appropriate questions.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SUIZA FOODS CORPORATION
<S> <C>
Independent Auditors' Report....................................................... F-2
Consolidated Balance Sheets........................................................ F-3
Consolidated Statements of Operations.............................................. F-4
Consolidated Statements of Stockholders' Equity.................................... F-5
Consolidated Statements of Cash Flows.............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
Condensed Consolidated Balance Sheets.............................................. F-26
Condensed Consolidated Statements of Operations.................................... F-27
Condensed Consolidated Statements of Cash Flows.................................... F-28
Notes to Condensed Consolidated Financial Statements............................... F-29
THE MORNINGSTAR GROUP INC.
Independent Auditors' Report....................................................... F-33
Consolidated Balance Sheets........................................................ F-34
Consolidated Statements of Operations.............................................. F-35
Consolidated Statements of Stockholders' Equity.................................... F-36
Consolidated Statements of Cash Flows.............................................. F-37
Notes to Consolidated Financial Statements......................................... F-39
Condensed Consolidated Balance Sheets.............................................. F-56
Condensed Consolidated Statements of Operations.................................... F-57
Condensed Consolidated Statements of Cash Flows.................................... F-58
Notes to Condensed Consolidated Financial Statements............................... F-60
COUNTRY FRESH, INC.
Independent Auditors' Report....................................................... F-62
Consolidated Balance Sheets........................................................ F-63
Consolidated Statements of Earnings................................................ F-64
Consolidated Statements of Shareholders' Equity.................................... F-65
Consolidated Statements of Cash Flows.............................................. F-66
Notes to Consolidated Financial Statements......................................... F-67
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Suiza Foods Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Suiza Foods
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Suiza Foods
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Dallas, Texas
February 18, 1997
F-2
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 8,951 $ 3,177
Accounts receivable..................................................................... 50,608 31,045
Inventories............................................................................. 19,228 11,346
Prepaid expenses and other current assets............................................... 2,754 1,380
Refundable income taxes................................................................. 2,312
Deferred income taxes................................................................... 3,672 1,448
---------- ----------
Total current assets.................................................................. 87,525 48,396
PROPERTY, PLANT AND EQUIPMENT............................................................. 123,260 92,715
DEFERRED INCOME TAXES..................................................................... 8,524
INTANGIBLE AND OTHER ASSETS............................................................... 164,839 91,411
---------- ----------
TOTAL................................................................................. $ 384,148 $ 232,522
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses................................................... $ 46,664 $ 31,957
Income taxes payable.................................................................... 1,105 2,415
Current portion of long-term debt....................................................... 12,876 15,578
---------- ----------
Total current liabilities............................................................. 60,645 49,950
LONG-TERM DEBT............................................................................ 226,693 171,745
DEFERRED INCOME TAXES..................................................................... 3,278 1,367
COMMITMENTS AND CONTINGENCIES.............................................................
STOCKHOLDERS' EQUITY:
Preferred stock.........................................................................
Common stock, 10,741,729 and 6,313,479 shares issued and outstanding.................... 107 63
Additional paid-in capital.............................................................. 89,337 31,023
Retained earnings (deficit)............................................................. 4,088 (21,626)
---------- ----------
Total stockholders' equity............................................................ 93,532 9,460
---------- ----------
TOTAL................................................................................. $ 384,148 $ 232,522
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
NET SALES............................................................... $ 520,916 $ 430,466 $ 341,108
COST OF SALES........................................................... 388,548 312,633 240,468
------------ ------------ ------------
GROSS PROFIT............................................................ 132,368 117,833 100,640
OPERATING COSTS AND EXPENSES:
Selling and distribution.............................................. 70,709 64,289 54,248
General and administrative............................................ 21,913 19,277 16,935
Amortization of intangibles........................................... 4,624 3,703 3,697
------------ ------------ ------------
Total operating costs and expenses.................................... 97,246 87,269 74,880
------------ ------------ ------------
INCOME FROM OPERATIONS.................................................. 35,122 30,564 25,760
OTHER (INCOME) EXPENSE:
Interest expense, net................................................. 17,470 19,921 19,279
Merger and other costs................................................ 571 10,238 1,660
Other income, net..................................................... (4,012) (469) (268)
------------ ------------ ------------
Total other (income) expense.......................................... 14,029 29,690 20,671
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS....................... 21,093 874 5,089
INCOME TAXES (BENEFIT).................................................. (6,836) 2,450 844
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS................................. 27,929 (1,576) 4,245
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT.................... 2,215 8,462 197
------------ ------------ ------------
NET INCOME (LOSS)....................................................... $ 25,714 $ (10,038) $ 4,048
------------ ------------ ------------
------------ ------------ ------------
NET EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary loss............................... $ 2.81 $ (0.26) $ 0.69
Extraordinary loss.................................................... (0.22) (1.38) (0.03)
------------ ------------ ------------
Net income (loss)..................................................... $ 2.59 $ (1.64) $ 0.66
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING..................................... 9,921,822 6,109,398 6,156,387
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL WARRANTS (DEFICIT) TOTAL
------------ ----------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................... 67,708 $ 1 $ 15,217 $ 523 $ (15,579) $ 162
Issuance of common stock................. 11,960 5,677 5,677
Increase in market value of warrants..... 57 (57) --
Net income............................... 4,048 4,048
------------ ----- ----------- ----- ---------- ----------
BALANCE, DECEMBER 31, 1994................. 79,668 1 20,894 580 (11,588) 9,887
Issuance of common stock................. 11,832 5,080 (580) 4,500
Capital contribution (Note 11)........... 5,111 5,111
Net loss................................. (10,038) (10,038)
69 for 1 stock split (Note 11)........... 6,221,979 62 (62) --
------------ ----- ----------- ----- ---------- ----------
BALANCE, DECEMBER 31, 1995................. 6,313,479 63 31,023 -- (21,626) 9,460
Issuance of common stock................. 4,428,250 44 58,314 58,358
Net income............................... 25,714 25,714
------------ ----- ----------- ----- ---------- ----------
BALANCE, DECEMBER 31, 1996................. 10,741,729 $ 107 $ 89,337 $ -- $ 4,088 $ 93,532
------------ ----- ----------- ----- ---------- ----------
------------ ----- ----------- ----- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 25,714 $ (10,038) $ 4,048
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation............................................................ 9,930 9,258 8,244
Amortization of intangible assets, including deferred financing costs... 5,458 4,686 4,876
Gain on the sale of assets.............................................. (21) (265) (177)
Extraordinary loss from early extinguishment of debt.................... 2,215 8,462 197
Merger and other nonrecurring costs..................................... 571 10,238 1,660
Noncash and imputed interest............................................ 236 1,087 483
Minority interests...................................................... 101 556
Deferred income taxes................................................... (8,895) (414) 333
Changes in operating assets and liabilities:
Accounts receivable................................................... (5,187) (1,881) (108)
Inventories........................................................... (3,346) (599) (73)
Prepaid expenses and other assets..................................... (163) 1,007 (222)
Refundable income taxes............................................... (2,312)
Accounts payable and accrued expenses................................. 967 716 4,862
Income tax payable.................................................... (1,575) 649 254
----------- ----------- ----------
Net cash provided by operating activities............................. 23,592 23,007 24,933
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................................ (14,022) (10,392) (4,784)
Proceeds from sale of property, plant and equipment....................... 500 691 245
Purchases of investments and other assets................................. (1,608)
Cash outflows for acquisitions............................................ (111,380) (2,425) (61,357)
----------- ----------- ----------
Net cash used in investing activities................................... (124,902) (12,126) (67,504)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt........................................ 110,550 154,505 67,585
Repayment of debt......................................................... (58,304) (154,387) (30,906)
Payments of deferred financing, debt restructuring and merger costs....... (3,520) (8,972) (1,660)
Issuance of common stock, net of expenses 58,358 4,087 5,677
Purchase of subsidiary preferred stock and minority interests............. (8,332) (61)
----------- ----------- ----------
Net cash provided by (used in) financing activities..................... 107,084 (13,099) 40,635
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 5,774 (2,218) (1,936)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................. 3,177 5,395 7,331
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................... $ 8,951 $ 3,177 $ 5,395
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. Suiza Foods Corporation (the "Company" or "Suiza Foods") is a
manufacturer and distributor of fresh milk products, refrigerated ready-to-serve
fruit drinks and coffee in Puerto Rico; fresh milk and related dairy products in
Florida, California and Nevada; and packaged ice in Florida and the southwestern
United States.
On March 31, 1995, the Company became the holding company for the operations
of Suiza Holdings, L.P. and subsidiaries; Velda Holdings, L.P.; Velda Holdings,
Inc. and subsidiaries; and Reddy Ice Corporation (collectively, the "Combined
Entities") through the issuance of 6,313,479 shares of its common stock in
exchange for all of the outstanding equity interests of the Combined Entities.
The Company accounted for this combination using the pooling of interests method
of accounting, whereby the assets acquired and liabilities assumed are reflected
in the consolidated financial statements of the Company at the historical
amounts of the Combined Entities, which, in the case of Velda Farms, only
includes the results of operations from April 10, 1994, the date it was acquired
in a purchase business combination.
The Company and its subsidiaries provide credit terms to customers generally
ranging up to 30 days, perform ongoing credit evaluations of their customers and
maintain allowances for potential credit losses based on historical experience.
The preparation of financial statements requires the use of significant
estimates and assumptions by management; actual results could differ from these
estimates. Certain prior year amounts have been reclassified to conform to
current year presentation.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company; its U.S. operating subsidiaries, Velda Farms, Inc.
("Velda Farms"), Swiss Dairy Corporation ("Swiss Dairy"), Model Dairy, Inc.
("Model Dairy") and Reddy Ice Corporation ("Reddy Ice"); and its Puerto Rico
operating subsidiaries, Suiza Dairy Corporation ("Suiza Dairy"), Suiza Fruit
Corporation ("Suiza Fruit"), Neva Plastics Manufacturing Corp. ("Neva Plastics")
and Garrido & Compania ("Garrido") (collectively, "Suiza-Puerto Rico"). All
significant intercompany balances and transactions are eliminated in
consolidation.
INVENTORIES. Pasteurized and raw milk inventories are stated at the lower
of average cost or market. Raw materials, spare parts and supplies, and
merchandise for resale inventories are stated at the lower of cost, using the
first-in, first-out ("FIFO") method, or market. Manufactured finished goods
inventories are stated at the lower of average production cost or market.
Production costs include raw materials, direct labor and indirect production and
overhead costs.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets, as follows:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
- -------------------------------------------------------------- ------------------------------
<S> <C>
Buildings and improvements.................................... Ten to 40 years
Machinery and equipment....................................... Five to 20 years
Motor vehicles................................................ Five to 15 years
Furniture and fixtures........................................ Three to ten years
</TABLE>
Capitalized lease assets are amortized over the shorter of their lease term
or their estimated useful lives. Expenditures for repairs and maintenance which
do not improve or extend the life of the assets are expensed as incurred.
F-7
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS. Intangible assets include the following intangibles
which are amortized over their related useful lives:
<TABLE>
<CAPTION>
INTANGIBLE ASSET USEFUL LIFE
- ------------------------------------------- -------------------------------------------------
<S> <C>
Goodwill................................... Straight-line method over 20 to 40 years
Identifiable intangible assets:
Customer list............................ Straight-line method over seven to ten years
Trademarks/trade names................... Straight-line method over 30 years
Noncompetition agreements................ Straight-line method over the terms of the
agreements
Deferred financing costs................... Interest method over the terms of the related
debt (ranging from seven to 11 years)
Organization costs......................... Straight-line method over five years
</TABLE>
The Company periodically assesses the net realizable value of its intangible
assets, as well as all other assets, by comparing the expected future net
operating cash flows, undiscounted and without interest charges, to the carrying
amount of the underlying assets. The Company would evaluate a potential
impairment if the recorded value of these assets exceeded the associated future
net operating cash flows. Any potential impairment loss would be measured as the
amount by which the carrying value exceeds the fair value of the asset. Fair
value of assets would be measured by market value, if an active market exists,
or by a forecast of expected future net operating cash flows, discounted at a
rate commensurate with the risk involved.
INTEREST RATE AGREEMENTS. Interest rate swaps, caps and floors are entered
into as a hedge against interest exposure of variable rate debt. Differences
between amounts to be paid or received on these interest rate agreements
designated as hedges are included in interest expense as payments are made or
received. Gains or losses on other agreements not designated as hedges are
included in income as incurred. Amounts paid to acquire interest rate caps and
amounts received for interest rate floors are amortized as an adjustment to
interest expense over the life of the related agreement.
REVENUE. Revenue is recognized when the product is shipped to the customer.
INCOME TAXES. Since March 31, 1995, the Company's U.S. operating
subsidiaries have been included in the consolidated tax return of the Company.
The Company's Suiza Dairy, Suiza Fruit and Neva Plastics subsidiaries are
organized as Delaware companies and are required to file separate U.S. and
Puerto Rico income tax returns; however, since their operations are in Puerto
Rico, they are eligible for Section 936 tax credits which may reduce or
eliminate U.S. income taxes due. Garrido is organized under the laws of the
Commonwealth of Puerto Rico and is only required to file a separate tax return
in Puerto Rico.
Effective January 1, 1996, substantially all of the Company's Puerto Rico
operations are 90% exempt from Puerto Rico income taxes and 100% exempt from
property, municipal, certain excise and other taxes, and fees pursuant to the
Puerto Rico Agricultural Tax Incentives Act of 1995. Prior to this date, only
the Company's Suiza Fruit and Neva Plastics subsidiaries had similar exemptions
through separate tax grants in Puerto Rico. These operations are, however,
subject to a 10% withholding tax on distributions from Puerto Rico to the United
States.
F-8
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prior to March 31, 1995, the Combined Entities were separate taxpayers and
income taxes were provided for in the financial statements, where applicable,
based on each company's separate income tax return and tax status. As a result,
since certain of Suiza-Puerto Rico's operations were organized as a partnership
and Reddy Ice's operations were organized as a small business corporation under
Subchapter S, no income taxes were provided in the financial statements.
However, had these operations been subject to corporate income taxes, available
net operating losses would have been sufficient to eliminate any corporate
income taxes due.
Deferred income taxes are provided for temporary differences in the
financial statement and tax bases of assets and liabilities using current tax
rates. Deferred tax assets, including the benefit of net operating loss
carryforwards, are evaluated based on the guidelines for realization and may be
reduced by a valuation allowance.
CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
EARNINGS (LOSS) PER SHARE. The Company computes earnings per share based on
the weighted average number of common shares outstanding during the year, as
adjusted for the stock split (Note 11), including common equivalent shares, when
dilutive.
2. ACQUISITIONS
In April 1994, the Company acquired all of the outstanding common stock of
Velda Farms, Inc., a wholly owned subsidiary of The Morningstar Group, Inc. The
total purchase price, including related acquisition and financing costs, was
approximately $54.8 million, which was funded with the net proceeds from the
issuance of common stock, the proceeds from the issuance of subordinated notes,
term loan and revolving credit facility advances, and preferred stock issued to
the seller. In connection with the refinancing of debt at the date of the
combination, the term loan, revolving credit facility advances and preferred
stock were repaid.
In June 1994, the Company acquired Mayaguez Dairy, Inc. for a total purchase
price, including costs and expenses, of approximately $7.6 million, which was
funded primarily by additional term loan borrowings of $7.0 million.
In November 1994, the Company acquired all of the net assets of the Florida
Division of Flav-O-Rich, Inc. The total purchase price, including related
acquisition and financing costs, was approximately $5.9 million, which was
funded with revolving credit agreement borrowings, along with a subordinated
note payable to the seller and an amount payable to the seller upon the final
purchase price settlement, which was paid subsequent to year-end.
In July 1996, the Company acquired all of the outstanding common stock of
Garrido for approximately $35.8 million, including related acquisition and
financing costs, which was funded primarily by additional term loan borrowings
under the Senior Credit Facility. In connection with this acquisition, the
purchase agreement requires the payment of a contingent purchase price of up to
$5.5 million based on the future performance of this operation, which will be
accounted for as an adjustment to the purchase price when this contingency is
resolved should a payment of all or a portion of this contingent purchase price
be required. In addition, as a result of the adoption of the Puerto Rico
Agricultural Tax Incentives Act of 1995, as discussed in more detail in Note 10,
the Company may be eligible for tax credits on a portion of its
F-9
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS (CONTINUED)
investment in Garrido of between $6.2 million and $8.8 million, which are
dependent on the receipt of a favorable ruling on the availability of such tax
credits from the Treasury Department in Puerto Rico. Should a favorable ruling
on these tax credits be received, the Company will account for these tax
benefits as an adjustment of the purchase price, which would result in a
reduction of goodwill.
In September 1996, the Company acquired all of the net assets of Swiss Dairy
for approximately $55.1 million, including related acquisition costs, which was
funded primarily by borrowings under the revolving credit and acquisition
facilities of the Senior Credit Facility.
In December 1996, the Company acquired all of the net assets of Model Dairy,
along with certain assets held by affiliates of the seller, for approximately
$27.0 million, including related acquisition costs, which was funded primarily
by borrowings under the acquisition facility of the Senior Credit Facility.
In addition to the above acquisitions, during 1996, 1995 and 1994, the
Company acquired certain net assets of and entered into noncompetition
arrangements with 18 separate ice companies and two dairies for cash, including
costs and expenses, of approximately $8.4 million in 1996, $2.4 million in 1995
and $.3 million in 1994, along with the issuance of notes payable to the sellers
of approximately $.2 million in 1996, $.1 million in 1995 and $.4 million in
1994, all of which were funded by Senior Credit Facility borrowings.
The above acquisitions were accounted for using the purchase method of
accounting as of their respective acquisition dates, and accordingly, only the
results of operations of the acquired companies subsequent to their respective
acquisition dates are included in the consolidated financial statements of the
Company. At the acquisition date, the purchase price was allocated to assets
acquired, including identifiable intangibles, and liabilities assumed based on
their fair market values. The excess of the total purchase prices over the fair
values of the net assets acquired represented goodwill. In connection with the
acquisitions, assets were acquired and liabilities were assumed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchase prices:
Net cash paid............................................. $ 111,380 $ 2,425 $ 61,357
Subsidiary preferred stock issued 3,000
Notes and amounts payable to seller....................... 173 91 4,495
Cash acquired in acquisitions............................. 14,937 142
---------- --------- ----------
Total purchase prices....................................... 126,490 2,516 68,994
Fair values of net assets acquired:
Fair values of assets acquired............................ 63,598 2,317 53,590
Liabilities assumed....................................... (14,076) (10,924)
---------- --------- ----------
Total net assets acquired................................... 49,522 2,317 42,666
---------- --------- ----------
Goodwill.................................................... $ 76,968 $ 199 $ 26,328
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-10
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS (CONTINUED)
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1995 and 1996, as if the above 1996
acquisitions had occurred at the beginning of 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales............................................................. $ 662,174 $ 634,186
Income before extraordinary loss...................................... 30,634 2,008
Net income (loss)..................................................... 28,419 (6,454)
Earnings (loss) per share............................................. 2.86 (1.06)
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of what the actual results of operations of the Company would have been had the
acquisitions occurred at the beginning of 1995, nor do they purport to be
indicative of the future results of operations of the Company.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Trade customers, including route receivables............................ $ 47,785 $ 28,435
Milk industry and milk price stabilization fund......................... 168 1,839
Suppliers............................................................... 715 604
Officers and employees.................................................. 554 425
Other................................................................... 2,594 1,090
--------- ---------
51,816 32,393
Less allowance for doubtful accounts.................................... (1,208) (1,348)
--------- ---------
$ 50,608 $ 31,045
--------- ---------
--------- ---------
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Pasteurized and raw milk and raw materials.............................. $ 7,693 $ 4,278
Parts and supplies...................................................... 5,584 3,105
Finished goods.......................................................... 5,951 3,963
--------- ---------
$ 19,228 $ 11,346
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................................. $ 20,104 $ 15,582
Buildings and improvements............................................ 45,016 33,264
Machinery and equipment............................................... 63,614 47,119
Motor vehicles........................................................ 13,173 9,994
Furniture and fixtures................................................ 22,360 18,219
---------- ----------
164,267 124,178
Less accumulated depreciation......................................... (41,007) (31,463)
---------- ----------
$ 123,260 $ 92,715
---------- ----------
---------- ----------
</TABLE>
6. INTANGIBLE AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Goodwill............................................................... $ 155,242 $ 78,503
Identifiable intangibles............................................... 14,652 13,374
Deferred financing costs............................................... 5,248 6,018
Deposits and other..................................................... 724 994
---------- ---------
175,866 98,889
Less accumulated amortization.......................................... (11,027) (7,478)
---------- ---------
$ 164,839 $ 91,411
---------- ---------
---------- ---------
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable........................................................ $ 31,005 $ 21,689
Accrued payroll and benefits............................................ 7,294 5,033
Accrued interest........................................................ 1,413 1,845
Accrued insurance....................................................... 3,437 2,436
Other................................................................... 3,515 954
--------- ---------
$ 46,664 $ 31,957
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Senior Credit Facility:
Revolving loan facility............................................. $ 8,600 $ 10,900
Acquisition facility................................................ 69,100
Term loans.......................................................... 125,000 123,750
Subordinated notes.................................................... 36,000 51,101
Capital lease obligations and other................................... 869 1,572
---------- ----------
239,569 187,323
Less current portion.................................................. (12,876) (15,578)
---------- ----------
$ 226,693 $ 171,745
---------- ----------
---------- ----------
</TABLE>
SENIOR CREDIT FACILITY. In September 1996, the Company amended its existing
credit facility and entered into a supplemental credit facility with a group of
lenders, including First Union National Bank of North Carolina, as agent, and
The First National Bank of Chicago, as syndication agent, which provide for an
aggregate senior credit facility (the "Senior Credit Facility") of $250.0
million comprised of (i) a $130.0 million term loan facility; (ii) a $30.0
million revolving credit facility and (iii) a $90.0 million acquisition
facility. Under the terms of the Senior Credit Facility, the term loan is
amortized over five and one-half years, and the revolving credit facility
expires on March 31, 2000. Any amounts drawn under the acquisition facility that
are outstanding on September 30, 1998, will be amortized in fifteen quarterly
installments. Amounts outstanding under the Senior Credit Facility bear interest
at a rate per annum equal to one of the following rates, at the Company's
option: (i) the sum of a base rate equal to the higher of the Federal Funds rate
plus 50 basis points or First Union National Bank of North Carolina's prime
commercial lending rate, plus a margin that varies from 0 to 75 basis points
depending on the Company's ratio of defined indebtedness to EBITDA (as defined
in the Senior Credit Facility); or (ii) The London Interbank Offering Rate
("LIBOR") plus a margin that varies from 75 to 200 basis points depending on the
Company's ratio of defined indebtedness to EBITDA. The Company pays a commitment
fee on unused amounts of the revolving facility and the acquisition facility
that ranges from 20 basis points to 37.5 basis points, based on the Company's
ratio of defined indebtedness to EBITDA. The blended interest rate in effect at
December 31, 1996, on the Senior Credit Facility was 7.2%.
Interest is payable quarterly, and scheduled principal installments on the
term loan facilities are due in quarterly installments of approximately $2.5
million through June 1997, increasing to $3.75 million on September 30, 1997,
$5.0 million on September 30, 1998, $5.375 million on September 30, 1999, and
$6.0 million on September 30, 2000, with the remaining unpaid balance due on
March 31, 2002. Loans under the Senior Credit Facility are collateralized by
substantially all assets.
SUBORDINATED NOTES. On March 31, 1995, the Company issued subordinated
notes, which carried interest rates ranging from 12% to 15%, to replace certain
of the existing subordinated notes of the Combined Entities. On April 22, 1996,
the Company used $15.7 million of the net proceeds from its initial public
offering to repay all the outstanding principal balances of the 15% subordinated
notes. The remaining subordinated notes bear interest at rates ranging from 12%
to 13.5% (12.5% on a weighted
F-13
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. LONG-TERM DEBT (CONTINUED)
average basis), payable on a semiannual basis in March and September of each
year, with semiannual principal installments due in varying amounts commencing
in 2001, with the remaining unpaid principal balances due at maturity on March
31, 2004. The notes are subordinated to the loans under the Senior Credit
Facility. As is discussed in Note 19, in January 1997, the Company repaid all of
the outstanding principal balances of these remaining subordinated notes with a
portion of the proceeds from the sale of common stock.
OTHER DEBT. Other debt includes various promissory notes for the purchase
of property, plant and equipment and capital lease obligations. The various
promissory notes payable provided for interest at rates ranging from 10% to
prime plus 1% and were payable in monthly installments of principal and interest
until maturity, when the remaining principal balance was due. Capital lease
obligations represent machinery and equipment financing obligations which are
payable in monthly installments of principal and interest and are collateralized
by the related assets financed.
INTEREST RATE AGREEMENTS. The Company has five interest rate derivative
agreements in place, which have been designated as hedges against the Company's
variable interest rate exposure on its loans under the Senior Credit Facility.
The first agreement, which has a notional amount of $14.0 million, matures in
May 1997 and caps interest on LIBOR loans at 7.5%, plus the applicable LIBOR
margin. The second and third agreements, each of which has a notional amount of
$27.5 million and mature in June 1998, fix the interest rates on LIBOR loans at
6.0%, plus the applicable LIBOR margin. The fourth and fifth agreements, which
each have a notional amount of $25.0 million and mature in December 1997, fix
the interest rates on LIBOR loans at 6.01%, plus the applicable LIBOR margin.
These derivative agreements provide hedges for the Senior Credit Facility loans
by limiting or fixing the LIBOR interest rates specified in the Senior Credit
Facility (5.6% at December 31, 1996) at the above rates until the indicated
expiration dates of these interest-rate-derivative agreements. The original
costs and premiums of these derivative agreements are being amortized on a
straight-line basis as a component of interest expense. The Company has
designated these interest rate agreements as hedges against its interest rate
exposure on its variable rate loans under the Senior Credit Facility.
The Company is exposed to market risk under these arrangements due to the
possibility of exchanging a lower interest rate for a higher interest rate. The
counterparties are major financial institutions, and the risk of incurring
losses related to credit risk is considered by the Company to be remote.
DEBT COVENANTS. The Company's Senior Credit Facility contains various
financial and other restrictive covenants and requirements that the Company
maintain certain financial ratios, including leverage (computed as the ratio of
the aggregate outstanding principal amount of defined indebtedness to EBITDA, as
defined), fixed charges (computed as the ratio of EBITDA to defined fixed
charges), interest coverage (computed as the ratio of EBITDA to defined interest
expense) and minimum net worth. The Senior Credit Facility also contains
limitations on capital expenditures, investments, the payment of dividends and
the incurrence of additional indebtedness and requires certain mandatory
prepayments from the proceeds of certain dispositions of property.
F-14
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. LONG-TERM DEBT (CONTINUED)
SCHEDULED MATURITIES. The scheduled maturities of long-term debt, which
include capitalized lease obligations, at December 31, 1996, were as follows (in
thousands):
<TABLE>
<S> <C>
1997.............................................................. $ 12,876
1998.............................................................. 19,544
1999.............................................................. 24,348
2000.............................................................. 34,826
2001.............................................................. 29,206
Thereafter........................................................ 118,769
---------
$ 239,569
---------
---------
</TABLE>
9. LEASES
The Company leases certain property, plant and equipment used in its
operations under both capital and operating lease agreements. Such leases, which
are primarily for machinery and equipment and vehicles, have lease terms ranging
from two to nine years. Certain of the operating lease agreements require the
payment of additional rentals for maintenance, along with additional rentals,
based on miles driven or units produced. Rent expense, including additional
rent, was $8.0 million, $6.3 million and $4.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
The composition of capital leases which are reflected as property, plant and
equipment in the balance sheets is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................................... $ 812 $ 1,370
Less accumulated amortization............................................... (366) (415)
--------- ---------
$ 446 $ 955
--------- ---------
--------- ---------
</TABLE>
Future minimum payments at December 31, 1996, under noncancelable capital
and operating leases with terms in excess of one year are summarized below (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1997..................................................................... $ 185 $ 4,539
1998..................................................................... 152 4,006
1999..................................................................... 112 3,188
2000..................................................................... 2,692
2001..................................................................... 2,216
Thereafter............................................................... 2,770
----- -----------
Total minimum lease payments............................................. 449 $ 19,411
-----------
-----------
Less amount representing imputed interest................................ (27)
-----
Present value of capitalized lease obligations........................... $ 422
-----
-----
</TABLE>
F-15
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. INCOME TAXES
The provisions for income taxes (benefit), excluding the current tax
benefits of $0.9 million and $0.7 million applicable to the extraordinary losses
during 1996 and 1995, respectively, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes payable:
Federal......................................................... $ 1,925 $ 2,763 $ 491
State........................................................... 134 101 20
Deferred income taxes............................................. (8,895) (414) 333
--------- --------- ---------
$ (6,836) $ 2,450 $ 844
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a reconciliation of income taxes expense (benefit) reported
in the statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rates............................... $ 7,383 $ 306 $ 1,959
Tax benefit from tax-exempt earnings......................... (2,711) (1,532) (2,745)
Tax expense from losses not subject to taxes at the corporate
level...................................................... 1,612
Puerto Rico tax credits...................................... (11,750)
Net operating loss carryforwards............................. 188 1,344
Nondeductible expenses....................................... 1,841 202
Other........................................................ 242 35 84
---------- --------- ---------
$ (6,836) $ 2,450 $ 844
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-16
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. INCOME TAXES (CONTINUED)
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Asset valuation reserves................................................ $ 244 $ 326
Nondeductible accruals.................................................. 1,785 1,122
Puerto Rico tax credits................................................. 10,076
Net operating loss carryforwards........................................ 91 1,989
Valuation allowance..................................................... (1,989)
--------- ---------
12,196 1,448
Deferred income tax liabilities:
Depreciation............................................................ (1,174) 312
Amortization of intangibles............................................. (2,177) (1,185)
Foreign distributions and other......................................... 73 (494)
--------- ---------
(3,278) (1,367)
--------- ---------
Net deferred income tax asset............................................. $ 8,918 $ 81
--------- ---------
--------- ---------
</TABLE>
These net deferred income tax assets are classified in the consolidated
balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current assets........................................................... $ 3,672 $ 1,448
Noncurrent assets........................................................ 8,524
Noncurrent liabilities................................................... (3,278) (1,367)
--------- ---------
$ 8,918 $ 81
--------- ---------
--------- ---------
</TABLE>
The Company had established a valuation allowance for deferred tax assets
related to net operating loss carryforwards of the Company's Suiza Dairy
subsidiary in Puerto Rico, which under Puerto Rico law were only available for
utilization against future taxable income of this subsidiary. Because of the
continuing operating losses of this subsidiary, the Company was unable to
determine that it is more likely than not that the net deferred tax assets of
this subsidiary would be realized. During 1996, the deferred tax asset related
to these net operating loss carryforwards and the related valuation allowance
was substantially eliminated as a result of the reduction in tax rates in Puerto
Rico from the Puerto Rico Agricultural Tax Incentives Act of 1995.
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico
Agricultural Tax Incentives Act of 1995, which reduced the effective income tax
rate for qualified agricultural business from 39% to 3.9% and provided for a 50%
tax credit for certain "eligible investments" in qualified agricultural
businesses in Puerto Rico. During 1996, the Company made investments in its
Puerto Rico dairy, fruit,
F-17
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
10. INCOME TAXES (CONTINUED)
plastics and Garrido operations, all of which were certified as qualified
agricultural businesses in Puerto Rico during 1996.
In connection with these investments, the Company believes that it has met
the eligible investment criteria of this act related to its investment in its
Puerto Rico dairy subsidiary. Accordingly, in 1996, the Company recognized
$15.75 million in tax credits related to this qualifying investment. Of this
amount, the Company (i) sold $4.0 million of tax credits to third parties,
resulting in a cash gain of $3.4 million (net of a discount and related
expenses), which is recorded in other income, and (ii) recognized a deferred tax
asset for the remainder of the tax credit in the amount of $11.75 million,
resulting in a corresponding credit to tax expense. These tax credits can be
used by the Company to eliminate both Puerto Rico income taxes and the 10%
Puerto Rico withholding tax on distributions from the Company's Puerto Rico
operations.
The Company is currently investigating whether its $43.0 million investment
in its fruit and plastics operations will qualify for tax credits based on
recent rulings by Puerto Rico tax authorities and has requested a formal ruling
on the allowability of such tax credits from the Treasury Department in Puerto
Rico. If a favorable ruling on the availability of these additional tax credits
is obtained, the Company will recognize substantial additional tax benefits in
the form of either a deferred tax asset or proceeds from the sale of such
credits.
11. STOCKHOLDERS' EQUITY
CAPITAL SHARES. Authorized capital shares of the Company include 1,000,000
shares of preferred stock with a par value of $.01 per share and 20,000,000
shares of common stock with a par value of $.01 per share. There have been no
shares of preferred stock issued by the Company. The rights and preferences of
preferred stock are established by the Company's Board of Directors upon
issuance. On March 31, 1995, the Company issued 6,313,479 shares of common stock
in exchange for all of the outstanding equity interests of the Combined
Entities, including profits interests that were granted to certain individuals
as compensation for services in identifying, structuring and negotiating certain
acquisitions. Immediately prior to the combination date, the existing investors
fixed this profits interest by mutual agreement and exchanged equity interests
among investors and these individuals. In connection with this exchange, the
Company recorded a compensation expense charge to merger expense of $5.1
million, which approximated the fair value of these interests, and resulted in a
capital contribution in the same amount.
COMMON STOCK SPLIT. On February 28, 1996, the Company's Board of Directors
authorized a 69 for 1 stock split in the form of a common stock dividend payable
to stockholders of record on February 29, 1996. All references in the
consolidated financial statements to number of common shares outstanding and per
share amounts, and all references to common stock issued, stock options and
related prices in the notes to the consolidated financial statements have been
restated to reflect the split.
STOCK OFFERINGS. On April 22, 1996, the Company sold 3,795,000 shares of
common stock, $.01 par value per share, in an initial public offering at a price
to the public of $14.00 per share. Following this offering, the Company had
10,108,479 shares of common stock issued and outstanding. The public offering
provided net cash proceeds to the Company of approximately $48.6 million. Of
this amount, $31.1 million was used to repay senior debt, $15.7 million was used
to repay the Company's 15% subordinated notes, and $1.8 million was used to pay
prepayment penalties related to the early extinguishment of the 15% subordinated
notes. As a result of these transactions, the Company recorded a $2.2 million
extraordinary
F-18
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. STOCKHOLDERS' EQUITY (CONTINUED)
loss from extinguishment of debt which included $1.8 million in prepayment
penalties and $1.3 million for the write-off of deferred financing costs related
to the repaid debt, net of a tax benefit of $0.9 million. In addition, on August
7, 1996, the Company sold 625,000 shares of its common stock at a price of
$16.00 per share in a private placement to a single investor. Following the
private sale, the Company had 10,739,729 shares of common stock issued and
outstanding. As is discussed in more detail in Note 19, in January 1997, the
Company completed the sale of additional shares of its common stock.
STOCK OPTION AND RESTRICTED STOCK PLANS. In connection with the
combination, the Company adopted an exchange option and restricted stock plan,
whereby the outstanding stock options granted by the Combined Entities were
converted into options to acquire 586,523 shares of common stock on
substantially the same terms as the prior options. These options are exercisable
at prices ranging from $.03 to $6.79 per share, which approximated the fair
market value of such shares at the date of original grant. At December 31, 1996,
577,760 of such options were outstanding, of which 480,450 were exercisable at
prices ranging from $.03 to $6.79 per share. The options vest ratably in five
annual increments and may be exercised, to the extent vested, over the ten-year
period following the award date.
Effective March 31, 1995, the Company also adopted the Option and Restricted
Stock Plan (the "Plan"), which provides for grants of incentive and nonqualified
stock options and awards of restricted stock to directors and key employees of
the Company or its subsidiaries of up to 1,069,500 shares, provided that no more
than 379,500 shares may be awarded as restricted stock. Under the terms of the
Plan, the options vest ratably over a three-year period, except for options
granted to outside directors, which vest immediately. The Plan also provides
that the exercise price of stock options will not be less than the fair market
value on the date of grant, and in the case of an incentive stock option granted
to an employee owning more than 10% of the common stock of the Company on the
date of grant, not less than 110% of the fair market value. On March 31, 1995,
the Company's Board of Directors granted 474,375 options pursuant to the Plan at
an exercise price per share of $10.51. In addition, during the remainder of
1995, the Company granted options for an additional 3,450 shares at the same
exercise price per share. At December 31, 1995, 477,825 options were outstanding
at an exercise price of $10.51 per share, of which 3,450 shares were
exercisable.
In 1996, the Company granted options to purchase 398,153 shares at exercise
prices ranging from $12.32 to $17.50 per share. At December 31, 1996, 873,978
options were outstanding at exercise prices ranging from $10.51 to $17.50 per
share, of which 739,035 shares were exercisable.
Effective January 1, 1997, the Board of Directors authorized the grant of
options for 141,500 shares at an exercise price of $20.25 per share.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation has been
recognized since stock options granted under these plans were at exercise prices
which approximated market value at the grant date. Had compensation expense been
determined for current period stock option grants using fair value methods
provided for in
F-19
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. STOCKHOLDERS' EQUITY (CONTINUED)
SFAS 123, the Company's pro forma net income (loss) and net earnings (loss) per
common share would have been the amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Compensation cost......................................................................... $ 1,697 $ 765
Net income (loss):
As reported............................................................................. $ 25,714 $ (10,038)
Pro forma............................................................................... 24,611 (10,543)
Net earnings (loss) per share:
As reported............................................................................. $ 2.59 $ (1.64)
Pro forma............................................................................... 2.48 (1.73)
Stock option share data:
Stock options granted during period..................................................... 398,153 477,825
Weighted average exercise price......................................................... $ 14.87 $ 10.51
Average option compensation value (a)................................................... 8.86 6.41
</TABLE>
- ------------------------
(a) Calculated in accordance with the Black-Scholes option pricing model, using
the following assumptions: expected volatility of 30% to 35%; expected
dividend yield of 0%; expected option term of ten years and risk-free rate
of return as of the date of grant which ranged from 5.64% to 7.15% based on
the yield of ten-year U.S. treasury securities.
WARRANTS. Prior to March 31, 1995, each of the Combined Entities had
entered into various warrant agreements with their subordinated and junior
subordinated noteholders which granted such holders the right to purchase equity
interests in each of the companies. These warrants were exercisable, in whole or
in part, at various dates through December 31, 2005. Immediately prior to the
combination, all warrant holders exercised their warrants to acquire equity
interests in the Combined Entities in consideration for aggregate proceeds of
$4.1 million and received shares of the Company's common stock in the
combination.
12. PENSION AND PROFIT SHARING PLANS
The Company's subsidiaries each sponsor an employees savings and profit
sharing plan. Non-union employees who have completed one or more years of
service and have met other requirements pursuant to the plans are eligible to
participate in the plans. The employees participating in the plans can generally
make contributions to the plans of between 6% and 8% of their annual
compensation, and each of the subsidiaries can elect to match such
contributions. During each of the years ended December 31, 1996, 1995 and 1994,
the Company expensed contributions to the plans of approximately $0.8 million.
Certain of the Company's recently acquired subsidiaries participate in
various multiemployer union pension plans, which are administered jointly by
management and union representatives and which sponsor most full-time and
certain part-time union employees who are not covered by the Company's other
plans. The pension expense for these plans approximated $0.2 million during
1996. The Company
F-20
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
12. PENSION AND PROFIT SHARING PLANS (CONTINUED)
could, under certain circumstances, be liable for unfunded vested benefits or
other expenses of jointly administered union/management plans. At this time, the
Company has not established any liabilities because withdrawal from these plans
is not probable or reasonably possible.
13. MERGER AND OTHER COSTS
MERGER AND OTHER COSTS. During 1995 and 1994, the Company incurred merger
and other costs of $10.2 million and $1.7 million, respectively, which consisted
of the costs associated with the negotiation of the merger and preparation of
related merger documents and agreements, financial consulting costs and other
costs related to the combination of $8.8 million and $1.4 million in 1995 and
1994, respectively; and other non-operating costs of $1.4 million and $0.3
million, respectively. During 1995, these other merger costs included a one-time
$0.5 million payment to cancel an existing management consulting agreement; a
one-time tax cost of $1.5 million to convert the Company's Puerto Rico operating
subsidiaries to United States corporations; the write-off of $0.4 million in
unamortized organization costs; and $5.1 million to recognize compensation
expense related to the issuance of common stock in exchange for a negotiated
profits interest (Note 12), which resulted in a capital contribution in the same
amount. Other non-operating costs included $0.3 million of bank fees in 1994
related to the funding of bridge loans to repay certain indebtedness, and during
1995, $0.7 million of costs associated with several uncompleted acquisitions and
$0.7 million of costs associated with an uncompleted debt offering.
During 1996, the Company expensed non-operating costs of $0.6 million in
connection with fees and expenses paid to amend its Senior Credit Facility.
EXTRAORDINARY LOSS. During 1996, 1995 and 1994, as a result of the
repayment of the outstanding indebtedness, the Company expensed approximately
$2.2 million (net of income tax benefit of $0.9 million), $8.5 million (net of
income tax benefit of $0.7 million) and $0.2 million, respectively, of debt
issuance, legal and other costs associated with extinguishment of prior credit
facilities. These amounts have been classified as an extraordinary loss in
accordance with the provisions of Statement of Financial Accounting Standards
No. 4, "Reporting Gains and Losses From the Extinguishment of Debt."
F-21
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for interest........................................................... $ 16,932 $ 17,226 $ 16,929
Cash paid for taxes.............................................................. 4,662 1,432 362
Noncash transactions:
Issuance of subsidiary preferred stock in connection with acquisitions......... 3,000
Issuance of subordinated notes and amounts payable to the seller in connection
with acquisitions............................................................ 173 91 4,495
Dividends payable or paid in additional preferred stock on subsidiary stock...... 197
Distribution of investment and related debt in a bread bag manufacturer to
shareholders of Reddy Ice.................................................... 1,534
Acquisition of minority interest common stock and exercise of warrants 993
Compensation expense recorded as a capital contribution........................ 5,111
Subordinated notes issued in lieu of interest.................................... 236 671 430
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are parties, in the ordinary course of
business, to certain claims and litigation. In management's opinion, the
settlement of such matters is not expected to have a material impact on the
consolidated financial statements.
In addition, the Company is a party to employment agreements with certain
officers which provided for minimum compensation levels and incentive bonuses
along with provisions for termination of benefits in certain circumstances. The
Company also entered into a consulting and noncompetition arrangement with a
former officer providing for monthly payments of $12,500 for services to be
rendered in the future, which expires in March 1998.
16. RELATED PARTY TRANSACTIONS
Prior to March 31, 1995, the Company had consulting agreements with certain
stockholders and affiliates requiring the payment of monthly consulting fees,
plus expenses, in consideration for financial advisory and oversight services
provided to it by such stockholders. These consulting agreements, which were
cancelable only at the option of such stockholders over their term, were
canceled in the combination. During the years ended December 31, 1995 and 1994,
the Company expensed $0.2 million and $0.9 million, respectively, plus expenses
under the provisions of these agreements, which are included in general and
administrative expenses. In addition, the Company paid an affiliate of one of
its stockholders investment banking fees of $1.1 million, along with related
expenses, during the year ended December 31, 1994, for acquisition and financing
services, which were included as part of the costs and expenses of the
acquisition.
F-22
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
17. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Information about the Company's operations in the Dairy and Ice businesses
and in different geographic areas for the three years ended December 31, 1996,
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales to unaffiliated customers:
Dairy:
United States........................................ $ 252,826 $ 175,553 $ 102,073
Puerto Rico.......................................... 215,306 204,406 191,334
---------- ---------- ----------
468,132 379,959 293,407
Ice--United States..................................... 52,784 50,507 47,701
---------- ---------- ----------
Total.................................................. $ 520,916 $ 430,466 $ 341,108
---------- ---------- ----------
---------- ---------- ----------
Operating income:
Dairy:
United States........................................ $ 11,339 $ 9,125 $ 4,848
Puerto Rico.......................................... 16,430 14,160 12,274
---------- ---------- ----------
27,769 23,285 17,122
Ice--United States..................................... 11,022 10,116 8,638
Corporate.............................................. (3,669) (2,837)
---------- ---------- ----------
Total.................................................. $ 35,122 $ 30,564 $ 25,760
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets (at end of period):
Dairy:
United States........................................ $ 167,179 $ 68,852 $ 68,781
Puerto Rico.......................................... 152,198 119,977 125,207
---------- ---------- ----------
319,377 188,829 193,988
Ice--United States..................................... 47,096 40,519 44,964
Corporate.............................................. 17,675 3,174
---------- ---------- ----------
Total.................................................. $ 384,148 $ 232,522 $ 238,952
---------- ---------- ----------
---------- ---------- ----------
Capital expenditures:
Dairy.................................................. $ 10,229 $ 6,676 $ 3,364
Ice.................................................... 3,715 3,573 1,420
Corporate.............................................. 78 143
---------- ---------- ----------
Total.................................................. $ 14,022 $ 10,392 $ 4,784
---------- ---------- ----------
---------- ---------- ----------
Depreciation expense:
Dairy.................................................. $ 6,786 $ 5,995 $ 4,943
Ice.................................................... 3,115 3,263 3,301
Corporate.............................................. 29
---------- ---------- ----------
Total.................................................. $ 9,930 $ 9,258 $ 8,244
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-23
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," the Company is required to disclose an estimate of the fair value
of the Company's financial instruments as of December 31, 1996 and 1995.
Differences between the historical presentation and estimated fair values can
occur for many reasons, including taxes, commissions, prepayment penalties,
make-whole provisions and other restrictions as well as the inherent limitations
in any estimation technique.
Due to their near-term maturities, the carrying amounts of accounts
receivable and accounts payable are considered equivalent to fair value. In
addition, because the interest rates on the Company's revolving credit and term
loan facilities and certain other debt are variable, their fair values
approximate their carrying values.
Certain of the Company's long-term debt bears fixed interest rates and is
privately placed with unique terms and no active market. The fair value of such
long-term debt was determined by discounting future cash flows at current market
yields. In addition, the Company has entered into various interest rate
agreements to reduce the Company's sensitivity to changes in interest rates on
its variable rate debt. The fair values of these instruments were determined
based on current values for similar instruments with similar terms. The
following is a summary of the asset (liability) values for both the carrying
values and fair values of such instruments:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
HISTORICAL HISTORICAL
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate debt............................... $ (36,696) $ (34,036) $ (52,472) $ (53,621)
Interest rate agreements...................... (143) (1,220)
</TABLE>
19. SUBSEQUENT EVENTS
On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01
par value per share, in a public offering at a price to the public of $22.00 per
share. Following this offering, the Company had 15,011,729 shares of common
stock issued and outstanding. The public offering provided net cash proceeds to
the Company of approximately $89.0 million. Of this amount, $36 million was used
to repay subordinated notes and $4.3 million was used to pay prepayment
penalties related to the early extinguishment of the subordinated notes, which,
along with the remaining balance of unamortized deferred loan costs, will be
reported as an extraordinary loss from the early extinguishment of debt in 1997.
The remainder of the net proceeds were used to repay a portion of the
outstanding balance of the acquisition facility of the Company's Senior Credit
Facility.
As discussed in Note 11, on April 22, 1996, and August 7, 1996, the Company
sold 3,795,000 shares and 625,000 shares, respectively, of its common stock,
which provided net cash proceeds to the Company of approximately $58.4 million,
which was used to repay existing debt. In addition, as discussed above, on
January 28, 1997, the Company sold an additional 4,270,000 shares of its common
stock, which provided net cash proceeds to the Company of approximately $89.0
million, which was used to repay debt. Had these sales of common stock occurred
on January 1, 1996, the supplemental pro forma net earnings per
F-24
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
19. SUBSEQUENT EVENTS (CONTINUED)
share before extraordinary losses from the early extinguishment of debt for the
year ended December 31, 1996, would have decreased by $.47 to $2.34.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1996 and 1995 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------------
1996 FIRST SECOND THIRD FOURTH FULL YEAR
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ 109,035 $ 116,272 $ 139,304 $ 156,305 $ 520,916
Gross profit......................................... 26,420 32,970 38,090 34,888 132,368
Income before extraordinary loss..................... 383 4,553 18,937 4,056 27,929
Net income........................................... 383 2,338 18,937 4,056 25,714
Earnings per common share:
Income before extraordinary loss................... 0.06 0.46 1.68 0.35 2.81
Net income......................................... 0.06 0.24 1.68 0.35 2.59
</TABLE>
<TABLE>
<CAPTION>
1995 FIRST SECOND THIRD FOURTH FULL YEAR
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ 104,876 $ 110,029 $ 110,549 $ 105,012 $ 430,466
Gross profit......................................... 26,207 31,046 33,439 27,141 117,833
Income (loss) before extraordinary loss.............. (9,889) 2,332 4,711 1,270 (1,576)
Net income (loss).................................... (18,351) 2,332 4,711 1,270 (10,038)
Earnings per common share:
Income (loss) before extraordinary loss............ (1.80) 0.37 0.75 0.20 (0.26)
Net income (loss).................................. (3.34) 0.37 0.75 0.20 (1.64)
</TABLE>
Earnings per common share calculations for each of the quarters were based
on the weighted average number of shares outstanding for each period, and the
sum of the quarters may not necessarily be equal to the full year earnings per
common share amount.
The results for the first quarter of 1995 included $8.8 million of merger
costs related to the combination along with $8.5 million of extraordinary losses
from the early extinguishment of debt repaid at the combination date.
The results for the second quarter of 1996 include $2.2 million of
extraordinary losses from the early extinguishment of debt repaid with the
proceeds of the Company's initial public offering.
The results for the third quarter of 1996 include a gain on the sale of
Puerto Rico tax credits of $3.4 million and a tax benefit related to the
recognition of the remaining amount of such credits of $11.8 million, partially
offset by $0.6 million in financing costs related to the amendment of the
Company's Senior Credit Facility.
F-25
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 8,951 $ 7,130
Accounts receivable........................................................... 50,608 50,784
Inventories................................................................... 19,228 21,536
Prepaid expenses and other current assets..................................... 2,754 3,369
Refundable income taxes....................................................... 2,312 --
Deferred income taxes......................................................... 3,672 3,796
------------ -----------
Total current assets........................................................ 87,525 86,615
PROPERTY, PLANT AND EQUIPMENT................................................... 123,260 136,281
DEFERRED INCOME TAXES........................................................... 8,524 8,319
INTANGIBLE AND OTHER ASSETS..................................................... 164,839 171,091
------------ -----------
TOTAL....................................................................... $384,148 $402,306
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses......................................... $ 46,664 $ 42,118
Income taxes payable.......................................................... 1,105 1,154
Current portion of long-term debt............................................. 12,876 17,323
------------ -----------
Total current liabilities................................................... 60,645 60,595
LONG-TERM DEBT.................................................................. 226,693 128,150
DEFERRED INCOME TAXES........................................................... 3,278 4,928
COMMITMENTS AND CONTINGENCIES...................................................
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 100,000,000 shares authorized,
10,741,729 and 15,286,968 shares issued and outstanding..................... 107 153
Additional paid-in capital.................................................... 89,337 183,263
Retained earnings............................................................. 4,088 25,217
------------ -----------
Total stockholders' equity.................................................. 93,532 208,633
------------ -----------
TOTAL....................................................................... $384,148 $402,306
------------ -----------
------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-26
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1996 1997 1996 1997
------------ ------------- ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
NET SALES................................................ $ 116,272 $ 171,694 $ 225,307 $ 336,819
COST OF SALES............................................ 83,302 125,478 165,917 252,047
------------ ------------- ------------ -------------
GROSS PROFIT............................................. 32,970 46,216 59,390 84,772
OPERATING COSTS AND EXPENSES:
Selling and distribution............................... 17,180 22,102 32,682 42,244
General and administrative............................. 4,884 7,583 9,805 16,397
Amortization of intangibles............................ 1,023 1,510 1,960 2,982
------------ ------------- ------------ -------------
Total operating costs and expenses................... 23,087 31,195 44,447 61,623
------------ ------------- ------------ -------------
INCOME FROM OPERATIONS................................. 9,883 15,021 14,943 23,149
OTHER (INCOME) EXPENSE:
Interest expense, net.................................. 3,872 2,910 8,488 6,580
Other income, net...................................... (172) (222) (252) (18,575)
------------ ------------- ------------ -------------
Total other (income) expense......................... 3,700 2,688 8,236 (11,995)
------------ ------------- ------------ -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........ 6,183 12,333 6,707 35,144
INCOME TAXES............................................. 1,630 3,376 1,771 10,745
------------ ------------- ------------ -------------
INCOME BEFORE EXTRAORDINARY LOSS......................... 4,553 8,957 4,936 24,399
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT..... (2,215) -- (2,215) (3,270)
------------ ------------- ------------ -------------
NET INCOME............................................... $ 2,338 $ 8,957 $ 2,721 $ 21,129
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
NET EARNINGS (LOSS) PER SHARE:
Income before extraordinary loss....................... $ 0.46 $ 0.55 $ 0.58 $ 1.57
Extraordinary loss..................................... (0.22) -- (0.26) (0.21)
------------ ------------- ------------ -------------
Net income........................................... $ 0.24 $ 0.55 $ 0.32 $ 1.36
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
WEIGHTED AVERAGE SHARES OUTSTANDING...................... 9,921,715 16,342,250 8,455,332 15,509,388
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
See notes to condensed consolidated financial statements.
F-27
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1996 1997
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 2,721 $ 21,129
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 4,479 6,512
Amortization of intangible assets, including deferred financing costs............... 2,297 3,401
Loss on the sales of assets......................................................... 20 38
Extraordinary loss from early extinguishment of debt................................ 2,215 3,270
Noncash and imputed interest........................................................ 236 --
Deferred income taxes............................................................... 767 1,731
Changes in operating assets and liabilities:
Accounts and notes receivable..................................................... (2,625) 104
Inventories....................................................................... (899) (2,082)
Prepaid expenses and other assets................................................. 37 (1,676)
Accounts payable and other accrued expenses....................................... (1,959) (4,465)
Income taxes payable.............................................................. (511) 5,535
---------- -----------
Net cash provided by operating activities....................................... 6,778 33,497
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.......................................... (7,984) (9,067)
Proceeds from the sale of property, plant and equipment............................. 245 67
Cash outflows for acquisitions...................................................... (4,176) (16,278)
---------- -----------
Net cash used in investing activities............................................. (11,915) (25,278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt.................................................. 8,653 28,000
Repayment of debt................................................................... (52,322) (122,096)
Payment of deferred financing costs and debt prepayment penalties................... (1,800) (4,970)
Issuance of common stock, net of expenses........................................... 48,608 89,026
---------- -----------
Net cash provided by (used in) financing activities................................. 3,139 (10,040)
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS................................................... (1,998) (1,821)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 3,177 8,951
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 1,179 $ 7,130
---------- -----------
---------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of June 30, 1997 and for
the three month and six month periods ended June 30, 1997 and 1996 have been
prepared by Suiza Foods Corporation (the "Company" or "Suiza Foods") without
audit. In the opinion of management, all necessary adjustments (which include
only normal recurring adjustments) to present fairly, in all material respects,
the consolidated financial position, results of operations and cash flows of the
Company as of June 30, 1997 and for the three month and six month periods ended
June 30, 1997 and 1996 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the Company's 1996 financial
statements contained in its Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 29, 1997.
2. INVENTORIES
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1996 1997
--------------- -----------
<S> <C> <C>
Pasteurized and raw milk and raw materials...................... $ 7,693 $ 9,795
Parts and supplies.............................................. 5,584 6,067
Finished goods.................................................. 5,951 5,674
------- -----------
$ 19,228 $ 21,536
------- -----------
------- -----------
</TABLE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1996 1997
--------------- -----------
<S> <C> <C>
Senior credit facility:
Revolving loan facility....................................... $ 8,600 $ 2,800
Acquisition loan facility..................................... 69,100 --
Term loan facility............................................ 125,000 142,000
Subordinated notes............................................ 36,000 --
Capital lease obligations and other debt........................ 869 673
--------------- -----------
239,569 145,473
Less: current portion........................................... (12,876) (17,323)
--------------- -----------
$ 226,693 $ 128,150
--------------- -----------
--------------- -----------
</TABLE>
On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01
par value per share, in a public offering (the "Offering") at a price to the
public of $22.00 per share. The Offering provided net cash proceeds to the
Company of approximately $89.0 million. Of this amount, $36.0 million was used
to repay subordinated notes and $4.3 million was used to pay prepayment
penalties related to the early extinguishment of the subordinated notes, which,
along with the related balance of unamortized deferred loan costs and net of
related income tax benefits, was reported as an extraordinary loss from the
early extinguishment of debt. The remainder of the net proceeds were used to
repay a portion of the outstanding balance of the acquisition loan facility of
the Company's Senior Credit Facility.
F-29
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
3. LONG-TERM DEBT (CONTINUED)
On March 5, 1997, the Company amended its Senior Credit Facility. Pursuant
to this amendment, the Company's term loans were expanded from a $130.0 million
facility into a $150.0 million facility. Quarterly amortization payments
beginning March 31, 1997 on this facility are $4.0 million, increasing to: 1)
$4.5 million on March 31, 1998; 2) $5.0 million on March 31, 1999; 3) $5.5
million on March 31, 2000; 4) $6.0 million on March 31, 2001; 5) $6.5 million on
March 31, 2002, with a final installment of $24.0 million due on March 31, 2003.
The Company further amended its Senior Credit Facility to increase the
acquisition loan facility from $90.0 million to $100.0 million. The Company is
required to pay interest only on amounts drawn under the acquisition loan
facility until June 30, 1999, at which time any outstanding balance will convert
into a term loan facility with scheduled amortization.
On July 31, 1997, the Company amended its Senior Credit Facility to provide
for an aggregate of $700.0 million comprised of: (i) a $150.0 million term loan;
(ii) a $50.0 million revolving credit facility; (iii) a $325.0 million revolving
acquisition facility, and (iv) a $175.0 million acquisition term loan. Under the
terms of the Senior Credit Facility, the $150.0 million term loan will be
amortized over six years beginning September 30, 1997 and the revolving credit
facility expires on September 30, 2003. The availability under the revolving
acquisition facility will decrease at the end of each calendar quarter beginning
December 31, 2000 by $20.3 million until December 31, 2002, when it begins
reducing by $40.6 million each quarter until maturity on September 30, 2003. The
$175.0 million acquisition term loan will be amortized over five years beginning
December 31, 1999. Amounts outstanding under the Senior Credit Facility will
bear interest at a rate per annum equal to one of the following rates, at the
Company's option: (i) the sum of a base rate equal to the higher of the Federal
Funds rates plus 50 basis points or First Union National Bank's prime commercial
lending rate, plus a margin that varies from 0 to 50 basis points depending on
the Company's ratio of defined indebtedness to EBITDA (as defined in the Senior
Credit Facility); or (ii) The London Interbank Offered Rate ("LIBOR") plus a
margin that varies from 75 to 150 basis points depending on the Company's ratio
of defined indebtedness to EBITDA. The Company will pay a commitment fee on
unused amounts of the revolving facility and the revolving acquisition facility
that ranges from 20 to 37.5 basis points, based on the Company's ratio of
defined indebtedness to EBITDA.
4. TAXES
In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico
Agricultural Tax Incentives Act of 1995, which reduced the effective income tax
rate for qualified agricultural businesses from 39% to 3.9% and provided for a
50% tax credit for certain "eligible investments" in qualified agricultural
businesses in Puerto Rico. During 1996, the Company made investments in its
Suiza-Puerto Rico dairy, fruit, plastics and coffee operations, all of which
were certified as qualified agricultural businesses in Puerto Rico during 1996.
During 1996, the Company recognized $15.75 million in tax credits related to
qualifying investment made in its Puerto Rico dairy subsidiary which met the
eligible investment criteria of this act. However, in 1996 the Company did not
recognize any of the potential tax credits related to its investments in its
Puerto Rico fruit, plastics and coffee operations since certain rulings in 1996
by Puerto Rico tax authorities created uncertainty as to whether these
investments met the eligible investment criteria of the act and whether these
additional tax credits had been earned.
During the first quarter of 1997, the Company obtained a ruling from the
Commonwealth of Puerto Rico confirming that its investments in its Suiza-Puerto
Rico fruit and plastics subsidiaries qualified for the
F-30
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
4. TAXES (CONTINUED)
50% tax credit. Accordingly, in March 1997, the Company recognized a
nonrecurring gain of $18.1 million, net of discounts and related expenses ($11.5
million after income taxes) for earned tax credits which at March 31, 1997, it
had agreed to sell to third parties. During the second quarter of 1997, the
Company completed the sale of substantially all of these tax credits to the
third parties.
The Company is currently investigating whether its investment in its coffee
business will qualify for additional tax credits based on recent rulings by
Puerto Rico tax authorities and is awaiting a ruling from the Treasury
Department in Puerto Rico on the availability of such tax credits. If the
Company ultimately qualifies for such credits, the Company will account for
these tax benefits as an adjustment of the purchase price of the coffee
business, which would result in a reduction of goodwill.
5. ACQUISITIONS
During the quarter, the Company acquired four small ice businesses for total
consideration of approximately $10.7 million. Estimated annual sales of these
ice companies are $8.3 million. Since June 30, 1997, the Company has acquired
three ice companies for approximately $5.9 million, bringing the total number of
acquired ice companies in 1997 to ten, with estimated aggregate annual sales of
$15.8 million.
On July 1, 1997, the Company completed the acquisition of substantially all
the assets of Dairy Fresh L.P., a Delaware limited partnership ("Dairy Fresh"),
for approximately $104.5 million in cash (subject to adjustment and excluding
transaction costs), plus the assumption of certain current liabilities. Dairy
Fresh is a manufacturer of fresh milk and ice cream products based in
Winston-Salem, North Carolina. During its fiscal year ended December 31, 1996,
Dairy Fresh reported net sales of approximately $117.0 million throughout the
southeastern United States. The Company will use the acquired assets to continue
operating the business previously operated by Dairy Fresh. The Company financed
the acquisition with borrowings under its Senior Credit Facility.
On July 31, 1997 the Company completed the purchase of all the outstanding
stock of three affiliated dairy manufacturing and distribution companies, as
well as an affiliated water bottling and distribution company, and 16 affiliated
plastic manufacturing companies headquartered in Franklin, Massachusetts
(collectively, the "Garelick Companies"). In connection with this acquisition
the Company paid aggregate cash consideration of approximately $293.7 million
(subject to adjustment and excluding transaction costs) and issued 446,100
shares of common stock to acquire the outstanding stock and repay existing
indebtedness of the Garelick Companies. The combined businesses operated by the
Garelick Companies reported net sales of approximately $363 million during the
fiscal year ended September 30, 1996. The dairy operations of the Garelick
Companies are operated through Garelick Farms in Franklin, Massachusetts,
Fairdale Farms in Bennington, Vermont, and Grant's Dairy in Bangor, Maine. The
Garelick Companies also operate the Miscoe Springs water bottling company in
Mendon, Massachusetts and 16 plastic bottle manufacturing operations located in
Connecticut, Florida, Georgia, Illinois, Louisiana, Maine, Massachusetts, New
Jersey, North Carolina, Ohio, Pennsylvania, Texas and Virginia. The acquisition
of the Garelick Companies expands the geographic presence of the Company's dairy
operations into the northeastern United States and expands the Company's
operations into the related business of plastic container manufacturing.
F-31
<PAGE>
SUIZA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
5. ACQUISITIONS (CONTINUED)
In connection with the acquisition of the Garelick Companies, the Company
increased the size of its Senior Credit Facility from $300.0 million to $700.0
million in the aggregate (see footnote 3--Long-Term Debt).
6. STOCKHOLDERS' EQUITY
On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01
par value per share, in a public offering at a price to the public of $22.00 per
share. On March 12, 1997, the Company issued 133,000 shares of its common stock
in partial consideration of the purchase of an ice company. As of June 30, 1997
the Company had 15,286,968 shares of common stock issued and outstanding.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
The Morningstar Group Inc.:
We have audited the accompanying consolidated balance sheets of The
Morningstar Group Inc. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Morningstar Group Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
February 10, 1997
F-33
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................... $ 4,786 $ 5,811
Receivables, net of allowance for doubtful accounts of $6,676 and $1,595,
respectively..................................................................... 57,802 28,043
Inventories........................................................................ 25,400 11,123
Prepaids and other................................................................. 3,015 1,597
Deferred tax assets................................................................ 7,339 3,089
Net assets held for sale........................................................... 676 836
------------ ------------
Total current assets............................................................. 99,018 50,499
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................................... 7,843 5,713
Buildings and improvements......................................................... 29,507 18,804
Machinery and equipment............................................................ 70,239 43,552
------------ ------------
Gross property, plant and equipment.............................................. 107,589 68,069
Less: Accumulated depreciation..................................................... (22,807) (17,748)
------------ ------------
Net property, plant and equipment................................................ 84,782 50,321
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets..................................................... 73,146 1,847
Goodwill........................................................................... 96,175 58,671
Deferred financing costs........................................................... 2,731 1,259
Other assets....................................................................... 139 112
------------ ------------
Total intangible and other assets................................................ 172,191 61,889
------------ ------------
Total assets..................................................................... $ 355,991 $ 162,709
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................... $ 32,968 $ 21,488
Accrued liabilities................................................................ 39,923 15,869
Current maturities of long-term debt............................................... 8,000 8,000
------------ ------------
Total current liabilities........................................................ 80,891 45,357
LONG-TERM DEBT (net of current maturities)........................................... 177,349 36,000
OTHER LONG-TERM LIABILITIES.......................................................... 3,269 1,959
DEFERRED TAX LIABILITIES............................................................. 5,694 2,070
COMMITMENTS AND CONTINGENCIES........................................................
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized; 15,298,111 shares in
1996 and 15,244,261 shares in 1995 issued........................................ 153 152
Additional paid-in capital......................................................... 73,179 71,991
Treasury stock, at cost (767,000 shares in 1996 and 230,000 shares in 1995)........ (6,140) (1,840)
Retained earnings.................................................................. 21,596 7,020
------------ ------------
Total stockholders' equity....................................................... 88,788 77,323
------------ ------------
Total liabilities and stockholders' equity....................................... $ 355,991 $ 162,709
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
----------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND
SHARE AMOUNTS)
<S> <C> <C> <C>
NET SALES....................................................................... $ 394,306 $ 304,730 $ 292,314
COST OF GOODS SOLD.............................................................. 302,801 232,948 222,145
----------- -------------- --------------
GROSS PROFIT.................................................................... 91,505 71,782 70,169
OPERATING COSTS AND EXPENSES:
Distribution.................................................................. 17,056 16,120 18,689
Selling and marketing......................................................... 32,839 22,233 21,295
General and administrative.................................................... 15,450 13,001 11,778
----------- -------------- --------------
Total operating costs and expenses.......................................... 65,345 51,354 51,762
----------- -------------- --------------
OPERATING INCOME................................................................ 26,160 20,428 18,407
INTEREST EXPENSE................................................................ 3,647 3,921 4,446
AMORTIZATION OF DEFERRED FINANCING COSTS........................................ 379 381 351
DIVIDEND INCOME................................................................. -- (268) --
OTHER INCOME, NET............................................................... (286) (1,008) (1,244)
----------- -------------- --------------
INCOME BEFORE INCOME TAXES...................................................... 22,420 17,402 14,854
PROVISION FOR INCOME TAXES...................................................... 7,844 6,062 5,533
----------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS............................................... 14,576 11,340 9,321
DISCONTINUED OPERATIONS:
Income from discontinued operations........................................... -- -- 903(a)
Gain on disposal.............................................................. -- 184(b) 423(b)
----------- -------------- --------------
INCOME FROM DISCONTINUED OPERATIONS............................................. -- 184 1,326
NET INCOME...................................................................... $ 14,576 $ 11,524 $ 10,647
----------- -------------- --------------
----------- -------------- --------------
EARNINGS PER COMMON SHARE:
Continuing operations......................................................... $ .96 $ .74 $ .62
Discontinued operations....................................................... -- .02 .09
----------- -------------- --------------
Earnings per common share..................................................... $ .96 $ .76 $ .71
----------- -------------- --------------
----------- -------------- --------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING................ 15,133,887 15,245,562 15,050,538
</TABLE>
- ------------------------
(a) Net of applicable tax provision of $507.
(b) Net of applicable tax provision of $216 and $2,865.
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
COMMON AND ADDITIONAL TREASURY RETAINED
SHARES PAID-IN STOCK AT EARNINGS
ISSUED CAPITAL COST (DEFICIT) TOTAL
------------ -------------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993....................... 14,287,212 $ 69,684 $ -- $ (15,151) $ 54,533
Exercise of stock options........................ 633,585 1,622 -- -- 1,622
Net income....................................... -- -- -- 10,647 10,647
------------ ------- ---------- ---------- ---------
Balance, December 31, 1994....................... 14,920,797 71,306 -- (4,504) 66,802
Exercise of stock options........................ 323,464 837 -- -- 837
Purchase of treasury stock....................... -- -- (1,840) -- (1,840)
Net income....................................... -- -- -- 11,524 11,524
------------ ------- ---------- ---------- ---------
Balance, December 31, 1995....................... 15,244,261 72,143 (1,840) 7,020 77,323
Exercise of stock options........................ 53,850 381 -- -- 381
Income tax benefits of stock options............. -- 808 -- -- 808
Purchase of treasury stock....................... -- -- (4,300) -- (4,300)
Net income....................................... -- -- -- 14,576 14,576
------------ ------- ---------- ---------- ---------
Balance, December 31, 1996....................... 15,298,111 $ 73,332 $ (6,140) $ 21,596 $ 88,788
------------ ------- ---------- ---------- ---------
------------ ------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-36
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.............................................. $ 389,101 $ 306,918 $ 284,605
Interest received......................................................... 129 224 134
Income tax refund......................................................... 156 -- --
Cash paid to suppliers and employees...................................... (354,037) (272,992) (259,147)
Interest paid............................................................. (2,971) (4,220) (4,395)
Income taxes paid......................................................... (4,171) (3,199) (2,663)
---------- ---------- ----------
Net cash provided by Continuing Operations................................ 28,207 26,731 18,534
Net cash used by Discontinued Operations.................................. -- -- (3,403)
---------- ---------- ----------
Net cash provided by operating activities................................. 28,207 26,731 15,131
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries:
Working capital........................................................... (3,268) -- --
Property, plant and equipment............................................. (29,926) -- --
Other assets.............................................................. (111,809) -- --
Other long-term (assets) liabilities...................................... (311) -- --
---------- ---------- ----------
(145,314) -- --
---------- ---------- ----------
Capital expenditures...................................................... (11,462) (10,705) (7,622)
Proceeds from sale of assets.............................................. -- 2 32
Dividends received from Preferred Stock................................... -- 268 --
Other..................................................................... (52) 1,258 682
---------- ---------- ----------
Net cash used by Continuing Operations.................................... (156,828) (9,177) (6,908)
Discontinued Operations:
Sale of Discontinued Operations........................................... -- -- 50,237
Sale of Preferred Stock................................................... -- 3,000 --
Capital and other expenditures............................................ -- -- (482)
---------- ---------- ----------
Net cash provided by Discontinued Operations.............................. -- 3,000 49,755
---------- ---------- ----------
Net cash provided (used) by investing activities.......................... (156,828) (6,177) 42,847
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................................... 381 837 1,622
Purchase of treasury stock................................................ (4,300) (1,840) --
Proceeds from issuance of long-term debt.................................. 160,000 -- --
Net borrowings (repayments) under revolving credit facility............... 22,349 (1,892) (14,783)
Principal payments on long-term debt...................................... (50,834) (14,000) (45,470)
Dividends paid............................................................ -- -- (535)
---------- ---------- ----------
Net cash provided (used) by financing activities.......................... 127,596 (16,895) (59,166)
NET INCREASE (DECREASE) IN CASH............................................. (1,025) 3,659 (1,188)
CASH, BEGINNING OF PERIOD................................................... 5,811 2,152 3,340
---------- ---------- ----------
CASH, END OF PERIOD......................................................... $ 4,786 $ 5,811 $ 2,152
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME.................................................................... $ 14,576 $ 11,524 $ 10,647
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATIONS:
Discontinued Operations net income........................................ -- (184) (1,326)
Depreciation.............................................................. 6,378 5,122 4,344
Amortization of intangibles............................................... 3,291 2,700 2,632
(Gain) loss on fixed asset retirements.................................... -- -- (243)
Increase in deferred tax assets........................................... (4,250) 3,635 4,222
Change in assets and liabilities net of effects from acquisitions and
divestitures of subsidiaries:
Accounts receivable....................................................... (5,205) 2,426 (3,707)
Inventories............................................................... (1,243) (583) 987
Prepaids and other........................................................ 1,493 151 3,569
Accounts payable.......................................................... 1,747 4,225 (655)
Accrued liabilities....................................................... 8,011 (4,076) (1,986)
Other long-term liabilities............................................... 3,409 1,791 50
---------- ---------- ----------
Total adjustments......................................................... 13,631 15,207 7,887
---------- ---------- ----------
Net cash provided by Continuing Operations................................ 28,207 26,731 18,534
Discontinued Operations:
Discontinued Operations net income........................................ -- 184 1,326
Gain on disposal.......................................................... -- (184) (423)
Change in working capital................................................. -- -- (4,914)
Depreciation and amortization............................................. -- -- 608
---------- ---------- ----------
Net cash used by Discontinued Operations.................................. -- -- (3,403)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... $ 28,207 $ 26,731 $ 15,131
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-38
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND BUSINESS
BACKGROUND
The Morningstar Group Inc., a Delaware corporation (together with its
subsidiaries, the "Company" or "Morningstar") was formed in March 1991. On April
1, 1988, the Company's predecessor, MorningStar Foods Inc., acquired
substantially all of the net assets and operations of the Dairy Group of The
Southland Corporation.
BUSINESS
The Company's Continuing Operations include its specialty operations which
manufacture and market shelf stable, refrigerated and frozen food products
including nationally branded products, other specialty, dairy-based cultured and
ultra-pasteurized products and non-dairy based food products. Discontinued
Operations include all previously divested regional dairy operations and other
divested operations.
2. PRESTO FOOD PRODUCTS, INC. ACQUISITION
On December 3, 1996, the Company acquired all of the issued and outstanding
shares of capital stock of Presto Food Products, Inc. ("Presto"), a California
corporation, from the shareholders of Presto pursuant to a stock purchase
agreement dated as of October 20, 1996, by and among the Company, Presto and the
Presto shareholders. Presto's sales for the year ended December 31, 1995, were
approximately $139.5 million. Presto is a national manufacturer, marketer and
distributor of non-dairy and dairy products, such as Mocha Mix non-dairy coffee
creamers, Jon Donaire desserts and ice cream cakes, aerosols, bakery toppings
and icings, frozen pre-whipped toppings and creamers, serving customers
throughout the United States since 1937. The Company paid approximately $123.5
million in cash for the stock acquired and assumed approximately $37.4 million
in related liabilities. The allocation of the purchase price was based on
preliminary estimates of fair value. The final allocation may be revised if the
appraised values are significantly different from the preliminary estimates.
Included in the assumed liabilities is approximately $3.2 million related to
costs associated with the involuntary termination and/or relocation of certain
employees of the acquired company. The terminated employees represent redundant
and excess personnel in the operations, marketing, selling, and general and
administrative areas. This termination plan will likely be completed by the
second quarter of 1997. In conjunction with the consummation of the Presto
acquisition, the Company renegotiated its credit agreement. Funds provided by
the renegotiated Senior Credit Agreement ("Senior Credit Agreement") were
utilized to pay off existing senior debt of approximately $44.8 million, to
acquire the capital stock of Presto for $123.5 million and to pay approximately
$2.1 million in fees and expenses associated with the Presto acquisition. The
Company accounted for the acquisition as a purchase and accordingly, Presto's
results are included in the 1996 Consolidated Statement of Operations for the
period December 3, 1996, through December 31, 1996.
F-39
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. PRESTO FOOD PRODUCTS, INC. ACQUISITION (CONTINUED)
Unaudited pro forma operating results of the Company, assuming the
acquisition had been made as of January 1, 1995, follow. Such information
includes adjustments to reflect additional goodwill and intangible amortization,
a reduction in redundant and excess personnel related costs, additional interest
expense, additional amortization of deferred financing costs and additional
income tax expense.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Pro forma net sales................................................... $ 528,056 $ 444,202
---------- ----------
---------- ----------
Pro forma net income from Continuing Operations....................... $ 18,325 $ 13,799
---------- ----------
---------- ----------
Pro forma net income.................................................. $ 18,325 $ 13,983
---------- ----------
---------- ----------
Pro forma earnings per share from Continuing Operations............... $ 1.21 $ 0.91
---------- ----------
---------- ----------
Pro forma earnings per share.......................................... $ 1.21 $ 0.92
---------- ----------
---------- ----------
</TABLE>
3. OTHER ACQUISITIONS
WACKY WILLIE ACQUISITION
On October 1, 1996, the Company completed the acquisition of the rights to
the Wacky Willie and Killer Shake trademarks for $300,000 in cash from Killer
Productions Company. There were no liabilities associated with the acquisition,
nor were there any other assets included in the transaction. The Company may at
its sole option, before August 1999, pay an additional $700,000 to Killer
Productions representing the final portion of the purchase price. In addition,
in the event net sales reach $5.0 million in any consecutive twelve-month period
ending on or before August 1999, the Company will be required to pay the
additional $700,000 representing the final portion of the purchase price. The
funding for this purchase was provided by the Company's operations. Sales of
Killer Shake are included in the 1996 Consolidated Statement of Operations for
the period January 1, 1996, through December 31, 1996. The Company manufactured
and sold this product under a license arrangement for the period January 1,
1996, through September 30, 1996.
CREAM PRODUCTS ACQUISITION
On August 1, 1996, the Company completed the purchase of substantially all
of the assets of Cream Products Company ("Cream Products"), located in Chicago,
Illinois. Cream Products' sales for the year ended December 31, 1995, were
approximately $24.6 million. Cream Products is a manufacturer and distributor of
dairy and non-dairy products primarily supplying food makers and food service
customers throughout the United States since 1938. The Company paid
approximately $5.9 million in cash for the assets acquired, and assumed
approximately $2.3 million in related liabilities. Funds for this acquisition
were provided by the Company's operations in conjunction with its revolving
credit facility. The Company
F-40
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. OTHER ACQUISITIONS (CONTINUED)
accounted for the acquisition as a purchase and accordingly, Cream Products'
results are included in the 1996 Consolidated Statement of Operations for the
period August 1, 1996, through December 31, 1996.
LA CORONA ACQUISITION
On May 28, 1996, the Company completed the purchase of substantially all of
the assets of La Corona Foods, Inc. ("La Corona"), located in Glendale, Arizona.
La Corona's sales for the fiscal year ended September 30, 1995, were
approximately $6.9 million. The Company paid approximately $3.4 million in cash
for the assets purchased, and assumed approximately $2.5 million in related
liabilities. The funding for this acquisition was provided by the Company's
operations. The Company accounted for the acquisition as a purchase and
accordingly, La Corona's results are included in the 1996 Consolidated Statement
of Operations for the period May 29, 1996, through December 31, 1996.
MERKTS CHEESE ACQUISITION
On March 19, 1996, the Company completed the acquisition of substantially
all of the assets of Merkts Cheese Company ("Merkts"), located in Bristol,
Wisconsin. Merkts recorded approximately $10.3 million in sales for the fiscal
year ending June 30, 1995. The Company paid approximately $3.6 million in cash
for the assets purchased, and assumed approximately $0.4 million in liabilities.
The funding for this acquisition was provided by the Company's operations. The
Company accounted for the acquisition as a purchase and accordingly, Merkts'
results are included in the 1996 Consolidated Statement of Operations for the
period March 20, 1996, through December 31, 1996.
4. DISCONTINUED OPERATIONS
The Company has made significant divestitures since its inception and as a
result, the size and scope of the Company's operations have changed
significantly. In 1991, the Company divested a novelty/ice cream operation in
Texas and closed a novelty/ice cream operation in Missouri. In 1992, the Company
divested a regional dairy operation and a novelty/ice cream operation, both
located in Maryland. On April 13, 1994, the Company completed the divestiture of
its Florida-based fluid milk operation Velda Farms Inc. ("Velda") for $51.0
million, consisting of $48.0 million in cash after working capital adjustments
and $3.0 million of 9% Series A Preferred Stock (the "Preferred Stock"). The
Company deferred the gain on the Preferred Stock pending realization of the
gain. The majority of the cash proceeds were used to pay down external bank debt
and to fund federal and state taxes generated by the gain on the sale. The sale
of Velda concluded the divestiture of the Company's regional dairies which were
considered a major and distinct segment of its business. As such, the operations
of the regional dairies and other divested operations have been restated and
presented in the consolidated financial statements to conform with discontinued
operations treatment ("Discontinued Operations").
On March 31, 1995, the Preferred Stock was redeemed by its issuer at face
value plus accrued dividends. The $3.0 million gain on the stock, less
applicable taxes and other reserves of $2.3 million, was reflected in
Discontinued Operations in the Consolidated Statements of Operations during the
first quarter of 1995. The Company also recognized $268,000 in dividends,
related to the Preferred Stock, during the first quarter of 1995 which was
recorded in Continuing Operations. The Company recorded an additional loss from
Discontinued Operations of approximately $0.5 million, net of tax benefits,
during the second quarter of 1995, related to Discontinued Operations reserves
and other liabilities.
F-41
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. DISCONTINUED OPERATIONS (CONTINUED)
Net sales of the Discontinued Operations were $38.6 million in 1994.
Interest expense of $0.4 million was allocated to Discontinued Operations during
1994. The allocation method was based upon the ratio of net assets of
Discontinued Operations to the sum of consolidated net assets plus consolidated
debt, less debt specifically allocated to certain of the Company's subsidiaries.
5. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intracompany
transactions and balances have been eliminated.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company sells
its products to supermarkets, convenience stores, dairies, food service and
institutional organizations, club stores and private label suppliers located in
all 50 states and over 20 foreign countries, with a concentration of customers
located in California. The Company performs ongoing credit evaluations of its
customers' financial condition. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other relevant information.
CASH AND CASH EQUIVALENTS
The Company considers overnight investments to be cash.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Raw materials and supplies.............................................. $ 11,767 $ 5,975
Finished goods.......................................................... 13,633 5,148
--------- ---------
Total................................................................. $ 25,400 $ 11,123
--------- ---------
--------- ---------
</TABLE>
Finished goods inventories include the costs of materials, labor and plant
overhead.
F-42
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of the assets, as follows:
<TABLE>
<CAPTION>
USEFUL LIFE
ASSET CATEGORY (YEARS)
- --------------------------------------------------------------------------- -----------------
<S> <C>
Machinery and equipment.................................................... 3 - 10
Buildings and improvements................................................. 25
</TABLE>
Property sold or retired is eliminated from the accounts in the year of
disposition. Major expenditures for renewals and betterments are capitalized
while maintenance and repairs are charged against income.
IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets related to the acquisition of Favorite were
added in 1993, and are being amortized over their estimated useful lives which
is generally five years. Identifiable intangible assets of approximately $72.3
million were recorded in connection with the acquisitions consummated in 1996.
These assets are being amortized on a straight-line basis over a range of 5-40
years. Amortization costs totaled $1.0 million in 1996, $0.7 million in 1995,
and $0.7 million in 1994. Accumulated amortization was $2.8 million and $1.8
million at December 31, 1996 and 1995, respectively.
GOODWILL
Goodwill is amortized on a straight-line basis over a range of 25-40 years
and is recorded at cost less accumulated amortization. Goodwill of approximately
$39.4 million was recorded in connection with the acquisitions consummated in
1996. Amortization costs totaled $1.9 million in 1996, $1.7 million in 1995, and
$1.7 million in 1994. Accumulated amortization was $10.4 million and $8.5
million at December 31, 1996 and 1995, respectively.
DEFERRED FINANCING COSTS
Costs incurred that relate to the issuance of indebtedness and the
corresponding accumulated amortization are included in deferred financing costs
in the accompanying consolidated balance sheets. Deferred financing costs
related to existing debt are amortized over the life of the related debt. In
conjunction with renegotiating its Senior Credit Agreement in December 1996, the
Company incurred deferred financing costs of approximately $2.7 million.
Accumulated amortization was $87,000 and $1.5 million at December 31, 1996 and
1995, respectively.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued "SFAS" No.
121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of."
This statement is effective for financial statements beginning after December
15, 1995. The Company elected to adopt the statement effective December 31,
1995. The adoption of SFAS No. 121 had no material effect on the Company's
financial statements.
F-43
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company continually evaluates whether events and circumstances indicate
that the remaining carrying amount of an asset may not be recoverable or the
remaining useful life may warrant revision. To make this evaluation, the Company
uses its estimate of undiscounted future cash flows (without interest charges)
over the remaining life of the asset.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accrued interest........................................................ $ 1,140 $ 407
Payroll and benefits (accrued wages, vacation and profit sharing)....... 8,315 4,080
Restructuring accruals.................................................. 60 230
Insurance accruals...................................................... 5,527 5,195
Income and property taxes............................................... 5,791 1,491
Marketing and advertising............................................... 6,863 2,017
Acquisition related accruals............................................ 6,290 --
Other accrued liabilities............................................... 5,937 2,449
--------- ---------
Total................................................................. $ 39,923 $ 15,869
--------- ---------
--------- ---------
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial position of the Company at December 31, 1996 and 1995,
includes certain financial instruments which may have a fair value that is
different from that which is currently reflected in the financial statements.
However, any variation in value is insignificant.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment to customers.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has not entered into any derivatives or other speculative
financial instruments as of December 31, 1996.
F-44
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amount of assets and liabilities recognized for financial reporting
and tax purposes and are measured by applying currently enacted tax laws. The
effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
OTHER INCOME
Other income primarily consists of royalty revenue.
EARNINGS PER COMMON SHARE
The earnings per common share is computed based on the fully diluted
weighted average number of shares of the Company's common stock and common stock
equivalents outstanding during the period. Common stock equivalents represent
the dilutive effect of the assumed exercise of certain outstanding stock
options.
FINANCIAL STATEMENT PRESENTATION
Certain prior year balances have been reclassified to conform to the current
year presentation.
F-45
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES
The components of the provision for income taxes from Continuing Operations
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current.......................................................... $ 6,271 $ 1,879 $ 272
Deferred......................................................... (340) 3,448 4,163
State............................................................ 1,913 735 1,098
--------- --------- ---------
Provision for income taxes....................................... $ 7,844 $ 6,062 $ 5,533
--------- --------- ---------
--------- --------- ---------
</TABLE>
Temporary differences and carryforwards which give rise to a significant
portion of net deferred income tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets: Net operating loss carryforward.................... $ -- $ 385
Accrued vacation....................................................... 588 504
Accrued workers' compensation.......................................... 1,671 1,397
Acquisition reserves................................................... 2,394 --
Other insurance reserves............................................... 666 657
Restructuring reserves................................................. 350 396
Other accrued expenses and reserves.................................... 2,182 1,454
Other deferred tax assets.............................................. 600 2,340
--------- ---------
Total deferred tax assets............................................ 8,451 7,133
Deferred tax liabilities: Accelerated depreciation and amortization...... 6,759 2,901
Other deferred tax liabilities......................................... 47 140
--------- ---------
Total deferred tax liabilities....................................... 6,806 3,041
Valuation allowance...................................................... -- (3,073)
--------- ---------
Net deferred tax assets................................................ 1,645 1,019
Noncurrent deferred tax liabilities.................................... (5,694) (2,070)
--------- ---------
Current deferred tax assets............................................ $ 7,339 $ 3,089
--------- ---------
--------- ---------
</TABLE>
The Company reduced goodwill by approximately $21,000, $5.6 million and $4.2
million for the years ended December 31, 1996, 1995 and 1994, respectively,
representing realization of deferred tax assets created prior to the Company's
financial restructuring transaction.
F-46
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES (CONTINUED)
The provision for income taxes was different from the amount computed using
the statutory income tax rate for the reasons set forth in the following table
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Provision computed at statutory rate.......................... $ 7,846 $ 5,917 $ 5,050
State income taxes............................................ 1,243 1,025 905
Tax on non-deductible goodwill amortization................... 486 473 516
Utilization of previously unrecognized deferred tax assets.... (2,265) (1,405) (1,107)
Other......................................................... 534 52 169
--------- --------- ---------
Provision for income taxes.................................... $ 7,844 $ 6,062 $ 5,533
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Senior term loan....................................................... $ 160,000 $ 41,000
Revolving credit facility.............................................. 22,349 --
Industrial development revenue bonds................................... 3,000 3,000
---------- ---------
Total long-term debt................................................. 185,349 44,000
Less: Current maturities............................................. (8,000) (8,000)
---------- ---------
Long-term debt, net of current maturities............................ $ 177,349 $ 36,000
---------- ---------
---------- ---------
</TABLE>
Maturities of long-term debt at December 31, 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1997.............................................................................. $ 8,000
1998.............................................................................. 15,000
1999.............................................................................. 20,000
2000.............................................................................. 30,000
2001.............................................................................. 35,000
Thereafter........................................................................ 77,349
----------
Total maturities................................................................ $ 185,349
----------
----------
</TABLE>
SENIOR TERM LOAN AND REVOLVING CREDIT FACILITY
On December 2, 1996, in conjunction with the Presto acquisition, the Company
renegotiated a $220.0 million credit agreement ("Senior Credit Agreement").
Funding provided by the Senior Credit Agreement was utilized to acquire the
capital stock of Presto for approximately $123.5 million, to pay off
F-47
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. LONG-TERM DEBT (CONTINUED)
the existing senior debt of approximately $44.8 million and to pay $2.1 million
in fees and expenses associated with the Presto acquisition.
The base interest rate on the Term Loan and the Revolver is the prime rate
plus an applicable margin spread. Both facilities have alternative rate options
based upon applicable margin spreads above the London Interbank Offered Rate
("LIBOR"). At December 31, 1996, $160.0 million in borrowings under the Term
Loan were outstanding at an interest rate of 6.95% and $22.4 million in
borrowings were outstanding under the Revolver at an interest rate of 6.99%.
Borrowings under these lending facilities are secured by virtually all of the
assets of the Company. Up to $15.0 million in letters of credit may be issued
under the Revolver, of which $8.8 million was issued and outstanding at December
31, 1996. As of December 31, 1996, approximately $28.8 million was additionally
available to the Company under the $60.0 million Revolver. A fee of 1.5% per
year is charged on outstanding letters of credit. A 0.42% per year commitment
fee on uncommitted funds is payable quarterly. The Revolver matures on December
1, 2002, coincident with the scheduled maturity of the Term Loan. The Senior
Credit Agreement contains numerous covenants pertaining to management and
operations of the Company including, among other restrictions, limitations on
the amount of annual capital expenditures as well as specification of certain
maximum leverage ratios, minimum fixed charge coverage ratios and minimum net
worth. The Senior Credit Agreement also requires mandatory prepayment of the
loans under certain conditions such as the sale of assets, excess cash flow, the
issuance of new debt or equity and the receipt of certain other cash proceeds.
During April 1994, the Company completed the sale of Velda for approximately
$51.0 million, consisting of $48.0 million in cash after working capital
adjustments and $3.0 million in 9% Series A Preferred Stock. In conjunction with
the sale, the Company paid down approximately $36.7 million of its then existing
senior term loan and $11.8 million of its then existing revolver.
The Company was in compliance with all financial covenants as of December
31, 1996.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
The industrial development revenue bonds were issued on December 14, 1988,
to fund the construction of a waste water treatment facility at the Company's
Frederick, Maryland, processing plant. The bonds mature on December 1, 2003, and
bear interest that fluctuates weekly based upon market factors. The interest
rate in effect for these bonds on December 31, 1996, was 4.30%.
8. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company has adopted a defined contribution profit sharing plan for the
purpose of providing retirement benefits for eligible non-union employees. At
December 31, 1996, eligible employees totaled 363, of which 214 were
participants in the plan. Contributions are made by the Company and by plan
participants. Company contributions are allocated to the participants on the
basis of individual contributions, the age of the participant and the number of
years that the participant has been in the plan. During 1996 the Company also
contributed to two single-employer and five multi-employer pension/retirement
F-48
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
plans under the terms of various union contracts, which covered 778 of its 1,403
employees at December 31, 1996. The number of union pension plans and the
portion of employees covered has varied from year to year. Contributions to
these pension plans are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Defined contribution profit sharing plan......................... $ 416 $ 250 $ 230
Union pension plans.............................................. 1,445 1,182 1,122
</TABLE>
POST-RETIREMENT BENEFIT PLANS
In December 1990, the Financial Accounting Standards Board issued its
standard on accounting for post retirement benefits other than pensions. This
standard requires that the expected cost of these benefits must be charged to
expense during the years that the employees render service. The cost of
providing these benefits has been primarily paid by non-union retirees and the
Company's calculation of its obligation is not material as of December 31, 1996.
The Company's union employees participate in various defined contribution
union plans that provide health care and other welfare benefits during their
employment and after retirement. Amounts charged to expense and contributed to
these health and welfare plans totaled approximately $2.0 million in 1996, $2.0
million in 1995, and $2.6 million in 1994. Having made these payments, no
remaining obligations exist for these years under the union plans.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain plant facilities and related equipment and
vehicles under operating lease arrangements. Lease expense pursuant to such
arrangements was approximately $4.3 million in 1996, $3.2 million in 1995, and
$3.0 million in 1994.
The following is a summary of future minimum annual lease payments under
noncancelable operating lease obligations as of December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997................................................................ $ 3,893
1998................................................................ 3,469
1999................................................................ 2,557
2000................................................................ 1,965
2001................................................................ 693
Thereafter.......................................................... 1,383
-------
Total............................................................. $ 13,960
-------
-------
</TABLE>
F-49
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
As of December 31, 1996, the Company had entered into employment agreements
with certain key management personnel which provide for annual compensation and
benefits and also provide for certain severance payments to be made to such
individuals in the event of a change in control (as defined) of the Company or
the involuntary termination of such individuals for reasons other than cause (as
defined). As of December 31, 1996, the maximum amount payable under these
employment agreements was approximately $4.6 million in the aggregate.
LITIGATION
From time to time the Company is subject to litigation in the ordinary
course of its business. In connection with the divestitures of certain of the
Company's operations, the Company assumed certain obligations of
indemnification, none of which is believed to be material to the Company. The
Company maintains insurance in respect of certain losses that may result from
its current or future operations. The Company believes that the outcome of any
existing litigation, after considering the indemnities and insurance related to
such litigation, would not have a material impact on its business, financial
condition or results of operations.
10. RELATED PARTY TRANSACTIONS
HICKS MUSE
The Company had previously entered into a financial advisory agreement dated
March 1, 1991, as amended, pursuant to which Hicks Muse provided financial
advisory services to the Company. Effective September 30, 1995, this agreement
was terminated. As compensation for such services, the Company paid Hicks Muse
an advisory fee, together with all reasonable expenses incurred in connection
therewith. The Company paid advisory fees of $150,000 and $114,000 in 1995 and
1994, respectively, and reimbursed Hicks Muse approximately $28,000 and $37,000
for expenses for each year, respectively. Hicks Muse was also paid a fee of
$300,000 relating to the sale of Velda.
11. EQUITY
EMPLOYEE AND DIRECTOR STOCK OPTIONS
The Company has several stock-based compensation plans, which are described
below. The Company applies Accounting Principles Board ("APB") Opinion 25 and
related Interpretations in accounting for its stock-based compensation plans. In
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), which, if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of its stock-based compensation plans.
Adoption of the cost recognition provisions of SFAS 123 is optional and the
Company has decided not to elect these provisions. However, pro forma
disclosures as if the Company had adopted these cost recognition provisions in
1995 are required for fiscal years beginning after December 15, 1995. The
Company has elected to provide these disclosures for its fiscal year which began
on January 1, 1996.
F-50
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
1991 STOCK OPTION PLAN
In March 1991, the Company established the 1991 Incentive and Nonstatutory
Stock Option Plan which provides for the issuance of options to purchase 999,999
shares of common stock to key employees of the Company. At December 31, 1996,
769,941 tenure options and 228,258 incentive options had been granted to
employees. Upon completion of the common stock offering in 1992, the incentive
options became vested, resulting in compensation expense of $1.1 million. The
exercise price for all options granted was $2.56 per share, which was the fair
market value of the options at the date of issuance. The options expire ten
years after the date of their issuance.
1992 STOCK OPTION PLAN
In July 1992, the Company established the 1992 Incentive and Nonstatutory
Stock Option Plan which provides for the issuance of options to purchase 181,818
shares of common stock to key employees of the Company. At December 31, 1996,
175,000 options had been granted to employees. The exercise price for 25,000 of
the options granted in 1992 is $9.00 per share, which was the fair market value
of the options at the date of issuance. The exercise price for 120,000 of the
options granted in 1994 is $7.00 per share, which was the fair market value of
the options at the date of issuance. The exercise price for 30,000 of the
options granted in 1995 is $6.75 per share, which was the fair market value of
the options at the date of issuance. The options granted in 1992 become
exercisable over a three-year period and expire ten years after the date of
their issuance. One-third of the options granted in 1994 became exercisable on
the date of issuance, while the remaining options vest in equal amounts over two
years. The options granted in 1995 vest ratably over a three-year period. The
options granted in 1994 and 1995 expire ten years after the date of their
issuance. Under this plan, 14,000 options had been exercised as of December 31,
1996.
1992 DIRECTOR STOCK OPTION PLAN
In April 1992, the Company established the 1992 Director Stock Option Plan
which provides for the issuance of options to purchase 39,062 shares of common
stock to non-employee directors of the Company. At December 31, 1996, 39,062
options had been granted to non-employee directors. The exercise price for these
options is $2.56 per share, which was the fair market value of the options at
the date of issuance. The options become exercisable over a three-year period
and expire ten years after the date of their issuance. As of December 31, 1996,
no options under this plan had been exercised.
1994 STOCK OPTION PLAN
In June 1994, the Company established the 1994 Incentive and Nonstatutory
Stock Option Plan which provides for the issuance of options to purchase 250,000
shares of common stock to key employees of the Company. At December 31, 1996,
231,000 options had been granted to employees. The exercise price for 195,000 of
the options granted in 1994 is $7.00 per share, which was the fair market value
of the options at the date of issuance. The exercise price for 24,000 of the
options granted in 1995 is $8.00 per share, which was the fair market value of
the options at the date of issuance. An additional 12,000 options were granted
in 1996 under this plan at exercise prices of $9.50 (6,000 options) and $10.00
(6,000 options), which were the fair market values of the options on each
issuance date. These options become exercisable over a three-year period and
expire ten years after the date of their issuance. Under this plan, 26,000
options had been exercised as of December 31, 1996.
F-51
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
1996 STOCK OPTION PLAN
In May 1996, the Company amended the 1994 Incentive and Nonstatutory Stock
Option Plan to provide for the issuance of options to purchase up to 1,440,000
shares of common stock to key employees of the Company. At December 31, 1996,
1,212,000 options had been granted to employees. The exercise price for these
options is $10.25 per share, which was the fair market value of the options at
the date of issuance. 387,000 of the options become exercisable over a
three-year period and 825,000 of the options became exercisable on the date of
issuance. These options expire ten years after the date of their issuance. As of
December 31, 1996, no options under this plan had been exercised.
1996 DIRECTOR STOCK OPTION PLAN
In May 1996, the Company established the 1996 Director Stock Option Plan
which provides for the issuance of options to purchase 50,000 shares of common
stock to non-employee directors of the Company. At December 31, 1996, 40,000
options had been granted to non-employee directors. The exercise price for these
options is $10.25 per share, which was the fair market value of the options at
the date of issuance. The options become exercisable over a three-year period
and expire ten years after the date of their issuance. As of December 31, 1996,
no options under this plan had been exercised.
CHAIRMAN OPTION PLAN
On February 15, 1994, the Compensation Committee of the Company's Board of
Directors approved the issuance of options to purchase 600,000 shares of common
stock of the Company to C. Dean Metropoulos, Chairman and CEO of the Company. As
of December 31, 1996, 600,000 options had been granted to Mr. Metropoulos. The
exercise price for these options is $6.50 per share, which was the fair market
value of the options at the date of issuance. One-third of these options became
exercisable on the date of issuance, while the remaining options vested in equal
amounts over two years. The options expire ten years after the date of their
issuance. As of December 31, 1996, no options under this plan had been
exercised.
F-52
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
SUMMARY OF OPTIONS (NUMBER OF OPTIONS)
<TABLE>
<CAPTION>
1992 1996
DIRECTOR CHAIRMAN DIRECTOR
1991 PLAN 1992 PLAN PLAN 1994 PLAN PLAN 1996 PLAN* PLAN
----------- ----------- ----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at December 31,
1994........................... 335,413 176,000 39,062 210,000 600,000 -- --
Granted in 1995.................. -- 30,000 -- 81,000 -- -- --
Canceled in 1995................. (13,049) (31,000) -- (70,000) -- -- --
Exercised in 1995................ (311,464) -- -- (2,000) -- -- --
----------- ----------- ----------- ----------- ------------ ----------- ---------
Outstanding at December 31,
1995........................... 10,900 175,000 39,062 219,000 600,000 -- --
Granted in 1996.................. -- -- -- 12,000 -- 1,212,000 40,000
Canceled in 1996................. -- -- -- -- -- -- --
Exercised in 1996................ (5,850) (14,000) -- (24,000) -- -- --
----------- ----------- ----------- ----------- ------------ ----------- ---------
Outstanding at December 31,
1996........................... 5,050 161,000 39,062 207,000 600,000 1,212,000 40,000
----------- ----------- ----------- ----------- ------------ ----------- ---------
----------- ----------- ----------- ----------- ------------ ----------- ---------
Exercisable at December 31,
1995........................... 10,900 105,000 39,062 52,000 600,000 -- --
----------- ----------- ----------- ----------- ------------ ----------- ---------
----------- ----------- ----------- ----------- ------------ ----------- ---------
Exercisable at December 31,
1996........................... 5,050 141,000 39,062 119,000 600,000 825,000 --
----------- ----------- ----------- ----------- ------------ ----------- ---------
----------- ----------- ----------- ----------- ------------ ----------- ---------
</TABLE>
- ------------------------
* Granted under 1994 Stock Option Plan as amended.
PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and earnings
per common share for 1996 and 1995 would approximate the pro forma amounts below
(in thousands, except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income......................... $ 14,576 $ 10,770 $ 11,524 $ 11,460
Earnings per common share.......... .96 .72 .76 .75
</TABLE>
F-53
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
11. EQUITY (CONTINUED)
Pro forma charges to expense for options granted in 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 CHARGE
ANNUAL 1995 ANNUAL ALLOCABLE TO TOTAL
CHARGE CHARGE FUTURE YEARS CHARGE
--------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
1995 Stock options................................. $ 104 $ 64 $ 144 $ 312
1996 Stock options................................. 3,702 -- 1,573 5,275
--------- --- ------ ---------
Total............................................ $ 3,806 $ 64 $ 1,717 $ 5,587
--------- --- ------ ---------
--------- --- ------ ---------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Modified Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995, respectively: risk free
interest rates of 6.47% and 6.65%; expected dividend yields of 0.00% and 0.00%;
expected lives of 4.0 years and 4.0 years; expected volatility of 40.31% and
39.86%. The weighted average fair value of options granted in 1996 and 1995 was
$10.31 and $6.93, respectively. The effects of applying SFAS 123 in this pro
forma disclosure are not indicative of future amounts. SFAS 123 does not apply
to awards prior to 1995.
STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that it had
approved a plan pursuant to which the Company may repurchase up to $20.0 million
of its common stock. The purchases will be effected through open market
transactions or negotiated transactions from time to time, depending on the
market price of the stock and other factors. As of December 31, 1995, 230,000
shares had been repurchased by the Company at a cost of $1.8 million. As of
December 31, 1996, the Company had purchased an additional 537,000 shares at a
cost of $4.3 million.
F-54
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1996 and
1995, is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS:
Net sales.............................. 1996 $ 81,724 $ 85,693 $ 99,869 $ 127,020
1995 71,893 74,882 73,167 84,788
Gross profit........................... 1996 19,386 19,996 20,588 31,535
1995 17,269 17,718 16,295 20,500
Income from Continuing Operations...... 1996 2,831 3,463 3,027 5,255
1995 2,269 2,846 2,316 3,909
Income (loss) from Discontinued
Operations........................... 1996 -- -- -- --
1995 694 (510) -- --
Net income............................. 1996 2,831 3,463 3,027 5,255
1995 2,963 2,336 2,316 3,909
PER COMMON SHARE:
Income from Continuing Operations...... 1996 $ 0.19 $ 0.23 $ 0.20 $ 0.34
1995 0.15 0.19 0.15 0.25
Income (loss) from Discontinued
Operations........................... 1996 -- -- -- --
1995 0.05 (0.03) -- --
Net income............................... 1996 0.19 0.23 0.20 0.34
1995 0.20 0.16 0.15 0.25
Market price range:
High................................... 1996 10.00 12.25 11.88 20.00
Low.................................... 1996 7.88 9.13 10.25 11.88
High................................... 1995 7.50 8.00 9.25 9.00
Low.................................... 1995 5.50 6.38 6.38 7.50
</TABLE>
F-55
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.......................................................................... $ 2,167 $ 4,786
Receivables, net of allowance for doubtful accounts of $8,852 and $6,676...... 48,038 57,802
Inventories................................................................... 25,689 25,400
Prepaids and other............................................................ 2,599 3,015
Deferred tax assets........................................................... 7,339 7,339
Net assets held for sale...................................................... 630 676
----------- ------------
Total current assets........................................................ 86,462 99,018
PROPERTY, PLANT AND EQUIPMENT:
Land.......................................................................... 12,551 7,843
Buildings..................................................................... 35,131 29,507
Machinery and equipment....................................................... 80,189 70,239
----------- ------------
Gross property, plant and equipment......................................... 127,871 107,589
Less: Accumulated depreciation................................................ (27,163) (22,807)
----------- ------------
Net property, plant and equipment........................................... 100,708 84,782
INTANGIBLE AND OTHER ASSETS:
Identifiable intangible assets................................................ 71,808 73,146
Goodwill...................................................................... 90,189 96,175
Deferred financing costs...................................................... 2,495 2,731
Other assets.................................................................. 661 139
----------- ------------
Total intangible and other assets........................................... 165,153 172,191
----------- ------------
TOTAL ASSETS.................................................................... $352,323 $355,991
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 27,102 $ 32,968
Accrued liabilities........................................................... 36,364 39,923
Current portion of long-term debt............................................. 11,500 8,000
----------- ------------
Total current liabilities................................................... 74,966 80,891
LONG-TERM DEBT (net of current maturities)...................................... 169,200 177,349
OTHER LONG-TERM LIABILITIES..................................................... 3,020 3,269
DEFERRED TAX LIABILITIES........................................................ 5,694 5,694
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized; 15,382,942 shares
in 1997 and 15,261,061 shares issued in 1996................................ 153 153
Additional paid-in capital.................................................... 73,873 73,179
Treasury stock, at cost (767,000 shares in 1997 and 1996)..................... (6,140) (6,140)
Retained earnings............................................................. 31,557 21,596
----------- ------------
Total stockholders' equity.................................................. 99,443 88,788
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $352,323 $355,991
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-56
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES........................................... $ 140,374 $ 85,693 $ 270,672 $ 167,417
Cost of goods sold................................ 100,953 65,698 196,022 128,036
Selling, distribution, and general and
administrative.................................. 26,337 14,239 51,223 28,737
------------- ------------- ------------- -------------
OPERATING INCOME.................................... 13,084 5,756 23,427 10,644
OTHER (INCOME) AND EXPENSES:
Interest expense.................................. 3,310 645 6,562 1,342
Amortization of deferred financing costs.......... 116 95 236 190
Other income, net................................. (131) (191) (249) (382)
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES.......................... 9,789 5,207 16,878 9,494
Provision for income taxes........................ 4,012 1,744 6,917 3,200
------------- ------------- ------------- -------------
NET INCOME.......................................... $ 5,777 $ 3,463 $ 9,961 $ 6,294
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
EARNINGS PER COMMON SHARE........................... $ .37 $ .23 $ .64 $ .42
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING....................................... 15,716,000 14,724,000 15,643,651 14,778,316
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-57
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers........................................................... $ 280,622 $ 169,021
Interest received...................................................................... 35 127
Income tax refund...................................................................... -- 156
Cash paid to suppliers and employees................................................... (245,771) (148,572)
Interest paid.......................................................................... (7,415) (1,617)
Income taxes paid...................................................................... (7,773) (2,807)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................ 19,698 16,308
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary: Working capital............................................. (1,290) (125)
Property, plant and equipment.......................................................... (1,559) (3,613)
Other assets........................................................................... (4,151) (3,315)
----------- ----------
Net cash used by acquisition of subsidiary........................................... (7,000) (7,053)
Capital expenditures................................................................... (10,121) (4,455)
Proceeds from sale of fixed assets..................................................... 19 --
Other.................................................................................. (1,260) 1,173
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES.................................................... (18,362) (10,335)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................................. 694 118
Net payments under revolving credit facility........................................... (649) --
Payments on long-term debt............................................................. (4,000) (4,000)
Purchase of treasury stock............................................................. -- (4,300)
----------- ----------
NET CASH USED BY FINANCING ACTIVITIES.................................................... (3,955) (8,182)
----------- ----------
NET DECREASE IN CASH..................................................................... (2,619) (2,209)
CASH, BEGINNING OF PERIOD................................................................ 4,786 5,811
----------- ----------
CASH, END OF PERIOD...................................................................... $ 2,167 $ 3,602
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-58
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
NET INCOME.................................................................................. $ 9,961 $ 6,294
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOW FROM OPERATIONS:
Depreciation.............................................................................. 5,243 2,938
Amortization of intangibles............................................................... 2,988 1,350
Increase in deferred taxes................................................................ -- 21
Change in assets and liabilities, net of effects from acquisition of subsidiary:
Accounts receivable....................................................................... 10,477 1,604
Inventories............................................................................... 398 (1,094)
Prepaids and other........................................................................ 416 (70)
Accounts payable.......................................................................... (5,866) 2,384
Accrued liabilities....................................................................... (3,670) 3,018
Long-term liabilities..................................................................... (249) (138)
--------- ---------
NET CASH PROVIDED BY OPERATIONS............................................................. $ 19,698 $ 16,308
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-59
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1997, and for the six
months then ended have been prepared by The Morningstar Group Inc. (the
"Company" or "Morningstar") without audit. In the opinion of management, all
necessary adjustments (which include only normal recurring adjustments) to
present fairly, in all material respects, the consolidated financial position,
results of operations and changes in cash flows at June 30, 1997, and for the
six months then ended, have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the Company's 1996 financial
statements contained in its most recent Annual Report on Form10-K. Certain prior
year balances have been reclassified to conform to the current year
presentation.
On February 3, 1997, the Company completed the purchase of substantially all
of the assets of the frozen whipped toppings business of Van de Kamp's, Inc.
("VDK"). VDK's sales for the year ended December 31, 1996 were approximately
$13.1 million. VDK is a manufacturer and distributor of frozen whipped toppings
primarily supplying retail customers throughout the United States. The Company
paid approximately $7.0 million in cash for the assets acquired, and assumed
approximately $.1 million in related liabilities. The source of funding was
provided by the Company's operations in conjunction with its revolving credit
facility.
During the first six months of 1997, the company received appraised values
on certain assets acquired in the Presto Food Products, Inc. acquisition. As a
result, the allocation of the purchase price was revised resulting in a
reclassification of $9.2 million from goodwill to property, plant and equipment.
2. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventories are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
AT JUNE 30,
1997 AT DECEMBER 31, 1996
--------------- --------------------
<S> <C> <C>
Raw materials and supplies............................. $ 14,443 $ 11,767
Finished goods......................................... 11,246 13,633
------- -------
Total................................................ $ 25,689 $ 25,400
------- -------
------- -------
</TABLE>
Finished goods inventories include the costs of materials, labor and plant
overhead.
F-60
<PAGE>
THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
3. DEBT
The Company's outstanding long-term debt and average interest rates in
effect on June 30, 1997 were:
<TABLE>
<CAPTION>
AMOUNT OF DEBT AVERAGE INTEREST RATE
-------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
Senior term loan................................................................ $156,000 7.130%
Revolving credit facility (a)................................................... 21,700 7.256%
Industrial development revenue bonds............................................ 3,000 4.080%
--------------
Total......................................................................... 180,700
Less: Current maturities........................................................ 11,500
--------------
Long-term debt, net of current maturities....................................... $169,200
--------------
--------------
</TABLE>
- ------------------------
(a) As of June 30, 1997, approximately $21,700,000 was outstanding under the
revolving credit facility and letters of credit totaling $7,974,000 were
issued. As of June 30, 1997, the Company had $30,326,000 in additional
borrowing capacity under the terms of its revolving credit facility.
4. EARNINGS PER COMMON SHARE
The earnings per common share is computed based on the weighted average
number of shares of the Company's common stock and common stock equivalents
outstanding during the period. Common stock equivalents represent the dilutive
effect of the assumed exercise of certain outstanding stock options.
The Company intends to adopt SFAS No. 128 "Earnings Per Share" "SFAS 128"
effective December 15, 1997 and present December 31, 1997 and prior periods
earnings per share under SFAS128. Early adoption of the new statement is not
permitted. The calculation of basic earnings per share under SFAS 128 will have
a favorable impact as it excludes potentially dilutive options previously
included in the calculation of primary earnings per share.
5. STOCK REPURCHASE PROGRAM
On June 21, 1995, the Company's Board of Directors announced that it had
approved a plan pursuant to which the Company may repurchase up to $20.0 million
of its common stock. The purchases will be effected through open market
transactions or negotiated transactions from time to time, depending on the
market price of the stock and other factors. As of December 31, 1996, 767,000
shares had been repurchased by the Company at a cost of $6.1 million. As of June
30, 1997, the Company had not purchased any additional shares.
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Country Fresh, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Country Fresh,
Inc. and subsidiaries as of March 1, 1997 and March 2, 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended March 1, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In
our opinion, such financial statements present fairly, in all material respects,
the consolidated financial position of Country Fresh, Inc. and subsidiaries as
of March 1, 1997 and March 2, 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
March 1, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, in fiscal
year 1995 the Company changed its method of accounting for postretirement
benefits other than pensions to conform with Statement of Financial Accounting
Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions."
DELOITTE & TOUCHE LLP
Grand Rapids, Michigan
May 5, 1997
F-62
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 2, MARCH 1, JULY 19,
1996 1997 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 11,651,121 $ 10,524,048 $ 6,697,162
Accounts receivable, net of the allowance for doubtful accounts of $1,227,000,
$670,000 and $672,000....................................................... 23,863,323 24,311,205 26,084,045
Inventories (Note 2).......................................................... 12,564,674 14,297,557 18,846,324
Deferred taxes on income (Note 7)............................................. 1,122,000 1,168,000 1,186,000
Prepaid income taxes.......................................................... 94,213
Prepaid expenses and other.................................................... 1,117,599 998,880 240,585
------------ ------------ ------------
Total current assets........................................................ 50,412,930 51,299,690 53,054,116
DEFERRED TAXES ON INCOME (Note 7)............................................... 2,543,000 2,970,000 3,059,000
PROPERTY, PLANT AND EQUIPMENT (Note 4):.........................................
Land and improvements......................................................... 2,852,510 3,124,502 3,224,502
Buildings..................................................................... 26,796,538 29,814,418 29,814,418
Machinery and equipment....................................................... 56,456,723 61,210,938 64,346,224
Shipping containers........................................................... 8,881,155 9,475,755 9,579,400
Transportation equipment...................................................... 12,507,898 14,391,892 14,633,233
------------ ------------ ------------
107,494,824 118,017,505 121,597,777
Accumulated depreciation...................................................... (68,987,812) (75,335,243) (78,122,058)
------------ ------------ ------------
38,507,012 42,682,262 43,475,719
OTHER ASSETS.................................................................... 3,302,314 2,254,340 2,352,934
------------ ------------ ------------
TOTAL ASSETS.................................................................... $ 94,765,256 $ 99,206,292 $101,941,769
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable........................................................ $ 18,029,941 $ 18,973,756 $ 19,226,753
Accrued expenses (Note 3)..................................................... 11,297,087 11,659,319 11,089,591
Income taxes payable.......................................................... 1,963,787 2,262,333
Current portion of long-term debt (Note 4).................................... 2,809,721 2,835,646 3,766,924
------------ ------------ ------------
Total current liabilities................................................... 32,136,749 35,432,508 36,345,601
LONG-TERM DEBT (Note 4)......................................................... 32,152,297 28,571,200 26,522,684
POST RETIREMENT BENEFITS (Notes 5 and 6)........................................ 5,350,118 3,668,633 3,557,633
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 98):
Preferred stock, Series A, 8% cumulative, par value $320 a share; 31,250
authorized shares........................................................... 3,800,000 3,741,120 3,741,120
Common stock, no par value; 15,000,000 authorized shares...................... 1,774,092 1,869,950 1,897,660
Retained earnings............................................................. 19,552,000 25,922,881 29,877,071
------------ ------------ ------------
Total shareholders' equity.................................................. 25,126,092 31,533,951 35,515,851
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 94,765,256 $ 99,206,292 $101,941,769
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-63
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED TWENTY WEEKS ENDED
---------------------------------------- --------------------------
FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19,
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................................................... $310,164,014 $336,054,590 $353,037,053 $135,327,698 $136,154,331
COST OF GOODS SOLD.......................................... 268,500,028 291,721,220 305,613,569 115,962,551 116,232,837
------------ ------------ ------------ ------------ ------------
Gross profit.............................................. 41,663,986 44,333,370 47,423,484 19,365,147 19,921,494
OPERATING COSTS AND EXPENSES:
Selling and distribution.................................. 21,224,430 21,632,703 19,916,061 7,396,735 7,216,944
General and administrative................................ 15,036,712 15,699,730 16,009,777 5,907,043 6,234,400
Amortization of intangibles............................... 99,618 82,540 656,410 33,272 19,022
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses...................... 36,360,760 37,414,973 36,582,248 13,337,050 13,470,366
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS...................................... 5,303,226 6,918,397 10,841,236 6,028,097 6,451,128
OTHER (INCOME) EXPENSE:
Interest (income) expense, net............................ (258,505) 1,392,648 1,219,353 613,168 597,186
Miscellaneous income...................................... (551,116) (633,310) (435,642) (111,535) (254,070)
------------ ------------ ------------ ------------ ------------
Total other (income) expense............................ (809,621) 759,338 783,711 501,633 343,116
------------ ------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING............................................. 6,112,847 6,159,059 10,057,525 5,526,464 6,108,012
INCOME TAXES (Note 7)....................................... 2,145,000 2,090,000 3,385,000 1,884,000 2,079,000
------------ ------------ ------------ ------------ ------------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING... 3,967,847 4,069,059 6,672,525 3,642,464 4,029,012
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS (NET OF INCOME TAX BENEFIT OF
$1,170,376) (Note 6)...................................... 2,271,907
------------ ------------ ------------ ------------ ------------
NET EARNINGS................................................ $ 1,695,940 $ 4,069,059 $ 6,672,525 $ 3,642,464 $ 4,029,012
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
NET EARNINGS PER COMMON SHARE:
Before cumulative effect of change in accounting.......... $ 0.52 $ 1.04 $ 1.75 $ 0.97 $ 1.07
Cumulative effect of change in accounting................. (0.30)
------------ ------------ ------------ ------------ ------------
Net earnings............................................ $ 0.22 $ 1.04 $ 1.75 $ 0.97 $ 1.07
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 7,622,840 3,609,245 3,636,519 3,631,758 3,685,236
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-64
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TWENTY WEEKS ENDED JULY 19, 1997 AND YEARS ENDED MARCH 1, 1997, MARCH 2, 1996
AND FEBRUARY 25, 1995
<TABLE>
<CAPTION>
PREFERRED STOCK SERIES
A 8% CUMULATIVE COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPTIAL EARNINGS TOTAL
--------- ----------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 27, 1994......... 191,313 $ 3,884,020 $ 6,305,559 $ 39,416,901 $ 49,606,480
Net earnings..................... 1,695,940 1,695,940
Issuance of common stock......... 2,669 56,900 462,532 519,432
Redemption of common stock....... (2,291) (48,220) (48,530) (373,966) (470,716)
Recapitalization expenses........ (86,569) (86,569)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, February 25, 1995......... -- -- 191,691 3,892,700 6,632,992 40,738,875 51,264,567
Net earnings..................... 4,069,059 4,069,059
Redemption of Class A common
stock and exchange of 40 shares
of no par common stock for
Class B common stock........... 7,451,549 (73,600) (73,600)
Redemption of common pursuant to
the redemption and exchange
offer.......................... 11,875 3,800,000 (4,157,520) (2,078,760) (6,632,992) (24,548,365) (29,460,117)
Issuance of common stock......... 4,459 35,672 35,672
Redemption of common stock....... (240) (1,920) (1,920)
Recapitalization expenses........ (403,569) (403,569)
Preferred stock dividends........ (304,000) (304,000)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, March 2, 1996............. 11,875 3,800,000 3,489,939 1,774,092 -- 19,552,000 25,126,092
Net earnings..................... 6,672,525 6,672,525
Issuance of common stock......... 11,637 97,458 97,458
Redemption of common and
preferred stock................ (184) (58,880) (200) (1,600) (60,480)
Preferred stock dividends........ (301,644) (301,644)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, March 1, 1997............. 11,691 3,741,120 3,501,376 1,869,950 -- 25,922,881 31,533,951
Net earnings (Unaudited)......... 4,029,012 4,029,012
Issuance of common stock
(Unaudited).................... 2,611 27,710 27,710
Preferred stock dividends
(Unaudited).................... (74,822) (74,822)
--------- ----------- ---------- ----------- ----------- ------------- -------------
BALANCE, July 19, 1997
(Unaudited)...................... 11,691 $ 3,741,120 3,503,987 $ 1,897,660 $ -- $ 29,877,071 $ 35,515,851
--------- ----------- ---------- ----------- ----------- ------------- -------------
--------- ----------- ---------- ----------- ----------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-65
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED TWENTY WEEKS ENDED
---------------------------------------- ------------------------
FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19,
1995 1996 1997 1996 1997
------------ ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 1,695,940 $ 4,069,059 $ 6,672,525 $3,642,464 $4,029,012
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................. 7,932,522 8,401,628 6,577,718 2,600,153 2,786,815
Deferred income taxes..................................... (1,588,000) (126,000) (473,000) (297,000 ) (107,000 )
Post retirement benefits.................................. 1,540,535 459,795 (410,845) (158,018 ) (111,000 )
Change in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable..................................... (928,541) (2,059,592) (447,882) (4,991,501 ) (1,772,840 )
Inventories............................................. (1,064,010) (363,904) (1,732,883) (2,181,767 ) (2,279,467 )
Prepaid expenses and other.............................. 136,117 47,688 118,719 403,871 758,295
Accounts payable and accrued expenses................... 1,882,944 2,024,370 1,267,868 7,899,393 (316,731 )
Income taxes............................................ (1,487,000) (313,005) 2,058,000 864,000 298,546
------------ ------------ ----------- ----------- -----------
Net cash provided by operating activities............. 8,120,507 12,140,039 13,630,220 7,781,595 3,285,630
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (5,817,122) (7,213,562) (8,810,163) (3,497,237 ) (2,380,272 )
Cash paid for acquisitions (Note 10)...................... (3,862,913) (3,469,300 )
(Increase) decrease in other assets....................... 1,336,367 (1,112,394) (307,292) 536,079 (98,594 )
------------ ------------ ----------- ----------- -----------
Net cash used in investing activities................. (8,343,668) (8,325,956) (9,117,455) (2,961,158 ) (5,948,166 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (1,465,454) (7,231,685) (5,375,172) (1,183,941 ) (1,217,238 )
Proceeds from long-term borrowings........................ 27,000,000 100,000
Payments of recapitalization expenses..................... (86,569) (403,569)
Proceeds from issuance of common stock.................... 519,432 35,672 97,458 93,426 27,710
Redemption of preferred and common stock.................. (470,716) (28,319,096) (60,480)
Dividends paid on preferred stock......................... (304,000) (301,644) (60,480 ) (74,822 )
------------ ------------ ----------- ----------- -----------
Net cash used in financing activities................. (1,503,307) (9,222,678) (5,639,838) (1,150,995 ) (1,164,350 )
------------ ------------ ----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,726,468) (5,408,595) (1,127,073) 3,669,442 (3,826,886 )
CASH AND CASH EQUIVALENTS, BEGINNING........................ 18,786,184 17,059,716 11,651,121 11,651,121 10,524,048
------------ ------------ ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, ENDING........................... $17,059,716 $ 11,651,121 $10,524,048 $15,320,563 $6,697,162
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 615,498 $ 2,272,540 $ 1,993,371 $ 947,085 $ 629,580
Taxes on income paid...................................... 4,050,000 2,500,000 1,800,000 600,000 2,300,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of installment notes for the purchase of
transportation equipment................................ $ 1,652,233 $ -- $ 1,820,000 $ -- $ --
Collection of note receivable through the redemption of
common stock in the recapitalization (Note 8)........... 1,216,541
</TABLE>
See notes to consolidated financial statements.
F-66
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Country Fresh, Inc. and its subsidiaries (the "Company") process
and market dairy and other related products to customers primarily located in
Michigan, northern Indiana, and northern Ohio. The Company provides credit terms
to its customers generally ranging up to 30 days, perform ongoing credit
evaluations of their customers and maintain allowances for potential credit
losses and rebates and allowances based on historical experience.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Country Fresh, Inc. and its wholly owned subsidiaries. All
significant intercompany profits, transactions and balances have been eliminated
in consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although management believes the estimates are reasonable,
actual results could differ from those estimates.
FISCAL YEAR--The fiscal year of the Company ends on the Saturday closest to
the end of February. The fiscal years ended March 1, 1997 and February 25, 1995
were comprised of fifty-two weeks, whereas the fiscal year ended March 2, 1996
was comprised of fifty-three weeks. References to fiscal years 1995, 1996 and
1997 represent the Company's fiscal years ended February 25, 1995, March 2, 1996
and March 1, 1997, respectively.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash and
highly-liquid investments purchased with a remaining maturity at date of
purchase of approximately three months or less.
INVENTORIES--Inventories are primarily stated at the lower of cost, using
the LIFO (last-in, first-out) method, or market. The cost of manufactured
finished goods inventories include raw materials direct labor and indirect
production and overhead costs.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment assets are
recorded at cost. Depreciation is computed using both the straight-line and
declining balance methods based on the estimated useful lives of the related
assets.
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
- -------------------------------------------- --------------------------------------------
<S> <C>
Buildings and improvements Ten to 20 years
Machinery and equipment Three to 12 years
Shipping containers Three years
Transportation equipment Five to 12 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as incurred
whereas major additions are capitalized.
The Company periodically assesses the carrying values of its long lived
assets, which primarily consists of its property, plant and equipment assets, by
comparing the expected undiscounted future cash flows to the carrying amount of
the asset, and would evaluate a potential impairment if the recorded value of
these
F-67
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets exceeded the associated future cash flows. Any adjustment to the carrying
value of long-lived assets is recognized on a current basis.
DEFERRED INCOME TAXES--Deferred income taxes are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future. Such deferred income
tax asset and liability computations are based on enacted tax laws and rates
applicable to periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
EARNINGS PER COMMON SHARE--The Company computes earnings per common shared
by dividing net earnings less dividends on preferred stock by the weighted
average number of common shares outstanding, including common equivalent shares.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's consolidated balance
sheet as of July 19, 1997 and the consolidated statements of earnings,
shareholders' equity and of cash flows for the twenty weeks ended July 20, 1996
and July 19, 1997, have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal, recurring
adjustments) necessary to present fairly the balance sheet of the Company at
July 19, 1997, and the results of operations and cash flows of the Company for
the twenty weeks ended July 20, 1996 and July 19, 1997, have been made. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 2, MARCH 1, JULY 19,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished products........................................... $ 7,099,479 $ 8,135,843 $11,199,792
Raw materials............................................... 3,010,340 5,498,844 7,054,746
Containers.................................................. 3,103,377 1,334,458 1,472,069
----------- ----------- -----------
13,213,196 14,969,145 19,726,607
Less LIFO reserve........................................... (648,522) (671,588) (880,283)
----------- ----------- -----------
$12,564,674 $14,297,557 $18,846,324
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-68
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 2, MARCH 1, JULY 19,
1996 1997 1997
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll............................... $3,305,793 $3,428,354 $2,871,207
Discounts, rebates and allowances..... 2,837,837 2,982,688 1,625,292
Insurance............................. 1,702,439 1,689,717 1,942,919
Retirement and pension................ 698,113 799,193 1,226,093
Containers............................ 2,752,905 2,759,367 3,424,080
---------- ---------- ----------
$11,297,087 11,659,319 11,089,591
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company accrues customer discounts, rebates and allowances as earned by
its customers, which are generally paid either monthly, quarterly or annually
pursuant to the terms of the arrangement with the specific customer.
The Company is self-insured in certain states, up to specified limits, for
workers' compensation claims. Individual workers' compensation claims in excess
of $300,000 and aggregate workers' compensation claims between $2.2 million and
$20 million are insured through an insurance carrier. In addition, the Company
is self-insured, up to certain limits, for medical benefit claims. The estimated
cost of claims for workers' compensation and medical benefits are accrued as
incurred in the consolidated financial statements.
F-69
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
4. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
MARCH 2, MARCH 1, JULY 19,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Credit agreement:
Term loan facility........................................ $10,000,000 $ 8,000,000 $ 7,000,000
Revolving credit facility................................. 11,000,000 10,000,000 10,000,000
Revenue bonds:
Economic Development Corporation of the County of Elkhart,
Indiana................................................. 3,680,000 3,450,000 3,450,000
Economic Development Corporation of the City of Livonia,
Michigan................................................ 2,780,000 2,570,000 2,570,000
Toledo-Lucas County Port Authority........................ 4,590,000 4,335,000 4,335,000
Installment loan............................................ 1,512,262 1,809,968 1,758,816
Promissory notes payable.................................... 1,084,000 1,084,000 1,078,000
Other notes payable......................................... 315,756 157,878 97,792
----------- ----------- -----------
34,962,018 31,406,846 30,289,608
Less current portion........................................ (2,809,721) (2,835,646) (3,766,924)
----------- ----------- -----------
Total long-term debt........................................ $32,152,297 $28,571,200 $26,552,684
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
CREDIT AGREEMENT--The Company has a credit agreement with a syndicate of
banks which provides for both a term loan facility and a revolving credit
facility, which are unsecured and mature on January 1, 2002. The term loan
facility requires quarterly principal installments of $464,286 plus interest and
the revolving credit facility, which provides for maximum borrowings of up to
$20 million, requires quarterly interest payments. The interest rate under the
credit agreement is determined at the Company's option at either (i) the LIBOR
rate (6.38% at March 1, 1997) plus between 1% and 1.5%, based on certain
financial ratios of the Company, or (ii) the prime rate.
In addition to amounts available under the revolving credit facility of the
credit agreement, the Company also has a $5 million unsecured line of credit
with a bank, which expires in July 1998. No amounts are outstanding under this
line of credit agreement,
REVENUE BONDS--The Company has three series of revenue bonds outstanding
which require aggregate annual sinking fund redemption installments of $695,000,
and are secured by irrevocable letters of credit issued by financial
institutions, along with first mortgages on real property and equipment with an
aggregate net book value of approximately $9,100,000 at March 1, 1997, for
certain of the revenue bonds. Advances made, if any, under these letters of
credit provide for repayment of such advances either ratably over the remaining
life of the bond issue or within one year of such advance. Interest on the
revenue bonds is due semi-annually at rates, determined by the remarketing
agents (subject to certain maximums), which will approximate market conditions
for tax exempt securities of the same stature. At March 1, 1997, the interest
rates on the revenue bonds ranged from 3.4% to 3.75%. These revenues bonds are
included in the accompanying schedule of maturities on long-term debt based on
their mandatory sinking fund redemption installments.
F-70
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
4. LONG-TERM DEBT (CONTINUED)
INSTALLMENT NOTE PAYABLE--The Company has an installment note payable with
monthly payments of principal and interest of $21,938, which bears interest at a
fixed rate of 7.85% through December 31, 2001 and a variable rate determined
quarterly thereafter at the prime rate plus 1/2%. This installment note payable
is collateralized by the Company's airplane.
PROMISSORY NOTES PAYABLE--Between 1988 and 1993, the Company issued
unsecured promissory notes in units of $1,000 pursuant to a Promissory Note
Prospectus filed with the Corporation and Securities Bureau, Michigan Department
of Commerce. These promissory notes require quarterly interest payments at the
prime rate less 1% (7.25% at March 1, 1997) with a minimum interest rate of 8%,
which was reduced to 6% in 1993, and are repayable at the option of the Company
on any quarterly interest payment date. At March 2, 1996 and March 1, 1997,
$543,000 of these promissory notes were held by certain of the Company's
shareholders.
DEBT COVENANTS--The loans under the credit agreement and certain of the
revenue bonds contain covenants which include restrictions on additional
indebtedness and the payment of cash dividends in excess of prescribed amounts
and require the Company to maintain certain minimum financial ratios, including:
a current ratio of 1.35 to 1.0; working capital of $18,500,000; tangible net
worth of $21,500,000 at March 1, 1997, increasing $3,000,000 annually
thereafter; a ratio of total liabilities to net worth of not more than 3.5 to
1.0, decreasing .5 annually; and fixed charge coverage ratios (as defined) of
2.0 to 1.0. The Company's working capital at March 1, 1997 and March 2, 1996 was
less than the required amounts, however, this covenant was waived by the
respective lendors through February 1998.
DEBT MATURITIES--At March 1, 1997, future annual maturities on long-term
debt are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- ------------------------------------------------------------
<S> <C>
1998...................................................... $ 2,835,646
1999...................................................... 2,687,992
2000...................................................... 2,699,049
2001...................................................... 2,711,005
2002...................................................... 11,438,220
Thereafter................................................ 9,034,934
-----------
Total..................................................... $31,406,846
-----------
-----------
</TABLE>
At March 1, 1997 and March 2, 1996, the estimated fair value of the
Company's long-term debt, including current maturities, approximated its
carrying value. The estimated fair value was based on anticipated rates
available to the Company for debt with similar terms and maturities.
5. EMPLOYEE RETIREMENT PLANS
The Company's retirement programs include both defined benefit and defined
contribution pension plans. Substantially all of the Company's supervisory and
administrative personnel are covered by a non-contributory defined benefit
pension plan and the employees of a subsidiary which are covered by a non-
contributory defined benefit pension plan required by a collective bargaining
agreement. The benefits
F-71
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
5. EMPLOYEE RETIREMENT PLANS (CONTINUED)
under these defined benefit plans are based on years of service and, as to one
of the plans, the employee's compensation. The Company's funding policy is to
contribute annually the minimum amount required under ERISA regulations. Plan
assets consist principally of investments made with insurance companies under a
group annuity contract.
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's balance sheets at March 1, 1997 and March 2,
1996, respectively:
<TABLE>
<CAPTION>
MARCH 2, MARCH 1,
1996 1997
------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation including vested benefit obligations of
$11,973,482 in 1997 and $10,462,548 in 1996.................................... $ 10,943,674 $ 12,508,894
------------- -------------
------------- -------------
Projected benefit obligation for service rendered to date........................ $ 12,668,312 $ 14,980,825
Plan assets, at estimated fair value............................................... 11,624,776 14,056,504
------------- -------------
Projected benefit obligation in excess of the plan assets.......................... 1,043,536 924,321
Unrecognized net gain from past experience different from that assumed and effect
of changes in assumptions........................................................ 1,742,605 1,361,803
Unrecognized prior service cost.................................................... (938,367) (874,264)
Unrecognized initial net obligation at December 1, 1986 and March 1, 1987 being
amortized over 19 and 16 years, respectively..................................... (823,258) (735,027)
Adjustment required to reflect minimum liability................................... 1,232,462
------------- -------------
Accrued pension costs.............................................................. 2,256,978 676,833
Less current portion............................................................... (250,000) (200,000)
------------- -------------
Long-term.......................................................................... $ 2,006,978 $ 476,833
------------- -------------
------------- -------------
</TABLE>
Net periodic pension costs for the fiscal years ended 1995, 1996 and 1997
included the following components:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Service cost-benefits earned during the year........................ $ 724,759 $ 748,726 $ 1,023,899
Interest cost on projected benefit obligation....................... 824,538 890,515 979,136
Actual return on plan assets........................................ (316,919) (1,824,261) (1,673,896)
Net amortization and deferral....................................... (385,888) 1,073,581 807,514
------------- ------------- -------------
Net periodic pension costs.......................................... $ 846,490 $ 888,561 $ 1,136,653
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-72
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
5. EMPLOYEE RETIREMENT PLANS (CONTINUED)
Assumptions used in the actuarial valuations were:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Discount rates............................................................................. 8.25% 7.25% 7.50%
Rates of increase in compensation levels................................................... 4.75% 3.75% 4.00%
Expected long-term rate of return on assets................................................ 9.00% 9.00% 9.00%
</TABLE>
Substantially all of the Company's supervisory and administrative personnel
may elect coverage in a salary reduction defined contribution retirement plan.
The plan provides for employer contributions as determined by the Board of
Directors. The Company's matching contributions to this plan were approximately
$110,000, $131,000 and $132,000 in 1995, 1996 and 1997, respectively.
Certain union hourly employees are participants in Company sponsored defined
contribution plans which provide for employer contributions in various amounts
ranging from $19 to $35 per pay period per participant. Contributions to these
plans amounted to approximately $245,000, $350,000 and $377,000 in 1995, 1996
and 1997, respectively.
In addition to the plans described above, the Company participates in
several multi-employer and other defined contribution plans covering
substantially all union employees. The expense for these plans aggregated
approximately $858,000, $809,000 and $848,000 in 1995, 1996 and 1997,
respectively.
The Multi-Employer Pension Plan Amendments Act of 1980 amended ERISA to
establish funding requirements and obligations for employers participating in
multi-employer plans, principally related to employer withdrawal from or
termination of such plans. Separate actuarial calculations of the Company's
position are not available with respect to the multi-employer plans.
6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Country Fresh, Inc. Employees' Retirement Health Care Plan provides
health care benefits to certain retirees of one subsidiary, who are covered
under specific group contracts. Postretirement health care coverage on
subsequent employment contracts has been eliminated, therefore, no additional
employees will be eligible under current agreements for such benefits. As
defined by the specific group contract, qualified covered associates may be
eligible to receive major medical insurance with deductible and coinsurance
provisions subject to certain lifetime maximums.
Effective February 27, 1994, the Company adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" (SFAS 106). Under SFAS 106, the Company is required to
accrue the estimated cost of retiree benefit payments, other than pensions,
during the employee's active service period. As permitted by SFAS 106, the
Company elected to recognize immediately the cumulative effect of the change in
accounting in the year ended February 25, 1995. The accumulated postretirement
benefit obligation amounted to $3,543,140 and $3,479,979 at March 2, 1996 and
March 1, 1997, respectively of which $3,343,140 and $3,191,800, respectively
were considered long-term liabilities. Postretirement health care expense for
1996 and 1997 consisted of interest cost on the accumulated postretirement
benefit obligation of $280,547 and $225,018, respectively.
F-73
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The Company continues to fund the cost of these benefits as incurred, which
required payments of $80,000, $180,000 and $287,000 in 1995, 1996 and 1997,
respectively.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.58% for the fiscal year ended March 1,
1997, gradually declining at a rate of approximately 1% per year to 5.25% in
2005 and remaining at that level thereafter, and the assumed discount rate in
determining the accumulated postretirement benefit obligation was 7.50%. A
one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit cost and the
service cost plus interest cost by between approximately 8% and 9%.
7. TAXES ON INCOME
The Company and its subsidiaries file a consolidated federal income tax
return. The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Currently payable................................... $ 3,733,000 $ 2,216,000 $ 3,858,000
Deferred............................................ (1,588,000) (126,000) (473,000)
------------ ------------ ------------
Total............................................... $ 2,145,000 $ 2,090,000 $ 3,385,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The effective income tax rates are different from the statutory federal
income tax rates for the following reasons:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate....................................... 34.0% 34.0% 34.0%
Other................................................................... 1.1 (0.1) (0.3)
--- --- ---
Effective income tax rate............................................... 35.1% 33.9% 33.7%
--- --- ---
--- --- ---
</TABLE>
F-74
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
7. TAXES ON INCOME (CONTINUED)
Deferred tax assets and liabilities resulting from temporary differences are
as follows at March 2, 1996 and March 1, 1997:
<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
DEFERRED DEFERRED
DEFERRED TAX TAX DEFERRED TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ---------- ------------ ----------
Accounts receivable.......................................... $ 415,000 $ 235,000
Inventory.................................................... 180,000 177,000
Prepaid expenses............................................. $ 148,000 $ 130,000
Goodwill..................................................... 195,000
Depreciation................................................. 947,000 1,399,000 105,000
Employee benefits............................................ 2,354,000 2,281,000
Other........................................................ 68,000 151,000 119,000 33,000
------------ ---------- ------------ ----------
Total........................................................ $ 3,964,000 $ 299,000 $ 4,406,000 $ 268,000
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company leases a building, transportation equipment, certain packaging
equipment and computer equipment under operating lease agreements with terms
ranging from 1 to 5 years. The transportation and packaging equipment leases
provide for additional rentals based upon mileage and production, respectively,
and the computer equipment lease agreements include an option to purchase the
related equipment upon the expiration of the lease.
As of March 1, 1997, future minimum rental commitments under non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- --------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... $ 1,092,181
1999.......................................................................... 740,791
2000.......................................................................... 569,248
2001.......................................................................... 525,146
2002.......................................................................... 89,235
------------
Total......................................................................... $ 3,016,601
------------
------------
</TABLE>
Total rental expense for all non-cancelable operating leases was comprised
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rentals..................................... $ 2,168,228 $ 2,350,214 $ 2,039,594
Contingent rentals.................................. 855,658 654,063 692,726
------------ ------------ ------------
Total............................................... $ 3,023,886 $ 3,004,277 $ 2,732,320
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-75
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
9. SHAREHOLDERS' EQUITY
Prior to February 21, 1995, the Company's common stock included shares of
both Class A and Class B common stock. On February 21, 1995, the Company's
shareholders approved a Plan of Recapitalization which, effective February 26,
1995, changed the Company's capital structure by redeeming all Class A common
shares at $100 per share, converting each Class B common share into forty shares
of no par value voting common stock, and creating 800,000 shares of preferred
stock of which 31,250 shares were designated as Series A, 8% cumulative with a
par value of $320. In connection with this Plan of Recapitalization, the Company
also approved a Redemption and Exchange Offer (the "Offer"), whereby the Company
offered to redeem up to 4,293,400 shares of common stock at $8 per share and to
convert up to 1,250,000 shares of common stock into Series A preferred stock at
the rate of forty shares of common stock for each share of Series A preferred
stock, par value $320 per share. As a result of the Offer, 3,682,520 shares of
common stock were redeemed for cash and 475,000 shares of common stock were
converted into 11,875 shares of Series A preferred stock. Payment for shares
redeemed under the Offer was financed by borrowings of $27 million under a $35
million credit facility. All per share and stock option data have been restated
to reflect the recapitalization transaction.
The Company's outstanding shares of common and preferred stock are held
primarily by its customers. Net sales to customers who were also shareholders
were approximately 43%, 41% and 35% of consolidated net sales in 1995, 1996 and
1997, respectively.
Effective December 1, 1989, the Board of Directors established a stock
option plan which provided for the grant of up to 1,000,000 stock options to
acquire the Company's common stock to officers and key employees, at an exercise
price equal to market value on the date of grant. During 1994, the Board of
Directors granted stock options to acquire 420,000 shares at $5.50 per share to
one key employee. There have been no subsequent stock option grants since that
date. As of March 2, 1996 and March 1, 1997, these options, covering 420,000
shares, remained outstanding. The options vest ratably over seven years from the
grant date and must be exercised within twelve years of the date of grant. As of
March 1, 1997, options were exercisable for 120,000 shares.
Since the Company's stock options are granted at prices equal to market
value, the Company does not recognize compensation expense for such options.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which became effective for the Company for the year
ended March 1, 1997, establishes a fair value method and disclosure standards
for stock-based employee compensation agreements. The Company intends to
continue its current accounting for stock-based compensation as allowed by SFAS
No. 123 and will disclose the pro forma effects of applying this new standard
for all future stock option grants. However, since the Company has not made any
grants since 1994, no pro forma disclosures are required.
10. ACQUISITIONS
On April 20, 1997, the Company acquired certain inventory and equipment
assets of Wesley Ice Cream Company for $3.5 million, which approximated the fair
value of the assets acquired, and entered into a five-year lease for the plant's
real estate. The consolidated statements of earnings include the operations of
this acquired business from the acquisition date.
In 1994, the Company paid $3.9 million to acquire certain assets of
Southeastern Juice Packers, Inc. and Toledo Milk Processing, Inc., which have
been accounted for as purchase business combinations.
F-76
<PAGE>
COUNTRY FRESH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995
10. ACQUISITIONS (CONTINUED)
Accordingly, the above purchase price has been allocated to the assets acquired
at their fair values, which resulted in the allocation of $3.5 million of the
purchase price to tangible assets, with the remaining excess of the purchase
price over the fair value of tangible assets acquired recorded as goodwill. The
consolidated statements of earnings include the operations of Southeastern Juice
Packers, Inc. and Toledo Milk Processing, Inc. from their respective dates of
acquisition.
* * * * *
F-77
<PAGE>
APPENDIX A
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
SEPTEMBER 28, 1997
AMONG
SUIZA FOODS CORPORATION
SF ACQUISITION CORPORATION
AND
THE MORNINGSTAR GROUP INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I
THE MERGER
Section 1.1 THE MERGER............................................................................... A-1
Section 1.2 EFFECTIVE TIME OF THE MERGER............................................................. A-1
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 CERTIFICATE OF INCORPORATION............................................................. A-1
Section 2.2 BY-LAWS.................................................................................. A-1
Section 2.3 BOARD OF DIRECTORS; OFFICERS............................................................. A-1
Section 2.4 EFFECTS OF MERGER........................................................................ A-2
ARTICLE III
CONVERSION OF SHARES
Section 3.1 EXCHANGE RATIO........................................................................... A-2
Section 3.2 PARENT TO MAKE CERTIFICATES AVAILABLE.................................................... A-2
Section 3.3 DIVIDENDS; STOCK TRANSFER TAXES.......................................................... A-2
Section 3.4 NO FRACTIONAL SHARES..................................................................... A-3
Section 3.5 STOCK OPTIONS............................................................................ A-3
Section 3.6 STOCKHOLDERS' MEETINGS................................................................... A-4
Section 3.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS.................................................. A-4
Section 3.8 CLOSING.................................................................................. A-4
Section 3.9 TRANSFER TAXES........................................................................... A-4
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Section 4.1 ORGANIZATION AND QUALIFICATION........................................................... A-4
Section 4.2 CAPITALIZATION........................................................................... A-5
Section 4.3 SUBSIDIARIES............................................................................. A-5
Section 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT..................................................... A-6
Section 4.5 REPORTS AND FINANCIAL STATEMENTS......................................................... A-6
Section 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS..................................................... A-7
Section 4.7 LITIGATION............................................................................... A-7
Section 4.8 EMPLOYEE BENEFIT PLANS................................................................... A-8
Section 4.9 FINANCIAL ADVISOR........................................................................ A-9
Section 4.10 COMPLIANCE WITH APPLICABLE LAWS.......................................................... A-9
Section 4.11 TAXES.................................................................................... A-10
Section 4.12 CERTAIN AGREEMENTS....................................................................... A-10
Section 4.13 TAX AND ACCOUNTING MATTERS............................................................... A-11
Section 4.14 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS................................................ A-11
Section 4.15 INTELLECTUAL PROPERTY.................................................................... A-11
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 5.1 ORGANIZATION AND QUALIFICATION........................................................... A-12
Section 5.2 CAPITALIZATION........................................................................... A-12
Section 5.3 SUBSIDIARIES............................................................................. A-12
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Section 5.4 AUTHORITY RELATIVE TO THIS AGREEMENT..................................................... A-13
Section 5.5 REPORTS AND FINANCIAL STATEMENTS......................................................... A-13
Section 5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS..................................................... A-14
Section 5.7 LITIGATION............................................................................... A-14
Section 5.8 EMPLOYEE BENEFIT PLANS................................................................... A-15
Section 5.9 COMPANY ACTION........................................................................... A-16
Section 5.10 FINANCIAL ADVISORS....................................................................... A-16
Section 5.11 COMPLIANCE WITH APPLICABLE LAWS.......................................................... A-17
Section 5.12 TAXES.................................................................................... A-17
Section 5.13 CERTAIN AGREEMENTS....................................................................... A-18
Section 5.14 TAX AND ACCOUNTING MATTERS............................................................... A-18
Section 5.15 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS................................................ A-18
Section 5.16 INTELLECTUAL PROPERTY.................................................................... A-18
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Section 6.1 ORGANIZATION............................................................................. A-19
Section 6.2 CAPITALIZATION........................................................................... A-19
Section 6.3 AUTHORITY RELATIVE TO THIS AGREEMENT..................................................... A-19
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.................................... A-19
Section 7.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER......................................... A-20
Section 7.3 CONDUCT OF BUSINESS OF SUB............................................................... A-21
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 ACCESS AND INFORMATION................................................................... A-21
Section 8.2 REGISTRATION STATEMENT/PROXY STATEMENT................................................... A-22
Section 8.3 COMPLIANCE WITH THE SECURITIES ACT AND POOLING REQUIREMENTS.............................. A-22
Section 8.4 STOCK EXCHANGE LISTING................................................................... A-23
Section 8.5 EMPLOYEE MATTERS......................................................................... A-23
Section 8.6 INDEMNIFICATION.......................................................................... A-24
Section 8.7 HSR ACT.................................................................................. A-24
Section 8.8 ADDITIONAL AGREEMENTS.................................................................... A-24
Section 8.9 NO SHOP.................................................................................. A-25
Section 8.10 ADVICE OF CHANGES; SEC FILINGS........................................................... A-26
Section 8.11 PARENT DIRECTORSHIPS..................................................................... A-26
ARTICLE IX
CONDITIONS PRECEDENT
Section 9.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER............................... A-26
Section 9.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER............................. A-27
Section 9.3 CONDITIONS TO OBLIGATIONS OF PARENT AND SUB TO EFFECT THE MERGER......................... A-27
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 TERMINATION BY MUTUAL CONSENT............................................................ A-25
Section 10.2 TERMINATION BY EITHER PARENT OR THE COMPANY.............................................. A-25
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Section 10.3 OTHER TERMINATION RIGHTS................................................................. A-28
Section 10.4 EFFECT OF TERMINATION AND ABANDONMENT.................................................... A-28
ARTICLE XI
MISCELLANEOUS
Section 11.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS............................... A-29
Section 11.2 NOTICES.................................................................................. A-29
Section 11.3 FEES AND EXPENSES........................................................................ A-30
Section 11.4 PUBLICITY................................................................................ A-30
Section 11.5 SPECIFIC PERFORMANCE..................................................................... A-30
Section 11.6 ASSIGNMENT; BINDING EFFECT............................................................... A-30
Section 11.7 ENTIRE AGREEMENT......................................................................... A-30
Section 11.8 AMENDMENT................................................................................ A-31
Section 11.9 GOVERNING LAW............................................................................ A-31
Section 11.10 COUNTERPARTS............................................................................. A-31
Section 11.11 HEADINGS AND TABLE OF CONTENTS........................................................... A-31
Section 11.12 INTERPRETATION........................................................................... A-31
Section 11.13 WAIVERS.................................................................................. A-31
Section 11.14 SEVERABILITY............................................................................. A-31
Section 11.15 SUBSIDIARIES............................................................................. A-31
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
A-1...... Form of Affiliate Letter Addressed to Suiza Foods Corporation
A-2...... Form of Affiliate Letter Addressed to The Morningstar Group Inc.
B-1...... Form of Tax Opinion of Weil, Gotshal & Manges LLP
B-2...... Form of Tax Opinion of Hughes & Luce, L.L.P.
C-1...... Certificate of the Company re: Tax Opinion of Weil, Gotshal & Manges LLP
C-2...... Certificate of the Company re: Tax Opinion of Hughes & Luce, L.L.P.
D-1...... Certificate of Parent re: Tax Opinion of Weil, Gotshal & Manges LLP
D-2...... Certificate of Parent re: Tax Opinion of Hughes & Luce, L.L.P.
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of September
28, 1997, by and among Suiza Foods Corporation, a Delaware corporation
("Parent"), SF Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Parent ("Sub"), and The Morningstar Group Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, each of Parent and the Company has concluded that a business
combination between Parent and the Company represents a strategic combination of
their complementary businesses and operational and long term vision and is in
the best interests of the stockholders of Parent and the Company, respectively,
and accordingly, Parent and the Company desire to effect a business combination
by means of the merger of Sub with and into the Company (the "Merger");
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
unanimously approved the Merger, upon the terms and subject to the conditions
set forth herein;
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests"; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE I
THE MERGER
Section 1.1 THE MERGER. Upon the terms and subject to the conditions
hereof, at the Effective Time (as defined in Section 1.2), Sub shall be merged
with and into the Company and the separate existence of Sub shall thereupon
cease, and the Company, as the corporation surviving the Merger (the "Surviving
Corporation"), shall by virtue of the Merger continue its corporate existence
under the laws of the State of Delaware.
Section 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at the date and time (the "Effective Time") when a properly executed
Certificate of Merger is filed with the Secretary of State of the State of
Delaware, which Certificate shall be filed as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation
of the Company as in effect at the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation, and thereafter may be amended in
accordance with its terms and as provided by law and this Agreement.
Section 2.2 BY-LAWS. The By-laws of the Company as in effect at the
Effective Time shall be the By-laws of the Surviving Corporation, and thereafter
may be amended in accordance with their terms and as provided by law and this
Agreement.
Section 2.3 BOARD OF DIRECTORS; OFFICERS. The directors of Sub immediately
prior to the Effective Time shall be the directors of the Surviving Corporation,
and the officers of Sub immediately prior to the
A-1
<PAGE>
Effective Time shall be the officers of the Surviving Corporation, in each case
until their respective successors are duly elected and qualified.
Section 2.4 EFFECTS OF MERGER. The Merger shall have the effects set forth
in Section 259 of the Delaware General Corporation Law (the "DGCL").
ARTICLE III
CONVERSION OF SHARES
Section 3.1 EXCHANGE RATIO. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder of any common stock, par value
$.01 per share, of the Company ("Company Stock"):
(a) All shares of Company Stock which are held by the Company, and any
shares of Company Stock owned by Parent, Sub or any other subsidiary of Parent,
shall be canceled.
(b) Subject to Section 3.4, each remaining outstanding share of Company
Stock shall be converted into the right to receive 0.85 (the "Exchange Ratio")
fully paid and nonassessable shares of the common stock, par value $.01 per
share, of Parent ("Parent Common Stock").
(c) In the event of any dividend, stock split, reclassification,
recapitalization, combination or exchange of shares or other similar transaction
with respect to the Parent Common Stock or Company Stock after the date of this
Agreement and prior to the Effective Time, the Exchange Ratio shall be
appropriately adjusted.
(d) All of the issued and outstanding shares of stock of Sub shall be
converted into and become, in the aggregate, 10,000 fully paid and nonassessable
shares of capital stock of the Surviving Corporation.
Section 3.2 PARENT TO MAKE CERTIFICATES AVAILABLE. (a) Prior to the
Effective Time, Parent shall select an Exchange Agent, which shall be Parent's
Transfer Agent or such other person or persons reasonably satisfactory to the
Company, to act as Exchange Agent for the Merger (the "Exchange Agent"). As soon
as practicable after the Effective Time, Parent shall make available, and each
holder of Company Stock will be entitled to receive, upon surrender to the
Exchange Agent of one or more certificates ("Certificates") representing shares
of Company Stock for cancellation, certificates representing the number of
shares of Parent Common Stock into which such shares are converted in the Merger
and cash in consideration of fractional shares as provided in Section 3.4 (the
"Share Consideration").
(b) Any holder of shares of Company Stock who has not exchanged his
Certificates for Parent Common Stock in accordance with subsection (a) of this
Section 3.2 within twelve months after the Effective Time shall have no further
claim upon the Exchange Agent and shall thereafter look only to Parent and the
Surviving Corporation for payment of the Share Consideration in respect of his
shares of Company Stock. Until so surrendered, Certificates shall represent
solely the right to receive the Share Consideration.
Section 3.3 DIVIDENDS; STOCK TRANSFER TAXES. No dividends or other
distributions that are declared or made on Parent Common Stock will be paid to
persons entitled to receive certificates representing Parent Common Stock
pursuant to this Agreement until such persons surrender their Certificates
representing Company Stock. Upon such surrender, there shall be paid to the
person in whose name the certificates representing such Parent Common Stock
shall be issued (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time and a payment
date prior to surrender with respect to such whole shares of Parent Common Stock
and which have not been paid, less the amount of any withholding taxes which may
be required thereon, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Parent Common Stock, less the amount of any
withholding taxes which may be required thereon. In no event shall
A-2
<PAGE>
the person entitled to receive such dividends be entitled to receive interest on
such dividends. In the event that any certificates representing shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it shall be a
condition of such exchange that the Certificate or Certificates so surrendered
shall be properly endorsed or be 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
shares of Parent Common Stock in a name other than that of the registered holder
of the Certificate or Certificates 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 of Company Stock for any
shares of Parent Common Stock or dividends thereon delivered to a public
official pursuant to any applicable abandoned property, escheat or similar laws.
In the event any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by Parent, the posting by such
person of a bond in such reasonable amount as the Surviving Corporation may
direct as indemnity against any claim that may be made against the Surviving
Corporation or any other party hereto with respect to such Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Parent Common Stock and cash in lieu of fractional
shares, and unpaid dividends and distributions on shares of Parent Common Stock
as provided in this Section 3.3, deliverable in respect thereof pursuant to this
Agreement.
Section 3.4 NO FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates pursuant to Section 3.1(b). Notwithstanding any other
provision of this Agreement, each holder of Company Stock exchanged pursuant to
the Merger who would otherwise be entitled to receive a fraction of a share of
Parent Common Stock (after taking into account all Certificates delivered by
such holder) shall receive, in lieu thereof, cash from Parent in an amount equal
to such fractional part of a share of Parent Common Stock multiplied by the
Average Closing Price. For purposes of this Section 3.4, "Average Closing Price"
is defined to mean the average of the daily closing prices for the shares of
Parent Common Stock for the twenty (20) consecutive trading days on which such
shares are actually traded on the New York Stock Exchange ("NYSE") (as reported
by the Wall Street Journal or, if not reported thereby, any other authoritative
source selected by Parent) ending at the close of trading on the second trading
day immediately preceding the Closing Date.
Section 3.5 STOCK OPTIONS. (a) Each of the Company's stock option plans
(the "Option Plans"), each of which is set forth in Section 5.2 of the Company
Disclosure Schedule (as defined in Article V), and each option to acquire shares
of Company Stock outstanding thereunder immediately prior to the Effective Time,
whether vested or unvested (each, an "Option" and collectively, the "Options"),
shall be assumed by Parent at the Effective Time, and each such Option shall
become an option to purchase a number of shares of Parent Common Stock (a
"Substitute Option") equal to the number of shares of Company Stock subject to
such Option multiplied by the Exchange Ratio (rounded down to the nearest whole
share). The per share exercise price for each Substitute Option shall be the
current exercise price per share of Company Stock divided by the Exchange Ratio
(rounded up to the nearest full cent), and each Substitute Option otherwise
shall be subject to all of the other terms and conditions of the original option
to which it relates, including, without limitation, the provisions therein with
respect to vesting and forfeiture. Prior to the Effective Time, the Company
shall take such additional actions as are necessary under applicable law and the
applicable agreements and Option Plans to ensure that each outstanding Option
shall, from and after the Effective Time, represent only the right to purchase,
upon exercise, shares of Parent Common Stock. No Option shall be accelerated by
reason of the Merger to the extent the Board of Directors of the Company has
discretion to make a determination to cause such acceleration. It is the
intention of the parties that, to the extent that any Option constitutes an
"incentive stock option" (within the meaning of Section 422 of the Code)
immediately prior to the Effective Time, that the Substitute Option relating
thereto shall also qualify as an incentive stock option, and that the assumption
by Parent of such Option
A-3
<PAGE>
and the substitution of a Substitute Option therefor as provided by this Section
3.5(a) will satisfy each of the conditions of Section 422(a) of the Code with
respect to such continued qualification.
(b) As soon as practicable after the Effective Time, Parent shall cause to
be included under a registration statement on Form S-8 of Parent all shares of
Parent Common Stock which are subject to Substitute Options, and shall maintain
the effectiveness of such registration statement until all Substitute Options
have been exercised, expired or forfeited.
Section 3.6 STOCKHOLDERS' MEETINGS. Each of Parent and the Company will
take all action necessary in accordance with applicable law and its Certificate
of Incorporation or charter, as the case may be, and By-laws to convene a
meeting of its stockholders as promptly as practicable to consider and vote upon
(i) in the case of Parent, the approval by the holders of a majority of the
shares of Parent Common Stock present and voting of the issuance of the shares
of Parent Common Stock contemplated by this Agreement and (ii) in the case of
the Company, the approval by the holders of a majority of the shares of Company
Stock outstanding and entitled to vote thereon of this Agreement and the
transactions contemplated hereby. Parent shall take all action necessary to
authorize Sub to consummate the Merger. The Board of Directors of each of Parent
and the Company shall recommend such approval and Parent and the Company shall
each take all lawful action to solicit such approval, including, without
limitation, timely and promptly mailing the Proxy Statement/Prospectus (as
defined in Section 8.2); provided, however, that such recommendation is subject
to any action permitted pursuant to Section 8.9. Parent and the Company shall
coordinate and cooperate with respect to the timing of such meetings and shall
use their best efforts to hold such meetings on the same day.
Section 3.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective
Time, the stock transfer books of the Company shall be closed and no transfer of
shares of Company Stock shall be made thereafter. In the event that Certificates
are presented to the Surviving Corporation or Parent after the Effective Time,
they shall be canceled and exchanged for Parent Common Stock and/or cash as
provided in Sections 3.1(b) and 3.4.
Section 3.8 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Weil, Gotshal &
Manges LLP, 100 Crescent Court, Suite 1300, Dallas, Texas, at 9:00 a.m. local
time on the day which is not more than one business day after the day on which
the last of the conditions set forth in Article IX (other than those that can be
fulfilled only at the Effective Time) is fulfilled or waived or at such other
time and place as Parent and the Company shall agree in writing.
Section 3.9 TRANSFER TAXES. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, applications or other
documents regarding any real property transfer, stamp, recording, documentary or
other taxes and any other fees and similar taxes which become payable in
connection with the Merger other than transfer or stamp taxes payable in respect
of transfers pursuant to the fourth sentence of Section 3.3 (collectively,
"Transfer Taxes"). From and after the Effective Time, Parent shall pay or cause
to be paid, without deduction or withholding from any amounts payable to the
holders of Company Stock, all Transfer Taxes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows (such
representations and warranties (as well as other provisions of this Agreement)
are qualified by the matters identified (with references to the appropriate
Section and, if applicable, subsection being qualified) on a disclosure schedule
(the "Parent Disclosure Schedule") delivered by Parent to the Company prior to
execution of this Agreement):
Section 4.1 ORGANIZATION AND QUALIFICATION. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its
A-4
<PAGE>
business as it is now being conducted or currently proposed to be conducted.
Parent is duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities make such qualification
necessary, except where the failure to be so qualified will not, alone or in the
aggregate, have a Parent Material Adverse Effect. For the purposes of this
Agreement, a "Parent Material Adverse Effect" means any material adverse effect
on the business, properties, assets, condition (financial or otherwise),
liabilities or results of operations of Parent and its subsidiaries taken as a
whole, other than any effects arising out of, resulting from or relating to
changes in general economic or financial conditions. Complete and correct copies
as of the date hereof of the Certificate of Incorporation and By-laws of Parent
have been delivered to the Company as part of the Parent Disclosure Schedule.
Section 4.2 CAPITALIZATION. The authorized capital stock of Parent
consists of 100,000,000 shares of Parent Common Stock, and 1,000,000 shares of
Preferred Stock, par value $.01 per share (the "Parent Preferred Stock"), of
which 11,691 shares will be designated as Series A Preferred Stock ("Series A
Preferred Stock") on or prior to the Effective Time and will be issuable under
the terms of that certain Agreement and Plan of Merger dated September 18, 1997
among Parent, CF Acquisition Corp. and Country Fresh, Inc. (the "CF Merger
Agreement"), as more fully described in Section 4.2 of the Parent Disclosure
Schedule. As of September 1, 1997, the issued and outstanding capital stock of
Parent consisted solely of 15,804,545 shares of Parent Common Stock, all of
which were validly issued and outstanding, fully paid, and nonassessable. There
are no bonds, debentures, notes or other indebtedness issued or outstanding
having the right to vote on any matters on which Parent's stockholders may vote.
There are no options, warrants, calls, convertible securities or other rights,
agreements or commitments presently outstanding obligating Parent to issue,
deliver or sell shares of its capital stock or debt securities, or obligating
Parent to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment, other than as identified in Section 4.2 of
the Parent Disclosure Schedule. Section 4.2 of the Parent Disclosure Schedule
sets forth the name of each optionee, the number of options held by such
optionee and the exercise price for such options under the Parent Stock Plans
(as defined below). Since September 1, 1997, Parent has not issued any shares of
its capital stock except (i) shares of Parent Common Stock issued under, or
issued upon exercise of options granted under, Parent's stock option, restricted
stock and stock purchase plans described in Section 4.2 of the Parent Disclosure
Schedule (the "Parent Stock Plans") and (ii) shares of Parent Common Stock and
Series A Preferred Stock issuable under the terms of the CF Merger Agreement, as
more fully described in Section 4.2 of the Parent Disclosure Schedule. All of
the shares of Parent Common Stock issuable in accordance with this Agreement in
exchange for Company Stock at the Effective Time in accordance with this
Agreement will be, when so issued, duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and shall be delivered free and
clear of all liens, claims, charges and encumbrances of any kind or nature
whatsoever.
Section 4.3 SUBSIDIARIES. Each subsidiary of Parent is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to the
business of such subsidiary) and has the corporate or similar power to carry on
its business as it is now being conducted or currently proposed to be conducted.
Each subsidiary of Parent is duly qualified to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified, when taken together with
all such failures, has not had, and would not have, a Parent Material Adverse
Effect. Section 4.3 of the Parent Disclosure Schedule contains, with respect to
each subsidiary of Parent, its name and jurisdiction of organization and, with
respect to each subsidiary that is not wholly owned, the number of issued and
outstanding shares of capital stock or share capital and the number of shares of
capital stock or share capital owned by Parent or a subsidiary. All the
outstanding shares of capital stock or share capital of each subsidiary of
Parent are validly issued, fully paid and nonassessable, and except as set forth
in Section 4.3 of the Company Disclosure Schedule, those owned by Parent or by a
subsidiary of Parent are owned free and clear of any liens, claims or
encumbrances. Except as described in Section 4.3 of the Parent
A-5
<PAGE>
Disclosure Schedule, there are no existing options, warrants, calls, convertible
securities or other rights, agreements or commitments of any character relating
to the issued or unissued capital stock or other securities of any of the
subsidiaries of Parent. Except as set forth in Parent's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, any Parent SEC Report (as
hereinafter defined) filed subsequent to such date and prior to the date hereof,
or in Section 4.3 of the Parent Disclosure Schedule, and except for acquisitions
after the date hereof of assets or businesses primarily engaged in the same
businesses as those conducted by Parent and its subsidiaries as of the date
hereof (which acquisitions do not require any approval of the stockholders of
Parent (including, without limitation, any approval of related financings by the
stockholders of Parent)), Parent does not directly or indirectly own any
interest in any other corporation, partnership, joint venture or other business
association or entity or have any obligation, commitment or undertaking to
acquire any such interest.
Section 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT. Parent has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by Parent's Board of
Directors. This Agreement constitutes a valid and binding obligation of Parent
enforceable in accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. Except for the
approval of the issuance of the Parent Common Stock contemplated by this
Agreement by the holders of the Parent Common Stock as described in Section 3.6,
no other corporate proceedings on the part of Parent are necessary to authorize
this Agreement and the transactions contemplated hereby. Except as described in
Section 4.4 of the Parent Disclosure Schedule, Parent is not subject to or
obligated under (i) any charter or by-law provision or (ii) any contract,
indenture, loan or credit document, license, franchise, permit, order, decree,
concession, lease, instrument, judgment, statute, law, ordinance, rule or
regulation applicable to Parent or any of its subsidiaries or their respective
properties or assets, which would be breached or violated, or under which there
would be a default (with or without notice or lapse of time, or both), or under
which there would arise a right of termination, cancellation, modification or
acceleration of any obligation, or any right to payment or compensation, or the
loss of a material benefit, by its executing and carrying out this Agreement
other than, in the case of this clause (ii) only, (A) any breaches, violations,
defaults, terminations, cancellations, modifications, accelerations, rights to
payment or compensation, or losses which, either alone or in the aggregate, have
not had, and would not have, a Parent Material Adverse Effect or would not
prevent the consummation of the transactions contemplated hereby and (B) the
laws and regulations referred to in the next sentence. Except as required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
corporation, securities or blue sky laws or regulations of the various states,
no filing or registration with, or authorization, consent or approval of, any
court, administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (each, a "Governmental Entity"), is
necessary for the consummation by Parent of the Merger or the other transactions
contemplated by this Agreement, other than filings, registrations,
authorizations, consents or approvals the failure to make or obtain which has
not had, and would not have, a Parent Material Adverse Effect or would not
prevent the consummation of the transactions contemplated hereby.
Section 4.5 REPORTS AND FINANCIAL STATEMENTS. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Reports on
Form 10-K for the fiscal years ended December 31, 1995 and December 31, 1996, as
filed with the Securities and Exchange Commission (the "Commission"), (ii)
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997, and June
30, 1997, as filed with the Commission, (iii) proxy statements related to all
meetings of its stockholders (whether annual or special) since December 31,
1995, and (iv) all other reports or registration statements filed by Parent with
the Commission since December 31, 1995, except for preliminary material (in the
case of clauses (iii) and
A-6
<PAGE>
(iv) above) and except for registration statements on Form S-8 relating to
employee benefit plans and annual reports on Form 11-K with respect to such
plans, which are all the documents that Parent was required to file with the
Commission since that date (the documents in clauses (i) through (iv) being
referred to herein collectively as the "Parent SEC Reports"). As of their
respective dates, the Parent SEC Reports complied as to form in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the Commission thereunder
applicable to such Parent SEC Reports. As of their respective dates, the Parent
SEC Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim financial statements of Parent included in the Parent SEC Reports comply
as to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the Commission with respect thereto.
The financial statements included in the Parent SEC Reports: (i) have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis, except as may be indicated therein or in the notes thereto
and subject, in the case of the unaudited interim financial statements, to
normal year-end adjustments, any other adjustments described therein and the
fact that certain information and notes have been condensed or omitted in
accordance with the Exchange Act and the rules promulgated thereunder; (ii)
present fairly, in all material respects, the financial position of Parent and
its subsidiaries as at the dates thereof and the results of their operations and
cash flows for the periods then ended; and (iii) are in all material respects in
accordance with the books of account and records of Parent and its subsidiaries.
As of June 30, 1997, there was no basis for any claim or liability of any nature
against Parent or its subsidiaries, whether absolute, accrued, contingent or
otherwise, which, alone or in the aggregate, has had, or would have, a Parent
Material Adverse Effect, other than as reflected in the Parent SEC Reports.
Section 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Parent SEC Reports filed prior to the date of this Agreement or as set forth
in Section 4.6 of the Parent Disclosure Schedule, since June 30, 1997, Parent
and its subsidiaries have operated their respective businesses in the ordinary
course of business consistent with past practice and there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
which, alone or in the aggregate, has had, or would have, a Parent Material
Adverse Effect; (ii) any damage, destruction or loss, whether or not covered by
insurance, which has had, or would have, a Parent Material Adverse Effect; (iii)
any declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) with respect to the capital stock of the
Company or any of its subsidiaries (other than dividends or distributions
between Parent and its wholly owned subsidiaries); (iv) any material change in
Parent's accounting principles, practices or methods; (v) any repurchase or
redemption with respect to its capital stock; (vi) any stock split, combination
or reclassification of any of Parent's capital stock or the issuance or
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for, shares of Parent's capital stock; (vii) any grant or
amendment of the terms of any option to purchase shares of capital stock of
Parent other than pursuant to the Parent Stock Plans; or (viii) any agreement
(whether or not in writing), arrangement or understanding to do any of the
foregoing.
Section 4.7 LITIGATION. Except as disclosed in the Parent SEC Reports
filed prior to the date of this Agreement, there is no suit, action or
proceeding pending or, to Parent's knowledge, threatened against Parent or any
of its subsidiaries which, alone or in the aggregate, has had or would have, a
Parent Material Adverse Effect, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against
Parent or any of its subsidiaries which, alone or in the aggregate, has had, or
would have, any such Parent Material Adverse Effect. For purposes of this
Agreement, the phrases "Parent's knowledge," and "to the knowledge of Parent"
and other phrases of like import shall mean the actual knowledge of any
executive officer of Parent.
A-7
<PAGE>
Section 4.8 EMPLOYEE BENEFIT PLANS. (a) Section 4.8 of the Parent
Disclosure Schedule hereto sets forth a list of all "employee benefit plans," as
defined in Section 3(3) of ERISA, and all other material employee benefit or
compensation arrangements or payroll practices, including, without limitation,
any such arrangements or payroll practices providing severance pay, sick leave,
vacation pay, salary continuation for disability, retirement benefits, deferred
compensation, bonus pay, incentive pay, stock options (including those held by
directors, employees, and consultants), hospitalization insurance, medical
insurance, life insurance, scholarships or tuition reimbursements, that are
maintained by Parent, any subsidiary of Parent or any Parent ERISA Affiliate (as
defined below) or to which Parent, any subsidiary of Parent or any Parent ERISA
Affiliate is obligated to contribute thereunder for current or former directors,
employees, independent contractors, consultants and leased employees of Parent,
any subsidiary of Parent or any Parent ERISA Affiliate (the "Parent Employee
Benefit Plans").
(b) Except as set forth in Section 4.8 of the Parent Disclosure Schedule,
none of the Parent Employee Benefit Plans is a "multiemployer plan", as defined
in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"), and since December 31,
1995, neither Parent nor any Parent ERISA Affiliate has contributed or
contributes, or has been or is required to contribute, to any such plan.
(c) Except as set forth in Section 4.8 of the Parent Disclosure Schedule,
Parent does not maintain or contribute to any plan or arrangement which provides
or has any liability to provide life insurance or medical or other employee
welfare benefits to any employee, officer or director or former employee,
officer or director upon his retirement or termination of employment, and Parent
has never represented, promised or contracted (whether in oral or written form)
to any employee, officer or director or former employee, officer or director
that such benefits would be provided.
(d) Except as set forth in Section 4.8 of the Parent Disclosure Schedule,
the execution of, and performance of the transactions contemplated in, this
Agreement will not, either alone or upon the occurrence of subsequent events,
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, officer or director.
The only severance agreements or severance policies applicable to Parent or its
subsidiaries in the event of a change of control of Parent are the agreements
and policies specifically referred to in Section 4.8 of the Parent Disclosure
Schedule. The Board of Directors of Parent has determined that the transactions
contemplated hereby do not constitute a change of control for purposes of any
such agreement, plan, policy or stock option plan or program to the extent
Parent or its Board has discretion to make such determination under such
agreement, plan or policy and such Board shall not change such determination.
Such Board has also determined not to accelerate vesting of any stock options or
other benefits on account of the transactions contemplated hereby to the extent
such Board has discretion to make such determination and such Board shall not
change such determination.
(e) Each Parent Employee Benefit Plan that is intended to qualify under
Section 401 of the Code, and each trust maintained pursuant thereto, has been
determined to be exempt from federal income taxation under Section 501 of the
Code by the Internal Revenue Service (the "IRS"), and, to Parent's knowledge,
nothing has occurred with respect to the operation or organization of any such
Parent Employee Benefit Plan that would cause the loss of such qualification or
exemption or the imposition of any material liability, penalty or tax under
ERISA or the Code. With respect to any Parent Employee Benefit Plan or other
employee benefit plan which is a "defined benefit plan" within the meaning of
Section 3(35) of ERISA, (i) Parent has not incurred and is not reasonably likely
to incur any material liability under Title IV of ERISA (other than for the
payment of premiums, all of which have been paid when due), (ii) Parent has not
incurred any material accumulated funding deficiency within the meaning of
Section 412 of the Code and has not applied for or obtained a waiver of any
minimum funding standard or an extension of any amortization period under
Section 412 of the Code, (iii) no "reportable event" (as such term is defined in
Section 4043 of ERISA but excluding any event for which the provision for 30-day
notice to the Pension Benefit Guaranty Corporation has been waived by
regulation) has occurred or is expected
A-8
<PAGE>
to occur and (iv) since December 31, 1996, no material adverse change in the
financial condition of any such plan has occurred.
(f) (i) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under any of the
Parent Employee Benefit Plans to any funds or trusts established thereunder or
in connection therewith have been made by the due date thereof, (ii) Parent has
complied in all material respects with any notice, reporting and documentation
requirements of ERISA and the Code, (iii) there are no pending actions, claims
or lawsuits which have been asserted, instituted or, to Parent's knowledge,
threatened, in connection with the Parent Employee Benefit Plans, and (iv) the
Parent Employee Benefit Plans have been maintained, in all material respects, in
accordance with their terms and with all provisions of ERISA and the Code
(including rules and regulations thereunder) and other applicable federal and
state laws and regulations.
(g) To Parent's knowledge, neither Parent nor any Parent ERISA Affiliate,
has engaged in any transaction in violation of Section 406(a) or (b) of ERISA or
any "prohibited transaction" (as defined in Section 4975(c)(1) of the Code),
which would subject Parent or any Parent ERISA Affiliate to any taxes, penalties
or other liabilities resulting from such prohibited transaction, and no
condition exists that would subject Parent or any Parent ERISA Affiliate to any
excise tax, penalty tax or fine related to any Parent Employee Benefit Plans.
(h) With respect to each Parent Employee Benefit Plan, Parent has furnished
or made available to the Company true, correct and complete copies of (i) the
plan documents and summary plan descriptions; (ii) the most recent determination
letter received from the Internal Revenue Service; (iii) the annual reports to
be filed for the three most recent plan years of each such plan; (iv) all
related trust agreements, insurance contracts or other funding agreements that
implement such plans; and (v) all other documents, records or other materials
related thereto reasonably requested by the Company.
For purposes of this Agreement, "Parent ERISA Affiliate" means any business
or entity which is a member of the same "controlled group of corporations,"
under "common control" or an "affiliated service group" with Parent within the
meanings of Sections 414(b), (c) or (m) of the Code, or required to be
aggregated with Parent under Section 414(o) of the Code, or is under "common
control" with Parent, within the meaning of Section 4001(a)(14) of ERISA, or any
regulations promulgated or proposed under any of the foregoing Sections.
Section 4.9 FINANCIAL ADVISOR. Parent has received the opinion of
Donaldson, Lufkin & Jenrette Securities Corp. ("DLJ"), dated as of the date of
this Agreement, to the effect that the Exchange Ratio is fair from a financial
point of view to the holders of Parent Common Stock. Except for DLJ, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent. Parent
has previously delivered to the Company a copy of the engagement letter executed
on September 10, 1997, between Parent and DLJ. In addition to any such fee and
commission arrangements, Parent has previously delivered to the Company a good
faith estimate of all additional fees, costs and expenses to be incurred by
Parent and its subsidiaries in connection with this Agreement and the
transactions contemplated by this Agreement (but not including any estimate of
legal or accounting fees, costs and expenses).
Section 4.10 COMPLIANCE WITH APPLICABLE LAWS. Parent and each of its
subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not have, a Parent Material Adverse
Effect (the "Parent Permits"). Parent and each of its subsidiaries is in
compliance with the terms of the Parent Permits, except for any failure to
comply which, alone or in the aggregate, has not had, and would not have, a
Parent Material Adverse Effect. Except as disclosed in the Parent SEC Reports
filed prior to the date of this Agreement, the businesses of Parent and its
subsidiaries
A-9
<PAGE>
are not being conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which, alone or in the
aggregate, have not had, and would not have, a Parent Material Adverse Effect.
To Parent's knowledge, during the past five years, none of Parent's or any of
its subsidiaries' officers, employees or agents, nor any other person acting on
behalf of any of them or Parent or any of its subsidiaries, has, directly or
indirectly, given or agreed to give any gift or similar benefit to any customer,
supplier, governmental employee or other person in violation of any law,
ordinance or regulation of any Governmental Entity, including, without
limitation, the Foreign Corrupt Practices Act.
Section 4.11 TAXES. Except to the extent that the inaccuracy of any of the
succeeding representations has not had, or would not have, a Parent Material
Adverse Effect: (i) all Tax Returns required to be filed by or with respect to
Parent and each of its subsidiaries have been filed; (ii) neither Parent nor any
of its subsidiaries has requested or been granted an extension of time for
filing any Tax Return that has not yet been filed; (iii) Parent and each of its
subsidiaries has paid all Taxes that are due from or with respect to it; (iv)
Parent and each of its subsidiaries has withheld and paid all Taxes required by
all applicable laws to be withheld or paid in connection with any amounts paid
or owing to any employee, creditor, independent contractor or other third party;
(v) there are no outstanding agreements, waivers, or arrangements extending the
statutory period of limitation applicable to any claim for, or the period for
the collection or assessment of, Taxes due from or with respect to Parent or any
of its subsidiaries for any taxable period; (vi) no audit, action, proceeding,
investigation, dispute or claim by any court, governmental or regulatory
authority, or similar person is pending or, to Parent's knowledge, threatened in
regard to any Taxes due from or with respect to Parent or any of its
subsidiaries or any Tax Return filed by or with respect to Parent or any of its
subsidiaries; (vii) no claim has been made by a taxing authority in a
jurisdiction in which Parent does not file Tax Returns that Parent is required
to file Tax Returns in such jurisdiction, and, to Parent's knowledge, no taxing
authority could reasonably make such a claim; (viii) no assessment of any
deficiency for Taxes is proposed against Parent or any of its subsidiaries or
any of their assets; (ix) there are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of Parent; (x) Parent has not
been a member of an affiliated group as defined in Section 1504 of the Code (or
any analogous combined, consolidated or unitary group as defined under state,
local or foreign income tax law) other than one of which Parent was the common
parent; (xi) Parent has no obligation or liability for the payment of Taxes of
any other person arising as a result of any obligation to indemnify another
person or as a result of Parent assuming or succeeding to the tax liability of
any other person as a successor, transferee or otherwise; (xii) Parent will not
be required to include any amount in taxable income for any taxable period (or
portion thereof) ending after the Effective Time as a result of (A) a change in
method of accounting for a taxable period ending prior to the Effective Time,
(B) any "closing agreement" as described in Section 7121 of the Code (or any
corresponding provision of state, local or foreign income tax laws) entered into
prior to the Effective Time, (C) any sale reported on the installment method
that occurred prior to the Effective Time or (D) any prepaid amount received
prior to the Effective Time; (xiv) all Taxes accrued but not yet due and all
contingent liabilities for Taxes are adequately reflected in the reserves for
Taxes in the financial statements contained in the Parent SEC Reports; and (xv)
there has been no "ownership change" as described in Section 382 of the Code
that has resulted in any limitation on the Parent's ability to offset pre-change
losses against its taxable income. "Taxes" shall mean all taxes, charges, fees,
levies, or other similar assessments or liabilities, including without
limitation (a) income, gross receipts, ad valorem, premium, excise, real
property, personal property, sales, use, transfer, withholding, employment,
payroll, and franchise taxes imposed by the United States of America, or by any
state, local, or foreign government, or any subdivision, agency, or other
similar person of the United States or any such government; and (b) any
interest, fines, penalties, assessments, or additions to taxes resulting from,
attributable to, or incurred in connection with any Tax or any contest, dispute,
or refund thereof. "Tax Returns" shall mean any report, return, or statement
required to be supplied to a taxing authority in connection with Taxes.
Section 4.12 CERTAIN AGREEMENTS. Neither Parent nor any of its
subsidiaries is in default (or would be in default with notice or lapse of time,
or both) under any indenture, note, credit agreement, loan
A-10
<PAGE>
document, lease, license, concession or other agreement, whether or not such
default has been waived, which default, alone or in the aggregate with other
such defaults, has had, or would have, a Parent Material Adverse Effect.
Section 4.13 TAX AND ACCOUNTING MATTERS. To Parent's knowledge, Parent has
not taken any action which would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code. Parent has
received a letter from Deloitte & Touche LLP, a copy of which has previously
been delivered to the Company, with respect to the eligibility of Parent for
"pooling of interests" accounting treatment.
Section 4.14 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS. Parent has made
available to the Company a list of (i) the ten largest customers of Parent and
its subsidiaries taken as a whole as determined by the dollar volume of sales
for the year ended December 31, 1996, together with such sales volumes and (ii)
the ten largest suppliers of Parent and its subsidiaries taken as a whole as
determined by the dollar volume of purchases for the year ended December 31,
1996, together with such purchase volumes. In the last 12 months, no such
supplier or customer, and no licensor or licensee, of Parent or its subsidiaries
has notified Parent or its subsidiaries that it has canceled or otherwise
terminated, or, to Parent's knowledge, threatened to cancel or otherwise
terminate, its relationship with Parent or any of its subsidiaries which has
had, or would have, either alone or in the aggregate, a Parent Material Adverse
Effect. To Parent's knowledge, there has not been any dispute with any such
customer or supplier which has had, or would have, either alone or in the
aggregate, a Parent Material Adverse Effect.
Section 4.15 INTELLECTUAL PROPERTY. (a) Parent has made available to the
Company a list of the following (collectively, the "Parent Intellectual
Property"): (i) each trademark, trade name, brand name, service mark or other
trade designation owned or licensed by or to Parent or any of its subsidiaries,
each patent, copyright and similar intellectual property owned or licensed to or
by Parent and each license, royalty, assignment or other similar agreement and
each registration and application relating to the foregoing that is material to
the conduct of the business of Parent and its subsidiaries taken as a whole; and
(ii) each agreement relating to technology, know-how or processes that Parent or
its subsidiaries is licensed or authorized to use, or which it licenses or
authorizes others to use, that is material to the conduct of the business of
Parent and its subsidiaries taken as a whole.
(b) Parent and its subsidiaries own the Parent Intellectual Property, or
have the right to use the same without infringing or violating the rights of any
third parties, except where such infringement or violation has not had, or would
not have, either alone or in the aggregate, a Parent Material Adverse Effect. No
consent of third parties will be required for the use of the Parent Intellectual
Property after the Effective Time, except where the failure to obtain such
consent would not have, either alone or in the aggregate, a Parent Material
Adverse Effect. No claim has been asserted by any person against Parent or any
of its subsidiaries regarding the ownership of or the right to use any Parent
Intellectual Property or challenging the rights of Parent or any of its
subsidiaries with respect to any of the Parent Intellectual Property which, if
adversely determined, would have, either alone or in the aggregate, a Parent
Material Adverse Effect.
(c) To Parent's knowledge, no person or entity has asserted any claim that
any product, activity or operation of Parent or any of its subsidiaries
infringes upon or involves, or has resulted in the infringement of, any
proprietary right of such person or entity, except for such infringement which
has not had, or would not have, either alone or in the aggregate, a Parent
Material Adverse Effect; and no proceedings have been instituted, are pending
or, to Parent's knowledge, are threatened which challenge the rights of Parent
or any of its subsidiaries with respect thereto, which, if adversely determined,
would have, either alone or in the aggregate, a Parent Material Adverse Effect.
A-11
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows (such
representations and warranties (as well as other provisions of this Agreement)
are qualified by the matters identified (with references to the appropriate
Section and, if applicable, subsection being qualified) on a disclosure schedule
(the "Company Disclosure Schedule") delivered by the Company to Parent prior to
execution of this Agreement):
Section 5.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted or currently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not, alone or in the aggregate, have a
Company Material Adverse Effect. For the purposes of this Agreement, a "Company
Material Adverse Effect" means a material adverse effect on the business,
properties, assets, condition (financial or otherwise), liabilities or results
of operations of the Company and its subsidiaries taken as a whole, other than
any effects arising out of, resulting from or relating to changes in general
economic or financial conditions. Complete and correct copies as of the date
hereof of the Certificate of Incorporation and By-laws of the Company have been
delivered to Parent as part of the Company Disclosure Schedule.
Section 5.2 CAPITALIZATION. The authorized stock of the Company consists
of 50,000,000 shares of Company Stock and 5,000,000 shares of preferred stock,
par value $.01 per share, of the Company ("Company Preferred Stock"). As of
September 22, 1997, the issued and outstanding capital stock of the Company
consisted solely of 14,753,000 shares of Company Stock, all of which were
validly issued and outstanding, fully paid and nonassessable. There are no
bonds, debentures, notes or other indebtedness issued or outstanding having the
right to vote on any matters on which the Company's stockholders may vote. There
are no options, warrants, calls, convertible securities or other rights,
agreements or commitments presently outstanding obligating the Company to issue,
deliver or sell shares of its stock or debt securities, or obligating the
Company to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment, other than as identified in Section 5.2 of
the Company Disclosure Schedule. Section 5.2 of the Company Disclosure Schedule
sets forth the name of each optionee, the number of Options held by such
optionee and the exercise price for such Options under the Option Plans. Since
September 22, 1997, the Company has not issued any shares of its capital stock
except shares of Company Stock issued upon exercise of Options. After the
Effective Time, the Surviving Corporation will have no obligation to issue,
transfer or sell any shares of stock of the Company or the Surviving Corporation
pursuant to any Company Employee Benefit Plan (as defined in Section 5.8).
Section 5.3 SUBSIDIARIES. Each subsidiary of the Company is a corporation,
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to the
business of such subsidiary) and has the corporate or similar power to carry on
its business as it is now being conducted or currently proposed to be conducted.
Each subsidiary of the Company is duly qualified to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified, when taken together with
all such failures, has not had, and would not have, a Company Material Adverse
Effect. Section 5.3 of the Company Disclosure Schedule contains, with respect to
each subsidiary of the Company, its name and jurisdiction of organization and,
with respect to each subsidiary that is not wholly owned, the number of issued
and outstanding shares of capital stock or share capital and the number of
shares of capital stock or share capital owned by the Company or a subsidiary.
Except as described in Section 5.3 of the Company Disclosure Schedule, all the
outstanding shares of capital stock or
A-12
<PAGE>
share capital of each subsidiary of the Company are validly issued, fully paid
and nonassessable, and those owned by the Company or by a subsidiary of the
Company are owned free and clear of any liens, claims or encumbrances. There are
no existing options, warrants, calls, convertible securities or other rights,
agreements or commitments of any character relating to the issued or unissued
capital stock or other securities of any of the subsidiaries of the Company.
Except as set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 or any Company SEC Report (as hereinafter defined)
filed subsequent to such date and prior to the date hereof, the Company does not
directly or indirectly own any interest in any other corporation, partnership,
joint venture or other business association or entity or have any obligation,
commitment or undertaking to acquire any such interest.
Section 5.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the
corporate power to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the Company's
Board of Directors. This Agreement constitutes a valid and binding obligation of
the Company enforceable in accordance with its terms except as enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought. Except for the
approval of this Agreement and the transactions contemplated hereby by the
holders of a majority of the shares of Company Stock outstanding and entitled to
vote thereon as described in Section 3.6, no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement and the
transactions contemplated hereby. Except as described in Section 5.4 of the
Company Disclosure Schedule, the Company is not subject to or obligated under
(i) any charter or by-law provision or (ii) any contract, indenture, loan or
credit document, license, franchise, permit, order, decree, concession, lease,
instrument, judgment, statute, law, ordinance, rule or regulation applicable to
the Company or any of its subsidiaries or their respective properties or assets
which would be breached or violated, or under which there would be a default
(with or without notice or lapse of time, or both), or under which there would
arise a right of termination, cancellation, modification or acceleration of any
obligation, or any right to payment or compensation, or the loss of a material
benefit, by its executing and carrying out this Agreement, other than, in the
case of this clause (ii) only, (A) any breaches, violations, defaults,
terminations, cancellations, modifications, accelerations, rights to payment or
compensation, or losses which, either alone or in the aggregate, have not had,
and would not have, a Company Material Adverse Effect or would not prevent the
consummation of the transactions contemplated hereby and (B) the laws and
regulations referred to in the next sentence. Except as required by the HSR Act,
the Securities Act, the Exchange Act, and the corporation, securities or blue
sky laws or regulations of the various states, no filing or registration with,
or authorization, consent or approval of, any Governmental Entity is necessary
for the consummation by the Company of the Merger or the other transactions
contemplated by this Agreement, other than filings, registrations,
authorizations, consents or approvals the failure to make or obtain which has
not had, and would not have, a Company Material Adverse Effect or would not
prevent the consummation of the transactions contemplated hereby.
Section 5.5 REPORTS AND FINANCIAL STATEMENTS. The Company has previously
furnished Parent with true and complete copies of its (i) Annual Reports on Form
10-K for the fiscal years ended December 31, 1995 and December 31, 1996, as
filed with the Commission, (ii) Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997, as filed with the Commission, (iii)
proxy statements related to all meetings of its stockholders (whether annual or
special) since December 31, 1995 and (iv) all other reports or registration
statements filed by the Company with the Commission since December 31, 1995,
except for preliminary material (in the case of clauses (iii) and (iv) above)
and except for registration statements on Form S-8 relating to employee benefit
plans and annual reports on Form 11-K with respect to such plans, which are all
the documents that the Company was required to file with the Commission since
that date (the documents in clauses (i) through (iv) being referred to herein
collectively as the "Company SEC Reports"). As of their respective dates, the
Company SEC Reports complied as to form in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
A-13
<PAGE>
and the rules and regulations of the Commission thereunder applicable to such
Company SEC Reports. As of their respective dates, the Company SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of the Company included in the Company SEC Reports comply as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto. The
financial statements included in the Company SEC Reports: (i) have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis, except as may be indicated therein or in the notes thereto and
subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments and any other adjustments described therein and the fact
that certain information and notes have been condensed or omitted in accordance
with the Exchange Act and the rules promulgated thereunder; (ii) present fairly,
in all material respects, the financial position of the Company and its
subsidiaries, as at the dates thereof and the results of their operations and
cash flows for the periods then ended; and (iii) are in all material respects in
accordance with the books of account and records of the Company and its
subsidiaries. As of June 30, 1997, there was no basis for any claim or liability
of any nature against the Company or any of its subsidiaries, whether absolute,
accrued, contingent or otherwise, which, alone or in the aggregate, has had, or
would have, a Company Material Adverse Effect, other than as reflected in the
Company SEC Reports.
Section 5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Company SEC Reports filed prior to the date of this Agreement or in Section
5.6 of the Company Disclosure Schedule, since June 30, 1997, the Company and its
subsidiaries have operated their respective businesses in the ordinary course of
business consistent with past practice and there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
which, alone or in the aggregate, has had, or would have, a Company Material
Adverse Effect; (ii) any damage, destruction or loss, whether or not covered by
insurance, which has had, or would have, a Company Material Adverse Effect;
(iii) any declaration, setting aside or payment of any dividend or distribution
(whether in cash, stock or property) with respect to the stock of the Company or
any of its subsidiaries (other than dividends or distributions between the
Company and its wholly owned subsidiaries); (iv) any material change in the
Company's accounting principles, practices or methods; (v) any repurchase or
redemption with respect to its stock; (vi) any stock split, combination or
reclassification of any of the Company's stock or the issuance or authorization
of any issuance of any other securities in respect of, in lieu of or in
substitution for, shares of the Company's stock; (vii) any grant or amendment of
the terms of any option to purchase shares of stock of the Company other than
pursuant to the Option Plans; (viii) any granting by the Company or any of its
subsidiaries to any director, officer or employee of the Company or any of its
subsidiaries of (A) any increase in compensation (other than in the case of
employees in the ordinary course of business consistent with past practice), (B)
any increase in severance or termination pay, or (C) acceleration of
compensation or benefits; (ix) any entry by the Company or any of its
subsidiaries into any employment, severance, bonus or termination agreement with
any director, officer or employee of the Company or any of its subsidiaries; or
(x) any agreement (whether or not in writing), arrangement or understanding to
do any of the foregoing.
Section 5.7 LITIGATION. Except as disclosed in the Company SEC Reports
filed prior to the date of this Agreement, there is no suit, action or
proceeding pending or, to the Company's knowledge, threatened against the
Company or any of its subsidiaries which, alone or in the aggregate, has had or
would have, a Company Material Adverse Effect, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator
outstanding against the Company or any of its subsidiaries which, alone or in
the aggregate, has had, or would have, any such Company Material Adverse Effect.
For purposes of this Agreement, the phrases "the Company's knowledge" and
"knowledge of the Company" and other phrases of like import shall mean the
actual knowledge of any executive officer of the Company.
A-14
<PAGE>
Section 5.8 EMPLOYEE BENEFIT PLANS. (a) Section 5.8(a) of the Company
Disclosure Schedule hereto sets forth a list of all "employee benefit plans," as
defined in Section 3(3) of ERISA, and all other material employee benefit or
compensation arrangements or payroll practices, including, without limitation,
any such arrangements or payroll practices providing severance pay, sick leave,
vacation pay, salary continuation for disability, retirement benefits, deferred
compensation, bonus pay, incentive pay, stock options (including those held by
directors, employees, and consultants), hospitalization insurance, medical
insurance, life insurance, scholarships or tuition reimbursements, that are
maintained by the Company, any subsidiary of the Company or any Company ERISA
Affiliate (as defined below) or to which the Company, any subsidiary of the
Company or any Company ERISA Affiliate is obligated to contribute thereunder for
current or former directors, employees, independent contractors, consultants and
leased employees of the Company, any subsidiary of the Company or any Company
ERISA Affiliate (the "Company Employee Benefit Plans").
(b) Except as set forth in Section 5.8(b) of the Company Disclosure
Schedule, none of the Company Employee Benefit Plans is a "multiemployer plan",
as defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"), and since
December 31, 1995, neither the Company nor any Company ERISA Affiliate has
contributed or contributes, or has been or is required to contribute, to any
such plan.
(c) Except as set forth in Section 5.8(c) of the Company Disclosure
Schedule, the Company does not maintain or contribute to any plan or arrangement
which provides or has any liability to provide life insurance or medical or
other employee welfare benefits to any employee, officer or director or former
employee, officer or director upon his retirement or termination of employment,
and the Company has never represented, promised or contracted (whether in oral
or written form) to any employee, officer or director or former employee,
officer or director that such benefits would be provided.
(d) Except as set forth in Section 5.8(d) of the Company Disclosure
Schedule, the execution of, and performance of the transactions contemplated in,
this Agreement will not, either alone or upon the occurrence of subsequent
events, result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any employee, officer or
director. The only severance agreements or severance policies applicable to the
Company or its subsidiaries in the event of a change of control of the Company
are the agreements and policies specifically referred to in Section 5.8 of the
Company Disclosure Schedule. The Board of Directors of the Company has
determined that the transactions contemplated hereby do not constitute a change
of control for purposes of any such agreement, plan, policy or stock option plan
or program to the extent the Company or its Board has discretion to make such
determination under such agreement, plan or policy and such Board shall not
change such determination. Such Board has also determined not to accelerate
vesting of any stock options or other benefits on account of the transactions
contemplated hereby to the extent such Board has discretion to make such
determination and such Board shall not change such determination.
(c) Each Company Employee Benefit Plan that is intended to qualify under
Section 401 of the Code, and each trust maintained pursuant thereto, has been
determined to be exempt from federal income taxation under Section 501 of the
Code by the IRS, and, to the Company's knowledge, nothing has occurred with
respect to the operation or organization of any such Company Employee Benefit
Plan that would cause the loss of such qualification or exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
With respect to any Company Employee Benefit Plan or other employee benefit plan
which is a "defined benefit plan" within the meaning of Section 3(35) of ERISA,
(i) the Company has not incurred and is not reasonably likely to incur any
material liability under Title IV of ERISA (other than for the payment of
premiums, all of which have been paid when due), (ii) the Company has not
incurred any material accumulated funding deficiency within the meaning of
Section 412 of the Code and has not applied for or obtained a waiver of any
minimum funding standard or an extension of any amortization period under
Section 412 of the Code, (iii) no "reportable event" (as such term is defined in
Section 4043 of ERISA but excluding any event for which the provision for 30-day
notice to the Pension
A-15
<PAGE>
Benefit Guaranty Corporation has been waived by regulation) has occurred or is
expected to occur and (iv) since December 31, 1996, no material adverse change
in the financial condition of any such plan has occurred.
(f) (i) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under any of the
Company Employee Benefit Plans to any funds or trusts established thereunder or
in connection therewith have been made by the due date thereof, (ii) the Company
has complied in all material respects with any notice, reporting and
documentation requirements of ERISA and the Code, (iii) there are no pending
actions, claims or lawsuits which have been asserted, instituted or, to the
Company's knowledge, threatened, in connection with the Company Employee Benefit
Plans, and (iv) the Company Employee Benefit Plans have been maintained, in all
material respects, in accordance with their terms and with all provisions of
ERISA and the Code (including rules and regulations thereunder) and other
applicable federal and state laws and regulations.
(g) To the Company's knowledge, neither the Company nor any Company ERISA
Affiliate, has engaged in any transaction in violation of Section 406(a) or (b)
of ERISA or any "prohibited transaction" (as defined in Section 4975(c)(1) of
the Code), which would subject the Company or any Company ERISA Affiliate to any
taxes, penalties or other liabilities resulting from such prohibited
transaction, and no condition exists that would subject the Company or any
Company ERISA Affiliate to any excise tax, penalty tax or fine related to any
Company Employee Benefit Plans.
(h) With respect to each Company Employee Benefit Plan, the Company has
furnished or made available to Parent true, correct and complete copies of (i)
the plan documents and summary plan descriptions; (ii) the most recent
determination letter received from the Internal Revenue Service; (iii) the
annual reports to be filed for the three most recent plan years of each such
plan; (iv) all related trust agreements, insurance contracts or other funding
agreements that implement such plans; and (v) all other documents, records or
other materials related thereto reasonably requested by Parent.
For purposes of this Agreement, "Company ERISA Affiliate" means any business
or entity which is a member of the same "controlled group of corporations,"
under "common control" or an "affiliated service group" with the Company within
the meanings of Sections 414 (b), (c) or (m) of the Code, or required to be
aggregated with the Company under Section 414(o) of the Code, or is under
"common control" with the Company, within the meaning of Section 4001(a)(14) of
ERISA, or any regulations promulgated or proposed under any of the foregoing
Sections.
Section 5.9 COMPANY ACTION. The Board of Directors of the Company (at a
meeting duly called and held) has by the unanimous vote of all directors present
(a) determined that the Merger is advisable and fair to and in the best
interests of the Company and its stockholders, (b) approved the Merger in
accordance with the provisions of Section 251 of the DGCL, and (c) recommended
the approval of this Agreement and the Merger by the holders of the Company
Stock and directed that the Merger be submitted for consideration by the
Company's stockholders at the meeting of stockholders contemplated by Section
3.6.
Section 5.10 FINANCIAL ADVISORS. The Company has received the opinion of
Goldman, Sachs & Co. ("Goldman Sachs") to the effect that, as of the date
hereof, the Exchange Ratio is fair from a financial point of view to the holders
of Company Stock. Except for Goldman Sachs and Hicks, Muse, Tate & Furst
Incorporated, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of the Company. The Company has previously delivered to Parent
copies of the engagement letters, dated May 22, 1997 and June 10, 1997, from
Goldman Sachs and Hicks, Muse, Tate & Furst Incorporated, respectively, to the
Company. In addition to any such fee and commission arrangements, the Company
has previously delivered to Parent a good faith estimate of all additional fees,
costs, and expenses to be incurred by the Company and its subsidiaries in
connection with this Agreement (but not including any estimate of legal or
accounting fees, costs and expenses).
A-16
<PAGE>
Section 5.11 COMPLIANCE WITH APPLICABLE LAWS. The Company and each of its
subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not have a Company Material Adverse
Effect (the "Company Permits"). The Company and each of its subsidiaries is in
compliance with the terms of the Company Permits, except for any failure to
comply which, alone or in the aggregate, has not had, and would not have, a
Company Material Adverse Effect. Except as disclosed in the Company SEC Reports
filed prior to the date of this Agreement, the businesses of the Company and its
subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except for possible violations which
alone or in the aggregate have not had, and would not have, a Company Material
Adverse Effect. To the Company's knowledge, during the past five years, none of
the Company's or any of its subsidiaries' officers, employees or agents, nor any
other person acting on behalf of any of them or the Company or any of its
subsidiaries, has, directly or indirectly, given or agreed to give any gift or
similar benefit to any customer, supplier, governmental employee or other person
in violation of any law, ordinance or regulation of any Governmental Entity,
including, without limitation, the Foreign Corrupt Practices Act.
Section 5.12 TAXES. Except to the extent that the inaccuracy of any of the
succeeding representations has not had, or would not have, a Company Material
Adverse Effect: (i) all Tax Returns required to be filed by or with respect to
the Company and each of its subsidiaries have been filed; (ii) neither the
Company nor any of its subsidiaries has requested or been granted an extension
of time for filing any Tax Return that has not yet been filed; (iii) the Company
and each of its subsidiaries has paid all Taxes that are due from or with
respect to it; (iv) the Company and each of its subsidiaries has withheld and
paid all Taxes required by all applicable laws to be withheld or paid in
connection with any amounts paid or owing to any employee, creditor, independent
contractor or other third party; (v) there are no outstanding agreements,
waivers, or arrangements extending the statutory period of limitation applicable
to any claim for, or the period for the collection or assessment of, Taxes due
from or with respect to the Company or any of its subsidiaries for any taxable
period; (vi) no audit, action, proceeding, investigation, dispute or claim by
any court, governmental or regulatory authority, or similar person is pending
or, to the Company's knowledge, threatened in regard to any Taxes due from or
with respect to the Company or any of its subsidiaries or any Tax Return filed
by or with respect to the Company or any of its subsidiaries; (vii) no claim has
been made by a taxing authority in a jurisdiction in which the Company does not
file Tax Returns that the Company is required to file Tax Returns in such
jurisdiction, and, to the Company's knowledge, no taxing authority could
reasonably make such a claim; (viii) no assessment of any deficiency for Taxes
is proposed against the Company or any of its subsidiaries or any of their
assets; (ix) there are no liens for Taxes (other than for current Taxes not yet
due and payable) upon the assets of the Company; (x) the Company has not been a
member of an affiliated group as defined in Section 1504 of the Code (or any
analogous combined, consolidated or unitary group as defined under state, local
or foreign income tax law) other than one of which the Company was the common
parent; (xi) the Company has no obligation or liability for the payment of Taxes
of any other person arising as a result of any obligation to indemnify another
person or as a result of the Company assuming or succeeding to the tax liability
of any other person as a successor, transferee or otherwise; (xii) the Company
will not be required to include any amount in taxable income for any taxable
period (or portion thereof) ending after the Effective Time as a result of (A) a
change in method of accounting for a taxable period ending prior to the
Effective Time, (B) any "closing agreement" as described in Section 7121 of the
Code (or any corresponding provision of state, local or foreign income tax laws)
entered into prior to the Effective Time, (C) any sale reported on the
installment method that occurred prior to the Effective Time or (D) any prepaid
amount received prior to the Effective Time; (xiv) all Taxes accrued but not yet
due and all contingent liabilities for Taxes are adequately reflected in the
reserves for Taxes in the financial statements contained in the Company SEC
Reports; and (xv) there has been no "ownership change" as described in Section
382 of the Code that has resulted in any limitation on the Company's ability to
offset pre-change losses against its taxable income.
A-17
<PAGE>
Section 5.13 CERTAIN AGREEMENTS. Neither the Company nor any of its
subsidiaries is in default (or would be in default with notice or lapse of time,
or both) under any indenture, note, credit agreement, loan document, lease,
license, concession or other agreement, whether or not such default has been
waived, which default, alone or in the aggregate with other such defaults, has
had, or would have, a Company Material Adverse Effect.
Section 5.14 TAX AND ACCOUNTING MATTERS. To the Company's knowledge, the
Company has not taken any action which would prevent the Merger from
constituting a reorganization within the meaning of Section 368(a) of the Code.
The Company has received a letter from Arthur Andersen LLP, a copy of which has
previously been delivered to Parent, with respect to the eligibility of the
Company for "pooling of interests" accounting treatment.
Section 5.15 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS. The Company has
made available to Parent a list of (i) the ten largest customers of the Company
and its subsidiaries taken as a whole as determined by the dollar volume of
sales for the year ended December 31, 1996, together with such sales volumes and
(ii) the ten largest suppliers of the Company and its subsidiaries taken as a
whole as determined by the dollar volume of purchases for the year ended
December 31, 1996, together with such purchase volumes. In the last 12 months,
no such supplier or customer, and no licensor or licensee, of the Company or its
subsidiaries has notified the Company or its subsidiaries that it has canceled
or otherwise terminated, or, to the Company's knowledge, threatened to cancel or
otherwise terminate, its relationship with the Company or any of its
subsidiaries which has had, or would have, either alone or in the aggregate, a
Company Material Adverse Effect. To the Company's knowledge, there has not been
any dispute with any such customer or supplier which has had, or would have,
either alone or in the aggregate, a Company Material Adverse Effect.
Section 5.16 INTELLECTUAL PROPERTY. (a) The Company has made available to
Parent a list of the following (collectively, the "Company Intellectual
Property"): (i) each trademark, trade name, brand name, service mark or other
trade designation owned or licensed by or to the Company or any of its
subsidiaries, each patent, copyright and similar intellectual property owned or
licensed to or by the Company and each license, royalty, assignment or other
similar agreement and each registration and application relating to the
foregoing that is material to the conduct of the business of the Company and its
subsidiaries taken as a whole; and (ii) each agreement relating to technology,
know-how or processes that the Company or its subsidiaries is licensed or
authorized to use, or which it licenses or authorizes others to use, that is
material to the conduct of the business of the Company and its subsidiaries
taken as a whole.
(b) The Company and its subsidiaries own the Company Intellectual Property,
or have the right to use the same without infringing or violating the rights of
any third parties, except where such infringement or violation has not had, or
would not have, either alone or in the aggregate, a Company Material Adverse
Effect. No consent of third parties will be required for the use of the Company
Intellectual Property after the Effective Time, except where the failure to
obtain such consent would not have, either alone or in the aggregate, a Company
Material Adverse Effect. No claim has been asserted by any person against the
Company or any of its subsidiaries regarding the ownership of or the right to
use any Company Intellectual Property or challenging the rights of the Company
or any of its subsidiaries with respect to any of the Company Intellectual
Property which, if adversely determined, would have, either alone or in the
aggregate, a Company Material Adverse Effect.
(c) To the Company's knowledge, no person or entity has asserted any claim
that any product, activity or operation of the Company or any of its
subsidiaries infringes upon or involves, or has resulted in the infringement of,
any proprietary right of such person or entity, except for such infringement
which has not had, or would not have, either alone or in the aggregate, a
Company Material Adverse Effect; and no proceedings have been instituted, are
pending or, to the Company's knowledge, are threatened which challenge the
rights of the Company or any of its subsidiaries with respect thereto, which, if
adversely determined, would have, either alone or in the aggregate, a Company
Material Adverse Effect.
A-18
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Parent and Sub jointly and severally represent and warrant to the Company as
follows:
Section 6.1 ORGANIZATION. Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Sub has
not engaged in any business since it was incorporated other than in connection
with its organization and the transactions contemplated by this Agreement.
Section 6.2 CAPITALIZATION. The authorized capital stock of Sub consists
of 1,000 shares of common stock, par value $.01 per share, all of which are
validly issued and outstanding, fully paid and nonassessable and are directly
owned by Parent free and clear of all liens, claims and encumbrances.
Section 6.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Sub has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and sole stockholder, and no other corporate proceedings on the part
of Sub are necessary to authorize this Agreement and the transactions
contemplated hereby. Except as disclosed in Section 4.3 of the Parent Disclosure
Schedule or as required by the HSR Act, the Securities Act, the Exchange Act and
the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or approval
of, any Governmental Entity is necessary for the consummation by Sub of the
Merger or the transactions contemplated by this Agreement, other than filings,
registrations, authorizations, consents or approvals the failure to make or
obtain which would not prevent the consummation of the transactions contemplated
hereby.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. After
the date of this Agreement and prior to the Effective Time, unless Parent shall
otherwise agree in writing or except as otherwise required by this Agreement:
(i) the Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its subsidiaries to, use their reasonable efforts to preserve intact
their present business organizations and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and on-going businesses shall be unimpaired at the
Effective Time;
(ii) the Company shall, and shall cause its subsidiaries to, (A)
maintain insurance coverages and their books, accounts and records in the
usual manner consistent with past practice; (B) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries; (C) maintain and keep their
material properties and equipment in good repair, working order and
condition, ordinary wear and tear excepted; and (D) perform in all material
respects their obligations under all material contracts and commitments to
which any of them is a party or by which any of them is bound;
(iii) the Company shall not and shall not propose or agree to (A) sell
or pledge or agree to sell or pledge any capital stock owned by it in any of
its subsidiaries or owned by any of its subsidiaries, (B) amend its
Certificate of Incorporation or By-laws, (C) split, combine or reclassify
its outstanding stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
stock of the Company, or declare, set aside, authorize or pay any dividend
or other distribution payable in cash, stock or property, or (D) directly or
indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of Company stock;
A-19
<PAGE>
(iv) the Company shall not, nor shall it permit any of its subsidiaries
to, (A) issue, deliver or sell or agree to issue, deliver or sell any
additional shares of, or rights of any kind to acquire any shares of, its
respective stock of any class, any indebtedness having the right to vote on
any matter on which the Company's stockholders may vote or any option,
rights or warrants to acquire, or securities convertible into, exercisable
for or exchangeable for, shares of stock other than issuances, deliveries or
sales of Company Stock pursuant to obligations outstanding as of the date of
this Agreement under the Option Plans; (B) acquire, lease or dispose or
agree to acquire, lease or dispose of any capital assets or any other assets
other than in the ordinary course of business; (C) incur additional
indebtedness or encumber or grant a security interest in any asset or enter
into any other material transaction other than in each case in the ordinary
course of business; (D) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in, or by
any other manner, any business or any corporation, partnership, association
or other business organization or division thereof; (E) incur any material
transaction fees, costs or expenses in addition to those disclosed or
referenced pursuant to Section 5.10; or (F) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
(v) the Company shall not, nor shall it permit any of its subsidiaries
to, except as required to comply with applicable law and except as provided
in Section 8.5 hereof, enter into any new (or amend any existing) Company
Employee Benefit Plan or any new (or amend any existing) employment,
severance or consulting agreement, grant any general increase in the
compensation of current or former directors, officers or employees
(including any such increase pursuant to any bonus, pension, profit-sharing
or other plan or commitment) or grant any increase in the compensation
payable or to become payable to any director, officer or employee, except in
any of the foregoing cases in accordance with pre-existing contractual
provisions or in the ordinary course of business consistent with past
practice;
(vi) the Company shall not, nor shall it permit any of its subsidiaries
to, take or cause to be taken any action, whether before or after the
Effective Time, which would disqualify the Merger as a "pooling of
interests" for accounting purposes or as a "reorganization" within the
meaning of Section 368(a) of the Code; and
(vii) the Company shall not, nor shall it permit any of its subsidiaries
to, amend, modify, terminate, waive or permit to lapse any material right of
first refusal, preferential right, right of first offer, or any other
material right of the Company or any of its subsidiaries, except in the
ordinary course of business.
Section 7.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER. After the
date of this Agreement and prior to the Effective Time, unless the Company shall
otherwise agree in writing or except as otherwise required by this Agreement:
(i) Parent shall, and shall cause its subsidiaries to, carry on their
respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and shall, and shall
cause its subsidiaries to, use their reasonable efforts to preserve intact
their present business organizations and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and ongoing businesses shall be unimpaired at the
Effective Time;
(ii) Parent shall, and shall cause its subsidiaries to, (A) maintain
insurance coverages and their books, accounts and records in the usual
manner consistent with past practice; (B) comply in all material respects
with all laws, ordinances and regulations of Governmental Entities
applicable to Parent and its subsidiaries; (C) maintain and keep their
material properties and equipment in good repair, working order and
condition, ordinary wear and tear expected; and (D) perform in all material
respects their obligations under all material contracts and commitments to
which any of them is a party or by which any of them is bound;
A-20
<PAGE>
(iii) Parent shall not and shall not propose or agree to (A) sell or
pledge or agree to sell or pledge any capital stock owned by it in any of
its subsidiaries or owned by any of its subsidiaries (except for capital
stock acquired after the date hereof which is pledged as collateral pursuant
to the terms of the credit agreements described in Section 4.4 of the Parent
Disclosure Schedule), (B) except as contemplated by the CF Merger Agreement,
amend its Certificate of Incorporation or By-laws, (C) split, combine or
reclassify its outstanding capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of Parent, or declare, set aside,
authorize or pay any dividend or other distribution payable in cash, stock
or property, or (D) directly or indirectly redeem, purchase or otherwise
acquire or agree to redeem, purchase or otherwise acquire any shares of
Parent capital stock;
(iv) except in connection with acquisitions of assets or businesses that
are primarily engaged in the same businesses as that conducted by Parent and
its subsidiaries as of the date of this Agreement and any financing
transactions or issuances of securities related thereto which, in each case,
do not require the approval of the stockholders of Parent, Parent shall not,
and shall not permit any of its subsidiaries to, (A) issue, deliver or sell
or agree to issue, deliver or sell any additional shares of, or rights of
any kind to acquire any shares of, its respective capital stock of any
class, any indebtedness having the right to vote on any matter on which
Parent's stockholders may vote or any options, rights or warrants to
acquire, or securities convertible into, exercisable for or exchangeable
for, shares of capital stock other than issuances, deliveries or sales of
Parent securities or options, rights or warrants, to acquire Parent
securities under Parent Employee Benefit Plans; (B) acquire, lease or
dispose or agree to acquire, lease or dispose of any capital assets or any
other assets other than in the ordinary course of business; (C) incur
additional indebtedness or encumber or grant a security interest in any
asset or enter into any other material transaction other than in each case
in the ordinary course of business; (D) acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial equity
interest in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof;
(E) incur any material transaction fees, costs or expenses in addition to
those disclosed or referenced pursuant to Section 4.9; or (F) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing;
(v) Parent shall use its best efforts to not, nor shall it permit any of
its subsidiaries to, take or cause to be taken any action, whether before or
after the Effective Time, which would disqualify the Merger as a "pooling of
interests" for accounting purposes or as a "reorganization" within the
meaning of Section 368(a) of the Code; and
(vi) Parent shall not, nor shall it permit any of its subsidiaries to,
amend, modify, terminate, waive or permit to lapse any material right of
first refusal, preferential right, right of first offer, or any other
material right of Parent or any of its subsidiaries, except in the ordinary
course of business.
Section 7.3 CONDUCT OF BUSINESS OF SUB. During the period from the date of
this Agreement to the Effective Time, Sub shall not engage in any activities of
any nature except as provided in or contemplated by this Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 8.1 ACCESS AND INFORMATION. Each of the Company and Parent and
their respective subsidiaries shall afford to the other and to the other's
accountants, counsel and other representatives reasonable access during normal
business hours (and at such other times as the parties may mutually agree)
throughout the period prior to the Effective Time to all of its properties,
books, contracts, commitments, records and personnel, subject to existing
confidentiality obligations, and, during such period, each shall furnish
promptly to the other (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal or state
securities laws and (ii) all other information concerning its
A-21
<PAGE>
business, properties and personnel as the other may reasonably request. Each of
the Company and Parent shall hold, and shall cause their and their respective
subsidiaries, respective employees, agents and representatives to hold, in
confidence all such information in accordance with the terms of the
Confidentiality Agreements dated August 18, 1997 between Parent and the Company.
Section 8.2 REGISTRATION STATEMENT/PROXY STATEMENT. Parent and the Company
shall cooperate and promptly prepare, and Parent shall file with the Commission
as soon as practicable, a Registration Statement on Form S-4 (the "Form S-4")
under the Securities Act, with respect to the Parent Common Stock issuable in
the Merger, portions of which Registration Statement shall also serve as the
joint proxy statement of Parent and Company with respect to the meetings of
stockholders of Parent and the Company contemplated by Section 3.6 (the "Proxy
Statement/Prospectus"). The respective parties will cause the Proxy
Statement/Prospectus and the Form S-4 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. Parent shall use all reasonable
efforts, and the Company will cooperate with Parent, to have the Form S-4
declared effective by the Commission as promptly as practicable after the filing
thereof (including without limitation, responding to any comments received from
the Commission with respect thereto) and to keep the Form S-4 effective as long
as is necessary to consummate the Merger. Each of Parent and the Company shall,
as promptly as practicable, provide to the other copies of any written comments
received from the Commission with respect to the Proxy Statement/Prospectus or
the Form S-4 and advise the other of any oral comments with respect to the Proxy
Statement/Prospectus or the Form S-4 received from the Commission. Parent shall
use its best efforts to obtain, prior to the effective date of the Form S-4, all
necessary state securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by the Merger Agreement and will pay all
expenses incident thereto. Parent agrees that none of the information supplied
or to be supplied by Parent for inclusion or incorporation by reference in the
Form S-4 or the Proxy Statement/Prospectus (i) in the case of the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the meetings of stockholders of Parent and
the Company contemplated by Section 3.6, or (ii) in the case of the Form S-4 and
each amendment or supplement thereto, at the time it is filed or becomes
effective, will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Company agrees that none of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in the
Form S-4 or the Proxy Statement/Prospectus (i) in the case of the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the meetings of stockholders of Parent and
the Company contemplated by Section 3.6, or, (ii) in the case of the Form S-4 or
any amendment or supplement thereto, at the time it is filed or becomes
effective, will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. For purposes of the foregoing, it is understood and agreed that
information concerning or related to Parent will be deemed to have been supplied
by Parent and information concerning or related to the Company shall be deemed
to have been supplied by the Company. No amendment or supplement to the Proxy
Statement/Prospectus will be made by Parent or the Company without the approval
of the other party. Parent will advise the Company, promptly after it receives
notice thereof, of the time when the Form S-4 has become effective or any
supplement or amendment has been filed, the issuance of any stop order, or the
suspension of the qualification of Parent Common Stock issuable in connection
with the Merger for offering or sale in any jurisdiction.
Section 8.3 COMPLIANCE WITH THE SECURITIES ACT AND POOLING
REQUIREMENTS. (a) At least 30 days prior to the Effective Time, the Company
shall deliver to Parent a list of names and addresses of those persons who were,
in the Company's reasonable judgment, at the record date for the Company
Meeting, "affiliates" (each such person, an "Affiliate") of the Company within
the meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act. The Company shall use all reasonable efforts to deliver or cause
to be delivered to Parent, prior to the Effective Time, from each of the
Affiliates of the
A-22
<PAGE>
Company identified in the foregoing list, an Affiliate Letter in the form
attached hereto as Exhibit A-1 (an "Affiliate Letter"). Parent shall be entitled
to place legends as specified in such Affiliate Letters on the certificates
evidencing any Parent Common Stock to be received by such Affiliates pursuant to
the terms of the Agreement, and to issue appropriate stop transfer instructions
to the transfer agent for the Parent Common Stock, consistent with the terms of
such Affiliate Letters.
(b) At least 30 days prior to the Effective Time, Parent shall deliver to
the Company a list of names and addresses of those persons who were, in Parent's
reasonable judgment, at the record date for the Parent Meeting, "affiliates"
(each such person, a "Parent Affiliate") of Parent within the meaning of Rule
145 of the rules and regulations promulgated under the Securities Act. Parent
shall use all reasonable efforts to deliver or cause to be delivered to the
Company, prior to the Effective Time, from each of the Parent Affiliates
identified in the foregoing list, an Affiliate Letter in the form attached
hereto as Exhibit A-2.
(c) Each of Parent and the Company shall use commercially reasonable efforts
to cause the Merger to qualify for "pooling of interests" accounting treatment.
The Company shall request, and shall use commercially reasonable efforts to
obtain, a letter from Arthur Andersen LLP, dated the date of Closing, to the
effect that the Merger will qualify for "pooling of interests" accounting
treatment if consummated in accordance with this Agreement. Parent shall
request, and shall use commercially reasonable efforts to obtain, a letter from
Deloitte & Touche LLP, dated the date of Closing, to the effect that the Merger
will qualify for "pooling of interests" accounting treatment if consummated in
accordance with this Agreement.
(d) Parent shall use its best efforts to publish, by public filing or
announcement, the results of at least 30 days of combined operations of Parent
and the Company as soon after the Effective Time as is commercially practicable.
Section 8.4 STOCK EXCHANGE LISTING. Parent shall use its best efforts to
list on the NYSE, upon official notice of issuance, the Parent Common Stock to
be issued pursuant to the Merger.
Section 8.5 EMPLOYEE MATTERS. As of the Effective Time, the employees of
the Company and each subsidiary shall continue employment with the Surviving
Corporation and the subsidiaries, respectively, in the same positions and at the
same level of wages and/or salary and without having incurred a termination of
employment or separation from service; provided, however, except as may be
specifically required by applicable law or any contract, the Surviving
Corporation and the subsidiaries shall not be obligated to continue any
employment relationship with any employee for any specific period of time.
Except with respect to the Option Plans to be assumed by the Parent as provided
by Section 3.5(a) hereto, as of the Effective Time, the Surviving Corporation
shall be the sponsor of the Company Employee Benefit Plans sponsored by the
Company immediately prior to the Effective Time, and Parent shall cause the
Surviving Corporation and the subsidiaries to satisfy all obligations and
liabilities under such Company Employee Benefit Plans; provided, however, that,
except as hereafter provided in this Section 8.5 or in the Company Disclosure
Schedule, nothing contained in this Agreement shall limit or restrict the
Surviving Corporation's right on or after the Effective Time to amend, modify or
terminate any of the Company Employee Benefit Plans. To the extent any employee
benefit plan, program or policy of Parent, the Surviving Corporation, or their
affiliates is made available to any person who is an employee of the Company or
any of its subsidiaries immediately prior to the Effective Time: (i) service
with the Company and the subsidiaries by any employee prior to the Effective
Time shall be credited for eligibility and vesting purposes and for purposes of
qualifying for any additional benefits tied to periods of service (such as
higher rates of matching contributions and eligibility for early retirement)
under such plan, program or policy, but not for benefit accrual purposes (except
for disability, vacation and severance, with respect to which service with the
Company and the subsidiaries shall be credited for benefit accrual purposes);
and (ii) with respect to any welfare benefit plans to which such employees may
become eligible, Parent shall cause such plans to provide credit for any
co-payments or deductibles by such employees and waive all pre-existing
condition exclusions and waiting periods, other than limitations or waiting
periods that have not
A-23
<PAGE>
been satisfied under any welfare plans maintained by the Company and the
subsidiaries for their employees prior to the Effective Time.
Section 8.6 INDEMNIFICATION. (a) From and after the Effective Date, the
Surviving Corporation and Parent shall indemnify, defend and hold harmless the
officers, directors and employees of the Company and its subsidiaries who were
such at any time prior to the Effective Time (the "Indemnified Parties") from
and against all losses, expenses, claims, damages or liabilities arising out of
the transactions contemplated by this Agreement to the fullest extent permitted
or required under applicable law, and the Indemnified Parties shall be advanced
expenses subject to a customary reimbursement agreement. All rights to
indemnification existing in favor of the directors, officers or employees of the
Company as provided in the Company's Certificate of Incorporation or By-laws, as
in effect as of the date hereof, with respect to matters occurring through the
Effective Time, shall survive the Merger and shall continue in full force and
effect thereafter. The Surviving Corporation shall maintain in effect for not
less than three years after the Effective Time the current policies of
directors' and officers' liability insurance maintained by the Company with
respect to matters occurring on or prior to the Effective Time; provided,
however, that the Surviving Corporation or Parent may substitute therefor
policies of at least the same coverage (with carriers comparable to the
Company's existing carriers) containing terms and conditions which are not
materially less advantageous to the Indemnified Parties; and provided, further,
that the Surviving Corporation (or Parent, if it shall substitute policies)
shall not be required in order to maintain or procure such coverage to pay an
annual premium in excess of 200% of the current annual premium paid by the
Company for its existing coverage (the "Cap"); and provided, further, that if
equivalent coverage cannot be obtained, or can be obtained only by paying an
annual premium in excess of the Cap, the Surviving Corporation shall only be
required to obtain as much coverage as can be obtained by paying an annual
premium equal to the Cap.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Effective Time, the parties hereto agree
to cooperate and use their respective reasonable efforts to vigorously defend
against and respond to the same.
Section 8.7 HSR ACT. The Company and Parent shall use their best efforts
to file as soon as practicable notifications under the HSR Act in connection
with the Merger and the transactions contemplated hereby, and to respond as
promptly as practicable to any inquiries received from the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") for additional information or documentation.
Section 8.8 ADDITIONAL AGREEMENTS. (a) Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all commercially
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including using all commercially reasonable
efforts to obtain all necessary waivers, consents and approvals, to effect all
necessary registrations and filings and to lift any injunction to the Merger
(and, in such case, to proceed with the Merger as expeditiously as possible).
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and/or directors of Parent, the Company and the Surviving Corporation
shall take all such necessary action.
(c) Following the Effective Time, Parent shall use its best efforts to
conduct the business and otherwise act, and shall cause the Surviving
Corporation to use its best efforts to conduct its business and otherwise act,
in a manner which would not disqualify the Merger as a "pooling of interests"
for accounting purposes.
A-24
<PAGE>
(d) Following the Effective Time, Parent shall file all Tax Returns of
Parent and the Company on the basis that the Merger qualifies as a
"reorganization" within the meaning of Section 368(a)(1)(A) and Section
368(a)(2)(E) of the Code and shall take no action which is inconsistent with or
contrary to such classification of the Merger for Tax purposes.
Section 8.9 NO SHOP. (a) Each of Parent and the Company agrees (i) that
neither it nor any of its subsidiaries shall, and it shall direct and use its
best efforts to cause its officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its subsidiaries) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction (other than, in the case of Parent, any
acquisitions of assets or businesses that are primarily engaged in the same
business as that conducted by Parent and its subsidiaries as of the date of this
Agreement and any financing transactions or issuances of securities related
thereto which, in each case, do not require approval by the stockholders of
Parent) involving, or any purchase of all or any significant portion of the
assets or any equity securities of, such party or any of its material
subsidiaries (any such proposal or offer being hereinafter referred to as an
"Alternative Proposal"), or engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person relating to an Alternative Proposal, or release any third party from any
obligations under any existing standstill agreement or arrangement, or enter
into any agreement with respect to an Alternative Proposal; (ii) that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing; and (iii) that it will notify the other party with
reasonable promptness if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it. Notwithstanding the foregoing,
each of Parent and the Company may, directly or indirectly, furnish information
and access to, and may participate in discussions and negotiate with, any
corporation, partnership, person or other entity that has submitted a written
proposal to the Board of Directors of such party relating to an Alternative
Proposal if (i) the Board of Directors of such party believes, in its good faith
judgment, that such Alternative Proposal is more favorable to such party's
stockholders than the Merger and is reasonably likely to be consummated or (ii)
the Board of Directors of such party, following consultation with its
independent legal counsel relating thereto, determines in its good faith
judgment that failing to take such action would constitute a breach of such
Board of Directors' fiduciary duty to its stockholders imposed by law.
(b) Neither the Board of Directors of the Company nor any committee thereof
shall (i) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to Parent, the approval or recommendation by such Board of Directors of
this Agreement or the Merger or (ii) approve or recommend, or propose to approve
or recommend, any Alternative Proposal, unless (x) the Board of Directors of the
Company believes, in its good faith judgment, that such Alternative Proposal is
more favorable to the Company's stockholders than the Merger and is reasonably
likely to be consummated or (y) the Board of Directors of the Company, following
consultation with its independent legal counsel relating thereto, determines in
its good faith judgment that failing to take such action in connection with such
Alternative Proposal would constitute a breach of such Board of Directors'
fiduciary duty to its stockholders imposed by law.
(c) Neither the Board of Directors of the Parent nor any committee thereof
shall (i) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to Company, the approval or recommendation by such Board of Directors of
this Agreement or the issuance of Parent Common Stock in connection with the
Merger or (ii) approve or recommend, or propose to approve or recommend, any
Alternative Proposal, unless (x) the Board of Directors of the Parent believes,
in its good faith judgment, that such Alternative Proposal is more favorable to
the Parent's stockholders than the Merger and is reasonably likely to be
consummated or (y) the Board of Directors of the Parent, following consultation
with its independent legal counsel relating thereto, determines in its good
faith judgment that failing to take such
A-25
<PAGE>
action in connection with such Alternative Proposal would constitute a breach of
such Board of Directors' fiduciary duty to its stockholders imposed by law.
(d) Nothing herein shall prevent the respective Boards of Directors of
Parent or the Company from taking, and disclosing to its stockholders, a
position contemplated by Rule 14e-2(a) promulgated under the Exchange Act,
provided that the Board of Directors of such party shall not recommend that the
stockholders of such party tender their shares in connection with any such
tender offer unless such recommendation is permitted by Section 8.09(b) or (c),
as applicable.
Section 8.10 ADVICE OF CHANGES; SEC FILINGS. The Company shall confer on a
regular basis with Parent on operational matters. Parent and the Company shall
promptly advise each other orally and in writing of any change or event that has
had, or could have, a Company Material Adverse Effect or a Parent Material
Adverse Effect, as the case may be. The Company and Parent shall promptly
provide each other (or their respective counsel) copies of all filings made by
such party with the SEC or any other Governmental Entity in connection with this
Agreement and the transactions contemplated hereby other than any filing by the
Company pursuant to the HSR Act.
Section 8.11 PARENT DIRECTORSHIPS. Immediately after the Effective Time,
Parent shall take such action as may be necessary to create two additional seats
of the Board of Directors of Parent and to cause two of the current directors of
the Company as determined by mutual agreement of the Company and Parent (the
"New Members") to be elected to the Parent Board of Directors. For a period of
two years following the Effective Time, Parent shall take, or cause to be taken,
all action necessary to nominate the New Members for election to the Parent
Board of Directors and, in accordance with its normal solicitation efforts,
shall solicit proxies for their election to such Board of Directors.
ARTICLE IX
CONDITIONS PRECEDENT
Section 9.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) This Agreement and the transactions contemplated hereby shall have been
approved and adopted by the requisite vote of the holders of the Company Stock
and the issuance of the Parent Common Stock pursuant to this Agreement shall
have been approved by the requisite vote of the holders of the Parent Common
Stock, in each case as provided in Section 3.6.
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(c) The Form S-4 shall have become effective in accordance with the
provisions of the Securities Act. No stop order suspending the effectiveness of
the Form S-4 shall have been issued by the Commission and remain in effect and
all necessary approvals under state securities laws relating to the issuance of
the Parent Common Stock to be issued to stockholders of the Company in
connection with the Merger shall have been obtained.
(d) No preliminary or permanent injunction or other order by any federal or
state court in the United States of competent jurisdiction which prevents the
consummation of the Merger shall have been issued and remain in effect (each
party agreeing to use all commercially reasonable efforts to have any such
injunction lifted).
(e) The Parent Common Stock to be issued to Company stockholders in
connection with the Merger shall have been approved for listing on the NYSE,
subject only to official notice of issuance.
A-26
<PAGE>
Section 9.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the additional following
conditions, unless waived by the Company:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior to
the Effective Time, and the representations and warranties of Parent and Sub
contained in this Agreement shall be true and correct when made and on and as of
the Effective Time as if made on and as of such date (except to the extent they
relate to a particular date), except (i) as expressly contemplated or permitted
by this Agreement and (ii) with respect to representations and warranties of
Parent and Sub that are not subject to a Parent Material Adverse Effect
qualification, where the failure to be true and correct, has not, and would not
have, either alone or in the aggregate with all such failures, a Parent Material
Adverse Effect. The Company shall have received a certificate of the President
and Chief Executive Officer or a Vice President of each of Parent and Sub to
that effect.
(b) The Company shall have received an opinion substantially in the form
attached hereto as Exhibit B-1, dated the date of Closing, from Weil, Gotshal &
Manges LLP, based upon certificates from the Company substantially in the form
attached hereto as Exhibit C-1 and from Parent substantially in the form
attached hereto as Exhibit D-1 (and such other assumptions, certificates, and
certifications as are customary or reasonably necessary in connection
therewith), to the effect that the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code. In rendering such opinion,
such counsel may receive and rely upon representations of fact contained in
certificates as specified in the preceding sentence.
(c) The Company shall have received a letter from Arthur Andersen LLP,
dated the date of Closing, to the effect that the Merger will qualify for
"pooling of interests" accounting treatment if consummated in accordance with
this Agreement.
Section 9.3 CONDITIONS TO OBLIGATIONS OF PARENT AND SUB TO EFFECT THE
MERGER. The obligations of Parent and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the additional following
conditions, unless waived by Parent:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Effective Time, and the representations and warranties of the Company
contained in this Agreement shall be true in all material respects when made and
on and as of the Effective Time as if made on and as of such date (except to the
extent they relate to a particular date), except (i) as expressly contemplated
or permitted by this Agreement and (ii) with respect to representations and
warranties of the Company that are not subject to a Company Adverse Material
Effect qualification, where the failure to be true and correct has not, and
would not have, either alone or in the aggregate with all such failures, a
Company Material Adverse Effect. Parent and Sub shall have received a
certificate of the President and Chief Executive Officer or a Vice President of
the Company to that effect.
(b) Parent shall have received an opinion substantially in the form
attached hereto as Exhibit B-2, dated the date of Closing, from Hughes & Luce,
L.L.P., based upon certificates from the Company substantially in the form
attached hereto as Exhibit C-2 and from Parent substantially in the form
attached hereto as Exhibit D-2 (and such other assumptions, certificates, and
certifications as are customary or reasonably necessary in connection
therewith), to the effect that the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code. In rendering such opinion,
such counsel may receive and rely upon representations of fact contained in
certificates as specified in the preceding sentence.
(c) Parent and Sub shall have received a letter from Deloitte & Touche LLP,
dated the date of Closing, to the effect that the Merger will qualify for
"pooling of interests" accounting treatment if consummated in accordance with
this Agreement.
A-27
<PAGE>
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after approval by the stockholders of the Company or Parent, by
the mutual consent of Parent and the Company.
Section 10.2 TERMINATION BY EITHER PARENT OR THE COMPANY. This Agreement
may be terminated and the Merger may be abandoned by action of the Board of
Directors of either Parent or the Company if (a) the Merger shall not have been
consummated by February 28, 1998, or (b) the approval of the Company's
stockholders required by Section 3.6 shall not have been obtained at a meeting
duly convened therefor or at any adjournment or postponement thereof, or (c) the
approval of Parent's stockholders required by Section 3.6 shall not have been
obtained at a meeting duly convened therefor or at any adjournment or
postponement thereof, or (d) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and non-appealable;
provided, that the party seeking to terminate this Agreement pursuant to clause
(d) above shall have used all commercially reasonable efforts to remove such
injunction, order or decree; and provided, in the case of a termination pursuant
to clause (a) above, that the terminating party shall not have breached in any
material respect its obligations under this Agreement in any manner that shall
have proximately contributed to the failure to consummate the Merger.
Section 10.3 OTHER TERMINATION RIGHTS. (a) This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, by action of the Board of Directors of Parent, (i) if the Board of
Directors of the Company shall have withdrawn or modified in a manner adverse to
Parent its approval or recommendation of this Agreement or the Merger or shall
have recommended an Alternative Proposal with respect to the Company to the
Company's stockholders or (ii) Parent shall have received an Alternative
Proposal which the Board of Directors of Parent believes, in its good faith
judgment, is more favorable to the Parent's stockholders than the Merger and is
reasonably likely to be consummated.
(b) This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time, by action of the Board of Directors of the
Company, (i) if the Board of Directors of Parent shall have withdrawn or
modified in a manner adverse to the Company its approval or recommendation of
this Agreement or the issuance of Parent Common Stock in connection with the
Merger or shall have recommended an Alternative Proposal with respect to Parent
to Parent's stockholders or (ii) the Company shall have received an Alternative
Proposal which the Board of Directors of the Company believes, in its good faith
judgment, is more favorable to the Company's stockholders than the Merger and is
reasonably likely to be consummated.
Section 10.4 EFFECT OF TERMINATION AND ABANDONMENT. In the event that (x)
Parent shall have terminated this Agreement pursuant to Section 10.3(a)(i) or
(y) the Company shall have terminated this Agreement pursuant to Section
10.3(b)(ii), then, in either such case, the Company shall, concurrently with
such termination, pay Parent a fee of $20,000,000 (a "Termination Fee"), which
amount shall be payable by wire transfer of same day funds, and shall promptly
reimburse Parent for all substantiated out-of-pocket costs and expenses incurred
by Parent in connection with this Agreement and the transactions contemplated
hereby, including, without limitation, costs and expenses of accountants,
attorneys and financial advisors, up to an aggregate of $2,000,000. The Company
acknowledges that the agreements contained in this Section 10.4(a) are an
integral part of the transactions contemplated in this Agreement, and that,
without these agreements, Parent and Sub would not enter into this Agreement;
accordingly, if the Company fails to promptly pay the amount due pursuant to
this Section 10.4(a), and, in order to obtain
A-28
<PAGE>
such payment, Parent or Sub commences a suit which results in a judgment against
the Company for the fee and expenses set forth in this Section 10.4(a), the
Company shall pay to Parent its costs and expenses (including attorneys' fees)
in connection with such suit.
(b) In the event that (x) the Company shall have terminated this Agreement
pursuant to Section 10.3(b)(i) or (y) Parent shall have terminated this
Agreement pursuant to Section 10.3(a)(ii), then, in either such case, Parent
shall concurrently with such termination, pay the Company a fee of $20,000,000
(a "Parent Termination Fee"), which amount shall be payable by wire transfer of
same day funds, and shall promptly reimburse the Company for all substantiated
out-of-pocket costs and expenses incurred by the Company in connection with this
Agreement and the transactions contemplated hereby, including, without
limitation, costs and expenses of accountants, attorneys and financial advisors,
up to an aggregate of $2,000,000. Parent acknowledges that the agreements
contained in this Section 10.4(b) are an integral part of the transactions
contemplated in this Agreement, and that, without these agreements, the Company
would not enter into this Agreement; accordingly, if Parent fails to promptly
pay the amount due pursuant to this Section 10.4(b), and, in order to obtain
such payment, the Company commences a suit which results in a judgment against
the Company for the fee and expenses set forth in this Section 10.4(b), Parent
shall pay to the Company its costs and expenses (including attorneys' fees) in
connection with such suit.
(c) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article X, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
10.4 and Section 11.3 and except for the provisions of Sections 11.5, 11.6,
11.7, 11.8, 11.9, 11.10, 11.11, 11.12, 11.13 and 11.14. Moreover, in the event
of termination of this Agreement pursuant to Section 10.2, nothing herein shall
prejudice the ability of the non-breaching party from seeking damages from any
other party for any breach of this Agreement, including without limitation,
attorneys' fees and the right to pursue any remedy at law or in equity.
ARTICLE XI
MISCELLANEOUS
Section 11.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. All representations and warranties set forth in this Agreement
shall terminate at the Effective Time. All covenants and agreements set forth in
this Agreement shall survive in accordance with their terms.
Section 11.2 NOTICES. All notices or other communications under this
Agreement shall be in writing and shall be given by delivery (and shall be
deemed to have been duly given upon delivery) in person, by cable, telegram,
telex or other standard form of telecommunications, or by registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
If to the Company:
The Morningstar Group Inc.
5956 Sherry Lane
Suite 1500
Dallas, Texas 75225
Attention: C. Dean Metropoulos
Telecopy No.: (214) 360-0948
With a copy to:
Weil, Gotshal & Manges LLP
100 Crescent Court, Suite 1300
Dallas, Texas 75201-6950
Attention: R. Scott Cohen, Esq.
Telecopy No.: (214) 746-7777
A-29
<PAGE>
If to Parent or Sub:
Suiza Foods Corporation
3811 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
Attention: Gregg L. Engles
Telecopy No.: (214) 528-9929
With a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: William A. McCormack, Esq.
Telecopy No.: (214) 939-6100
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section.
Section 11.3 FEES AND EXPENSES. Whether or not the Merger is consummated,
except as provided in Section 10.4 and, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that the allocable share of Parent and
Sub on the one hand and the Company on the other hand for all expenses related
to printing, filing and mailing the Form S-4 and the Proxy Statement/Prospectus
and all Commission and other regulatory filing fees incurred in connection with
the Form S-4 and the Proxy Statement/Prospectus shall be one-half each.
Section 11.4 PUBLICITY. So long as this Agreement is in effect, Parent,
Sub and the Company agree to consult with each other in issuing any press
release or otherwise making any public statement with respect to the
transactions contemplated by this Agreement, and none of them shall issue any
press release or make any public statement prior to such consultation, except as
may be required by law or by obligations pursuant to any listing agreement with
the NYSE or The Nasdaq Stock Market.
Section 11.5 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
Section 11.6 ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement; provided that
the third parties referenced in Sections 8.5 and 8.6 shall be third-party
beneficiaries of Parent's agreement contained in such Sections.
Section 11.7 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Company
Disclosure Schedule, the Parent Disclosure Schedule, the Confidentiality
Agreements dated August 18, 1997, between the Company and Parent and any
documents delivered by the parties in connection herewith and therewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede
A-30
<PAGE>
all prior agreements and understandings among the parties with respect thereto.
No addition to or modification of any provision of this Agreement shall be
binding upon any party hereto unless made in writing and signed by all parties
hereto.
Section 11.8 AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors, at any time
before or after approval of matters presented in connection with the Mergers by
the stockholders of the Company and Parent, but after any such stockholder
approval, no amendment shall be made which by law requires the further approval
of stockholders without obtaining such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 11.9 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to its rules of conflict of laws.
Section 11.10 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
Section 11.11 HEADINGS AND TABLE OF CONTENTS. Headings of the Articles and
Sections of this Agreement and the Table of Contents are for the convenience of
the parties only, and shall be given no substantive or interpretive effect
whatsoever.
Section 11.12 INTERPRETATION. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
Section 11.13 WAIVERS. At any time prior to the Effective Time, the
parties hereto, by or pursuant to action taken by their respective Boards of
Directors, may (i) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any documents delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
Section 11.14 SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
Section 11.15 SUBSIDIARIES. As used in this Agreement, the word
"subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner.
A-31
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunder duly authorized all as of
the date first written above.
SUIZA FOODS CORPORATION
By: /s/_GREGG L. ENGLES_______________
Name: Gregg L. Engles
Title: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
SF ACQUISITION CORPORATION
By: /s/_GREGG L. ENGLES_______________
Name: Gregg L. Engles
Title: PRESIDENT
THE MORNINGSTAR GROUP INC.
By: /s/_L. HOLLIS JONES_______________
Name: L. Hollis Jones
Title: PRESIDENT AND CHIEF
OPERATING OFFICER
A-32
<PAGE>
PARENT DISCLOSURE SCHEDULE
<TABLE>
<S> <C>
Section 4.2 Capitalization
Section 4.3 Subsidiaries
Section 4.4 Authority
Section 4.6 Absence of Certain Changes or Events
Section 4.8 Employee Benefit Plans
</TABLE>
COMPANY DISCLOSURE SCHEDULE
<TABLE>
<S> <C>
Section 5.2 Capitalization
Section 5.3 Subsidiaries
Section 5.4 Authority
Section 5.6 Absence of Certain Changes or Events
Section 5.8 Employee Benefit Plans
Section Taxes
5.12
</TABLE>
A-33
<PAGE>
APPENDIX B
[DONALDSON, LUFKIN & JENRETTE LETTERHEAD]
September 28, 1997
Board of Directors
Suiza Foods Corporation
3811 Turtle Creek Boulevard
Suite 1300
Dallas, TX 75219
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of common stock, par value $.01 per share (the "Company
Common Stock") of Suiza Foods Corporation (the "Company") of the Exchange Ratio
(as defined below). Pursuant to the terms of the Agreement and Plan of Merger,
to be dated as of September 28, 1997 (the "Agreement"), by and among the
Company, The Morningstar Group Inc. ("Morningstar") and SF Acquisition
Corporation, a wholly owned subsidiary of the Company ("Merger Sub"), whereby
Merger Sub will be merged (the "Merger") with and into Morningstar.
Pursuant to the Agreement, each share of common stock par value $.01 per
share, of Morningstar will be converted into the right to receive 0.85 shares
(the "Exchange Ratio") of Company Common Stock.
In arriving at our opinion, we have reviewed the draft dated September 27,
1997 of the Agreement. We also have reviewed financial and other information
that was publicly available or furnished to us by the Company and Morningstar
including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of Morningstar for the
period beginning January 1, 1997 and ending December 31, 2002 and certain
financial projections of the Company for the period beginning January 1, 1997
and ending December 31, 2002 prepared by the management of the Company. In
addition, we have compared certain financial and securities data of the Company
and Morningstar with various other companies whose securities are traded in
public markets, reviewed the historical stock prices and trading volumes of the
common stock of Morningstar and the Company Common Stock, reviewed prices and
premiums paid in certain other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Morningstar
or their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of the Company
of the operating synergies achievable as a result of the Merger and upon our
discussion of such synergies with the management of the Company and the
management of Morningstar. With respect to the financial projections supplied to
us, we have assumed with your consent that they have been reasonably prepared on
the basis reflecting the best currently available estimates and judgments of the
management of the Company and the management of Morningstar, respectively, as to
the future operating and financial performance of the Company and Morningstar,
respectively. We have not assumed any responsibility for making any independent
evaluation of any assets or liabilities or for making any independent
verification of any of the information reviewed by us. We have relied as to
certain legal matters on advice of counsel to the Company, including that the
transactions contemplated under the Agreement will qualify as a tax-free
B-1
<PAGE>
Suiza Foods Corporation
Page 2 September 28, 1997
transaction under the Internal Revenue Code of 1986, as amended, to the Company
and Morningstar and their respective shareholders.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which the Company Common Stock will trade at any time. Our opinion
does not address the relative merits of the Merger and the other business
strategies being considered by the Company's Board of Directors, nor does it
address the Company's Board of Directors' decision to proceed with the Merger.
Our opinion does not constitute a recommendation to any shareholder as to how
such shareholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for Morningstar and its affiliates, including Hicks,
Muse, Tate, & Furst, in the past and has been customarily compensated for such
services.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the holders of Company Common
Stock from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JAMES M. NEISSA
.................................
James M. Neissa
MANAGING DIRECTOR
B-2
<PAGE>
APPENDIX C
[Letterhead for Goldman, Sachs & Co.]
PERSONAL AND CONFIDENTIAL
September 28, 1997
Board of Directors
The Morningstar Group Inc.
5956 Sherry Lane
Suite 1500
Dallas, TX 75225
Gentlemen:
You have requested our opinion as to the fairness from a financial point
of view to the holders of the outstanding shares of Common Stock, par value
$0.01 per share (the "Shares"), of The Morningstar Group Inc. (the
"Company") of the exchange ratio of 0.85 shares of Common Stock, par value
$0.01 per share ("Suiza Common Stock"), of Suiza Foods Corporation
("Suiza") to be received for each Share (the "Exchange Ratio") pursuant
to the Agreement and Plan of Merger, dated as of September 28, 1997,
among Suiza, SF Acquisition Corporation, a wholly-owned subsidiary of Suiza,
and the Company (the "Agreement").
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, and having participated in certain of the
negotiations leading to, the Agreement.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of
the Company for the five years ended December 31, 1996 and of Suiza for
the year ended December 31, 1996; the Initial Public Offering Prospectus
of Suiza dated April 17, 1996; certain interim reports to stockholders and
Quarterly Reports on Form 10-Q of the Company and Suiza; certain other
communications from the Company and Suiza to their respective stockholders;
and certain internal financial analyses and forecasts for the Company and
Suiza prepared by their respective managements. We also have held discussions
with members of the senior management of the Company and Suiza regarding the
strategic rationale for, and the potential benefits of, the transaction
contemplated by the Agreement and the past and current business operations,
financial condition and future prospects of their respective companies. In
addition, we have reviewed the reported price and trading activity for the
Shares and the Suiza Common Stock, compared certain financial and stock
market information for the Company and Suiza with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the dairy and
branded foods
C-1
<PAGE>
The Morningstar Group Inc.
September 28, 1997
Page Two
industries specifically and in other industries generally and performed such
other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In addition, we have not
made an independent evaluation or appraisal of the assets and liabilities of
the Company or Suiza or any of their subsidiaries and we have not been
furnished with any such evaluation or appraisal. We have assumed, with your
consent, that the transaction contemplated by the Agreement will be
accounted for as a pooling of interests under generally accepted accounting
principles. Our advisory services and the opinion expressed herein are
provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated
by the Agreement and such opinion does not constitute a recommendation as to
how any holder of Shares should vote with respect to such transaction.
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
Exchange Ratio pursuant to the Agreement is fair from a financial point of
view to the holders of Shares.
Very truly yours,
/s/ Goldman, Sachs & Co.
- ----------------------------------
GOLDMAN, SACHS & CO.
C-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides that no director of
the Registrant will be personally liable to the Registrant or any of its
stockholders for monetary damages arising from the director's breach of
fiduciary duty as a director, with certain limited exceptions.
Pursuant to the provisions of Section 145 of the Delaware General
Corporation Law, every Delaware corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, against any and all
expenses, judgments, fines and amounts paid in settlement and reasonably
incurred in connection with such action, suit or proceeding. The power to
indemnify applies only if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests, or not opposed to the
best interests, of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification will be made
in the event of any adjudication of negligence or misconduct unless the court,
in its discretion, believes that in light of all the circumstances
indemnification should apply.
The Registrant's Certificate of Incorporation contains provisions requiring
it to indemnify its officers and directors to the fullest extent permitted by
the Delaware General Corporation Law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
See the Exhibit Index, beginning on page II-5.
(b) FINANCIAL STATEMENT SCHEDULES:
No financial statement schedules are required as all material required
information is disclosed in the notes to the Registrant's Consolidated Financial
Statements.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
II-1
<PAGE>
PROVIDED, HOWEVER, that paragraphs (1)(i) and
(1)(ii) do not apply if the information required
to be included in a post-effective amendment by
those paragraphs is contained in periodic reports
filed by the Registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the Registration Statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof;
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request;
(6) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(7) That every prospectus (i) that is filed pursuant to paragraph
(6) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described under
Item 20 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on October 28, 1997.
SUIZA FOODS CORPORATION
By: /s/ GREGG L. ENGLES,
-----------------------------------------
Gregg L. Engles,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
We, the undersigned officers and directors of Suiza Foods Corporation,
hereby severally constitute and appoint Gregg L. Engles and Tracy L. Noll, and
each of them, our true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for each of us in our name, place and stead,
in any and all capacities, to sign Suiza Foods Corporation's Registration
Statement on Form S-4, and any other Registration Statement relating to the same
offering, and any and all amendments thereto (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby grant to such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as each of us might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or his or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ GREGG L. ENGLES
- ------------------------------ Chairman of the Board and October 28, 1997
Gregg L. Engles Chief Executive Officer
*
- ------------------------------ Vice Chairman of the Board October 28, 1997
Cletes O. Beshears
*
- ------------------------------ Vice Chairman of the Board October 28, 1997
Hector M. Nevares
*
- ------------------------------ Principal financial and October 28, 1997
Tracy L. Noll accounting officer
*
- ------------------------------ Director October 28, 1997
Alan J. Bernon
II-3
<PAGE>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
*
- ------------------------------ Director October 28, 1997
Gayle O. Beshears
*
- ------------------------------ Director October 28, 1997
Stephen Green
*
- ------------------------------ Director October 28, 1997
Robert L. Kaminski
*
- ------------------------------ Director October 28, 1997
David F. Miller
*
- ------------------------------ Director October 28, 1997
P. Eugene Pender
*
- ------------------------------ Director October 28, 1997
Robert Piccinini
*By: GREGG L. ENGLES
-------------------------
Gregg L. Engles
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
2.1 Amended and Restated Reorganization Agreement; filed as Exhibit 2.1 to Suiza Foods' Registration
Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by reference.
2.2 Agreement and Plan of Merger dated as of September 28, 1997 by and among Suiza Foods, Sub, and
Morningstar (attached as Appendix A to the Joint Proxy Statement/Prospectus).
4.1 Specimen of Common Stock Certificate; filed as Exhibit 4.1 to Suiza Foods' Registration
Statement on Form S-1 (Registration No. 333-1858) and incorporated herein by reference.
4.2 Registrations Rights Agreement (Exhibit G-2 to Amended and Restated Reorganization Agreement);
filed as Exhibit 4.2 to Suiza Foods' Registration Statement on Form S-1 (Registration No.
333-1858) and incorporated herein by reference.
5.1 Opinion of Hughes & Luce, L.L.P. regarding Legality of Securities being registered.
8.1 Opinion of Weil, Gotshal & Manges LLP regarding certain tax matters.
23.1 Consent of Hughes & Luce, L.L.P. (contained in Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Barnard, Vogler & Co.
23.5 Consent of McGladrey & Pullen, LLP.
23.6 Consent of Coopers & Lybrand L.L.P.
23.7 Consent of Arthur Andersen LLP.
23.8 Consent of Price Waterhouse LLP.
23.9 Consent of Weil, Gotshal & Manges LLP (contained in Exhibit 8.1).
23.10 Consent of Donaldson, Lufkin & Jenrette Securities Corporation.
23.11 Consent of Goldman, Sachs & Co.
23.12 Consent of John R. Muse.
23.13 Consent of Jim L. Turner.
24.1 Power of Attorney (contained in the signature pages hereto).
99.1 Form of Suiza Foods Proxy.
99.2 Form of Morningstar Proxy.
</TABLE>
II-5
<PAGE>
EXHIBIT 5.1
[Hughes & Luce, L.L.P. Letterhead]
October 28, 1997
Suiza Foods Corporation
3811 Turtle Creek Blvd., Suite 1300
Dallas, Texas 75219
Ladies and Gentlemen:
We have acted as counsel to Suiza Foods Corporation, a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended, of 12,600,000 shares of the Company's common stock (the
"Common Stock"), as described in the Company's Registration Statement on Form
S-4 (the "Registration Statement") filed with the Securities and Exchange
Commission. The Company proposes to issue Shares to the shareholders of The
Morningstar Group Inc., a Delaware corporation ("Morningstar"), in connection
with the acquisition of Morningstar. Capitalized terms not otherwise defined in
this opinion have the meanings given to them in the Registration Statement.
In rendering this opinion, we have examined and relied upon executed
originals, counterparts or copies of such documents, records and certificates
(including certificates of public officials and officers of the Company) as we
considered necessary or appropriate for enabling us to express the opinions set
forth herein. In all such examinations, we have assumed the authenticity and
completeness of all documents submitted to us as originals and the conformity to
originals and completeness of all documents submitted to us as photostatic,
conformed, notarized or certified copies.
Based on the foregoing, we are of the opinion that the Common Stock, when
issued and sold to the Morningstar shareholders as described in the Registration
Statement and pursuant to the terms of the Merger Agreement (without waiver),
will be validly issued, fully paid and nonassessable.
This opinion may be filed as an exhibit to the Registration Statement. We
also consent to the reference to this firm as having passed on the validity of
the Common Stock under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not admit that we are included in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
/s/ Hughes & Luce, L.L.P.
<PAGE>
EXHIBIT 8.1
[WEIL, GOTSHAL & MANGES LLP LETTERHEAD]
October 28, 1997
The Morningstar Group Inc.
5956 Sherry Lane
Suite 1500
Dallas, Texas 75225
Attention: C. Dean Metropoulos
Ladies & Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the merger (the "Merger") of SF Acquisition Corporation
("Sub"), a Delaware corporation and the wholly owned subsidiary of Suiza
Foods Corporation ("Parent"), a Delaware corporation, with and into The
Morningstar Group Inc. (the "Company"), a Delaware corporation.
In formulating our opinion, we examined such documents as we deemed
appropriate, including the Agreement and Plan of Merger among Parent, Sub and
the Company dated as of September 28, 1997 (the "Merger Agreement"), and the
Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus")
included in the Registration Statement on Form S-4 (Registration No. 333-37869)
filed by Parent with the Securities and Exchange Commission on October 28, 1997.
In addition, we have obtained such additional information as we have deemed
relevant and necessary through consultation with various officers and
representatives of Parent and the Company.
Our opinion set forth below assumes (1) the accuracy of the
statements and facts concerning the Merger set forth in the Merger Agreement
and the Joint Proxy Statement/Prospectus, (2) the consummation of the Merger
in the manner contemplated by, and in accordance with the terms set forth in,
the Merger Agreement and the Joint Proxy Statement/Prospectus and (3) the
accuracy of (i) the representations made by Parent, which
<PAGE>
The Morningstar Group, Inc.
October 28, 1997
Page 2
are set forth in the Officers' Certificate delivered to us by Parent, dated
the date hereof, and (ii) the representations made by the Company, which are
set forth in the Officers' Certificate delivered to us by the Company, dated
the date hereof.
Based upon the facts and statements set forth above, our examination
and review of the documents referred to above and subject to the assumptions
set forth above, we are of the opinion that for federal income tax purposes:
1. The Merger will constitute a reorganization within the meaning of
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code").
2. No gain or loss will be recognized by the shareholders of the
Company upon their exchange of common stock of the Company ("Company
Common") for common stock of Parent ("Parent Common"), except for cash
received in lieu of a fractional share interest in Parent Common.
We express no opinion concerning any tax consequences of the Merger other
than those specifically set forth herein.
Our opinion is based on current provisions of the Code, the Treasury
Regulations promulgated thereunder, published pronouncements of the Internal
Revenue Service and case law, any of which may be changed at any time with
retroactive effect. Any change in applicable laws or facts and circumstances
surrounding the Merger, or any inaccuracy in the statements, facts,
assumptions and representations on which we have relied, may affect the
continuing validity of the opinions set forth herein. We assume no
responsibility to inform you of any such change or inaccuracy that may occur
or come to our attention.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the references to our firm under the captions
"SUMMARY--The Merger and the Merger Agreement--Certain Tax Consequences,"
"CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER," and "LEGAL
MATTERS" in the Joint Proxy Statement.
Very truly yours,
/s/ Weil, Gotshal & Manges LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use and the incorporation by reference in this Amendment
No. 1 to the Registration Statement of Suiza Foods Corporation on Form S-4 of
our report on the consolidated financial statements of Suiza Foods Corporation,
dated February 18, 1997, appearing in the Prospectus, which is part of this
Amendment No. 1 to the Registration Statement, and in the Annual Report on Form
10-K of Suiza Foods Corporation for the year ended December 31, 1996; and of our
reports on the financial statements of Pre-Acquisition Velda Farms, dated
November 4, 1994, and Swiss Dairy, a Corporation, dated August 28, 1996,
appearing in the final prospectus of Suiza Foods Corporation dated January 22,
1997 and filed with the Securities and Exchange Commission pursuant to Rule
424(B) on January 23, 1997 (File No. 333-18263). We also consent to the use in
this Amendment No. 1 to the Registration Statement of our report on the
consolidated financial statements of Country Fresh, Inc., dated May 5, 1997,
appearing in such Prospectus, and to the reference to us under the heading
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 28, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF KPMG PEAT MARWICK LLP
We consent to the incorporation by reference in this Amendment No. 1 to the
Registration Statement on Form S-4 of Suiza Foods Corporation and the related
prospectus of our report dated August 23, 1996, with respect to the consolidated
balance sheets of Garrido & Compania, Inc. and Subsidiaries as of June 30, 1996
and 1995, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996, appearing in the final prospectus of Suiza Foods
Corporation dated January 22, 1997 and filed with the Securities and Exchange
Commission pursuant to Rule 424(B) on January 23, 1997 (File No. 333-18263), and
to the reference to us under the heading "Experts" in this Prospectus which is
part of such Amendment No. 1 to the Registration Statement.
KPMG PEAT MARWICK LLP
San Juan, Puerto Rico
October 28, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF BARNARD, VOGLER & CO.
We consent to the incorporation by reference in this Amendment No. 1 to the
Registration Statement of Suiza Foods Corporation on Form S-4 of our report
dated December 14, 1995, with respect to the balance sheets of Model Dairy, Inc.
as of October 31, 1995 and 1994, and the related statements of earnings and
retained earnings, and cash flows for years then ended, appearing in the final
prospectus of Suiza Foods Corporation dated January 22, 1997 and filed with the
Securities and Exchange Commission pursuant to Rule 424(B) on January 23, 1997
(File No. 333-18263), and to the reference to us under the heading "Experts" in
the Prospectus which is part of such Amendment No. 1 to the Registration
Statement.
BARNARD, VOGLER & CO.
Reno, Nevada
October 28, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF MCGLADREY & PULLEN, LLP
We hereby consent to the incorporation by reference in this Amendment No. 1
to the Registration Statement of Suiza Foods Corporation on Form S-4 of our
report dated March 10, 1997, except for Note 13 as to which the date is July 1,
1997, with respect to the financial statements of Dairy Fresh, L.P., a Delaware
limited partnership, included in the Current Report on Form 8-K filed July 14,
1997, as amended on August 22, 1997, of Suiza Foods Corporation, and to the
reference to us under the heading "Experts" in the Prospectus which is part of
such Amendment No. 1 to the Registration Statement.
McGLADREY & PULLEN, LLP
Winston-Salem, North Carolina
October 28, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF COOPERS & LYBRAND L.L.P.
We hereby consent to the incorporation by reference in this Amendment No. 1
to the Registration Statement of Suiza Foods Corporation on Form S-4 of our
report dated July 31, 1997, with respect to the combined financial statements of
The Garelick Companies, included in the Current Report on Form 8-K filed July
14, 1997, as amended on August 22, 1997, of Suiza Foods Corporation, and to the
reference to us under the heading "Experts" in this Prospectus which is part of
such Amendment No. 1 to the Registration Statement.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
October 28, 1997
<PAGE>
EXHIBIT 23.7
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation of
our reports included in and incorporated by reference in this Amendment No. 1 to
the Registration Statement on Form S-4 of our report dated February 10, 1997,
included in the Prospectus, which is part of this Registration Statement, and in
the annual report on Form 10-K of the Morningstar Group Inc. for the year ended
December 31, 1996 and to all references to our firm included in this Amendment
No. 1 to the Registration Statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
October 28, 1997
<PAGE>
EXHIBIT 23.8
CONSENT OF PRICE WATERHOUSE LLP
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Amendment No. 1 to the Registration Statement on Form
S-4 of Suiza Foods Corporation of our report dated February 8, 1996 relating to
the combined financial statements of Presto Food Products, Inc. and Affiliate,
which appears in the Current Report on Form 8-K/A of The Morningstar Group Inc.
dated February 18, 1997. We also consent to the incorporation by reference of
our report dated February 8, 1996 relating to the Additional Information of
Presto Food Products, Inc. and Affiliate, which appears in such Current Report
on Form 8-K/A. We also consent to the references to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Los Angeles, California
October 28, 1997
<PAGE>
EXHIBIT 23.10
CONSENT OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
We hereby consent to (i) the inclusion of our opinion letter, dated
September 28, 1997 to the Board of Directors of Suiza Foods Corporation (the
"Company") as Appendix B to the Amendment No. 1 to the Joint Proxy
Statement/Prospectus which forms a part of the Registration Statement on Form
S-4 of the Company relating to the acquisition by the Company of The Morningstar
Group Inc. in a stock-for-stock pooling of interests exchange and merger, and
(ii) all references to such opinion in such Amendment No. 1 to the Joint Proxy
Statement/Prospectus under the captions "Summary--The Merger and the Merger
Agreement," "The Merger--Background of the Merger," "The Merger--Reasons for the
Merger; Recommendations of the Boards" and "The Merger--Opinion of Suiza Foods'
Financial Advisor." In giving such consent, we do not admit that we come within
the category of persons whose consent is required under the Securities and
Exchange Commission thereunder, nor do we thereby admit that we are experts with
respect to any part of such Registration Statement within the meaning of the
term "experts" as used in the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JAMES M. NEISSA
-----------------------------------
James M. Neissa
MANAGING DIRECTOR
New York, New York
October 28, 1997
<PAGE>
EXHIBIT 23.11
[GOLDMAN, SACHS & CO. LETTERHEAD]
PERSONAL AND CONFIDENTIAL
October 24, 1997
Board of Directors
The Morningstar Group Inc.
5956 Sherry Lane
Suite 1500
Dallas, TX 75225
Re: Registration Statement on Form S-4 of Suiza Foods Corporation, dated
October 28, 1997, including the Prospectus/Joint Proxy Statement of Suiza
Foods Corporation and The Morningstar Group Inc.
Gentlemen:
Reference is made to our opinion letter dated as of September 28, 1997, with
respect to the fairness from a financial point of view to the holders of the
outstanding shares of Common Stock, par value $0.01 per share (the "Shares"), of
The Morningstar Group Inc. (the "Company") of the exchange ratio of 0.85 shares
of Common Stock, par value $0.01 per share, of Suiza Foods Corporation ("Suiza")
to be received for each Share pursuant to the Agreement and Plan of Merger,
dated as of September 28, 1997, among Suiza, SF Acquisition Corporation, a
wholly-owned subsidiary of Suiza, and the Company.
The foregoing opinion letter is solely for the information and assistance of the
Board of Directors of the Company in connection with its consideration of the
transaction contemplated therein and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-referenced Registration Statement.
In that regard, we hereby consent to the references to the opinion of our Firm
dated as of September 28, 1997, in the cover letter to Morningstar stockholders,
under the captions "SUMMARY--The Merger and the Merger Agreement--Background and
Reasons for the Merger; Recommendation of the Boards-- Morningstar,"
"SUMMARY--The Merger and the Merger Agreement--Opinions of Financial Advisors,"
"THE MERGER--Reasons for the Merger; Recommendations of the Boards--Morningstar"
and "THE MERGER--Opinion of Morningstar's Financial Advisor," and to the
inclusion of the foregoing opinion in the Prospectus/Joint Proxy Statement
included in the above-mentioned Registration Statement. In giving such consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933 or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Goldman, Sachs & Co.
- --------------------------------------
(GOLDMAN, SACHS & CO.)
<PAGE>
EXHIBIT 23.12
CONSENT OF JOHN R. MUSE
I hereby consent to use of my name in this Amendment No. 1 to the
Registration Statement on Form S-4 of Suiza Foods Corporation as the same
appears under the caption "THE MERGER--Board of Directors of Suiza Foods
Following the Merger" with respect to my becoming a director of Suiza Foods
Corporation following the Merger (as defined in such Registration Statement).
/s/ John R. Muse
--------------------------------------
John R. Muse
October 28, 1997
<PAGE>
EXHIBIT 23.13
CONSENT OF JIM L. TURNER
I hereby consent to use of my name in this Amendment No. 1 to the
Registration Statement on Form S-4 of Suiza Foods Corporation as the same
appears under the caption "THE MERGER--Board of Directors of Suiza Foods
Following the Merger" with respect to my becoming a director of Suiza Foods
Corporation following the Merger (as defined in such Registration Statement).
/s/ Jim L. Turner
--------------------------------------
Jim L. Turner
October 28, 1997
<PAGE>
PROXY PROXY
SUIZA FOODS CORPORATION
BOARD OF DIRECTORS PROXY FOR THE SPECIAL MEETING
OF STOCKHOLDERS AT 9:00 A.M. WEDNESDAY, NOVEMBER 26, 1997
HOTEL CRESCENT COURT, 400 CRESCENT COURT
2200 CEDAR SPRINGS, DALLAS, TEXAS 75201
The undersigned stockholder of Suiza Foods Corporation (the "Company")
hereby appoints Gregg L. Engles and Tracy L. Noll or either of them, as
proxies, each with full powers of substitution, to vote the shares of the
undersigned at the above-stated Special Meeting and at any adjournment(s)
thereof:
PLEASE SIGN, DATE AND MAIL TODAY
(Continued and to be signed on reverse side)
<PAGE>
<TABLE>
<S> <C> <C>
SUIZA FOODS CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
1. Issuance of common stock to stockholders of For Against Abstain 3. In their discretion, the proxies are authorized
The Morningstar Group Inc. and Suiza / / / / / / to vote upon such other business or matters as
Foods' assumption of the Morningstar may properly come before the meeting or any
stock option plans and options adjournment thereof.
outstanding thereunder.
2. Approval of increase in authorized shares For Against Abstain THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
of common stock reserved for issuance under / / / / / / DIRECTORS AND WILL BE VOTED IN ACCORDANCE WITH THE
the Suiza Foods Corporation 1997 Stock SPECIFICATIONS MADE ON THE REVERSE SIDE. IF A CHOICE
Option and Restricted Stock Plan from IS NOT INDICATED WITH RESPECT TO ITEMS (1) AND (2)
1,150,000 shares to 3,000,000 shares. THIS PROXY WILL BE VOTED "FOR" SUCH ITEM. THE PROXIES
WILL USE THEIR DISCRETION WITH RESPECT TO ANY MATTER
REFERRED TO IN ITEM (3). THIS PROXY IS REVOCABLE AT
ANY TIME BEFORE IT IS EXERCISED.
Receipt herewith of the Joint Proxy Statement/
Prospectus, dated October 28, 1997, is hereby
acknowledged.
Dated ________________________________________, 1997
____________________________________________________
____________________________________________________
(Signature(s) of Stockholder(s))
(Joint owners must EACH sign. Please sign EXACTLY as
your name(s) appear(s) on this card. When signing as
attorney, trustee, executor, administrator, guardian
or corporate officer, please give your FULL title.)
</TABLE>
<PAGE>
PROXY PROXY
THE MORNINGSTAR GROUP, INC.
BOARD OF DIRECTORS PROXY FOR THE SPECIAL MEETING
OF STOCKHOLDERS AT 9:00 A.M. WEDNESDAY, NOVEMBER 26, 1997
HOTEL CRESCENT COURT, 400 CRESCENT COURT
2200 CEDAR SPRINGS, DALLAS, TEXAS 75201
The undersigned stockholder of The Morningstar Group, Inc. (the "Company")
hereby appoints Michael J. Cramer and Joseph B. Armes or either of them, as
proxies, each with full powers of substitution, to vote the shares of the
undersigned at the above-stated Special Meeting and at any adjournment(s)
thereof:
PLEASE SIGN, DATE AND MAIL TODAY
(Continued and to be signed on reverse side)
<PAGE>
<TABLE>
<S> <C> <C>
THE MORNINGSTAR GROUP INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
1. Approval of the Merger, the Merger For Against Abstain
Agreement and the transactions / / / / / /
contemplated thereby.
2. In their discretion, the proxies are For Against Abstain THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
authorized to vote upon such other business / / / / / / DIRECTORS AND WILL BE VOTED IN ACCORDANCE WITH THE
or matters as may properly come before the SPECIFICATIONS MADE ON THE REVERSE SIDE. IF A CHOICE
meeting or any adjournment thereof. IS NOT INDICATED WITH RESPECT TO ITEM (1) THIS PROXY
WILL BE VOTED "FOR" SUCH ITEM. THE PROXIES WILL USE
THEIR DISCRETION WITH RESPECT TO ANY MATTER
REFERRED TO IN ITEM (2). THIS PROXY IS REVOCABLE AT
ANY TIME BEFORE IT IS EXERCISED.
Receipt herewith of the Joint Proxy Statement/
Prospectus, dated October 28, 1997, is hereby
acknowledged.
Dated ________________________________________, 1997
____________________________________________________
____________________________________________________
(Signature(s) of Stockholder(s))
(Joint owners must EACH sign. Please sign EXACTLY as
your name(s) appear(s) on this card. When signing as
attorney, trustee, executor, administrator, guardian
or corporate officer, please give your FULL title.)
</TABLE>
