<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1998
or
[] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission file number 001-12755
SUIZA FOODS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2559681
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
3811 Turtle Creek Boulevard, Suite 1300
Dallas, Texas 75219
(214) 528-9922
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1998 the number of shares outstanding of each class of common
stock was:
Common Stock, $.01 par value: 35,015,841
1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,073 $ 24,388
Temporary investments 27,395 --
Accounts receivable, net of allowance for doubtful
accounts of $15,933 and $3,589, respectively 411,240 164,284
Inventories 221,619 76,087
Prepaid expenses and other current assets 17,065 7,978
Refundable income taxes 19,083 19,836
Deferred income taxes 6,617 2,718
Net assets of discontinued operations -- 100,785
----------- -----------
Total current assets 735,092 396,076
PROPERTY, PLANT AND EQUIPMENT, NET 746,438 363,649
DEFERRED INCOME TAXES 2,527 4,484
INTANGIBLE AND OTHER ASSETS 1,282,110 639,253
----------- -----------
TOTAL $ 2,766,167 $ 1,403,462
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 446,589 $ 178,021
Income taxes payable 10,085 4,006
Lines of credit and current portion of long-term debt 47,413 50,846
----------- -----------
Total current liabilities 504,087 232,873
LONG-TERM DEBT 830,963 777,813
OTHER LONG-TERM LIABILITIES 62,473 13,230
DEFERRED INCOME TAXES 15,241 20,236
MANDATORILY REDEEMABLE CONVERTIBLE TRUST ISSUED PREFERRED SECURITIES 682,792 --
MINORITY INTEREST IN SUBSIDIARIES 24,793 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- 3,741
Common stock, 34,992,672 and 30,463,312 shares issued and outstanding 350 305
Additional paid-in capital 488,135 281,774
Retained earnings 177,786 73,490
Accumulated other comprehensive income 9,935 --
Treasury stock (30,388) --
----------- -----------
Total stockholders' equity 645,818 359,310
----------- -----------
TOTAL $ 2,766,167 $ 1,403,462
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 3
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 968,104 $ 499,836 $ 2,329,345 $ 1,247,203
COST OF SALES 747,309 385,174 1,785,670 960,141
------------ ------------ ------------ ------------
GROSS PROFIT 220,795 114,662 543,675 287,062
OPERATING COSTS AND EXPENSES:
Selling and distribution 108,019 55,876 267,347 145,615
General and administrative 34,846 16,316 78,967 43,549
Amortization of intangibles 9,143 4,719 22,129 10,077
------------ ------------ ------------ ------------
Total operating costs and expenses 152,008 76,911 368,443 199,241
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 68,787 37,751 175,232 87,821
OTHER (INCOME) EXPENSE:
Interest expense, net 14,104 12,728 35,951 23,351
Financing charges on preferred securities 9,646 -- 20,541 --
Other income, net (921) (980) (2,362) (20,114)
------------ ------------ ------------ ------------
Total other (income) expense 22,829 11,748 54,130 3,237
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTERESTS 45,958 26,003 121,102 84,584
INCOME TAXES 17,066 9,066 43,978 28,979
MINORITY INTEREST 579 -- 1,128 --
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 28,313 16,937 75,996 55,605
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS -- 2,774 (3,161) 2,422
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEMS 28,313 19,711 72,835 58,027
EXTRAORDINARY GAIN (LOSS) -- -- 31,698 (3,270)
------------ ------------ ------------ ------------
NET INCOME $ 28,313 $ 19,711 $ 104,533 $ 54,757
============ ============ ============ ============
NET INCOME APPLICABLE TO COMMON STOCK $ 28,238 $ 19,636 $ 104,296 $ 54,532
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES: Basic 34,638,425 30,097,654 32,752,669 29,225,850
Diluted 45,183,512 32,376,270 41,242,617 31,071,025
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 0.82 $ 0.56 $ 2.31 $ 1.90
Income (loss) from discontinued operations -- 0.09 (0.10) 0.08
Extraordinary gain (loss) -- -- 0.97 (0.11)
------------ ------------ ------------ ------------
Net income $ 0.82 $ 0.65 $ 3.18 $ 1.87
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 0.76 $ 0.52 $ 2.15 $ 1.78
Income (loss) from discontinued operations -- 0.09 (0.08) 0.08
Extraordinary gain (loss) -- -- 0.77 (0.11)
------------ ------------ ------------ ------------
Net income $ 0.76 $ 0.61 $ 2.84 $ 1.75
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 104,533 $ 54,757
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations 3,161 (2,422)
Depreciation and amortization 64,209 30,643
Minority interest 1,128 --
Extraordinary (gain) loss (31,698) 3,270
Deferred income taxes 17,904 4,113
Other 1,104 (520)
Changes in operating assets and liabilities, net of acquisitions:
Receivables (88,778) 10,940
Inventories (12,367) (6,699)
Prepaid expenses and other assets (3,919) (1,159)
Accounts payable and other accrued expenses 47,555 (1,006)
Income taxes 17,103 8,963
----------- -----------
Net cash provided by continuing operations 119,935 100,880
Net cash (used) provided by discontinued operations (2,068) 4,210
----------- -----------
Net cash provided by operating activities 117,867 105,090
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (113,655) (37,664)
Cash outflows for acquisitions (566,782) (425,089)
Net proceeds from the sale of discontinued operations 172,732 --
Other (12) (721)
----------- -----------
Net cash used by continuing operations (507,717) (463,474)
Net cash used by discontinued operations (14,022) (31,206)
----------- -----------
Net cash used by investing activities (521,739) (494,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 892,419 446,250
Repayment of debt (1,063,749) (136,078)
Payment of deferred financing, debt restructuring and merger costs (1,256) (12,770)
Redemption of preferred stock (3,741) --
Redemption of common stock (30,388) --
Issuance of common stock, net of expenses 36,069 91,396
Issuance of trust issued preferred securities, net of expenses 582,500 --
Other (297) (150)
----------- -----------
Net cash provided by financing activities 411,557 388,648
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,685 (942)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,388 23,823
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,073 $ 22,881
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements as of September 30, 1998 and
for the three and nine month periods ended September 30, 1998 and 1997 have
been prepared by Suiza Foods Corporation (the "Company" or "Suiza") without
audit and have been prepared to give retroactive effect to the November 1997
mergers with Country Fresh, Inc. and The Morningstar Group Inc. which have
been accounted for as poolings of interests. The consolidated financial
statements of the Company as of and for the periods ended September 30,
1998, also reflect the acquisitions of a number of businesses during 1998,
which have been accounted for as purchase business combinations as of their
respective acquisition dates, as discussed in Note 6. As a result of these
1998 purchase acquisitions, the assets acquired and liabilities assumed and
the post-acquisition results of operations have resulted in significant
increases in the Company's assets and liabilities and operating results
during 1998 as compared to 1997 levels.
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 September 30, 1998 and for the three month and nine month
periods ended September 30, 1998 and 1997 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 1997 financial statements contained in its
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 31, 1998. Certain reclassifications have been made to
conform the prior year condensed consolidated statements of income to the
current year classifications.
2. TEMPORARY INVESTMENTS
Temporary investments at September 30, 1998 consist of U.S. Government
obligations due within one year, certificates of deposit or Eurodollar
deposits due within one year, highly rated commercial paper, and an
investment in securities. At September 30, 1998, the carrying value of
temporary investments approximates market value.
3. INVENTORIES
<TABLE>
<CAPTION>
At September 30, At December 31,
1998 1997
---------------- ---------------
(in thousands)
<S> <C> <C>
Raw materials and supplies $119,620 $ 43,764
Finished goods 101,999 32,323
-------- --------
$221,619 $ 76,087
======== ========
</TABLE>
4. DEBT
<TABLE>
<CAPTION>
At September 30, At December 31,
1998 1997
---------------- ---------------
(in thousands)
<S> <C> <C>
Subsidiary lines of credit $ 26,235 $ --
========= =========
Senior credit facility:
Revolving loan facility $ 648,000 $ 265,500
Term loan facility 550,000
Subsidiary debt obligations 204,141 13,159
--------- ---------
852,141 828,659
Less: current portion (21,178) (50,846)
--------- ---------
$ 830,963 777,813
========= =========
</TABLE>
Subsidiary Lines of Credit - In connection with the acquisition of
Continental Can Company, Inc. ("Continental Can"), the Company has assumed
existing subsidiary lines of credit of certain of Continental Can's domestic
and foreign subsidiaries. Borrowings under these subsidiary lines of credit
are generally subject to limitations based on a borrowing base, as defined
in the respective agreements, and bear interest generally at floating
interest rates determined for each subsidiary. Outstanding borrowings under
these subsidiary lines of credit, which at September 30, 1998, represented
foreign subsidiary borrowings, have been classified as a current liability
since such borrowings are expected to be repaid within one year.
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4. DEBT (continued)
Senior Credit Facilities - Effective as of May 29, 1998, the Company amended
and restated its existing credit facility with a group of lenders, including
First Union National Bank, as administrative agent, and The First National
Bank of Chicago, as syndication agent (the "Senior Credit Facility"), which
terminated the term loan facility of the prior agreement and expanded the
revolving loan facility. The new Senior Loan Facility provides the Company
with a line of credit of up to $1 billion to be used for general corporate
and working capital purposes, including the financing of acquisitions by the
Company. The Senior Credit Facility expires March 31, 2003, unless extended
in accordance with its terms.
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)
a base rate equal to the higher of the Federal Funds rate plus 50 basis
points or the prime rate or (ii) The London Interbank Offering Rate
("LIBOR") plus a margin that varies from 50 to 75 basis points depending on
the Company's ratio of defined indebtedness to EBITDA (as defined in the
Senior Credit Facility). The Company pays a commitment fee on unused amounts
of the Senior Credit Facility that ranges from 15 to 23 basis points, based
on the Company's ratio of defined indebtedness to EBITDA. Interest is
payable quarterly or at the end of the applicable interest period. The
interest rate in effect on the Senior Credit Facility, including the
applicable interest rate margin, was 6.43% at September 30, 1998.
The Senior Credit Facility is secured by capital stock of the Company's
subsidiaries other than Continental Can Company, Inc. and its subsidiaries
and certain other subsidiaries.
The Company's Senior Credit Facility contains various financial and other
restrictive covenants and requirements that the Company maintain certain
financial ratios, including a leverage ratio (computed as the ratio of the
aggregate outstanding principal amount of defined indebtedness to EBITDA, as
defined) and an interest coverage ratio (computed as the ratio of EBITDA to
interest expense). In addition, the Senior Credit Facility requires that the
Company maintain a minimum level of net worth. The Senior Credit Facility
also contains limitations on liens, investments, the incurrence of
additional indebtedness and acquisitions, and prohibits certain dispositions
of property.
Subsidiary Debt Obligations - Subsidiary debt obligations include senior
secured notes of one of Continental Can's subsidiaries, industrial
development revenue bond obligations of certain subsidiaries and other debt
obligations of certain subsidiaries.
The senior secured notes were issued in December 1996 by one of Continental
Can's subsidiaries, Plastic Containers, Inc. ("PCI"), and have an original
face value of $125 million. These notes, which are due in 2006, bear
interest at a fixed interest rate of 10%, payable semi-annually in July and
December of each year, and are secured by substantially all assets other
than inventory, receivables and certain equipment of PCI, along with the
stock of certain of PCI's subsidiaries. These notes are redeemable, in whole
or in part, at the option of PCI, beginning on December 16, 2001, at an
initial price of 105% of par value, declining ratably each year to par value
on December 15, 2004. In addition, the indenture requires PCI to offer to
redeem the notes at a redemption price of 101% of par value in the event of
a change in control, and at 100% of par value upon the occurrence of certain
other events. The indenture places certain restrictions on the payment of
dividends, additional liens, disposition of the proceeds of asset sales,
sale and leaseback transactions and additional borrowings.
Certain of the Company's subsidiaries have revenue bonds outstanding,
certain of which require aggregate annual sinking fund redemptions
aggregating $0.7 million and are secured by irrevocable letters of credit
issued by financial institutions, along with first mortgages on certain real
property and equipment. Interest on these bonds is due semiannually at
interest rates that vary based on market conditions which, at September 30,
1998, ranged from 4.10% to 4.15%.
Other debt includes various promissory notes for the purchase of property,
plant and equipment and capital lease obligations. The various promissory
notes payable provide for interest at varying rates and are payable in
monthly installments of principal and interest until maturity, when the
remaining principal balances are 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 interest rate derivative
agreements in place, including interest rate caps and interest rate swaps,
that have been designated as hedges against the Company's variable interest
rate exposure on its loans under the Senior Credit Facility.
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<PAGE> 7
At September 30, 1998, the interest rate caps, which mature in March 2000,
had aggregate notional amounts of $60 million and capped interest on LIBOR
loans at 8.0%, plus the applicable LIBOR margin. At September 30, 1998, the
interest rate swaps had aggregate notional amounts of $435 million at
interest rates ranging from 6.03% to 6.14%, plus the applicable LIBOR margin
and include $110 million of swaps that mature in December 2000; $50 million
of swaps that mature in March 2001; $225 million of swaps that mature in
December 2002; and $50 million of swaps that mature in December 2003. In
addition, the Company has entered into $100 million of interest rate
collars, which mature from December 2002 to June 2003, and provide for an
interest rate floor and limit of approximately 6.11% and 7.5%, respectively,
plus the applicable LIBOR margin. These derivative agreements provide hedges
for Senior Credit Facility loans by limiting or fixing the LIBOR interest
rates specified in the Senior Credit Facility 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 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.
4. STOCKHOLDER'S EQUITY
On September 15, 1998, the Company's Board of Directors authorized an open
market share repurchase program of up to $100 million of the Company's
common stock. During the third quarter of 1998, the Company repurchased one
million shares of common stock for a total purchase price of approximately
$30.4 million pursuant to this Board authorization. In addition, subsequent
to September 30, 1998, the Company has repurchased an additional 510,400
shares of common stock for a total purchase price of approximately $15.6
million pursuant to this Board authorization. On September 29, 1998, the
Company also redeemed all outstanding shares of Series A preferred stock
for the stated value of $320 per share, plus accumulated unpaid dividends,
for a total cost of $3.8 million.
6. 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 in Puerto Rico from 39% to
3.9% and provided for a 50% tax credit for certain "eligible investments" in
qualified agricultural businesses in Puerto Rico.
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 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) from the sale of earned tax credits to third parties. In
addition, in April 1998, the Company sold additional tax credits for net
proceeds of $7.6 million related to its 1996 investment in its Puerto Rico
coffee business subject to indemnification provisions. The sale of these tax
credits will be recognized as an adjustment to the original purchase price
of the coffee business, once the uncertainties related to these
indemnification provisions are resolved, which will result in a reduction of
goodwill.
7. ACQUISITIONS
On February 20, 1998, Suiza completed the acquisition of Land-O-Sun Dairies,
L.L.C., ("Land-O-Sun") for a purchase price of approximately $248 million,
including approximately $128 million in cash. The non-cash portion of the
purchase price was funded through the issuance of $100 million of
company-obligated 5% mandatorily redeemable convertible preferred securities
of a Delaware business trust formed by Suiza, and the issuance of $20
million of preferred interests of Land-O-Sun. In addition, Suiza refinanced
Land-O-Sun's existing outstanding long-term indebtedness, which totaled
approximately $52 million as of the closing date. Suiza financed the cash
portion of the purchase price and refinanced the existing long-term
indebtedness with borrowings of $180 million under its Senior Credit
Facility. Land-O-Sun is based in Johnson City, Tennessee and operates 13
fluid dairy and ice cream processing facilities in Tennessee, North
Carolina, South Carolina, Georgia, Illinois, Kentucky and Virginia.
Land-O-Sun reported net sales of approximately $464 million for its fiscal
year ended December 31, 1997.
On May 29, 1998, the Company completed the acquisition of Continental Can
for a purchase price of approximately $181 million, which was funded through
the issuance of 2,050,635 shares of Suiza common stock and Suiza stock
options to replace
7
<PAGE> 8
outstanding stock options of Continental Can, along with cash of $41
million. Suiza also assumed Continental Can's long-term indebtedness of
approximately $200 million at acquisition date. Continental Can is primarily
engaged in the packaging business through a number of operating subsidiaries
in the United States and in Europe, and reported net sales of approximately
$546 million for the fiscal year ended December 31, 1997.
Following is a summary of unaudited pro forma results of operations of Suiza
which gives effect to Suiza's significant acquisitions in 1997 (Dairy Fresh,
Garelick Farms, and Franklin Plastics) and in 1998 (Continental Can, and
Land-O-Sun, ) as if these significant acquisitions had occurred at the
beginning of 1997.
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------- -------------------------------------
1998 1997 1998 1997
------------------------------------- -------------------------------------
(in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 968,104 $ 807,694 $ 2,605,092 $ 2,295,524
Income from continuing operations 28,313 17,591 80,317 75,113
Net income 28,313 20,366 108,854 74,265
Income from continuing operations
per share:
Basic $ 0.82 $ 0.54 $ 2.36 $ 2.39
Diluted 0.76 0.51 2.18 2.23
Net income per share:
Basic $ 0.82 $ 0.63 $ 3.20 $ 2.37
Diluted 0.76 0.59 2.85 2.21
</TABLE>
On June 30, 1998 the Company acquired the operations of West Lynn Creamery,
Inc. ("West Lynn"). West Lynn is a leading manufacturer and distributor of
milk, cultured products, extended shelf-life products, juice and ice cream
throughout the northeast United States and reported net sales of $214
million for its fiscal year ended December 31, 1997. On August 14, 1998 the
Company completed the purchase of certain assets of the fluid dairy division
of Cumberland Farms, Inc. ("Cumberland Farms"). Cumberland Farms' fluid
dairy division, which processes and distributes milk, juice, water and
related dairy products, reported net sales of approximately $200 million in
1997.
During the first nine months of 1998, the Company also acquired a number of
smaller dairy and plastic packaging businesses, including the acquisitions
of Louis Trauth Dairy, Inc. ("Trauth"), a Newport, Kentucky-based
manufacturer and distributor of fresh milk, ice cream and related dairy
products, Oberlin Farms Dairy, Inc. ("Oberlin"), a Cleveland, Ohio-based
processor of milk and cultured dairy products, four small dairy businesses
and six small packaging businesses. Trauth and Oberlin recorded net sales of
approximately $67 million and $76 million, respectively, for their most
recent fiscal years
All of the above acquisitions have been accounted for using the purchase
method of accounting. The purchase price of each of the acquisitions was
allocated to assets acquired, including identifiable intangibles, and
liabilities assumed based on their estimated fair market values. The excess
of the total purchase prices over the estimated fair values of the net
assets represented goodwill. These allocations are tentative and subject to
change.
On September 10, 1998, the Company signed a definitive agreement to acquire
publicly-traded Broughton Foods Company ("Broughton") for a cash purchase
price of $19.00 per share of common stock outstanding. Broughton is a
leading manufacturer and distributor of milk, cultured products, ice cream,
extended shelf-life and other dairy products in Michigan, Ohio, West
Virginia, Kentucky, Tennessee and parts of the eastern U.S. Broughton's
current annual revenue, including the pro forma effect of completed business
combinations, is approximately $200 million. Completion of the acquisition
of Broughton is subject to customary conditions including, among other
things, the receipt of certain governmental approvals and the approval of
the shareholders of Broughton. Assuming all closing conditions are
satisfied, the transaction could be completed at approximately the end of
December 1998.
8. DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEMS
On April 30, 1998, Suiza consummated its previously announced sale of Reddy
Ice Corporation ("Reddy Ice") to Packaged Ice, Inc. ("Packaged Ice") for net
cash proceeds of approximately $172.7 million. The Company reported an
extraordinary gain of $35.5 million from the sale of Reddy Ice, net of $22
million of income taxes. Reddy Ice had revenues during 1997 of approximately
$66.3 million.
Income (loss) from discontinued operations includes interest expense of $1.8
million during the third quarter of 1997 and interest expense of $2.4
million and $5.3 million during the first nine months of 1998 and 1997,
respectively. Interest charges allocated to discontinued operations are
based on debt specifically attributed to Reddy Ice. The income (loss) from
discontinued operations as reported in the condensed consolidated statements
of income is presented net of the related income tax expense of $1.7 million
in the third quarter of 1997, and income tax benefit of $2.1 million and
income
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<PAGE> 9
tax expense of $1.5 million in the first nine months of 1998 and 1997,
respectively.
During the second quarter of 1998, the Company recognized a $3.8 million
extraordinary loss from the early extinguishment of debt, net of income tax
benefit of $2.3 million, which included the write-off of deferred financing
costs and the recognition of market losses on interest rate contracts, from
the termination of the term loan facility under the Senior Credit Facility
and the repayment of all amounts outstanding under the term loan facility.
In addition, during the nine months ended September 30, 1997, the Company
recognized a $3.3 million extraordinary loss from the early extinguishment
of subordinated debt, net of income tax benefit of $2.0 million, which
included the write-off of deferred financing costs and certain prepayment
penalties.
9. TRUST ISSUED PREFERRED SECURITIES
In connection with the Land-O-Sun acquisition, Suiza issued $100 million of
company-obligated 5% mandatorily redeemable convertible preferred securities
of a Delaware business trust. On March 24, 1998, the Company also completed
the sale of $600 million of company-obligated 5.5% mandatorily redeemable
convertible preferred securities of a Delaware business trust in a private
placement to "qualified institutional buyers" under Rule 144A under the
Securities Act of 1933, as amended. These trust issued preferred securities,
which are recorded net of related fees and expenses, are convertible at the
option of the holders into an aggregate of approximately 9.1 million shares
of the Company's common stock, subject to adjustment in certain
circumstances. These preferred securities are also redeemable, at the
Company's option, at any time after three years from their respective issue
dates at specified amounts and are mandatorily redeemable at their
liquidation preference amount of $50 per share after 30 years from their
respective issue dates or upon occurrence of certain specified events, as
defined.
10. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," issued in
June 1997. For interim periods, SFAS 130 requires disclosure of
comprehensive income, which is composed of net income and other
comprehensive income items. Other comprehensive income items are revenues,
expenses, gains and losses that under generally accepted accounting
principles are excluded from net income and reflected as a component of
equity. Consolidated comprehensive income was $35.0 million and $110.4
million for the three and nine month periods ended September 30, 1998, which
included net income as reported and comprehensive income adjustments
primarily for foreign currency gains of $11.2 million and $9.9 million ($6.7
million and $5.9 million, net of taxes) for the three and nine month periods
ended September 30, 1998, respectively. Consolidated comprehensive income
was equal to consolidated net income for the three and nine month periods
ended September 30, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Suiza Foods Corporation (the "Company" or "Suiza") is a leading manufacturer and
distributor of fresh milk and related dairy products and plastic packaging in
the United States. Suiza also manufactures, distributes and markets
refrigerated, shelf-stable and frozen food products. Suiza has grown primarily
through a successful acquisition strategy, having consummated more than 20 dairy
and packaging acquisitions since its initial public offering in April 1996.
Through these acquisitions, Suiza has realized and continues to realize
economies of scale, operating efficiencies and added complementary product
lines. The Company conducts its dairy operations primarily through its Puerto
Rico subsidiaries ("Suiza-Puerto Rico"), Velda Farms, Inc. ("Velda Farms"),
Swiss Dairy Corporation ("Swiss Dairy"), Model Dairy, Inc. ("Model Dairy"),
Dairy Fresh, Inc. ("Dairy Fresh"), Garelick Farms, Inc. and certain related
dairy subsidiaries ("Garelick Farms"), Country Delite Farms Inc. ("Country
Delite"), Country Fresh, Inc. ("Country Fresh"), The Morningstar Group Inc.
("Morningstar"), LOS Holdings, Inc. ("Land-O-Sun"), Louis Trauth Dairy Inc.
("Trauth"), Oberlin Farms Dairies ("Oberlin"), West Lynn Creamery ("West Lynn"),
and Cumberland Farms Inc. ("Cumberland Farms"). The Company conducts its
packaging operations through Franklin Plastics, Inc. and subsidiaries ("Franklin
Plastics" or "Plastics") and through Continental Can Company, Inc. ("Continental
Can"). Each of the Company's dairy and plastic packaging operating subsidiaries
is a leading competitor in its market, with an established reputation for
customer service and product quality. The Company's dairy subsidiaries market
their products through extensive distribution networks to a diverse group of
customers, including convenience stores, grocery stores, schools and
institutional food service customers. The Company's customers in the plastic
packaging business include regional dairy manufacturers, bottled water
processors, beverage manufacturers, and consumer and industrial products
companies.
9
<PAGE> 10
Recent Developments
Completed Acquisitions. On August 14, 1998, the Company completed the purchase
of the assets of the fluid dairy division of Cumberland Farms, Inc. ("Cumberland
Farms"). Cumberland Farms' fluid dairy division, which processes and distributes
milk, juice, water and related dairy products and operates in the northeast,
reported net sales of approximately $200 million in 1997. The Cumberland Farms
acquisition was accounted for using the purchase method of accounting. Also
during the third quarter and early fourth quarter of 1998, the Company's dairy
group completed three additional small acquisitions.
The Company's packaging group completed three small acquisitions during the
third quarter of 1998 comprising six plants. The packaging group now operates 52
rigid plastic container facilities in the United States and Puerto Rico, and one
plastic film facility and eight metal can facilities in Europe.
Pending Acquisition. On September 10, 1998, the Company signed a definitive
agreement to acquire publicly-traded BroughtonFoods Company ("Broughton") for a
cash purchase price of $19.00 per share of common stock outstanding. Broughton
is a leading manufacturer and distributor of milk, cultured products, ice cream,
extended shelf-life and other dairy products in Michigan, Ohio, West Virginia,
Kentucky, Tennessee and parts of the eastern U.S. Broughton's current annual
revenue, including the pro forma effect of completed business combinations, is
approximately $200 million. Completion of the acquisition of Broughton is
subject to customary conditions including, among other things, the receipt of
certain governmental approvals and the approval of the shareholders of
Broughton. Assuming all closing conditions are satisfied, the transaction could
be completed at approximately the end of December 1998.
Share Repurchase Program. On September 15, 1998, the Company's Board of
Directors authorized an open market share repurchase program of up to $100
million of the Company's common stock. During the third quarter of 1998, the
Company repurchased one million shares of common stock for a total purchase
price of approximately $30.4 million pursuant to this Board authorization. In
addition, subsequent to September 30, 1998, the Company has repurchased an
additional 510,400 shares of common stock for a total purchase price of
approximately $15.6 million pursuant to this Board authorization. On September
29, 1998, the Company also redeemed all outstanding shares of Series A
preferred stock for the stated value of $320 per share, plus accumulated unpaid
dividends, for a total cost of $3.8 million.
Results of Operations
The Company currently operates in two distinct businesses ("Dairy" and
"Packaging") as shown below (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------------------- --------------------------------------------------
1998 1997 1998 1997
--------------------- -------------------- ---------------------- ------------------------
Percent Percent Percent Percent
of of of of
Dollars Net Sales Dollars Net Sales Dollars Net Sales Dollars Net Sales
---------- --------- --------- --------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Dairy $ 764,741 $ 474,552 $ 1,995,213 $ 1,221,919
Packaging 203,363 25,284 334,132 25,284
---------- ------- --------- ------ ----------- --------- ----------- -----------
Net sales 968,104 100.0% 499,836 100.0% 2,329,345 100.0% 1,247,203 100.0%
Cost of sales 747,309 77.2 385,174 77.1 1,785,670 76.7 960,141 77.0
---------- ------- --------- ------ ----------- --------- ----------- -----------
Gross profit 220,795 22.8 114,662 22.9 543,675 23.3 287,062 23.0
Operating expenses:
Selling and distribution 108,019 11.2 55,876 11.2 267,347 11.4 145,615 11.7
General and administrative 34,846 3.6 16,316 3.3 78,967 3.4 43,549 3.5
Amortization of intangibles 9,143 0.9 4,719 0.9 22,129 1.0 10,077 0.8
---------- ------- --------- ------ ----------- --------- ----------- -----------
Total operating expenses 152,008 15.7 76,911 15.4 368,443 15.8 199,241 16.0
---------- ------- --------- ------ ----------- --------- ----------- -----------
Operating income (loss):
Dairy 50,498 5.2 37,594 7.5 149,555 6.4 90,918 7.2
Packaging 22,392 2.3 2,389 0.5 36,816 1.6 2,389 0.2
Corporate office (4,103) (0.4) (2,232) (0.5) (11,139) (0.5) (5,486) (0.4)
---------- ------- --------- ------ ----------- --------- ----------- -----------
Total operating income $ 68,787 7.1% $ 37,751 7.5% $ 175,232 7.5% $ 87,821 7.0%
========== ======= ========= ====== =========== ========= =========== ===========
</TABLE>
Third Quarter and Year-to-date 1998 Compared to Third Quarter and Year-to-date
1997 Net Sales. The Company's net sales increased by 93.7% and 86.8% for the
third quarter and first nine months of 1998, respectively, when compared to like
periods of 1997. Dairy net sales increased by 61.2% and 63.3% for the third
quarter and first nine months of 1998, respectively, compared to like periods of
1997 primarily due to (i) the acquisitions of Garelick Farms, Dairy Fresh and
Country Delite in the last half of 1997, (ii) the acquisitions of Land-O-Sun,
Trauth, Oberlin, West Lynn, and
10
<PAGE> 11
Cumberland in the first nine months of 1998 and (iii) increased sales and higher
pricing of our branded products. The Company began operating in the Packaging
business with the acquisition of Franklin Plastics in July, 1997 and acquired
Continental Can in May, 1998. The Packaging segment has experienced rapid growth
through these acquisitions, as well as through several smaller acquisitions and
through newly opened facilities at Franklin Plastics.
Cost of Sales. The Company's cost of sales margins were 77.2% and 76.7% for the
third quarter and first nine months of 1998, respectively, compared to 77.1% and
77.0% for the same periods in 1997. Dairy cost of sales margins were slightly
higher in the third quarter of 1998 compared to last year due to significant
increases in butterfat prices. For the first nine months of 1998 Dairy cost of
sales margins improved from the prior year due to (i) realized operating
synergies in the Company's fluid dairy operations and (ii) increased branded
sales, which have a higher gross margin than other products.
Operating Expenses. The Company's operating expense ratios were 15.7% and 15.8%
for the third quarter and first nine months of 1998 compared to 15.4% and 16.0%
for the same periods in 1997. The operating expense ratio increased in the
quarter comparison primarily due to (i) the impact of a severe hurricane in
Puerto Rico and (ii) the acquisition of several dairies that currently have
higher operating expenses than existing dairies. The operating expense ratio
decreased slightly in the year-to-date periods as a result of realized
efficiencies in purchasing and the addition of Packaging, which has lowered the
Company's overall operating expense ratios.
Operating Income. The Company's operating income increased 82.2% to $68.8
million in the third quarter of 1998 from $37.8 million in the third quarter of
1997 primarily as a result of (i) the aforementioned acquisitions, (ii) realized
operating efficiencies and synergies and (iii) the increased growth of
Packaging. For the first nine months of 1998, operating income was $175.2
million, an increase of 99.5% from 1997 operating income of $87.8 million. The
Company's operating income margin decreased to 7.1% in the third quarter of 1998
from 7.6% in the third quarter of 1997 due to increased butterfat costs and the
impact of a hurricane in Puerto Rico; however it increased to 7.5% in the first
nine months of 1998 from 7.0% in the first nine months of 1997 due to
acquisitions, realized operating efficiencies, and the growth of Packaging.
Other (Income) Expense. Interest expense increased to $14.1 million in the third
quarter of 1998 from $12.7 million in the third quarter of 1997 primarily due to
the increased level of debt used to finance the aforementioned acquisitions. For
the same reason, interest expense increased to $36.0 million during the first
nine months of 1998 from $23.4 million in the first nine months of 1997.
Financing charges on preferred securities amounted to $9.6 million and $20.5
million in the third quarter and first nine months of 1998, respectively,
reflecting (i) the issuance on February 20, 1998 of $100 million of
company-obligated mandatorily redeemable preferred securities related to the
acquisition of Land-O-Sun and (ii) the issuance on March 24, 1998 of $600
million of company-obligated mandatorily redeemable preferred securities. Other
income decreased to $2.4 million in the first nine months of 1998 from $20.1
million in the first nine months of 1997 due to the recognition in the 1997
period of an $18.1 million gain from the sale of Puerto Rico tax credits as
discussed in Note 5 to the condensed consolidated financial statements.
Extraordinary Items. In the first nine months of 1998, the Company reported a
$35.5 million extraordinary gain (net of $22.0 million of income taxes) from the
sale of Reddy Ice Corporation ("Reddy Ice") and a $3.8 million extraordinary
loss from the early extinguishment of the term loan facility of the Senior
Credit Facility (net of $2.3 million of income tax benefit) related to the
write-off of deferred financing costs and the recognition of interest rate swap
losses. The Company incurred a $3.3 million extraordinary loss (net of a $2.0
million tax benefit) in the first nine months of 1997 related to the early
extinguishment of subordinated debt, which included the write-off of deferred
financing costs and certain prepayment penalties.
Net Income. The Company reported net income of $28.3 million in the third
quarter of 1998 compared to net income of $19.7 million in the third quarter of
1997. The Company reported net income of $104.5 million in the first nine months
of 1998 ($72.8 million excluding the net extraordinary gain of $31.7 million)
compared to $54.8 million in the first nine months of 1997 ($46.6 million
excluding the after-tax gain on the sale of tax credits of $11.5 million and the
extraordinary loss of $3.3 million).
11
<PAGE> 12
Liquidity and Capital Resources
As of September 30, 1998, the Company had total stockholders' equity of $645.8
million, total indebtedness of $878.4 million (including long-term debt and the
current portion of long-term debt) and $682.8 million of mandatorily redeemable
convertible trust issued preferred securities. The Company is currently in
compliance with all covenants and financial ratios contained in its debt
agreements.
Cash Flow. Historically, the working capital needs of the Company have been met
with cash flow from operations along with borrowings under the Senior Credit
Facility. Net cash provided by continuing operations was $119.9 million for the
first nine months of 1998 as contrasted to $100.9 million for the first nine
months of 1997. Investing activities in the first nine months of 1998 included
approximately $113.7 million in capital expenditures of which $68.6 million was
spent at Dairy, $39.5 million was spent at Packaging, and $5.6 million was spent
at corporate. Investing activities during the first nine months of 1998 also
included $566.8 million of cash paid for acquisitions, along with net proceeds
of $172.7 million from the sale of Reddy Ice.
On February 20, 1998, Suiza completed the acquisition of Land-O-Sun for a
purchase price of approximately $248 million, including approximately $128
million in cash. The non-cash portion of the purchase price was funded through
the issuance of $100 million of company-obligated 5% mandatorily redeemable
convertible preferred securities of a Delaware business trust formed by Suiza,
and the issuance of $20 million of preferred interests of Land-O-Sun. In
addition, Suiza refinanced Land-O-Sun's existing outstanding long-term
indebtedness, which totaled approximately $52 million as of the closing date.
Suiza financed the cash portion of the purchase price and refinanced the
existing long-term indebtedness with borrowings of $180 million under its Senior
Credit Facility.
On May 29, 1998 the Company completed the acquisition of Continental Can for a
purchase price of approximately $181 million, which was funded through the
issuance of 2,050,635 shares of Suiza common stock and Suiza stock options to
replace outstanding stock options of Continental Can, along with cash of $41
million. Suiza also assumed Continental Can's long-term indebtedness of
approximately $200 million at acquisition date.
On June 30, 1998 the Company acquired West Lynn and on August 14, 1998 the
Company completed the purchase of assets of the fluid dairy division of
Cumberland Farms. During the first nine months of 1998 the Company also acquired
Trauth, Oberlin and six small plastic packaging businesses. Suiza financed these
acquisitions with borrowings under its Senior Credit Facility.
On March 24, 1998, the Company completed the sale of $600 million of
company-obligated 5.5% mandatorily redeemable convertible preferred securities
of a Delaware business trust in a private placement, resulting in net proceeds
after expenses of approximately $582.5 million. The net proceeds were used to
repay amounts outstanding under the revolving loan facility of the Company's
Senior Credit Facility.
On September 15, 1998, the Company's Board of Directors authorized an open
market share repurchase program of up to $100 million of the Company's common
stock. During the third quarter of 1998, the Company repurchased one million
shares of common stock for a total purchase price of approximately $30.4 million
pursuant to this Board authorization. In addition, subsequent to September 30,
1998, the Company has repurchased an additional 510,400 shares of common stock
for a total purchase price of approximately $15.6 million pursuant to this Board
authorization. On September 29, 1998, the Company also redeemed all outstanding
shares of Series A preferred stock for the stated value of $320 per share, plus
accumulated unpaid dividends, for a total cost of $3.8 million.
Current Debt Obligations. On May 29, 1998 the Company amended its Senior Credit
Facility. Pursuant to this amendment, the Company terminated and repaid the term
loan facility and expanded the revolving loan facility to $1 billion. At
September 30, 1998, approximately $328.6 million was available under the
revolving loan facilities.
Future Capital Requirements. During 1998, the Company intends to invest a total
of approximately $140 to $150 million in its manufacturing facilities and
distribution capabilities of which almost $114 million has been spent to date.
Of this amount, Dairy intends to spend approximately $90 to $100 million for the
year to expand and maintain its manufacturing facilities and for fleet
replacement and Packaging intends to spend approximately $40 to $50 million.
The Company has not completed its budget for 1999, but expects to make
investments in manufacturing facilities and distribution capabilities in 1999
comparable in amount to 1998. In addition, the Company has current commitments,
subject to certain conditions, to expend approximately $185 million on currently
proposed acquisitions during the remainder of 1998 and early 1999.
12
<PAGE> 13
The Company expects that cash flow from operations will be sufficient to meet
the Company's requirements for its existing businesses for the remainder of 1998
and for the foreseeable future. Management expects to fund currently proposed
acquisitions out of cash flow from operations and borrowings under the Senior
Credit Facility. In the future, the Company intends to pursue additional
acquisitions in its existing regional markets as well as new markets, and to
seek strategic acquisition opportunities that are compatible with it core
businesses. Management believes that the Company has the ability to secure
additional financing to pursue its acquisition and consolidation strategy. There
can be no assurance, however, that the Company will have sufficient available
capital resources to realize its acquisition and consolidation strategy.
Known Trends and Uncertainties
Year 2000 Compliance. The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a two-digit year is commonly referred to as the Year 2000 problem.
The Year 2000 problem is rooted in the way dates are recorded and computed in
most applications, operating systems, hardware and embedded chips. If the
problem is not corrected, systems that use the date for calculations may fail or
produce erroneous results on or before the year 2000.
As is the case with most other companies using computers in their operations,
the Company is currently engaged in a comprehensive project to address its Year
2000 issues in the following areas: enterprise systems and applications; plant
floor systems; personal computers and applications; networks and communications;
supply chain; EDI and miscellaneous equipment. These areas encompass both
information technology (IT) systems (such as enterprise systems, networks and
communications, and EDI) and non-IT systems (such as plant floor systems). Each
functional area plan details specific tasks needed to assess the extent of Year
2000 issues, and to implement and test solutions to these issues. The Company's
Year 2000 readiness project is being led by a project manager and the Company
has adopted a structural approach which has included the development of
corporate standards, the communication of the status of the project with
management, and consultation with outside experts.
The Company has completed the assessment phase in all IT system areas and
implementation processes are underway in these areas, using both internal and
external resources. The Company has also completed the preliminary assessment of
Year 2000 issues with its plant floor systems and is in the process of
performing detailed inventories for these systems. For IT and non-IT
applications that are provided by a third party software vendor, available
upgrades are in the process of being implemented. The Company has received or
requested assurances from these vendors that these systems are already Year 2000
compliant and that timely updates will be made available for purchased software.
All critical systems, including plant floor systems, are targeted to be Year
2000 compliant by mid-1999.
As a result of the numerous systems used by companies that the Company has
acquired in recent years and also due to technological enhancements, the Company
has had an ongoing information systems development plan to move these acquired
companies' systems to the Company's platform systems, with scheduled
replacements of systems throughout the organization. Year 2000 compliance is a
part of the Company's overall development plan. The Company has delayed certain
non-essential IT projects in order to reassign Company resources to the Year
2000 strategic plan.
The Company has incurred and expensed approximately $1 million to date for
remediation costs associated with the implementation of its Year 2000 strategic
plan for existing IT and non-IT systems that are being modified, and expects to
incur and expense approximately up to an additional $5 million in the future to
remediate Company-developed software, to inventory and test plant floor systems
and to write off unamortized costs for systems replaced. In addition to these
remediation costs expensed, the Company has also capitalized approximately $3
million of capital expenditures to date for the replacement and upgrading of
purchased software and hardware for both existing systems and the systems of
acquired businesses pursuant to its Year 2000 strategic plan and its on-going
information systems development plan. The Company has budgeted an additional $12
million (approximately) of capital expenditures in 1999 for the purchase of
additional replacement systems; however, budgeted amounts are based on
management's conservative estimates and actual results could differ as the plan
is further implemented. The majority of the remaining budgeted expenditures are
for replacement of plant floor systems, and until the Company has completed its
detailed inventories for its plant floor systems, there can be no assurance
whether replacement of such systems will be necessary to the extent budgeted.
A critical step in the Company's strategic plan is the coordination of Year 2000
readiness with third parties. The Company is communicating with its significant
suppliers and customers to determine the extent to which the Company and its
interface systems are vulnerable if the customer, supplier or a third party
fails to resolve their Year 2000 issues. The Company will continue
13
<PAGE> 14
to work with all of its major trading partners to understand the associated
risks and plan for contingencies. There can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
timely converted or that the failure of these systems would not have an adverse
effect on the Company's systems.
Management believes that necessary modifications and replacements of the
Company's critical IT and non-IT systems will be completed timely. If for any
reason, critical service providers, suppliers or customers are unable to resolve
their Year 2000 issues in a timely manner, such matters could have a material
adverse impact on the Company's results of operations. The Company's current
assessment of risks based on the most reasonable worst case scenario, however,
is that there will be no material adverse impact on the Company's operations or
financial performance, because management believes that if any disruption to
operations does occur, it will be isolated and or short-term in duration.
The Company has prioritized its efforts and is addressing the most strategic
areas first. Development of contingency plans is underway and such plans will
address individual business units and corporate applications as well as actions
necessary to mitigate the impact of third party disruptions.
Euro Currency Conversion. Companies conducting business in or having
transactions denominated in certain European currencies are facing the European
Union's pending conversion to a new common currency, the "euro." This conversion
is expected to be implemented over a three year period. On January 1, 1999, the
euro will become the official currency for accounting and tax purposes of
several countries of the European Union and the exchange rate between the euro
and local currencies will be fixed. In 2002, the euro will replace the
individual nation's currencies. Since the Company's Packaging group has plants,
and otherwise conducts business, in Europe, the conversion to the euro will have
an effect on the Company. The Company is currently considering the specific
nature of the impact of the conversion on the Company, and management believes
that there will be no material adverse impact of the conversion on the Company's
operations or financial performance.
Trends in Tax Rates. The Company has experienced increased income tax rates
throughout 1998. During the third quarter of 1998 income taxes averaged 37% of
pretax income compared to 35% of pretax income in the third quarter of 1997.
This increase reflects a shift of the Company's business from Puerto Rico, which
has a lower tax rate, to the United States. This trend has been caused by the
Company's acquisitions and is expected to continue, with 1999 income tax rates
estimated to be approximately 38%.
Cautionary Statement
Certain statements and information in this Quarterly Report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be indicated by
phrases such as "believes," "anticipates," "expects," "intends," "foresees,"
"projects," "forecasts" or words of similar meaning or import. Such statements
are subject to certain risks, uncertainties, or assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those set forth in
applicable forward-looking statements. Among the key factors that may have a
direct bearing on the Company's results and financial condition are (i) risks
associated with the Company's acquisition strategy, including its ability to
integrate the operations of its acquired businesses and realize operating
efficiencies, (ii) risks relating to the Company's leverage position, (iii)
risks associated with intense competition in the Company's industries, (iv) the
impact of governmental regulations affecting the dairy industry, (v) risks
associated with volatility in the costs of raw goods such as butterfat, and (vi)
the impact of extreme weather conditions. Any forward-looking statements made or
incorporated by reference herein speak only as of the date of this Quarterly
Report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statements, to reflect any change
in its expectations with regard thereto or any change in events, conditions, or
circumstances on which any such statement is based. Additional information
concerning these and other risk factors is contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, a copy of which
may be obtained from the Company upon request.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement and Plan of Merger dated as of September 10, 1998 by and
among Suiza Foods Corporation, Broughton Foods Acquisition
Corporation and Broughton Foods Company.
11 Statement re computation of per share earnings.
27 Financial Data Schedules
(b) Reports on Form 8-K
(1) On September 14, 1998, the Company filed a Form 8-K (pursuant to
Item 5 of Form 8-K) in connection with a press release issued by
the Company on September 11, 1998 regarding the proposed
acquisition of Broughton Foods Company by Suiza Foods Corporation.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUIZA FOODS CORPORATION
/s/ Barry A. Fromberg
------------------------------------
Barry A. Fromberg
Executive Vice President, Chief
Financial Officer (Principal
Accounting Officer)
Date: November 16, 1998
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Agreement and Plan of Merger dated as of September 10, 1998 by and
among Suiza Foods Corporation, Broughton Foods Acquisition
Corporation and Broughton Foods Company.
11 Statement re computation of per share earnings.
27 Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SUIZA FOODS CORPORATION,
A DELAWARE CORPORATION
SUIZA FOODS ACQUISITION CORP.
AN OHIO CORPORATION
AND
BROUGHTON FOODS COMPANY,
AN OHIO CORPORATION
DATES AS OF SEPTEMBER 10, 1988
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
THE MERGER
SECTION 1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1 Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.2 Code of Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.3 Board of Directors; Officers . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.4 Effects of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III
CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
SECTION 3.1 Effect of the Merger on Capital Stock . . . . . . . . . . . . . . . . . . . . 2
SECTION 3.2 Cancellation of Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3.3 Capital Stock of Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3.4 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3.5 Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3.6 Stockholders' Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 3.7 Closing of the Company's Transfer Books . . . . . . . . . . . . . . . . . . . 5
SECTION 3.8 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.9 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
SECTION 4.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 4.2 Authority Relative to this Agreement . . . . . . . . . . . . . . . . . . . . 6
SECTION 4.3 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4.4 Information for Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 5.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 5.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 5.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 5.4 Authority Relative to this Agreement . . . . . . . . . . . . . . . . . . . . 8
SECTION 5.5 Reports and Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 5.6 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . 9
SECTION 5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.8 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5.9 Company Action; Vote Required . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 5.10 Financial Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 5.11 Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 5.13 Certain Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 5.14 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5.15 Relationship with Customers and Suppliers . . . . . . . . . . . . . . . . . . 16
SECTION 5.16 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 5.17 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 5.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 5.19 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 5.20 Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 5.21 No Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 5.22 Takeover Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 5.23 Information for Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING MERGER SUB
SECTION 6.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 6.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 6.3 Authority Relative to this Agreement . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 7.1 Conduct of Business by the Company Pending the Merger . . . . . . . . . . . . 22
</TABLE>
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<TABLE>
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ARTICLE VIII
ADDITIONAL AGREEMENTS
SECTION 8.1 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 8.2 Proxy Statement; Stockholders' Meeting . . . . . . . . . . . . . . . . . . . 25
SECTION 8.3 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 8.4 Rights to Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 8.5 HSR Act and Foreign Acts . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 8.6 Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 8.7 No Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 8.8 Advice on Changes; SEC Filings . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 8.9 Takeover Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 8.10 Surveys; Title Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 8.11 Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE IX
CONDITIONS PRECEDENT
SECTION 9.1 Conditions to Each Party's Obligation to Effect the Merger . . . . . . . . . 29
SECTION 9.2 Conditions to Obligation of the Company to Effect the Merger . . . . . . . . 29
SECTION 9.3 Conditions to Obligations of Parent and Merger Sub to Effect the
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1 Termination by Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 10.2 Termination by Either Parent or the Company . . . . . . . . . . . . . . . . . 31
SECTION 10.3 Other Termination Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 10.4 Effect of Termination and Abandonment . . . . . . . . . . . . . . . . . . . . 31
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Non-Survival of Representations, Warranties and Agreements . . . . . . . . . 32
SECTION 11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 11.3 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 11.4 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 11.5 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 11.6 Assignment; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 11.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
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<TABLE>
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SECTION 11.8 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 11.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 11.11 Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 11.12 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 11.13 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 11.14 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 11.15 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBITS
Exhibit A Form of Inducement Agreement
</TABLE>
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
September 10, 1998, by and among Suiza Foods Corporation, a Delaware
corporation ("Parent"), Suiza Foods Acquisition Corp., an Ohio corporation and
subsidiary of Parent ("Merger Sub"), and Broughton Foods Company, an Ohio
corporation (the "Company").
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 Merger Sub with and into the
Company (the "Merger");
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company
have approved the Merger, upon the terms and subject to the conditions set
forth herein;
WHEREAS, in order to induce Parent and Merger Sub to enter into this
Agreement, certain stockholders of the Company have entered into an Inducement
Agreement with Parent, the form of which is attached hereto as Exhibit A,
pursuant to which, among other things, such stockholders have granted Parent an
irrevocable proxy to vote their shares of the Company's common stock in favor
of the Merger and have granted Parent certain rights in connection with certain
dispositions of such common stock, on the terms and conditions set forth
therein;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
I.
THE MERGER
1.1 The Merger. Upon the terms and subject to the satisfaction or
waiver of the conditions hereof, at the Effective Time (as defined in Section
1.2), Merger Sub shall be merged with and into the Company and the separate
existence of Merger Sub shall thereupon cease, and the Company, as the
corporation surviving the Merger (the "Surviving Corporation"), shall by virtue
of the Merger continue its corporate existence under the laws of the State of
Ohio.
1.2 Effective Time of the Merger. The Merger shall become
effective at the date and time (the "Effective Time") when a properly executed
Certificate of Merger is filed with the Secretary of State of the State of
Ohio, which Certificate shall be filed as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof.
<PAGE> 7
II.
THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Articles of Incorporation
of the Company as in effect at the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation and thereafter may be amended in
accordance with their terms and as provided by law and this Agreement.
2.2 Code of Regulations. The Code of Regulations (the
"Regulations") of the Company as in effect at the Effective Time shall be the
Regulations of the Surviving Corporation and thereafter may be amended in
accordance with their terms and as provided by law and this Agreement.
2.3 Board of Directors; Officers. The directors of Merger Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation, and the officers of Merger Sub immediately prior to the Effective
Time shall be the officers of the Surviving Corporation, in each case until
their respective successors are duly elected and qualified.
2.4 Effects of Merger. The Merger shall have the effects set
forth in Section 1701.82 of the Ohio General Corporation Law (the "OGCL").
III.
CONVERSION OF SHARES; EXCHANGE OF CERTIFICATES
3.1 Effect of the Merger on Capital Stock. At the Effective Time,
by virtue of the Merger and without any action on the part of any holder of any
common stock, par value $1.00 per share, of the Company (the "Company Stock"),
each share of Company Stock issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares (as defined in Section 3.4))
shall be canceled and retired and converted automatically into the right to
receive $19.00 in cash (the "Merger Consideration") payable to the holder
thereof, without interest thereon, upon surrender of the certificate formerly
representing such share of Company Stock. All such shares of Company Stock,
when so converted, shall no longer be held by the holders of certificates
representing such shares prior to the Effective Time, and each such holder
shall cease to have any rights with respect thereto other than the right to
receive the Merger Consideration.
3.2 Cancellation of Treasury Stock. All shares of Company Stock
and all other shares of capital stock of the Company that are owned by the
Company as treasury stock or otherwise immediately prior to the Effective Time
and any shares of Company Stock and other shares of capital stock of the
Company owned by any subsidiary of the Company shall, as of the Effective Time,
be canceled and retired and shall cease to exist, and no Merger consideration
or other consideration shall be delivered or deliverable in exchange therefor.
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<PAGE> 8
3.3 Capital Stock of Merger Sub. At the Effective Time, all of
the issued and outstanding shares of stock of Merger Sub shall be converted
into and become, in the aggregate, 1,000 fully paid and nonassessable shares of
capital stock of the Surviving Corporation.
3.4 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary but only in the circumstances and to the extent provided by the
OGCL, shares of Company Stock that are outstanding immediately prior to the
Effective Time and that are held by stockholders who have not voted in favor of
the Merger or consented thereto in writing and who have properly made a demand
in writing to obtain payment for such shares of Company Stock in accordance
with Section 1701.85 of the OGCL (collectively, the "Dissenting Shares") shall
not be converted into or represent the right to receive the Merger
Consideration. Such stockholders shall be entitled to receive payment from the
Company of the value of such shares of Company Stock held by them in accordance
with the provisions of such Section 1701.85; provided, however, that Dissenting
Shares held by stockholders who shall have failed to perfect or who have
effectively withdrawn or lost their rights to appraisal under such Section
1701.85 shall be deemed to have been converted into and become exchangeable
for, as of the Effective Time, the right to receive the Merger Consideration,
without any interest thereon, upon surrender of the certificate or certificates
that formerly evidenced such shares, in the manner provided for in Section 3.5.
The Company shall give Parent and Merger Sub (i) prompt notice received by the
Company of any demands to obtain payment pursuant to Section 1701.85 of the
OGCL, withdrawals of such demands and of any other instruments served upon the
Company pursuant to the OGCL in respect of Dissenting Shares and (ii) the
opportunity to direct all negotiations and proceedings with respect to any
demands to obtain payment under the OGCL. The Company shall not, except with
the prior written consent of Parent, make any payment with respect to any
demands to obtain payment in respect of Dissenting Shares or settle or offer to
settle any such demands.
3.5. Exchange of Certificates.
(a) Exchange Agent. The Company shall designate Wachovia
Bank, N.A. or such other bank or trust company reasonably satisfactory
to Parent and Merger Sub to act as agent (the "Exchange Agent") in
connection with the Merger to hold the funds to which holders of
shares of Company Stock shall become entitled pursuant to Section 3.1.
At or as soon as practicable after the Effective Time, Parent or
Merger Sub, as applicable, shall deposit in trust with the Exchange
Agent an amount in immediately available funds equal to the product of
(i) the number of shares of Company Stock outstanding immediately
prior to the Effective Time (other than Dissenting Shares) and (ii)
the Merger Consideration. The Exchange Agent shall agree to hold such
funds (together with earnings thereon, the "Exchange Fund") for
delivery as contemplated by this Section 3.5 and upon such additional
terms as may be agreed upon by the Exchange Agent, Parent or Merger
Sub, as applicable, and the Surviving Corporation before the Effective
Time.
(b) Exchange Procedures. As soon as reasonably
practicable after the Effective Time, the Surviving Corporation shall
cause the Exchange Agent to mail to each person who was, at the
Effective Time, a holder of record of shares of Company Stock entitled
to
3
<PAGE> 9
receive the Merger Consideration pursuant to Section 3.1 a form of
letter of transmittal (which shall specify that delivery will be
effected, and risk of loss and title to the certificates evidencing
such shares (the "Certificates") will pass, only upon proper delivery
of the Certificates to the Exchange Agent) and instructions for use in
effecting the surrender of the Certificates pursuant to such letter of
transmittal. Upon surrender to the Exchange Agent of a Certificate,
together with such letter of transmittal, duly completed and validly
executed in accordance with its instructions, and such other documents
as may be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor the
Merger Consideration for each share of Company Stock formerly
evidenced by such Certificate, and such Certificate shall then be
canceled. No interest shall accrue or be paid on the Merger
Consideration payable upon the surrender of any Certificate for the
benefit of the holder of such Certificate. If payment of the Merger
Consideration is to be made to a person other than the person in whose
name the surrendered Certificate is registered on the stock transfer
books of the Company, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or be otherwise
in proper form for transfer and that the person requesting such
payment shall have paid all transfer and other taxes required by
reason of the payment of the Merger Consideration to a person other
than the registered holder of the Certificate surrendered or shall
have established to the satisfaction of the Surviving Corporation or
the Exchange Agent that such taxes have been paid or are not
applicable.
(c) Termination of Exchange Fund. At any time
following the third month after the Effective Time, the Surviving
Corporation shall be entitled to require the Exchange Agent to deliver
to the Surviving Corporation any funds made available to the Exchange
Agent and not disbursed to holders of shares of Company Stock
(including, without limitation, all interest and other income received
by the Exchange Agent in respect of all funds made available to it)
and, thereafter, such holders shall be entitled to look to the
Surviving Corporation only as general creditors thereof with respect
to any Merger Consideration that may be payable upon due surrender of
the Certificates held by them. Notwithstanding the foregoing, none of
Parent, Merger Sub or the Surviving Corporation shall be liable to any
holder of shares of Company Stock for any Merger Consideration
delivered in respect of such stock to a public official pursuant to
any abandoned property, escheat or similar law.
(d) Lost Certificates. If any Certificate shall
have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such Certificate to be lost,
stolen or destroyed, and, if required by the Surviving Corporation,
the posting by such person of a bond in such reasonable amount as the
Surviving Corporation may direct as indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange
Agent shall disburse the applicable Merger Consideration as provided
in this Section 3.5 in exchange for such lost, stolen or destroyed
Certificate.
3.6 Stockholders' Meeting. The Company shall take all action
necessary in accordance with applicable law, its Articles of Incorporation and
its Regulations to convene a
4
<PAGE> 10
meeting of its stockholders as promptly as practicable to consider and vote
upon the approval by the holders of at least two-thirds of the shares of
Company Stock outstanding and entitled to vote thereon of this Agreement and
the transactions contemplated hereby. The Board of Directors of the Company
shall recommend such approval, and the Company shall take all lawful action to
solicit such approval, including, without limitation, timely and promptly
mailing the Proxy Statement (as defined in Section 8.2); provided, however,
that such recommendation is subject to Section 8.7 hereof.
3.7 Closing of the Company's Transfer Books. At the Effective
Time, the stock transfer books of the Company shall be closed, and no transfer
of shares of Company Stock shall be made thereafter. In the event that
Certificates are presented to the Surviving Corporation, Parent or the Exchange
Agent after the Effective Time, they shall be canceled in return for the
payment of the applicable Merger Consideration relating thereto, as provided in
this Article III, subject to applicable law in the case of Dissenting Shares.
3.8 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Huddleston, Bolen,
Beatty, Porter & Copen, 611 Third Avenue, Huntington, West Virginia 25722-
2185, at 9:00 a.m. local time on the day which is not more than one business
day after satisfaction (or waiver) of the conditions set forth in Article IX
(other than those conditions that can be satisfied only at the Effective Time)
or at such other time and place as Parent and the Company shall agree in
writing.
3.9 Transfer Taxes. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, applications or other
documents regarding any real property transfer, stamp, recording, documentary
or other taxes and any other fees and similar taxes which become payable in
connection with the Merger other than transfer or stamp taxes payable in
respect of transfers pursuant to the fourth sentence of Section 3.5(b)
(collectively, "Transfer Taxes"). From and after the Effective Time, the
Surviving Corporation shall pay or cause to be paid, without deduction or
withholding from any amounts payable to the holders of Company Stock, all
Transfer Taxes.
IV.
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows (which
representations and warranties as well as other provisions of this Agreement
are qualified by the matters identified, with references to the appropriate
Section and, if applicable, subsection, on a disclosure schedule (the "Parent
Disclosure Schedule") delivered by Parent to the Company prior to execution of
this Agreement):
4.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good
5
<PAGE> 11
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities make such qualification
necessary. Complete and correct copies as of the date hereof of the
Certificate of Incorporation and Bylaws of Parent have been delivered to the
Company as Section 4.1 of the Parent Disclosure Schedule.
4.2 Authority Relative to this Agreement. Parent has the
corporate power to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by Parent's
Board of Directors. This Agreement constitutes a valid and binding obligation
of Parent enforceable in accordance with its terms, except as enforcement may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the
discretion of the court before which any proceeding therefor may be brought.
No other corporate proceedings on the part of Parent are necessary to authorize
this Agreement and the transactions contemplated hereby. Except as described
in Section 4.2 of the Parent Disclosure Schedule, Parent is not subject to or
obligated under (i) any charter or bylaw provision or (ii) any contract,
indenture, loan or credit document, license, franchise, permit, order, decree,
concession, lease, instrument, judgment, statute, law, ordinance, rule or
regulation applicable to Parent or any of its subsidiaries or their respective
properties or assets, which would be breached or violated, or under which there
would be a default (with or without notice or lapse of time, or both), or under
which there would arise a right of termination, cancellation, modification or
acceleration of any obligation, or any right to payment or compensation, or the
loss of a benefit, by its executing and carrying out this Agreement, other than
the laws and regulations referred to in the next sentence. Except as required
by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), similar pre-acquisition notification or approval requirements
applicable to the Company's foreign operations (the "Foreign Acts"), the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the corporation,
securities or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign and including foreign, national, regional,
state, provincial and municipal authorities (each, a "Governmental Entity"), is
necessary for the consummation by Parent of the Merger or the other
transactions contemplated by this Agreement.
4.3 Financing. Parent shall have at the Effective Time sufficient
funds available to it to consummate the transactions contemplated by this
Agreement, including the payment of the Merger Consideration.
4.4 Information for Proxy Statement. None of the information
supplied or to be supplied by Parent or Merger Sub in writing specifically for
inclusion in the Proxy Statement will, on the date the Proxy Statement (and any
amendment or supplement thereto) is first mailed to stockholders of the
Company, at the time of the stockholders' meeting to vote on the approval of
this Agreement and the transactions contemplated hereby or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein
6
<PAGE> 12
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
V.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub as
follows (which representations and warranties as well as other provisions of
this Agreement are qualified by the matters identified, with references to the
appropriate Section and, if applicable, subsection, on a disclosure schedule
(the "Company Disclosure Schedule") delivered by the Company to Parent prior to
execution of this Agreement):
5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Ohio and has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary.
Complete and correct copies as of the date hereof of the Articles of
Incorporation and Regulations of the Company have been delivered to Parent as
Section 5.1 of the Company Disclosure Schedule.
5.2 Capitalization. The authorized stock of the Company consists
of 10,000,000 shares of Company Stock of which, as of the date of this
Agreement, (i) 5,774,335 shares were issued and outstanding, and (ii) 540,240
shares were held in treasury. All of the issued and outstanding and treasury
shares of Company Stock are duly authorized, validly issued, fully paid and
nonassessable. There are no bonds, debentures, notes or other indebtedness
issued or outstanding having the right to vote on any matters on which the
Company's stockholders may vote. There are no options, warrants, calls,
convertible securities or other rights, agreements or commitments presently
outstanding obligating the Company to issue, deliver or sell shares of its
capital stock or debt securities, or obligating the Company to grant, extend or
enter into any such option, warrant, call or other such right, agreement or
commitment. Since December 31, 1997, the Company has not issued any shares of
its capital stock. After the Effective Time, the Surviving Corporation will
have no obligation to issue, transfer or sell any shares of stock of the
Company or the Surviving Corporation pursuant to any Company Employee Benefit
Plan (as defined in Section 5.8).
5.3 Subsidiaries. Each subsidiary of the Company is a
corporation, partnership or other entity duly organized, validly existing and
in good standing under the laws of its jurisdiction of organization and has the
corporate or similar power to carry on its business as it is now being
conducted or currently proposed to be conducted. Each subsidiary of the
Company is duly qualified to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary. Section 5.3
of the Company Disclosure Schedule contains, with respect to each subsidiary of
the Company, its name and jurisdiction of organization and, with respect to
each
7
<PAGE> 13
subsidiary that is not wholly owned, the number of issued and outstanding
shares of capital stock or share capital and the number of shares of capital
stock or share capital owned by the Company or subsidiary thereof. All the
outstanding shares of capital stock or share capital of each subsidiary of the
Company are validly issued, fully paid and nonassessable, and those owned by
the Company or by a subsidiary of the Company are owned free and clear of any
liens, claims or encumbrances. There are no existing options, warrants, calls,
convertible securities or other rights, agreements or commitments of any
character relating to the issued or unissued capital stock or other securities
of any of the subsidiaries of the Company. Except as set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997 or any Company SEC Report (as defined in Section 5.5) filed subsequent to
such date and prior to the date hereof, or as set forth in Section 5.3 of the
Company Disclosure Schedule, the Company does not directly or indirectly own
any interest in any other corporation, partnership, joint venture or other
business association or entity or have any obligation, commitment or
undertaking to acquire any such interest.
5.4 Authority Relative to this Agreement. The Company has the
corporate power to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by the
Company's Board of Directors. This Agreement constitutes a valid and binding
obligation of the Company enforceable in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought. Except for the approval of this Agreement and the transactions
contemplated hereby by the holders of two-thirds of the shares of Company Stock
outstanding and entitled to vote thereon as described in Section 3.6, no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement and the transactions contemplated hereby. Except as described
in Section 5.4 of the Company Disclosure Schedule, the Company is not subject
to or obligated under (i) any charter or regulations provision or (ii) any
contract, indenture, loan or credit document, license, franchise, permit,
order, decree, concession, lease, instrument, judgment, statute, law,
ordinance, rule or regulation applicable to the Company or any of its
subsidiaries or their respective properties or assets which would be breached
or violated, or under which there would be a default (with or without notice or
lapse of time, or both), or under which there would arise a right of
termination, cancellation, modification or acceleration of any obligation, or
any right to payment or compensation, or the loss of a benefit, by its
executing and carrying out this Agreement, other than the laws and regulations
referred to in the next sentence. Except as required by the HSR Act, the
Foreign Acts, the Securities Act, the Exchange Act, and the corporation,
securities or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any Governmental
Entity is necessary for the consummation by the Company of the Merger or the
other transactions contemplated by this Agreement.
5.5 Reports and Financial Statements. The Company has previously
furnished Parent with true and complete copies of its (i) Annual Report on Form
10-K for the fiscal year ended December 31, 1997, as filed with the Securities
and Exchange Commission (the "Commission"),
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(ii) Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and
June 30, 1998, as filed with the Commission, (iii) proxy statements related to
all meetings of its stockholders (whether annual or special) since September
30, 1997 and (iv) all other reports or registration statements filed by the
Company with the Commission since September 30, 1997, except for preliminary
material in the case of clauses (iii) and (iv) above, which are all the
documents that the Company was required to file with the Commission since
September 30, 1997 (the documents in clauses (i) through (iv) being referred to
herein collectively as the "Company SEC Reports"). As of their respective
dates, the Company SEC Reports complied as to form in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case
may be, and the rules and regulations of the Commission thereunder applicable
to such Company SEC Reports. As of their respective dates, the Company SEC
Reports did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim financial statements of the Company included in the Company SEC Reports
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission
with respect thereto. The financial statements included in the Company SEC
Reports: (i) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis, except as may be indicated
therein or in the notes thereto and subject, in the case of the unaudited
interim financial statements, to normal year- end adjustments and any other
adjustments described therein and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the
rules promulgated thereunder; (ii) present fairly, in all material respects,
the financial position of the Company and its subsidiaries as at the dates
thereof and the results of their operations and cash flows for the periods then
ended; and (iii) are in all material respects in accordance with the books of
account and records of the Company and its subsidiaries. As of June 30, 1998,
there was no basis for any claim or liability of any nature against the Company
or any of its subsidiaries, whether absolute, accrued, contingent or otherwise,
which, alone or in the aggregate, has had, or would have, a Company Material
Adverse Effect, other than as reflected in the Company SEC Report filed prior
to the date of this Agreement. For the purposes of this Agreement, a "Company
Material Adverse Effect" means a material adverse effect on the business,
properties, assets, operations, condition (financial or otherwise), customer
relations, supplier relations, business prospects, liabilities or results of
operations of the Company and its subsidiaries taken as a whole, other than any
effects arising out of, resulting from or relating to changes in general
economic or financial conditions.
5.6 Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports filed prior to the date of this Agreement or in Section
5.6 of the Company Disclosure Schedule, since June 30, 1998, the Company and
its subsidiaries have operated their respective businesses in the ordinary
course of business consistent with past practice and there has not been (i) any
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of business)
which, alone or in the aggregate, has had, or would have, a Company Material
Adverse Effect; (ii) any damage, destruction or loss, whether or not covered by
insurance, which has had, or would have, a Company Material Adverse Effect;
(iii) any declaration, setting aside or payment of any dividend
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<PAGE> 15
or distribution (whether in cash, stock or property) with respect to the stock
of the Company or any of its subsidiaries (other than dividends or
distributions between the Company and its wholly owned subsidiaries and the
normal and customary quarterly dividends to the Company's stockholders in an
amount not exceeding $.05 per share in any fiscal quarter); (iv) any material
change in the Company's accounting principles, practices or methods; (v) any
repurchase or redemption with respect to its stock; (vi) any stock split,
combination or reclassification of any of the Company's stock or the issuance
or authorization of any issuance of any other securities in respect of, in lieu
of or in substitution for, shares of the Company's stock; (vii) any adoption of
any option or similar plan to purchase shares of stock of the Company; (viii)
any granting by the Company or any of its subsidiaries to any director, officer
or employee of the Company or any of its subsidiaries of (A) any increase in
compensation (other than in the ordinary course of business consistent with
past practice in the case of employees who are not officers or directors of the
Company or a subsidiary thereof), (B) any increase in severance or termination
pay, or (C) acceleration of compensation or benefits; (ix) any entry by the
Company or any of its subsidiaries into any employment, severance, bonus or
termination agreement with any director, officer or employee of the Company or
any of its subsidiaries; or (x) any agreement (whether or not in writing),
arrangement or understanding to do any of the foregoing.
5.7 Litigation. Except as disclosed in the Company SEC Reports
filed prior to the date of this Agreement or in Section 5.7 of the Company
Disclosure Schedule, there is no suit, action or proceeding pending or, to the
Company's knowledge, threatened against the Company or any of its subsidiaries
which, alone or in the aggregate, has had or would have, a Company Material
Adverse Effect, nor is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator outstanding against the Company or any of
its subsidiaries which, alone or in the aggregate, has had, or would have, any
such Company Material Adverse Effect. In addition, the aggregate reasonable
estimate of uninsured exposures or losses under all claims and judgments
pending, or, to the best knowledge of the Company, threatened, does not exceed
$125,000. For purposes of this Agreement, the phrases "the Company's
knowledge" and "knowledge of the Company" and other phrases of like import
shall mean the actual knowledge of any officer or director of the Company or of
any subsidiary of the Company.
5.8 Employee Benefit Plans.
(a) Section 5.8(a) of the Company Disclosure Schedule
hereto sets forth a list of all "employee benefit plans," as defined
in Section 3(3) of ERISA, and all other material employee benefit or
compensation arrangements or payroll practices, including, without
limitation, any such arrangements or payroll practices providing
severance pay, sick leave, vacation pay, salary continuation for
disability, 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
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<PAGE> 16
contractors, consultants and leased employees of the Company, any
subsidiary of the Company or any Company ERISA Affiliate (the "Company
Employee Benefit Plans").
(b) Except as set forth in Section 5.8(b) of the Company
Disclosure Schedule, none of the Company Employee Benefit Plans is a
"multiemployer plan", as defined in Section 4001(a)(3) of ERISA (a
"Multiemployer Plan"), and since December 31, 1995, neither the
Company nor any Company ERISA Affiliate has contributed or
contributes, or has been or is required to contribute, to any such
plan. With respect to any Multiemployer Plan that the Company or any
Company ERISA Affiliate are required or have been required in the past
to contribute to:
(i) the Company and each Company ERISA Affiliate
has or will have, as of the date of the Closing, made all
contributions to the Multiemployer Plan required by the terms
of such Multiemployer Plan or any collective bargaining
agreement;
(ii) neither the Company nor Parent would be
subject to any material withdrawal liability under Part 1 of
Subtitle E of Title IV of ERISA if, as of the date of the
Closing, the Company or any Company ERISA Affiliate were to
engage in a complete withdrawal (as defined in ERISA Section
4203) or a partial withdrawal (as defined in ERISA Section
4205) from the Multiemployer Plan; and
(iii) the Company has made available to Parent
current, accurate, and complete copies of the Multiemployer
Plan and of all collective bargaining agreements requiring
contributions to be made to such Multiemployer Plan.
(c) Except as set forth in Section 5.8(c) of the Company
Disclosure Schedule, neither the Company nor any of it subsidiaries
maintains or contributes to any plan or arrangement which provides or
has any liability to provide life insurance or medical or other
employee welfare benefits to any employee, officer or director or
former employee, officer or director upon his retirement or
termination of employment, and neither the Company nor any of its
subsidiaries has ever represented, promised or contracted (whether in
oral or written form) to any employee, officer or director or former
employee, officer or director that such benefits would be provided.
(d) Except as set forth in Section 5.8(d) of the Company
Disclosure Schedule, the execution of, and performance of the
transactions contemplated in, this Agreement will not, either alone or
upon the occurrence of subsequent events, result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee, officer or
director of the Company or any of its subsidiaries. The only
severance agreements or severance policies applicable to the Company
or its subsidiaries in the event of a change of control of the Company
are the agreements and policies specifically referred to in Section
5.8 of the Company Disclosure Schedule.
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(e) Each Company Employee Benefit Plan that is intended
to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"), and each trust maintained pursuant thereto, has
been determined to be exempt from federal income taxation under
Section 501 of the Code by the IRS, and, to the Company's knowledge,
nothing has occurred with respect to the operation or organization of
any such Company Employee Benefit Plan that would cause the loss of
such qualification or exemption or the imposition of any liability,
penalty or tax under ERISA or the Code. With respect to any Company
Employee Benefit Plan or other employee benefit plan which is a
"defined benefit plan" within the meaning of Section 3(35) of ERISA,
(i) the Company has not incurred and is not reasonably likely to incur
any liability under Title IV of ERISA (other than for the payment of
premiums, all of which have been paid when due), (ii) the Company has
not incurred any accumulated funding deficiency within the meaning of
Section 412 of the Code and has not applied for or obtained a waiver
of any minimum funding standard or an extension of any amortization
period under Section 412 of the Code, (iii) no "reportable event" (as
such term is defined in Section 4043 of ERISA but excluding any event
for which the provision for 30-day notice to the Pension Benefit
Guaranty Corporation has been waived by regulation) has occurred or is
expected to occur and (iv) since December 31, 1996, no material
adverse change in the financial condition of any such plan has
occurred.
(f) (i) All contributions (including all employer
contributions and employee salary reduction contributions) required to
have been made under any of the Company Employee Benefit Plans to any
funds or trusts established thereunder or in connection therewith have
been made by the due date thereof, (ii) the Company has complied in
all material respects with any notice, reporting and documentation
requirements of ERISA and the Code, (iii) there are no pending
actions, claims or lawsuits which have been asserted, instituted or,
to the Company's knowledge, threatened, in connection with the Company
Employee Benefit Plans, (iv) the Company Employee Benefit Plans have
been maintained, in all material respects, in accordance with their
terms and with all provisions of ERISA and the Code (including rules
and regulations thereunder) and other applicable federal and state
laws and regulations, and (v) except as set forth in Section 5.8(f) of
the Company Disclosure Statement, each Company Employee Benefit Plan
could be terminated as of the date of the Closing with no liability to
the Company, Parent or any Company ERISA Affiliate.
(g) Neither the Company nor any Company ERISA Affiliate
has engaged in any transaction in violation of Section 406(a) or (b)
of ERISA or any "prohibited transaction" (as defined in Section
4975(c)(1) of the Code), which would subject the Company or any
Company ERISA Affiliate to any taxes, penalties or other liabilities
resulting from such prohibited transaction, and no condition exists
that would subject the Company or any Company ERISA Affiliate to any
excise tax, penalty tax or fine related to any Company Employee
Benefit Plans.
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(h) With respect to each Company Employee Benefit Plan,
the Company has furnished or made available to Parent true, correct
and complete copies of the following (to the extent applicable): (i)
the plan documents and summary plan descriptions; (ii) the most recent
determination letter received from the Internal Revenue Service; (iii)
the annual reports to be filed for the three most recent plan years of
each such plan; (iv) all related trust agreements, insurance contracts
or other funding agreements that implement such plans; and (v) all
other documents, records or other materials related thereto reasonably
requested by Parent.
(i) Each Company Employee Benefit Plan covering any
employee residing or working outside the United States or sponsored or
maintained by a foreign subsidiary of the Company (i) complies in all
material respects with applicable law; and (ii) could be terminated on
the date of the Closing without any material liability to Parent, the
Surviving Corporation or any subsidiary of the Company.
For purposes of this Agreement, "Company ERISA Affiliate" means any
business or entity which is a member of the same "controlled group of
corporations," under "common control" or an "affiliated service group" with the
Company within the meanings of Sections 414 (b), (c) or (m) of the Code, or
required to be aggregated with the Company under Section 414(o) of the Code, or
is under "common control" with the Company, within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.
5.9 Company Action; Vote Required. The Board of Directors of the
Company, at a meeting duly called and held, has by the unanimous vote of all
directors present (a) determined that the Merger is advisable and fair to and
in the best interests of the Company and its stockholders, (b) approved the
Merger in accordance with the provisions of Section 1701.78 of the OGCL, and
(c) recommended the approval of this Agreement and the Merger by the holders of
the Company Stock and directed that the Merger be submitted for consideration
by the Company's stockholders at the meeting of stockholders contemplated by
Section 3.6 The affirmative vote of two-thirds of the outstanding shares of
Company Stock entitled to vote at such meeting of the Company's stockholders is
required to approve the Agreement and the Merger.
5.10 Financial Advisors. The Company has received the opinion of
Chaffe & Associates, Inc., financial advisor to the Company, which financial
advisor is not an affiliate (as that term is defined in the Securities Exchange
Act of 1934, as amended) of the Company, to the effect that, as of the date
hereof, the Merger Consideration is fair from a financial point of view to the
holders of Company Stock, a copy of which opinion has been delivered to Parent
and Merger Sub. Except for Chaffe & Associates, Inc., no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company.
The Company has previously delivered to Parent a copy of the engagement letter
executed on August 10, 1998 between the Company and Chaffe & Associates, Inc.
In addition to any such fee and commission arrangements, the Company has
previously delivered to
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Parent a good faith estimate of all additional fees, costs and expenses to be
incurred by the Company and its subsidiaries in connection with this Agreement.
5.11 Compliance with Applicable Laws. The Company and each of its
subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business (the "Company Permits"). The Company and
each of its subsidiaries is in compliance with the terms of the Company
Permits, except for any failure to comply which, alone or in the aggregate, has
not had, and would not have, a Company Material Adverse Effect. Except as
disclosed in the Company SEC Reports filed prior to the date of this Agreement,
the businesses of the Company and its subsidiaries are not being conducted in
violation of any material Law (as defined below), including, with respect to
the operations of the Company's foreign subsidiaries, any "social law" (as
defined below). Without limitation, any mandated or voluntary plant closing or
product recall due to an actual or potential violation of any health or safety
law, ordinance or regulation shall be deemed to cause a Company Material
Adverse Effect. To the Company's knowledge, during the past five years, none
of the Company's or any of its subsidiaries' directors, officers, employees or
agents, nor any other person acting on behalf of any of them or the Company or
any of its subsidiaries, has, directly or indirectly, given or agreed to give
any gift or similar benefit to any customer, supplier, governmental employee or
other person in violation of any Law, including, without limitation, the
Foreign Corrupt Practices Act. "Law" means any statute, law, ordinance,
decree, order, rule or regulation of any Governmental Entity. "Social law"
means any foreign, national, regional, state, provincial and municipal laws,
regulations, ordinances and decisions and any collective bargaining agreements
agreed on any level, affecting the employment of labor, including but not
limited to social security, wages, hours, discrimination, plant closing
notices, working conditions, health and safety in the work place, works council
information and consultation of the work force, the organization of
participation by the work force, internal regulations, maternity and sickness
leave, etc.
5.12 Taxes. Except as set forth in Section 5.12 of the Company
Disclosure Schedule, (i) all returns and reports ("Tax Returns") of or with
respect to any tax that are required to be filed by or with respect to the
Company and each of its subsidiaries have been filed; (ii) neither the Company
nor any of its subsidiaries has requested or been granted an extension of time
for filing any Tax Return that has not yet been filed; (iii) the Company and
each of its subsidiaries has paid all taxes that are due from or with respect
to it; (iv) the Company and each of its subsidiaries has withheld and paid all
taxes required by all applicable laws to be withheld or paid in connection with
any amounts paid or owing to any employee, creditor, independent contractor or
other third party; (v) there are no outstanding agreements, waivers or
arrangements extending the statutory period of limitation applicable to any
claim for, or the period for the collection or assessment of, taxes due from or
with respect to the Company or any of its subsidiaries for any taxable period;
(vi) no audit, action, proceeding, investigation, dispute or claim by any
court, governmental or regulatory authority or similar person is pending or, to
the Company's knowledge, threatened in regard to any taxes due from or with
respect to the Company or any of its subsidiaries or any Tax Return filed by or
with respect to the Company or any of its subsidiaries; (vii) no claim has been
made by a taxing authority in a jurisdiction in which neither the Company nor
any of its subsidiaries files Tax Returns that the Company or any subsidiary is
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<PAGE> 20
required to file Tax Returns in such jurisdiction, and, to the Company's
knowledge, no taxing authority could reasonably make such a claim; (viii) no
assessment of any deficiency for taxes is proposed against the Company or any
of its subsidiaries or any of their assets; (ix) there are no liens for taxes
(other than for current taxes not yet due and payable) upon the assets of the
Company; (x) the Company has not been a member of an affiliated group as
defined in Section 1504 of the Code (or any analogous combined, consolidated or
unitary group as defined under state, local or foreign income tax law) other
than one of which the Company was the common parent; (xi) neither the Company
nor any subsidiary has any obligation or liability for the payment of taxes of
any other person arising as a result of any obligation to indemnify another
person or as a result of the Company or any such subsidiary assuming or
succeeding to the tax liability of any other person as a successor, transferee
or otherwise; (xii) the Company will not be required to include any amount in
taxable income for any taxable period (or portion thereof) ending after the
Effective Time as a result of (A) a change in method of accounting for a
taxable period ending prior to the Effective Time, (B) any "closing agreement"
as described in Section 7121 of the Code (or any corresponding provision of
state, local or foreign income tax laws) entered into prior to the Effective
Time, (C) any sale reported on the installment method that occurred prior to
the Effective Time or (D) any prepaid amount received prior to the Effective
Time; (xiii) all taxes accrued but not yet due and all contingent liabilities
for taxes are adequately reflected in the reserves for taxes in the financial
statements contained in the Company SEC Reports; and (xiv) except as described
in Section 5.12 of the Company Disclosure Schedule, there has been no
"ownership change" as described in Section 382 of the Code that has resulted in
any limitation on the Company's ability to offset pre-change losses against its
taxable income.
5.13 Certain Material Contracts.
(a) Section 5.13(a) of the Company Disclosure Schedule
lists each agreement and arrangement (whether written or oral and
including all amendments thereto) to which the Company or any of its
subsidiaries is a party or a beneficiary or by which the Company or
any of its subsidiaries is bound that is material, directly or
indirectly, to the business of the Company (collectively, the
"Material Contracts"), including without limitation (i) any supply,
distribution or other agreements or arrangements pursuant to which
third parties are or will be entitled or obligated to purchase or use
any of the assets of Company or any of its subsidiaries with an
aggregate per contract purchase price in excess of $100,000; (ii) any
warranty agreements or arrangements (including any bonds) with any
party under which the Company or any of its subsidiaries has any
liability, in any individual agreement or arrangement or in the
aggregate under all agreements or arrangements with such party, with a
value in excess of $25,000; (iii) any capital or operating leases or
conditional sales agreements relating to vehicles or equipment with a
value in excess of $100,000; (iv) any supply or manufacturing
agreements or arrangements pursuant to which the Company or any of its
subsidiaries is entitled or obligated to acquire any assets from a
third party in excess of $500,000; (v) any employment, consulting,
noncompetition, separation, collective bargaining, union or labor
agreements or arrangements; (vi) any agreement evidencing, securing or
otherwise relating to any indebtedness for which the Company or any of
its subsidiaries has any liability, (vii) any agreement with or for
the benefit of any stockholder,
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<PAGE> 21
director, officer or employee of the Company or any of its
subsidiaries, or any affiliate or family member thereof; and (viii)
any other agreement, arrangement or lease of real or personal property
pursuant to which the Company or any of its subsidiaries could be
required to make or be entitled to receive aggregate payments in
excess of $100,000 and which is not cancelable within 30 days notice
without penalty.
(b) The Company and, as applicable, each subsidiary of
the Company, has performed in all material respects all of its
obligations under each Material Contract, and there exists no breach
or default (or event that with notice or lapse of time would
constitute a breach or default), whether or not such default has been
waived, under any Material Contract.
(c) On the date hereof and on the Closing Date, each
Material Contract will be valid, binding and in full force and effect
and enforceable in accordance with its respective terms. There has
been no termination or, to the Company's knowledge, threatened
termination or notice of default under any Material Contract. The
Company has delivered to Parent a copy of each written Material
Contract.
(d) Except as set forth in Section 5.13(d) of the Company
Disclosure Schedule, no consent of any person is required in
connection with the transactions contemplated by this Agreement in
order to preserve the rights of the Company or any of its subsidiaries
under, or to prevent any disadvantage to the Company or any of its
subsidiaries in respect of, any Material Contract after the Effective
Time.
5.14 Labor Relations. Except as set forth in Section 5.14 of the
Company Disclosure Schedule, there is (i) no unfair labor practice, complaint,
grievance or arbitration pending or, to the knowledge of the Company,
threatened against the Company or any subsidiary of the Company, (ii) no
strike, labor dispute, slowdown or stoppage pending or, to the knowledge of the
Company, threatened against the Company or any subsidiary of the Company and
(iii) to the best knowledge of the Company, no labor union organizing campaign
in progress with respect to any employees of the Company or any subsidiary of
the Company.
5.15 Relationship with Customers and Suppliers. Except as
disclosed in Section 5.15 of the Company Disclosure Schedule, in the last 12
months, none of (i) the ten largest customers of the Company and each of its
operating subsidiaries as determined by the dollar volume of sales for the year
ended December 31, 1997 and for the six months ended June 30, 1998, and (ii)
the ten largest suppliers of the Company and each of its operating subsidiaries
as determined by the dollar volume of purchases for the year ended December 31,
1997 and for the six months ended June 30, 1997, has canceled or otherwise
terminated, or, to the Company's knowledge, threatened to cancel or otherwise
terminate, its relationship with the Company or any of its subsidiaries, and,
to the Company's knowledge, there has not been any material dispute with any
such customer or supplier. Except as described in Section 5.15 of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries, and, to
the Company's knowledge, no director or officer of the Company or any
subsidiary of the Company, owns, directly or indirectly, an interest in any
entity that is a competitor, customer or supplier of the Company or any of its
subsidiaries or that otherwise has material business dealings with the Company
or any of its subsidiaries.
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5.16 Intellectual Property.
(a) The Company has made available to Parent a list of
the following (collectively, the "Company Intellectual Property"):
(i) each trademark, trade name, brand name, service mark or other
trade designation owned or licensed by or to the Company or any of its
subsidiaries, each patent, copyright and similar intellectual property
owned or licensed to or by the Company or any of its subsidiaries and
each license, royalty, assignment or other similar agreement and each
registration and application relating to the foregoing that is
material to the conduct of the business of the Company and its
subsidiaries taken as a whole, which list is set forth in Section
5.16(a) of the Company Disclosure Schedule; and (ii) each agreement
relating to Company Intellectual Property or any technology, know-how
or processes that the Company or any of its subsidiaries is licensed
or authorized to use, or which the Company or any of its subsidiaries
licenses or authorizes others to use, that is material to the conduct
of the business of the Company and its subsidiaries taken as a whole.
(b) The Company and its subsidiaries own the Company
Intellectual Property, or have the right to use the same without
infringing or violating the rights of any third parties. No consent
of third parties will be required for the use of the Company
Intellectual Property after the Effective Time. No claim has been
asserted by any person against the Company or any of its subsidiaries
regarding the ownership of or the right to use any Company
Intellectual Property or challenging the rights of the Company or any
of its subsidiaries with respect to any of the Company Intellectual
Property.
(c) To the Company's knowledge, no person or entity has
asserted any claim that any product, activity or operation of the
Company or any of its subsidiaries infringes upon or involves, or has
resulted in the infringement of, any proprietary right of such person
or entity. No proceedings have been instituted, are pending or, to
the Company's knowledge, are threatened that challenge the rights of
the Company or any of its subsidiaries with respect thereto.
5.17 Environmental Matters. Except for matters disclosed in
Section 5.17 of the Company Disclosure Schedule, to the knowledge of the
Company, after due inquiry, (a) the properties, operations and activities of
the Company and its subsidiaries are in compliance in all material respects
with all applicable Environmental Laws (as hereinafter defined); (b) the
Company and its subsidiaries and the properties and operations of the Company
and its subsidiaries are not subject to any existing, pending or, to the
Company's knowledge, threatened action, suit, claim, investigation, inquiry or
proceeding by or before any Governmental Entity under any Environmental Law;
(c) all notices, permits, licenses or similar authorizations, if any, required
to be obtained or filed by the Company or any of its subsidiaries under any
Environmental Law in connection with any aspect of the business of the Company
or any of its subsidiaries, including without limitation, those relating to the
treatment, storage, disposal or
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release of a hazardous or otherwise regulated substance, have been duly
obtained or filed and will remain valid and in effect after the Merger, and the
Company and its subsidiaries are in compliance with the terms and conditions of
all such notices, permits, licenses and similar authorizations; (d) the Company
and its subsidiaries have satisfied and are currently in compliance with all
financial responsibility requirements applicable to their operations and
imposed by any Governmental Entity under any Environmental Law, and neither the
Company nor any of its subsidiaries has received any notice of noncompliance
with any such financial responsibility requirements; (e) there are no physical
or environmental conditions existing on any property of the Company or any of
its subsidiaries or resulting from the Company's or any such subsidiary's
operations or activities, past or present, at any location, that would give
rise to any material on- site or off-site remedial obligations under any
Environmental Laws or that would impact the soil, groundwater, surface water or
human health; (f) since the effective date of the relevant requirements of
applicable Environmental Laws and to the extent required by such applicable
Environmental Laws, all hazardous or otherwise regulated substances generated
by the Company or any of its subsidiaries have been transported only by
carriers authorized under Environmental Laws to transport such substances and
wastes, and disposed of only at treatment, storage, and disposal facilities
authorized under Environmental Laws to treat, store or dispose of such
substances and wastes; (g) there has been no exposure of any person or property
to hazardous substances or any pollutant or contaminant, nor has there been any
release of hazardous substances, or any pollutant or contaminant into the
environment by the Company or any of its subsidiaries or in connection with
their properties or operations that could reasonably be expected to give rise
to any claim against the Company or any of its subsidiaries for damages or
compensation; and (h) the Company has delivered to Parent all internal and
external environmental audits and studies and all correspondence on substantial
environmental matters in the possession of the Company relating to any of the
current or former properties or operations of the Company and its subsidiaries.
For purposes of this Agreement, the term "Environmental Laws" means
any and all laws, statutes, ordinances, rules, regulations, or orders of any
Governmental Entity pertaining to health or the environment currently in effect
in any and all jurisdictions in which the Company or any of its subsidiaries
owned or owns property or has conducted or conducts business, including without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act
of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986,
as amended, any state laws implementing the foregoing federal laws, and all
other environmental conservation or protection laws. For purposes of this
Agreement, the terms "hazardous substance" and "release" have the meanings
specified in CERCLA and RCRA and shall include petroleum and petroleum
products, radon and PCB's, and the term "disposal" has the meaning specified in
RCRA; provided, however, that to the extent the laws of the state in which the
property is located establish a meaning for "hazardous substance," "release,"
or "disposal" that is broader than that specified in either CERCLA or RCRA,
such broader meaning shall apply.
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5.18. Insurance. Section 5.18(a) of the Company Disclosure Schedule
sets forth a complete and accurate list of all primary, excess and umbrella
policies, bonds and other forms of insurance currently owned or held by or on
behalf of and/or providing insurance coverage to the Company, its subsidiaries
and their businesses, properties and assets (or their directors, officers,
salespersons, agents or employees). Section 5.18(a) of the Company Disclosure
Schedule also sets forth the following information with respect to each
insurance policy or bond listed therein: coverage, limits, carrier,
deductibles, annual premium, policy term, special provisions and any estimated
losses. All such policies are in full force and effect. Neither the Company
nor any of its subsidiaries has received a notice of default under any such
policy or notice of any pending or threatened termination or cancellation,
coverage limitation or reduction, or material premium increase with respect to
any such policy. Section 5.18(b) of the Company Disclosure Schedule sets forth
a complete and accurate summary of all of the self-insurance coverage provided
by the Company and its subsidiaries, and no letters of credit have been posted
and no cash has been restricted to support any reserves for insurance. The
insurance policies of the Company and its subsidiaries are issued by insurers
of recognized responsibility and insure the Company, its subsidiaries and their
businesses, properties and assets against such losses and risks, and in such
amounts, as are customary in the case of corporations of established reputation
engaged in the same or similar businesses and similarly situated.
5.19 Properties.
(a) Section 5.19(a) of the Company Disclosure Schedule
sets forth a description (including the street address) of all real
property owned or leased by the Company or any of its subsidiaries
(the "Real Estate"). No lease agreement, letter of intent or proposal
(whether written or oral) has been entered into by the Company or any
of its subsidiaries relating to the Real Estate except as specified on
Section 5.19(a) of the Company Disclosure Schedule. No premises other
than the Real Estate are used in the business of the Company.
(b) Except for properties and assets disposed of in the
ordinary course of business consistent with past practices after June
30, 1998, the Company and its subsidiaries have good and marketable
title to, or hold by valid and enforceable lease or license, free and
clear of all liens, all properties and assets, whether tangible or
intangible, real, personal or mixed, reflected in the Company's latest
Quarterly Report on Form 10- Q for the period ended June 30, 1998 or
purported to be owned by the Company and its subsidiaries. The
equipment of the Company and its subsidiaries in regular use has been
well maintained and is in good and serviceable condition, reasonable
wear and tear excepted.
(c) The Real Estate is zoned for a classification that
permits its continued use in the manner currently used by the Company
and its subsidiaries, and the occupancy, operation and use of the Real
Estate conforms in all material respects to all applicable Laws,
covenants, conditions and restrictions applicable thereto.
Improvements to the Real Estate were constructed in compliance with,
and remain in compliance with, all
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applicable Laws, covenants, conditions or restrictions, and except for
current construction in process, to the extent required or applicable,
final certificates of occupancy have been issued for such improvements
permitting the existing use of such improvements. There are no
actions pending or, to the Company's knowledge, threatened that would
alter the current zoning classification of the Real Estate or alter
any applicable Laws, covenants, conditions or restrictions that would
adversely affect the use of the Real Estate in the business of the
Company and its subsidiaries. To the Company's knowledge, no
insurance company or Governmental Entity has given notice of any
defects or inadequacies in the Real Estate or the improvements thereon
that would adversely affect the insurability or usability of the Real
Estate or such improvements or prevent the issuance of new insurance
policies thereon at rates not materially higher than present rates.
To the Company's knowledge, no fact or condition exists that would
result in the discontinuation of necessary utilities or services to
the Real Estate or the termination of current access to and from the
Real Estate.
(d) There is no litigation or proceeding pending or, to
the Company's knowledge, threatened against or relating to any of the
Real Estate, and there is no pending or, to the Company's knowledge,
threatened or contemplated condemnation actions or special assessments
with respect to the Real Estate. Neither the Company nor any of its
subsidiaries has received a request (written or otherwise) from any
Governmental Entity with respect to the dedication of any of the Real
Estate. To the Company's knowledge, there is no pending or
contemplated change in any regulation or private restriction
applicable to the Real Estate.
(e) None of the Real Estate is situated in a special
flood hazard area according to any of the applicable city maps or
flood insurance rate maps, or the flood hazard boundary maps issued by
the Department of Housing and Urban Development, the Federal Insurance
Administration or the Federal Emergency Management Agency.
(f) No person has, or at the Effective Time will have,
any right or option to acquire all or any portion of the Real Estate.
(g) Except for the tenants under the leases described in
Section 5.19(a) of the Company Disclosure Schedule (the "Leases"),
there are no parties in possession of, or that have the right to
possess, any portion of the Real Estate as lessees, tenants at
sufferance or trespassers. The Company and each of its subsidiaries
have performed and complied with all of their respective obligations
under the Leases as and when required, and there exists no fact or
circumstance that, with or without notice or passage of time, or both,
could constitute a default of the landlord or lessor under any of the
Leases, or entitle any tenant thereunder to any offset or defenses
against the prompt and current payment of rent or the performance of
any other obligation of tenant thereunder. As of the date of
execution of this Agreement, there are no rental or other concessions
of any nature granted to tenants under the Leases except as set forth
therein. There are no Leases or other agreements with respect to the
Real Estate that give any tenant the right to purchase the Real Estate
or any part thereof. The rentals and other sums due or to become due
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under the Leases have not been, and will not be, assigned, encumbered
or subjected to any liens as of the Effective Time. To the Company's
knowledge, no tenant under any of the Leases is in default thereunder,
nor is there any fact or circumstance that, with or without notice or
the passage of time, or both, would constitute a default of any tenant
under any of the Leases.
5.20 Year 2000 Compliance. Except as described in Section 5.20 of
the Company Disclosure Schedule, the disclosure contained in the Company's SEC
Reports with respect to the Company's "Year 2000 Compliant" (as hereinafter
defined) status is correct in all material respects. To the extent that the
hardware, software and computer systems of the Company and its subsidiaries are
not "Year 2000 Compliant", such failure has not had and would not have a
Company Material Adverse Effect. As used herein, "Year 2000 Compliant" means
that the hardware, firmware, software and computer systems of the Company and
its subsidiaries (a) will completely and accurately address, produce, store and
calculate data involving dates beginning with January 1, 2000 and will not
produce abnormally ending or incorrect results involving such dates as used in
any forward-or regression-dated based functions; and (b) will provide that all
"date"- related functionalities and data fields include the indication of
century and millennium, and will perform calculations which involve a
four-digit year.
5.21. No Commitments. Except as described in Section 5.21 of the
Company Disclosure Schedule, none of the Company or any of its subsidiaries has
entered into any commitments, understandings or agreements of any kind with
respect to the proposed expansion of the Marietta facility.
5.22 Takeover Statutes. No "fair price," "moratorium," "control
share acquisition" or other similar anti- takeover statute or regulation to
which the Company or its subsidiaries or operations is subject (a "Takeover
Statute") is applicable to the transactions contemplated by this Agreement or
the Inducement Agreement.
5.23 Information for Proxy Statement. None of the information
supplied or to be supplied by the Company and its subsidiaries and included or
incorporated by reference in the Proxy Statement will, on the date the Proxy
Statement (and any amendment or supplement thereto) is first mailed to
stockholders of the Company, at the time of the stockholders' meeting to vote
on the approval of this Agreement and the transactions contemplated hereby or
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. If at any time prior to the Effective Time any
event with respect to the Company or any of its subsidiaries, or with respect
to other information supplied by the Company or any of its subsidiaries for
inclusion in the Proxy Statement, shall occur that is required to be described
in an amendment of, or a supplement to, the Proxy Statement, such event shall
be so described, and such amendment or supplement shall be promptly filed with
the Commission and, as required by law, distributed to the stockholders of the
Company. The Proxy Statement, insofar as it relates to the Company or its
subsidiaries or other information supplied by the Company for inclusion
therein, will comply in all material respects with the provisions of the
Exchange Act and the regulations promulgated thereunder.
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VI.
REPRESENTATIONS AND WARRANTIES REGARDING MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to
the Company as follows:
6.1 Organization. Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Ohio.
Merger Sub has not engaged in any business since it was incorporated other than
in connection with its organization and the transactions contemplated by this
Agreement.
6.2 Capitalization. The authorized capital stock of Merger Sub
consists of 10,000 shares of common stock, par value $.01 per share, of which
1,000 shares are validly issued and outstanding, fully paid and nonassessable
and are owned by Parent or by a subsidiary of Parent free and clear of all
liens, claims and encumbrances.
6.3 Authority Relative to this Agreement. Merger Sub has the
corporate power to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by its Board
of Directors and sole stockholder, and no other corporate proceedings on the
part of Merger Sub are necessary to authorize this Agreement and the
transactions contemplated hereby. Except as disclosed in Section 4.2 of the
Parent Disclosure Schedule or as required by the HSR Act, the Foreign Acts, the
Securities Act, the Exchange Act and the corporation, securities or blue sky
laws or regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any Governmental Entity is necessary for
the consummation by Merger Sub of the Merger or the transactions contemplated
by this Agreement, other than filings, registrations, authorizations, consents
or approvals the failure to make or obtain which would not prevent the
consummation of the transactions contemplated hereby.
VII.
CONDUCT OF BUSINESS PENDING THE MERGER
7.1 Conduct of Business by the Company Pending the Merger. After
the date of this Agreement and prior to the Effective Time, unless Parent shall
otherwise agree in writing or except as otherwise required by this Agreement:
(i) the Company shall, and shall cause its subsidiaries
to, carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as heretofore
conducted, and shall, and shall cause its subsidiaries to, use their
reasonable efforts to preserve intact their present business
organizations and preserve their relationships with customers,
suppliers and others having business dealings with them to the end
that their goodwill and on-going businesses shall be unimpaired at the
Effective Time;
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(ii) the Company shall, and shall cause its subsidiaries
to, (A) maintain insurance coverages and their books, accounts and
records in the usual manner consistent with past practice; (B) comply
in all material respects with all Laws (including "social laws"),
ordinances and regulations of Governmental Entities applicable to the
Company and its subsidiaries; (C) maintain and keep their material
properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (D) perform in all material
respects their obligations under all material contracts and
commitments to which any of them is a party or by which any of them is
bound;
(iii) the Company shall not and shall not propose or agree
to (A) sell or pledge or agree to sell or pledge any of its capital
stock or any capital stock owned by it in any of its subsidiaries or
owned by any of its subsidiaries, (B) amend its Articles of
Incorporation or Regulations, (C) split, combine or reclassify its
outstanding stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for
shares of stock of the Company, or declare, set aside, authorize or
pay any dividend or other distribution payable in cash, stock or
property, provided that the Company may pay that declared dividend of
$0.05 per share of Company Stock payable on September 30, 1998 to
stockholders of record as of September 18, 1998, or (D) directly or
indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of Company stock;
(iv) the Company shall not, nor shall it permit any of its
subsidiaries to, (A) issue, deliver or sell or agree to issue, deliver
or sell any additional shares of, or rights of any kind to acquire any
shares of, its respective stock of any class, any indebtedness having
the right to vote on any matter on which the Company's stockholders
may vote or any option, rights or warrants to acquire, or securities
convertible into, exercisable for or exchangeable for, shares of
stock; (B) other than finalization of the expansion of the hardening
room at the Company's Marietta facility (the total cost of which is
estimated to be approximately $1.6 million less approximately $400,000
incurred for refrigeration equipment as set forth in Section 5.21(2)
of the Company Disclosure Schedule), incur additional indebtedness or
encumber or grant a security interest in any asset or enter into any
other material transaction other than in each case in the ordinary
course of business, it being understood, without limitation, that the
Company and its subsidiaries shall immediately cease work on the
proposed expansion of the Marietta facility and shall not enter into
any additional commitments, understandings or agreements with respect
to such expansion; (C) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof; (D)
incur any material transaction fees, costs or expenses in addition to
those disclosed or referenced pursuant to Section 5.10; or (E) enter
into any contract, agreement, commitment or arrangement with respect
to any of the foregoing;
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(v) the Company shall not, nor shall it permit any of its
subsidiaries to, except as required to comply with applicable Law and
except as provided in Section 8.5 hereof, enter into any new (or amend
any existing) Company Employee Benefit Plan or any new (or amend any
existing) employment, severance or consulting agreement, grant any
general increase in the compensation of current or former directors,
officers or employees (including any such increase pursuant to any
bonus, pension, profit-sharing or other plan or commitment) or grant
any increase in the compensation payable or to become payable to any
director, officer or employee, except in any of the foregoing cases in
accordance with pre-existing contractual provisions or in the ordinary
course of business consistent with past practice;
(vi) settle or compromise any suit or claim or threatened
suit or claim material to the transactions contemplated hereby or
material to the Company and its subsidiaries, individually or in the
aggregate;
(vii) the Company shall not, nor shall it permit any of its
subsidiaries to, amend, modify, terminate, waive or permit to lapse
any material right of first refusal, preferential right, right of
first offer or any other material right of the Company or any of its
subsidiaries, except in the ordinary course of business;
(viii) the Company shall not, nor shall it permit any of its
subsidiaries to, (A) create or permit any lien or other encumbrance
affecting the Real Estate; (B) commit any waste or nuisance upon the
Real Estate; (C) impose any easements, covenants, conditions or
restrictions on the Real Estate; (D) institute or participate in any
annexation, zoning, platting, or other governmental action regarding
the Real Estate; or (E) enter into or modify any contract or other
agreement that in any way affects the Real Estate and that will
survive the Effective Time, unless such contract or agreement is
cancelable, without cost, with thirty days prior written notice;
(ix) the Company shall not, nor shall it permit any of its
subsidiaries to, without the prior written consent of Parent, enter
into any lease for the use or occupancy of the Real Estate with a term
in excess of 12 months or amend, renew, modify or terminate any of the
Leases;
(x) the Company shall cause at or prior to the Effective
Time the release of all liens against the Real Estate; and
(xi) the Company shall, and shall cause its subsidiaries
to, perform all of the Company's (or its subsidiaries', as the case
may be) obligations under any contracts pertaining to the Real Estate
(including all leases) and promptly notify Parent of any defaults
thereunder.
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VIII.
ADDITIONAL AGREEMENTS
8.1 Access and Information. The Company and Parent shall afford
to each other and to each other's accountants, counsel and other
representatives reasonable access during normal business hours (and at such
other times as the parties may mutually agree) throughout the period prior to
the Effective Time to all of their respective properties, books, contracts,
commitments, records and personnel, as applicable, subject to existing
confidentiality obligations, and, during such period, the Company and Parent
shall furnish promptly to each other (i) a copy of each report, schedule and
other document filed or received by it pursuant to the requirements of federal
or state securities laws and (ii) all other information concerning its
business, properties and personnel as the other may reasonably request.
Parent, Merger Sub, their agents and representatives shall have the right,
during normal business hours prior to the Effective Time, to physically inspect
all buildings, improvements, mechanical and other equipment and fixtures to
evaluate the operating condition thereof, and to conduct surveys, test borings,
soil tests and other tests and inspections on the Real Estate. The Company and
Parent shall hold, and shall cause their respective employees, agents and
representatives to hold, in confidence all such information in accordance with
the terms of the Non-Disclosure Agreement dated as of May 27, 1998 between
Parent and the Company (the "Non-Disclosure Agreement").
8.2 Proxy Statement; Stockholders' Meeting. As soon as
practicable following the date of this Agreement, the Company shall prepare and
file with the Commission a proxy statement (the "Proxy Statement") relating to
the merger and this Agreement. The Company shall notify Parent promptly upon
the receipt of any comments from the Commission and of any request by the
Commission for amendments or supplements to the Proxy Statement or for
additional information, and shall supply Parent with copies of all written
correspondence and details of all oral correspondence between the Company and
the Commission relating to the Proxy Statement. Upon the occurrence of any
event that is required to be described in an amendment or supplement to the
Proxy Statement, the Company shall, upon learning of such event, promptly
prepare, file and clear with the Commission and mail to its stockholders such
amendment or supplement; provided, however, that prior to such mailing the
Company shall consult with Parent with respect to such amendment or supplement
and afford Parent a reasonable opportunity to comment thereon.
8.3 Employee Matters. As of the Effective Time, the employees of
the Company and each of its subsidiaries shall continue employment with the
Surviving Corporation and such subsidiaries in the same positions and at the
same level of wages and/or salary and without having incurred a termination of
employment or separation from service; provided, however, except as may be
specifically required by applicable Law or any contract, the Surviving
Corporation and its subsidiaries shall not be obligated to continue any
employment relationship with any employee for any specific period of time. The
Surviving Corporation shall be the sponsor of the Company Employee Benefit
Plans sponsored by the Company immediately prior to the Effective Time, and
Parent shall cause the Surviving Corporation and the subsidiaries to
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satisfy all existing obligations and liabilities under such Company Employee
Benefit Plans; provided, however, that except as hereafter provided in this
Section 8.3 or in the Company Disclosure Schedule, nothing contained in this
Agreement shall limit or restrict the Surviving Corporation's right on or after
the Effective Time to amend, modify or terminate any of the Company Employee
Benefit Plans.
8.4 Rights to Indemnification.
(a) All rights to indemnification existing in favor of
the directors, officers or employees of the Company as provided in the
Company's Articles of Incorporation or Regulations, as in effect as of
the date hereof, with respect to matters occurring through the
Effective Time, shall survive the Merger and shall continue in full
force and effect thereafter. The Surviving Corporation shall maintain
in effect for not less than one year after the Effective Time the
current policies of directors' and officers' liability insurance
maintained by the Company with respect to matters occurring on or
prior to the Effective Time; provided, however, that the Surviving
Corporation or Parent may substitute therefor policies of at least the
same coverage (with carriers comparable to the Company's existing
carriers) containing terms and conditions which are not materially
less advantageous to the Indemnified Parties; and provided, further,
that the Surviving Corporation (or Parent, if it shall substitute
policies) shall not be required in order to maintain or procure such
coverage to pay an annual premium in excess of 150% of the current
annual premium paid by the Company for its existing coverage.
(b) In the event that any action, suit, proceeding or
investigation relating hereto or to the transactions contemplated by
this Agreement is commenced, whether before or after the Effective
Time, the parties hereto agree to cooperate and use their respective
reasonable efforts to vigorously defend against and respond to the
same.
8.5 HSR Act and Foreign Acts. The Company and Parent shall use
their best efforts to file as soon as practicable notifications under the HSR
Act and any applicable Foreign Acts in connection with the Merger and the
transactions contemplated hereby, and to respond as promptly as practicable to
any inquiries for additional information or documentation received from the
Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") or any other applicable
Governmental Entities. Notwithstanding the foregoing or any other provision of
this Agreement, Parent shall have no obligation to comply with any request or
requirement imposed by the FTC, the DOJ or any such other Governmental Entity
in connection with the HSR Act or any Foreign Act, including without limitation
any request or requirement (i) to disclose confidential information about
Parent or its affiliates; (ii) to dispose of any assets or operations of Parent
or its affiliates; or (iii) to comply with any restriction on the manner in
which Parent or its affiliates conduct their operations.
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8.6 Additional Agreements.
(a) Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use all commercially reasonable
efforts to take, or cause to be taken, all actions and to do, or cause
to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including using all commercially
reasonable efforts to obtain all necessary waivers, consents and
approvals, to effect all necessary registrations and filings and to
remove any injunction to the Merger (and, in such case, to proceed
with the Merger as expeditiously as possible).
(b) If, at any time after the Effective Time, any further
action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and/or directors of Parent, the Company
and the Surviving Corporation shall take all such necessary action.
8.7 No Shop.
(a) The Company agrees (i) that neither it nor any of its
subsidiaries shall, and each of them shall direct and use their best
efforts to cause their officers, directors, employees, agents and
representatives (including, without limitation, any investment banker,
attorney or accountant retained by it or any of its subsidiaries) not
to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, the
Company or any of its subsidiaries (any such proposal or offer being
hereinafter referred to as an "Alternative Proposal"), or engage in
any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an
Alternative Proposal, or release any third party from any obligations
under any existing standstill agreement or arrangement, or enter into
any agreement with respect to an Alternative Proposal; (ii) that it
will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing; and (iii) that it
will notify Parent immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued
with, the Company or any of its subsidiaries and will disclose to
Parent the material substance thereof.
(b) Notwithstanding the foregoing, if the Company
receives a written proposal which the Board of Directors of the
Company, in the exercise of its reasonable judgment, believes is
likely to result in an Alternative Proposal, and such written proposal
was not solicited by the Company and did not result from a breach of
this Section 8.7 (an "Unsolicited Proposal"), the Company may directly
or indirectly furnish information and access to, and may participate
in discussions and negotiate with, the person or entity that
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has submitted such Unsolicited Proposal, but only if (i) the Board of
Directors of the Company reasonably concludes that (A) all holders of
Company Stock would receive Superior Consideration (as defined below)
if the Alternative Proposal is accepted and consummated, and (B) the
proposed acquiror has the legal ability (including, without
limitation, under antitrust laws) to complete such acquisition on a
timely basis, and (C) such Alternative Proposal is not subject to a
financing contingency, and (ii) the Board of Directors of the Company,
following consultation with and considering the advice of its
independent legal counsel relating thereto, determines in its good
faith judgment that failing to take such action would constitute a
breach of such Board of Directors' fiduciary duties to the Company's
stockholders imposed by law. For purposes of this Agreement,
"Superior Consideration" means consideration consisting of cash and/or
securities for all the shares of Company Stock then outstanding or for
all or substantially all the assets of the Company that the Company's
Board of Directors determines in its good faith judgment (having
received the advice of an unaffiliated reputable financial advisor) to
be materially more favorable to holders of the Company Stock than the
Merger.
(c) Neither the Board of Directors of the Company nor any
committee thereof shall (i) withdraw or modify, or propose to withdraw
or modify, in a manner adverse to Parent, the approval or
recommendation by such Board of Directors of this Agreement or the
Merger or (ii) approve or recommend, or propose to approve or
recommend, any Alternative Proposal, unless (x) as a result of actions
taken in compliance with Section 8.7(b), the Company has received an
Unsolicited Proposal concerning an Alternative Proposal that meets the
requirements set forth in clauses (A), (B) and (C) of the preceding
paragraph, and (y) the Board of Directors of the Company, following
consultation with and considering the advice of its independent legal
counsel relating thereto, determines in its good faith judgment that
failing to take such action would constitute a breach of such Board of
Directors' fiduciary duties to the Company's stockholders imposed by
law, and (z) the Company has given Parent two business days' prior
notice of such action specifying the material terms of such
Unsolicited Proposal.
(d) Nothing herein shall prevent the Board of Directors
of the Company from taking, and disclosing to its stockholders, a
position contemplated by Rule 14e-2(a) promulgated under the Exchange
Act, provided that the Board of Directors of the Company shall not
recommend that the stockholders of the Company tender their shares in
connection with any such tender offer unless such recommendation is
permitted by Section 8.7(c).
8.8 Advice of Changes; SEC Filings. The Company shall confer on a
regular basis with Parent on operational matters. Parent and the Company shall
promptly advise each other orally and in writing of any change or event that
has had, or could have, a Company Material Adverse Effect or a Parent Material
Adverse Effect, as the case may be. For the purposes of this Agreement, a
"Parent Material Adverse Effect" means any material adverse effect on the
business, properties, assets, operations, condition (financial or otherwise),
customer relations, supplier relations, business prospects, liabilities or
results of operations of Parent and its subsidiaries taken as a whole, other
than any effects arising out of, resulting from or relating to
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changes in general economic or financial conditions. The Company and Parent
shall promptly provide each other (or their respective counsel) with copies of
all filings made by such party with the Commission or any other Governmental
Entity in connection with this Agreement and the transactions contemplated
hereby other than any filing by the Company pursuant to the HSR Act or any
Foreign Act.
8.9 Takeover Statutes. If any Takeover Statute is or may become
applicable to the transactions contemplated hereby or by the Inducement
Agreement, the Company's Board of Directors shall grant such approvals and take
such actions as are necessary so that the transactions contemplated hereby and
thereby may be consummated as promptly as practicable on the terms contemplated
hereby and thereby and otherwise shall act to eliminate the effects of any
Takeover Statute on any of such transactions.
8.10 Surveys; Title Commitments. Within 45 days from the date of
this Agreement, the Company shall have obtained and delivered to Parent surveys
and irrevocable title commitments for standard owner's policies of title
insurance (which surveys and title commitments must be in form and substance
reasonably satisfactory to Parent) for the following Real Estate: (i) Burton,
Michigan, (ii) Port Huron, Michigan, (iii) Marietta, Ohio, (iv) Charleston,
West Virginia and (v) Somerset, Kentucky. The surveys shall (A) be current
"as-built" metes and bounds surveys of the land covered by the title
commitments, including easements which benefit such land, (B) be made in
accordance with the "Minimum Standard Detail Requirements" for ALTA/ACSM Land
Title Surveys" jointly established and adopted by ALTA and ACSM in 1997 and
meet the accuracy requirements of an "Urban" survey as defined therein, (C)
contain Optional Survey Responsibilities and Specifications 1, 2, 3, 6, 7(a),
7(b), 8, 9, 10, 11, and 13 as specified in Table A of the Minimum Standard
Detail Requirements and (D) be certified to the title companies and Parent.
8.11 Estoppel Certificates. Within 30 days after the date of this
Agreement, the Company shall deliver to Parent a consent and estoppel
certificate, in form and substance reasonably satisfactory to Parent, from the
owner of each of the following parcels of Real Estate leased by the Company or
any of its subsidiaries: (i) Huntington, Cabell County, West Virginia, (ii)
Dunbar, Kanawha County, West Virginia, (iii) Ashland, Boyd County, Kentucky,
(iv) Charleston, West Virginia (MacCorkle Avenue); (v) Goodlettsville,
Tennessee; (vi) Marietta, Ohio (Seventh Street, Peoples Banking and Trust
Company and Elizabeth S. Broughton, lessors); (vii) Charleston, West Virginia
(Washington Street) and (viii) Bay City, Bay County, Michigan.
IX.
CONDITIONS PRECEDENT
9.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following
conditions:
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(a) This Agreement and the transactions contemplated
hereby shall have been approved and adopted by the requisite vote of
the holders of the Company Stock.
(b) The waiting period and any other requirements
applicable to the consummation of the Merger under the HSR Act and any
applicable Foreign Acts shall have expired or been terminated.
(c) No preliminary or permanent injunction or other order
by any federal or state court of competent jurisdiction or other
Governmental Entity which prevents the consummation of the Merger
shall have been issued and remain in effect (each party agreeing to
use all commercially reasonable efforts to have any such injunction
removed).
9.2 Conditions to Obligation of the Company to Effect the Merger.
The obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the additional following
condition, unless waived by the Company:
(a) Parent and Merger Sub shall have performed in all
material respects their agreements contained in this Agreement
required to be performed on or prior to the Effective Time, and the
representations and warranties of Parent and Merger Sub contained in
this Agreement shall be true and correct when made and on and as of
the Effective Time as if made on and as of such date (except to the
extent they relate to a particular date), except as expressly
contemplated or permitted by this Agreement. The Company shall have
received a certificate of the Chief Executive Officer, President or a
Vice President of each of Parent and Merger Sub to that effect.
9.3 Conditions to Obligations of Parent and Merger Sub to Effect
the Merger. The obligations of Parent and Merger Sub to effect the Merger
shall be subject to the fulfillment at or prior to the Effective Time of the
additional following conditions, unless waived by Parent:
(a) The Company shall have performed in all material
respects its agreements contained in this Agreement required to be
performed on or prior to the Effective Time, and the representations
and warranties of the Company contained in this Agreement shall be
true in all material respects when made and on and as of the Effective
Time as if made on and as of such date (except to the extent they
relate to a particular date), except as expressly contemplated or
permitted by this Agreement. Parent and Merger Sub shall have
received a certificate of the Chief Executive Officer, President or a
Vice President of the Company to that effect.
(b) Since June 30, 1998, there shall have been no change,
occurrence or circumstance having or reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect,
and Parent shall have received a certificate signed by the Chief
Executive Officer, President or a Vice President of the Company to
that effect.
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(c) The Company and its subsidiaries shall take no action
or agree to any resolution regarding the currently pending suspension,
proposed debarment and related proceedings with the U.S. Department of
Agriculture without the prior written consent of Parent, which consent
may be withheld by Parent in its sole discretion, and there shall be
no other suspension, debarment or similar proceedings pending or
threatened against the Company or any of its subsidiaries.
(d) At the time of Closing, holders of no more than 5% of
the outstanding shares of Company Stock shall have dissented and
preserved their rights to seek appraisal in accordance with the OGCL.
(e) Parent's review of surveys, title commitments and
responses to requests for verification of compliance with applicable
Laws shall have revealed no facts or circumstances that may materially
and adversely affect the value or use by Parent or any of its
subsidiaries of any of the Real Estate located at (i) Burton,
Michigan, (ii) Port Huron, Michigan, (iii) Marietta, Ohio, (iv)
Charleston, West Virginia, and (v) Somerset, Kentucky; provided that
neither Parent nor Merger Sub may rely on the condition described in
this paragraph to terminate the Agreement unless Parent shall have
provided the Company reasonable notice of any such facts or
circumstances that may materially and adversely affect the value or
use by Parent or any of its subsidiaries of any such Real Estate, and
the Company shall have failed to cure within 20 days from the date of
such notice (and any party may delay the Closing until completion of
such 20-day period).
X.
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after approval by the stockholders of the Company, by the
mutual consent of Parent and the Company.
10.2 Termination by Either Parent or the Company. This Agreement
may be terminated and the Merger may be abandoned by action of the Board of
Directors of either Parent or the Company if (a) the Merger shall not have been
consummated by December 31, 1998, or (b) the approval of the Company's
stockholders required by Section 3.6 shall not have been obtained at a meeting
duly convened therefor or at any adjournment or postponement thereof, or (c) a
federal or state court of competent jurisdiction or other Governmental Entity
shall have issued an injunction or other order which prevents consummation of
the Merger, and such injunction or order shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to clause (c) above shall have used all commercially reasonable
efforts to remove such injunction, order or decree; and provided, in the case
of a termination pursuant to clause (a) above, that the terminating party shall
not have breached in any material respect its obligations under this Agreement
in any manner that shall have approximately contributed to the failure to
consummate the Merger.
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10.3 Other Termination Rights.
(a) This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, by action of the
Board of Directors of Parent, if the Board of Directors of the Company
shall have withdrawn or modified in a manner adverse to Parent its
approval or recommendation of this Agreement or the Merger or shall
have recommended an Alternative Proposal to the Company's
stockholders.
(b) This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time, by action of the
Board of Directors of the Company, if, in compliance with Section
8.7(c), the Board of Directors of the Company shall have withdrawn or
modified in a manner adverse to Parent its approval or recommendation
of this Agreement or the Merger or shall have recommended an
Alternative Proposal to the Company's stockholders.
10.4 Effect of Termination and Abandonment.
(a) In the event that (i) Parent shall have terminated
this Agreement pursuant to Section 10.3(a) or (ii) the Company shall
have terminated this Agreement pursuant to Section 10.3(b), then, in
either such case, the Company shall, concurrently with such
termination, pay Parent a fee of $1,000,000 (a "Termination Fee"),
which amount shall be payable by wire transfer of same day funds, and
shall promptly reimburse Parent for all substantiated out-of-pocket
costs and expenses incurred by Parent in connection with this
Agreement and the transactions contemplated hereby, including, without
limitation, costs and expenses of accountants, attorneys and financial
advisors (collectively, "Expenses"), up to an aggregate of $400,000.
The Company acknowledges that the agreements contained in this Section
10.4(a) are an integral part of the transactions contemplated in this
Agreement, and that, without these agreements, Parent and Merger Sub
would not enter into this Agreement; accordingly, if the Company fails
to promptly pay the amount due pursuant to this Section 10.4(a), and,
in order to obtain such payment, Parent or Merger Sub commences a suit
which results in a judgment against the Company for the fee and
expenses set forth in this Section 10.4(a), the Company shall pay to
Parent its costs and expenses (including attorneys' fees) in
connection with such suit.
(b) In the event of termination of this Agreement and the
abandonment of the Merger pursuant to this Article X, all obligations
of the parties hereto shall terminate, except the obligations of the
parties pursuant to this Section 10.4 and Sections 8.1, 11.2, 11.3,
11.4, 11.5, 11.6, 11.7, 11.8, 11.9, 11.10, 11.11, 11.12, 11.13 and
11.14. Moreover, in the event of termination of this Agreement
pursuant to Section 10.2(a), nothing herein shall prejudice the
ability of the non-breaching party to pursue any remedy at law or in
equity, including an action seeking damages from any other party for
the breach of this Agreement.
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XI.
MISCELLANEOUS
11.1 Non-Survival of Representations, Warranties and Agreements.
All representations and warranties set forth in this Agreement shall terminate
at the Effective Time. All covenants and agreements set forth in this
Agreement shall survive in accordance with their terms.
11.2 Notices. All notices or other communications under this
Agreement shall be in writing and shall be given by delivery (and shall be
deemed to have been duly given upon delivery) in person, by telegram, telex or
telecopy, or by registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
If to the Company:
Broughton Foods Company
210 North Seventh Street
P.O. Box 656
Marietta, Ohio 45750
Attention: Philip E. Cline
Telecopy No. (710) 376-9301
With a copy to:
Huddleston, Bolen, Beatty, Porter & Copen
611 Third Avenue
P.O. Box 2185
Huntington, West Virginia 25722-2185
Attention: Thomas Murray, Esq.
Telecopy No. (304) 522-4312
If to Parent or Merger Sub:
Suiza Foods Corporation
3811 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
Attention: Gregg L. Engles
Telecopy No.: (214) 529-9929
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With a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: William A. McCormack, Esq.
Telecopy No.: (214) 939-5849
or to such other address (or telecopy number) as any party may have furnished
to the other parties in writing in accordance with this Section.
11.3 Fees and Expenses. Whether or not the Merger is consummated,
except as provided in Section 10.4, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not
the Merger is consummated; provided, however, that the allocable share of
Parent and Merger Sub on the one hand and the Company on the other hand for
regulatory filing fees (including those related to the HSR Act and any
applicable Foreign Acts) shall be one-half each.
11.4 Publicity. So long as this Agreement is in effect, Parent,
Merger Sub and the Company agree to consult with each other in issuing any
press release or otherwise making any public statement with respect to the
transactions contemplated by this Agreement, and none of them shall issue any
press release or make any public statement prior to such consultation, except
as may be required by law or by obligations pursuant to any listing agreement
with the New York Stock Exchange.
11.5 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
11.6 Assignment; Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the
parties hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement; provided that
the third parties referenced in Sections 8.3 and 8.4 shall be third-party
beneficiaries of Parent's agreement contained in such Sections.
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11.7 Entire Agreement. This Agreement, the Exhibits, the Parent
Disclosure Schedule, the Company Disclosure Schedule, the Non-Disclosure
Agreement and any documents delivered by the parties in connection herewith and
therewith constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto. No addition to or modification of any
provision of this Agreement shall be binding upon any party hereto unless made
in writing and signed by all parties hereto.
11.8 Amendment. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors, at any time
before or after approval of matters presented in connection with the Merger to
the stockholders of the Company, but after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
11.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to its rules of conflict of laws.
11.10 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
11.11 Headings and Table of Contents. Headings of the Articles and
Sections of this Agreement and the Table of Contents are for the convenience of
the parties only, and shall be given no substantive or interpretive effect
whatsoever.
11.12 Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
11.13 Waivers. At any time prior to the Effective Time, the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
may (i) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any documents delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party. Except as provided in this Agreement,
no action taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any
other provision hereunder.
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11.14 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
11.15 Subsidiaries. As used in this Agreement, the word
"subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities
or other interests having by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization, or any organization of which
such party is a general partner.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused
this Agreement to be signed by their respective officers thereunto duly
authorized all as of the date first written above.
SUIZA FOODS CORPORATION
By:
------------------------------------------
Tracy L. Noll, Executive Vice President-
Corporate Development
SUIZA FOODS ACQUISITION CORP.
By:
------------------------------------------
Tracy L. Noll, Vice President
BROUGHTON FOODS COMPANY
By:
------------------------------------------
Title:
---------------------------------------
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EXHIBIT A
INDUCEMENT AGREEMENT
This Inducement Agreement (the "Agreement"), dated as of September 10,
1998, is entered into by and among Suiza Foods Corporation , a Delaware
corporation ("Parent"), and the stockholders of Broughton Foods Company, an
Ohio corporation (the "Company"), listed on the signature page hereof (each
such stockholder being referred to herein as a "Stockholder" and, collectively
with each other Stockholder, the "Stockholders").
WITNESSETH:
WHEREAS, each Stockholder, as of the date hereof, is the owner of or
has the sole right to vote with respect to certain shares of common stock, par
value $1.00 per share (the "Common Stock"), of the Company (together with any
shares of Common Stock acquired by a Stockholder after the date hereof, the
"Shares");
WHEREAS, in reliance upon the execution and delivery of this
Agreement, Parent and Suiza Foods Acquisition Corp., an Ohio corporation and a
subsidiary of Parent ("Merger Sub"), will enter into an Agreement and Plan of
Merger, dated as of the date hereof (the "Merger Agreement"), with the Company
that provides, among other things, that upon the terms and subject to the
conditions thereof, Merger Sub shall be merged (the "Merger") with and into the
Company and the Company shall become a subsidiary of Parent; and
WHEREAS, to induce Parent and Merger Sub to enter into the Merger
Agreement and to incur the obligations set forth therein, the Stockholders are
entering into this Agreement pursuant to which each Stockholder is granting an
irrevocable proxy to Parent to vote in favor of the Merger and to make certain
agreements with respect to such Stockholder's Shares, upon the terms and
conditions set forth herein;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
1. Irrevocable Proxy. Each Stockholder hereby irrevocably
appoints Parent, Gregg L. Engles and Tracy L. Noll, and each of them, the
attorneys, agents and proxies, with full power of substitution in each of them,
for the undersigned and in the name, place and stead of the undersigned, to
vote all of such Stockholder's Shares at any meeting of the Company's
stockholders (whether annual or special and whether or not an adjourned or
postponed meeting), or, if applicable, to take action by written consent (i)
for adoption and approval of the Merger Agreement and otherwise in favor of the
Merger and any other transaction contemplated by the Merger Agreement, as such
Merger Agreement may be modified or amended from time to time, and (ii) against
any action, omission or agreement which would or could impede or interfere
with, or have the effect of discouraging, the Merger. Each Stockholder
acknowledges and agrees that this proxy is coupled with an interest and
constitutes, among other things, an inducement for
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Parent and Merger Sub to enter into the Merger Agreement and, accordingly, this
proxy is irrevocable and shall not be terminated by operation of law upon the
occurrence of any event, including, without limitation, the death or incapacity
of such Stockholder. This proxy shall operate to revoke any prior proxy as to
the Shares heretofore granted by any Stockholder. This Proxy has been executed
in accordance with Section 1701.48 of the Ohio General Corporation Law.
Notwithstanding the foregoing, this proxy shall terminate on the earlier of (A)
the Effective Time (as defined in the Merger Agreement) or (B) the date on
which the Merger Agreement is terminated (the earlier thereof being hereinafter
referred to as the "Merger Termination Date").
2. Covenants of Stockholders. Except as set forth in Schedule 2
hereto, each Stockholder covenants and agrees for the benefit of Parent that,
until the Merger Termination Date, such Stockholder will not:
(a) sell, transfer, pledge, hypothecate, encumber,
assign, tender or otherwise dispose of, or enter into any contract, option or
other arrangement or understanding with respect to the sale, transfer, pledge,
hypothecation, encumbrance, assignment, tender or other disposition of, any of
such Stockholder's Shares or any interest therein;
(b) other than as expressly contemplated by this
Agreement, grant any powers of attorney or proxies or consents in respect of
any of such Stockholder's Shares, deposit any of such Shares into a voting
trust, enter into a voting agreement with respect to any of such Shares or
otherwise restrict or take any action adversely affecting the ability of such
Stockholder freely to exercise all voting rights with respect thereto; or
(c) except as permitted by Section 8.7(b) of the Merger
Agreement, directly, or indirectly through his or her agents and
representatives, initiate, solicit or encourage, any inquiries or the making or
implementation of any Alternative Proposal (as defined in the Merger Agreement)
or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to,
an Alternative Proposal, or otherwise facilitate any effort or attempt to make
or implement an Alternative Proposal; and such Stockholder shall (i)
immediately cease and cause to be terminated any existing activities, including
discussions or negotiations with any parties, conducted heretofore with respect
to any of the foregoing and will take the necessary steps to inform his or her
agents and representatives of the obligations undertaken in this Section 2(c),
and (ii) notify Parent immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such negotiations
or discussions are sought to be initiated or continued with, him or her.
3. Covenants of Parent. Parent covenants and agrees for the
benefit of the Stockholders that, provided that the board of directors of the
Company shall have approved the Merger Agreement and the transactions
contemplated thereby, (a) immediately upon execution of this Agreement, Parent
shall enter into the Merger Agreement, and (b) until the Merger Termination
Date, it shall use all reasonable efforts to take, or cause to be taken, all
action, and do, or cause to be done, all things necessary or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement and the Merger Agreement, consistent
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with the terms and conditions of each such agreement; provided, however, that
nothing in this Section 3, Section 12 or any other provision of this Agreement
is intended, nor shall it be construed, to limit or in any way restrict
Parent's or Merger Sub's right or ability to exercise any of its rights under
the Merger Agreement.
4. Representations and Warranties of the Stockholders. Each
Stockholder represents and warrants to Parent and Merger Sub that: (a) the
execution, delivery and performance by such Stockholder of this Agreement will
not conflict with, require a consent, waiver or approval under, or result in a
breach of or default under, any of the terms of any contract, commitment or
other obligation (written or oral) to which such Stockholder is bound; (b) such
Stockholder has full right, power and authority to execute and deliver this
Agreement and to perform such Stockholder's obligations hereunder; (c) the
proxy granted pursuant to Section 1 does not constitute a proxy appointed for
or in connection with the stockholder authorization of a control share
acquisition pursuant to section 1701.831 of the Ohio General Corporation Law,
and this Agreement has been duly executed and delivered by such Stockholder and
constitutes a legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms; (d) such
Stockholder is the sole owner of or has the right to vote with respect to such
Stockholder's Shares, and such Stockholder's Shares represent all shares of
Common Stock of or with respect to which such Stockholder is the sole owner or
has the right to vote at the date hereof, and such Stockholder does not have
any right to acquire, nor is he or she the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended)
of, any other shares of any class of capital stock of the Company or any
securities convertible into or exchangeable or exercisable for any shares of
any class of capital stock of the Company; and (e) such Stockholder owns his
Shares free and clear of all liens, claims, pledges, charges, proxies,
restrictions, encumbrances, proxies and voting agreements of any nature
whatsoever (each an "Encumbrance") other than as provided by this Agreement,
and good and valid title to its Shares, free and clear of any Encumbrance, will
pass to Parent upon Closing (as defined in the Merger Agreement). The
representations and warranties contained herein shall be made as of the date
hereof and as of the Closing.
5. Adjustments; Additional Shares. In the event (a) of any stock
dividend, stock split, merger (other than the Merger) recapitalization,
reclassification, combination, exchange of shares or the like of the capital
stock of the Company on, of or affecting the Common Stock or (b) that any
Stockholder shall become the owner of, or otherwise obtain the right to vote
with respect to, any additional shares of Common Stock or other securities
entitling the holder thereof to vote or give consent with respect to the
matters set forth in Section 1, then the terms of this Agreement shall apply to
the shares of capital stock or other instruments or documents that the
Stockholders own or have the right to vote immediately following the
effectiveness of the events described in clause (a) or any Stockholder becoming
the owner of or obtaining the right to vote with respect to any Common Stock or
other securities as described in clause (b), as though, in either case, they
were Shares hereunder.
6. Specific Performance. Each Stockholder acknowledges that the
agreements contained in this Agreement are an integral part of the transactions
contemplated by the Merger Agreement, and that, without these agreements,
Parent and Merger Sub would not enter into the
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Merger Agreement, and acknowledges that damages would be an inadequate remedy
for any breach by him of the provisions of this Agreement. Accordingly, the
Stockholders each agree that the obligations of the Stockholders hereunder
shall be specifically enforceable and they shall not take any action to impede
Parent from seeking to enforce such right of specific performance.
7. Notices. All notices, requests, claims, demands and other
communications hereunder shall be effective upon receipt (or refusal of
receipt), shall be in writing and shall be delivered in person, by telecopy or
telefacsimile, by telegram, by next-day courier service, or by mail (registered
or certified mail, postage prepaid, return receipt requested) to any
Stockholder at the address listed on the signature page hereof, and to Parent
at 3811 Turtle Creek Boulevard, Suite 1300, Dallas, Texas 75219, Attention:
Gregg L. Engles, telecopy number 214-528-9929, or to such other address or
telecopy number as any party may have furnished to the other in writing in
accordance herewith.
8. Binding Effect; Survival. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
personal representatives, successors and assigns.
9. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio applicable to
agreements made and to be performed entirely within such State, without giving
effect to conflicts of laws principles.
10. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
11. Effect of Headings; Gender. The Section headings herein are
for convenience of reference only and shall not affect the construction hereof.
Any references to male, female and neuter genders shall be deemed to refer to
each other gender, as applicable.
12. Additional Agreements; Further Assurance. Subject to the
terms and conditions herein provided, each of the parties hereto agrees to use
all reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective the transactions contemplated by this Agreement. The
Stockholders will provide Parent with all documents which may reasonably be
requested by Parent and will take reasonable steps to enable Parent to obtain
all rights and benefits provided it hereunder.
13. Amendment; Waiver. No amendment or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and signed by Parent and all affected Stockholders, in the case of an
amendment, or by the party which is the beneficiary of any such provision, in
the case of a waiver or a consent to depart therefrom.
A-4
<PAGE> 47
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto all as of the day and year first above written.
SUIZA FOODS CORPORATION
By:
------------------------------------------
Tracy L. Noll, Vice President -
Corporate Development
STOCKHOLDERS:
---------------------------------------------
Marshall T. Reynolds
---------------------------------------------
Philip E. Cline
---------------------------------------------
George W. Broughton
---------------------------------------------
David J. Broughton
---------------------------------------------
Ronald V. Arthur, II
---------------------------------------------
Robert E. Evans
A-5
<PAGE> 48
---------------------------------------------
Todd R. Fry
---------------------------------------------
Charles R. Hooten, Jr.
---------------------------------------------
Neal W. Scaggs
---------------------------------------------
Martin P. Shearer
---------------------------------------------
Philip Todd Shell
---------------------------------------------
Kirby J. Taylor
---------------------------------------------
Paul T. Theisen
WRIGHT FAMILY PARTNERSHIP
By:
------------------------------------------
Thomas W. Wright, Partner
A-6
<PAGE> 49
CHAMPION LEASING CORPORATION
By:
------------------------------------------
Marshall T. Reynolds, President
THE HARRAH AND REYNOLDS
CORPORATION
By:
------------------------------------------
Marshall T. Reynolds, President
ADJ CORP.
By:
------------------------------------------
Jack M. Reynolds
Title:
---------------------------------------
---------------------------------------------
Jack M. Reynolds
---------------------------------------------
Douglas V. Reynolds
---------------------------------------------
Shirley A. Reynolds
A-7
<PAGE> 50
SCHEDULE 2
A-8
<PAGE> 1
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER SHARE:
Income from continuing operations $ 28,313 $ 16,937 $ 75,996 $ 55,605
Less preferred stock dividends (75) (75) (237) (225)
------------ ------------ ------------ ------------
Income from continuing operations applicable to
common stock $ 28,238 $ 16,862 $ 75,759 $ 55,380
============ ============ ============ ============
Total weighted average shares outstanding 34,638,425 30,097,654 32,752,669 29,225,850
============ ============ ============ ============
Basic EPS from continuing operations $ 0.82 $ 0.56 $ 2.31 $ 1.90
============ ============ ============ ============
CALCULATION OF DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 28,313 $ 16,937 $ 75,996 $ 55,605
Less preferred stock dividends (75) (75) (237) (225)
Net effect on earnings from conversion of mandatorily
redeemable convertible preferred securities 5,981 12,735
------------ ------------ ------------ ------------
Income from continuing operations applicable to
common stock $ 34,219 $ 16,862 $ 88,494 $ 55,380
============ ============ ============ ============
Weighted average shares outstanding 34,638,425 30,097,654 32,752,669 29,225,850
Stock option conversion 1,448,784 2,278,616 1,963,650 1,845,175
Dilutive effect of conversion of mandatorily redeemable
convertible preferred securities 9,096,303 6,526,298
------------ ------------ ------------ ------------
Total weighted average shares outstanding 45,183,512 32,376,270 41,242,617 31,071,025
============ ============ ============ ============
Diluted EPS from continuing operations $ 0.76 $ 0.52 $ 2.15 $ 1.78
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Condensed
Financial Statements for the 9-month period ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 32,073
<SECURITIES> 27,395
<RECEIVABLES> 411,240
<ALLOWANCES> 0
<INVENTORY> 221,619
<CURRENT-ASSETS> 735,092
<PP&E> 746,438
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,766,167
<CURRENT-LIABILITIES> 504,087
<BONDS> 830,963
682,792
0
<COMMON> 350
<OTHER-SE> 645,468
<TOTAL-LIABILITY-AND-EQUITY> 2,766,167
<SALES> 2,329,345
<TOTAL-REVENUES> 2,329,345
<CGS> 1,785,670
<TOTAL-COSTS> 368,443
<OTHER-EXPENSES> (2,362)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,492
<INCOME-PRETAX> 121,102
<INCOME-TAX> 43,978
<INCOME-CONTINUING> 75,996
<DISCONTINUED> (3,161)
<EXTRAORDINARY> 31,698
<CHANGES> 0
<NET-INCOME> 104,533
<EPS-PRIMARY> 3.18
<EPS-DILUTED> 2.84
</TABLE>
