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Dean Foods Co · S-4/A · On 10/28/97

Filed On 10/28/97   ·   Accession Number 1047469-97-1838   ·   SEC File 333-37869

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

10/28/97  Dean Foods Co                     S-4/A                 16:745K                                   Merrill Corp/New/FA

Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction   —   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4/A       Pre-Effective Amendment to Registration of           210   1.25M 
                          Securities Issued in a                                 
                          Business-Combination Transaction                       
 2: EX-5.1      Opinion re: Legality                                   1     10K 
 3: EX-8.1      Opinion re: Tax Matters                                2     14K 
11: EX-23.10    Consent of Donaldson, Lufkin & Jenrette                1      9K 
12: EX-23.11    Consent of Goldman, Sachs & Co.                        2±    12K 
13: EX-23.12    Consent of John R. Muse                                1      7K 
14: EX-23.13    Consent of Jim L. Turner                               1      7K 
 4: EX-23.2     Consent of Experts or Counsel                          1      9K 
 5: EX-23.3     Consent of Experts or Counsel                          1      8K 
 6: EX-23.4     Consent of Experts or Counsel                          1      8K 
 7: EX-23.5     Consent of Experts or Counsel                          1      8K 
 8: EX-23.6     Consent of Experts or Counsel                          1      7K 
 9: EX-23.7     Consent of Experts or Counsel                          1      7K 
10: EX-23.8     Consent of Experts or Counsel                          1      7K 
15: EX-99.1     Form of Suiza Foods Proxy                              2     12K 
16: EX-99.2     Form of Morningstar Proxy                              2     11K 


S-4/A   —   Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Form S-4
2Item 3. Risk Factors, Ratio of Earnings to Fixed Summary; Risk Factors Charges, and Other Information
"Item 5. Pro Forma Financial Information Summary; Pro Forma Financial Data
"Item 6. Material Contacts with the Company Being The Merger -- Background of the Merger Acquired
"Item 7. Additional Information Required for Not Applicable Reoffering by Persons and Parties Deemed to be Underwriters
"Item 8. Interests of Named Experts and Counsel Legal Matters; Experts
"Item 11. Incorporation of Certain Information by Incorporation of Certain Information by Reference Reference
"Item 12. Information with Respect to S-2 or S-3 Not Applicable Registrants
"Item 13. Incorporation of Certain Information by Not Applicable Reference
"Item 14. Information with Respect to Registrants Not Applicable Other Than S-3 or S-2 Registrants
3Item 16. Information with Respect to S-2 or S-3 Not Applicable Companies
"Item 17. Information with Respect to Companies Other Not Applicable Than S-2 or S-3 Companies
"Item 19. Information if Proxies, Consents or Not Applicable Authorizations Are Not to be Solicited, or in an Exchange Offer
13Available Information
"Incorporation of Certain Information by Reference
15Table of Contents
17Summary
"The Companies
"Morningstar
"Recent Developments
"Suiza Foods
18The Special Meetings
19The Merger and the Merger Agreement
"General
"Effective Time
20Option Conversion
21Anticipated Accounting Treatment
22New Morningstar Board and Management Following the Merger
"Board of Directors of Suiza Foods Following the Merger
"Governmental Approvals
"Absence of Appraisal Rights
23Interests of Certain Persons in the Merger
"Risk Factors
"Cautionary Statement Concerning Forward-Looking Statements
24Market Price and Dividend Information
"1997
26Comparative Per Share Data
27Summary Pro Forma Financial Data
28Summary Financial Data of Suiza Foods
29Summary Financial Data of Morningstar
30Summary Financial Data of Country Fresh
31Risks Associated with Acquisition Strategy
"Competition
32Substantial Indebtedness
"Government Regulation; Raw Material Costs
33Dependence on Key Personnel
"Limitations on Favorable Tax Treatment
"Antitakeover Provisions
"Expected Benefits of Combined Business May Not Be Achieved
34Sub
36Pro Forma Financial Data
38Other
46Selected Financial Data of Suiza Foods
48Selected Financial Data of Morningstar
49Selected Financial Data of Country Fresh
"Net earnings per common share
50Voting Securities and Record Dates
"Purpose of Special Meetings
51Proxies
52The Merger
"Background of the Merger
53Reasons for the Merger; Recommendations of the Boards
56Opinion of Suiza Foods' Financial Advisor
59Opinion of Morningstar's Financial Advisor
64Restrictions on Resale by Affiliates
66Stock options
68Stock Exchange Listing
"Treatment of Stock Certificates
69The Merger Agreement
"Consideration to Be Received in the Merger
"Effective Time of the Merger
"Exchange of Shares
70Corporate Organization and Governance
"Stockholders' Meetings
71Representations and Warranties
"Conduct of Business Pending the Merger
73Additional Agreements
74Employee Matters
"Indemnification
75No Shop
76Conditions Precedent
77Termination
78Fees and Expenses
"Certain U.S. Federal Income Tax Consequences of the Merger
79Tax Consequences to Suiza Foods, Sub and Morningstar
"Tax Consequences to Morningstar Stockholders
"Comparison of the Rights of Suiza Stockholders and Morningstar Stockholders
80Authorized Capital
"Number of Directors; Election of Directors; Removal; Vacancies
"Charter Amendments
81Bylaw Amendments
"Special Stockholder Meetings
"Business Combinations
"State Takeover Legislation
82Indemnification of Directors and Officers
"Limitation of Personal Liability of Directors
83Suiza Preferred Stock
84Stock Option Increase
"The 1997 Plan
85Federal Income Tax Consequences
86Restricted Stock
"Reasons for Proposal
"Interests of Certain Persons in Matters to be Acted Upon
87Legal Matters
"Experts
88Index to Financial Statements
89Independent Auditors' Report
90Consolidated Balance Sheets
91Consolidated Statements of Operations
92Consolidated Statements of Stockholders' Equity
93Consolidated Statements of Cash Flows
94Notes to Consolidated Financial Statements
"Inventories
"Property, plant and equipment
95Interest rate agreements
"Income Taxes
100Senior Credit Facility
"Subordinated notes
108Extraordinary loss
113Condensed Consolidated Balance Sheets
114Condensed Consolidated Statements of Operations
115Condensed Consolidated Statements of Cash Flows
116Notes to Condensed Consolidated Financial Statements
121Intangible and Other Assets
122Discontinued Operations
129Cash and cash equivalents
130Identifiable intangible assets
"Goodwill
"Deferred financing costs
131Accrued liabilities
132Earnings per common share
135Industrial development revenue bonds
137Hicks Muse
151Consolidated Statements of Earnings
152Consolidated Statements of Shareholders' Equity
169Section 1.2 EFFECTIVE TIME OF THE MERGER
"Section 2.2 BY-LAWS
"Section 2.3 BOARD OF DIRECTORS; OFFICERS
"A-1
170Section 2.4 EFFECTS OF MERGER
"Section 3.2 PARENT TO MAKE CERTIFICATES AVAILABLE
"Section 3.3 DIVIDENDS; STOCK TRANSFER TAXES
"A-2
171Section 3.4 NO FRACTIONAL SHARES
"Section 3.5 STOCK OPTIONS
172Section 3.6 STOCKHOLDERS' MEETINGS
"Section 3.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS
"Section 3.8 CLOSING
"Section 3.9 TRANSFER TAXES
173Section 4.2 CAPITALIZATION
"Section 4.3 SUBSIDIARIES
174Section 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT
"Section 4.5 REPORTS AND FINANCIAL STATEMENTS
175Section 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS
"Section 4.7 LITIGATION
176Section 4.8 EMPLOYEE BENEFIT PLANS
177Section 4.9 FINANCIAL ADVISOR
"Section 4.10 COMPLIANCE WITH APPLICABLE LAWS
178Section 4.11 TAXES
"Section 4.12 CERTAIN AGREEMENTS
179Section 4.13 TAX AND ACCOUNTING MATTERS
"Section 4.14 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS
"Section 4.15 INTELLECTUAL PROPERTY
180Section 5.2 CAPITALIZATION
"Section 5.3 SUBSIDIARIES
181Section 5.4 AUTHORITY RELATIVE TO THIS AGREEMENT
"Section 5.5 REPORTS AND FINANCIAL STATEMENTS
182Section 5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS
"Section 5.7 LITIGATION
183Section 5.8 EMPLOYEE BENEFIT PLANS
184Section 5.9 COMPANY ACTION
"Section 5.10 FINANCIAL ADVISORS
185Section 5.11 COMPLIANCE WITH APPLICABLE LAWS
"Section 5.12 TAXES
186Section 5.13 CERTAIN AGREEMENTS
"Section 5.14 TAX AND ACCOUNTING MATTERS
"Section 5.15 RELATIONSHIP WITH CUSTOMERS AND SUPPLIERS
"Section 5.16 INTELLECTUAL PROPERTY
187Section 6.2 CAPITALIZATION
"Section 6.3 AUTHORITY RELATIVE TO THIS AGREEMENT
188Section 7.2 CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER
189Section 7.3 CONDUCT OF BUSINESS OF SUB
190Section 8.2 REGISTRATION STATEMENT/PROXY STATEMENT
"Section 8.3 COMPLIANCE WITH THE SECURITIES ACT AND POOLING REQUIREMENTS
191Section 8.4 STOCK EXCHANGE LISTING
"Section 8.5 EMPLOYEE MATTERS
192Section 8.6 INDEMNIFICATION
"Section 8.7 HSR ACT
"Section 8.8 ADDITIONAL AGREEMENTS
193Section 8.9 NO SHOP
194Section 8.10 ADVICE OF CHANGES; SEC FILINGS
"Section 8.11 PARENT DIRECTORSHIPS
195Section 9.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER
"Section 9.3 CONDITIONS TO OBLIGATIONS OF PARENT AND SUB TO EFFECT THE MERGER
196Section 10.2 TERMINATION BY EITHER PARENT OR THE COMPANY
"Section 10.3 OTHER TERMINATION RIGHTS
"Section 10.4 EFFECT OF TERMINATION AND ABANDONMENT
197Section 11.2 NOTICES
198Section 11.3 FEES AND EXPENSES
"Section 11.4 PUBLICITY
"Section 11.5 SPECIFIC PERFORMANCE
"Section 11.6 ASSIGNMENT; BINDING EFFECT
"Section 11.7 ENTIRE AGREEMENT
199Section 11.8 AMENDMENT
"Section 11.9 GOVERNING LAW
"Section 11.10 COUNTERPARTS
"Section 11.11 HEADINGS AND TABLE OF CONTENTS
"Section 11.12 INTERPRETATION
"Section 11.13 WAIVERS
"Section 11.14 SEVERABILITY
"Section 11.15 SUBSIDIARIES
201Parent Disclosure Schedule
"Company Disclosure Schedule
202B-1
203B-2
204C-1
205C-2
206Item 21. Exhibits and Financial Statement Schedules
"Item 22. Undertakings
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997 REGISTRATION NO. 333-37869 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO  FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- SUIZA FOODS CORPORATION (Exact name of registrant as specified in its charter) [Download Table] DELAWARE 2026 75-2559681 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification organization) Number) 3811 TURTLE CREEK BLVD. SUITE 1300 DALLAS, TEXAS 75219 (214) 528-0939 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) GREGG L. ENGLES CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 3811 TURTLE CREEK BLVD. SUITE 1300 DALLAS, TEXAS 75219 (214) 528-0939 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: WILLIAM A. MCCORMACK R. SCOTT COHEN Hughes & Luce, L.L.P. Weil, Gotshal & Manges LLP 1717 Main Street 100 Crescent Court Suite 2800 Suite 1300 Dallas, Texas 75201 Dallas, Texas 75201 (214) 939-5500 (214) 746-7700 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT. -------------------------- If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------- If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------- -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT BECOMES EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
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CROSS REFERENCE SHEET [Enlarge/Download Table] S-4 ITEM PROSPECTUS CAPTION OR LOCATION -------------------------------------------------------- -------------------------------------------------------- Part I A. Information About the Transaction Item 1. Forepart of Registration Statement and Forepart of Registration Statement and Outside Front Outside Front Cover Page of Prospectus Cover Page of Prospectus Item 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus; Prospectus Available Information; Incorporation of Certain Information by Reference; Table of Contents  Item 3. Risk Factors, Ratio of Earnings to Fixed Summary; Risk Factors Charges, and Other Information Item 4. Terms of the Transaction The Merger--Reasons for the Merger; Recommendations of the Boards; The Merger-- Anticipated Accounting Treatment; The Merger Agreement; Certain U.S. Federal Income Tax Consequences of the Merger; Comparison of the Rights of Suiza Stockholders and Morningstar Stockholders  Item 5. Pro Forma Financial Information Summary; Pro Forma Financial Data  Item 6. Material Contacts with the Company Being The Merger--Background of the Merger Acquired  Item 7. Additional Information Required for Not Applicable Reoffering by Persons and Parties Deemed to be Underwriters  Item 8. Interests of Named Experts and Counsel Legal Matters; Experts Item 9. Disclosure of Commission Position on Comparison of the Rights of Suiza Stockholders and Indemnification for Securities Act Morningstar Stockholders--Indemnification of Directors Liabilities and Officers B. Information About the Registrant Item 10. Information with Respect to S-3 Registrants Summary; Incorporation of Certain Information by Reference; Selected Financial Data of Suiza Foods; Pro Forma Financial Data; The Companies--Recent Developments  Item 11. Incorporation of Certain Information by Incorporation of Certain Information by Reference Reference  Item 12. Information with Respect to S-2 or S-3 Not Applicable Registrants  Item 13. Incorporation of Certain Information by Not Applicable Reference  Item 14. Information with Respect to Registrants Not Applicable Other Than S-3 or S-2 Registrants
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[Enlarge/Download Table] S-4 ITEM PROSPECTUS CAPTION OR LOCATION -------------------------------------------------------- -------------------------------------------------------- C. Information About the Company Being Acquired Item 15. Information with Respect to S-3 Companies Summary; Incorporation of Certain Information by Reference; Selected Financial Data of Morningstar; Pro Forma Financial Data  Item 16. Information with Respect to S-2 or S-3 Not Applicable Companies  Item 17. Information with Respect to Companies Other Not Applicable Than S-2 or S-3 Companies D. Voting and Management Information Item 18. Information if Proxies, Consents or Forepart of Registration Statement and Outside Front Authorizations Are to be Solicited Cover Page of Prospectus; The Special Meetings--General; The Special Meetings-- Voting Securities and Record Dates; The Special Meetings--Proxies; The Merger-- Interests of Certain Persons in the Merger; The Merger--Absence of Appraisal Rights  Item 19. Information if Proxies, Consents or Not Applicable Authorizations Are Not to be Solicited, or in an Exchange Offer
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SUIZA FOODS CORPORATION 3811 TURTLE CREEK BOULEVARD SUITE 1300 DALLAS, TEXAS 75219 OCTOBER 28, 1997 Dear Fellow Stockholders: You are cordially invited to attend a special meeting (the "Special Meeting") of the stockholders (the "Stockholders") of Suiza Foods Corporation ("Suiza Foods"), to be held on Wednesday, November 26, 1997, at 9:00 a.m., local time, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201. At the Special Meeting, Stockholders will be asked to vote upon a proposal to approve the issuance of Suiza Foods common stock in connection with the combination of Suiza Foods and The Morningstar Group Inc. ("Morningstar") as contemplated by the Agreement and Plan of Merger dated as of September 28, 1997 (the "Merger Agreement"). Subject to the terms and conditions of the Merger Agreement, SF Acquisition Corporation, a wholly owned subsidiary of Suiza Foods ("Sub"), will be merged (the "Merger") with and into Morningstar, and Morningstar will become a wholly owned subsidiary of Suiza Foods. Pursuant to the Merger, each share of Morningstar common stock outstanding immediately prior to the effective time of the Merger will be converted (the "Share Conversion") into the right to receive 0.85 shares (the "Exchange Ratio") of Suiza Foods common stock (with cash being paid in lieu of any fractional shares of Suiza Foods common stock). In addition, Suiza Foods will assume each of Morningstar's stock option plans and each option to acquire shares of Morningstar common stock outstanding thereunder, and each such option will become an option to acquire Suiza Foods common stock (the "Option Conversion" and, together with the Share Conversion, the "Stock Issuance"). AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT BY A UNANIMOUS VOTE AND HAS CONCLUDED THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE STOCK ISSUANCE. Your Board of Directors has retained as financial advisor Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), which has delivered to the Board of Directors its written opinion dated as of September 28, 1997, to the effect that the Exchange Ratio is fair from a financial point of view to the holders of Suiza Foods common stock. A copy of the DLJ opinion letter, which sets forth the assumptions made, matters considered and the scope of review undertaken in connection therewith, is attached as Appendix B to the accompanying Joint Proxy Statement/Prospectus and should be read carefully in its entirety. At the Special Meeting, Stockholders will also be asked to vote upon a proposal to increase the number of authorized shares of common stock reserved for issuance under the Suiza Foods Corporation 1997 Stock Option and Restricted Stock Plan (the "1997 Plan") from 1,150,000 shares to 3,000,000 shares (the "Plan Amendment"). In the material accompanying this letter, you will find a formal Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken by Stockholders at the Special Meeting and a proxy card. The Joint Proxy Statement/Prospectus more fully describes the proposed Merger and includes information about Suiza Foods and Morningstar and the reasons for the Merger.
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Your vote is important, regardless of the number of shares you own. Approval of the Stock Issuance and the Plan Amendment requires an affirmative vote of holders of a majority of the shares of Suiza Foods common stock present and entitled to vote at the Special Meeting (assuming a quorum is present). I RESPECTFULLY URGE YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. This will not prevent you from attending the Special Meeting or voting in person, but will assure that your vote is counted if you are unable to attend the Special Meeting. If you have any questions or require additional information with respect to the proposed business combination or the Plan Amendment, please contact Tracy L. Noll at (214) 528-0939. On behalf of your Board of Directors, I thank you for your support and urge you to vote FOR approval of the Stock Issuance and the Plan Amendment. Sincerely, /s/ Gregg L. Engles -------------------------------------- Gregg L. Engles CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER ii
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THE MORNINGSTAR GROUP INC. 5956 SHERRY LANE, SUITE 1500 DALLAS, TEXAS 75225 OCTOBER 28, 1997 Dear Fellow Stockholders: You are cordially invited to attend a special meeting (the "Special Meeting") of the stockholders (the "Stockholders") of The Morningstar Group Inc. ("Morningstar") to be held on Wednesday, November 26, 1997 at 9:00 a.m., local time, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201. At the Special Meeting, Stockholders will be asked to vote upon a proposal to combine Morningstar and Suiza Foods Corporation ("Suiza Foods") as contemplated by the Agreement and Plan of Merger dated as of September 28, 1997 (the "Merger Agreement"). Subject to the terms and conditions of the Merger Agreement, SF Acquisition Corporation, a wholly owned subsidiary of Suiza Foods ("Sub"), will be merged (the "Merger") with and into Morningstar, and Morningstar will become a wholly owned subsidiary of Suiza Foods. Pursuant to the Merger, each share of Morningstar common stock outstanding immediately prior to the effective time of the Merger will be converted into 0.85 shares (the "Exchange Ratio") of Suiza Foods common stock (with cash being paid in lieu of any fractional shares of Suiza Foods common stock). In addition, Suiza Foods will assume each of Morningstar's stock option plans and each option to acquire shares of Morningstar common stock outstanding thereunder, and each such option will become an option to acquire Suiza Foods common stock. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND HAS CONCLUDED THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE MERGER, THE MERGER AGREEMENT AND TRANSACTIONS CONTEMPLATED THEREBY. Your Board of Directors retained as financial advisor Goldman, Sachs & Co. ("Goldman Sachs"), which has delivered to the Board of Directors its written opinion, dated as of September 28, 1997, to the effect that as of such date the Exchange Ratio pursuant to the Merger Agreement was fair from a financial point of view to the holders of Morningstar common stock. A copy of the Goldman Sachs opinion letter, which sets forth the assumptions made, matters considered and the scope of the review undertaken in connection therewith, is attached as Appendix C to the accompanying Joint Proxy Statement/Prospectus and should be read carefully in its entirety. In the material accompanying this letter, you will find a formal Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken by Stockholders at the Special Meeting and a proxy card. The Joint Proxy Statement/Prospectus more fully describes the proposed Merger and includes information about Suiza Foods and Morningstar and the reasons for the Merger. Your vote is important, regardless of the number of shares you own. Approval of the Merger, the Merger Agreement and transactions contemplated thereby requires an affirmative vote of holders of a majority of the authorized and outstanding shares of Morningstar common stock entitled to vote thereon. I RESPECTFULLY URGE YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. This will not prevent you from attending the Special Meeting or voting in person, but will assure that your vote is counted if you are unable to attend the Special Meeting.
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PLEASE DO NOT SEND YOUR SHARE CERTIFICATES WITH THE ENCLOSED PROXY CARD AT THIS TIME. Promptly after the Merger is consummated, you will be sent a letter of transmittal which will include instructions as to the procedures to be used in exchanging your certificates representing shares of Morningstar common stock for certificates representing shares of Suiza Foods common stock. If you have any questions or require additional information with respect to the proposed business combination, please contact Darron K. Ash at (214) 360-4700. On behalf of your Board of Directors, I thank you for your support and urge you to vote FOR approval of the Merger, the Merger Agreement and transactions contemplated thereby. Sincerely, /s/ C. Dean Metropoulos -------------------------------------- C. Dean Metropoulos CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER ii
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SUIZA FOODS CORPORATION 3811 TURTLE CREEK BLVD. SUITE 1300 DALLAS, TEXAS 75219 ------------------------ NOTICE OF SPECIAL MEETING OF THE STOCKHOLDERS TO BE HELD ON NOVEMBER 26, 1997 ------------------------ To the Stockholders of Suiza Foods Corporation NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Suiza Foods Corporation, a Delaware corporation ("Suiza Foods"), will be held on Wednesday, November 26, 1997 at 9:00 a.m. local time, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201 (the "Special Meeting") for the following purposes: 1. To consider and vote upon a proposal to approve the issuance of shares of Suiza Foods common stock in connection with the merger (the "Merger") of SF Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Suiza Foods ("Sub"), with and into The Morningstar Group Inc. ("Morningstar"), in accordance with the Agreement and Plan of Merger, dated as of September 28, 1997, among Suiza Foods, Sub and Morningstar (the "Merger Agreement"). Pursuant to the Merger Agreement (a) each share of Morningstar common stock issued and outstanding immediately prior to the Merger will be converted into the right to receive 0.85 shares of Suiza Foods common stock and (b) Suiza Foods will assume each of Morningstar's stock option plans and each option to acquire shares of Morningstar common stock outstanding thereunder, and each such option will become an option to acquire Suiza Foods common stock (collectively, the "Stock Issuance"). 2. To consider and vote upon a proposal to approve an increase in the number of shares of Suiza Foods common stock authorized for issuance under the Suiza Foods Corporation 1997 Stock Option and Restricted Stock Plan from 1,150,000 shares to 3,000,000 shares (the "Plan Amendment"). 3. To transact such other business as may properly come before the Special Meeting and any and all adjournments or postponements thereof. The close of business on October 27, 1997 has been fixed as the record date for the determination of the stockholders entitled to notice of and to vote at the Special Meeting. The affirmative vote of the holders of Suiza Foods common stock holding a majority of the shares of Suiza Foods common stock present and entitled to vote at the Special Meeting is required to approve the Stock Issuance and the Plan Amendment. Holders of Suiza Foods common stock will not have rights of appraisal in connection with the Merger. Stockholders are invited to attend the Special Meeting. Whether or not you expect to attend, WE URGE YOU TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If you attend the meeting, you may vote your shares in person, and thereby revoke any previously executed proxy. If your shares of Suiza Foods common stock are held of record by a broker, bank or other nominee and you wish to attend the Special Meeting, you must obtain a letter from the broker, bank or other nominee confirming your beneficial ownership of the shares and bring it to the Special Meeting. In order to vote your shares at the Special Meeting, you must obtain from the record holder a proxy issued in your name.
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Regardless of how many shares you own, your vote is very important. PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD TODAY. By Order of the Board of Directors /s/ Tracy L. Noll -------------------------------------- Tracy L. Noll SECRETARY Dallas, Texas October 28, 1997 ii
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THE MORNINGSTAR GROUP INC. 5956 SHERRY LANE, SUITE 1500 DALLAS, TEXAS 75225-6522 ------------------------ NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON NOVEMBER 26, 1997 ------------------------ To the Stockholders of The Morningstar Group Inc. NOTICE IS HEREBY GIVEN that a special meeting of stockholders of The Morningstar Group Inc., a Delaware corporation ("Morningstar"), will be held on Wednesday, November 26, 1997 at 9:00 a.m. local time, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201 (the "Special Meeting") for the following purposes: 1. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of September 28, 1997 (the "Merger Agreement"), by and among Morningstar, Suiza Foods Corporation, a Delaware corporation ("Suiza Foods"), and SF Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Suiza Foods ("Sub"), the Merger (as hereinafter defined) and the other transactions contemplated by the Merger Agreement. Upon the terms and subject to the conditions of the Merger Agreement, Sub will be merged (the "Merger") with and into Morningstar and Morningstar will become a wholly owned subsidiary of Suiza Foods. At the effective time of the Merger, and as more fully described in the accompanying Joint Proxy Statement and Prospectus and in the Merger Agreement included as Appendix A thereto, each share of common stock, par value $0.01 per share, of Morningstar ("Morningstar Common Stock") issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive 0.85 shares of common stock of Suiza Foods. 2. To transact such other business as may properly come before the Special Meeting and any and all adjournments or postponements thereof. The close of business on October 27, 1997 has been fixed as the record date for the determination of the stockholders entitled to notice of and to vote at the Special Meeting. The affirmative vote of a majority of the outstanding shares of Morningstar Common Stock entitled to vote at the Special Meeting is required to approve the Merger, the Merger Agreement and the transactions contemplated thereby. Holders of Morningstar Common Stock will not have rights of appraisal in connection with the Merger. Stockholders are invited to attend the Special Meeting. Whether or not you expect to attend, WE URGE YOU TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If you attend the meeting, you may vote your shares in person, and thereby revoke any previously executed proxy. If your shares of Morningstar Common Stock are held of record by a broker, bank or other nominee and you wish to attend the Special Meeting, you must obtain a letter from the broker, bank or other nominee confirming your beneficial ownership of the shares and bring it to the Special Meeting. In order to vote your shares at the Special Meeting, you must obtain from the record holder a proxy issued in your name.
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Regardless of how many shares you own, your vote is very important. PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD TODAY. By Order of the Board of Directors /s/ Michael J. Cramer -------------------------------------- Michael J. Cramer SECRETARY Dallas, Texas October 28, 1997 ii
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SUIZA FOODS CORPORATION AND THE MORNINGSTAR GROUP INC. ------------------ JOINT PROXY STATEMENT ------------------ PROSPECTUS OF SUIZA FOODS CORPORATION This Joint Proxy Statement/Prospectus constitutes the proxy statement of each of Suiza Foods Corporation, a Delaware corporation ("Suiza Foods"), and The Morningstar Group Inc., a Delaware corporation ("Morningstar"), relating to the solicitation of proxies for use at the special meetings of stockholders of each of Suiza Foods ("Suiza Stockholders") and Morningstar ("Morningstar Stockholders"), each of which is scheduled to be held on Wednesday, November 26, 1997, and at any adjournments or postponements thereof (respectively, the "Suiza Special Meeting" and the "Morningstar Special Meeting" and, collectively, the "Special Meetings"). This Joint Proxy Statement/Prospectus relates to the Agreement and Plan of Merger (the "Merger Agreement"), dated as of September 28, 1997, among Suiza Foods, SF Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Suiza Foods ("Sub"), and Morningstar, pursuant to which Sub will merge (the "Merger") with and into Morningstar (such combined company after the Merger is referred to herein as "New Morningstar") and each outstanding share of the common stock, $0.01 par value per share, of Morningstar ("Morningstar Common Stock") will be converted into the right to receive 0.85 shares (the "Exchange Ratio") of common stock, par value $0.01 per share, of Suiza Foods ("Suiza Common Stock"). Cash will be paid in lieu of any fractional shares of Suiza Common Stock. As a result of the Merger, Morningstar will become a wholly owned subsidiary of Suiza Foods. The consummation of the Merger is subject to (i) the approval of the issuance in the Merger of shares of Suiza Common Stock upon conversion of outstanding shares of Morningstar Common Stock (the "Stock Conversion") and of the assumption by Suiza Foods of Morningstar's stock option plans and each option to purchase shares of Morningstar Common Stock (each a "Morningstar Option") outstanding thereunder and the conversion of each Morningstar Option into a Substitute Option (as hereinafter defined) (the "Option Conversion" and, collectively with the Stock Conversion, the "Stock Issuance") by the affirmative vote of Suiza Stockholders holding a majority of the shares of Suiza Common Stock present and entitled to vote at the Suiza Special Meeting; (ii) the approval of the Merger, the Merger Agreement and the transactions contemplated thereby by the affirmative vote of Morningstar Stockholders holding a majority of the shares of Morningstar Common Stock outstanding and entitled to vote at the Morningstar Special Meeting; and (iii) certain other conditions set forth in the Merger Agreement. A copy of the Merger Agreement is attached to this Joint Proxy Statement/Prospectus as Appendix A and is incorporated herein by reference. This Joint Proxy Statement/Prospectus also constitutes the prospectus of Suiza Foods with respect to the shares of Suiza Common Stock to be issued to Morningstar Stockholders in connection with the Stock Conversion, which prospectus is a part of the registration statement on Form S-4 (the "Suiza Registration Statement") that has been filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Suiza Common Stock to be issued in the Stock Conversion. Based on the number of shares of Morningstar Common Stock outstanding on October 27, 1997, Suiza Foods will issue approximately 12,562,096 shares of Suiza Common Stock in the aggregate to the Morningstar Stockholders in connection with the Stock Conversion, and as a result of the Stock Conversion, Morningstar Stockholders will hold approximately 44.3% of the shares of Suiza Common Stock outstanding after the Merger. In addition, each Morningstar Option will be assumed by Suiza Foods and converted into an option (a "Substitute Option") to purchase a number of shares of Suiza Common Stock equal to the number of shares of Morningstar Common Stock subject to such Morningstar Option multiplied by the Exchange Ratio (rounded down to the nearest whole share) at a per share price equal to the per share exercise price of the Morningstar Option immediately prior to the Merger divided by the Exchange Ratio (rounded up to the nearest full cent). As of October 27, 1997, there were outstanding Morningstar Options to purchase approximately 3,479,985 shares of Morningstar Common Stock, which options will be converted into Substitute Options to purchase an aggregate of approximately 2,957,987 shares of Suiza Common Stock. Any shares of Suiza Common Stock that may be issued pursuant to the Stock Conversion or upon exercise of Substitute Options will be authorized for listing, subject to official notice of issuance, on the New York Stock Exchange (the "NYSE") prior to the effective time of the Merger. SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS JOINT PROXY STATEMENT/PROSPECTUS FOR A DISCUSSION OF CERTAIN MATTERS WITH RESPECT TO AN INVESTMENT IN SUIZA COMMON STOCK UPON CONSUMMATION OF THE MERGER. This Joint Proxy Statement/Prospectus and the accompanying form of proxy are first being mailed to Suiza Stockholders and Morningstar Stockholders on or about October 28, 1997. THE SHARES OF SUIZA COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/ PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR A SOLICITATION OF A PROXY FROM ANY PERSON, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SUIZA FOODS OR MORNINGSTAR AT ANY TIME SUBSEQUENT TO THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ------------------------------ THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS OCTOBER 28, 1997.
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AVAILABLE INFORMATION Suiza Foods and Morningstar are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by Suiza Foods and Morningstar with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. Suiza Common Stock is listed on the NYSE and traded under the symbol "SZA" and Morningstar Common Stock is authorized for trading on the Nasdaq Stock Market, National Market System ("Nasdaq") and traded under the symbol "MSTR". Reports and other information concerning Suiza Foods can also be inspected at the offices of the New York Stock Exchange, 30 Broad Street, New York, New York 10005 and reports and other information concerning Morningstar can also be inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. Upon consummation of the Merger, the Morningstar Common Stock will cease to be authorized for trading on Nasdaq. This Joint Proxy Statement/Prospectus, which constitutes a part of the Suiza Registration Statement, does not contain all of the information set forth in the Suiza Registration Statement, certain items of which are contained in schedules and exhibits to the Suiza Registration Statement as permitted by the rules and regulations of the Commission. For further information, reference is made to the Suiza Registration Statement, including the schedules and exhibits filed as a part thereof or incorporated by reference therein. Statements contained herein concerning the provisions of documents are necessarily summaries of such documents, and each such statement is qualified in its entirety by reference to the copy of the applicable document filed as an appendix hereto or as otherwise filed with the Commission. The Suiza Registration Statement and the exhibits and schedules thereto may be inspected, and copies thereof may be obtained, as set forth above.  INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents previously filed with the Commission pursuant to the Securities Act and the Exchange Act are incorporated herein by reference and shall be deemed a part hereof: SUIZA FOODS CORPORATION FILINGS 1. The audited financial statements of Garrido & Compania, Inc. and subsidiaries, Swiss Dairy, a Corporation and Model Dairy, Inc. included in the Suiza Foods Final Prospectus dated January 22, 1997 and filed with the Commission pursuant to Rule 424(b) on January 23, 1997 (File No. 333-18263). 2. Suiza Foods' Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 1-12755). 3. Suiza Foods' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and Suiza Foods' Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (as amended on October 24, 1997) (File No. 1-12755). 4. Suiza Foods' Current Reports on Form 8-K filed July 14, 1997 (as amended on August 22, 1997), which includes the audited financial statements of Dairy Fresh L.P. and The Garelick Companies, and Suiza Foods' Current Report on Form 8-K filed September 29, 1997 (File No. 1-12755). 5. The description of the Suiza Common Stock contained in Suiza Foods' Registration Statement on Form 8-A filed on February 19, 1997 (File No. 1-12755). THE MORNINGSTAR GROUP INC. FILINGS 1. Morningstar's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-19075). 2. Morningstar's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 (File No. 0-19934). ii
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3. Morningstar's Current Report on Form 8-K filed September 29, 1997 (File No. 0-19075). 4. Morningstar's Current Report on Form 8-K filed December 3, 1996 (as amended February 18, 1997), which includes the audited financial statements of Presto Foods Products, Inc. ("Presto") and affiliates (File No. 0-19075). All reports and other documents filed by either Suiza Foods or Morningstar pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Joint Proxy Statement/Prospectus and prior to the date of its Special Meeting shall be deemed to be incorporated by reference herein and to be a part hereof from the dates of filing of such reports and documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Joint Proxy Statement/Prospectus to the extent that a statement contained herein, or in any other subsequently filed document that also is incorporated or deemed to be incorporated by reference herein, modifies or supersedes the earlier statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Joint Proxy Statement/Prospectus. THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS THERETO WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF SHARES OF SUIZA COMMON STOCK OR MORNINGSTAR COMMON STOCK TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS SENT, UPON WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO SUIZA FOODS, TO THE CORPORATE SECRETARY OF SUIZA FOODS AT 3811 TURTLE CREEK BLVD., SUITE 1300, DALLAS, TEXAS 75219, TELEPHONE (214) 528-0939 AND, IN THE CASE OF DOCUMENTS RELATING TO MORNINGSTAR, TO THE GENERAL COUNSEL OF MORNINGSTAR AT 5956 SHERRY LANE, SUITE 1500, DALLAS, TEXAS 75225-6522, TELEPHONE (214) 360-4700. IN ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE SPECIAL MEETING, ANY SUCH REQUEST SHOULD BE MADE NOT LATER THAN WEDNESDAY, NOVEMBER 19, 1997. All information contained in this Joint Proxy Statement/Prospectus relating to Suiza Foods and its subsidiaries has been supplied by Suiza Foods and all information relating to Morningstar and its subsidiaries has been supplied by Morningstar. iii
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TABLE OF CONTENTS [Enlarge/Download Table] PAGE --------- AVAILABLE INFORMATION...................................................................................... ii INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... ii SUMMARY.................................................................................................... 1 The Companies............................................................................................ 1 Recent Developments...................................................................................... 1 The Special Meetings..................................................................................... 2 The Merger and the Merger Agreement...................................................................... 3 Risk Factors............................................................................................. 7 Cautionary Statement Concerning Forward-Looking Statements............................................... 7 Market Price and Dividend Information.................................................................... 8 Comparative Per Share Data............................................................................... 10 Summary Pro Forma Financial Data......................................................................... 11 Summary Financial Data of Suiza Foods.................................................................... 12 Summary Financial Data of Morningstar.................................................................... 13 Summary Financial Data of Country Fresh.................................................................. 14 RISK FACTORS............................................................................................... 15 Risks Associated with Acquisition Strategy............................................................... 15 Competition.............................................................................................. 15 Substantial Indebtedness................................................................................. 16 Government Regulation; Raw Material Costs................................................................ 16 Dependence on Key Personnel.............................................................................. 17 Limitations on Favorable Tax Treatment................................................................... 17 Antitakeover Provisions.................................................................................. 17 Expected Benefits of Combined Business May Not Be Achieved............................................... 17 Anticipated Accounting Treatment......................................................................... 17 THE COMPANIES.............................................................................................. 18 General.................................................................................................. 18 Recent Developments...................................................................................... 18 PRO FORMA FINANCIAL DATA................................................................................... 20 SELECTED FINANCIAL DATA OF SUIZA FOODS..................................................................... 30 SELECTED FINANCIAL DATA OF MORNINGSTAR..................................................................... 32 SELECTED FINANCIAL DATA OF COUNTRY FRESH................................................................... 33 THE SPECIAL MEETINGS....................................................................................... 34 General.................................................................................................. 34 Voting Securities and Record Dates....................................................................... 34 Purpose of Special Meetings.............................................................................. 34 Proxies.................................................................................................. 35 THE MERGER................................................................................................. 36 General.................................................................................................. 36 Background of the Merger................................................................................. 36 Reasons for the Merger; Recommendations of the Boards.................................................... 37 Opinion of Suiza Foods' Financial Advisor................................................................ 40 Opinion of Morningstar's Financial Advisor............................................................... 43 Anticipated Accounting Treatment......................................................................... 48 Restrictions on Resale by Affiliates..................................................................... 48 New Morningstar Board and Management Following the Merger................................................ 49 Board of Directors of Suiza Foods Following the Merger................................................... 49 Governmental Approvals................................................................................... 49 iv
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[Enlarge/Download Table] PAGE --------- Interests of Certain Persons in the Merger............................................................... 50 Absence of Appraisal Rights.............................................................................. 52 Stock Exchange Listing................................................................................... 52 Treatment of Stock Certificates.......................................................................... 52 THE MERGER AGREEMENT....................................................................................... 53 General.................................................................................................. 53 Consideration to Be Received in the Merger............................................................... 53 Effective Time of the Merger............................................................................. 53 Exchange of Shares....................................................................................... 53 Corporate Organization and Governance.................................................................... 54 Stockholders' Meetings................................................................................... 54 Representations and Warranties........................................................................... 55 Conduct of Business Pending the Merger................................................................... 55 Additional Agreements.................................................................................... 57 Employee Matters......................................................................................... 58 Indemnification.......................................................................................... 58 No Shop.................................................................................................. 59 Conditions Precedent..................................................................................... 60 Termination.............................................................................................. 61 Fees and Expenses........................................................................................ 62 CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER................................................. 62 General.................................................................................................. 62 Tax Consequences to Suiza Foods, Sub and Morningstar..................................................... 63 Tax Consequences to Morningstar Stockholders............................................................. 63 COMPARISON OF THE RIGHTS OF SUIZA STOCKHOLDERS AND MORNINGSTAR STOCKHOLDERS................................ 63 Authorized Capital....................................................................................... 64 Number of Directors; Election of Directors; Removal; Vacancies........................................... 64 Charter Amendments....................................................................................... 64 Bylaw Amendments......................................................................................... 65 Special Stockholder Meetings............................................................................. 65 Business Combinations.................................................................................... 65 State Takeover Legislation............................................................................... 65 Indemnification of Directors and Officers................................................................ 66 Limitation of Personal Liability of Directors............................................................ 66 Suiza Preferred Stock.................................................................................... 67 STOCK OPTION INCREASE...................................................................................... 68 The 1997 Plan............................................................................................ 68 Federal Income Tax Consequences.......................................................................... 69 Reasons for Proposal..................................................................................... 70 Interests of Certain Persons in Matters to be Acted Upon................................................. 70 LEGAL MATTERS.............................................................................................. 71 EXPERTS.................................................................................................... 71 INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1 APPENDICES:................................................................................................ A--Merger Agreement B--Fairness Opinion of Donaldson, Lufkin & Jenrette Securities Corporation C--Fairness Opinion of Goldman, Sachs & Co. v
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SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND IN THE APPENDICES HERETO INCLUDING, BUT NOT LIMITED TO, THE MERGER AGREEMENT SET FORTH AS APPENDIX A HERETO. CAPITALIZED TERMS WHICH ARE USED BUT NOT DEFINED IN THIS SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS OF SUIZA FOODS AND MORNINGSTAR ARE URGED TO READ CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO, AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, IN THEIR ENTIRETY. UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED HEREIN REFERENCES TO "SUIZA FOODS" MEAN SUIZA FOODS AND ITS SUBSIDIARIES, ON A CONSOLIDATED BASIS, REFERENCES TO "MORNINGSTAR" MEAN MORNINGSTAR AND ITS SUBSIDIARIES, ON A CONSOLIDATED BASIS, AND REFERENCES TO "COUNTRY FRESH" MEAN COUNTRY FRESH, INC. AND ITS SUBSIDIARIES, ON A CONSOLIDATED BASIS.  THE COMPANIES SUIZA FOODS AND SUB Suiza Foods is a leading manufacturer and distributor of fresh milk and related dairy products, plastic containers and packaged ice in the United States. Each of Suiza Foods' operating subsidiaries is a strong competitor with an established reputation for customer service and product quality. Suiza Foods' dairy and ice subsidiaries market their products through extensive distribution networks to a diverse group of customers, including convenience stores, grocery stores, schools and institutional food service customers. Suiza Foods' customers in the plastic container business include regional dairy manufacturers, bottled water processors and other beverage manufacturers. Suiza Foods has grown primarily through a successful acquisition strategy, having consummated 54 acquisitions since its inception in 1988, including 27 acquisitions since its initial public offering in April 1996. See "The Companies--General--Suiza Foods." Sub is a newly formed Delaware corporation and a wholly owned subsidiary of Suiza Foods. Sub was organized for the purpose of effecting the Merger pursuant to the Merger Agreement. Sub has no material assets and has not engaged in any activities except in connection with the Merger. The principal executive offices of Suiza Foods and Sub are located at 3811 Turtle Creek Blvd., Suite 1300, Dallas, Texas 75219, telephone number (214) 528-0939.  MORNINGSTAR Morningstar is a nationally prominent manufacturer, distributor and marketer of refrigerated, shelf-stable and frozen food products. Its established branded products include: International Delight-Registered Trademark-, a gourmet-flavored and non-flavored coffee creamer; Second Nature-Registered Trademark-, a refrigerated no-cholesterol egg substitute; Mocha Mix-Registered Trademark-, non-dairy coffee creamers; Naturally Yours-TM-, fat-free and regular, real dairy sour cream; Jon Donaire-Registered Trademark-, cheesecakes and desserts; Wacky Willie-TM-, flavored shakes; and, in the western two-thirds of the United States, Lactaid-Registered Trademark-, lactose-free and lactose-reduced milks produced under license from McNeil Consumer Products Company, a subsidiary of Johnson & Johnson. Morningstar also specializes in providing private label refrigerated, shelf-stable and frozen products to grocery warehouses, bakery/ industrial companies, club stores and dairy companies. Branded products are sold primarily to grocery warehouses serving the major supermarket chains through Morningstar's network of independent food brokers and nationwide sales force. Morningstar's other specialty products are marketed directly to dairy companies, supermarket wholesalers, grocery warehouses, food service outlets and food manufacturers. Morningstar's products are distributed to more than 3,200 customers in fifty states and to more than twenty foreign countries. The principal executive offices of Morningstar are located at 5956 Sherry Lane, Suite 1500, Dallas, Texas 75225, telephone number (214) 360-4700.  RECENT DEVELOPMENTS  SUIZA FOODS. On September 18, 1997, Suiza Foods entered into a merger agreement with Country Fresh, Inc. ("Country Fresh"). Pursuant to the merger agreement, upon satisfaction of certain closing 1
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conditions, Country Fresh stockholders would receive approximately 1.9 million shares of Suiza Common Stock upon conversion of their common stock in Country Fresh, and Country Fresh would become a wholly owned subsidiary of Suiza Foods (the "Country Fresh Merger"). Country Fresh recorded net sales of approximately $353 million during its fiscal year ended March 1, 1997. Country Fresh has called a special meeting of its shareholders for November 25, 1997 at which approval of the Country Fresh Merger will be considered. CONSUMMATION OF THE MERGER IS NOT CONDITIONED UPON OR SUBJECT TO THE CONSUMMATION OF THE COUNTRY FRESH MERGER. In connection with the Merger, Suiza Foods has received a commitment letter from its senior lenders to enter into new credit facilities that would increase Suiza Foods' total borrowing capacity to approximately $1.25 billion. See "The Companies--Recent Developments--Suiza Foods."  THE SPECIAL MEETINGS DATE, TIME AND PLACE  SUIZA FOODS. The Suiza Foods Special Meeting will be held on Wednesday, November 26, 1997, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas, 75201, commencing at 9:00 a.m. local time. See "The Special Meetings--General."  MORNINGSTAR. The Morningstar Special Meeting will be held on Wednesday, November 26, 1997, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas, 75201, commencing at 9:00 a.m. local time. See "The Special Meetings--General."  PURPOSE OF THE SPECIAL MEETINGS  SUIZA FOODS. The purpose of the Suiza Foods Special Meeting is to (i) consider and vote upon a proposal to approve the Stock Issuance in accordance with the Merger Agreement, (ii) consider and vote upon a proposal to increase the number of authorized shares of Suiza Common Stock reserved for issuance under the Suiza Foods Corporation 1997 Stock Option and Restricted Stock Plan (the "1997 Plan") from 1,150,000 shares to 3,000,000 shares (the "Plan Amendment" and, together with the Stock Issuance, the "Suiza Proposals") and (iii) transact such other business as may properly come before the Suiza Special Meeting and at any and all adjournments or postponements thereof. See "The Special Meetings--Purpose of Special Meetings--Suiza Foods."  MORNINGSTAR. The purpose of the Morningstar Special Meeting is to (i) consider and vote upon a proposal (the "Morningstar Proposal") to approve the Merger, the Merger Agreement and the transactions contemplated thereby and (ii) transact such other business as may properly come before the Morningstar Special Meeting and at any and all adjournments or postponements thereof. See "The Special Meetings--Purpose of Special Meetings--Morningstar." RECORD DATES; SHARES ENTITLED TO VOTE  SUIZA FOODS. Only holders of record of shares of Suiza Common Stock at the close of business on October 27, 1997 (the "Suiza Record Date") are entitled to notice of and to vote at the Suiza Special Meeting. On such date, there were 15,810,800 shares of Suiza Common Stock outstanding. Each share of Suiza Common Stock will be entitled to one vote on each matter to be acted upon at the Suiza Special Meeting. See "The Special Meetings--Voting Securities and Record Dates--Suiza Foods."  MORNINGSTAR. Only holders of record of shares of Morningstar Common Stock at the close of business on October 27, 1997 (the "Morningstar Record Date") are entitled to notice of and to vote at the Morningstar Special Meeting. On such date, there were 14,778,936 shares of Morningstar Common Stock outstanding. Each share of Morningstar Common Stock will be entitled to one vote on each matter to be acted upon at the Morningstar Special Meeting. See "The Special Meetings--Voting Securities and Record Dates--Morningstar." 2
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VOTE REQUIRED  SUIZA FOODS. The affirmative vote of the holders of a majority of the shares of Suiza Common Stock present at the Suiza Special Meeting and entitled to vote is required to approve the Suiza Proposals; provided, however, that the total number of votes cast on the Suiza Proposals represents more than 50% of the outstanding shares of Suiza Common Stock. Brokers who hold shares of Suiza Common Stock as nominees will not have discretionary authority to vote such shares in the absence of instructions from the beneficial owners thereof. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for transaction of business. Otherwise, abstention and broker non-votes will have no effect on the outcome of the vote on the Suiza Proposals. See "The Special Meetings--Voting Securities and Record Dates--Suiza Foods" and "--Proxies."  MORNINGSTAR. The affirmative vote of the holders of a majority of the shares of Morningstar Common Stock outstanding and entitled to vote is required to approve the Morningstar Proposal. Accordingly, an abstention with respect to the Morningstar Proposal will have the same effect as a vote cast against the Morningstar Proposal. Brokers who hold shares of Morningstar Common Stock as nominees will not have discretionary authority to vote such shares in the absence of instructions from the beneficial owners thereof. Any votes which are not cast by a nominee-broker will have the same effect as votes cast against the Morningstar Proposal. See "The Special Meetings--Voting Securities and Record Dates-- Morningstar" and "--Proxies." SECURITY OWNERSHIP OF MANAGEMENT  SUIZA FOODS. As of the close of business on the Suiza Record Date, the directors and executive officers of Suiza Foods owned approximately 15.2% of the outstanding shares of Suiza Common Stock entitled to be voted at the Suiza Special Meeting. Each of the directors and executive officers of Suiza Foods are expected to vote, or cause to be voted, all shares of Suiza Common Stock over which they exercise voting control "FOR" the approval and adoption of the Stock Issuance and the Plan Amendment. See "The Special Meetings--Voting Securities and Record Dates--Suiza Foods."  MORNINGSTAR. As of the close of business on the Morningstar Record Date, the directors and executive officers of Morningstar owned approximately 1.7% of the shares of Morningstar Common Stock outstanding and entitled to be voted at the Morningstar Special Meeting. All directors and executive officers of Morningstar are expected to vote, or cause to be voted, all shares of Morningstar Common Stock over which they exercise voting control "FOR" the approval and adoption of the Merger, the Merger Agreement and the transactions contemplated thereby. See "The Special Meetings--Voting Securities and Record Dates--Morningstar."  THE MERGER AND THE MERGER AGREEMENT  GENERAL Upon the terms and subject to the conditions of the Merger Agreement, Sub will be merged with and into Morningstar, and Morningstar will become a wholly owned subsidiary of Suiza Foods. See "The Merger--General." A copy of the Merger Agreement is attached as Appendix A to this Joint Proxy Statement/Prospectus and is incorporated herein by reference.  EFFECTIVE TIME The Merger will become effective at the date and time (the "Effective Time") when a properly executed certificate of merger (the "Certificate of Merger") is filed with the Secretary of State of the State of Delaware in accordance with applicable provisions of the Delaware General Corporation Law (the "DGCL"). The Certificate of Merger will be filed as soon as practicable following the fulfillment of the conditions set forth in the Merger Agreement. See "The Merger--General." 3
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CONVERSION OF SHARES In the Merger, each share of Morningstar Common Stock issued and outstanding immediately prior to the Effective Time (excluding those held in the treasury of Morningstar and those owned by Suiza Foods, Sub or any other subsidiary of Suiza Foods), without any action on the part of the holder thereof, will be converted into the right to receive 0.85 shares of Suiza Common Stock. Cash will be paid in lieu of any fractional share of Suiza Common Stock. See "The Merger Agreement--Consideration to be Received in the Merger."  OPTION CONVERSION In the Merger, each outstanding and unexercised Morningstar Option will be assumed by Suiza Foods and converted into a Substitute Option to purchase a number of shares of Suiza Common Stock equal to the number of shares of Morningstar Common Stock subject to such Morningstar Option multiplied by the Exchange Ratio (rounded down to the nearest whole share) at a per share price equal to the per share exercise price of the Morningstar Option immediately prior to the Merger divided by the Exchange Ratio (rounded up to the nearest full cent). BACKGROUND AND REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARDS  SUIZA FOODS. The Board of Directors of Suiza Foods (the "Suiza Board") has reviewed the Merger Agreement and the transactions contemplated thereby, and has considered, among other things, that Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has delivered its written opinion, dated September 28, 1997 (the "DLJ Opinion"), to the Suiza Board to the effect that, based upon and subject to certain matters stated therein, as of the date of such opinion, the Exchange Ratio pursuant to the Merger Agreement is fair to Suiza Stockholders from a financial point of view. The full text of the DLJ Opinion, which sets forth a description of the assumptions made, matters considered and limitations on the review undertaken, is attached to this Joint Proxy Statement/Prospectus as Appendix B and should be read carefully in its entirety. The Suiza Board has reviewed the terms and conditions of the Merger Agreement and considered a range of factors, including the opinion of DLJ. After consideration of these factors the Suiza Board concluded that the Merger is in the best interests of Suiza Stockholders. THE SUIZA BOARD UNANIMOUSLY RECOMMENDS THAT THE SUIZA STOCKHOLDERS VOTE "FOR" APPROVAL OF THE STOCK ISSUANCE. For a more detailed discussion of the factors considered by the Suiza Board in reaching its decision and the background and reasons for the Merger, see "The Merger--Background of the Merger" and "--Reasons for the Merger; Recommendations of the Boards--Suiza Foods."  MORNINGSTAR. The Board of Directors of Morningstar (the "Morningstar Board") has reviewed the Merger Agreement and the transactions contemplated thereby, and has considered, among other things, that Goldman, Sachs & Co. ("Goldman Sachs") has delivered its written opinion, dated as of September 28, 1997 (the "Goldman Sachs Opinion"), to the Morningstar Board to the effect that as of such date, the Exchange Ratio pursuant to the Merger Agreement was fair from a financial point of view to the holders of Morningstar Common Stock. The Morningstar Board has reviewed the terms and conditions of the Merger Agreement and considered a range of factors. After consideration of these factors, the Morningstar Board unanimously concluded that the Merger is fair to and in the best interests of the Morningstar Stockholders and unanimously approved the Merger Agreement. THE MORNINGSTAR BOARD UNANIMOUSLY RECOMMENDS THAT THE MORNINGSTAR STOCKHOLDERS VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. See "The Merger--Background of the Merger" and "--Reasons for the Merger; Recommendations of the Boards--Morningstar." OPINIONS OF FINANCIAL ADVISORS In deciding to approve the Merger, each of the Suiza Board and the Morningstar Board (together, the "Boards") considered opinions from their respective financial advisors as to the fairness of the Exchange Ratio from a financial point of view. 4
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DLJ has delivered to the Suiza Board the DLJ Opinion to the effect that, based upon and subject to certain matters stated therein, as of the date of such opinion, the Exchange Ratio is fair from a financial point of view to the Suiza Stockholders. The full text of the DLJ Opinion which sets forth assumptions made, matters considered and limitations on the review undertaken in connection with the opinion is attached to this Joint Proxy Statement/Prospectus as Appendix B and is incorporated herein by reference. The DLJ Opinion was provided for the information and assistance of the Suiza Board in connection with its consideration of the transactions contemplated by the Merger Agreement, and such opinion does not constitute a recommendation as to how any Suiza Stockholder should vote with respect to such transaction. SUIZA STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. Goldman Sachs delivered its oral opinion on September 28, 1997, which was subsequently confirmed in writing, to the Morningstar Board to the effect that as of the date of such opinion the Exchange Ratio pursuant to the Merger Agreement was fair from a financial point of view to the holders of Morningstar Common Stock. The full text of the Goldman Sachs Opinion, which sets forth assumptions made, matters considered and limitations on the review undertaken in connection with the opinion is attached to this Joint Proxy Statement/Prospectus as Appendix C and is incorporated herein by reference. The Goldman Sachs Opinion was provided for the information and assistance of the Morningstar Board in connection with its consideration of the transactions contemplated by the Merger Agreement, and such opinion does not constitute a recommendation as to how any holder of Morningstar Common Stock should vote with respect to such transaction. MORNINGSTAR STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "The Merger--Opinion of Suiza Foods' Financial Advisor" and "--Opinion of Morningstar's Financial Advisor." OWNERSHIP OF SUIZA FOODS FOLLOWING THE MERGER Based on the number of shares of Suiza Common Stock and Morningstar Common Stock outstanding on October 27, 1997, the shares of Suiza Common Stock issued to Morningstar Stockholders in the Merger will constitute approximately 44.3% of the Suiza Common Stock outstanding after the Merger. On the same basis but also assuming that 1,911,075 additional shares of Suiza Common Stock are issued in the Country Fresh Merger, Morningstar Stockholders will hold approximately 41.5% of the Suiza Common Stock outstanding after the Merger. Each outstanding and unexercised Morningstar Option will be assumed by Suiza Foods in the Merger and converted into a Substitute Option. Following the Merger, approximately 2,957,987 shares of Suiza Common Stock will be issuable upon the exercise of Substitute Options, based on the number of shares of Morningstar Common Stock subject to Morningstar Options as of October 27, 1997, multiplied by the Exchange Ratio. The per share exercise price of the Substitute Options will equal the per share exercise price of the Morningstar Options divided by the Exchange Ratio.  ANTICIPATED ACCOUNTING TREATMENT The Merger is intended to qualify for "pooling of interests" accounting treatment under generally accepted accounting principles. Receipt by Suiza Foods and Sub of advice in writing from Deloitte & Touche, LLP, and receipt by Morningstar of advice in writing from Arthur Andersen LLP, in each case, that the merger will qualify for pooling of interests accounting treatment is a condition to the consummation of the Merger. See "Risk Factors--Anticipated Accounting Treatment" and "The Merger--Anticipated Accounting Treatment." 5
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CERTAIN TAX CONSEQUENCES Consummation of the Merger is conditioned upon, among other things, receipt by Morningstar of an opinion of its tax counsel, Weil, Gotshal & Manges LLP, and by Suiza Foods of an opinion of its tax counsel, Hughes & Luce, L.L.P, in each case, that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, Morningstar Stockholders are not expected to recognize any gain or loss on the exchange of shares of Morningstar Common Stock for shares of Suiza Common Stock pursuant to the Merger, except to the extent that any Morningstar Stockholder receives cash in lieu of fractional shares of Suiza Common Stock. All stockholders should read carefully the discussion under the caption "Certain U.S. Federal Income Tax Consequences of the Merger" and other sections of this Joint Proxy Statement/Prospectus. Stockholders are also urged to consult their own tax advisors as to the specific consequences to them of the Merger under U.S. federal, state, local or any other applicable tax laws. See "Certain U.S. Federal Income Tax Consequences of the Merger."  NEW MORNINGSTAR BOARD AND MANAGEMENT FOLLOWING THE MERGER If the proposed Merger is approved and consummated, Morningstar Stockholders will become stockholders of Suiza Foods, which will conduct its business under the direction of the Board of Directors and management of Suiza Foods. The directors of Sub immediately prior to the Effective Time will be the initial directors of New Morningstar and the officers of Sub immediately prior to the Effective Time will be the initial officers of New Morningstar.  BOARD OF DIRECTORS OF SUIZA FOODS FOLLOWING THE MERGER Following the Merger, the Board of Directors of Suiza Foods (the "New Suiza Board") will consist of 12 members. Two members of the New Suiza Board will be present members of the Morningstar Board, and the remainder of the New Suiza Board will be Suiza Foods' current directors. For information about the two nominees, see "The Merger--Board of Directors of Suiza Foods Following the Merger." Suiza Foods has also agreed to add a thirteenth member to its Board of Directors upon completion of the Country Fresh Merger.  GOVERNMENTAL APPROVALS Pursuant to the Merger Agreement, on October 21, 1997 Suiza Foods and Morningstar each filed with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "DOJ") a notification and report, together with requests for early termination of the applicable waiting period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to the Merger. Expiration or early termination of the applicable waiting period under the HSR Act is a condition to the obligations of Suiza Foods and Morningstar to consummate the Merger. The applicable waiting period under the HSR Act is scheduled to expire at 11:59 p.m. on November 20, 1997. Neither Suiza Foods nor Morningstar is aware of any other governmental or regulatory approval required for consummation of the Merger, other than compliance with applicable securities laws. See "The Merger--Governmental Approvals."  ABSENCE OF APPRAISAL RIGHTS Under the DGCL, the Suiza Stockholders are not entitled to appraisal rights with respect to the Stock Issuance and the Morningstar Stockholders are not entitled to appraisal rights with respect to the Merger. See "The Merger--Absence of Appraisal Rights." 6
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CONDITIONS PRECEDENT TO THE MERGER The obligations of Suiza Foods, Morningstar and Sub to effect the Merger are subject, among other things, to the fulfillment or, where permissible, waiver of certain conditions, including without limitation: (i) the approval of the Merger, the Merger Agreement and the transactions contemplated thereby by the requisite vote of the Morningstar Stockholders and the approval of the Stock Issuance by the requisite vote of the Suiza Stockholders; (ii) the expiration or termination of any waiting period applicable to the consummation of the Merger under the HSR Act; (iii) the effectiveness of the Registration Statement and the absence of a stop order suspending such effectiveness; (iv) there not having been issued or in effect any preliminary or permanent injunction or order by any federal or state court in the United States of competent jurisdiction prohibiting the consummation of the Merger; (v) the listing on the NYSE, subject only to official notice of issuance, of the shares of Suiza Common Stock to be issued pursuant to the Stock Issuance; (vi) Morningstar having received an opinion of Weil, Gotshal & Manges LLP, and Suiza Foods having received an opinion of Hughes & Luce, L.L.P, in each case, that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code and (vii) Morningstar having received a letter from Arthur Andersen LLP, and Suiza Foods and Sub having received a letter from Deloitte & Touche LLP, in each case, dated as of the closing date, to the effect that the Merger will qualify for pooling of interest accounting treatment if consummated in accordance with the Merger Agreement. See "Risk Factors--Anticipated Accounting Treatment" and "The Merger Agreement--Conditions Precedent." TERMINATION OF THE MERGER Under certain circumstances the Merger Agreement may be terminated and the Merger abandoned prior to the Effective Time. Under certain circumstances in connection with the termination of the Merger Agreement, one party may be required to reimburse the other party for its expenses up to $2,000,000 and to pay the other party a termination fee of $20,000,000. See "The Merger Agreement--Termination." COMPARATIVE RIGHTS OF HOLDERS OF SUIZA COMMON STOCK AND MORNINGSTAR COMMON STOCK The rights of holders of Morningstar Common Stock are currently governed by Delaware law and by Morningstar's Restated Certificate of Incorporation (the "Morningstar Charter") and Bylaws (the "Morningstar Bylaws"). If the Merger is consummated, the rights of former Morningstar Stockholders who become Suiza Stockholders pursuant to the Merger will thereafter be governed by Delaware law and by Suiza Foods' Certificate of Incorporation (the "Suiza Charter") and Bylaws (the "Suiza Bylaws"). The rights of Suiza Stockholders differ in certain respects from those of the Morningstar Stockholders. See "Comparison of the Rights of Suiza Stockholders and Morningstar Stockholders" for a description of such differences.  INTERESTS OF CERTAIN PERSONS IN THE MERGER For information regarding interests of certain officers and directors of Morningstar separate from and in addition to their interests as stockholders of Morningstar generally, see "The Merger--Interests of Certain Persons in the Merger."  RISK FACTORS SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY THE MORNINGSTAR STOCKHOLDERS IN CONNECTION WITH AN INVESTMENT IN SUIZA FOODS UPON CONSUMMATION OF THE MERGER.  CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This Joint Proxy Statement/Prospectus contains or incorporates by reference "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are subject to risks and uncertainties. All statements other than statements of historical fact included in 7
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this Joint Proxy Statement/Prospectus, including, without limitation, statements under "The Merger-- Background of the Merger," "--Reasons for the Merger; Recommendations of the Boards," "--Opinion of Suiza Foods' Financial Advisor" and "--Opinion of Morningstar's Financial Advisor" regarding the financial position, business strategy and plans and objectives of management of Suiza Foods and Morningstar are forward-looking statements. Although Suiza Foods and Morningstar believe that the expectations reflected in such forward-looking statements, to the extent applicable to each of them, are reasonable, neither can give any assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") are disclosed under "Risk Factors" and elsewhere in this Joint Proxy Statement/Prospectus, including, without limitation, in conjunction with the forward-looking statements included herein. All subsequent written and oral forward-looking statements attributable to Suiza Foods, Morningstar or persons acting on their behalf are expressly qualified in their entirety by the Cautionary Statements.  MARKET PRICE AND DIVIDEND INFORMATION MARKET PRICE The Suiza Common Stock began trading on Nasdaq on April 17, 1996. Effective March 5, 1997, the Suiza Common Stock began trading on the NYSE. The Morningstar Common Stock began trading on Nasdaq on April 24, 1992. The following table sets forth, for the periods from April 17, 1996 to October 27, 1997, the high and low sales prices of the Suiza Common Stock as quoted on Nasdaq and the NYSE, as applicable, and for the periods from January 1, 1995 to October 27, 1997, the high and low sales price of the Morningstar Common Stock as quoted on Nasdaq. On October 27, 1997, the last reported sales price of the Suiza Common Stock on the NYSE was $47.00 per share and the last reported sales price of the Morningstar Common Stock on Nasdaq was $38.50 per share. At September 30, 1997, there were approximately 77 record holders of Suiza Common Stock and 124 record holders of Morningstar Common Stock. [Enlarge/Download Table] SUIZA MORNINGSTAR COMMON STOCK COMMON STOCK PRICES PRICES -------------------- -------------------- HIGH LOW HIGH LOW --------- --------- --------- --------- 1995 First Quarter....................................... N/A N/A $ 7.50 $ 5.50 Second Quarter...................................... N/A N/A 8.00 6.38 Third Quarter....................................... N/A N/A 9.25 6.38 Fourth Quarter...................................... N/A N/A 9.00 7.50 1996 First Quarter....................................... N/A N/A 10.00 7.88 Second Quarter...................................... $ 18.75 $ 14.00 12.25 9.13 Third Quarter....................................... 17.75 15.75 11.88 10.25 Fourth Quarter...................................... 20.75 16.75 20.00 11.88  1997 First Quarter....................................... 29.25 19.50 25.50 17.25 Second Quarter...................................... 42.00 24.75 29.50 19.00 Third Quarter....................................... 57.50 39.13 45.00 27.13 Fourth Quarter (through October 27, 1997)........... 55.00 46.88 44.38 38.50 On September 26, 1997, the last full trading day prior to the first public announcement of the execution of the Merger Agreement, and on October 27, 1997, the last full trading day prior to the date of 8
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this Joint Proxy Statement/Prospectus, the reported high and low sale prices per share and closing price per share of Suiza Common Stock on the NYSE and Morningstar Common Stock on Nasdaq were as follows: [Enlarge/Download Table] SEPTEMBER 26, 1997 OCTOBER 27, 1997 ------------------------------- ------------------------------- HIGH LOW CLOSE HIGH LOW CLOSE --------- --------- --------- --------- --------- --------- Suiza Foods........................ $ 54.63 $ 53.50 $ 53.94 $ 50.13 $ 46.88 $ 47.00 Morningstar........................ 41.00 39.75 40.00 41.44 37.13 38.50 EQUIVALENT PER SHARE PRICES The following table sets forth the last reported sale price of the Suiza Common Stock on September 26, 1997, the last full trading day prior to the first public announcement of the execution of the Merger Agreement, and on October 27, 1997, the last practicable day prior to the mailing of this Joint Proxy Statement/Prospectus. The equivalent per share price of the Morningstar Common Stock was determined by multiplying the last reported sale price of a share of Suiza Common Stock at each specified date by the Exchange Ratio. These assumptions are made solely for the purpose of calculating the pro forma data presented below and are not intended to be, nor should they be, interpreted as a representation or an approximation of the actual value of the Suiza Common Stock to be issued in the Merger. For a discussion of the terms upon which Morningstar Common Stock will be converted into Suiza Common Stock in the Merger, see "The Merger--General." [Enlarge/Download Table] EQUIVALENT PRICE PER PRICE OF SUIZA SHARE OF MORNINGSTAR COMMON STOCK COMMON STOCK --------------- --------------------- September 26, 1997...................................... $ 53.94 $ 45.85 October 27, 1997........................................ 47.00 39.95 THE MARKET PRICE OF THE SUIZA COMMON STOCK AND MORNINGSTAR COMMON STOCK WILL FLUCTUATE BETWEEN THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE EFFECTIVE DATE. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR SHARES OF SUIZA COMMON STOCK AND MORNINGSTAR COMMON STOCK. DIVIDENDS  SUIZA FOODS. Suiza Foods has never declared or paid a cash dividend on the Suiza Common Stock. Management intends to retain all earnings to cover working capital fluctuations and to fund capital expenditures, scheduled debt repayments and acquisitions, and does not anticipate paying cash dividends on the Suiza Common Stock in the foreseeable future. In addition, Suiza Foods' senior credit facilities prohibit the payment of dividends by Suiza Foods on any shares of Suiza Common Stock, other than dividends payable solely in shares of Suiza Common Stock.  MORNINGSTAR. Morningstar last declared and paid a cash dividend on the Morningstar Common Stock in the first quarter of 1994 to holders of record as of December 31, 1993. Management intends to retain all earnings to cover working capital fluctuations and to fund capital expenditures, scheduled debt repayments and acquisitions, and does not anticipate paying cash dividends on the Morningstar Common Stock in the foreseeable future. In addition, Morningstar's senior credit facilities prohibit the payment of dividends by Morningstar on any shares of Morningstar Common Stock, other than dividends payable solely in shares of Morningstar Common Stock. 9
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COMPARATIVE PER SHARE DATA The following table sets forth certain historical per share data for Suiza Foods and Morningstar and unaudited pro forma and equivalent pro forma per share data. See "Pro Forma Financial Data." Earnings (loss) per common share are presented for the six months ended June 30, 1997 and for each of the three years in the period ended December 31, 1996. Book value per share is presented as of June 30, 1997 and December 31, 1996. These data should be read in conjunction with the selected financial data and the pro forma financial data included in this Joint Proxy Statement/Prospectus and the separate financial statements of Suiza Foods, Morningstar and Country Fresh and the respective notes thereto. The pro forma financial data is not necessarily indicative of the operating results or financial position that would have occurred had the mergers been consummated at the beginning of the earliest period presented and should not be construed as indicative of future operations. [Enlarge/Download Table] UNAUDITED SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- --------------- 1994 1995 1996 1997 --------- --------- --------- --------------- HISTORICAL--SUIZA FOODS Earnings (loss) per common share(a)................................... $ 0.66 $ (1.64) $ 2.59 $ 1.36 Book value per common share at the end of period(b)................... 1.80 1.50 8.71 13.65 HISTORICAL--MORNINGSTAR Earnings per common share(a).......................................... $ 0.71 $ 0.76 $ 0.96 $ 0.64 Book value per common share at the end of period(b)................... 4.48 5.07 5.80 6.46 UNAUDITED PRO FORMA DATA PER SHARE OF SUIZA COMMON STOCK Earnings per share(c)................................................. $ 0.76 $ 0.64 $ 2.45 $ 1.48 Book value per share at the end of period............................. N/A N/A 7.59 10.76 UNAUDITED EQUIVALENT PRO FORMA DATA PER SHARE OF MORNINGSTAR COMMON STOCK(D) Earnings per share.................................................... $ 0.65 $ 0.54 $ 2.08 $ 1.26 Book value per share at the end of period............................. N/A N/A 6.45 9.15 ------------------------ (a) The historical earnings per common share are based upon the weighted average number of common shares outstanding, as adjusted for the Suiza Foods' stock split, for each period indicated. (b) The historical book value per common share is computed by dividing stockholders' equity by the number of shares of common stock outstanding at the end of each period indicated. (c) The unaudited pro forma earnings per common share is based upon the pro forma weighted average number of common shares outstanding for each period indicated. (d) The unaudited equivalent pro forma per common share data is calculated by multiplying the unaudited pro forma per common share data by 0.85. 10
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SUMMARY PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) The following summary pro forma financial data are based on adjustments to the historical consolidated balance sheets and related consolidated statements of income of Suiza Foods to give effect to the Merger and the Country Fresh Merger using the pooling of interests method of accounting and, for the year ended December 31, 1996 and the six-month period ended June 30, 1997, the business combinations completed by Suiza Foods and Morningstar during 1996 and 1997 on a purchase accounting basis. Country Fresh's consolidated financial statements are based on a fiscal year ending on the Saturday nearest to the end of February, while the fiscal years of Suiza Foods and Morningstar end on December 31. As a result, the unaudited pro forma financial information combines different fiscal periods. The unaudited pro forma balance sheet as of June 30, 1997 assumes that the above described transactions occurred as of such date and reflects the combination of the historical balance sheets of Suiza Foods and Morningstar as of June 30, 1997 with the historical balance sheet of Country Fresh as of July 19, 1997. The pro forma statements of income for the years ended December 31, 1994, 1995 and 1996 and the six month period ended June 30, 1997 (i) assume that the merger with Country Fresh and the merger with Morningstar had been consummated as of January 1, 1994, and combine the historical results of operations of Suiza Foods and Morningstar for those periods with the historical results of operations of Country Fresh for the fiscal years ended February 25, 1995, March 2, 1996 and March 1, 1997, and the six-month period (26 weeks) ended July 19, 1997, respectively and (ii) assume that the business combinations completed by Suiza Foods and Morningstar in 1996 and 1997 on a purchase accounting basis had been consummated as of January 1, 1996. For ease of reference, all column headings used in the table below refer to the period-ended dates for Suiza Foods. The summary pro forma data presented below should be read in conjunction with the selected financial data of Suiza Foods, Country Fresh and Morningstar, the unaudited pro forma financial data and notes thereto, "Recent Developments" and the financial statements and other financial information included elsewhere in this Joint Proxy Statement/Prospectus and in the documents incorporated herein by reference. The unaudited pro forma income statement data are not necessarily indicative of the operating results that would have occurred had the Merger and the Country Fresh Merger occurred on January 1, 1994, nor are they necessarily indicative of future operating results of the combined companies. [Enlarge/Download Table] UNAUDITED SIX UNAUDITED MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ------------- 1994 1995 1996 1997 ------------- ------------- ------------- ------------- PRO FORMA INCOME STATEMENT DATA: Net Sales......................................... $ 938,866 $ 1,065,433 $ 2,014,626 $ 1,022,064 Operating income.................................. 49,470 57,910 135,171 80,118 Interest expense, net............................. 23,817 25,615 66,439 28,579 Net income from continuing operations............. 17,534 13,833 61,607 46,196 Net income from continuing operations applicable to common shares................................ 17,534 13,529 61,308 46,046 Net earnings per common share..................... .76 .64 2.45 1.48 Weighted average common shares outstanding........ 23,106,841 21,036,608 25,066,383 31,113,819 [Download Table] PRO FORMA BALANCE SHEET DATA (AT END OF PERIOD): Total assets........................................................ $1,312,265 Long term debt, excluding current portion........................... 729,825 Preferred Stock..................................................... 3,741 Total common stockholders' equity................................... 321,851 11
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SUMMARY FINANCIAL DATA OF SUIZA FOODS (IN THOUSANDS, EXCEPT SHARE DATA) The following table sets forth selected historical consolidated financial data for Suiza Foods for each of the three years in the period ended December 31, 1996 and for the unaudited six-month periods ended June 30, 1996 and 1997. Such data have been derived from, and should be read in conjunction with, the audited consolidated financial statements and unaudited interim financial statements and other financial information contained elsewhere in this Joint Proxy Statement/Prospectus or incorporated by reference herein. See "Available Information" and "Incorporation of Certain Information by Reference." [Enlarge/Download Table] UNAUDITED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------ ------------------------- 1994 1995 1996 1996 1997 ----------- ---------- ----------- ----------- ------------ INCOME STATEMENT DATA: Net sales............................................... $ 341,108 $ 430,466 $ 520,916 $ 225,307 $ 336,819 Income from operations.................................. 25,760 30,564 35,122 14,943 23,149 Interest expense, net................................... 19,279 19,921 17,470 8,488 6,580 Income (loss) before extraordinary losses............... 4,245 (1,576) 27,929 4,936 24,399 Net income (loss)(1).................................... 4,048 (10,038) 25,714 2,721 21,129 Earnings (loss) per share: Income (loss) before extraordinary loss............... .69 (.26) 2.81 .58 1.57 Extraordinary loss.................................... (.03) (1.38) (.22) (.26) (.21) Net income (loss)(1).................................. .66 (1.64) 2.59 .32 1.36 Weighted average shares outstanding..................... 6,156,387 6,109,398 9,921,822 8,455,332 15,509,388 BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................................ $ 238,952 $ 232,522 $ 384,148 $ 237,973 $ 402,306 Long term debt, excluding current portion............... 173,327 171,745 226,693 134,334 128,150 Total stockholders' equity.............................. 9,887 9,460 93,532 60,789 208,633 -------------------------- (1) Net income (loss) and related per share amounts include the following nonrecurring and extraordinary charges and benefits: [Enlarge/Download Table] SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Merger, financing and other costs (a).................... $ (1,602) $ (9,554) $ (354) $ -- $ -- Tax benefits (b)......................................... -- -- 13,950 -- 11,500 Extraordinary loss from early extinguishment of debt (c).................................................... (197) (8,462) (2,215) (2,215) (3,270) --------- --------- --------- --------- --------- $ (1,799) $ (18,016) $ 11,381 $ (2,215) 8,230 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (a) Consists of costs incurred in connection with the corporate combination pursuant to which Suiza Foods was formed as a holding company for certain pre-existing operations, an uncompleted public offering of shares of Suiza Common Stock, an uncompleted debt offering, uncompleted acquisitions and debt refinancing costs, net of associated income taxes of $58 in 1994, $684 in 1995 and $217 in 1996. (b) For 1996, includes the sale of Puerto Rico tax credits of $3,400 (net of related expenses), reflected in other income, and the recognition of $11,750 in deferred income tax benefits recorded as a credit to tax expense, both effects related to tax credits generated by Suiza-Puerto Rico, partially offset by additional income tax expense of $1,200 related to the sale of the tax credits. For the six months ended June 30, 1997, includes a nonrecurring gain of $18,100, net of discounts and related expenses, resulting from additional tax credits generated by Suiza-Puerto Rico that Suiza Foods subsequently sold to third parties, partially offset by additional income tax expense of $6,600 related to the sale of tax credits. (c) Net of associated income taxes of approximately $700 in 1995, $900 in 1996 and $2,000 for the six months ended June 30, 1997. 12
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SUMMARY FINANCIAL DATA OF MORNINGSTAR (IN THOUSANDS, EXCEPT SHARE DATA) The following table sets forth selected historical consolidated financial data for Morningstar for each of the three years in the period ended December 31, 1996 and for the unaudited six-month periods ended June 30, 1996 and 1997. Such data have been derived from, and should be read in conjunction with, the audited consolidated financial statements and unaudited interim financial statement and other financial information contained elsewhere in this Joint Proxy Statement/Prospectus or incorporated by reference herein. See "Available Information" and "Incorporation of Certain Information by Reference." [Enlarge/Download Table] UNAUDITED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Net Sales............................................... $ 292,314 $ 304,730 $ 394,306 $ 167,417 $ 270,672 Income from operations.................................. 18,407 20,428 26,160 10,644 23,427 Interest expense, net................................... 4,797 4,302 4,026 1,532 6,798 Income from continuing operations (1)................... 9,321 11,340 14,576 6,294 9,961 Net income.............................................. 10,647 11,524 14,576 6,294 9,961 Earnings per share: Income from continuing operations (1)................. .62 .74 .96 .42 .64 Income from discontinued operations................... .09 .02 -- -- -- Net Income............................................ .71 .76 .96 .42 .64 Weighted average shares outstanding..................... 15,050,538 15,245,562 15,133,887 14,778,316 15,643,651 BALANCE SHEET DATA (AT END OF PERIOD): Total assets.......................................... $ 165,265 $ 162,709 $ 355,991 $ 170,042 $ 352,323 Long-term debt, excluding current portion............. 53,892 36,000 177,349 30,463 169,200 Total common stockholders' equity..................... 66,802 77,323 88,788 79,748 99,443 -------------------------- (1) Represents income before income from discontinued operations of $1,326 in 1994 and $184 in 1995. 13
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SUMMARY FINANCIAL DATA OF COUNTRY FRESH (IN THOUSANDS, EXCEPT SHARE DATA) The following table sets forth selected historical consolidated financial data for Country Fresh for each of the three years in the period ended March 1, 1997 and for the unaudited 20 weeks ended June 20, 1996 and July 19, 1997. Such data has been derived from, and should be read in conjunction with, the audited and unaudited consolidated financial statements and financial information contained elsewhere in this Joint Proxy Statement/Prospectus. [Enlarge/Download Table] UNAUDITED YEARS ENDED 20 WEEKS ENDED -------------------------------------- ------------------------ FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19, 1995 1996 1997 1996 1997 ------------ ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Net sales.............................................. $ 310,164 $ 336,055 $ 353,037 $ 135,328 $ 136,154 Operating income....................................... 5,303 6,918 10,841 6,028 6,451 Interest expense (income), net......................... (259) 1,392 1,219 613 597 Earnings from continuing operations (1)................ 3,968 4,069 6,673 3,642 4,029 Net earnings........................................... 1,696 4,069 6,673 3,642 4,029 Net earnings applicable to common shares............... 1,696 3,765 6,371 3,566 3,954 Net earnings per common share: Earnings from continuing operations.................. .52 1.04 1.75 .97 1.07 Cumulative effect of change in accounting............ (.30) -- -- -- -- Net earnings......................................... .22 1.04 1.75 .97 1.07 Weighted average common shares outstanding............. 7,622,840 3,609,245 3,636,519 3,631,758 3,685,236 BALANCE SHEET DATA (AT END OF PERIOD): Total assets........................................... $ 98,870 $ 94,765 $ 99,206 $ 105,565 $ 101,942 Long term debt, excluding current portion.............. 14,217 32,152 28,571 36,318 26,523 Preferred stock........................................ -- 3,800 3,741 3,800 3,741 Total common stockholders' equity...................... 51,265 21,326 27,793 25,002 31,775 -------------------------- (1) Represents earnings before cumulative effect of change in accounting for post-retirement benefits other than pensions. 14
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RISK FACTORS IN CONSIDERING THE MATTERS SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS, MORNINGSTAR STOCKHOLDERS SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE SIGNIFICANT RISKS AND SPECULATIVE FACTORS DESCRIBED BELOW, WHICH ARE ASSOCIATED WITH AN INVESTMENT IN SUIZA COMMON STOCK UPON CONSUMMATION OF THE MERGER.  RISKS ASSOCIATED WITH ACQUISITION STRATEGY Suiza Foods' strategy is to continue to expand its dairy, ice, food distribution and related food businesses primarily through acquisitions of strong regional operators in new markets and consolidating or add-on acquisitions in its existing markets. Suiza Foods will evaluate specific acquisition opportunities based on market conditions and economic factors existing at the time and intends to pursue favorable opportunities as they arise. Suiza Foods may encounter increased competition for acquisitions in the future, which could result in acquisition prices Suiza Foods does not consider acceptable. There can be no assurance that Suiza Foods will find suitable acquisition candidates at acceptable prices or succeed in integrating acquired businesses into Suiza Foods' existing business or in retaining key customers of acquired businesses. There can also be no assurance that Suiza Foods will have sufficient available capital resources to realize its acquisition strategy. See "--Substantial Indebtedness." Although Suiza Foods often acquires operations in new markets requiring minimal integration, the success of Suiza Foods' acquisition strategy is also dependent on the ability of Suiza Foods to integrate add-on acquisitions into Suiza Foods' existing operations in established markets. In addition, Suiza Food's recent growth has placed, and is expected to continue to place, a significant strain on its management, operational and financial resources. The Merger will significantly expand, and will require integration of Morningstar's operations into, Suiza Foods' operations. There can be no assurance that the integration and management of Morningstar's operations and future acquired operations will not result in unforeseen difficulties, or require the investment of capital or absorb significant management resources at levels higher than that anticipated by management, or that Suiza Foods will realize meaningful economies of scale or operating efficiencies from its acquisitions. The failure of Suiza Foods to successfully integrate and manage acquired operations (including, without limitation, Morningstar's operations) could have a material adverse effect on Suiza Foods.  COMPETITION Suiza Foods' regional dairy businesses are subject to significant competition from regional dairy operations and large national food service distributors that operate in Suiza Foods' markets. Competition in the dairy processing, fruit drink and food distribution businesses is based primarily on service, price, brand recognition, quality and breadth of product line. Certain of Suiza Foods' competitors are large, well capitalized and may have greater financial, operational and marketing resources than Suiza Foods. The dairy industry has excess capacity and has been in the process of consolidation for many years. Excess capacity has resulted from the development of more efficient manufacturing techniques, the establishment of captive dairy manufacturing operations by large grocery retailers and relatively little growth in the demand for fresh milk products. Any expansion of production capacity in one of Suiza Foods' regional markets could have an adverse effect on Suiza Foods' operations. The plastic container manufacturing industry is also subject to significant competition. Suiza Foods competes with larger independent manufacturing companies and vertically integrated food and industrial companies that operate captive plastic container manufacturing facilities. The primary competitive factors in the plastic container manufacturing industry are price, quality and service. Many of the Suiza Foods' competitors are larger and better capitalized than Suiza Foods, and have greater resources than Suiza Foods. The packaged ice business is also highly competitive. Suiza Foods faces a number of competitors in the packaged ice business, including smaller independent ice manufacturers, convenience and grocery retailers that operate captive commercial ice plants and retailers that manufacture and package ice at store locations. Competition exists primarily on a regional basis, with service, price and quality as the principal 15
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competitive factors. A significant increase in the utilization of captive commercial ice plants or on-site manufacturing by operators of large retail chains served by Suiza Foods could have an adverse effect on Suiza Foods' operations.  SUBSTANTIAL INDEBTEDNESS On June 30, 1997 (as adjusted to reflect the July 1997 acquisitions of Dairy Fresh, Garelick Dairy and Franklin Plastics), Suiza Foods' total indebtedness and long-term debt (excluding current portion) were $551.4 million and $534.1 million, respectively, with long-term indebtedness (excluding current portion) representing 71% of total capitalization. In connection with its acquisition of Garelick Dairy and Franklin Plastics in July 1997, Suiza Foods increased the size of its existing senior credit facilities from $300.0 million to $700.0 million in the aggregate. Suiza Foods' total indebtedness and long-term debt (excluding current portion), on a pro forma basis as of June 30, 1997, after giving effect to the Merger and the Country Fresh Merger would be $762.4 million and $729.8 million, respectively, with long-term indebtedness (excluding current portion) representing 69% of total capitalization. Prior to the Effective Date, Suiza Foods intends to enter into the New Credit Facility (as defined), in order to increase its total borrowing capacity to approximately $1.25 billion. For a description of the New Credit Facility see "The Companies--Recent Developments--Suiza Foods." As a result, Suiza Foods would be able to incur substantial amounts of additional indebtedness in the future. The New Credit Facility and related debt service obligations are expected to (i) limit Suiza Foods' ability to obtain additional financing in the future; (ii) require Suiza Foods to dedicate a significant portion of its cash flow to the payment of principal and interest on its indebtedness, thereby reducing the funds available to Suiza Foods for other purposes; (iii) limit Suiza Foods' flexibility in planning for, or reacting to, changes in its business and market conditions; and (iv) impose additional financial and operational restrictions on Suiza Foods, including restrictions on dividends. See "The Companies--Recent Developments--Suiza Foods" and "Pro Forma Financial Data." Suiza Foods' ability to make scheduled payments on its indebtedness depends on its financial and operating performance, which is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond Suiza Foods' control. Under its existing senior credit facilities, Suiza Foods has pledged substantially all of its assets to secure its indebtedness. Although the lenders would release such security interests under the proposed terms of the New Credit Facility, Suiza Foods would pledge the stock of most of its direct and indirect subsidiaries. The failure of Suiza Foods to comply with the financial and other restrictive covenants under its existing senior credit facilities or the New Credit Facility may result in an event of default which, if not cured or waived, could have a material adverse effect on Suiza Foods. Suiza Foods has entered into various interest rate agreements to reduce its exposure to interest rate fluctuations under the senior credit facilities, which agreements have the effect of fixing Suiza Foods' interest rate with respect to a portion of its indebtedness under the senior credit facilities. Suiza Foods remains subject to interest rate risk, however, with respect to a substantial portion of its indebtedness.  GOVERNMENT REGULATION; RAW MATERIAL COSTS The supply and price of milk in Puerto Rico are regulated under Puerto Rico law. The government of Puerto Rico establishes an industry-wide production ceiling and sets the prices that may be charged for milk at the dairy farm level and the maximum prices that may be charged at the processor and retail levels. These prices are reviewed, typically on an annual basis, and remain fixed unless changed by the government. The price controls in Puerto Rico make Suiza Foods vulnerable to increases in the costs of manufacturing, packaging and distributing its products. There can be no assurance that Suiza Foods' operating results will not be adversely affected by price levels set by the government of Puerto Rico. The price of raw milk in the United States fluctuates based on supply and demand, with minimum support prices established monthly on a regional basis by federal or state government agencies. In 1996, Congress passed legislation to phase out support prices over a specified period. There can be no assurance 16
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that a material increase in milk prices in the United States will not occur or that any such increase would not reduce the profitability of Suiza Foods' operations. As a manufacturer and distributor of food products, Suiza Foods is subject to federal, state and local laws and regulations governing the manufacture (including composition and ingredients), labeling, packaging and safety of food. The Federal Food and Drug Administration and various state and local agencies are authorized to enforce these laws and regulations by inspecting Suiza Foods' facilities and requiring remedial action where necessary. Although Suiza Foods maintains quality control programs designed to address these issues, an actual or perceived problem with the quality or safety of products at any of Suiza Foods' facilities could lead to product withdrawals, product recalls, remediation expenses, temporary plant closings and related negative publicity, any of which could have a material adverse effect on Suiza Foods. Suiza Foods' operations are also subject to other federal, Puerto Rico, state and local governmental regulation.  DEPENDENCE ON KEY PERSONNEL The future success of Suiza Foods' business operations is dependent in part on the efforts and skills of certain key members of management, including Gregg L. Engles, Chairman and Chief Executive Officer of Suiza Foods. The loss of any of its key members of management could have an adverse effect on Suiza Foods.  LIMITATIONS ON FAVORABLE TAX TREATMENT Under Section 936 of the Code, a portion of Suiza Foods' income derived from its dairy, fruit drink and plastic container manufacturing operations in Puerto Rico qualifies for a tax credit that has the effect of reducing or eliminating United States income taxes on income derived from these operations. In the Revenue Reconciliation Act of 1993, the United States Congress imposed certain limitations on the availability of the Section 936 credit. In August 1996, Congress passed the Small Business Job Protection Act of 1996 which contains further restrictions on the availability of Section 936 credits and eliminates Section 936 altogether by December 31, 2005. These limitations, combined with certain other provisions in the Code that govern the allocation among affiliated corporations of credits under Section 936, may limit the amount of tax credits available to Suiza Foods prior to the expiration of Section 936.  ANTITAKEOVER PROVISIONS The Suiza Charter and Suiza Bylaws contain provisions that may delay, defer or prevent a change in control of Suiza Foods. Among other things, these provisions: (i) authorize the Suiza Board to issue preferred stock in series with the terms of each series to be fixed by the Suiza Board; (ii) divide the Suiza Board into three classes so that only approximately one-third of the total number of directors will be elected each year; (iii) permit directors to be removed only for cause; and (iv) specify advance notice requirements for stockholder proposals and director nominations. See "Comparison of the Rights of Suiza Stockholders and Morningstar Stockholders."  EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED There can be no assurance that the expected benefits of the Merger as described under "The Merger--Reasons for the Merger; Recommendations of the Boards" will be achieved. The integration of departments, systems and procedures will present significant management challenges and there can be no assurance that such actions will be successfully accomplished within a specified time period or at all. For additional information concerning the risks associated with Morningstar's business, see Morningstar's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, which report is incorporated by reference herein.  ANTICIPATED ACCOUNTING TREATMENT Suiza Foods and Morningstar anticipate that the Merger will be accounted for using the "pooling of interests" method of accounting pursuant to Opinion No. 16 of the Accounting Principles Board. The pooling of interests method of accounting assumes that the combining companies have been merged from 17
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inception, and the historical consolidated financial statements for periods prior to consummation of the Merger are restated as though the companies had been combined from inception. One of the conditions to the Merger is that Suiza Foods and Sub will have been advised in writing by Deloitte & Touche, LLP, on the closing date of the Merger, and Morningstar will have been advised in writing by Arthur Andersen LLP on the closing date of the Merger, in each case, that the Merger will be treated as a pooling of interests for accounting purposes. However, such opinions will not be binding on the Commission.  THE COMPANIES  GENERAL  SUIZA FOODS. Suiza Foods is a leading manufacturer and distributor of fresh milk and related dairy products, plastic containers and packaged ice in the United States. Each of Suiza Foods' operating subsidiaries is a strong competitor with an established reputation for customer service and product quality. Suiza Foods' dairy and ice subsidiaries market their products through extensive distribution networks to a diverse group of customers, including convenience stores, grocery stores, schools and institutional food service customers. Suiza Foods' customers in the plastic container business include regional dairy manufacturers, bottled water processors and other beverage manufacturers. Suiza Foods has grown primarily through a successful acquisition strategy, having consummated 54 acquisitions since its inception in 1988, including 27 acquisitions since its initial public offering in April 1996. This Joint Proxy Statement/Prospectus should be read in conjunction with the more detailed information on Suiza Foods and its business contained in Suiza Foods' Annual Report on Form 10-K for the fiscal year ended December 31, 1996, which Annual Report is incorporated herein by reference.  SUB. Sub is a wholly owned subsidiary of Suiza Foods that was incorporated in Delaware on September 25, 1997 for the purpose of effectuating the Merger and the other transactions contemplated by the Merger Agreement. Prior to the consummation of the Merger, Sub will not engage in any activity other than activities related to the transactions contemplated by the Merger Agreement.  MORNINGSTAR. Morningstar is a nationally prominent manufacturer, distributor and marketer of refrigerated, shelf-stable and frozen food products. Its established branded products include: International Delight-Registered Trademark-, a gourmet-flavored and non-flavored coffee creamer; Second Nature-Registered Trademark-, a refrigerated no-cholesterol egg substitute; Mocha Mix-Registered Trademark-, non-dairy coffee creamers; Naturally Yours-TM-, fat-free and regular, real dairy sour cream; Jon Donaire-Registered Trademark-, cheesecakes and desserts; Wacky Willie-TM-, flavored shakes; and, in the western two-thirds of the United States, Lactaid-Registered Trademark-, lactose-free and lactose-reduced milks produced under license from McNeil Consumer Products Company, a subsidiary of Johnson & Johnson. Morningstar also specializes in providing private label refrigerated, shelf-stable and frozen products to grocery warehouses, bakery/industrial companies, club stores and dairy companies. Branded products are sold primarily to grocery warehouses serving the major supermarket chains through Morningstar's network of independent food brokers and nationwide sales force. Morningstar's other specialty products are marketed directly to dairy companies, supermarket wholesalers, grocery warehouses, food service outlets and food manufacturers. Morningstar's products are distributed to more than 3,200 customers in fifty states and to more than twenty foreign countries. This Joint Proxy Statement/Prospectus should be read in conjunction with the more detailed information on Morningstar and its business contained in Morningstar's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, which Annual Report is incorporated herein by reference.  RECENT DEVELOPMENTS  SUIZA FOODS. On September 18, 1997, Suiza Foods entered into a merger agreement with Country Fresh, a processor of milk, juice and ice cream products based in Grand Rapids, Michigan. Upon consummation of the proposed Country Fresh Merger, (i) Country Fresh stockholders would receive approximately 1.9 million shares of Suiza Common Stock upon conversion of their shares of Country Fresh common stock, and Country Fresh would become a wholly owned subsidiary of Suiza Foods, (ii) Suiza Foods would assume all of the outstanding options to purchase shares of Country Fresh common stock, 18
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which would be converted into options to purchase a total of 229,068 shares of Suiza Common Stock, and (iii) holders of Country Fresh's outstanding preferred stock would receive shares of a new series of Suiza Foods preferred stock with an aggregate stated value (on a pro forma basis, as of June 30, 1997) of approximately $3.7 million. As of June 30, 1997, Country Fresh had approximately $30.3 million of indebtedness, which Suiza Foods would either assume or refinance in connection with the Country Fresh Merger. Country Fresh reported net sales of approximately $353 million in its fiscal year ended March 1, 1997. The Country Fresh Merger is subject to approval by holders of a majority of Country Fresh's outstanding common stock and preferred stock, as well as certain regulatory approvals and other closing conditions. Country Fresh has called a special meeting of its shareholders for November 25, 1997 at which approval of the Country Fresh Merger will be considered. There can be no assurance that the Country Fresh Merger will be completed as currently contemplated or at all. The Merger and the Country Fresh Merger are separate transactions and the closing of one merger is not in any way contingent on the closing of the other. For additional information regarding the pro forma effect of the Country Fresh Merger, see "Pro Forma Financial Data." In connection with the Merger, Suiza Foods has received a commitment letter from its senior lenders to replace its existing $700 million senior credit facilities with replacement facilities in the aggregate amount of $1.25 billion, consisting of a $550 million term loan and a $700 million revolving credit facility (collectively, the "New Credit Facility"). The term loan would be amortized over six years beginning in 1998, and the revolving credit facility would expire on December 31, 2003. Amounts outstanding under the New Credit Facility would bear interest at a rate per annum equal to one of the following rates, at Suiza Foods' option: (i) a specified base rate or (ii) The London Interbank Offered Rate ("LIBOR") plus a margin that would vary from 40 to 100 basis points depending on Suiza Foods' leverage ratio (defined as the ratio of aggregate funded debt to EBITDA). Suiza Foods would pay a commitment fee on unused amounts of the revolving facility that ranges from 15 to 25 basis points depending on the leverage ratio. The New Credit Facility would require Suiza Foods to comply with certain financial covenants, including the following: (i) the leverage ratio will not exceed 3.90 to 1 during 1998, 3.75 to 1 during 1999 and 3.50 to 1 thereafter; (ii) net worth will not be less than $300 million, plus 50% of positive net income, plus 75% of the proceeds of new equity offerings; (iii) the interest coverage ratio (defined as the ratio of EBITDA to interest expense) will not be less than 3.00 to 1; and (iv) the fixed charge coverage ratio (defined as the ratio of EBITDA to the sum of scheduled principal repayments, interest, taxes, capital expenditures and dividends) will not be less than 1.00 to 1 during 1998 and 1.10 to 1 thereafter. The New Credit Facility would also include usual and customary covenants, including limitations on material acquisitions or dispositions of assets, lines of business, the incurrence of additional indebtedness and transactions with affiliates, subject to specified exceptions. Suiza Foods would pledge all of the capital stock of its direct and indirect subsidiaries (except for 35% of the capital stock of Garrido) to secure the New Credit Facility, and Suiza Foods would agree not to grant a security interest in its remaining assets to any other person (subject to certain exceptions). In addition, each of Suiza Foods' direct and indirect subsidiaries (other than Garrido) would guarantee the debt incurred under the New Credit Facility. The New Credit Facility would include various events of default customary for similar senior credit facilities, including defaults resulting from a change in control of Suiza Foods (including certain changes in the Suiza Board and certain acquisitions of Suiza Common Stock by third parties). Suiza Foods currently anticipates that it will be able to finalize the New Credit Facility prior to completion of the Merger. There can be no assurance, however, that the New Credit Facility will be finalized on the terms contained in the commitment letter or that Suiza Foods will ultimately be able to amend or replace its existing senior credit facilities. 19
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PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data is based on adjustments to the historical consolidated balance sheet and related consolidated statements of income of Suiza Foods to give effect to (i) the Merger and the Country Fresh Merger, expected to be accounted for using the pooling of interests method of accounting (the "Combined Companies") and (ii) the completed acquisitions by Suiza Foods of Garrido on July 1, 1996, Swiss Dairy on September 9, 1996, Model Dairy on December 16, 1996, Dairy Fresh on July 1, 1997 and Garelick Farms and Franklin Plastics on July 31, 1997 and the completed acquisition by Morningstar of Presto on December 3, 1996, all of which have been accounted for using the purchase method of accounting (the "Acquired Businesses"). The unaudited pro forma consolidated statements of earnings for the years ended December 31, 1994, 1995 and 1996 and the six month period ended June 30, 1997 give effect to (i) the proposed mergers of the Combined Companies as if they had been consummated on January 1, 1994 and (ii) the completed acquisitions of the Acquired Businesses as if they had been consummated on January 1, 1996. There is no unaudited pro forma consolidated statement of earnings effect during the six month period ended June 30, 1997 of the acquisitions by Suiza Foods of Garrido, Swiss Dairy and Model Dairy or of the acquisition by Morningstar of Presto since these acquisitions were completed prior to January 1, 1997 and, as a result, their results of operations are already included in the historical consolidated results of operations of Suiza Foods or Morningstar. The unaudited pro forma consolidated balance sheet as of June 30, 1997 gives effect to (i) the proposed mergers of the Combined Companies and (ii) the completed acquisitions by Suiza Foods of Dairy Fresh, Garelick Farms and Franklin Plastics, as if they had all been consummated on June 30, 1997. There is no pro forma consolidated balance sheet effect of the acquisitions by Suiza Foods of Garrido, Swiss Dairy and Model Dairy or of the acquisition by Morningstar of Presto since these acquisitions were completed prior to December 31, 1996 and, as a result, their balance sheets are already included in the historical consolidated balance sheets of Suiza Foods or Morningstar. Country Fresh's consolidated financial statements are based on its fiscal year which ends on the Saturday nearest to February 28, as compared to Suiza Foods' and Morningstars' fiscal year ends of December 31. As a result, the unaudited pro forma consolidated financial data for the years ended December 31, 1994, 1995 and 1996 combines the different fiscal year end of Country Fresh with the calendar year ends of Suiza Foods and Morningstar. Similarly, the unaudited pro forma consolidated financial data as of and for the six month period ended June 30, 1997, combines the six month information as of and for the period ended June 30, 1997 for Suiza Foods and Morningstar with the financial information for Country Fresh as of the end of its four week period ended July 19, 1997 and for the 26 weeks ended July 19, 1997, which includes 6 weeks of operations already included in the Country Fresh financial statements for the year ended March 1, 1997. For ease of reference, all headings used in the unaudited pro forma consolidated financial data refer to the period ended date of Suiza Foods. In connection with the Merger and the Country Fresh Merger, Suiza Foods expects to expense approximately $28 million as merger costs, which represent transaction related expenses that are expected to be incurred on the consumation dates of the mergers. These transaction related costs include approximately $16 million of investment banking fees, legal fees, accounting fees, and filing and printing fees, along with approximately $12 million of employee costs related to the payments of retention bonuses and excise and other taxes to certain Country Fresh and Morningstar employees pursuant to existing contractual agreements and the payments pursuant to existing contractual agreements of severance costs and excise and other taxes for certain Morningstar employees whose employment will be terminated at the Effective Time of the Merger. After the consummation of the Merger and the Country Fresh Merger, Suiza expects to achieve at least $10 million of savings from eliminating redundant administrative and financial aspects of the Combined Companies, including the elimination of certain Morningstar employee costs related to employees terminated at the consummation date and reduced interest costs from the lower interest rates on the 20
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new credit facility for the Combined Company currently being negotiated. In addition, Suiza expects to realize significant additional annual cost savings within the first year from combined purchasing and rationalized manufacturing and distribution. The unaudited pro forma financial data should be read in conjunction with the separate audited and unaudited financial statements of the Combined Companies and of the Acquired Businesses, including the notes thereto, either included elsewhere or incorporated by reference in this Joint Proxy Statement/ Prospectus. The unaudited pro forma consolidated income statement data are not necessarily indicative of the operating results that would have occurred had the proposed mergers of the Combined Companies and the completed acquisitions of the Acquired Businesses occurred on the pro forma dates indicated, nor are they necessarily indicative of the future operating results of the Combined Companies. 21
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] HISTORICAL COMBINED COMPANIES -------------------------------------- SUIZA COMBINING COMBINED FOODS COUNTRY FRESH MORNINGSTAR ADJUSTMENTS COMPANIES --------- ------------- ----------- ----------- ---------- NET SALES................................................... $ 341,108 $ 310,164 $ 292,314 $(4,720)(a) $ 938,866 COST OF SALES............................................... 240,468 268,500 222,145 (4,720)(a) 726,393 --------- ------------- ----------- ---------- Gross profit.............................................. 100,640 41,664 70,169 212,473 OPERATING EXPENSES: Selling and distribution.................................. 54,248 21,225 39,984 115,457 General and administrative................................ 16,935 15,036 9,497 41,468 Amortization of intangibles............................... 3,697 100 2,281 6,078 --------- ------------- ----------- ---------- Total operating expenses................................ 74,880 36,361 51,762 163,003 --------- ------------- ----------- ---------- OPERATING INCOME............................................ 25,760 5,303 18,407 49,470  OTHER: Interest expense, net..................................... 19,279 (259) 4,797 23,817 Merger and other costs.................................... 1,660 -- -- 1,660 Other (income) expense.................................... (268) (551) (1,244) (2,063) --------- ------------- ----------- ---------- Total other............................................. 20,671 (810) 3,553 23,414 --------- ------------- ----------- ---------- INCOME BEFORE INCOME TAXES.................................. 5,089 6,113 14,854 26,056 INCOME TAXES................................................ 844 2,145 5,533 8,522 --------- ------------- ----------- ---------- INCOME FROM CONTINUING OPERATIONS........................... $ 4,245 $ 3,968 $ 9,321 $ 17,534 --------- ------------- ----------- ---------- --------- ------------- ----------- ---------- INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS.......... $ 0.69 $ 0.52 $ 0.62 $ 0.76 --------- ------------- ----------- ---------- --------- ------------- ----------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING................................................ 6,156,387 7,622,840 15,050,538 23,106,841 --------- ------------- ----------- ---------- --------- ------------- ----------- ---------- ------------------------------ (a) Elimination of sales and cost of sales for transactions between Morningstar and Suiza Foods. 22
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] HISTORICAL COMBINED COMPANIES ----------------------------------------- COMBINING COMBINED SUIZA FOODS COUNTRY FRESH MORNINGSTAR ADJUSTMENTS COMPANIES ----------- ------------- ----------- ----------- ---------- NET SALES................................................... $ 430,466 $ 336,055 $ 304,730 $(5,818)(a) $1,065,433 COST OF SALES............................................... 312,633 291,722 232,948 (5,818)(a) 831,485 ----------- ------------- ----------- ---------- Gross profit.............................................. 117,833 44,333 71,782 233,948 OPERATING EXPENSES: Selling and distribution.................................. 64,289 21,633 38,353 124,275 General and administrative................................ 19,277 15,700 10,682 45,659 Amortization of intangibles............................... 3,703 82 2,319 6,104 ----------- ------------- ----------- ---------- Total operating expenses................................ 87,269 37,415 51,354 176,038 ----------- ------------- ----------- ---------- OPERATING INCOME............................................ 30,564 6,918 20,428 57,910  OTHER: Interest expense, net..................................... 19,921 1,392 4,302 25,615 Merger and other costs.................................... 10,238 -- -- 10,238 Other (income) expense.................................... (469) (633) (1,276) (2,378) ----------- ------------- ----------- ---------- Total other............................................. 29,690 759 3,026 33,475 ----------- ------------- ----------- ---------- INCOME BEFORE INCOME TAXES............................................... 874 6,159 17,402 24,435 INCOME TAXES................................................ 2,450 2,090 6,062 10,602 ----------- ------------- ----------- ---------- INCOME FROM CONTINUING OPERATIONS........................... $ (1,576) $ 4,069 $ 11,340 $ 13,833 ----------- ------------- ----------- ---------- ----------- ------------- ----------- ---------- INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS.......... $ (0.26) $ 1.04 $ 0.74 $ 0.64 ----------- ------------- ----------- ---------- ----------- ------------- ----------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING................................................ 6,109,398 3,609,245 15,245,562 21,036,608 ----------- ------------- ----------- ---------- ----------- ------------- ----------- ---------- ------------------------------ (a) Elimination of sales and cost of sales for transactions between Morningstar and Suiza Foods. 23
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] HISTORICAL COMBINED COMPANIES -------------------------------- HISTORICAL ACQUIRED SUIZA COUNTRY MORNING- COMBINING COMBINED ACQUIRED BUSINESSES FOODS FRESH STAR ADJUSTMENTS COMPANIES BUSINESSES(A) ADJUSTMENTS PRO FORMA --------- --------- ---------- ----------- ---------- ------------- ------------- ----------- NET SALES................ $ 520,916 $ 353,037 $ 394,306 $(7,910)(b) $1,260,349 $754,277 $ -- $2,014,626 COST OF SALES............ 388,548 305,614 302,801 (7,910)(b) 989,053 586,167 (2,624)(c)(d) 1,572,596 --------- --------- ---------- ---------- ------------- ----------- Gross profit........... 132,368 47,423 91,505 271,296 168,110 442,030 OPERATING EXPENSES: Selling and distribution......... 70,709 19,916 49,895 140,520 79,847 (4,202)(c)(d) 216,165 General and administrative....... 21,913 16,010 12,538 50,461 29,693 (9,411)(c)(d) 70,743 Amortization of intangibles.......... 4,624 656 2,912 8,192 2,217 9,542(e) 19,951 --------- --------- ---------- ---------- ------------- ----------- Total operating expenses........... 97,246 36,582 65,345 199,173 111,757 306,859 --------- --------- ---------- ---------- ------------- ----------- OPERATING INCOME......... 35,122 10,841 26,160 72,123 56,353 135,171 OTHER: Interest expense, net.................. 17,470 1,219 4,026 22,715 5,600 38,124(f) 66,439 Merger and other costs................ 571 -- -- 571 -- 571 Other (income) expense.............. (4,012) (436) (286) (4,734 ) (495) (5,229) --------- --------- ---------- ---------- ------------- ----------- Total other.......... 14,029 783 3,740 18,552 5,105 61,781 --------- --------- ---------- ---------- ------------- ----------- INCOME BEFORE INCOME TAXES........... 21,093 10,058 22,420 53,571 51,248 73,390 INCOME TAXES............. (6,836) 3,385 7,844 4,393 1,280 6,110(g) 11,783 --------- --------- ---------- ---------- ------------- ----------- INCOME FROM CONTINUING OPERATIONS........... $ 27,929 $ 6,673 $ 14,576 $ 49,178 $ 49,968 $ 61,607 --------- --------- ---------- ---------- ------------- ----------- --------- --------- ---------- ---------- ------------- ----------- INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS............. $ 2.81 $ 1.75 $ 0.96 $ 1.97 $ 2.45 --------- --------- ---------- ---------- ----------- --------- --------- ---------- ---------- ----------- WEIGHTED AVERAGE SHARES OUTSTANDING............ 9,921,822 3,636,519 15,133,887 24,768,983 25,066,383 --------- --------- ---------- ---------- ----------- --------- --------- ---------- ---------- ----------- ------------------------------ (a) Includes the pre-acquisition results of operations of Suiza Foods' 1996 acquisitions of Garrido through June 30, 1996, Swiss Dairy through August 31, 1996 and Model Dairy through November 30, 1996; the pre-acquisition results of operations of Morningstars' 1996 acquisition of Presto through November 30, 1996; and the pre-acquisition results of operations of Suiza Foods' 1997 acquisitions of Dairy Fresh for the year ended December 31, 1996, and Garelick for its most recent fiscal year ended September 30, 1996. (b) Elimination of sales and cost of sales for transactions between Morningstar and Suiza Foods. (c) Excess of historical depreciation expense over the depreciation of the fair value of property and equipment acquired in the Suiza Foods acquisitions, which resulted in a decrease of $2,107, $708 and $121 in amounts charged to cost of sales, selling and distribution expense and general and administrative expense, respectively. There was no material difference between the historical depreciation expense and the depreciation of the fair value of property and equipment acquired in the Morningstar acquisition. 24
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(d) Elimination of salaries and benefits paid primarily to former shareholders of the acquired businesses whose employment was either terminated or salaries were reduced as part of the purchase agreement, along with the elimination of certain related party expenses of the acquired businesses, pursuant to an agreement with such related parties at acquisition date, resulting in a reduction of historical costs of sales, selling and distribution and general administrative costs, as follows: [Enlarge/Download Table] SUIZA MORNING- FOODS STAR ACQUISITIONS ACQUISITION TOTAL ------------- ----------- --------- Cost of sales................................................. $ (517) $ -- $ (517) Selling and distribution...................................... (968) (2,526) (968) General and administration.................................... (4,816) (4,474) (11,816) ------------- ----------- --------- $ (6,301) $ (7,000) $ (13,301) ------------- ----------- --------- ------------- ----------- --------- (e) Amortization of goodwill and other intangibles, over the following amortization periods, in excess of historical amounts, as follows: [Enlarge/Download Table] SUIZA MORNING- FOODS STAR LIFE ACQUISITIONS ACQUISITION TOTAL --------- ------------- ----------- --------- Organization costs................................... 5 $ 22 $ -- $ 22 Tradenames........................................... 25-40 510 1,833 2,343 Customer list........................................ 10 367 -- 367 Goodwill............................................. 40 6,069 741 6,810 ------------- ----------- --------- $ 6,968 $ 2,574 $ 9,542 ------------- ----------- --------- ------------- ----------- --------- (f) Pro forma interest expense on the average outstanding balance of new variable rate borrowings used to fund the Suiza Foods and Morningstar acquisitions at an assumed interest rate of 7.75%, including the amortization of deferred financing costs, net of the reduction of historical interest expense related to the historical debt repaid as follows: [Download Table] Suiza Foods acquisitions...................................... $ 31,346 Morningstar acquisition....................................... 6,778 ------------- Total......................................................... $ 38,124 ------------- ------------- The effect of a .125% change in the interest rate on the new variable rate borrowings to fund the Suiza Foods and Morningstar acquisitions, would have resulted in a change in the proforma interest expense adjustment of $615. (g) Estimated pro forma adjustment to reflect income taxes at the estimated effective tax rate for the Suiza Foods acquisitions of 4% for Garrido, 35% for Model Dairy and 40% for Swiss Dairy, Dairy Fresh and Garelick, and for Morningstar's Presto acquisition of 42%. [Download Table] Suiza Foods acquisitions...................................... $ 3,995 Morningstar acquisition....................................... 2,115 ------------- Total......................................................... $ 6,110 ------------- ------------- 25
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] HISTORICAL COMBINED COMPANIES --------------------------------- HISTORICAL ACQUIRED SUIZA COUNTRY MORNING- COMBINING COMBINED ACQUIRED BUSINESSES PRO FOODS FRESH STAR ADJUSTMENTS COMPANIES BUSINESSES(A) ADJUSTMENTS FORMA ---------- --------- ---------- ----------- ---------- ------------- ------------- ----------- NET SALES................ $ 336,819 $ 172,295 $ 270,672 $(4,699)(b) $ 775,087 $246,977 $ -- $1,022,064 COST OF SALES............ 252,047 147,711 196,022 (4,699)(b) 591,081 192,812 (1,995)(c) 781,898 ---------- --------- ---------- ---------- ------------- ----------- Gross profit........... 84,772 24,584 74,650 184,006 54,165 240,166 OPERATING EXPENSES: Selling and distribution......... 42,244 9,497 41,785 93,526 22,073 (473)(c) 115,126 General and administrative....... 16,397 7,775 6,685 30,857 5,674 (1,243)(c)(d) 35,288 Amortization of intangibles.......... 2,982 25 2,753 5,760 1,251 2,623(e) 9,634 ---------- --------- ---------- ---------- ------------- ----------- Total operating expenses........... 61,623 17,297 51,223 130,143 28,998 160,048 ---------- --------- ---------- ---------- ------------- ----------- OPERATING INCOME......... 23,149 7,287 23,427 53,863 25,167 80,118 OTHER: Interest expense, net.................. 6,580 803 6,798 14,181 3,410 10,988(f) 28,579 Other (income) expense.............. (18,575) (230) (249) (19,054 ) (18) (19,072) ---------- --------- ---------- ---------- ------------- ----------- Total other.......... (11,995) 573 6,549 (4,873 ) 3,392 9,507 ---------- --------- ---------- ---------- ------------- ----------- INCOME BEFORE INCOME TAXES............. 35,144 6,714 16,878 58,736 21,775 70,611 INCOME TAXES............. 10,745 2,303 6,917 19,965 715 3,735(g) 24,415 ---------- --------- ---------- ---------- ------------- ----------- INCOME FROM CONTINUING OPERATIONS.... $ 24,399 $ 4,411 $ 9,961 $ 38,771 $ 21,060 $ 46,196 ---------- --------- ---------- ---------- ------------- ----------- ---------- --------- ---------- ---------- ------------- ----------- INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS.... $ 1.57 $ 1.16 $ 0.64 $ 1.25 $ 1.48 ---------- --------- ---------- ---------- ----------- ---------- --------- ---------- ---------- ----------- WEIGHTED AVERAGE SHARES OUTSTANDING............ 15,509,388 3,685,236 15,643,651 30,816,419 31,113,819 ---------- --------- ---------- ---------- ----------- ---------- --------- ---------- ---------- ----------- ------------------------------ (a) Includes the pre-acquisition results of operations Suiza Foods' 1997 acquisitions of Dairy Fresh and Garelick for the six months ended June 30, 1997. (b) Elimination of sales and cost of sales for transactions between Morningstar and Suiza Foods. (c) Excess of historical depreciation expense over the depreciation of the fair value of property and equipment acquired in the Suiza Foods acquisitions, which resulted in a decrease of $1,995, $473 and $71 in amounts charged to cost of sales, selling and distribution expense and general and administrative expense, respectively. (d) Elimination of salaries and benefits paid primarily to former shareholders of the Suiza Foods acquired businesses whose employment was either terminated or salaries were reduced as part of the purchase agreement, along with the elimination of certain related party expenses of the acquired businesses, pursuant to an agreement with such related parties at acquisition date, resulting in a reduction of historical general administrative costs of $1,172. 26
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(e) Amortization of goodwill and other intangibles for the Suiza Foods acquisitions, over the following amortization periods, in excess of historical amounts, as follows: [Download Table] LIFE --- Organization costs........................... 5 $ 5 Tradename.................................... 25 200 Goodwill..................................... 40 2,418 ------ $ 2,623 ------ ------ (f) Pro forma interest expense to reflect additional interest expense of $10,988 on the average outstanding balance of new variable rate borrowings used to fund the Suiza Foods acquisitions at an assumed interest rate of 7.75%, including the amortization of deferred financing costs, net of the reduction of historical interest expense related to the historical debt repaid. The effect of a .125% change in the interest rate on the new variable rate borrowings to fund the Suiza Foods acquisitions, would have resulted in a change in the proforma interest expense adjustment of $177. (g) Estimated pro forma adjustment to reflect increased income taxes for the Suiza Foods acquisitions of $3,735 at the estimated effective tax rate of 40% for Dairy Fresh and Garelick. 27
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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS) [Enlarge/Download Table] HISTORICAL COMBINED COMPANIES -------------------------------- HISTORICAL ACQUIRED SUIZA COUNTRY MORNING- COMBINING COMBINED ACQUIRED BUSINESSES FOODS FRESH STAR ADJUSTMENTS COMPANIES BUSINESSES ADJUSTMENTS PRO FORMA -------- --------- ---------- ----------- --------- ---------- ----------- ---------- (A) CURRENT ASSETS: Cash........................ $ 7,130 $ 6,697 $ 2,167 $ $ 15,994 $ 291 $ (68)(e) $ 16,217 Accounts receivable......... 50,784 26,084 48,038 124,906 32,948 157,854 Inventories................. 21,536 18,846 25,689 66,071 6,882 72,953 Prepaid expenses and other..................... 3,369 241 3,229 6,839 2,299 (75)(e) 9,063 Deferred income taxes....... 3,796 1,186 7,339 12,321 -- 12,321 -------- --------- ---------- --------- ---------- ---------- Total current assets...... 86,615 53,054 86,462 226,131 42,420 268,408 PROPERTY AND EQUIPMENT........ 136,281 43,476 100,708 280,465 85,199 26,862(e) 392,526 DEFERRED INCOME TAXES......... 8,319 3,059 -- 11,378 -- 11,378 INTANGIBLE AND OTHER ASSETS... 171,091 2,353 165,153 338,597 42,219 259,137(e) 639,953 -------- --------- ---------- --------- ---------- ---------- TOTAL ASSETS.................. $402,306 $101,942 $352,323 $856,571 $169,838 $1,312,265 -------- --------- ---------- --------- ---------- ---------- -------- --------- ---------- --------- ---------- ---------- CURRENT LIABILITIES: Accounts payable and accrued expenses.................. $42,118 $ 30,316 $ 63,466 $ 28,000(c) $163,900 $ 40,122 $ (380)(d) $ 203,642 Income taxes payable........ 1,154 2,262 -- 3,416 -- 3,416 Current portion of long-term debt...................... 17,323 3,767 11,500 32,590 57,762 (57,762)(d) 32,590 -------- --------- ---------- --------- ---------- ---------- Total current liabilities............. 60,595 36,345 74,966 199,906 97,884 239,648 LONG-TERM DEBT................ 128,150 26,523 169,200 323,873 32,436 373,516(c) 729,825 OTHER LIABILITIES............. -- 3,558 3,020 6,578 -- 6,578 DEFERRED INCOME TAXES......... 4,928 -- 5,694 10,622 -- 10,622 STOCKHOLDERS' EQUITY: Preferred stock............. -- 3,741 -- 3,741 3,741 Common stock................ 153 1,898 153 (1,908)(b) 296 3(d) 299 Additional paid-in capital................... 183,263 -- 67,733 1,908(b) 252,904 9,997(c) 262,901 Retained earnings........... 25,217 29,877 31,557 (28,000)(c) 58,651 58,651 Equity of acquired businesses................ -- -- -- -- 39,518 (39,518)(e) -- -------- --------- ---------- --------- ---------- ---------- Total stockholders' equity.................. 208,633 35,516 99,443 315,592 39,518 325,592 -------- --------- ---------- --------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $402,306 $101,942 $352,323 $856,571 $169,838 $1,312,265 -------- --------- ---------- --------- ---------- ---------- -------- --------- ---------- --------- ---------- ---------- ------------------------------ (a) Includes the pre-acquisition balance sheets of Suiza Foods' 1997 acquisitions of Dairy Fresh and Garelick as of June 30, 1997. (b) Pro forma adjustment to common stock and additional paid-in capital to reflect the par value of the common stock issued to affect the mergers. (c) Pro forma adjustment to expense $28 million of estimated merger costs which are expected to be incurred on the consumation date of the mergers. These estimated transaction related costs include approximately $16 million of investment banking fees, legal fees, accounting fees, and filing and printing fees, along with approximately $12 million of employee costs related to the payments of retention bonuses and excise and other taxes to certain Country Fresh and Morningstar employees pursuant to existing contractual agreements and the payments pursuant to existing contractual agreements of severance costs and excise and other taxes for certain Morningstar employees whose employment will be terminated at the Effective Time of the Merger. (d) On July 1, 1997, Suiza Foods completed the acquisition of substantially all the net assets of Dairy Fresh and, on July 31, 1997, the acquisition of all of the outstanding common stock of Garelick. The purchase prices for these acquisitions were approximately $104.5 million and $306.6 million, respectively, including acquired cash and including expenses of $1.8 million and $3.0 million, respectively, which were used to acquired Dairy Fresh and Garelick and to repay their existing debt. The total purchase prices 28
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were funded primarily with borrowings under Suiza Foods' senior credit facility and the issuance of 297,400 shares of Suiza Common Stock for $10.0 million to Garelick shareholders, as follows: [Enlarge/Download Table] Credit agreement borrowings............................................................. $ 405,952 Issuance of common stock................................................................ 10,000 --------- Total purchase prices................................................................... 415,952 Repayment of existing indebtedness: Accrued interest...................................................................... (380) Current portion of long-term debt..................................................... (57,762) Long-term debt........................................................................ (32,436) --------- Net purchase price...................................................................... $ 325,374 --------- --------- (e) The above acquisitions resulted in an excess of the purchase prices over the historical net assets acquired, which were allocated to the net assets acquired, as follows: [Enlarge/Download Table] Net purchase prices..................................................................... $ 325,374 Historical carrying value of net assets: Total net assets...................................................................... 39,518 Less net assets not assumed: Cash................................................................................ (68) Prepaid expenses.................................................................... (75) Intangible and other assets......................................................... (38,693) --------- Historical carrying values of net assets acquired....................................... 682 --------- Excess of net purchase prices over historical carrying values........................... $ 324,692 --------- Allocation of excess purchase price: Excess fair value of property and equipment........................................... $ 26,862 Intangible assets..................................................................... 297,830 --------- $ 324,692 --------- --------- 29
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SELECTED FINANCIAL DATA OF SUIZA FOODS (IN THOUSANDS, EXCEPT SHARE DATA) The following selected financial data of Suiza Foods for each of the five years in the period ended December 31, 1996 have been derived from Suiza Foods' audited consolidated financial statements. The selected consolidated financial data for the six months ended June 30, 1996 and 1997 are unaudited, and in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) that are necessary to present fairly the financial results for such periods. The selected financial data do not purport to indicate results of operations as of any future date or for any future period. The selected financial data of Suiza Foods should be read in conjunction with the Consolidated Financial Statements and related notes of Suiza Foods incorporated by reference into or included elsewhere in this Joint Proxy Statement/Prospectus. [Enlarge/Download Table] UNAUDITED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- --------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- --------- ---------- OPERATING DATA: Net sales......................................... $ 44,452 $ 51,675 $ 341,108 $ 430,466 $ 520,916 $ 225,307 $ 336,819 Cost of sales..................................... 14,586 20,412 240,468 312,633 388,548 165,917 252,047 --------- --------- --------- --------- --------- --------- ---------- Gross profit...................................... 29,866 31,263 100,640 117,833 132,368 59,390 84,772 Operating costs and expenses: Selling and distribution........................ 14,483 15,434 54,248 64,289 70,709 32,682 42,244 General and administrative...................... 6,110 6,305 16,935 19,277 21,913 9,805 16,397 Amortization of intangibles and other........... 1,911 822 3,697 3,703 4,624 1,960 2,982 --------- --------- --------- --------- --------- --------- ---------- Total operating costs and expenses.............. 22,504 22,561 74,880 87,269 97,246 44,447 61,623 --------- --------- --------- --------- --------- --------- ---------- Income from operations............................ 7,362 8,702 25,760 30,564 35,122 14,943 23,149 Other (income) expense: Interest expense, net........................... 8,495 7,697 19,279 19,921 17,470 8,488 6,580 Merger and other costs.......................... 1,199 -- 1,660 10,238 571 -- -- Other income, net............................... (408) (419) (268) (469) (4,012) (252) (18,575) --------- --------- --------- --------- --------- --------- ---------- Total other (income) expense.................... 9,286 7,278 20,671 29,690 14,029 8,236 (11,995) --------- --------- --------- --------- --------- --------- ---------- Income (loss) before income taxes and extraordinary loss.............................. (1,924) 1,424 5,089 874 21,093 6,707 35,144 Income taxes (benefit)............................ -- 4 844 2,450 (6,836) 1,771 10,745 --------- --------- --------- --------- --------- --------- ---------- Income (loss) before extraordinary loss........... (1,924) 1,420 4,245 (1,576) 27,929 4,936 24,399 Extraordinary loss from early extinguishment of debt............................................ 2,491 -- 197 8,462 2,215 2,215 3,270 --------- --------- --------- --------- --------- --------- ---------- Net income (loss) (1)............................. $ (4,415) $ 1,420 $ 4,048 $ (10,038) $ 25,714 $ 2,721 $ 21,129 --------- --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- --------- ---------- Weighted average shares outstanding............... 1,763,502 2,487,174 6,156,387 6,109,398 9,921,822 8,455,332 15,509,388 Earnings (loss) per share: Income (loss) before extraordinary loss......... $ (1.09) $ .57 $ .69 $ (.26) $ 2.81 $ .58 $ 1.57 Extraordinary loss.............................. (1.41) -- (.03) (1.38) (.22) (.26) (.21) --------- --------- --------- --------- --------- --------- ---------- Net income (loss)(1)............................ $ (2.50) $ .57 $ .66 $ (1.64) $ 2.59 $ .32 $ 1.36 --------- --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- --------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Total assets...................................... $ 46,991 $ 167,948 $ 238,952 $ 232,522 $ 384,148 $ 237,973 $ 402,306 Long-term debt, net of current portion............ 54,739 132,123 173,327 171,745 226,693 134,334 128,150 Total stockholders' equity (deficit).............. (15,408) 162 9,887 9,460 93,532 60,789 208,633 30
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---------------------------------- (1) Net income (loss) and related per share amounts include the following nonrecurring and extraordinary charges and benefits: [Enlarge/Download Table] SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- --------- --------- Merger, financing and other costs (a)............ $ (1,199) $ -- $ (1,602) $ (9,554) $ (354) $ -- $ -- Tax benefits (b)................................. -- -- -- -- 13,950 -- 11,500 Extraordinary loss from early extinguishment of debt (c)....................................... (2,491) -- (197) (8,462) (2,215) (2,215) (3,270) --------- --------- --------- --------- --------- --------- --------- $ (3,690) $ -- $ (1,799) $ (18,016) $ 11,381 $ (2,215) 8,230 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (a) Consists of costs incurred in connection with the corporate combination pursuant to which Suiza Foods was formed as a holding company for certain pre-existing operations, an uncompleted public offering of shares of Suiza Common Stock, an uncompleted debt offering, uncompleted acquisitions and debt refinancing costs, net of associated income taxes of $58 in 1994, $684 in 1995 and $217 in 1996. (b) For 1996, includes the sale of Puerto Rico tax credits of $3,400 (net of related expenses), reflected in other income, and the recognition of $11,750 in deferred income tax benefits recorded as a credit to tax expense, both effects related to tax credits generated by Suiza-Puerto Rico, partially offset by additional income tax expense of $1,200 related to the sale of the tax credits. For the six months ended June 30, 1997, includes a nonrecurring gain of $18,100, net of discounts and related expenses, resulting from additional tax credits generated by Suiza-Puerto Rico that Suiza Foods subsequently sold to third parties, partially offset by additional income tax expense of $6,600 related to the sale of tax credits. (c) Net of associated income taxes of approximately $700 in 1995, $900 in 1996 and $2,000 for the six months ended June 30, 1997. 31
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SELECTED FINANCIAL DATA OF MORNINGSTAR (IN THOUSANDS, EXCEPT SHARE DATA) The following selected financial data of Morningstar for each of the five years in the period ended December 31, 1996 have been derived from Morningstar's audited consolidated financial statements. The selected consolidated financial data for the six months ended June 30, 1996 and 1997 are unaudited, and in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) that are necessary to present fairly the financial results for such periods. The selected financial data do not purport to indicate results of operations as of any future date or for any future period. The selected financial data of Morningstar should be read in conjunction with the Consolidated Financial Statements and related notes of Morningstar incorporated by reference into or included elsewhere in this Joint Proxy Statement/Prospectus. [Enlarge/Download Table] UNAUDITED SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31, 30, ---------------------------------------------------------- ---------- 1992 1993 1994 1995 1996 1996 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING DATA: Net sales....................................... $ 230,220 $ 273,949 $ 292,314 $ 304,730 $ 394,306 $ 167,417 Cost of sales................................... 174,130 211,418 222,145 232,948 302,801 128,036 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit.................................... 56,090 62,531 70,169 71,782 91,505 39,381 Operating costs and expenses: Selling and distribution...................... 27,100 36,669 39,984 38,353 49,895 22,316 General and administrative.................... 7,579 9,432 9,497 10,682 12,538 5,259 Amortization of intangibles................... 4,825 3,995 2,281 2,319 2,912 1,162 Restructuring and other charges............... 1,093 7,100 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total operating costs and expenses............ 40,597 57,196 51,762 51,354 65,345 28,737 ---------- ---------- ---------- ---------- ---------- ---------- Income from operations.......................... 15,493 5,335 18,407 20,428 26,160 10,644 Other (income) expenses: Interest expense, net......................... 7,875 5,477 4,797 4,302 4,026 1,532 Refinancing charges........................... 9,584 -- -- -- -- -- Other income, net............................. (424) (726) (1,244) (1,276) (286) (382) ---------- ---------- ---------- ---------- ---------- ---------- Total other (income) expense.................. 17,035 4,751 3,553 3,026 3,740 1,150 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes, discontinued operations and extraordinary loss............. (1,542) 584 14,854 17,402 22,420 9,494 Income taxes.................................... 98 841 5,533 6,062 7,844 3,200 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations........ (1,640) (257) 9,321 11,340 14,576 6,294 Income (loss) from discontinued operations...... (3,359) 1,241 1,326 184 -- -- Extraordinary loss from early extinguishment of debt.......................................... (5,676 (1) (164 (2) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)............................... (10,675) 820 10,647 11,524 14,576 6,294 Dividends on Preferred Stock.................... 939 -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net Income (loss) to Common..................... $ (11,614) $ 820 $ 10,647 $ 11,524 $ 14,576 $ 6,294 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding...... 12,128,343 15,011,607 15,050,538 15,245,562 15,133,887 14,778,316 Earnings (loss) per common share: Income (loss) from continuing operations...... $ (0.21) $ (0.02) $ 0.62 $ 0.74 $ 0.96 $ 0.42 Income (loss) from discontinued operations.... (0.28) 0.08 0.09 0.02 -- -- Extraordinary loss............................ (0.47) (0.01) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net Income (loss)............................. $ (0.96) $ 0.05 $ 0.71 $ 0.76 $ 0.96 $ 0.42 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Dividends declared per common share............. $ .075 $ .15 $ -- $ -- $ -- $ -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Total assets.................................... $ 180,786 $ 212,134 $ 165,265 $ 162,709 $ 355,991 $ 170,042 Long-term debt, net of current portion.......... 86,329 105,425 53,892 36,000 177,349 30,463 Total stockholders' equity...................... 55,779 54,533 66,802 77,323 88,788 79,748  1997 ---------- OPERATING DATA: Net sales....................................... $ 270,672 Cost of sales................................... 196,022 ---------- Gross profit.................................... 74,650 Operating costs and expenses: Selling and distribution...................... 41,785 General and administrative.................... 6,685 Amortization of intangibles................... 2,753 Restructuring and other charges............... -- ---------- Total operating costs and expenses............ 51,223 ---------- Income from operations.......................... 23,427 Other (income) expenses: Interest expense, net......................... 6,798 Refinancing charges........................... -- Other income, net............................. (249) ---------- Total other (income) expense.................. 6,549 ---------- Income (loss) before income taxes, discontinued operations and extraordinary loss............. 16,878 Income taxes.................................... 6,917 ---------- Income (loss) from continuing operations........ 9,961 Income (loss) from discontinued operations...... -- Extraordinary loss from early extinguishment of debt.......................................... -- ---------- Net income (loss)............................... 9,961 Dividends on Preferred Stock.................... -- ---------- Net Income (loss) to Common..................... $ 9,961 ---------- ---------- Weighted average common shares outstanding...... 15,643,651 Earnings (loss) per common share: Income (loss) from continuing operations...... $ 0.64 Income (loss) from discontinued operations.... -- Extraordinary loss............................ -- ---------- Net Income (loss)............................. $ 0.64 ---------- ---------- Dividends declared per common share............. $ -- ---------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Total assets.................................... $ 352,323 Long-term debt, net of current portion.......... 169,200 Total stockholders' equity...................... 99,443 ---------------------------------- (1) Morningstar reported a net loss of $5,676 on the purchase of approximately $34,000 in subordinated debt at a premium. (2) Loss on purchase of senior subordinated debentures, net of applicable tax benefit of $71. 32
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SELECTED FINANCIAL DATA OF COUNTRY FRESH (IN THOUSANDS, EXCEPT SHARE DATA) The following selected financial data of Country Fresh for each of the five fiscal years in the period ended March 1, 1997 have been derived from Country Fresh's audited consolidated financial statements. The selected consolidated financial data for the 20 weeks ended July 20, 1996 and July 19, 1997 are unaudited, and in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) that are necessary to present fairly the financial results for such periods. The selected financial data do not purport to indicate results of operations as of any future date or for any future period. The selected financial data of Country Fresh should be read in conjunction with the Consolidated Financial Statements and related notes of Country Fresh included elsewhere in this Joint Proxy Statement/ Prospectus. [Enlarge/Download Table] UNAUDITED TWENTY WEEKS ENDED YEAR ENDED ------------------------------------------------------------------ -------------------- FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19, 1993 1994 1995 1996 1997 1996 1997 ------------ ------------ ------------ ----------- ----------- --------- --------- OPERATING DATA: Net sales........................... $ 294,305 $ 298,739 $ 310,164 $ 336,055 $ 353,037 $ 135,328 $ 136,154 Cost of sales....................... 248,081 254,927 268,500 291,722 305,614 115,963 116,233 ------------ ------------ ------------ ----------- ----------- --------- --------- Gross profit........................ 46,224 43,812 41,664 44,333 47,423 19,365 19,921 Operating costs and expenses: Selling and distribution.......... 24,202 22,638 21,225 21,633 19,916 7,397 7,217 General and administrative........ 12,705 14,123 15,036 15,700 16,010 5,907 6,234 Amortization of intangibles....... 9 37 100 82 656 33 19 ------------ ------------ ------------ ----------- ----------- --------- --------- Total operating costs and expenses........................ 36,916 36,798 36,361 37,415 36,582 13,337 13,470 ------------ ------------ ------------ ----------- ----------- --------- --------- Income from operations.............. 9,308 7,014 5,303 6,918 10,841 6,028 6,451 Other (income) expenses: Interest expense, net............. 319 463 (259) 1,392 1,219 613 597 Other income, net................. (411) (572) (551) (633) (436) (111) (254) ------------ ------------ ------------ ----------- ----------- --------- --------- Total other (income) expense...... (92) (109) (810) 759 783 502 343 ------------ ------------ ------------ ----------- ----------- --------- --------- Income before income taxes and cumulative effect of accounting change............................ 9,400 7,123 6,113 6,159 10,058 5,526 6,108 Income taxes........................ 3,347 2,400 2,145 2,090 3,385 1,884 2,079 ------------ ------------ ------------ ----------- ----------- --------- --------- Income before cumulative effect of accounting change................. 6,053 4,723 3,968 4,069 6,673 3,642 4,029 Cumulative effect of change in accounting for post-retirement benefits other than pensions...... -- -- 2,272 -- -- -- -- ------------ ------------ ------------ ----------- ----------- --------- --------- Net income.......................... $ 6,053 $ 4,723 $ 1,696 $ 4,069 $ 6,673 $ 3,642 $ 4,029 ------------ ------------ ------------ ----------- ----------- --------- --------- ------------ ------------ ------------ ----------- ----------- --------- --------- Net income applicable to common shares............................ $ 6,053 $ 4,723 $ 1,696 $ 3,765 $ 6,371 $ 3,566 $ 3,954 ------------ ------------ ------------ ----------- ----------- --------- --------- ------------ ------------ ------------ ----------- ----------- --------- --------- Weighted average shares outstanding....................... 7,905,400 7,865,120 7,622,840 3,609,245 3,636,519 3,631,758 3,685,236  Net earnings per common share: Income before cumulative effect of accounting change............... $ 0.77 $ 0.60 $ 0.52 $ 1.04 $ 1.75 $ 0.97 $ 1.07 Cumulative effect of change in accounting for post-retirement benefits other than pensions.... -- -- (0.30) -- -- -- -- ------------ ------------ ------------ ----------- ----------- --------- --------- Net income........................ $ 0.77 $ 0.60 $ 0.22 $ 1.04 $ 1.75 $ 0.97 $ 1.07 ------------ ------------ ------------ ----------- ----------- --------- --------- ------------ ------------ ------------ ----------- ----------- --------- --------- Balance sheet data (at end of period): Total assets........................ $ 93,629 $ 95,089 $ 98,870 $ 94,765 $ 99,206 $ 105,565 $ 101,942 Long-term debt, net of current portion........................... 14,777 13,832 14,217 32,152 28,571 36,318 26,523 Preferred stock..................... -- -- -- 3,800 3,741 3,800 3,741 Total common stockholders' equity... 47,168 49,606 51,265 21,326 27,793 25,002 31,775 33
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THE SPECIAL MEETINGS  GENERAL The Suiza Special Meeting will be held at 9:00 a.m., local time, on Wednesday, November 26, 1997, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201 for the purpose set forth in the Notice of Suiza Special Meeting and as described below. The Morningstar Special Meeting will be held at 9:00 a.m. local time, on Wednesday, November 26, 1997, at the Hotel Crescent Court, 400 Crescent Court, 2200 Cedar Springs, Dallas, Texas 75201 for the purpose set forth in the Notice of Morningstar Special Meeting and as described below. This Joint Proxy Statement/Prospectus is furnished in connection with the solicitation by the Suiza Board and Morningstar Board of proxies to be used at their respective Special Meetings and at any and all adjournments or postponements of such Special Meetings. Any person executing a proxy card may revoke it prior to its exercise by filing with the Corporate Secretary of Suiza Foods or the General Counsel of Morningstar, as the case may be, prior to or at the applicable Special Meeting, at the address specified under the caption "Incorporation of Certain Information by Reference" in this Joint Proxy Statement/Prospectus, either an instrument revoking the proxy or a duly executed proxy bearing a later date.  VOTING SECURITIES AND RECORD DATES  SUIZA FOODS. Suiza Stockholders of record at the close of business on October 27, 1997 are entitled to notice of and to vote at the Suiza Special Meeting. On October 27, 1997, there were 15,810,800 outstanding shares of Suiza Common Stock. Each share of Suiza Common Stock is entitled to one vote on each matter to be acted upon at the Suiza Special Meeting. No other shares of Suiza common stock or preferred stock were outstanding as of the Suiza Record Date. The presence, in person or by proxy, at the Suiza Special Meeting of the holders of a majority of the shares of Suiza Common Stock outstanding and entitled to vote at the Suiza Special Meeting is necessary to constitute a quorum at the Suiza Special Meeting. In addition, applicable NYSE rules require that the total vote cast with respect to the Stock Issuance and the Plan Amendment represent over 50% in interest of all securities entitled to vote on each proposal. Assuming that these quorum requirements are satisfied, the affirmative vote of the holders of a majority of the shares of Suiza Common Stock present and entitled to vote at the Suiza Special Meeting is required to approve each Suiza Proposal.  MORNINGSTAR. Morningstar Stockholders of record at the close of business on October 27, 1997 are entitled to notice of and to vote at the Morningstar Special Meeting. On October 27, 1997, there were 14,778,936 outstanding shares of Morningstar Common Stock. Each share of Morningstar Common Stock is entitled to one vote on each matter to be acted upon at the Morningstar Special Meeting. No other shares of Morningstar common stock or preferred stock were outstanding as of the record date. The presence, in person or by proxy, at the Morningstar Special Meeting of the holders of a majority of the shares of Morningstar Common Stock outstanding and entitled to vote at the Morningstar Special Meeting is necessary to constitute a quorum at the Morningstar Special Meeting. The affirmative vote of a majority of the shares of Morningstar Common Stock outstanding and entitled to vote at the Morningstar Special Meeting is required to approve the Morningstar Proposal.  PURPOSE OF SPECIAL MEETINGS  SUIZA FOODS. The purpose of the Suiza Special Meeting is to (i) consider and vote upon the proposal to approve the Stock Issuance, (ii) consider and vote upon the proposal to approve the Plan Amendment and (iii) transact such other business as may properly come before the Suiza Special Meeting and at any and all adjournments or postponements thereof.  MORNINGSTAR. The purpose of the Morningstar Special Meeting is to (i) consider and vote upon the proposal to approve the Merger Agreement, the Merger and the transactions contemplated thereby and (ii) transact such other business as may properly come before the Morningstar Special Meeting and at any 34
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and all adjournments or postponements thereof. A copy of the Merger Agreement is attached hereto as Appendix A.  PROXIES All shares of Suiza Common Stock and Morningstar Common Stock represented by properly executed proxies received prior to or at the Suiza Special Meeting or Morningstar Special Meeting, as the case may be, and not duly and timely revoked, will be voted in accordance with the instructions indicated on such proxies. If no instructions are indicated on a properly executed and returned proxy, such proxy will be voted "FOR" the approval of the Suiza Proposals or the Morningstar Proposal, as the case may be. A properly executed proxy marked "ABSTAIN," although counted for purposes of determining whether there is a quorum and for purposes of determining the aggregate voting power and number of shares represented and entitled to vote at the applicable Special Meeting, will not be voted. Shares represented by "broker non-votes" (i.e., shares held by brokers or nominees which are represented at a meeting but with respect to which the broker or nominee is not empowered to vote) will be counted for purposes of determining whether there is a quorum at a Special Meeting. In accordance with NYSE and Nasdaq rules, brokers and nominees are precluded from exercising their voting discretion with respect to the approval and adoption of the Suiza Proposals and the Morningstar Proposal and thus, absent specific instructions from the beneficial owner of such shares, are not empowered to vote such shares with respect to the approval and adoption of the Suiza Proposals or the Morningstar Proposal. Because the affirmative vote of a majority of the Suiza Common Stock present and entitled to vote is required to approve the Suiza Proposals, an abstention, a "broker non-vote" or the failure to be present in person or by proxy at the Suiza Special Meeting will have no effect upon the outcome of the vote with respect to the Suiza Proposals, assuming a quorum is present. Because the affirmative vote of a majority of the Morningstar Common Stock outstanding and entitled to vote is required to approve the Morningstar Proposal, an abstention, a "broker non-vote" or the failure to be present in person or by proxy at the Morningstar Special Meeting will have the same effect as a vote against the Morningstar Proposal. The Suiza Board and the Morningstar Board are not currently aware of any business to be acted upon at their respective Special Meeting other than as described herein. If, however, other matters are properly brought before either Special Meeting, or any adjournments or postponements thereof, the persons appointed as proxies will have discretion to vote or act thereon according to their judgment. Such adjournments may be for the purpose of soliciting additional proxies. Neither Suiza Foods nor Morningstar currently intends to seek an adjournment of its Special Meeting. Any proxy given pursuant to this solicitation may be revoked at any time before such proxy is voted. Attendance at the Suiza Special Meeting or the Morningstar Special Meeting will not in and of itself constitute a revocation of a proxy. The cost of soliciting proxies will be borne by Suiza Foods for Suiza Foods proxies and by Morningstar for Morningstar proxies. In addition to the use of the mail, arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries to send proxy material to beneficial owners and Suiza Foods or Morningstar, as the case may be, will, upon request, reimburse them for their reasonable expenses. Suiza Foods and Morningstar have retained a proxy solicitation firm to aid in the solicitation of proxies and to verify certain records related to the solicitation for a fee of approximately $9,000 plus expenses. To the extent necessary in order to ensure sufficient representation at its Special Meeting, Suiza Foods or Morningstar may request by telephone, telegram or in person the return of proxy cards. The extent to which this will be necessary depends entirely upon how promptly proxy cards are returned. Stockholders are urged to send in their proxies without delay. 35
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MORNINGSTAR STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. A LETTER OF TRANSMITTAL WITH INSTRUCTIONS FOR THE SURRENDER OF CERTIFICATES FOR SHARES OF MORNINGSTAR COMMON STOCK WILL BE MAILED TO MORNINGSTAR STOCKHOLDERS AS SOON AS PRACTICABLE AFTER THE EFFECTIVE TIME.  THE MERGER  GENERAL At the Effective Time of the Merger, Sub will be merged with and into Morningstar, with Morningstar surviving the Merger as a wholly owned subsidiary of Suiza Foods. In the Merger, each share of Morningstar Common Stock issued and outstanding immediately before the Effective Time (excluding those held in the treasury of Morningstar and those owned by Suiza Foods, Sub or any other subsidiary of Suiza Foods), without any action on the part of the holder thereof, will be converted into the right to receive 0.85 shares of Suiza Common Stock. Cash will be paid in lieu of fractional shares of Suiza Common Stock. The Merger will become effective at the date and time the Certificate of Merger is filed with the Secretary of State of the State of Delaware, which will occur as soon as practicable after receipt of requisite regulatory and stockholder approvals and fulfillment of the other conditions set forth in the Merger Agreement. Based on the number of shares of Suiza Common Stock and Morningstar Common Stock outstanding on October 27, 1997, the shares of Suiza Common Stock issued to Morningstar Stockholders in the Merger will constitute approximately 44.3% of the Suiza Common Stock outstanding after the Merger and the current Suiza Stockholders will hold approximately 55.7% of the Suiza Common Stock outstanding after the Merger. On the same basis, but also assuming that 1,911,075 additional shares of Suiza Common Stock are issued in the Country Fresh Merger, Morningstar Stockholders will hold approximately 41.5% of the Suiza Common Stock outstanding after the Merger. Each outstanding and unexercised Morningstar Option will be assumed by Suiza Foods in the Merger and converted into a Substitute Option. Approximately 2,957,987 shares of Suiza Common Stock will be subject to Substitute Options, based on the number of shares of Morningstar Common Stock subject to the Morningstar Options as of October 27, 1997. The per share exercise price with respect to the Substitute Options will equal the exercise price with respect to the Morningstar Options divided by the Exchange Ratio. The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio of 0.85 shares of Suiza Common Stock for each share of Morningstar Common Stock. Accordingly, the Exchange Ratio will not be adjusted in the event of any increase or decrease in the price of Suiza Common Stock or Morningstar Common Stock. The price of Suiza Common Stock at the Effective Time may vary from its price at the date of the Special Meetings. These variations may be the result of changes in the business, operations, or prospects of Suiza Foods or Morningstar, market assessments of the likelihood that the Merger will be consummated and the timing thereof, general market and economic conditions, and other factors.  BACKGROUND OF THE MERGER In April 1994, Morningstar sold its Florida-based fluid milk operation, Velda Farms Inc., to a predecessor of Suiza Foods for approximately $48 million in cash (after working capital adjustments) and $3 million in preferred stock issued by such predecessor of Suiza Foods. This sale concluded the divestiture of Morningstar's regional dairies, which were considered a distinct segment of its business. In March 1995, Suiza Foods redeemed the preferred stock issued in this transaction for its stated value plus accrued dividends. During the spring of 1995, representatives of Morningstar and representatives of Hicks, Muse & Co. Incorporated, now known as Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), met with representatives of Suiza Foods and one other bidder to discuss a possible sale of Morningstar. At that time, Hicks 36
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Muse controlled a majority of the voting stock of Morningstar through an investment partnership. In May 1995, Suiza Foods and the other bidder submitted acquisition proposals to the Morningstar Board. The Morningstar Board rejected both of these proposals and determined not to pursue a sale of Morningstar. Following this determination in July 1995, Hicks Muse caused the investment partnership which held shares in Morningstar to distribute these shares to the individual partners of the partnership, thereby relinquishing voting control of Morningstar and terminating any further discussions or activities, with Suiza Foods or other bidders, related to a possible sale of Morningstar. In early August of 1997, representatives of the management of Suiza Foods met with representatives of the management of Morningstar. At that meeting, the possibility was raised of a business combination between Morningstar and Suiza Foods in which Morningstar Stockholders would receive Suiza Common Stock having a current market value representing a significant premium to the then current market price of the Morningstar Common Stock. On August 14, 1997, the Morningstar Board authorized Morningstar management to pursue a possible transaction with Suiza Foods. From August 15 through September 26, representatives of Morningstar and Suiza Foods, including their respective legal and financial advisors, conducted a mutual exchange of business and financial information pursuant to confidentiality agreements executed on August 18, 1997 and negotiated the terms and conditions of a possible transaction. The Suiza Board discussed the possible transaction at a meeting held on August 29, 1997, and the Morningstar Board again discussed the possible transaction at a meeting held on September 26, 1997. During this time, Suiza Foods was also negotiating a merger transaction with Country Fresh. Suiza Foods and Country Fresh signed a merger agreement with respect to the Country Fresh Merger on September 18, 1997. The discussions and negotiations between Morningstar and Suiza Foods representatives were centered around the appropriate exchange ratios and possible "collar" mechanisms for an exchange ratio, the synergies and other benefits that could arise from a combination of Suiza Foods and Morningstar, and the terms of the Merger Agreement. Final negotiations were conducted from September 24 through 26, with agreement being reach on the Exchange Ratio of 0.85 on September 26, 1997, subject to approval by the respective Boards of Directors of Suiza Foods and Morningstar. On September 27, 1997 the legal advisors to Suiza Foods and Morningstar met and resolved outstanding issues on the Merger Agreement. On September 28, 1997, the respective boards of Suiza Foods and Morningstar separately met to consider the Merger and the Merger Agreement, and after receiving fairness opinions from DLJ and Goldman Sachs, respectively, both the Suiza Board and the Morningstar Board approved the Merger and the Merger Agreement. Later that day, the parties executed the Merger Agreement, which was publicly announced on the morning of September 29, 1997 through a joint press release before the opening of trading of the NYSE and Nasdaq.  REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS  SUIZA FOODS. The Suiza Board, based upon certain factors listed below, including the DLJ Opinion, concluded that the Merger is fair to and in the best interests of Suiza Foods and the Suiza Stockholders and unanimously approved the Merger and resolved to recommend that the Suiza Stockholders approve the Stock Issuance. It should be noted that one of the ten members of the Suiza Board was unable to attend the meeting at which the Suiza Board voted to recommend approval of the Stock Issuance. Accordingly, all references in this Joint Proxy Statement/Prospectus to the unanimous approval or recommendation of the Suiza Board shall mean that all members of the Suiza Board other than such one absent member concurred in such approval or recommendation. The Suiza Board believes that the merger will benefit Suiza Foods and the Suiza Stockholders in a number of respects, including the following: (i) the combined company will be the largest dairy company in the United States, and its size, geographic reach and breadth of product offerings will allow it to offer its customers more products, and to manufacture and deliver such products more efficiently, than Suiza Foods or Morningstar could independently; (ii) the branded character of Morningstar's product offerings will 37
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improve the gross margin of Suiza Foods' product offerings; (iii) growth in sales of Morningstar's branded and value-added product lines complement Suiza Foods' strategy of growing through acquisition; (iv) Morningstar's national infrastructure for manufacturing and distributing value-added dairy and non-dairy products should afford Suiza Foods greater synergies from rationalizing the manufacturing and distribution of value-added products of regional dairies acquired in the future; (v) Morningstar's existing corporate infrastructure should allow Suiza Foods to avoid creating a duplicative infrastructure of its own to manage its rapidly expanding business; (vi) the additional cash flow from Morningstar's operations should reduce Suiza Foods' leverage, expand its borrowing capacity and reduce its borrowing costs and (vii) the issuance of Suiza Common Stock in the Merger should materially increase the float and liquidity of the Suiza Common Stock. In reaching its determination to recommend the Stock Issuance to Suiza Stockholders, the Suiza Board considered, among other things, the following factors and information: 1. the judgment, advice and analyses of its management with respect to the strategic rationale behind the Merger and the financial and operational benefits and challenges of the Merger, based in part on the business, financial, accounting and legal due diligence performed with respect to Morningstar; 2. the financial condition, results of operations, business, operations and assets of each of Suiza Foods and Morningstar and other financial information; 3. the operational opportunities and challenges of operating Morningstar as a subsidiary of Suiza Foods and the management challenges associated with successfully integrating the businesses of two public companies as well as the many companies that have been acquired by Suiza Foods and Morningstar over the last several years; 4. the strategic and competitive benefits of combining the two companies in the respective markets that Suiza Foods and Morningstar serve; 5. current industry, economic and market conditions; 6. the terms and conditions of the Merger Agreement; 7. the DLJ Opinion (see "The Merger--Opinion of Suiza Foods' Financial Advisor" and Appendix B); 8. historical market prices and trading information with respect to Suiza Foods and Morningstar; 9. the advice of Suiza Foods' independent accountants concerning the ability of Suiza Foods and Morningstar to account for the Merger as a pooling of interests for accounting purposes; and 10. the advice of Suiza Foods' counsel that the Merger should be treated as a tax-free reorganization for federal income tax purposes. The foregoing discussion of the factors and information considered by the Suiza Board is not intended to be exhaustive. In view of the variety of factors and information considered by the Suiza Board in connection with its evaluation of the Merger, the Suiza Board did not find it practicable to assign, and did not assign, relative weights to the specific factors and information considered in reaching its conclusion that the Merger is in the best interests of Suiza Foods and the Suiza Stockholders or its recommendation that the Suiza Stockholders vote "FOR" the Stock Issuance. In addition, individual members of the Suiza Board may have given or assigned different weight to the factors and information listed above as well as any other factors and information considered in reaching their respective decisions. There can be no assurance that the expected benefits of the Merger will be achieved. See "Risk Factors--Risks Associated with Acquisition Strategy" and "--Expected Benefits of the Merger May Not Be Achieved." THE SUIZA BOARD UNANIMOUSLY RECOMMENDS THAT THE SUIZA STOCKHOLDERS VOTE "FOR" APPROVAL OF THE STOCK ISSUANCE. 38
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MORNINGSTAR. The Morningstar Board, based upon, among other things, the factors listed below concluded that the Merger is fair to, and in the best interests of, Morningstar and the Morningstar Stockholders, unanimously approved the Merger, the Merger Agreement and the transactions contemplated thereby, and resolved to recommend that the Morningstar Stockholders approve the Morningstar Proposal. It should be noted that two members of the Morningstar Board were unable to attend the meetings of the Morningstar Board at which the Merger Agreement was discussed. Accordingly, all references in this Joint Proxy Statement/Prospectus to the unanimous approval or recommendation of the Morningstar Board with respect to the Merger, the Merger Agreement and the transactions contemplated thereby shall mean that all members of the Morningstar Board other than the two absent members concurred in such approval or recommendation. In determining to approve the Merger Agreement and to recommend that the Morningstar Stockholders approve the Morningstar Proposal, the Morningstar Board based its opinion as to the transactions contemplated in the Merger Agreement upon many different factors, including the following: (i) the judgment, advice and analyses of its management with respect to the strategic rationale behind the Merger and the financial and operational benefits and challenges of the Merger, based in part on the business, financial, accounting and legal due diligence performed with respect to Suiza Foods; (ii) current industry, economic, and market conditions; (iii) the financial condition, results of operations and cash flows of Morningstar and Suiza Foods on a historical basis and other financial information; (iv) the Goldman Sachs Opinion, to the effect that, as of the date of such opinion the Exchange Ratio pursuant to the Merger Agreement was fair from a financial point of view to the holders of Morningstar Common Stock. See "The Merger--Opinion of Morningstar's Financial Advisor" and Appendix C; (v) the historical market prices and trading information in respect of Morningstar Common Stock and Suiza Common Stock; (vi) the terms and conditions of the Merger Agreement, including, without limitation, the requirement of Morningstar Stockholder approval and the fees that would be payable upon termination under certain circumstances; and (vii) the ability to consummate the Merger as a pooling-of-interests under generally accepted accounting principles and as a tax-free reorganization under Section 368(a) of the Code. The Morningstar Board believes the Merger offers Morningstar Stockholders an opportunity to participate in an entity that, following the Merger, will have a greater financial flexibility, better opportunities for growth and better financial outlook than Morningstar would have if it were to continue on a stand- alone basis. There can be no assurances, however, that the expected benefits of the Merger will be realized. See "Risk Factors--Risks Associated with Acquisition Strategy" and "--Expected Benefits of the Merger May Not Be Achieved." The foregoing discussion of the factors and information considered by the Morningstar Board is not intended to be exhaustive. In view of the variety of factors considered in connection with its evaluation of the Merger, the Morningstar Board did not find it practicable to and did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination, and individual directors may have given differing weights to different factors. THE MORNINGSTAR BOARD UNANIMOUSLY RECOMMENDS THAT THE MORNINGSTAR STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. 39
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OPINION OF SUIZA FOODS' FINANCIAL ADVISOR Suiza Foods retained DLJ in connection with the Merger based upon DLJ's qualifications, expertise and reputation, including the fact that DLJ, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. THE FULL TEXT OF THE DLJ OPINION IS SET FORTH AS APPENDIX B TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. SUIZA STOCKHOLDERS SHOULD READ THE DLJ OPINION CAREFULLY IN ITS ENTIRETY FOR INFORMATION CONCERNING THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY DLJ. The DLJ Opinion was prepared for the Suiza Board and addresses only the fairness of the Exchange Ratio to the Suiza Stockholders from a financial point of view and does not constitute a recommendation to any Suiza Stockholder as to how such stockholder should vote at the Suiza Special Meeting. The DLJ Opinion does not constitute an opinion as to the price at which Suiza Common Stock will actually trade at any time. The type and amount of consideration was determined in arm's length negotiations between Suiza Foods and Morningstar. No restrictions or limitations were imposed upon DLJ with respect to the investigations made or procedures followed by DLJ in rendering its opinion. In arriving at the DLJ Opinion, DLJ reviewed a draft of the Merger Agreement, as well as financial and other information that was publicly available or furnished to it by Suiza Foods and Morningstar, including information provided during discussions with their respective managements. Included in the information provided to DLJ were various financial projections for Suiza Foods and Morningstar for various time periods. In addition, DLJ compared certain financial and securities data of Suiza Foods and Morningstar with that of various other companies whose securities are traded in public markets, reviewed the historical stock prices and trading volumes of the Morningstar Common Stock and Suiza Common Stock, reviewed prices and premiums paid in certain other business combinations and conducted such other financial studies, analyses and investigations as DLJ deemed appropriate for purposes of rendering its opinions. In rendering its opinion, DLJ relied upon, without independent investigation and assumed the accuracy and completeness of, all of the financial and other information that was available to it from public sources or that was provided to it by Suiza Foods and Morningstar or their respective representatives. In particular, DLJ relied upon the estimates of the management of Suiza Foods of the operating synergies (the "Synergies") achievable as a result of the Merger and upon its discussions of the Synergies with the managements of Suiza Foods and Morningstar. DLJ also assumed that the financial projections regarding Suiza Foods and Morningstar supplied to DLJ were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the managements of Suiza Foods and Morningstar as to the future operating and financial performance of Suiza Foods and Morningstar, respectively. DLJ did not assume any responsibility for making any independent evaluation of any assets or liabilities, or for making any independent verification of any of the information that it reviewed. The DLJ Opinion is necessarily based on economic, market, financial and other conditions as they exist on, and on information made available to DLJ as of, the date of the DLJ Opinion. DLJ does not have any obligation to update, revise or reaffirm the DLJ Opinion. The following is a summary of the material analyses presented by DLJ to the Suiza Board at its September 28, 1997 meeting. All analyses discussed below, unless otherwise indicated, (i) exclude the Synergies estimated by Suiza Foods management and (ii) assume the Exchange Ratio is calculated using a Suiza Common Stock price of $53.94, based on the closing price on September 26, 1997. 40
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COMMON STOCK PERFORMANCE ANALYSES. DLJ's analysis of the performance of Suiza Common Stock consisted of an historical analysis of closing prices and trading volumes for the period from September 26, 1996 through September 26, 1997. During this time period, Suiza Common Stock outperformed the S&P 500 and a comparable company index comprised of Dean Foods Co., Michael Foods, Inc., Dreyer's Grand Ice Cream, Inc., Flowers Industries, Inc., Hormel Foods Corporation, International Multifoods Corporation, Lance, Inc., Riviana Foods, Inc. and J.M. Smucker Company (the "Comparable Companies"). During the above period, Suiza Common Stock reached a high of $56.00 per share and a low of $16.75 per share. On September 26, 1997, the closing price of Suiza Common Stock was $53.94 per share. DLJ's analysis of the performance of Morningstar Common Stock consisted of an historical analysis of closing prices and trading volumes for the period from September 26, 1996 through September 26, 1997. During this time period, Morningstar Common Stock outperformed the S&P 500 and a comparable company index comprised of the Comparable Companies. During the above period, Morningstar Common Stock reached a high of $41.50 per share and a low of $11.25 per share. On September 26, 1997, the closing price of Morningstar Common Stock was $40.00 per share. COMPARABLE COMPANY ANALYSIS. To provide contextual data and comparative market information, DLJ analyzed the operating performance of Morningstar relative to the Comparable Companies. Historical financial information used in connection with the ratios provided below with respect to the Comparable Companies is as of the most recent financial statements publicly available for each company as of September 26, 1997. DLJ also analyzed pro forma financial information for Morningstar giving effect to the acquisition of Presto which was completed on December 3, 1996. DLJ performed a valuation analysis of Morningstar by applying certain market trading statistics for the Comparable Companies to Morningstar's historical and estimated financial results. DLJ examined certain publicly available financial data of the Comparable Companies, including enterprise value (defined as market value of common equity plus book value of total debt and preferred stock less cash) as a multiple of: (a) latest 12 months ("LTM") revenues, earnings before interest, taxes, depreciation and amortization ("EBITDA") and earnings before interest and taxes ("EBIT") and (b) price to earnings ratios based on: (x) LTM earnings per share ("EPS"); and (y) estimated calendar year 1997 EPS and estimated calendar year 1998 EPS. Based on these valuation multiples for the Comparable Companies, DLJ derived a summary valuation range for Morningstar Common Stock of $31.18 to $46.05 per share. Calendar year 1997 and 1998 EPS estimates for the Comparable Companies were based on estimates provided by First Call Research Direct. EPS calendar year 1997 and 1998 estimates for Morningstar were based on estimates developed by Morningstar. No company utilized in the comparable company analysis is identical to Morningstar. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of the Comparable Companies and Morningstar and other factors that could affect the public trading value of the Comparable Companies. Mathematical analysis such as determining the median is not in itself a meaningful method of using comparable company data. COMPARABLE TRANSACTION ANALYSIS. DLJ also performed an analysis of the implied purchase price and adjusted transaction value multiples of selected merger and acquisition transactions (the "Comparable Transactions") in the dairy and broader food industry. Multiples reviewed in the Comparable Transactions consisted of (i) enterprise value to (where available) LTM revenues, LTM EBITDA, LTM EBIT, and (ii) equity value of the offer to (where available) LTM net income. The Comparable Transactions were comprised of eight transactions announced during the period 1991 to 1997. DLJ noted that the implied multiples of enterprise value and equity value, as the case may be, for these transactions were in (i) a range of 0.3x to 1.0x (with a median of 0.4x) LTM revenues; (ii) a range of 6.6x to 10.5x (with a median of 8.8x) LTM EBITDA; (iii) a range of 8.3x to 30.9x (with a median of 15.0x) LTM EBIT; and (iv) a range of 14.0x to 27.8x (with a median of 19.5x) LTM net income. Based on the multiples paid in the Comparable 41
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Transactions discussed above, DLJ derived a summary valuation range for Morningstar Common Stock of $29.16 to $42.86 per share. LTM pro forma revenue, EBITDA, EBIT and net income for Morningstar were based on information provided by Morningstar. No transaction utilized in the comparable transaction analysis is identical to the Merger. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of Morningstar and other factors that could affect the acquisition value of the companies to which it is being compared. Mathematical analysis such as determining the average is not itself a meaningful method of using comparable transaction data. PREMIUM ANALYSIS. DLJ derived an acquisition valuation for Morningstar based on premiums offered in stock for stock merger and acquisition transactions ranging from $700 million to $1.0 billion in size and announced between January 1994 and September 1997. DLJ's analysis indicated that, for the transactions reviewed, the median premiums offered to the market price of the acquired company one day, one week and one month prior to announcement were 20.6%, 23.3% and 34.4%, respectively, and the mean premiums were 25.7%, 30.9% and 40.9%, respectively. Applying the above premiums to Morningstar's closing stock price one day, one week and one month prior to September 25, 1997 implies an acquisition valuation range of approximately $42.10 to $53.84 per share of Morningstar Common Stock. This analysis did not take into account differing market and other conditions occurring during the January 1994 to September 1997 period during which these transactions occurred, and no further material assessments were made by DLJ in respect of such analysis. DISCOUNTED CASH FLOW ANALYSIS. In addition, DLJ performed a discounted cash flow ("DCF") analysis for the five-year period commencing January 1, 1998 and ending December 31, 2002 based on the stand-alone unlevered free cash flows of Morningstar, without giving effect to the Synergies. Unlevered free cash flows were calculated as the after-tax operating earnings of Morningstar, plus depreciation and amortization, plus (or minus) net changes in working capital, minus projected capital expenditures. DLJ calculated terminal values by applying a range of estimated EBITDA multiples of 8.0x to 10.0x to the projected EBITDA of Morningstar in 2002. The unlevered free cash flows and terminal values were then discounted to the present using a range of discount rates of 9.0% to 11.0% representing an estimated range of the weighted average cost of capital of Morningstar. Based on this analysis, DLJ calculated per share equity values of Morningstar ranging from $40.74 to $55.82. EPS IMPACT ANALYSIS. DLJ also analyzed the pro forma effects on the projected EPS of Suiza Foods resulting from the Merger, including, without independent verification, the Synergies projected by the management of Suiza Foods, for each of the years ending December 31, 1998, 1999, 2000 and 2001 and assuming an exchange ratio of 0.85. This analysis was based on a number of assumptions, including, among other things, estimated amounts and timing of the Synergies and the projected financial performance of Suiza Foods and Morningstar. The analysis indicated that the Merger, accounted for as a pooling-of-interests transaction, with the benefit of the Synergies, would be accretive to Suiza Foods' stand-alone EPS estimates in 1998, 1999, 2000 and 2001. RELATIVE CONTRIBUTION ANALYSIS. DLJ analyzed the relative contributions of Suiza Foods and Morningstar to the revenues, EBITDA, EBIT, pre-tax income and net income of the pro forma combined entity for the projected calendar years 1997 and 1998, excluding Synergies and transaction adjustments. Based on the projected financial information for the calendar year 1997, Morningstar's revenues, EBITDA, EBIT, pre-tax income and net income would represent 31.9%, 40.7%, 42.8%, 46.3% and 42.6%, respectively, of the pro forma combined entity, assuming the transaction occurred at January 1, 1997. Based on the projected financial information for the calendar year 1998, Morningstar's net sales, EBITDA, EBIT, pre-tax income and net income would represent 29.0%, 36.5%, 38.9%, 45.8% and 42.6%, respectively, of the pro forma combined entity. The shares of Suiza Common Stock to be issued to the holders of Morningstar Common Stock on a fully diluted basis would represent approximately 42.4% of the outstanding shares of Suiza Common Stock after giving effect to the Merger at an exchange ratio of 0.85. 42
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The summary set forth above does not purport to be a complete description of the analyses performed by DLJ, but describes, in summary form, the principal elements of the analyses contained in the materials presented by DLJ to the Suiza Board in connection with DLJ rendering its opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Each of the analyses conducted by DLJ was carried out in order to provide a different perspective on the transaction and add to the total mix of information available. DLJ did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to fairness from a financial point of view. Rather, in reaching its conclusion, DLJ considered the results of each analysis in light of each other and ultimately reached its opinion based on the results of the analyses taken as a whole. DLJ did not place particular reliance or weight on any individual factor, but instead concluded that its analyses, taken as a whole, supported its determination. Accordingly, notwithstanding the separate factors summarized above, DLJ believes that its analyses must be considered as a whole and that selecting portions of its analysis and the factors considered by it, without considering all analyses and factors, could create an incomplete or misleading view of the evaluation process underlying its opinion. In performing its analyses, DLJ made numerous assumptions with respect to industry performance, business and economic conditions and other matters. The analyses performed by DLJ are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Pursuant to a letter agreement between Suiza Foods and DLJ dated September 10, 1997 (the "DLJ Engagement Letter"), DLJ is entitled to a fee of $500,000 in connection with the delivery of the DLJ Opinion, irrespective of the conclusion reached therein, and is entitled to an additional fee of $2,250,000 upon consummation of the Merger. In addition, Suiza Foods has agreed to reimburse DLJ for all out-of-pocket expenses (including the reasonable fees and expenses of its counsel) incurred by DLJ in connection with its engagement thereunder, whether or not the Merger is consummated, and to indemnify DLJ for certain liabilities and expenses arising out of the Merger or the transactions in connection therewith, including liabilities under federal securities laws. The terms of the fee arrangement with DLJ, which DLJ and Suiza Foods believe are customary in transactions of this nature, were negotiated at arm's length between Suiza Foods and DLJ and the Suiza Board was aware of such arrangement. DLJ provides a full range of financial, advisory and brokerage services and, in the course of its normal trading activities, may from time to time effect transactions and hold positions in the securities or options on the securities of Morningstar and/or Suiza Foods for its own account and for the account of customers. In addition, DLJ has performed investment banking services for Morningstar and its affiliates, including Hicks Muse, in the past and has received usual and customary compensation for such services.  OPINION OF MORNINGSTAR'S FINANCIAL ADVISOR On September 28, 1997, Goldman Sachs delivered its oral opinion, which was subsequently confirmed in writing, to the Morningstar Board to the effect that, as of the date of such opinion, the Exchange Ratio pursuant to the Merger Agreement was fair from a financial point of view to the holders of shares of Morningstar Common Stock. THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED AS OF SEPTEMBER 28, 1997, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF MORNINGSTAR ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. In connection with its opinion, Goldman Sachs reviewed, among other things, (i) the Merger Agreement; (ii) Annual Reports to Stockholders and Annual Reports on Form 10-K for the five years ended December 31, 1996 of Morningstar and for the year ended December 31, 1996 of Suiza Foods; (iii) the initial public offering Prospectus of Suiza Foods, dated April 17, 1996; (iv) certain interim reports 43
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to stockholders and Quarterly Reports on Form 10-Q of Morningstar and Suiza Foods; (v) certain other communications from Morningstar and Suiza Foods to their respective stockholders; (vi) certain internal financial analyses and forecasts for Morningstar and Suiza Foods that were prepared by their respective managements. Goldman Sachs held discussions with members of the senior managements of Morningstar and Suiza Foods regarding the strategic rationale for, and the potential benefits of, the transaction contemplated by the Merger Agreement and the past and current business operations, financial condition, and future prospects of their respective companies. In addition, Goldman Sachs reviewed the reported price and trading activity for the Morningstar Common Stock and Suiza Common Stock, compared certain financial and stock market information for Morningstar and Suiza Foods with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations in the dairy and branded foods industries specifically and in other industries generally and performed such other studies and analyses as it considered appropriate. Goldman Sachs relied upon the accuracy and completeness of all of the financial and other information reviewed by it and Goldman Sachs assumed such accuracy and completeness for purposes of rendering its opinion. In addition, Goldman Sachs did not make any independent evaluation or appraisal of the assets and liabilities of Morningstar or Suiza Foods or any of their subsidiaries and Goldman Sachs was not furnished with any such evaluation or appraisal. Goldman Sachs assumed, with Morningstar's consent, that the transaction contemplated by the Merger Agreement will be accounted for as a pooling of interests under GAAP. Goldman Sachs' opinion was provided for the information and assistance of the Board of Directors of Morningstar in connection with its consideration of the transaction contemplated by the Merger Agreement, and such opinion does not constitute a recommendation as to how any holder of shares of Morningstar Common Stock should vote with respect to such transaction. The following is a summary of certain of the financial analyses used by Goldman Sachs in connection with providing its opinion to the Morningstar Board on September 28, 1997. (i) HISTORICAL STOCK TRADING ANALYSIS. (A) MORNINGSTAR. Goldman Sachs reviewed the daily and monthly historical price and trading volume history for Morningstar Common Stock for the periods from September 26, 1996 to September 26, 1997 and from September 30, 1992 to September 26, 1997, respectively. Goldman Sachs also reviewed the volume of shares of Morningstar Common Stock traded at a range of prices for the three month, six month, one year and two year periods ended September 26, 1997. Such review indicated weighted average trading prices of shares of Morningstar Common Stock of $33.45, $29.90, $24.05 and $19.74, respectively, for the periods reviewed. (B) SUIZA FOODS. Goldman Sachs reviewed the daily historical stock price and trading volume history for Suiza Common Stock for the period from April 17, 1996 (the date of Suiza Foods' initial public offering) to September 26, 1997. Goldman Sachs also reviewed the volume of shares of Suiza Common Stock traded at a range of prices for the three month, six month and one year periods ended September 26, 1997, and for the period from April 17, 1996 to September 26, 1997. Such review indicated weighted average trading prices of shares of Suiza Common Stock of $42.46, $36.81, $31.19 and $28.15, respectively, for the periods reviewed. (ii) INDEXED STOCK PRICE HISTORIES. Goldman Sachs reviewed the daily indexed historical prices for shares of Morningstar Common Stock during the period from April 17, 1996 to September 26, 1997, as compared to Suiza Common Stock, the S&P 500 and the S&P Foods index (the "S&P Foods"). The S&P Foods is comprised of the following companies: Archer Daniels Midland, Campbell, Conagra, CPC International, General Mills, H.J. Heinz, Hershey, Kellogg, Quaker Oats, Ralston Purina, Sara Lee, Unilever and Wrigley. (iii) SELECTED COMPANIES ANALYSIS. Goldman Sachs reviewed and compared certain financial information, ratios and public market multiples relating to Morningstar and Suiza Foods to corresponding financial information, ratios and public market multiples for (a) Dean Foods, (b) certain small- and mid- 44
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capitalization food companies comprised of Flowers Industries, Hormel, International Multifoods, Lance, Riviana Foods and J.M. Smucker (the "Small/Mid Cap Food Companies"), (c) certain large-capitalization food companies comprised of Campbell, CPC, General Mills, H.J. Heinz, Hershey, Kellogg and Nabisco (the "Large Cap Food Companies" and, together with the Small/Mid Cap Food Companies and Dean Foods, the "Selected Companies"), and (d) in certain circumstances, the S&P 500 and the S&P Foods. The multiples for Morningstar and Suiza Foods were calculated using a price of $40.00 per share of Morningstar Common Stock and a price of $53.94 per share of Suiza Common Stock, the closing prices of such shares on Nasdaq and the NYSE, respectively, on September 26, 1997. Goldman Sachs reviewed the following: (i) enterprise value as a multiple of last 12 month ("LTM") (x) sales, (y) earnings before interest, taxes, depreciation and amortization ("EBITDA") and (z) earnings before interest and taxes ("EBIT"); (ii) price-to-earnings ("P/E") multiples based on 1997 and 1998 Institutional Brokers Estimate System ("IBES") earnings estimates as of September 26, 1997; (iii) IBES estimated five year earnings growth rates; and (iv) the P/E multiple based on 1998 IBES earnings estimates, as a multiple of the IBES estimated five year earnings growth rate (the "1998 P/E to Five Year Earnings Growth Multiple"). Goldman Sachs' analyses indicated that (a) enterprise value as a multiple of LTM sales was .70x for Dean Foods, and a median of 1.01x for the Small/Mid Cap Food Companies, 2.32x for the Large Cap Food Companies and 1.55x for the Selected Companies, as compared with 1.71x for Morningstar and 2.62x for Suiza Foods, (b) enterprise value as a multiple of LTM EBITDA was 8.5x for Dean Foods, and a median of 10.5x for the Small/Mid Cap Food Companies, 13.0x for the Large Cap Food Companies and 10.9x for the Selected Companies, as compared with 16.3x for Morningstar and 26.8x for Suiza Foods, (c) enterprise value as a multiple of LTM EBIT was 12.4x for Dean Foods, and a median of 16.8x for the Small/Mid Cap Food Companies, 16.5x for the Large Cap Food Companies and 16.4x for the Selected Companies, as compared with 22.0x for Morningstar and 38.3x for Suiza Foods, (d) the P/E multiple based on 1997 IBES earnings estimates was 19.7x for Dean Foods, a median of 22.5x for the Small/Mid Cap Food Companies, 25.1x for the Large Cap Food Companies, 22.7x for the Selected Companies, and 22.2x for the S&P 500 and 23.5x for the S&P Foods, as compared with 27.8x for Morningstar and 27.2x for Suiza Foods, (e) the P/E multiple based on 1998 IBES earnings estimates was 17.4x for Dean Foods, a median of 19.7x for the Small/Mid Cap Companies, 22.1x for the Large Cap Food Companies, 19.7x for the Selected Companies, and 20.8x for the S&P 500 and 20.7x for the S&P Foods, as compared with 22.6x for Morningstar and 21.0x for Suiza Foods, (f) the IBES estimated five year earnings growth rate was 12.0% for Dean Foods, and a median of 10.5% for the Small/Mid Cap Food Companies, 11.0% for the Large Cap Food Companies and 11.0% for the Selected Companies, as compared with 17.5% for Morningstar and 23.0% for Suiza Foods, and (g) the 1998 P/E to Five Year Earnings Growth Multiple was 1.4x for Dean Foods, and a median of 1.7x for the Small Cap Food Companies, 1.9x for the Large Cap Food Companies and 1.8x for the Selected Companies, as compared with 1.3x for Morningstar and .9x for Suiza Foods. (iv) DISCOUNTED CASH FLOW ANALYSIS--MORNINGSTAR. Goldman Sachs performed discounted cash flow analyses based on projected unlevered free cash flows from 1998-2002. Goldman Sachs assumed that EBITDA terminal multiples were applied to trailing 2002 EBITDA and that cash flows were discounted to December 31, 1997 to arrive at a net present value per share of Morningstar Common Stock. (A) OPERATING SENSITIVITIES. Goldman Sachs calculated net present values per share of Morningstar Common Stock based on a range of assumed average operating margins and average sales growth rates, in each case for the years 1998-2002 (based on discussions with the management of Morningstar), assuming a 12.0% discount rate and 9.0x EBITDA terminal multiple. Goldman Sachs applied such operating margin and sales growth rate assumptions to a 1997 base case provided by Morningstar management. Such analysis indicated a range of net present values per share of Morningstar Common Stock of $24.73 to $58.61. (B) DISCOUNT RATE AND TERMINAL MULTIPLE SENSITIVITIES. Goldman Sachs calculated net present values per share of Morningstar Common Stock based on discount rates of 10% to 15% and EBITDA terminal multiples of 7.0x to 11.0x, assuming a 1997 base case provided by Morningstar management 45
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and, for the years 1998-2002, an assumed average sales growth rate and average operating margin (based on discussions with the management of Morningstar). Such analysis indicated a range of net present values per share of Morningstar Common Stock of $28.34 to $54.06. (v) DISCOUNTED CASH FLOW ANALYSIS--SUIZA FOODS. Goldman Sachs performed a discounted cash flow analysis based on projected unlevered free cash flows from 1998-2006, excluding the impact of any potential acquisitions during such period. Goldman Sachs assumed that EBITDA terminal multiples were applied to trailing 2006 EBITDA and that cash flows were discounted to December 31, 1997 to arrive at a net present value per share of Suiza Common Stock. Goldman Sachs' analysis was based on various projections prepared by Suiza Foods' management, which included acquisitions announced through September 26, 1997. Goldman Sachs calculated net present values per share of Suiza Common Stock based on discount rates of 10% to 14% and EBITDA terminal multiples of 7.0x to 11.0x. Such analysis indicated a range of net present values per share of Suiza Common Stock of $31.22 to $74.40. (vi) SELECTED TRANSACTIONS ANALYSIS. Goldman Sachs analyzed certain information relating to 16 selected transactions in the dairy (the "Selected Dairy Transactions") and 120 selected transactions in the branded foods (the "Selected Branded Foods Transactions" and, together with the Selected Dairy Transactions, the "Selected Transactions") industries consummated or announced since 1990, in the case of the Selected Dairy Transactions, and since 1988, in the case of the Selected Branded Foods Transactions. Such analyses indicated that for the Selected Transactions, with certain data points not being publicly available, levered consideration as a multiple of LTM (a) sales was a median of .46x for the Dairy Transactions with a mean of .52x, and a median of 1.10x for the Branded Foods Transactions with a mean of 1.22x, (b) EBITDA was a median of 7.5x for the Dairy Transactions with a mean of 7.8x, and a median of 8.9x for the Branded Foods Transactions with a mean of 10.1x, and (c) EBIT was a median of 12.5x for the Dairy Transactions with a mean of 11.6x, and a median of 12.1x for the Branded Foods Transactions with a mean of 15.8x. (vii) REVIEW OF IMPLIED TRANSACTION PREMIUMS AND MULTIPLES. Goldman Sachs reviewed certain implied transaction premiums and multiples, based on the Exchange Ratio, at a range of prices per share of Suiza Common Stock of $45.00 to $62.50. Goldman Sachs noted that based on a price per share of Suiza Common Stock of $53.94 (the closing price on September 26, 1997), and a corresponding implied value of $45.85 per share of Morningstar Common Stock (applying the Exchange Ratio), the implied premiums per share of Morningstar Common Stock resulting from the Merger were 14.6%, 55.4%, 37.1% and 57.0%, as compared with the closing prices of Morningstar Common Stock on September 26, 1997 and August 26, 1997, and the weighted average prices for the three-month and six-months periods ended September 26, 1997, respectively. Goldman Sachs also noted that, based on a price per share of Suiza Common Stock of $53.94, and a corresponding implied value of $45.85 per share of Morningstar Common Stock (applying the Exchange Ratio), the Merger implies multiples of LTM sales, EBITDA and EBIT of 1.92x, 18.3x and 24.7x, respectively. (viii) CONTRIBUTION ANALYSIS. Goldman Sachs reviewed certain historical and estimated future operating and financial information (including, among other things, sales, EBITDA, EBIT, net income, assets, shareholders' equity, levered market capitalization and equity market capitalization) for Morningstar, Suiza Foods and the pro forma combined entity resulting from the Merger, based on publicly available information and various estimates provided to Goldman Sachs by management of each of Morningstar and Suiza Foods. Goldman Sachs also analyzed the relative income statement and balance sheet contribution of Morningstar and Suiza Foods to the combined entity on a pro forma basis. Such analysis indicated the following contribution by Morningstar to the combined entity for the following figures and periods: (a) sales (management estimates): 31.7% and 29.0% in 1997 and 1998, respectively; (b) EBITDA (management estimates): 39.8% and 36.5% in 1997 and 1998, respectively; (c) EBIT (management estimates): 41.5% and 38.9% in 1997 and 1998, respectively; (d) net income (management estimates): 42.1% and 42.6% in 1997 and 1998, respectively; (e) net income (IBES estimates): 39.3% and 37.3% in 1997 and 1998, respectively; (f) total assets based on balance sheets as of June 30, 1997: 26.4%; 46
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(g) shareholders' equity based on balance sheets as of June 30, 1997: 29.9%; (h) levered market capitalization as of September 26, 1997: 33.9%; and (i) equity market capitalization as of September 26, 1997: 38.9%. Goldman Sachs also calculated that based on the Exchange Ratio Morningstar stockholders would own 42.4% of the fully diluted outstanding shares of the combined entity after the Merger. (ix) HISTORICAL EXCHANGE RATIO ANALYSIS. Goldman Sachs analyzed the implied historical exchange ratios of Morningstar Common Stock and Suiza Common Stock (calculated by dividing the price, or weighted average price, of Morningstar Common Stock by the price, or weighted average price, of Suiza Common Stock) for the following periods: closing stock prices on September 26, 1997, and weighted average prices for the one week, two weeks, one month, two months, three months, six months and one year prior to September 26, 1997. Such analysis indicated implied exchange ratios of .74x, .76x, .78x, .79x, .79x, .79x, .79x, and .77x, respectively, for the periods reviewed. (x) PRO FORMA MERGER ANALYSIS. Goldman Sachs prepared pro forma analyses of the financial impact of the Merger on an earnings-per-share ("EPS") basis to holders of Suiza Common Stock, based on a price per share of Suiza Common Stock of $53.94 and the Exchange Ratio, and assuming a range of pre-tax synergies resulting from the Merger of $0.0 to $16.0 million. Goldman Sachs noted that based on 1998 (a) earnings estimates provided to Goldman Sachs by the managements of Suiza Foods and Morningstar, the EPS impact per share of Suiza Common Stock ranged from 0.1% dilution to 9.6% accretion, and (b) IBES median EPS estimates the EPS impact per share of Suiza Common Stock ranged from 8.5% dilution to 2.5% accretion. (xi) IMPLIED MARKET TRADING PRICES AND IMPLIED PRICES TO HOLDERS OF MORNINGSTAR COMMON STOCK. Goldman Sachs analyzed implied per share market trading prices for the common stock of the combined company and implied prices to holders of Morningstar Common Stock. Goldman Sachs multiplied a range of potential 1998 P/E multiples for the common stock of the combined company by estimated pro forma 1998 EPS for the combined company (a) with and without an assumption of $14.1 million of net synergies and (b) based on 1998 EPS estimates provided to Goldman Sachs by the managements of Suiza Foods and Morningstar and based on 1998 IBES median EPS estimates. Based on such assumptions, Goldman Sachs noted that implied prices ranged from $39.97 to $76.01. Such range of implied prices indicated a range of values per share of Morningstar Common Stock (applying the Exchange Ratio) of $33.97 to $64.61. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs' opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all such analyses. No company or transaction used in the above analyses as a comparison is directly comparable to Morningstar or Suiza Foods or the contemplated transaction. The analyses were prepared solely for purposes of Goldman Sachs providing its opinion to the Morningstar Board as to the fairness of the Exchange Ratio pursuant to the Merger Agreement and do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Morningstar, Suiza Foods, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast. As described above, Goldman Sachs' opinion to the Morningstar Board was one of many factors taken into consideration by the Morningstar Board in making its determination to approve the Merger Agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs and is qualified by reference to the written opinion of Goldman Sachs set forth in Appendix C hereto. 47
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Goldman Sachs, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements, and valuations for estate, corporate and other purposes. Goldman Sachs is familiar with Morningstar, having acted as its financial advisor in connection with, and having participated in certain of the negotiations leading to, the Merger Agreement. Morningstar selected Goldman Sachs as its financial advisor because it is a nationally recognized investment banking firm that has substantial experience in transactions similar to the Merger. Goldman Sachs provides a full range of financial, advisory and brokerage services and in the course of its normal trading activities may from time to time effect transactions and hold positions in the securities or options on securities of Morningstar and/or Suiza Foods for its own account and for the accounts of customers. Pursuant to a letter agreement dated May 22, 1997 (the "Engagement Letter"), Morningstar engaged Goldman Sachs to act as its financial advisor in connection with the Merger. Pursuant to the terms of the Engagement Letter, Morningstar has agreed to pay Goldman Sachs, upon consummation of the Merger, a transaction fee of .51% of the levered consideration paid in the Merger. Morningstar has agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses, including attorney's fees, and to indemnify Goldman Sachs against certain liabilities, including certain liabilities under the federal securities laws.  ANTICIPATED ACCOUNTING TREATMENT The Merger is expected to be accounted for as a "pooling of interests" in accordance with generally accepted accounting principles. Under this accounting method, the historical financial information of Suiza Foods and Morningstar will be restated to reflect the combined financial position and operations of both companies. The combined financial position and operations may be adjusted to conform the accounting practices of the companies. Pursuant to the Merger Agreement, each of Suiza Foods and Morningstar has agreed to use its commercially reasonable efforts to cause the Merger to qualify for "pooling of interests" accounting treatment. Suiza Foods has agreed to use commercially reasonable efforts to obtain a letter from Deloitte & Touche LLP and Morningstar has agreed to use commercially reasonable efforts to obtain a letter from Arthur Andersen LLP, in each case, stating that the Merger will qualify for "pooling of interests" accounting treatment if consummated in accordance with the Merger Agreement. Receipt of such written opinions is a condition to the consummation of the Merger. However, such opinions will not be binding on the Commission.  RESTRICTIONS ON RESALE BY AFFILIATES The shares of Suiza Common Stock to be received by Morningstar Stockholders in connection with the Merger will be registered under the Securities Act and, except as set forth in this paragraph, may be traded without restriction. The shares of Suiza Common Stock to be issued in connection with the Merger and received by persons who are deemed to be "affiliates" (as that term is defined in Rule 145 under the Securities Act) of Morningstar prior to the Merger may be resold by them only in transactions permitted by the resale provisions of Rule 145 under the Securities Act (or, in the case of such persons who become affiliates of Suiza Foods, Rule 144 under the Securities Act) or as otherwise permitted under the Securities Act. Under guidelines published by the Commission, the sale or other disposition of Suiza Common Stock or Morningstar Common Stock by an affiliate of either Suiza Foods or Morningstar, as the case may be, during the period commencing 30 days prior to the Effective Time and ending upon the publication of financial results that include at least 30 days of post-Merger combined operations of Suiza Foods and Morningstar (the "Pooling Period") could preclude pooling of interests accounting treatment of the Merger. Suiza Foods agreed in the Merger Agreement to use its best efforts to publish, by public filing or announcement, the results of at least 30 days of post-merger combined operations of Suiza Foods and Morningstar as soon after the Effective Time as is commercially practicable and thereby minimize the 48
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duration of the Pooling Period. Each of Morningstar and Suiza Foods agreed in the Merger Agreement to use its reasonable efforts to deliver or cause to be delivered written agreements of each such "affiliate" to the effect that such person will not sell, transfer or otherwise dispose of any shares of Morningstar Common Stock or Suiza Common Stock, as the case may be, during the Pooling Period and that such person will not sell, transfer or otherwise dispose of Suiza Common Stock at any time in violation of the Securities Act or the rules and regulations promulgated thereunder, including Rule 145.  NEW MORNINGSTAR BOARD AND MANAGEMENT FOLLOWING THE MERGER If the proposed Merger is approved and consummated, Morningstar Stockholders will become stockholders of Suiza Foods, which will be under the direction of the Board of Directors and management of Suiza Foods. The directors of Sub immediately prior to the Effective Time will be the directors of New Morningstar, and the officers of Sub immediately prior to the Effective Time will be the officers of New Morningstar.  BOARD OF DIRECTORS OF SUIZA FOODS FOLLOWING THE MERGER Following the Merger, the New Suiza Board will consist of 12 members. Two members of the New Suiza Board will be present members of the Morningstar Board, and the remainder of the New Suiza Board will be Suiza Foods' current directors. Information about the two Morningstar Board members selected to serve on the New Suiza Board is set forth below: JOHN R. MUSE co-founded Hicks, Muse, Tate & Furst Incorporated in 1989 and has recently been named Chief Operating Officer. Prior to the formation of Hicks Muse, Mr. Muse headed the investment/ merchant banking activities of Prudential Securities for the southwestern region of the United States from 1984 to 1989. Prior to joining Prudential Securities, Mr. Muse served as senior vice president and a director of Schneider, Bernet & Hickman, Inc. in Dallas from 1979 to 1983 and was responsible for the company's investment banking activities. Prior to Schneider, Bernet, he was employed by Bateman, Eichler, Hill Richards in Los Angeles. Mr. Muse is Chairman of Atrium Companies, Inc. and Hat Brands, Inc. and serves as a director of Morningstar, Crain Holdings Corp., Ghirardelli Chocolate Company, Olympus Real Estate Corporation, Arnold Palmer Golf Management Co. and Sunrise Television Corp. JIM L. TURNER is the Chairman, President and Chief Executive Officer of Dr Pepper Bottling Holdings, Inc. and Dr Pepper Bottling Company of Texas, and has served in such capacities since March 1985. Dr Pepper Bottling Company of Texas is one of the largest independent companies in the United States. Mr. Turner is a director of Morningstar and All American Bottling Corporation. Suiza Foods has also agreed to add a thirteenth member to its Board of Directors upon completion of the Country Fresh Merger.  GOVERNMENTAL APPROVALS Under the HSR Act, and the rules promulgated thereunder by the FTC, the Merger may not be consummated until the following steps have been taken: (1) Premerger Notification and Report Forms have been submitted and certain information has been furnished to the FTC and the DOJ; and (2) applicable waiting periods have expired or been terminated. Suiza Foods and Morningstar agreed, pursuant to the Merger Agreement, to use their respective best efforts to file or cause to be filed with the FTC and the DOJ such notifications as are required to be filed under the HSR Act and the rules and regulations promulgated thereunder, and to respond as promptly as practicable to any requests for additional information made by either the FTC or the DOJ. Pursuant to such agreement, on October 21, 1997 Suiza Foods and Morningstar each filed Premerger Notification and Report Forms with the FTC and the Antitrust Division. The statutory waiting period under the HSR Act is scheduled to expire at 11:59 p.m. on November 20, 1997. At any time before or after the consummation of the Merger and notwithstanding the expiration or termination of the applicable HSR Act waiting period, any federal or state antitrust authorities could take action under the antitrust laws as they deem necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of all or part of the assets 49
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of Suiza Foods or Morningstar. Private parties may also seek to take legal action under the antitrust laws, if circumstances permit. If the FTC, the DOJ, or any other federal or state antitrust authority, were to challenge the Merger, the consummation of the Merger could be postponed beyond February 28, 1998, in which event either Suiza Foods or Morningstar would be entitled to terminate the Merger Agreement. See "The Merger Agreement--Termination."  INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the Morningstar Board with respect to the Merger, Morningstar Stockholders should be aware that certain officers and directors of Morningstar have the following interests in the Merger separate from and in addition to their interests as Morningstar Stockholders generally. The Morningstar Board was aware of these interests and took them into account in approving the Merger, the Merger Agreement and the transactions contemplated thereby. COMPOSITION OF NEW SUIZA BOARD. Immediately after the Effective Time, Suiza Foods will take action necessary to create two additional seats on the Suiza Board and to cause two of the current directors of Morningstar to be elected to the Suiza Board. See "The Merger--Board of Directors of Suiza Foods Following the Merger."  STOCK OPTIONS. The Merger Agreement provides that, at the Effective Time, each outstanding and unexercised Morningstar Option, including those held by directors and executive officers, will be converted into and become a Substitute Option to acquire shares of Suiza Common Stock as described under "The Merger Agreement--Consideration to be Received in the Merger." Pursuant to the terms of the applicable Morningstar option plans, each of the outstanding and unexercised Morningstar Options will become fully vested upon the consummation of the Merger. The following table sets forth, in respect of the directors and executive officers of Morningstar, (i) the number of shares of Morningstar Common Stock subject to the Morningstar Options held by such persons as of October 27, 1997, (ii) the weighted average per share exercise price of the Morningstar Options held by such persons and (iii) the aggregate value of the Morningstar Options (i.e., the aggregate market value of the shares of Morningstar Common Stock underlying the Morningstar Options less the aggregate exercise price with respect thereto) held by such persons based upon the $38.50 closing price of Morningstar Common Stock on October 27, 1997. [Enlarge/Download Table] NUMBER OF OPTION WEIGHTED AVERAGE AGGREGATE VALUE OPTION HOLDER SHARES(1) EXERCISE PRICE OF OPTION SHARES ----------------------------------------------------------- ---------------- ----------------- ---------------- C. Dean Metropolous........................................ 1,750,000 $ 14.94 $ 41,230,000.00 John R. Muse............................................... 25,000 17.90 515,000.00 Charles W. Tate............................................ 25,000 17.90 515,000.00 Jim L. Turner.............................................. 44,531 11.17 1,217,032.23 Ray Caldiero............................................... 16,000 23.00 248,000.00 L. Hollis Jones............................................ 360,000 15.47 8,290,800.00 Darron K. Ash.............................................. 116,000 15.69 2,645,960.00 Joseph B. Armes............................................ 65,000 20.06 1,198,600.00 Michael J. Cramer.......................................... 79,000 19.45 1,504,950.00 All directors and executive officers as a group............ 2,480,531 15.37 57,365,342.23 ------------------------ (1) The option shares included in the table underlie Morningstar Options that are presently exercisable or will become immediately exercisable upon consummation of the Merger. RETENTION AND EMPLOYMENT AGREEMENTS. Morningstar is party to executive retention agreements with each of Messrs. Armes, Ash and Jones that require Morningstar to provide certain severance benefits in the event any of these executives is terminated by Morningstar without "cause" (as defined in the applicable executive retention agreement) or voluntarily terminates his employment with Morningstar for "good reason" (as defined in the applicable executive retention agreement) in contemplation of or within 50
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180 days preceding a "change of control" (as defined in the applicable executive retention agreement) or within three years after a change of control. The Merger will constitute a change in control for purposes of each of the executive retention agreements. The value of the severance benefits to be paid to Mr. Armes (in the event he is terminated or voluntarily terminates his employment under the circumstances described above) under his executive retention agreement is estimated to be approximately $330,000. The value of the severance benefits to be paid to Mr. Ash (in the event he is terminated or voluntarily terminates his employment under the circumstances described above) under his executive retention agreement is estimated to be approximately $330,000. The value of the severance benefits to be paid to Mr. Jones (in the event he is terminated or voluntarily terminates his employment under the circumstances described above) under his executive retention agreement is estimated to be approximately $650,000. In addition to the foregoing severance benefits, the executive retention agreements for each of Messrs. Armes and Ash provide for the payment of a retention bonus in the event that such executive remains employed by Morningstar on the date of the change of control or is terminated by Morningstar without cause in contemplation of and within 180 days preceding the change of control. In each case, the amount of such retention bonus is equal to the executive's highest annual base salary rate plus an amount equal to the higher of the executive's target bonus for the fiscal year in which the termination occurs or the immediately preceding fiscal year. The retention bonuses are payable not later than three days following a change of control. As a result of the consummation of the Merger, each of Messrs. Armes and Ash will be entitled to receive a retention bonus in the amount of $217,500. Each of the aforementioned executive retention agreements requires that Morningstar "gross-up" the applicable executive with respect to any federal taxes payable by such executive as a result of the payment to such executive of the benefits contemplated by his executive retention agreement and with respect to any excise taxes that become payable by such executive in respect of his Morningstar Options. Morningstar is a party to employment agreements with C. Dean Metropolous and Michael J. Cramer (respectively, the "Metropolous Employment Agreement" and the "Cramer Employment Agreement") which require Morningstar to provide certain severance benefits to such executives. Under the Cramer Employment Agreement, severance benefits in an amount equal to 1.5 times Mr. Cramer's annual compensation (including salary, bonuses and allowances) for the last full year of employment, but in no event less than $200,000 shall be payable by Morningstar in the event Mr. Cramer is terminated by Morningstar "without cause" (as defined in the Cramer Employment Agreement) or voluntarily terminates his employment with Morningstar in the event of a "change in control" (as defined in the Cramer Employment Agreement). The Merger will constitute a change in control for purposes of the Cramer Employment Agreement. The value of the severance benefits to be paid to Mr. Cramer under the Cramer Employment Agreement is estimated to be approximately $200,000, plus the amount of the tax gross-up required by such agreement. The severance benefits are payable within seven days of any termination of Mr. Cramer by Morningstar without cause, or on the closing date of a change in control. Under the Metropolous Employment Agreement, severance benefits in an amount equal to Mr. Metropolous' aggregate compensation (current salary and bonus based on prior year's payment) for the balance of the then existing three-year term shall be payable by Morningstar in the event of a "triggering event" (as defined in the Metropolous Employment Agreement) or Mr. Metropolous terminates his employment with Morningstar for "good reason" (as defined in the Metropolous Employment Agreement) or Mr. Metropolous' employment is terminated by Morningstar for any reason other than for "cause" (as defined in the Metropolous Employment Agreement) or by Mr. Metropolous' resignation or retirement. The value of the severance payment to be paid to Mr. Metropolous under the Metropolous Employment Agreement is estimated to be approximately $2,525,000, plus the amount of the tax gross-up required by such agreement. The severance benefits are payable by Morningstar on the 14th day following the termination. REGISTRATION RIGHTS. Suiza Foods has agreed to grant C. Dean Metropoulos registration rights for a period of one year following the Effective Time with respect to the shares of Suiza Common Stock to be 51
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received by Mr. Metropoulos in connection with the Stock Issuance. Such registration rights will be subject to customary terms and conditions. FINANCIAL ADVISORY FEES. Two of Morningstar's existing directors, Charles W. Tate and John R. Muse, are principals of Hicks Muse. Pursuant to a letter agreement dated June 10, 1997, Morningstar engaged Hicks Muse to provide financial advisory services in connection with the Merger. Pursuant to the terms of this letter agreement, Morningstar has agreed to pay Hicks Muse, upon consummation of the Merger, a transaction fee of .34% of the levered consideration paid in the Merger. Morningstar has agreed to reimburse Hicks Muse for its reasonable out-of-pocket expenses, including attorney's fees, and to indemnify Hicks Muse against certain liabilities, including certain liabilities under the federal securities laws. DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. Pursuant to the Merger Agreement, New Morningstar and Suiza Foods are obligated to indemnify, defend and hold harmless officers, directors and employees of Morningstar and its subsidiaries who were such at any time prior to the Effective Time from and against all losses, expenses, claims, damages or liabilities arising out of the transactions contemplated by the Merger Agreement to the fullest extent permitted or required under applicable law, and advance expenses to such indemnified parties subject to a customary reimbursement agreement. All indemnification rights of such officers, directors and employees which exist prior to the Effective Time will survive the Merger and New Morningstar will maintain in effect for not less than three years after the Effective Time, the current policies of directors' and officers' liability insurance with respect to matters occurring on or prior to the Effective Time. In addition, the Merger Agreement provides that New Morningstar or Suiza Foods may provide substitute policies of at least the same coverage, provided that New Morningstar (or Suiza Foods, if Suiza Foods provides substitute policies) will be required to obtain only as much coverage as can be obtained by paying an annual premium not in excess of 200% of the current annual premium paid by Morningstar for its existing coverage. See "The Merger Agreement--Indemnification."  ABSENCE OF APPRAISAL RIGHTS Under the DGCL, the Suiza Stockholders are not entitled to appraisal rights with respect to the Stock Issuance and the Morningstar Stockholders are not entitled to appraisal rights with respect to the Merger.  STOCK EXCHANGE LISTING It is a condition to the Merger that the shares of Suiza Common Stock to be issued by Suiza Foods in connection with the Merger will have been authorized for listing on the NYSE, subject only to official notice of issuance. Upon completion of the Merger, the Morningstar Common Stock will cease to be authorized for trading on Nasdaq.  TREATMENT OF STOCK CERTIFICATES After the Effective Time, each certificate previously representing shares of Morningstar Common Stock will automatically represent, with no further action by the holder thereof, the right to receive 0.85 shares of Suiza Common Stock for each share of Morningstar Common Stock represented thereby. Harris Trust & Savings Bank is the transfer agent and registrar (the "Exchange Agent") for the Suiza Common Stock. As soon as practicable after the Effective Time, the Exchange Agent will mail a letter of transmittal with instructions to each holder of record of Morningstar Common Stock outstanding immediately prior to the Effective Time for use in exchanging certificates formerly representing shares of Morningstar Common Stock for certificates representing shares of Suiza Common Stock. Certificates should not be surrendered by any holders of Morningstar Common Stock until they have received the letter of transmittal from the Exchange Agent. THE SUIZA BOARD AND THE MORNINGSTAR BOARD UNANIMOUSLY RECOMMEND A VOTE "FOR" THE APPROVAL OF THE STOCK ISSUANCE AND THE MORNINGSTAR PROPOSAL, RESPECTIVELY. 52
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THE MERGER AGREEMENT The following summary of the terms of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, which is incorporated by reference herein and attached as Appendix A to this Joint Proxy Statement/Prospectus.  GENERAL The Merger Agreement contemplates the Merger of Sub with and into Morningstar, with Morningstar surviving the Merger as a wholly owned subsidiary of Suiza Foods. The Merger will become effective when the Certificate of Merger is filed with the Secretary of State of the State of Delaware. It is anticipated that such filing will be made promptly after the closing under the Merger Agreement, which closing, in turn, should occur as soon as practicable after the last of the conditions precedent to the Merger set forth in the Merger Agreement has been satisfied or waived. The Merger Agreement obligates Suiza Foods to have the shares of Suiza Common Stock to be issued in connection with the Merger approved for listing on the NYSE, subject only to official notice of issuance, prior to the Effective Time.  CONSIDERATION TO BE RECEIVED IN THE MERGER At the Effective Time, (a) each issued and outstanding share of Morningstar Common Stock (excluding shares held in the treasury of Morningstar or shares owned by Suiza Foods, Sub or any other subsidiary of Suiza Foods) will be converted into the right to receive 0.85 shares of Suiza Common Stock, (b) each share of Morningstar Common Stock held in the treasury of Morningstar or owned by Suiza Foods, Sub or any other subsidiary of Suiza Foods will be canceled and retired, (c) all of the issued and outstanding shares of common stock of Sub will be converted into and become, in the aggregate, 10,000 fully paid and nonassessable shares of common stock of New Morningstar and (d) each outstanding and unexercised Morningstar Option will be assumed by Suiza Foods and converted into a Substitute Option. The number of shares of Suiza Common Stock to be subject to a Substitute Option will be determined by multiplying the number of shares of Morningstar Common Stock subject to the related Morningstar Option by the Exchange Ratio (rounded down to the nearest whole share), and the per share exercise price with respect thereto will equal the per share exercise price of the related Morningstar Option divided by the Exchange Ratio (rounded up to the nearest full cent). Each Substitute Option will be subject to all of the other terms and conditions of the Morningstar Option to which it relates. No Morningstar Option will be accelerated by reason of the Merger to the extent the Morningstar Board has discretion to make a determination to cause such acceleration. As soon as practicable after the Effective Time, Suiza Foods will cause to be included under a registration statement on Form S-8 of Suiza Foods all shares of Suiza Common Stock that are subject to Substitute Options and will maintain the effectiveness of such registration statement until all Substitute Options have been exercised, expired or forfeited. For a further discussion of the treatment of Morningstar Options and other employee benefit plans of Morningstar under the Merger Agreement, see "The Merger--Interests of Certain Persons in the Merger."  EFFECTIVE TIME OF THE MERGER Subject to the terms and conditions of the Merger Agreement, the Merger will become effective at the date and time when the Certificate of Merger is filed with the Secretary of State of the State of Delaware. The Certificate of Merger will be filed as soon as practicable following fulfillment of the conditions precedent of the Merger Agreement. See "--Conditions Precedent."  EXCHANGE OF SHARES Suiza Foods has selected Harris Trust & Savings Bank as the Exchange Agent for the Merger. As soon as practicable after the Effective Time, Suiza Foods will make available, and each Morningstar Stockholder 53
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will be entitled to receive, upon surrender to the Exchange Agent of one or more certificates ("Certificates") representing shares of Morningstar Common Stock for cancellation, certificates representing the number of shares of Suiza Common Stock into which such shares were converted in the Merger and cash in consideration of fractional shares (the "Share Consideration"). Holders of unexchanged shares of Morningstar Common Stock will not be entitled to receive any dividends or other distributions payable by Suiza Foods until their Certificates are surrendered. Upon surrender, however, such holders will receive accumulated dividends and distributions without interest, together with cash in lieu of fractional shares. Holders of unexchanged shares of Morningstar Common Stock will have no further claim upon the Exchange Agent twelve months after the Effective Time and thereafter will look only to Suiza Foods and New Morningstar for payment of the Share Consideration in respect of their shares of Morningstar Common Stock. Fractional shares of Suiza Common Stock will not be issued to holders of Morningstar Common Stock. For each fractional share of Suiza Common Stock that would otherwise be issued, the holder will receive, in lieu thereof, cash in an amount equal to such fractional part of a share of Suiza Common Stock multiplied by the average of the daily closing sale prices for the Suiza Common Stock for the twenty (20) consecutive trading days on which such shares are actually traded on the NYSE ending at the close of trading on the second trading day immediately preceding the Effective Date.  CORPORATE ORGANIZATION AND GOVERNANCE CERTIFICATE OF INCORPORATION. The Morningstar Charter as in effect at the Effective Time will be the Charter of New Morningstar, and thereafter may be amended in accordance with its terms and as provided by law and the Merger Agreement. BYLAWS. The Morningstar Bylaws as in effect at the Effective Time will be the Bylaws of New Morningstar, and thereafter may be amended in accordance with their terms and as provided by law and the Merger Agreement. BOARD OF DIRECTORS; OFFICERS. The directors of Sub immediately prior to the Effective Time will be the directors of New Morningstar, and the officers of Sub immediately prior to the Effective Time will be the officers of New Morningstar, in each case, until their respective successors are duly elected and qualified.  STOCKHOLDERS' MEETINGS Each of Suiza Foods and Morningstar will take all action necessary in accordance with applicable law and its certificate of incorporation and bylaws to convene a meeting of its stockholders as promptly as practicable to consider and vote upon (i) in the case of Suiza Foods, the approval of the Stock Issuance and (ii) in the case of Morningstar, the approval of the Merger, the Merger Agreement and the transactions contemplated thereby. Suiza Foods will take all action necessary to authorize Sub to consummate the Merger. Suiza Foods and Morningstar will coordinate and cooperate with respect to the timing of such meetings and will use their best efforts to hold such meetings on the same day. Each of the Suiza Board and the Morningstar Board recommends such approval and Suiza Foods and Morningstar will each take all lawful action to solicit such approval, including, without limitation, timely and promptly mailing this Joint Proxy Statement/Prospectus; provided, however, that such recommendation is subject to certain rights of the Suiza Board and the Morningstar Board under the Merger Agreement to (i) withdraw or modify, or propose to modify or withdraw, in a manner adverse to the other party, the approval or recommendation by such Board of the Merger Agreement or the Merger and (ii) approve or recommend, or propose to approve or recommend, an Alternative Proposal (as hereinafter defined). See "--No Shop" and "--Termination." 54
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REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various representations and warranties of Suiza Foods, Morningstar and Sub, relating, among other things, to the following: (i) their incorporation, existence, good standing, corporate power and similar corporate matters; (ii) their capitalization; (iii) their authorization, execution, delivery and performance and the enforceability of the Merger Agreement and related matters; (iv) the absence of conflicts, violations and defaults under their respective certificates of incorporation and bylaws and certain other agreements and documents; (v) the documents and reports filed with the Commission and the accuracy and completeness of the information contained therein; (vi) the absence of certain material changes or events since June 30, 1997; (vii) pending or threatened investigations or litigation; (viii) employee benefit matters; (ix) the receipt of fairness opinions from their respective financial advisors; (x) compliance with applicable laws, ordinances and regulations; (xi) tax matters; (xii) accounting matters relating to the availability of "pooling of interests" accounting treatment; (xiii) relationships with their respective customers and suppliers and (xiv) intellectual property. Morningstar made additional representations and warranties as to the approval of the Merger by the Morningstar Board, its recommendation of the Merger and the Merger Agreement to the Morningstar Stockholders and its determination that the Merger is advisable and fair to and in the best interests of Morningstar and the Morningstar Stockholders. All representations and warranties of Suiza Foods, Morningstar and Sub will expire at the Effective Time.  CONDUCT OF BUSINESS PENDING THE MERGER  SUIZA FOODS. Suiza Foods has agreed that prior to the Effective Time, unless Morningstar otherwise agrees in writing or except as otherwise required by the Merger Agreement, it will, and will cause its subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as conducted prior to the date of the Merger Agreement and will, or will cause its subsidiaries to, use their reasonable efforts to preserve intact their present business organizations and preserve their relationships with customers, suppliers and others having business dealings with them to the end that their goodwill and ongoing businesses will be unimpaired at the Effective Time, and not propose or agree to (i) sell or pledge or agree to sell or pledge any capital stock owned by it in any of its subsidiaries or owned by any of its subsidiaries (except for certain stock pledged as collateral pursuant to Suiza Foods' existing credit facilities), (ii) except as contemplated in the merger agreement for the Country Fresh Merger, amend the Suiza Charter or Suiza Bylaws, (iii) split, combine or reclassify its outstanding capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of Suiza Foods, or declare, set aside, authorize or pay any dividend or other distribution payable in cash, stock or property or (iv) directly or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire any shares of Suiza Common Stock. Suiza Foods has also agreed that, except in connection with acquisitions of assets or businesses that are primarily engaged in the same businesses as those conducted by Suiza Foods as of the date of the Merger Agreement and any financing transactions or issuances of securities related thereto which, in each case, do not require the approval of Suiza Stockholders, it will not, and will not permit any of its subsidiaries to, (i) issue, deliver or sell or agree to issue, deliver or sell any additional shares of, or rights of any kind to acquire any shares of, its respective capital stock of any class, any indebtedness having the right to vote on any matter on which the Suiza Stockholders may vote or any options, rights or warrants to acquire, or securities convertible into, exercisable for or exchangeable for, shares of capital stock other than issuances, deliveries or sales of Suiza Foods' stock or options, rights or warrants, to acquire Suiza Foods' stock under Suiza Foods' existing benefit plans; (ii) acquire, lease or dispose or agree to acquire, lease or dispose of any capital assets or any other assets other than in the ordinary course of business; (iii) incur additional indebtedness or encumber or grant a security interest in any asset or enter into any other material transaction other than in each case in the ordinary course of business; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in, or by any 55
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other manner, any business or any corporation, partnership, association or other business organization or division thereof; (v) incur any material transaction fees, costs or expenses in addition to those disclosed to Morningstar prior to the execution of the Merger Agreement or (vi) enter into any contract, agreement, commitment or arrangement with respect to any of the foregoing. Suiza Foods has further agreed (i) to use its best efforts to not, and not to permit any of its subsidiaries to, take or cause to be taken any action, whether before or after the Effective Time, which would disqualify the Merger as a "pooling of interests" for accounting purposes or as a "reorganization" within the meaning of Section 368(a) of the Code and (ii) not to, and not to permit any of its subsidiaries to, amend, modify, terminate, waive or permit to lapse any material right of first refusal, preferential right, right of first offer, or any other material right of Suiza Foods, or any of its subsidiaries, except in the ordinary course of business. Suiza Foods has also agreed that following the Effective Time, it will file all tax returns on the basis that the Merger qualifies as a "reorganization" within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code and that it will not take any action which is inconsistent with or contrary to such classification of the Merger for tax purposes.  SUB. Sub has agreed not to engage, during the period from the date of the Merger Agreement to the Effective Time, in any activities of any nature except as provided in or contemplated by the Merger Agreement.  MORNINGSTAR. Morningstar has agreed that prior to the Effective Time, unless Suiza Foods otherwise agrees in writing or except as otherwise required by the Merger Agreement, it will, and will cause its subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as conducted prior to the Merger Agreement and will, and will cause its subsidiaries to, use their reasonable efforts to preserve intact their present business organizations and preserve their relationships with customers, suppliers and others having business dealings with them to the end that their goodwill and on-going businesses will be unimpaired at the Effective Time, and not propose or agree to (i) sell or pledge or agree to sell or pledge any capital stock owned by it in any of its subsidiaries or owned by any of its subsidiaries, (ii) amend the Morningstar Charter or the Morningstar Bylaws, (iii) split, combine or reclassify its outstanding stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of Morningstar Common Stock, or declare, set aside, authorize or pay any dividend or other distribution payable in cash, stock or property or (iv) directly or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire any shares of Morningstar Common Stock. Morningstar has also agreed that it will not, and will not permit any of its subsidiaries to, (i) issue, deliver or sell or agree to issue, deliver or sell any additional shares of, or rights of any kind to acquire any shares of, its respective stock of any class, any indebtedness having the right to vote on any matter on which the Morningstar Stockholders may vote or any option, rights or warrants to acquire, or securities convertible into, exercisable for or exchangeable for, shares of stock other than issuances, deliveries or sales pursuant to existing obligations under its option plans; (ii) acquire, lease or dispose or agree to acquire, lease or dispose of any capital assets or any other assets other than in the ordinary course of business; (iii) incur additional indebtedness or encumber or grant a security interest in any asset or enter into any other material transaction other than in each case in the ordinary course of business; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; (v) incur any material transaction fees, costs or expenses in addition to those disclosed to Suiza Foods prior to the execution of the Merger Agreement or (vi) enter into any contract, agreement, commitment or arrangement with respect to any of the foregoing. Morningstar has also agreed that except as required to comply with applicable law and except as provided in the provisions relating to employee matters (see "--Employee Matters"), it will not enter into any new (or amend any existing) employee benefit plan of Morningstar or any new (or amend any existing) employment, severance or consulting agreement, grant any general increase in the compensation of current or former directors, officers or 56
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employees (including any such increase pursuant to any bonus, pension, profit-sharing or other plan or commitment) or grant any increase in the compensation payable or to become payable to any director, officer or employee, except in any of the foregoing cases in accordance with pre-existing contractual provisions or in the ordinary course of business consistent with past practice. Morningstar has further agreed not to, and not to permit any of its subsidiaries to, take or cause to be taken any action, whether before or after the Effective Time, which would disqualify the Merger as a "pooling of interests" for accounting purposes or as a "reorganization" within the meaning of Section 368(a) of the Code, or amend, modify, terminate, waive or permit to lapse any material right of first refusal, preferential right, right of first offer, or any other material right of Morningstar or any of its subsidiaries, except in the ordinary course of business. Morningstar has also agreed that following the Effective Time, it will file all tax returns on the basis that the Merger qualifies as a "reorganization" within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code and that it will not take any action which is inconsistent with or contrary to such classification of the Merger for tax purposes.  ADDITIONAL AGREEMENTS The Merger Agreement contains certain covenants and agreements of Suiza Foods and Morningstar customary for transactions such as those contemplated by the Merger Agreement. These relate to, among other things, (i) each party allowing the other access, during normal business hours, to its properties, books, contracts, commitments and records, documents filed pursuant to requirements of the Commission and such other information to which the other party may reasonably request access, subject to existing confidentiality obligations; (ii) the preparation of the Registration Statement and this Joint Proxy Statement/Prospectus; (iii) each party using its reasonable efforts to deliver an affiliate letter from each of its affiliates as to the matters described under the caption "The Merger--Restrictions on Resales by Affiliates" and using commercially reasonable efforts to cause the Merger to qualify for "pooling of interests" accounting treatment; (iv) listing of the shares of Suiza Common Stock to be issued in connection with the Merger by Suiza Foods on the NYSE, upon official notice of issuance; (v) certain employee matters; (vi) filing of such notifications as are required to be filed under the HSR Act and responding to inquiries with respect thereto; (vii) using commercially reasonable efforts to consummate and make effective the transactions contemplated by the Merger Agreement, including the use of commercially reasonable efforts to obtain all necessary waivers, consents and approvals, to effect all necessary registrations and filings and to lift any injunction to the Merger; (viii) conducting its business in a manner which would not disqualify the Merger as a "pooling of interests" for accounting purposes; (ix) filing tax returns on the basis that the Merger qualifies as a "reorganization" within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code and taking no actions inconsistent with or contrary to such classification of the Merger for tax purposes; (x) advising the other party orally and in writing of any change or event that has had, or could have, a material adverse effect on such party and providing copies of all filings made by such party with the Commission or any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, in connection with the Merger Agreement and other transactions contemplated thereby and (xi) the appointment of two of the current directors of Morningstar to the New Suiza Board. Suiza Foods has agreed to use commercially reasonable efforts to obtain a letter from Deloitte & Touche LLP and Morningstar has agreed to use commercially reasonable efforts to obtain a letter from Arthur Andersen LLP, in each case, stating that the Merger qualifies for "pooling of interests" accounting treatment if consummated in accordance with the Merger Agreement. Suiza Foods has agreed to use its best efforts to publish, by public filing or announcement, the results of at least 30 days of combined operations of Suiza Foods and Morningstar as soon after the Effective Time as is commercially practicable. 57
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EMPLOYEE MATTERS The Merger Agreement provides that, as of the Effective Time, the employees of Morningstar and each subsidiary will continue employment with New Morningstar and its subsidiaries, respectively, in the same positions and at the same level of wages and/or salary and without having incurred a termination of employment or separation from service; provided, however, that except as may be specifically required by applicable law or any contract, New Morningstar and its subsidiaries will not be obligated to continue any employment relationship with any employee for any specific period of time. Except with respect to the stock option plans to be assumed by Suiza Foods as provided in the Merger Agreement, as of the Effective Time, New Morningstar will be the sponsor of the employee benefit plans sponsored by Morningstar immediately prior to the Effective Time, and Suiza Foods will cause New Morningstar and its subsidiaries to satisfy all obligations and liabilities under such employee benefit plans; provided, however, that, except as contemplated by the Merger Agreement, nothing contained in the Merger Agreement will limit or restrict New Morningstar's right on or after the Effective Time to amend, modify or terminate any of such employee benefit plans. To the extent any employee benefit plan, program or policy of Suiza Foods, New Morningstar, or their affiliates is made available to any person who is an employee of Morningstar or any of its subsidiaries immediately prior to the Effective Time: (i) service with Morningstar and its subsidiaries by any employee prior to the Effective Time will be credited for eligibility and vesting purposes and for purposes of qualifying for any additional benefits tied to periods of service (such as higher rates of matching contributions and eligibility for early retirement) under such plan, program or policy, but not for benefit accrual purposes (except for disability, vacation and severance, with respect to which service with Morningstar and its subsidiaries will be credited for benefit accrual purposes) and (ii) with respect to any benefit plans to which such employees may become eligible, Suiza Foods will cause such plans to provide credit for any co-payments or deductibles by such employees and waive all pre-existing condition exclusions and waiting periods, other than limitations or waiting periods that have not been satisfied under any benefit plans maintained by Morningstar and its subsidiaries for their employees prior to the Effective Time.  INDEMNIFICATION From and after the Effective Date, New Morningstar and Suiza Foods will be required to indemnify, defend and hold harmless the officers, directors and employees of Morningstar and its subsidiaries who were such at any time prior to the Effective Time (the "Indemnified Parties") from and against all losses, expenses, claims, damages or liabilities arising out of the transactions contemplated by the Merger Agreement to the fullest extent permitted or required under applicable law, and the Indemnified Parties will be advanced expenses subject to a customary reimbursement agreement. All rights to indemnification existing in favor of the directors, officers or employees of Morningstar as provided in the Morningstar Charter or the Morningstar Bylaws, as in effect on the date of the Merger Agreement, with respect to matters occurring through the Effective Time, will survive the Merger and will continue in full force and effect thereafter. New Morningstar will maintain in effect for not less than three years after the Effective Time the current policies of directors' and officers' liability insurance maintained by Morningstar with respect to matters occurring on or prior to the Effective Time. The Merger Agreement further provides that New Morningstar or Suiza Foods may substitute therefor policies of at least the same coverage (with carriers comparable to Morningstar's existing carriers) containing terms and conditions which are not materially less advantageous to the Indemnified Parties, that New Morningstar will not be required, in order to maintain or procure such coverage, to pay an annual premium in excess of 200% of the current annual premium paid by Morningstar for its existing coverage (the "Cap") and that if equivalent coverage cannot be obtained, or can be obtained only by paying an annual premium in excess of the Cap, New Morningstar will be required only to obtain as much coverage as can be obtained by paying an annual premium equal to the Cap. 58
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In the event that any action, suit, proceeding or investigation relating to the Merger Agreement or to the transactions contemplated by the Merger Agreement is commenced, whether before or after the Effective Time, Suiza Foods, Morningstar and Sub agree to cooperate and use their respective reasonable efforts to vigorously defend against and respond to the same.  NO SHOP Each of Suiza Foods and Morningstar has agreed (i) that neither it nor any of its subsidiaries will, and it will direct and use its best efforts to cause its officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its subsidiaries) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, acquisition, consolidation or similar transaction (other than, in the case of Suiza Foods, any acquisitions of assets or businesses that are primarily engaged in the same business as that conducted by Suiza Foods and its subsidiaries as of the date of the Merger Agreement and any financing transactions or issuances of securities related thereto which, in each case, do not require approval by the Suiza Stockholders), involving, or any purchase of all or any significant portion of the assets or any equity securities of, such party or any of its material subsidiaries (any such proposal or offer being hereinafter referred to as an "Alternative Proposal"), or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Alternative Proposal, or release any third party from any obligations under any existing standstill agreement or arrangement, or enter into any agreement with respect to an Alternative Proposal, or otherwise facilitate any effort or attempt to make or implement an Alternative Proposal; (ii) that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted prior to the date of the Merger Agreement with respect to any of the foregoing and (iii) that it will notify the other party with reasonable promptness if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, it. Notwithstanding the foregoing, the Merger Agreement provides that each of Suiza Foods and Morningstar may, directly or indirectly, furnish information and access to, and may participate in discussions and negotiate with, any corporation, partnership, person or other entity, if such corporation, partnership, person or other entity has submitted a written proposal to the Board of Directors of such party relating to an Alternative Proposal if (i) the Board of Directors of such party believes, in its good faith judgment, that such Alternative Proposal is more favorable to such party's stockholders than the Merger and is reasonably likely to be consummated or (ii) the Board of Directors of such party, following consultation with its independent legal counsel relating thereto, determines in its good faith judgment that failing to take such action would constitute a breach of such Board of Directors' fiduciary duty to its stockholders imposed by law. Neither the Morningstar Board nor any committee thereof may (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Suiza Foods, the approval or recommendation by the Morningstar Board of the Merger Agreement or the Merger or (ii) approve or recommend, or propose to approve or recommend, any Alternative Proposal, unless (x) the Morningstar Board believes, in its good faith judgment, that such Alternative Proposal is more favorable to the Morningstar Stockholders than the Merger and is reasonably likely to be consummated or (y) the Morningstar Board, following consultation with its independent legal counsel relating thereto, determines in its good faith judgment that failing to take such action in connection with such Alternative Proposal would constitute a breach of the Morningstar Board's fiduciary duty to the Morningstar Stockholders imposed by law. Neither the Suiza Board nor any committee thereof may (i) withdraw or modify, or propose to withdraw or modify, in a manner adverse to Morningstar, the approval or recommendation by the Suiza Board of the Merger Agreement or the issuance of Suiza Common Stock in connection with the Merger or (ii) approve or recommend, or propose to approve or recommend, any Alternative Proposal, unless (x) the Suiza Board believes, in its good faith judgment, that such Alternative Proposal is more favorable to Suiza 59
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Stockholders than the Merger and is reasonably likely to be consummated or (y) the Suiza Board, following consultation with its independent legal counsel relating thereto, determines in its good faith judgment that failing to take such action in connection with such Alternative Proposal would constitute a breach of the Suiza Board's fiduciary duty to the Suiza Stockholders imposed by law. The Merger Agreement provides that nothing contained in the Merger Agreement will prevent either Board from taking, and disclosing to its stockholders, a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act, provided that such Board does not recommend that its stockholders tender their shares in connection with any such tender offer unless such recommendation is permitted as described above.  CONDITIONS PRECEDENT The obligations of Suiza Foods, Morningstar and Sub to effect the Merger are subject, among other things, to the fulfillment or, where permissible, waiver, of certain conditions, including without limitation: (i) the approval of the Merger, the Merger Agreement and the transactions contemplated thereby by the requisite vote of the Morningstar Stockholders and the approval of the Stock Issuance by the requisite vote of the Suiza Stockholders; (ii) the expiration or termination of any waiting period applicable to the consummation of the Merger under the HSR Act; (iii) the effectiveness of the Registration Statement, the absence of a stop order suspending such effectiveness and the receipt of all necessary approvals under state securities laws relating to the issuance of Suiza Common Stock to be issued to Morningstar Stockholders in connection with the Merger; (iv) there not having been issued and in effect any preliminary or permanent injunction or order by any federal or state court in the United States of competent jurisdiction prohibiting the consummation of the Merger (each of the parties having agreed to use all commercially reasonable efforts to have any such injunction lifted); (v) the listing on the NYSE, subject only to official notice of issuance, of the shares of Suiza Common Stock to be issued pursuant to the Stock Issuance; (vi) Morningstar having received an opinion of Weil, Gotshal & Manges LLP and Suiza Foods having received an opinion of Hughes & Luce, L.L.P., in each case, that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code and (vii) Morningstar having received a letter from Arthur Andersen LLP, and Suiza Foods and Sub having received a letter from Deloitte & Touche LLP, in each case, dated as of the closing date, to the effect that the Merger will qualify for pooling of interest accounting treatment if consummated in accordance with the Merger Agreement. The obligation of Morningstar to effect the Merger is also subject to the fulfillment of certain additional conditions, including (i) the accuracy of the representations and warranties of Suiza Foods and Sub when made and on and as of the Effective Time, except as expressly contemplated or permitted by the Merger Agreement and, with respect to representations and warranties that are not otherwise subject to a materiality qualifier, where the inaccuracy thereof would not, alone or in the aggregate with all such inaccuracies, have a material adverse effect on the business, properties, assets, condition (financial or otherwise), liabilities or results of operation of Suiza Foods and its subsidiaries, (ii) the performance in all material respects of the obligations and covenants of Suiza Foods and Sub under the Merger Agreement and (iii) the receipt of a certificate of the President and Chief Executive Officer or a Vice President of each of Suiza Foods and Sub to such effect. The obligation of Suiza Foods and Sub to effect the Merger is also subject to the fulfillment of certain additional conditions, including (i) the accuracy of the representations and warranties of Morningstar when made and on and as of the Effective Time, except as expressly contemplated or permitted by the Merger Agreement and, with respect to representations and warranties that are not otherwise subject to a materiality qualifier, where the inaccuracy thereof would not, alone or in the aggregate with all such inaccuracies, have a material adverse effect on the business, properties, assets, condition (financial or otherwise), liabilities or results of operation of Morningstar and its subsidiaries, (ii) the performance in all material respects of the obligations and covenants of Morningstar under the Merger Agreement and (iii) the receipt of a certificate of the President and Chief Executive Officer or a Vice President of Morningstar to such effect. 60
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Prior to the Effective Time, the parties to the Merger Agreement may (i) extend the time for the performance of any of the obligations or other acts of the other parties thereto, (ii) waive any inaccuracies in the representations and warranties contained therein or in any documents delivered pursuant thereto and (iii) waive compliance with any of the agreements or conditions contained therein.  TERMINATION The Merger Agreement may be terminated by action of either the Suiza Board or Morningstar Board and the Merger abandoned under certain circumstances, including, but not limited to, the occurrence of any of the following: (i) the Merger has not been consummated by February 28, 1998, provided that the terminating party has not breached in any material respect its obligations under the Merger Agreement in any manner that would have proximately contributed to the failure to consummate the Merger; (ii) the requisite approval of the Merger, the Merger Agreement and the transactions contemplated thereby by the Morningstar Stockholders is not obtained; (iii) the requisite approval of the Stock Issuance by the Suiza Stockholders is not obtained; or (iv) a United States federal or state court of competent jurisdiction or United States federal or state governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement and such order, decree, ruling or other action has become final and non-appealable, provided that the party seeking to terminate the Merger Agreement has used all commercially reasonable efforts to remove such injunction, order or decree. The Merger Agreement may be also terminated and the Merger may be abandoned at any time prior to the Effective Time, by action of (a) the Suiza Board, (i) if the Morningstar Board has withdrawn or modified in a manner adverse to Suiza Foods its approval or recommendation of the Merger Agreement or the Merger or has recommended an Alternative Proposal with respect to Morningstar to Morningstar's Stockholders or (ii) Suiza Foods shall have received an Alternative Proposal which the Suiza Board believes, in its good faith judgment, is more favorable to Suiza Foods' stockholders than the Merger and is reasonably likely to be consummated or (b) the Morningstar Board, (i) if the Suiza Board shall have withdrawn or modified in a manner adverse to Morningstar its approval or recommendation of the Merger Agreement or the issuance of the Suiza Common Stock in connection with the Merger or shall have recommended an Alternative Proposal with respect to Suiza Foods to Suiza Stockholders or (ii) Morningstar shall have received an Alternative Proposal which the Morningstar Board believes, in its good faith judgment, is more favorable to Morningstar Stockholders than the Merger and is reasonably likely to be consummated. The Merger Agreement may also be terminated prior to the Effective Time, before or after approval of the Suiza Stockholders or Morningstar Stockholders, by the mutual consent of Suiza Foods and Morningstar. In the event that (x) Suiza Foods terminates the Merger Agreement as described in clause (a)(i) of the second preceding paragraph or (y) Morningstar terminates the Merger Agreement as described in clause (b)(ii) of the second preceding paragraph, then, in either such case, Morningstar shall concurrently with such termination pay Suiza Foods a fee of $20,000,000 (a "Termination Fee"), which amount shall be payable by wire transfer of same day funds, and shall promptly reimburse Suiza Foods for all substantiated out-of-pocket costs and expenses incurred by Suiza Foods in connection with the Merger Agreement and the transactions contemplated thereby, including, without limitation, costs and expenses of accountants, attorneys and financial advisors, up to an aggregate of $2,000,000. In the event that (x) Morningstar terminates the Merger Agreement as described in clause (b)(i) of the third preceding paragraph or (y) Suiza Foods terminates the Merger Agreement as described in clause (a)(ii) of the third preceding paragraph, then, in either such case, Suiza Foods shall concurrently with such termination pay Morningstar a fee of $20,000,000 (a "Suiza Termination Fee"), which amount shall be 61
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payable by wire transfer of same day funds, and shall promptly reimburse Morningstar for all substantiated out-of-pocket costs and expenses incurred by Morningstar in connection with the Merger Agreement and the transactions contemplated thereby, including, without limitation, costs and expenses of accountants, attorneys and financial advisors, up to an aggregate of $2,000,000. The provisions in the Merger Agreement relating to, among other things, the effect of termination and abandonment, fees and expenses, specific performance and assignment will survive the termination of the Merger Agreement.  FEES AND EXPENSES Whether or not the Merger is consummated, except as otherwise provided in the Merger Agreement following the exercise of certain termination rights, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated by the Merger Agreement will be paid by the party incurring such expenses. Suiza Foods and Sub on the one hand and Morningstar on the other hand will each be responsible for one half of all expenses relating to printing, filing and mailing this Joint Proxy Statement/Prospectus and the Registration Statement and all Commission and other regulatory filing fees incurred in connection with this Joint Proxy Statement/Prospectus and the Registration Statement.  CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The following is a general discussion of the material U.S. federal income tax consequences of the Merger. The discussion below with respect to holders of Morningstar Common Stock does not deal with special classes of investors, such as insurance companies, tax-exempt organizations, financial institutions, dealers in securities, foreign persons, persons who acquired shares of Morningstar Common Stock pursuant to an exercise of employee stock options or rights or otherwise as compensation, persons that hold shares of Morningstar Common Stock as part of a position in a "straddle" or as part of a "hedging" or "conversion" transaction for U.S. federal income tax purposes, and persons with a "functional currency" other than the U.S. dollar. In addition, no information is provided herein with respect to the tax consequences of the Merger under applicable foreign, state or local laws. This discussion is based on current law. Future legislative, judicial or administrative changes or interpretations, which may be retroactive, could alter or modify the statements set forth herein. Neither Suiza Foods nor Morningstar will request any ruling from the Internal Revenue Service ("IRS") as to the U.S. federal income tax consequences of the Merger. Opinions of counsel are not binding on the IRS or the courts, and the IRS and the courts are not precluded from taking contrary positions. EACH MORNINGSTAR STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE TRANSACTIONS DESCRIBED HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.  GENERAL It is a condition to the consummation of the Merger that Morningstar receive an opinion of its tax counsel, Weil, Gotshal & Manges LLP, and that Suiza Foods receive an opinion of its tax counsel, Hughes & Luce, L.L.P., in each case, that the Merger will constitute a reorganization within the meaning of Section 368(a)(1) of the Code. In rendering these opinions, each of Weil, Gotshal & Manges LLP and Hughes & Luce, L.L.P. will assume the accuracy of the facts and statements concerning the Merger set forth in this Joint Proxy Statement/Prospectus, and will receive and will rely upon representations of fact contained in certificates of Suiza Foods and Morningstar, including that (i) neither Morningstar nor Suiza Foods is aware of any plan, intention or obligation or commitment on the part of any holder of five percent or more of the Morningstar Common Stock to sell, exchange or otherwise dispose of (or to reduce the risk of loss by short sale or otherwise, to enter into any contract or arrangement with respect to, or to consent to the 62
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sale, exchange or other disposition of) Suiza Common Stock received in the Merger by such holder in exchange for such Morningstar Common Stock, (ii) Suiza Foods intends to cause Morningstar to continue Morningstar's historic business and use a significant portion of Morningstar's historic business assets in a business and (iii) after the Merger, Morningstar will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Merger.  TAX CONSEQUENCES TO SUIZA FOODS, SUB AND MORNINGSTAR Based on the assumption that, at the Effective Time, the Merger will constitute a reorganization within the meaning of section 368(a)(1) of the Code, no gain or loss will be recognized by Suiza Foods, Sub or Morningstar as a result of the Merger.  TAX CONSEQUENCES TO MORNINGSTAR STOCKHOLDERS Based on the assumption that, at the Effective Time, the Merger will constitute a reorganization within the meaning of section 368(a)(1) of the Code, a Morningstar Stockholder will not recognize gain or loss on the exchange of Morningstar Common Stock for Suiza Common Stock pursuant to the Merger, except for cash received in lieu of a fractional share interest in Suiza Common Stock. Such holder's aggregate adjusted tax basis in the shares of Suiza Common Stock received in the Merger (including any fractional shares deemed received and exchanged for cash) will equal such holder's adjusted tax basis in the shares of Morningstar Common Stock surrendered in exchange therefor. The holding period of the shares of Suiza Common Stock received by each holder of Morningstar Common Stock in the Merger (including any fractional share interest deemed received and exchanged for a cash payment) will include the holding period of the Morningstar Common Stock surrendered in exchange therefor. No fractional shares of Suiza Common Stock will be issued pursuant to the Merger. A holder of Morningstar Common Stock who, pursuant to the Merger, receives cash in lieu of fractional shares of Suiza Common Stock will be treated as having received such fractional shares of Suiza Common Stock pursuant to the Merger and then as having received such cash in a redemption of such fractional shares of Suiza Common Stock. Assuming the fractional shares of Suiza Common Stock are held as capital assets, the holder generally will recognize capital gain or loss on such deemed redemption of fractional shares equal to the difference between the amount of cash received and the holder's adjusted tax basis in the fractional shares of Suiza Common Stock deemed to have been issued. In the case of non-corporate holders, capital gains will be mid-term gains subject to a maximum federal income tax rate of 28% if the holder's holding period is more than one year but not more than 18 months, and will be long-term gains subject to a maximum federal income tax rate of 20% if the holder's holding period is more than 18 months.  COMPARISON OF THE RIGHTS OF SUIZA STOCKHOLDERS AND MORNINGSTAR STOCKHOLDERS If the Merger is consummated, Morningstar Stockholders will become Suiza Stockholders, and the rights of the former Morningstar Stockholders will be governed by the laws of the State of Delaware (as is presently the case), the Suiza Charter and the Suiza Bylaws. The rights of Suiza Stockholders differ in certain respects from the rights of Morningstar Stockholders. The following is a summary of the material differences between the rights of Suiza Stockholders and Morningstar Stockholders. Because both Suiza Foods and Morningstar are organized under the DGCL, such differences arise from differences between various provisions of the Suiza Charter and Suiza Bylaws, on the one hand, and the Morningstar Charter and Morningstar Bylaws, on the other hand. This summary does not purport to be complete and is qualified in its entirety by reference to the relevant provisions of the DGCL, the Suiza Charter, the Suiza Bylaws, the Morningstar Charter and the Morningstar Bylaws. The Suiza Charter and the Suiza Bylaws are exhibits to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part and are 63
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incorporated herein by reference. Copies of the Morningstar Charter and the Morningstar Bylaws are available for inspection at its offices, and copies will be sent to Morningstar Stockholders upon request in the manner specified under the caption "Incorporation of Certain Information by Reference".  AUTHORIZED CAPITAL The authorized capital stock of Suiza Foods consists of 101,000,000 shares, of which 100,000,000 shares are Common Stock, par value $0.01 per share, and 1,000,000 shares are Preferred Stock, par value $0.01 per share. The authorized capital stock of Morningstar consists of 50,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share.  NUMBER OF DIRECTORS; ELECTION OF DIRECTORS; REMOVAL; VACANCIES The DGCL permits the certificate of incorporation or the bylaws of a corporation to contain provisions governing the number and qualifications of directors. The Suiza Charter states that the number of directors shall be as set forth in or pursuant to the Suiza Bylaws. The Suiza Bylaws state that the number of directors shall be fixed from time to time by resolution of the board of directors. The Morningstar Charter provides that the number of directors constituting the board of directors shall be as specified in the Morningstar Bylaws from time to time. The Morningstar Bylaws state that the number of directors may be increased or decreased from time to time by resolution adopted by a majority of the board of directors. Under the DGCL, unless the board of directors is classified or the certificate of incorporation provides for cumulative voting, any director may be removed with or without cause, by the holders of a majority of shares entitled to vote for the election of directors. Although the Suiza Charter does not permit cumulative voting, the Suiza Board is classified, being divided into three classes, each of which shall be as nearly equal in number as possible, with the directors of each class serving three year terms. Therefore, Suiza Stockholders may remove directors only for cause, as is provided in the Suiza Charter and the Suiza Bylaws. The Morningstar Board is not classified and the Morningstar Charter does not provide for cumulative voting. Therefore, directors of Morningstar may be removed with or without cause by the holders of a majority of shares entitled to vote for the election of directors. Under the DGCL, vacancies and newly created directorships may be filled by a majority of the directors then in office or by a sole remaining director (even though less than a quorum) unless otherwise provided in the certificate of incorporation or bylaws. However, the DGCL also provides that if the directors then in office constitute less than a majority of the whole board, the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of shares at the time outstanding entitled to vote for directors, order an election of directors to be held. The Suiza Bylaws provide that vacancies and newly created directorships may be filled by a majority of the remaining or existing directors, though less than a quorum. The Morningstar Bylaws provide that vacancies and newly created directorships may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director.  CHARTER AMENDMENTS Under the DGCL, a proposed amendment to the certificate of incorporation requires a resolution adopted by the board of directors and, unless otherwise provided in the certificate of incorporation, the affirmative vote of the holders of a majority of the outstanding stock entitled to vote thereon and, if applicable, the affirmative vote of the holders of a majority of the outstanding stock of each class entitled to vote thereon as a class. If any such amendment would adversely affect the rights of any holders of shares of a class or series of stock, the vote of the holders of a majority of all outstanding shares of the class or series, voting as a class, is also necessary to authorize such amendment. The Suiza Charter, the Suiza Bylaws, the Morningstar Charter, and the Morningstar Bylaws contain no provisions regarding the amendment of its corporation's respective certificate of incorporation. 64
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BYLAW AMENDMENTS Under the DGCL, the power to adopt, alter and repeal the bylaws is vested in the stockholders, except to the extent that a corporation's certificate of incorporation vests it in the board of directors. However, the conferral of the power to adopt, alter and repeal the bylaws upon the directors does not divest the stockholders of their power to adopt, amend or repeal the bylaws. The Suiza Charter provides that the Suiza Board has authority to alter, amend or repeal the Suiza Bylaws or to adopt new bylaws. The Morningstar Charter grants authority to the Morningstar Board to adopt, amend, and repeal the Morningstar Bylaws.  SPECIAL STOCKHOLDER MEETINGS The DGCL provides that a special meeting of stockholders may be called by the board of directors or by such person or persons as may be authorized by a corporation's certificate of incorporation or Bylaws. Both the Suiza Charter and the Suiza Bylaws provide that special meetings of the stockholders may be called by Suiza Foods' chief executive officer or by a majority of the members of the board of directors. The Morningstar Bylaws state that special meetings of stockholders may be called by the chairman of the board of directors (if there is one), the president, any vice president (if there is one), the secretary, or any assistant secretary (if there is one) and shall be called by any such officer at the request in writing of a majority of the board of directors or at the request in writing of stockholders owning a majority of the capital stock of Morningstar issued and outstanding and entitled to vote.  BUSINESS COMBINATIONS Under the DGCL, the approval by the affirmative vote of the holders of a majority of the outstanding stock of a corporation entitled to vote on the matter generally is required for a merger, consolidation or sale, lease or exchange of all or substantially all the corporation's assets to be consummated. The Suiza Charter, the Suiza Bylaws, the Morningstar Charter, and the Morningstar Bylaws do not provide for supermajority voting requirements relating to business combinations.  STATE TAKEOVER LEGISLATION Section 203 of the DGCL generally prohibits a Delaware corporation from engaging in a "Business Combination" (defined as a variety of transactions, including mergers, asset sales, issuance of stock and other transactions resulting in a financial benefit to the Interested Stockholder) with an "Interested Stockholder" (defined generally as a person that is the beneficial owner of 15% or more of a corporation's outstanding voting stock) for a period of three years following the date that such person became an Interested Stockholder unless: (i) prior to the date such person became an Interested Stockholder, the board of directors of the corporation approved either the Business Combination or the transaction that resulted in the stockholder becoming an Interested Stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an Interested Stockholder, the Interested Stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding stock held by directors who are also officers of the corporation and employee stock ownership plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to the date such person became an Interested Stockholder, the Business Combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders, and not by written consent, by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock of the corporation not owned by the Interested Stockholder. 65
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A corporation may adopt an amendment to its certificate of incorporation or Bylaws expressly electing not to be governed by Section 203 of the DGCL if, in addition to any other vote required by law, such amendment is approved by the affirmative vote of a majority of the shares entitled to vote. However, such amendment generally will not be effective until 12 months after adoption of such amendment and will not apply to a Business Combination with an Interested Stockholder who was such on or prior to the adoption of the amendment. The Suiza Charter, the Suiza Bylaws, the Morningstar Charter, and the Morningstar Bylaws contain no provisions that exempt Suiza Foods or Morningstar from the prohibitions of Section 203.  INDEMNIFICATION OF DIRECTORS AND OFFICERS Under the DGCL, a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The DGCL permits similar indemnification in the case of derivative actions, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. A director or officer who is successful, on the merits or otherwise, in defense of any proceeding subject to the DGCL's indemnification provisions must be indemnified by the corporation for reasonable expenses incurred in connection therewith, including attorneys' fees. Both the Suiza Charter and the Morningstar Charter provide that their corporation's respective directors and officers shall, and their respective employees and agents may, be indemnified to the fullest extent authorized by the DGCL. However, the Morningstar Bylaws provide that Morningstar shall indemnify its directors, officers, employees, and agents.  LIMITATION OF PERSONAL LIABILITY OF DIRECTORS The DGCL provides that a corporation's certificate of incorporation may include a provision limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. However, no such provision can limit the liability of a director for (i) any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) violation of certain provisions of the DGCL, (iv) any transaction from which the director derived an improper personal benefit or (v) any act or omission prior to the adoption of such a provision in the certificate of incorporation. The Suiza Charter provides for the limitation of the personal liability of its directors in accordance with the provisions of the DGCL. However, such provisions do not limit the availability of equitable relief to Suiza Foods or Suiza Stockholders. The Morningstar Charter also provides for limitation of the liability of Morningstar's directors in accordance with the provisions of the DGCL. 66
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SUIZA PREFERRED STOCK The Suiza Charter authorizes the Suiza Board to issue preferred stock in classes or series and to establish the designations, preferences, qualifications, limitations or restrictions of any class or series. Suiza Foods may issue, without the approval of the holders of Suiza Common Stock, preferred stock that has voting, dividend or liquidation rights superior to the Suiza Common Stock and that may adversely affect the rights of holders of Suiza Common Stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and for other corporate purposes, could, among other things, adversely affect the voting power of the holders of Suiza Common Stock and could have the effect of delaying, deferring or preventing a change in control of Suiza Foods. If the Country Fresh Merger is completed, Suiza will authorize and issue a total of 11,691 shares of Series A Preferred Stock (the "Suiza Preferred Stock") to holders of Country Fresh's outstanding Series A 8% Preferred Stock. A description of the Suiza Preferred Stock follows: STATED VALUE. The Suiza Preferred Stock will have a stated value of $320 per share. DIVIDENDS. The holders of Suiza Preferred Stock, in preference to holders of the Suiza Common Stock, will be entitled to receive, when, as and if declared by the Suiza Board out of funds legally available for distribution to stockholders, cumulative dividends of $25.60 per share per annum, and no more. So long as any shares of Suiza Preferred Stock are outstanding, no dividend will be paid or declared, no funds will be set aside for payment of dividends, and no distribution will be made on the Suiza Common Stock or other preferred stock of Suiza Foods ranking junior to the Suiza Preferred Stock until all dividends accrued on the Suiza Preferred Stock have been paid for the current and all prior dividend periods. LIQUIDATION PREFERENCE. Upon the liquidation, dissolution or winding up of the affairs of Suiza Foods, whether voluntary or involuntary, the holders of Suiza Preferred Stock will be entitled to receive in full out of the assets of Suiza Foods available for distribution to stockholders, including its capital, before any amount will be paid to, or distributed among, the holders of Suiza Common Stock or other preferred stock ranking junior to the Suiza Preferred Stock, the sum of $320 per share, plus all accrued and unpaid dividends to the time of payment. REDEMPTION. Shares of Suiza Preferred Stock may be redeemed, as a whole or in part, at the option of Suiza Foods by vote of the Suiza Board at any time or from time to time, upon no less than 30 or more than 120 days' notice. The redemption price for shares of the Suiza Preferred Stock will be $320 per share plus accrued and unpaid dividends to the date fixed for redemption. Pro rata dividends on any shares of Suiza Preferred Stock to be redeemed will be deemed to accrue as of the date fixed for redemption. VOTING. Each share of Suiza Preferred Stock will have one vote on all matters upon which holders of Suiza Common Stock are entitled to vote. Shares of Suiza Preferred Stock and shares of Suiza Common Stock will be treated as a single class or series of shares for all voting purposes except to the extent a class or series vote is provided by law. LIMITATIONS. In addition to other rights as may be provided under applicable law, without the affirmative vote of the holders of a majority of the outstanding Suiza Preferred Stock, Suiza Foods may not authorize or create any class or series of stock ranking prior to the Suiza Preferred Stock with respect to dividends or the distribution of assets in liquidation. 67
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STOCK OPTION INCREASE  THE 1997 PLAN Effective as of February 24, 1997, the Suiza Board adopted the 1997 Plan, subject to Suiza Stockholder approval. The Suiza Stockholders approved the plan at the annual meeting of Suiza Stockholders held May 13, 1997. The 1997 Plan provides for grants of stock options ("Options") and restricted stock ("Restricted Stock") to certain directors and to officers, key employees and consultants of Suiza Foods and its subsidiaries. The 1997 Plan is administered by a committee of non-employee directors designated by the Suiza Board (the "Stock Option Committee") or by the Suiza Board as a whole. SHARES ISSUABLE UNDER THE 1997 PLAN. A total of 1,150,000 shares of Suiza Common Stock are currently authorized and reserved for issuance under the 1997 Plan upon the exercise of Options or grants of Restricted Stock. Proportionate adjustments will be made to the number of shares of Suiza Common Stock subject to the 1997 Plan in the event of any recapitalization, stock dividend, stock split, combination of shares or other change in Suiza Common Stock. The Suiza Board or the Stock Option Committee may also provide additional anti-dilution protection to a participant under the terms of such participant's Option or Restricted Stock agreement. Shares of Suiza Common Stock subject to Options or Restricted Stock grants that are canceled, terminated or forfeited will again be available for issuance under the 1997 Plan. The Stock Option Committee and the Suiza Board have granted 1,100,200 stock options under the 1997 Plan as of October 27, 1997. Approval of the Plan Amendment will increase the number of shares of Suiza Common Stock authorized for issuance under the 1997 Plan from 1,150,000 shares to 3,000,000 shares. SHARES ISSUABLE UNDER OTHER PLANS. In addition to the shares reserved for issuance under the 1997 Plan, as of October 27, 1997, a total of 1,021,748 shares of Suiza Common Stock are reserved for issuance upon exercise of options previously granted or available for future grants under the Suiza Foods 1995 Stock Option and Restricted Plan, and a total of 369,838 shares are reserved for issuance upon exercise of options granted under the Suiza Foods Exchange Stock Option and Restricted Stock Plan in connection with Suiza Foods' corporate reorganization in 1995. Upon consummation of the Merger, Suiza Foods will assume Morningstar's stock option plans and all of the Morningstar Options outstanding thereunder, which will be converted into Substitute Options to purchase 2,957,987 shares of Suiza Common Stock, based on the number of Morningstar Options outstanding on October 27, 1997. In addition, if the Country Fresh Merger is completed, Suiza Foods will assume Country Fresh's stock option plans and all of the stock options outstanding thereunder, which will be converted into options to purchase additional 229,068 shares of Suiza Common Stock, based on the number of Country Fresh options outstanding on October 27, 1997. ADMINISTRATION OF THE 1997 PLAN. The Suiza Board or the Stock Option Committee administers the 1997 Plan and has authority to select the participants that will be granted Options and Restricted Stock, to terminate the plan or accelerate vesting of Options and Restricted Stock, to determine the nature, extent, timing, exercise price, vesting and duration of Options and Restricted Stock, to prescribe all other terms and conditions consistent with the 1997 Plan, to interpret the 1997 Plan, to establish any rules or regulations relating to the 1997 Plan that it determines to be appropriate, and to make any other determination that it believes necessary or advisable for the proper administration of the 1997 Plan. STOCK OPTIONS AND RESTRICTED STOCK. From time to time, the Chief Executive Officer of Suiza Foods will recommend to the Suiza Board or the Stock Option Committee individuals he or she believes should receive Options or Restricted Stock grants, the amount of shares of Common Stock he or she believes 68
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should be subject to such Option or Restricted Stock grant, and, with respect to any recommended Option, whether the Option should be a qualified or nonqualified option. The Suiza Board or the Stock Option Committee will consider, but need not accept, the Chief Executive Officer's grant recommendations. Each non-employee director of Suiza Foods or its subsidiaries will receive nonqualified options to purchase 7,500 shares of Common Stock on each June 30 that such director serves on the Suiza Board; provided, that such number will be reduced to the extent (if any) that such director receives options on such date under an automatic grant pursuant to Suiza Food's 1995 Stock Option and Restricted Stock Plan. All employees of Suiza Foods, including all officers, are eligible to participate in the 1997 Plan. The Suiza Board or the Stock Option Committee may grant nonqualified stock options ("Nonqualified Options") or incentive stock options under Section 422 of the Code ("Qualified Option") to purchase shares of Suiza Common Stock. The Suiza Board or the Stock Option Committee will determine the number and exercise price of the Options, and the time or times that the Options become exercisable, provided that an Option exercise price may not be less than the fair market value of the Suiza Common Stock on the date of grant. The Suiza Board or the Stock Option Committee may award shares of Restricted Stock without requiring the payment of cash consideration for such shares. The term of an Option will also be determined by the Suiza Board or the Stock Option Committee, provided that the term of a Qualified Option may not exceed 10 years. The 1997 Plan provides that each grant of Options or Restricted Stock will vest in accordance with the applicable Option or Restricted Stock agreement. The Option exercise price may be paid in cash, or, at Suiza Foods' option, in shares of Common Stock. TERMINATION OF EMPLOYMENT. If a participant dies or becomes disabled, all vested Options may be exercised at any time within one year (or their remaining term of the Option, if less). If a participant ceases to be a Suiza Foods' employee for any other reason, he or she must exercise any vested Options within ninety days. AMENDMENTS TO THE 1997 PLAN. The Suiza Board or the Stock Option Committee may amend or discontinue the 1997 Plan at any time, subject to certain restrictions set forth in the 1997 Plan. Except in limited circumstances, no amendment or discontinuance may adversely affect any previously granted Option or Restricted Stock award without the consent of the recipient thereof.  FEDERAL INCOME TAX CONSEQUENCES The following general description of federal income tax consequences is based upon current statutes, regulations and interpretations and does not purport to be complete. Reference should be made to the applicable provisions of the Code. There also may be state, local and foreign income tax consequences applicable to transactions involving Options or Restricted Stock. In addition, the following description does not address special rules that may be applicable to directors and officers.  STOCK OPTIONS. Under existing federal income tax provisions, a participant who receives stock options will not normally realize any income, nor will Suiza Foods normally receive any deduction for federal income tax purposes, upon the grant of an Option. When a Nonqualified Option granted pursuant to the 1997 Plan is exercised, the employee generally will realize ordinary income (compensation) measured by the difference between the aggregate purchase price of the Suiza Common Stock as to which the option is exercised and the aggregate fair market value of the Suiza Common Stock on the exercise date, and Suiza Foods generally will be entitled to a deduction in the year the Option is exercised equal to the amount the employee is required to treat as ordinary income. Any taxable income recognized in connection with a Nonqualified Option exercised by an optionee who is also an employee of Suiza Foods will be subject to tax withholding by Suiza Foods. The basis for determining gain or loss upon a subsequent disposition of Common Stock acquired upon the exercise of a Nonqualified Option will be the purchase price paid to Suiza Foods for the Suiza Common Stock increased by an amount included in the optionee's taxable income resulting from the exercise of such option. The 69
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holding period for determining whether gain or loss on such subsequent disposition is short-term or long-term generally begins on the date on which the optionee acquires the Suiza Common Stock. An employee generally will not recognize any income upon the exercise of a Qualified Option, but the amount by which the fair market value of the Suiza Common Stock at the time of exercise exceeds the exercise price generally will be considered part of alternative minimum taxable income to the employee. An employee will recognize capital gain or loss in the amount of the difference between the exercise price and the sale price on the sale or exchange of stock acquired pursuant to the exercise of a Qualified Option, provided that the employee does not dispose of such stock within two years from the date of grant and one year from the date of exercise of the Qualified Option (the "Required Holding Periods"). An employee disposing of such shares before the expiration of the Required Holding Periods will recognize ordinary income equal to the lesser of (i) the difference between the option price and the fair market value of the stock on the date of exercise, or (ii) the total amount of gain realized. The remaining gain or loss is generally treated as short term or long term gain or loss depending on how long the shares are held. Suiza Foods will not be entitled to a federal income tax deduction in connection with the exercise of a Qualified Option, except where the employee disposes of the shares of Suiza Common Stock received upon exercise before the expiration of the Required Holding Periods.  RESTRICTED STOCK. A restricted stock award is not currently taxable income to a participant for so long as the stock is subject to a substantial risk of forfeiture and cannot be transferred free of forfeiture. The participant will generally be taxed on compensation income equal to the fair market value of the stock on the date the restrictions on the shares lapse, i.e., the date the participant becomes vested with respect to such shares. The participant may elect under Section 83(b) of the Code, however, to be taxed immediately on the value of the shares awarded as of the date of grant. Such an election must be made within 30 days after the award of shares and must be filed with the Internal Revenue Service. If the participant makes the Section 83(b) election and subsequently forfeits his or her shares, no deduction is permitted with respect to the forfeiture. The participant's tax basis in shares acquired through a stock award equals the amount of compensation income recognized upon vesting (or upon grant, in the case of a Section 83(b) election). Generally, if the participant subsequently sells the shares, any gain or loss will be capital.  REASONS FOR PROPOSAL The 1997 Plan is designed to attract and retain the best available personnel for positions of substantial responsibility and to provide incentives to such personnel to promote the success of the business of Suiza Foods. The Suiza Board is recommending the Plan Amendment in order to ensure that sufficient shares are available under the 1997 Plan to reward and motivate existing employees and to attract new employees in the future, particularly in light of the rapid growth experienced by Suiza Foods since the original adoption of the 1997 Plan and the substantial additional growth contemplated by the Merger and the Country Fresh Merger.  INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON In considering whether to vote for approval of the 1997 Plan, Suiza Stockholders should be aware that each of the directors and executive officers of Suiza Foods will be eligible for Option grants and Restricted Stock awards under the 1997 Plan. THE SUIZA BOARD UNANIMOUSLY RECOMMENDS THAT THE SUIZA STOCKHOLDERS VOTE "FOR" APPROVAL OF THE PLAN AMENDMENT. 70
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LEGAL MATTERS The validity of the Suiza Common Stock to be issued by Suiza Foods pursuant to the Merger will be passed upon by Hughes & Luce, L.L.P. Certain tax matters will be passed upon by Weil, Gotshal & Manges LLP for Morningstar and by Hughes & Luce, L.L.P. for Suiza Foods. A partner with Hughes & Luce, L.L.P., beneficially owns 41,795 shares of Suiza Common Stock.  EXPERTS The consolidated financial statements of Suiza Foods Corporation as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996; the financial statements of Pre-Acquisition Velda Farms as of April 9, 1994 and December 31, 1994 and for the period from January 1, 1994 to April 9, 1994 and for the year ended December 31, 1993; the financial statements of Swiss Dairy, a Corporation, as of December 30, 1995 and December 31, 1994 and for each of the three years in the period ended December 30, 1995; and the consolidated financial statements of Country Fresh, Inc. as of March 1, 1997 and March 2, 1996 and for each of the three years in the period ended March 1, 1997, included in or incorporated by reference into this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports either appearing herein or which are incorporated herein by reference. The consolidated financial statements of Garrido & Compania, Inc. as of June 30, 1996 and 1995 and for each of the years in the three year period ended June 30, 1996 incorporated by reference into this Prospectus have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in their report which is incorporated herein by reference. The financial statements of Model Dairy, Inc. as of October 31, 1995 and 1994 and for the years then ended incorporated by reference into this Prospectus have been audited by Barnard, Vogler & Co., independent auditors, as stated in their report which is incorporated herein by reference. The financial statements of Dairy Fresh, L.P., a Delaware limited partnership, as of December 31, 1996 and 1995 and for the years then ended and the period from July 1, 1994 (date of acquisition) to December 31, 1994, incorporated by reference into this Prospectus have been audited by McGladrey & Pullen, LLP, independent auditors, as stated in their report which is incorporated herein by reference. The combined financial statements of The Garelick Companies, as of September 30, 1996 and 1995 and for each of the three years in the period ended September 30, 1996, incorporated by reference into this Prospectus have been audited by Coopers & Lybrand L.L.P., independent accountants, as stated in their report which is incorporated herein by reference. The consolidated financial statements of Morningstar, as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 included in or incorporated by reference into this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto. The combined financial statements of Presto Food Products, Inc. and Affiliate, as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 incorporated by reference into this Prospectus have been audited by Price Waterhouse LLP, independent auditors, as stated in their report incorporated herein by reference. Such financial statements are included herein or incorporated herein by reference in reliance upon the respective reports of such firms given upon their authority as experts in accounting and auditing. Representatives of Deloitte & Touche LLP and Arthur Andersen LLP will be present at the Suiza Special Meeting and the Morningstar Special Meeting, respectively, and will have the opportunity to make a statement if they desire to do so and to respond to appropriate questions. 71
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INDEX TO FINANCIAL STATEMENTS [Enlarge/Download Table] SUIZA FOODS CORPORATION Independent Auditors' Report....................................................... F-2 Consolidated Balance Sheets........................................................ F-3 Consolidated Statements of Operations.............................................. F-4 Consolidated Statements of Stockholders' Equity.................................... F-5 Consolidated Statements of Cash Flows.............................................. F-6 Notes to Consolidated Financial Statements......................................... F-7 Condensed Consolidated Balance Sheets.............................................. F-26 Condensed Consolidated Statements of Operations.................................... F-27 Condensed Consolidated Statements of Cash Flows.................................... F-28 Notes to Condensed Consolidated Financial Statements............................... F-29 THE MORNINGSTAR GROUP INC. Independent Auditors' Report....................................................... F-33 Consolidated Balance Sheets........................................................ F-34 Consolidated Statements of Operations.............................................. F-35 Consolidated Statements of Stockholders' Equity.................................... F-36 Consolidated Statements of Cash Flows.............................................. F-37 Notes to Consolidated Financial Statements......................................... F-39 Condensed Consolidated Balance Sheets.............................................. F-56 Condensed Consolidated Statements of Operations.................................... F-57 Condensed Consolidated Statements of Cash Flows.................................... F-58 Notes to Condensed Consolidated Financial Statements............................... F-60 COUNTRY FRESH, INC. Independent Auditors' Report....................................................... F-62 Consolidated Balance Sheets........................................................ F-63 Consolidated Statements of Earnings................................................ F-64 Consolidated Statements of Shareholders' Equity.................................... F-65 Consolidated Statements of Cash Flows.............................................. F-66 Notes to Consolidated Financial Statements......................................... F-67 F-1
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INDEPENDENT AUDITORS' REPORT To the Board of Directors Suiza Foods Corporation Dallas, Texas We have audited the accompanying consolidated balance sheets of Suiza Foods Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Suiza Foods Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Deloitte & Touche LLP Dallas, Texas February 18, 1997 F-2
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 [Enlarge/Download Table] 1996 1995 ---------- ---------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents............................................................... $ 8,951 $ 3,177 Accounts receivable..................................................................... 50,608 31,045 Inventories............................................................................. 19,228 11,346 Prepaid expenses and other current assets............................................... 2,754 1,380 Refundable income taxes................................................................. 2,312 Deferred income taxes................................................................... 3,672 1,448 ---------- ---------- Total current assets.................................................................. 87,525 48,396 PROPERTY, PLANT AND EQUIPMENT............................................................. 123,260 92,715 DEFERRED INCOME TAXES..................................................................... 8,524 INTANGIBLE AND OTHER ASSETS............................................................... 164,839 91,411 ---------- ---------- TOTAL................................................................................. $ 384,148 $ 232,522 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses................................................... $ 46,664 $ 31,957 Income taxes payable.................................................................... 1,105 2,415 Current portion of long-term debt....................................................... 12,876 15,578 ---------- ---------- Total current liabilities............................................................. 60,645 49,950 LONG-TERM DEBT............................................................................ 226,693 171,745 DEFERRED INCOME TAXES..................................................................... 3,278 1,367 COMMITMENTS AND CONTINGENCIES............................................................. STOCKHOLDERS' EQUITY: Preferred stock......................................................................... Common stock, 10,741,729 and 6,313,479 shares issued and outstanding.................... 107 63 Additional paid-in capital.............................................................. 89,337 31,023 Retained earnings (deficit)............................................................. 4,088 (21,626) ---------- ---------- Total stockholders' equity............................................................ 93,532 9,460 ---------- ---------- TOTAL................................................................................. $ 384,148 $ 232,522 ---------- ---------- ---------- ---------- See notes to consolidated financial statements. F-3
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 [Enlarge/Download Table] 1996 1995 1994 ------------ ------------ ------------ (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) NET SALES............................................................... $ 520,916 $ 430,466 $ 341,108 COST OF SALES........................................................... 388,548 312,633 240,468 ------------ ------------ ------------ GROSS PROFIT............................................................ 132,368 117,833 100,640 OPERATING COSTS AND EXPENSES: Selling and distribution.............................................. 70,709 64,289 54,248 General and administrative............................................ 21,913 19,277 16,935 Amortization of intangibles........................................... 4,624 3,703 3,697 ------------ ------------ ------------ Total operating costs and expenses.................................... 97,246 87,269 74,880 ------------ ------------ ------------ INCOME FROM OPERATIONS.................................................. 35,122 30,564 25,760 OTHER (INCOME) EXPENSE: Interest expense, net................................................. 17,470 19,921 19,279 Merger and other costs................................................ 571 10,238 1,660 Other income, net..................................................... (4,012) (469) (268) ------------ ------------ ------------ Total other (income) expense.......................................... 14,029 29,690 20,671 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS....................... 21,093 874 5,089 INCOME TAXES (BENEFIT).................................................. (6,836) 2,450 844 ------------ ------------ ------------ INCOME (LOSS) BEFORE EXTRAORDINARY LOSS................................. 27,929 (1,576) 4,245 EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT.................... 2,215 8,462 197 ------------ ------------ ------------ NET INCOME (LOSS)....................................................... $ 25,714 $ (10,038) $ 4,048 ------------ ------------ ------------ ------------ ------------ ------------ NET EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary loss............................... $ 2.81 $ (0.26) $ 0.69 Extraordinary loss.................................................... (0.22) (1.38) (0.03) ------------ ------------ ------------ Net income (loss)..................................................... $ 2.59 $ (1.64) $ 0.66 ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING..................................... 9,921,822 6,109,398 6,156,387 ------------ ------------ ------------ ------------ ------------ ------------ See notes to consolidated financial statements. F-4
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 [Enlarge/Download Table] COMMON STOCK ADDITIONAL RETAINED ------------------------- PAID-IN EARNINGS SHARES AMOUNT CAPITAL WARRANTS (DEFICIT) TOTAL ------------ ----------- ----------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS) BALANCE, JANUARY 1, 1994................... 67,708 $ 1 $ 15,217 $ 523 $ (15,579) $ 162 Issuance of common stock................. 11,960 5,677 5,677 Increase in market value of warrants..... 57 (57) -- Net income............................... 4,048 4,048 ------------ ----- ----------- ----- ---------- ---------- BALANCE, DECEMBER 31, 1994................. 79,668 1 20,894 580 (11,588) 9,887 Issuance of common stock................. 11,832 5,080 (580) 4,500 Capital contribution (Note 11)........... 5,111 5,111 Net loss................................. (10,038) (10,038) 69 for 1 stock split (Note 11)........... 6,221,979 62 (62) -- ------------ ----- ----------- ----- ---------- ---------- BALANCE, DECEMBER 31, 1995................. 6,313,479 63 31,023 -- (21,626) 9,460 Issuance of common stock................. 4,428,250 44 58,314 58,358 Net income............................... 25,714 25,714 ------------ ----- ----------- ----- ---------- ---------- BALANCE, DECEMBER 31, 1996................. 10,741,729 $ 107 $ 89,337 $ -- $ 4,088 $ 93,532 ------------ ----- ----------- ----- ---------- ---------- ------------ ----- ----------- ----- ---------- ---------- See notes to consolidated financial statements. F-5
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 [Enlarge/Download Table] 1996 1995 1994 ----------- ----------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................................... $ 25,714 $ (10,038) $ 4,048 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation............................................................ 9,930 9,258 8,244 Amortization of intangible assets, including deferred financing costs... 5,458 4,686 4,876 Gain on the sale of assets.............................................. (21) (265) (177) Extraordinary loss from early extinguishment of debt.................... 2,215 8,462 197 Merger and other nonrecurring costs..................................... 571 10,238 1,660 Noncash and imputed interest............................................ 236 1,087 483 Minority interests...................................................... 101 556 Deferred income taxes................................................... (8,895) (414) 333 Changes in operating assets and liabilities: Accounts receivable................................................... (5,187) (1,881) (108) Inventories........................................................... (3,346) (599) (73) Prepaid expenses and other assets..................................... (163) 1,007 (222) Refundable income taxes............................................... (2,312) Accounts payable and accrued expenses................................. 967 716 4,862 Income tax payable.................................................... (1,575) 649 254 ----------- ----------- ---------- Net cash provided by operating activities............................. 23,592 23,007 24,933 ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment................................ (14,022) (10,392) (4,784) Proceeds from sale of property, plant and equipment....................... 500 691 245 Purchases of investments and other assets................................. (1,608) Cash outflows for acquisitions............................................ (111,380) (2,425) (61,357) ----------- ----------- ---------- Net cash used in investing activities................................... (124,902) (12,126) (67,504) ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt........................................ 110,550 154,505 67,585 Repayment of debt......................................................... (58,304) (154,387) (30,906) Payments of deferred financing, debt restructuring and merger costs....... (3,520) (8,972) (1,660) Issuance of common stock, net of expenses 58,358 4,087 5,677 Purchase of subsidiary preferred stock and minority interests............. (8,332) (61) ----------- ----------- ---------- Net cash provided by (used in) financing activities..................... 107,084 (13,099) 40,635 ----------- ----------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 5,774 (2,218) (1,936) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................. 3,177 5,395 7,331 ----------- ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................................... $ 8,951 $ 3,177 $ 5,395 ----------- ----------- ---------- ----------- ----------- ---------- See notes to consolidated financial statements. F-6
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS. Suiza Foods Corporation (the "Company" or "Suiza Foods") is a manufacturer and distributor of fresh milk products, refrigerated ready-to-serve fruit drinks and coffee in Puerto Rico; fresh milk and related dairy products in Florida, California and Nevada; and packaged ice in Florida and the southwestern United States. On March 31, 1995, the Company became the holding company for the operations of Suiza Holdings, L.P. and subsidiaries; Velda Holdings, L.P.; Velda Holdings, Inc. and subsidiaries; and Reddy Ice Corporation (collectively, the "Combined Entities") through the issuance of 6,313,479 shares of its common stock in exchange for all of the outstanding equity interests of the Combined Entities. The Company accounted for this combination using the pooling of interests method of accounting, whereby the assets acquired and liabilities assumed are reflected in the consolidated financial statements of the Company at the historical amounts of the Combined Entities, which, in the case of Velda Farms, only includes the results of operations from April 10, 1994, the date it was acquired in a purchase business combination. The Company and its subsidiaries provide credit terms to customers generally ranging up to 30 days, perform ongoing credit evaluations of their customers and maintain allowances for potential credit losses based on historical experience. The preparation of financial statements requires the use of significant estimates and assumptions by management; actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform to current year presentation. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company; its U.S. operating subsidiaries, Velda Farms, Inc. ("Velda Farms"), Swiss Dairy Corporation ("Swiss Dairy"), Model Dairy, Inc. ("Model Dairy") and Reddy Ice Corporation ("Reddy Ice"); and its Puerto Rico operating subsidiaries, Suiza Dairy Corporation ("Suiza Dairy"), Suiza Fruit Corporation ("Suiza Fruit"), Neva Plastics Manufacturing Corp. ("Neva Plastics") and Garrido & Compania ("Garrido") (collectively, "Suiza-Puerto Rico"). All significant intercompany balances and transactions are eliminated in consolidation.  INVENTORIES. Pasteurized and raw milk inventories are stated at the lower of average cost or market. Raw materials, spare parts and supplies, and merchandise for resale inventories are stated at the lower of cost, using the first-in, first-out ("FIFO") method, or market. Manufactured finished goods inventories are stated at the lower of average production cost or market. Production costs include raw materials, direct labor and indirect production and overhead costs.  PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, as follows: [Enlarge/Download Table] ASSET USEFUL LIFE -------------------------------------------------------------- ------------------------------ Buildings and improvements.................................... Ten to 40 years Machinery and equipment....................................... Five to 20 years Motor vehicles................................................ Five to 15 years Furniture and fixtures........................................ Three to ten years Capitalized lease assets are amortized over the shorter of their lease term or their estimated useful lives. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred. F-7
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS. Intangible assets include the following intangibles which are amortized over their related useful lives: [Enlarge/Download Table] INTANGIBLE ASSET USEFUL LIFE ------------------------------------------- ------------------------------------------------- Goodwill................................... Straight-line method over 20 to 40 years Identifiable intangible assets: Customer list............................ Straight-line method over seven to ten years Trademarks/trade names................... Straight-line method over 30 years Noncompetition agreements................ Straight-line method over the terms of the agreements Deferred financing costs................... Interest method over the terms of the related debt (ranging from seven to 11 years) Organization costs......................... Straight-line method over five years The Company periodically assesses the net realizable value of its intangible assets, as well as all other assets, by comparing the expected future net operating cash flows, undiscounted and without interest charges, to the carrying amount of the underlying assets. The Company would evaluate a potential impairment if the recorded value of these assets exceeded the associated future net operating cash flows. Any potential impairment loss would be measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value of assets would be measured by market value, if an active market exists, or by a forecast of expected future net operating cash flows, discounted at a rate commensurate with the risk involved.  INTEREST RATE AGREEMENTS. Interest rate swaps, caps and floors are entered into as a hedge against interest exposure of variable rate debt. Differences between amounts to be paid or received on these interest rate agreements designated as hedges are included in interest expense as payments are made or received. Gains or losses on other agreements not designated as hedges are included in income as incurred. Amounts paid to acquire interest rate caps and amounts received for interest rate floors are amortized as an adjustment to interest expense over the life of the related agreement. REVENUE. Revenue is recognized when the product is shipped to the customer.  INCOME TAXES. Since March 31, 1995, the Company's U.S. operating subsidiaries have been included in the consolidated tax return of the Company. The Company's Suiza Dairy, Suiza Fruit and Neva Plastics subsidiaries are organized as Delaware companies and are required to file separate U.S. and Puerto Rico income tax returns; however, since their operations are in Puerto Rico, they are eligible for Section 936 tax credits which may reduce or eliminate U.S. income taxes due. Garrido is organized under the laws of the Commonwealth of Puerto Rico and is only required to file a separate tax return in Puerto Rico. Effective January 1, 1996, substantially all of the Company's Puerto Rico operations are 90% exempt from Puerto Rico income taxes and 100% exempt from property, municipal, certain excise and other taxes, and fees pursuant to the Puerto Rico Agricultural Tax Incentives Act of 1995. Prior to this date, only the Company's Suiza Fruit and Neva Plastics subsidiaries had similar exemptions through separate tax grants in Puerto Rico. These operations are, however, subject to a 10% withholding tax on distributions from Puerto Rico to the United States. F-8
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Prior to March 31, 1995, the Combined Entities were separate taxpayers and income taxes were provided for in the financial statements, where applicable, based on each company's separate income tax return and tax status. As a result, since certain of Suiza-Puerto Rico's operations were organized as a partnership and Reddy Ice's operations were organized as a small business corporation under Subchapter S, no income taxes were provided in the financial statements. However, had these operations been subject to corporate income taxes, available net operating losses would have been sufficient to eliminate any corporate income taxes due. Deferred income taxes are provided for temporary differences in the financial statement and tax bases of assets and liabilities using current tax rates. Deferred tax assets, including the benefit of net operating loss carryforwards, are evaluated based on the guidelines for realization and may be reduced by a valuation allowance. CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. EARNINGS (LOSS) PER SHARE. The Company computes earnings per share based on the weighted average number of common shares outstanding during the year, as adjusted for the stock split (Note 11), including common equivalent shares, when dilutive. 2. ACQUISITIONS In April 1994, the Company acquired all of the outstanding common stock of Velda Farms, Inc., a wholly owned subsidiary of The Morningstar Group, Inc. The total purchase price, including related acquisition and financing costs, was approximately $54.8 million, which was funded with the net proceeds from the issuance of common stock, the proceeds from the issuance of subordinated notes, term loan and revolving credit facility advances, and preferred stock issued to the seller. In connection with the refinancing of debt at the date of the combination, the term loan, revolving credit facility advances and preferred stock were repaid. In June 1994, the Company acquired Mayaguez Dairy, Inc. for a total purchase price, including costs and expenses, of approximately $7.6 million, which was funded primarily by additional term loan borrowings of $7.0 million. In November 1994, the Company acquired all of the net assets of the Florida Division of Flav-O-Rich, Inc. The total purchase price, including related acquisition and financing costs, was approximately $5.9 million, which was funded with revolving credit agreement borrowings, along with a subordinated note payable to the seller and an amount payable to the seller upon the final purchase price settlement, which was paid subsequent to year-end. In July 1996, the Company acquired all of the outstanding common stock of Garrido for approximately $35.8 million, including related acquisition and financing costs, which was funded primarily by additional term loan borrowings under the Senior Credit Facility. In connection with this acquisition, the purchase agreement requires the payment of a contingent purchase price of up to $5.5 million based on the future performance of this operation, which will be accounted for as an adjustment to the purchase price when this contingency is resolved should a payment of all or a portion of this contingent purchase price be required. In addition, as a result of the adoption of the Puerto Rico Agricultural Tax Incentives Act of 1995, as discussed in more detail in Note 10, the Company may be eligible for tax credits on a portion of its F-9
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 2. ACQUISITIONS (CONTINUED) investment in Garrido of between $6.2 million and $8.8 million, which are dependent on the receipt of a favorable ruling on the availability of such tax credits from the Treasury Department in Puerto Rico. Should a favorable ruling on these tax credits be received, the Company will account for these tax benefits as an adjustment of the purchase price, which would result in a reduction of goodwill. In September 1996, the Company acquired all of the net assets of Swiss Dairy for approximately $55.1 million, including related acquisition costs, which was funded primarily by borrowings under the revolving credit and acquisition facilities of the Senior Credit Facility. In December 1996, the Company acquired all of the net assets of Model Dairy, along with certain assets held by affiliates of the seller, for approximately $27.0 million, including related acquisition costs, which was funded primarily by borrowings under the acquisition facility of the Senior Credit Facility. In addition to the above acquisitions, during 1996, 1995 and 1994, the Company acquired certain net assets of and entered into noncompetition arrangements with 18 separate ice companies and two dairies for cash, including costs and expenses, of approximately $8.4 million in 1996, $2.4 million in 1995 and $.3 million in 1994, along with the issuance of notes payable to the sellers of approximately $.2 million in 1996, $.1 million in 1995 and $.4 million in 1994, all of which were funded by Senior Credit Facility borrowings. The above acquisitions were accounted for using the purchase method of accounting as of their respective acquisition dates, and accordingly, only the results of operations of the acquired companies subsequent to their respective acquisition dates are included in the consolidated financial statements of the Company. At the acquisition date, the purchase price was allocated to assets acquired, including identifiable intangibles, and liabilities assumed based on their fair market values. The excess of the total purchase prices over the fair values of the net assets acquired represented goodwill. In connection with the acquisitions, assets were acquired and liabilities were assumed as follows: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- --------- ---------- (IN THOUSANDS) Purchase prices: Net cash paid............................................. $ 111,380 $ 2,425 $ 61,357 Subsidiary preferred stock issued 3,000 Notes and amounts payable to seller....................... 173 91 4,495 Cash acquired in acquisitions............................. 14,937 142 ---------- --------- ---------- Total purchase prices....................................... 126,490 2,516 68,994 Fair values of net assets acquired: Fair values of assets acquired............................ 63,598 2,317 53,590 Liabilities assumed....................................... (14,076) (10,924) ---------- --------- ---------- Total net assets acquired................................... 49,522 2,317 42,666 ---------- --------- ---------- Goodwill.................................................... $ 76,968 $ 199 $ 26,328 ---------- --------- ---------- ---------- --------- ---------- F-10
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 2. ACQUISITIONS (CONTINUED) The following table presents unaudited pro forma results of operations of the Company for the years ended December 31, 1995 and 1996, as if the above 1996 acquisitions had occurred at the beginning of 1995. [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............................................................. $ 662,174 $ 634,186 Income before extraordinary loss...................................... 30,634 2,008 Net income (loss)..................................................... 28,419 (6,454) Earnings (loss) per share............................................. 2.86 (1.06) The unaudited pro forma results of operations are not necessarily indicative of what the actual results of operations of the Company would have been had the acquisitions occurred at the beginning of 1995, nor do they purport to be indicative of the future results of operations of the Company. 3. ACCOUNTS RECEIVABLE [Enlarge/Download Table] DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Trade customers, including route receivables............................ $ 47,785 $ 28,435 Milk industry and milk price stabilization fund......................... 168 1,839 Suppliers............................................................... 715 604 Officers and employees.................................................. 554 425 Other................................................................... 2,594 1,090 --------- --------- 51,816 32,393 Less allowance for doubtful accounts.................................... (1,208) (1,348) --------- --------- $ 50,608 $ 31,045 --------- --------- --------- --------- 4. INVENTORIES [Enlarge/Download Table] DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Pasteurized and raw milk and raw materials.............................. $ 7,693 $ 4,278 Parts and supplies...................................................... 5,584 3,105 Finished goods.......................................................... 5,951 3,963 --------- --------- $ 19,228 $ 11,346 --------- --------- --------- --------- F-11
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5. PROPERTY, PLANT AND EQUIPMENT [Enlarge/Download Table] DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- (IN THOUSANDS) Land.................................................................. $ 20,104 $ 15,582 Buildings and improvements............................................ 45,016 33,264 Machinery and equipment............................................... 63,614 47,119 Motor vehicles........................................................ 13,173 9,994 Furniture and fixtures................................................ 22,360 18,219 ---------- ---------- 164,267 124,178 Less accumulated depreciation......................................... (41,007) (31,463) ---------- ---------- $ 123,260 $ 92,715 ---------- ---------- ---------- ---------- 6. INTANGIBLE AND OTHER ASSETS [Enlarge/Download Table] DECEMBER 31, --------------------- 1996 1995 ---------- --------- (IN THOUSANDS) Goodwill............................................................... $ 155,242 $ 78,503 Identifiable intangibles............................................... 14,652 13,374 Deferred financing costs............................................... 5,248 6,018 Deposits and other..................................................... 724 994 ---------- --------- 175,866 98,889 Less accumulated amortization.......................................... (11,027) (7,478) ---------- --------- $ 164,839 $ 91,411 ---------- --------- ---------- --------- 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES [Enlarge/Download Table] DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Accounts payable........................................................ $ 31,005 $ 21,689 Accrued payroll and benefits............................................ 7,294 5,033 Accrued interest........................................................ 1,413 1,845 Accrued insurance....................................................... 3,437 2,436 Other................................................................... 3,515 954 --------- --------- $ 46,664 $ 31,957 --------- --------- --------- --------- F-12
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8. LONG-TERM DEBT [Enlarge/Download Table] DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- (IN THOUSANDS) Senior Credit Facility: Revolving loan facility............................................. $ 8,600 $ 10,900 Acquisition facility................................................ 69,100 Term loans.......................................................... 125,000 123,750 Subordinated notes.................................................... 36,000 51,101 Capital lease obligations and other................................... 869 1,572 ---------- ---------- 239,569 187,323 Less current portion.................................................. (12,876) (15,578) ---------- ---------- $ 226,693 $ 171,745 ---------- ---------- ---------- ----------  SENIOR CREDIT FACILITY. In September 1996, the Company amended its existing credit facility and entered into a supplemental credit facility with a group of lenders, including First Union National Bank of North Carolina, as agent, and The First National Bank of Chicago, as syndication agent, which provide for an aggregate senior credit facility (the "Senior Credit Facility") of $250.0 million comprised of (i) a $130.0 million term loan facility; (ii) a $30.0 million revolving credit facility and (iii) a $90.0 million acquisition facility. Under the terms of the Senior Credit Facility, the term loan is amortized over five and one-half years, and the revolving credit facility expires on March 31, 2000. Any amounts drawn under the acquisition facility that are outstanding on September 30, 1998, will be amortized in fifteen quarterly installments. Amounts outstanding under the Senior Credit Facility bear interest at a rate per annum equal to one of the following rates, at the Company's option: (i) the sum of a base rate equal to the higher of the Federal Funds rate plus 50 basis points or First Union National Bank of North Carolina's prime commercial lending rate, plus a margin that varies from 0 to 75 basis points depending on the Company's ratio of defined indebtedness to EBITDA (as defined in the Senior Credit Facility); or (ii) The London Interbank Offering Rate ("LIBOR") plus a margin that varies from 75 to 200 basis points depending on the Company's ratio of defined indebtedness to EBITDA. The Company pays a commitment fee on unused amounts of the revolving facility and the acquisition facility that ranges from 20 basis points to 37.5 basis points, based on the Company's ratio of defined indebtedness to EBITDA. The blended interest rate in effect at December 31, 1996, on the Senior Credit Facility was 7.2%. Interest is payable quarterly, and scheduled principal installments on the term loan facilities are due in quarterly installments of approximately $2.5 million through June 1997, increasing to $3.75 million on September 30, 1997, $5.0 million on September 30, 1998, $5.375 million on September 30, 1999, and $6.0 million on September 30, 2000, with the remaining unpaid balance due on March 31, 2002. Loans under the Senior Credit Facility are collateralized by substantially all assets.  SUBORDINATED NOTES. On March 31, 1995, the Company issued subordinated notes, which carried interest rates ranging from 12% to 15%, to replace certain of the existing subordinated notes of the Combined Entities. On April 22, 1996, the Company used $15.7 million of the net proceeds from its initial public offering to repay all the outstanding principal balances of the 15% subordinated notes. The remaining subordinated notes bear interest at rates ranging from 12% to 13.5% (12.5% on a weighted F-13
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8. LONG-TERM DEBT (CONTINUED) average basis), payable on a semiannual basis in March and September of each year, with semiannual principal installments due in varying amounts commencing in 2001, with the remaining unpaid principal balances due at maturity on March 31, 2004. The notes are subordinated to the loans under the Senior Credit Facility. As is discussed in Note 19, in January 1997, the Company repaid all of the outstanding principal balances of these remaining subordinated notes with a portion of the proceeds from the sale of common stock. OTHER DEBT. Other debt includes various promissory notes for the purchase of property, plant and equipment and capital lease obligations. The various promissory notes payable provided for interest at rates ranging from 10% to prime plus 1% and were payable in monthly installments of principal and interest until maturity, when the remaining principal balance was due. Capital lease obligations represent machinery and equipment financing obligations which are payable in monthly installments of principal and interest and are collateralized by the related assets financed.  INTEREST RATE AGREEMENTS. The Company has five interest rate derivative agreements in place, which have been designated as hedges against the Company's variable interest rate exposure on its loans under the Senior Credit Facility. The first agreement, which has a notional amount of $14.0 million, matures in May 1997 and caps interest on LIBOR loans at 7.5%, plus the applicable LIBOR margin. The second and third agreements, each of which has a notional amount of $27.5 million and mature in June 1998, fix the interest rates on LIBOR loans at 6.0%, plus the applicable LIBOR margin. The fourth and fifth agreements, which each have a notional amount of $25.0 million and mature in December 1997, fix the interest rates on LIBOR loans at 6.01%, plus the applicable LIBOR margin. These derivative agreements provide hedges for the Senior Credit Facility loans by limiting or fixing the LIBOR interest rates specified in the Senior Credit Facility (5.6% at December 31, 1996) at the above rates until the indicated expiration dates of these interest-rate-derivative agreements. The original costs and premiums of these derivative agreements are being amortized on a straight-line basis as a component of interest expense. The Company has designated these interest rate agreements as hedges against its interest rate exposure on its variable rate loans under the Senior Credit Facility. The Company is exposed to market risk under these arrangements due to the possibility of exchanging a lower interest rate for a higher interest rate. The counterparties are major financial institutions, and the risk of incurring losses related to credit risk is considered by the Company to be remote. DEBT COVENANTS. The Company's Senior Credit Facility contains various financial and other restrictive covenants and requirements that the Company maintain certain financial ratios, including leverage (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to EBITDA, as defined), fixed charges (computed as the ratio of EBITDA to defined fixed charges), interest coverage (computed as the ratio of EBITDA to defined interest expense) and minimum net worth. The Senior Credit Facility also contains limitations on capital expenditures, investments, the payment of dividends and the incurrence of additional indebtedness and requires certain mandatory prepayments from the proceeds of certain dispositions of property. F-14
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8. LONG-TERM DEBT (CONTINUED) SCHEDULED MATURITIES. The scheduled maturities of long-term debt, which include capitalized lease obligations, at December 31, 1996, were as follows (in thousands): [Download Table] 1997.............................................................. $ 12,876 1998.............................................................. 19,544 1999.............................................................. 24,348 2000.............................................................. 34,826 2001.............................................................. 29,206 Thereafter........................................................ 118,769 --------- $ 239,569 --------- --------- 9. LEASES The Company leases certain property, plant and equipment used in its operations under both capital and operating lease agreements. Such leases, which are primarily for machinery and equipment and vehicles, have lease terms ranging from two to nine years. Certain of the operating lease agreements require the payment of additional rentals for maintenance, along with additional rentals, based on miles driven or units produced. Rent expense, including additional rent, was $8.0 million, $6.3 million and $4.5 million for the years ended December 31, 1996, 1995 and 1994, respectively. The composition of capital leases which are reflected as property, plant and equipment in the balance sheets is as follows: [Enlarge/Download Table] DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Machinery and equipment..................................................... $ 812 $ 1,370 Less accumulated amortization............................................... (366) (415) --------- --------- $ 446 $ 955 --------- --------- --------- --------- Future minimum payments at December 31, 1996, under noncancelable capital and operating leases with terms in excess of one year are summarized below (in thousands): [Enlarge/Download Table] CAPITAL OPERATING LEASES LEASES ----------- ----------- 1997..................................................................... $ 185 $ 4,539 1998..................................................................... 152 4,006 1999..................................................................... 112 3,188 2000..................................................................... 2,692 2001..................................................................... 2,216 Thereafter............................................................... 2,770 ----- ----------- Total minimum lease payments............................................. 449 $ 19,411 ----------- ----------- Less amount representing imputed interest................................ (27) ----- Present value of capitalized lease obligations........................... $ 422 ----- ----- F-15
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10. INCOME TAXES The provisions for income taxes (benefit), excluding the current tax benefits of $0.9 million and $0.7 million applicable to the extraordinary losses during 1996 and 1995, respectively, are as follows: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Current taxes payable: Federal......................................................... $ 1,925 $ 2,763 $ 491 State........................................................... 134 101 20 Deferred income taxes............................................. (8,895) (414) 333 --------- --------- --------- $ (6,836) $ 2,450 $ 844 --------- --------- --------- --------- --------- --------- The following is a reconciliation of income taxes expense (benefit) reported in the statements of operations: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- --------- --------- (IN THOUSANDS) Tax expense at statutory rates............................... $ 7,383 $ 306 $ 1,959 Tax benefit from tax-exempt earnings......................... (2,711) (1,532) (2,745) Tax expense from losses not subject to taxes at the corporate level...................................................... 1,612 Puerto Rico tax credits...................................... (11,750) Net operating loss carryforwards............................. 188 1,344 Nondeductible expenses....................................... 1,841 202 Other........................................................ 242 35 84 ---------- --------- --------- $ (6,836) $ 2,450 $ 844 ---------- --------- --------- ---------- --------- --------- F-16
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10. INCOME TAXES (CONTINUED) The tax effects of temporary differences giving rise to deferred income tax assets and liabilities were: [Enlarge/Download Table] DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Deferred income tax assets: Asset valuation reserves................................................ $ 244 $ 326 Nondeductible accruals.................................................. 1,785 1,122 Puerto Rico tax credits................................................. 10,076 Net operating loss carryforwards........................................ 91 1,989 Valuation allowance..................................................... (1,989) --------- --------- 12,196 1,448 Deferred income tax liabilities: Depreciation............................................................ (1,174) 312 Amortization of intangibles............................................. (2,177) (1,185) Foreign distributions and other......................................... 73 (494) --------- --------- (3,278) (1,367) --------- --------- Net deferred income tax asset............................................. $ 8,918 $ 81 --------- --------- --------- --------- These net deferred income tax assets are classified in the consolidated balance sheet as follows: [Enlarge/Download Table] DECEMBER 31, -------------------- 1996 1995 --------- --------- (IN THOUSANDS) Current assets........................................................... $ 3,672 $ 1,448 Noncurrent assets........................................................ 8,524 Noncurrent liabilities................................................... (3,278) (1,367) --------- --------- $ 8,918 $ 81 --------- --------- --------- --------- The Company had established a valuation allowance for deferred tax assets related to net operating loss carryforwards of the Company's Suiza Dairy subsidiary in Puerto Rico, which under Puerto Rico law were only available for utilization against future taxable income of this subsidiary. Because of the continuing operating losses of this subsidiary, the Company was unable to determine that it is more likely than not that the net deferred tax assets of this subsidiary would be realized. During 1996, the deferred tax asset related to these net operating loss carryforwards and the related valuation allowance was substantially eliminated as a result of the reduction in tax rates in Puerto Rico from the Puerto Rico Agricultural Tax Incentives Act of 1995. In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico Agricultural Tax Incentives Act of 1995, which reduced the effective income tax rate for qualified agricultural business from 39% to 3.9% and provided for a 50% tax credit for certain "eligible investments" in qualified agricultural businesses in Puerto Rico. During 1996, the Company made investments in its Puerto Rico dairy, fruit, F-17
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10. INCOME TAXES (CONTINUED) plastics and Garrido operations, all of which were certified as qualified agricultural businesses in Puerto Rico during 1996. In connection with these investments, the Company believes that it has met the eligible investment criteria of this act related to its investment in its Puerto Rico dairy subsidiary. Accordingly, in 1996, the Company recognized $15.75 million in tax credits related to this qualifying investment. Of this amount, the Company (i) sold $4.0 million of tax credits to third parties, resulting in a cash gain of $3.4 million (net of a discount and related expenses), which is recorded in other income, and (ii) recognized a deferred tax asset for the remainder of the tax credit in the amount of $11.75 million, resulting in a corresponding credit to tax expense. These tax credits can be used by the Company to eliminate both Puerto Rico income taxes and the 10% Puerto Rico withholding tax on distributions from the Company's Puerto Rico operations. The Company is currently investigating whether its $43.0 million investment in its fruit and plastics operations will qualify for tax credits based on recent rulings by Puerto Rico tax authorities and has requested a formal ruling on the allowability of such tax credits from the Treasury Department in Puerto Rico. If a favorable ruling on the availability of these additional tax credits is obtained, the Company will recognize substantial additional tax benefits in the form of either a deferred tax asset or proceeds from the sale of such credits. 11. STOCKHOLDERS' EQUITY CAPITAL SHARES. Authorized capital shares of the Company include 1,000,000 shares of preferred stock with a par value of $.01 per share and 20,000,000 shares of common stock with a par value of $.01 per share. There have been no shares of preferred stock issued by the Company. The rights and preferences of preferred stock are established by the Company's Board of Directors upon issuance. On March 31, 1995, the Company issued 6,313,479 shares of common stock in exchange for all of the outstanding equity interests of the Combined Entities, including profits interests that were granted to certain individuals as compensation for services in identifying, structuring and negotiating certain acquisitions. Immediately prior to the combination date, the existing investors fixed this profits interest by mutual agreement and exchanged equity interests among investors and these individuals. In connection with this exchange, the Company recorded a compensation expense charge to merger expense of $5.1 million, which approximated the fair value of these interests, and resulted in a capital contribution in the same amount. COMMON STOCK SPLIT. On February 28, 1996, the Company's Board of Directors authorized a 69 for 1 stock split in the form of a common stock dividend payable to stockholders of record on February 29, 1996. All references in the consolidated financial statements to number of common shares outstanding and per share amounts, and all references to common stock issued, stock options and related prices in the notes to the consolidated financial statements have been restated to reflect the split. STOCK OFFERINGS. On April 22, 1996, the Company sold 3,795,000 shares of common stock, $.01 par value per share, in an initial public offering at a price to the public of $14.00 per share. Following this offering, the Company had 10,108,479 shares of common stock issued and outstanding. The public offering provided net cash proceeds to the Company of approximately $48.6 million. Of this amount, $31.1 million was used to repay senior debt, $15.7 million was used to repay the Company's 15% subordinated notes, and $1.8 million was used to pay prepayment penalties related to the early extinguishment of the 15% subordinated notes. As a result of these transactions, the Company recorded a $2.2 million extraordinary F-18
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 11. STOCKHOLDERS' EQUITY (CONTINUED) loss from extinguishment of debt which included $1.8 million in prepayment penalties and $1.3 million for the write-off of deferred financing costs related to the repaid debt, net of a tax benefit of $0.9 million. In addition, on August 7, 1996, the Company sold 625,000 shares of its common stock at a price of $16.00 per share in a private placement to a single investor. Following the private sale, the Company had 10,739,729 shares of common stock issued and outstanding. As is discussed in more detail in Note 19, in January 1997, the Company completed the sale of additional shares of its common stock. STOCK OPTION AND RESTRICTED STOCK PLANS. In connection with the combination, the Company adopted an exchange option and restricted stock plan, whereby the outstanding stock options granted by the Combined Entities were converted into options to acquire 586,523 shares of common stock on substantially the same terms as the prior options. These options are exercisable at prices ranging from $.03 to $6.79 per share, which approximated the fair market value of such shares at the date of original grant. At December 31, 1996, 577,760 of such options were outstanding, of which 480,450 were exercisable at prices ranging from $.03 to $6.79 per share. The options vest ratably in five annual increments and may be exercised, to the extent vested, over the ten-year period following the award date. Effective March 31, 1995, the Company also adopted the Option and Restricted Stock Plan (the "Plan"), which provides for grants of incentive and nonqualified stock options and awards of restricted stock to directors and key employees of the Company or its subsidiaries of up to 1,069,500 shares, provided that no more than 379,500 shares may be awarded as restricted stock. Under the terms of the Plan, the options vest ratably over a three-year period, except for options granted to outside directors, which vest immediately. The Plan also provides that the exercise price of stock options will not be less than the fair market value on the date of grant, and in the case of an incentive stock option granted to an employee owning more than 10% of the common stock of the Company on the date of grant, not less than 110% of the fair market value. On March 31, 1995, the Company's Board of Directors granted 474,375 options pursuant to the Plan at an exercise price per share of $10.51. In addition, during the remainder of 1995, the Company granted options for an additional 3,450 shares at the same exercise price per share. At December 31, 1995, 477,825 options were outstanding at an exercise price of $10.51 per share, of which 3,450 shares were exercisable. In 1996, the Company granted options to purchase 398,153 shares at exercise prices ranging from $12.32 to $17.50 per share. At December 31, 1996, 873,978 options were outstanding at exercise prices ranging from $10.51 to $17.50 per share, of which 739,035 shares were exercisable. Effective January 1, 1997, the Board of Directors authorized the grant of options for 141,500 shares at an exercise price of $20.25 per share. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans, and accordingly, no compensation has been recognized since stock options granted under these plans were at exercise prices which approximated market value at the grant date. Had compensation expense been determined for current period stock option grants using fair value methods provided for in F-19
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 11. STOCKHOLDERS' EQUITY (CONTINUED) SFAS 123, the Company's pro forma net income (loss) and net earnings (loss) per common share would have been the amounts indicated below: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Compensation cost......................................................................... $ 1,697 $ 765 Net income (loss): As reported............................................................................. $ 25,714 $ (10,038) Pro forma............................................................................... 24,611 (10,543) Net earnings (loss) per share: As reported............................................................................. $ 2.59 $ (1.64) Pro forma............................................................................... 2.48 (1.73) Stock option share data: Stock options granted during period..................................................... 398,153 477,825 Weighted average exercise price......................................................... $ 14.87 $ 10.51 Average option compensation value (a)................................................... 8.86 6.41 ------------------------ (a) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 30% to 35%; expected dividend yield of 0%; expected option term of ten years and risk-free rate of return as of the date of grant which ranged from 5.64% to 7.15% based on the yield of ten-year U.S. treasury securities. WARRANTS. Prior to March 31, 1995, each of the Combined Entities had entered into various warrant agreements with their subordinated and junior subordinated noteholders which granted such holders the right to purchase equity interests in each of the companies. These warrants were exercisable, in whole or in part, at various dates through December 31, 2005. Immediately prior to the combination, all warrant holders exercised their warrants to acquire equity interests in the Combined Entities in consideration for aggregate proceeds of $4.1 million and received shares of the Company's common stock in the combination. 12. PENSION AND PROFIT SHARING PLANS The Company's subsidiaries each sponsor an employees savings and profit sharing plan. Non-union employees who have completed one or more years of service and have met other requirements pursuant to the plans are eligible to participate in the plans. The employees participating in the plans can generally make contributions to the plans of between 6% and 8% of their annual compensation, and each of the subsidiaries can elect to match such contributions. During each of the years ended December 31, 1996, 1995 and 1994, the Company expensed contributions to the plans of approximately $0.8 million. Certain of the Company's recently acquired subsidiaries participate in various multiemployer union pension plans, which are administered jointly by management and union representatives and which sponsor most full-time and certain part-time union employees who are not covered by the Company's other plans. The pension expense for these plans approximated $0.2 million during 1996. The Company F-20
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 12. PENSION AND PROFIT SHARING PLANS (CONTINUED) could, under certain circumstances, be liable for unfunded vested benefits or other expenses of jointly administered union/management plans. At this time, the Company has not established any liabilities because withdrawal from these plans is not probable or reasonably possible. 13. MERGER AND OTHER COSTS MERGER AND OTHER COSTS. During 1995 and 1994, the Company incurred merger and other costs of $10.2 million and $1.7 million, respectively, which consisted of the costs associated with the negotiation of the merger and preparation of related merger documents and agreements, financial consulting costs and other costs related to the combination of $8.8 million and $1.4 million in 1995 and 1994, respectively; and other non-operating costs of $1.4 million and $0.3 million, respectively. During 1995, these other merger costs included a one-time $0.5 million payment to cancel an existing management consulting agreement; a one-time tax cost of $1.5 million to convert the Company's Puerto Rico operating subsidiaries to United States corporations; the write-off of $0.4 million in unamortized organization costs; and $5.1 million to recognize compensation expense related to the issuance of common stock in exchange for a negotiated profits interest (Note 12), which resulted in a capital contribution in the same amount. Other non-operating costs included $0.3 million of bank fees in 1994 related to the funding of bridge loans to repay certain indebtedness, and during 1995, $0.7 million of costs associated with several uncompleted acquisitions and $0.7 million of costs associated with an uncompleted debt offering. During 1996, the Company expensed non-operating costs of $0.6 million in connection with fees and expenses paid to amend its Senior Credit Facility.  EXTRAORDINARY LOSS. During 1996, 1995 and 1994, as a result of the repayment of the outstanding indebtedness, the Company expensed approximately $2.2 million (net of income tax benefit of $0.9 million), $8.5 million (net of income tax benefit of $0.7 million) and $0.2 million, respectively, of debt issuance, legal and other costs associated with extinguishment of prior credit facilities. These amounts have been classified as an extraordinary loss in accordance with the provisions of Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses From the Extinguishment of Debt." F-21
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 14. SUPPLEMENTAL CASH FLOW INFORMATION [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Cash paid for interest........................................................... $ 16,932 $ 17,226 $ 16,929 Cash paid for taxes.............................................................. 4,662 1,432 362 Noncash transactions: Issuance of subsidiary preferred stock in connection with acquisitions......... 3,000 Issuance of subordinated notes and amounts payable to the seller in connection with acquisitions............................................................ 173 91 4,495 Dividends payable or paid in additional preferred stock on subsidiary stock...... 197 Distribution of investment and related debt in a bread bag manufacturer to shareholders of Reddy Ice.................................................... 1,534 Acquisition of minority interest common stock and exercise of warrants 993 Compensation expense recorded as a capital contribution........................ 5,111 Subordinated notes issued in lieu of interest.................................... 236 671 430 15. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are parties, in the ordinary course of business, to certain claims and litigation. In management's opinion, the settlement of such matters is not expected to have a material impact on the consolidated financial statements. In addition, the Company is a party to employment agreements with certain officers which provided for minimum compensation levels and incentive bonuses along with provisions for termination of benefits in certain circumstances. The Company also entered into a consulting and noncompetition arrangement with a former officer providing for monthly payments of $12,500 for services to be rendered in the future, which expires in March 1998. 16. RELATED PARTY TRANSACTIONS Prior to March 31, 1995, the Company had consulting agreements with certain stockholders and affiliates requiring the payment of monthly consulting fees, plus expenses, in consideration for financial advisory and oversight services provided to it by such stockholders. These consulting agreements, which were cancelable only at the option of such stockholders over their term, were canceled in the combination. During the years ended December 31, 1995 and 1994, the Company expensed $0.2 million and $0.9 million, respectively, plus expenses under the provisions of these agreements, which are included in general and administrative expenses. In addition, the Company paid an affiliate of one of its stockholders investment banking fees of $1.1 million, along with related expenses, during the year ended December 31, 1994, for acquisition and financing services, which were included as part of the costs and expenses of the acquisition. F-22
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 17. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS Information about the Company's operations in the Dairy and Ice businesses and in different geographic areas for the three years ended December 31, 1996, is as follows: [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) Net sales to unaffiliated customers: Dairy: United States........................................ $ 252,826 $ 175,553 $ 102,073 Puerto Rico.......................................... 215,306 204,406 191,334 ---------- ---------- ---------- 468,132 379,959 293,407 Ice--United States..................................... 52,784 50,507 47,701 ---------- ---------- ---------- Total.................................................. $ 520,916 $ 430,466 $ 341,108 ---------- ---------- ---------- ---------- ---------- ---------- Operating income: Dairy: United States........................................ $ 11,339 $ 9,125 $ 4,848 Puerto Rico.......................................... 16,430 14,160 12,274 ---------- ---------- ---------- 27,769 23,285 17,122 Ice--United States..................................... 11,022 10,116 8,638 Corporate.............................................. (3,669) (2,837) ---------- ---------- ---------- Total.................................................. $ 35,122 $ 30,564 $ 25,760 ---------- ---------- ---------- ---------- ---------- ---------- Identifiable assets (at end of period): Dairy: United States........................................ $ 167,179 $ 68,852 $ 68,781 Puerto Rico.......................................... 152,198 119,977 125,207 ---------- ---------- ---------- 319,377 188,829 193,988 Ice--United States..................................... 47,096 40,519 44,964 Corporate.............................................. 17,675 3,174 ---------- ---------- ---------- Total.................................................. $ 384,148 $ 232,522 $ 238,952 ---------- ---------- ---------- ---------- ---------- ---------- Capital expenditures: Dairy.................................................. $ 10,229 $ 6,676 $ 3,364 Ice.................................................... 3,715 3,573 1,420 Corporate.............................................. 78 143 ---------- ---------- ---------- Total.................................................. $ 14,022 $ 10,392 $ 4,784 ---------- ---------- ---------- ---------- ---------- ---------- Depreciation expense: Dairy.................................................. $ 6,786 $ 5,995 $ 4,943 Ice.................................................... 3,115 3,263 3,301 Corporate.............................................. 29 ---------- ---------- ---------- Total.................................................. $ 9,930 $ 9,258 $ 8,244 ---------- ---------- ---------- ---------- ---------- ---------- F-23
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 18. FAIR VALUE OF FINANCIAL INSTRUMENTS Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," the Company is required to disclose an estimate of the fair value of the Company's financial instruments as of December 31, 1996 and 1995. Differences between the historical presentation and estimated fair values can occur for many reasons, including taxes, commissions, prepayment penalties, make-whole provisions and other restrictions as well as the inherent limitations in any estimation technique. Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on the Company's revolving credit and term loan facilities and certain other debt are variable, their fair values approximate their carrying values. Certain of the Company's long-term debt bears fixed interest rates and is privately placed with unique terms and no active market. The fair value of such long-term debt was determined by discounting future cash flows at current market yields. In addition, the Company has entered into various interest rate agreements to reduce the Company's sensitivity to changes in interest rates on its variable rate debt. The fair values of these instruments were determined based on current values for similar instruments with similar terms. The following is a summary of the asset (liability) values for both the carrying values and fair values of such instruments: [Enlarge/Download Table] DECEMBER 31, ---------------------------------------------- 1996 1995 ---------------------- ---------------------- HISTORICAL HISTORICAL CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) Fixed rate debt............................... $ (36,696) $ (34,036) $ (52,472) $ (53,621) Interest rate agreements...................... (143) (1,220) 19. SUBSEQUENT EVENTS On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01 par value per share, in a public offering at a price to the public of $22.00 per share. Following this offering, the Company had 15,011,729 shares of common stock issued and outstanding. The public offering provided net cash proceeds to the Company of approximately $89.0 million. Of this amount, $36 million was used to repay subordinated notes and $4.3 million was used to pay prepayment penalties related to the early extinguishment of the subordinated notes, which, along with the remaining balance of unamortized deferred loan costs, will be reported as an extraordinary loss from the early extinguishment of debt in 1997. The remainder of the net proceeds were used to repay a portion of the outstanding balance of the acquisition facility of the Company's Senior Credit Facility. As discussed in Note 11, on April 22, 1996, and August 7, 1996, the Company sold 3,795,000 shares and 625,000 shares, respectively, of its common stock, which provided net cash proceeds to the Company of approximately $58.4 million, which was used to repay existing debt. In addition, as discussed above, on January 28, 1997, the Company sold an additional 4,270,000 shares of its common stock, which provided net cash proceeds to the Company of approximately $89.0 million, which was used to repay debt. Had these sales of common stock occurred on January 1, 1996, the supplemental pro forma net earnings per F-24
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 19. SUBSEQUENT EVENTS (CONTINUED) share before extraordinary losses from the early extinguishment of debt for the year ended December 31, 1996, would have decreased by $.47 to $2.34. 20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 1996 and 1995 (dollars in thousands, except per share data): [Enlarge/Download Table] QUARTER ---------------------------------------------------------- 1996 FIRST SECOND THIRD FOURTH FULL YEAR ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------- Net sales............................................ $ 109,035 $ 116,272 $ 139,304 $ 156,305 $ 520,916 Gross profit......................................... 26,420 32,970 38,090 34,888 132,368 Income before extraordinary loss..................... 383 4,553 18,937 4,056 27,929 Net income........................................... 383 2,338 18,937 4,056 25,714 Earnings per common share: Income before extraordinary loss................... 0.06 0.46 1.68 0.35 2.81 Net income......................................... 0.06 0.24 1.68 0.35 2.59 [Enlarge/Download Table] 1995 FIRST SECOND THIRD FOURTH FULL YEAR ----------------------------------------------------- ---------- ---------- ---------- ---------- ---------- Net sales............................................ $ 104,876 $ 110,029 $ 110,549 $ 105,012 $ 430,466 Gross profit......................................... 26,207 31,046 33,439 27,141 117,833 Income (loss) before extraordinary loss.............. (9,889) 2,332 4,711 1,270 (1,576) Net income (loss).................................... (18,351) 2,332 4,711 1,270 (10,038) Earnings per common share: Income (loss) before extraordinary loss............ (1.80) 0.37 0.75 0.20 (0.26) Net income (loss).................................. (3.34) 0.37 0.75 0.20 (1.64) Earnings per common share calculations for each of the quarters were based on the weighted average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year earnings per common share amount. The results for the first quarter of 1995 included $8.8 million of merger costs related to the combination along with $8.5 million of extraordinary losses from the early extinguishment of debt repaid at the combination date. The results for the second quarter of 1996 include $2.2 million of extraordinary losses from the early extinguishment of debt repaid with the proceeds of the Company's initial public offering. The results for the third quarter of 1996 include a gain on the sale of Puerto Rico tax credits of $3.4 million and a tax benefit related to the recognition of the remaining amount of such credits of $11.8 million, partially offset by $0.6 million in financing costs related to the amendment of the Company's Senior Credit Facility. F-25
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] DECEMBER 31, JUNE 30, 1996 1997 ------------ ----------- (UNAUDITED) (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................................... $ 8,951 $ 7,130 Accounts receivable........................................................... 50,608 50,784 Inventories................................................................... 19,228 21,536 Prepaid expenses and other current assets..................................... 2,754 3,369 Refundable income taxes....................................................... 2,312 -- Deferred income taxes......................................................... 3,672 3,796 ------------ ----------- Total current assets........................................................ 87,525 86,615 PROPERTY, PLANT AND EQUIPMENT................................................... 123,260 136,281 DEFERRED INCOME TAXES........................................................... 8,524 8,319 INTANGIBLE AND OTHER ASSETS..................................................... 164,839 171,091 ------------ ----------- TOTAL....................................................................... $384,148 $402,306 ------------ ----------- ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses......................................... $ 46,664 $ 42,118 Income taxes payable.......................................................... 1,105 1,154 Current portion of long-term debt............................................. 12,876 17,323 ------------ ----------- Total current liabilities................................................... 60,645 60,595 LONG-TERM DEBT.................................................................. 226,693 128,150 DEFERRED INCOME TAXES........................................................... 3,278 4,928 COMMITMENTS AND CONTINGENCIES................................................... STOCKHOLDERS' EQUITY: Common stock, par value $.01 per share; 100,000,000 shares authorized, 10,741,729 and 15,286,968 shares issued and outstanding..................... 107 153 Additional paid-in capital.................................................... 89,337 183,263 Retained earnings............................................................. 4,088 25,217 ------------ ----------- Total stockholders' equity.................................................. 93,532 208,633 ------------ ----------- TOTAL....................................................................... $384,148 $402,306 ------------ ----------- ------------ ----------- See notes to condensed consolidated financial statements. F-26
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) [Enlarge/Download Table] THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 1996 1997 1996 1997 ------------ ------------- ------------ ------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) NET SALES................................................ $ 116,272 $ 171,694 $ 225,307 $ 336,819 COST OF SALES............................................ 83,302 125,478 165,917 252,047 ------------ ------------- ------------ ------------- GROSS PROFIT............................................. 32,970 46,216 59,390 84,772 OPERATING COSTS AND EXPENSES: Selling and distribution............................... 17,180 22,102 32,682 42,244 General and administrative............................. 4,884 7,583 9,805 16,397 Amortization of intangibles............................ 1,023 1,510 1,960 2,982 ------------ ------------- ------------ ------------- Total operating costs and expenses................... 23,087 31,195 44,447 61,623 ------------ ------------- ------------ ------------- INCOME FROM OPERATIONS................................. 9,883 15,021 14,943 23,149 OTHER (INCOME) EXPENSE: Interest expense, net.................................. 3,872 2,910 8,488 6,580 Other income, net...................................... (172) (222) (252) (18,575) ------------ ------------- ------------ ------------- Total other (income) expense......................... 3,700 2,688 8,236 (11,995) ------------ ------------- ------------ ------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........ 6,183 12,333 6,707 35,144 INCOME TAXES............................................. 1,630 3,376 1,771 10,745 ------------ ------------- ------------ ------------- INCOME BEFORE EXTRAORDINARY LOSS......................... 4,553 8,957 4,936 24,399 EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT..... (2,215) -- (2,215) (3,270) ------------ ------------- ------------ ------------- NET INCOME............................................... $ 2,338 $ 8,957 $ 2,721 $ 21,129 ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- NET EARNINGS (LOSS) PER SHARE: Income before extraordinary loss....................... $ 0.46 $ 0.55 $ 0.58 $ 1.57 Extraordinary loss..................................... (0.22) -- (0.26) (0.21) ------------ ------------- ------------ ------------- Net income........................................... $ 0.24 $ 0.55 $ 0.32 $ 1.36 ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- WEIGHTED AVERAGE SHARES OUTSTANDING...................... 9,921,715 16,342,250 8,455,332 15,509,388 ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- See notes to condensed consolidated financial statements. F-27
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) [Enlarge/Download Table] SIX MONTHS ENDED JUNE 30, ----------------------- 1996 1997 ---------- ----------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................................................. $ 2,721 $ 21,129 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................................... 4,479 6,512 Amortization of intangible assets, including deferred financing costs............... 2,297 3,401 Loss on the sales of assets......................................................... 20 38 Extraordinary loss from early extinguishment of debt................................ 2,215 3,270 Noncash and imputed interest........................................................ 236 -- Deferred income taxes............................................................... 767 1,731 Changes in operating assets and liabilities: Accounts and notes receivable..................................................... (2,625) 104 Inventories....................................................................... (899) (2,082) Prepaid expenses and other assets................................................. 37 (1,676) Accounts payable and other accrued expenses....................................... (1,959) (4,465) Income taxes payable.............................................................. (511) 5,535 ---------- ----------- Net cash provided by operating activities....................................... 6,778 33,497 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.......................................... (7,984) (9,067) Proceeds from the sale of property, plant and equipment............................. 245 67 Cash outflows for acquisitions...................................................... (4,176) (16,278) ---------- ----------- Net cash used in investing activities............................................. (11,915) (25,278) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt.................................................. 8,653 28,000 Repayment of debt................................................................... (52,322) (122,096) Payment of deferred financing costs and debt prepayment penalties................... (1,800) (4,970) Issuance of common stock, net of expenses........................................... 48,608 89,026 ---------- ----------- Net cash provided by (used in) financing activities................................. 3,139 (10,040) ---------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS................................................... (1,998) (1,821) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 3,177 8,951 ---------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 1,179 $ 7,130 ---------- ----------- ---------- ----------- See notes to condensed consolidated financial statements. F-28
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SUIZA FOODS CORPORATION AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements as of June 30, 1997 and for the three month and six month periods ended June 30, 1997 and 1996 have been prepared by Suiza Foods Corporation (the "Company" or "Suiza Foods") without audit. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of the Company as of June 30, 1997 and for the three month and six month periods ended June 30, 1997 and 1996 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the Company's 1996 financial statements contained in its Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 1997. 2. INVENTORIES [Enlarge/Download Table] AT DECEMBER 31, AT JUNE 30, 1996 1997 --------------- ----------- Pasteurized and raw milk and raw materials...................... $ 7,693 $ 9,795 Parts and supplies.............................................. 5,584 6,067 Finished goods.................................................. 5,951 5,674 ------- ----------- $ 19,228 $ 21,536 ------- ----------- ------- ----------- 3. LONG-TERM DEBT [Enlarge/Download Table] AT DECEMBER 31, AT JUNE 30, 1996 1997 --------------- ----------- Senior credit facility: Revolving loan facility....................................... $ 8,600 $ 2,800 Acquisition loan facility..................................... 69,100 -- Term loan facility............................................ 125,000 142,000 Subordinated notes............................................ 36,000 -- Capital lease obligations and other debt........................ 869 673 --------------- ----------- 239,569 145,473 Less: current portion........................................... (12,876) (17,323) --------------- ----------- $ 226,693 $ 128,150 --------------- ----------- --------------- ----------- On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01 par value per share, in a public offering (the "Offering") at a price to the public of $22.00 per share. The Offering provided net cash proceeds to the Company of approximately $89.0 million. Of this amount, $36.0 million was used to repay subordinated notes and $4.3 million was used to pay prepayment penalties related to the early extinguishment of the subordinated notes, which, along with the related balance of unamortized deferred loan costs and net of related income tax benefits, was reported as an extraordinary loss from the early extinguishment of debt. The remainder of the net proceeds were used to repay a portion of the outstanding balance of the acquisition loan facility of the Company's Senior Credit Facility. F-29
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 3. LONG-TERM DEBT (CONTINUED) On March 5, 1997, the Company amended its Senior Credit Facility. Pursuant to this amendment, the Company's term loans were expanded from a $130.0 million facility into a $150.0 million facility. Quarterly amortization payments beginning March 31, 1997 on this facility are $4.0 million, increasing to: 1) $4.5 million on March 31, 1998; 2) $5.0 million on March 31, 1999; 3) $5.5 million on March 31, 2000; 4) $6.0 million on March 31, 2001; 5) $6.5 million on March 31, 2002, with a final installment of $24.0 million due on March 31, 2003. The Company further amended its Senior Credit Facility to increase the acquisition loan facility from $90.0 million to $100.0 million. The Company is required to pay interest only on amounts drawn under the acquisition loan facility until June 30, 1999, at which time any outstanding balance will convert into a term loan facility with scheduled amortization. On July 31, 1997, the Company amended its Senior Credit Facility to provide for an aggregate of $700.0 million comprised of: (i) a $150.0 million term loan; (ii) a $50.0 million revolving credit facility; (iii) a $325.0 million revolving acquisition facility, and (iv) a $175.0 million acquisition term loan. Under the terms of the Senior Credit Facility, the $150.0 million term loan will be amortized over six years beginning September 30, 1997 and the revolving credit facility expires on September 30, 2003. The availability under the revolving acquisition facility will decrease at the end of each calendar quarter beginning December 31, 2000 by $20.3 million until December 31, 2002, when it begins reducing by $40.6 million each quarter until maturity on September 30, 2003. The $175.0 million acquisition term loan will be amortized over five years beginning December 31, 1999. Amounts outstanding under the Senior Credit Facility will bear interest at a rate per annum equal to one of the following rates, at the Company's option: (i) the sum of a base rate equal to the higher of the Federal Funds rates plus 50 basis points or First Union National Bank's prime commercial lending rate, plus a margin that varies from 0 to 50 basis points depending on the Company's ratio of defined indebtedness to EBITDA (as defined in the Senior Credit Facility); or (ii) The London Interbank Offered Rate ("LIBOR") plus a margin that varies from 75 to 150 basis points depending on the Company's ratio of defined indebtedness to EBITDA. The Company will pay a commitment fee on unused amounts of the revolving facility and the revolving acquisition facility that ranges from 20 to 37.5 basis points, based on the Company's ratio of defined indebtedness to EBITDA. 4. TAXES In December 1995, the Commonwealth of Puerto Rico adopted the Puerto Rico Agricultural Tax Incentives Act of 1995, which reduced the effective income tax rate for qualified agricultural businesses from 39% to 3.9% and provided for a 50% tax credit for certain "eligible investments" in qualified agricultural businesses in Puerto Rico. During 1996, the Company made investments in its Suiza-Puerto Rico dairy, fruit, plastics and coffee operations, all of which were certified as qualified agricultural businesses in Puerto Rico during 1996. During 1996, the Company recognized $15.75 million in tax credits related to qualifying investment made in its Puerto Rico dairy subsidiary which met the eligible investment criteria of this act. However, in 1996 the Company did not recognize any of the potential tax credits related to its investments in its Puerto Rico fruit, plastics and coffee operations since certain rulings in 1996 by Puerto Rico tax authorities created uncertainty as to whether these investments met the eligible investment criteria of the act and whether these additional tax credits had been earned. During the first quarter of 1997, the Company obtained a ruling from the Commonwealth of Puerto Rico confirming that its investments in its Suiza-Puerto Rico fruit and plastics subsidiaries qualified for the F-30
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 4. TAXES (CONTINUED) 50% tax credit. Accordingly, in March 1997, the Company recognized a nonrecurring gain of $18.1 million, net of discounts and related expenses ($11.5 million after income taxes) for earned tax credits which at March 31, 1997, it had agreed to sell to third parties. During the second quarter of 1997, the Company completed the sale of substantially all of these tax credits to the third parties. The Company is currently investigating whether its investment in its coffee business will qualify for additional tax credits based on recent rulings by Puerto Rico tax authorities and is awaiting a ruling from the Treasury Department in Puerto Rico on the availability of such tax credits. If the Company ultimately qualifies for such credits, the Company will account for these tax benefits as an adjustment of the purchase price of the coffee business, which would result in a reduction of goodwill. 5. ACQUISITIONS During the quarter, the Company acquired four small ice businesses for total consideration of approximately $10.7 million. Estimated annual sales of these ice companies are $8.3 million. Since June 30, 1997, the Company has acquired three ice companies for approximately $5.9 million, bringing the total number of acquired ice companies in 1997 to ten, with estimated aggregate annual sales of $15.8 million. On July 1, 1997, the Company completed the acquisition of substantially all the assets of Dairy Fresh L.P., a Delaware limited partnership ("Dairy Fresh"), for approximately $104.5 million in cash (subject to adjustment and excluding transaction costs), plus the assumption of certain current liabilities. Dairy Fresh is a manufacturer of fresh milk and ice cream products based in Winston-Salem, North Carolina. During its fiscal year ended December 31, 1996, Dairy Fresh reported net sales of approximately $117.0 million throughout the southeastern United States. The Company will use the acquired assets to continue operating the business previously operated by Dairy Fresh. The Company financed the acquisition with borrowings under its Senior Credit Facility. On July 31, 1997 the Company completed the purchase of all the outstanding stock of three affiliated dairy manufacturing and distribution companies, as well as an affiliated water bottling and distribution company, and 16 affiliated plastic manufacturing companies headquartered in Franklin, Massachusetts (collectively, the "Garelick Companies"). In connection with this acquisition the Company paid aggregate cash consideration of approximately $293.7 million (subject to adjustment and excluding transaction costs) and issued 446,100 shares of common stock to acquire the outstanding stock and repay existing indebtedness of the Garelick Companies. The combined businesses operated by the Garelick Companies reported net sales of approximately $363 million during the fiscal year ended September 30, 1996. The dairy operations of the Garelick Companies are operated through Garelick Farms in Franklin, Massachusetts, Fairdale Farms in Bennington, Vermont, and Grant's Dairy in Bangor, Maine. The Garelick Companies also operate the Miscoe Springs water bottling company in Mendon, Massachusetts and 16 plastic bottle manufacturing operations located in Connecticut, Florida, Georgia, Illinois, Louisiana, Maine, Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Texas and Virginia. The acquisition of the Garelick Companies expands the geographic presence of the Company's dairy operations into the northeastern United States and expands the Company's operations into the related business of plastic container manufacturing. F-31
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SUIZA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 5. ACQUISITIONS (CONTINUED) In connection with the acquisition of the Garelick Companies, the Company increased the size of its Senior Credit Facility from $300.0 million to $700.0 million in the aggregate (see footnote 3--Long-Term Debt). 6. STOCKHOLDERS' EQUITY On January 28, 1997, the Company sold 4,270,000 shares of common stock, $.01 par value per share, in a public offering at a price to the public of $22.00 per share. On March 12, 1997, the Company issued 133,000 shares of its common stock in partial consideration of the purchase of an ice company. As of June 30, 1997 the Company had 15,286,968 shares of common stock issued and outstanding. F-32
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Morningstar Group Inc.: We have audited the accompanying consolidated balance sheets of The Morningstar Group Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Morningstar Group Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Dallas, Texas, February 10, 1997 F-33
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash............................................................................... $ 4,786 $ 5,811 Receivables, net of allowance for doubtful accounts of $6,676 and $1,595, respectively..................................................................... 57,802 28,043 Inventories........................................................................ 25,400 11,123 Prepaids and other................................................................. 3,015 1,597 Deferred tax assets................................................................ 7,339 3,089 Net assets held for sale........................................................... 676 836 ------------ ------------ Total current assets............................................................. 99,018 50,499  PROPERTY, PLANT AND EQUIPMENT: Land............................................................................... 7,843 5,713 Buildings and improvements......................................................... 29,507 18,804 Machinery and equipment............................................................ 70,239 43,552 ------------ ------------ Gross property, plant and equipment.............................................. 107,589 68,069 Less: Accumulated depreciation..................................................... (22,807) (17,748) ------------ ------------ Net property, plant and equipment................................................ 84,782 50,321  INTANGIBLE AND OTHER ASSETS: Identifiable intangible assets..................................................... 73,146 1,847 Goodwill........................................................................... 96,175 58,671 Deferred financing costs........................................................... 2,731 1,259 Other assets....................................................................... 139 112 ------------ ------------ Total intangible and other assets................................................ 172,191 61,889 ------------ ------------ Total assets..................................................................... $ 355,991 $ 162,709 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................................... $ 32,968 $ 21,488 Accrued liabilities................................................................ 39,923 15,869 Current maturities of long-term debt............................................... 8,000 8,000 ------------ ------------ Total current liabilities........................................................ 80,891 45,357 LONG-TERM DEBT (net of current maturities)........................................... 177,349 36,000 OTHER LONG-TERM LIABILITIES.......................................................... 3,269 1,959 DEFERRED TAX LIABILITIES............................................................. 5,694 2,070 COMMITMENTS AND CONTINGENCIES........................................................ STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized; 15,298,111 shares in 1996 and 15,244,261 shares in 1995 issued........................................ 153 152 Additional paid-in capital......................................................... 73,179 71,991 Treasury stock, at cost (767,000 shares in 1996 and 230,000 shares in 1995)........ (6,140) (1,840) Retained earnings.................................................................. 21,596 7,020 ------------ ------------ Total stockholders' equity....................................................... 88,788 77,323 ------------ ------------ Total liabilities and stockholders' equity....................................... $ 355,991 $ 162,709 ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these consolidated statements. F-34
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS [Enlarge/Download Table] YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 ----------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS) NET SALES....................................................................... $ 394,306 $ 304,730 $ 292,314 COST OF GOODS SOLD.............................................................. 302,801 232,948 222,145 ----------- -------------- -------------- GROSS PROFIT.................................................................... 91,505 71,782 70,169 OPERATING COSTS AND EXPENSES: Distribution.................................................................. 17,056 16,120 18,689 Selling and marketing......................................................... 32,839 22,233 21,295 General and administrative.................................................... 15,450 13,001 11,778 ----------- -------------- -------------- Total operating costs and expenses.......................................... 65,345 51,354 51,762 ----------- -------------- -------------- OPERATING INCOME................................................................ 26,160 20,428 18,407 INTEREST EXPENSE................................................................ 3,647 3,921 4,446 AMORTIZATION OF DEFERRED FINANCING COSTS........................................ 379 381 351 DIVIDEND INCOME................................................................. -- (268) -- OTHER INCOME, NET............................................................... (286) (1,008) (1,244) ----------- -------------- -------------- INCOME BEFORE INCOME TAXES...................................................... 22,420 17,402 14,854 PROVISION FOR INCOME TAXES...................................................... 7,844 6,062 5,533 ----------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS............................................... 14,576 11,340 9,321  DISCONTINUED OPERATIONS: Income from discontinued operations........................................... -- -- 903(a) Gain on disposal.............................................................. -- 184(b) 423(b) ----------- -------------- -------------- INCOME FROM DISCONTINUED OPERATIONS............................................. -- 184 1,326 NET INCOME...................................................................... $ 14,576 $ 11,524 $ 10,647 ----------- -------------- -------------- ----------- -------------- -------------- EARNINGS PER COMMON SHARE: Continuing operations......................................................... $ .96 $ .74 $ .62 Discontinued operations....................................................... -- .02 .09 ----------- -------------- -------------- Earnings per common share..................................................... $ .96 $ .76 $ .71 ----------- -------------- -------------- ----------- -------------- -------------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING................ 15,133,887 15,245,562 15,050,538 ------------------------ (a) Net of applicable tax provision of $507. (b) Net of applicable tax provision of $216 and $2,865. The accompanying notes are an integral part of these consolidated statements. F-35
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [Enlarge/Download Table] COMMON STOCK COMMON AND ADDITIONAL TREASURY RETAINED SHARES PAID-IN STOCK AT EARNINGS ISSUED CAPITAL COST (DEFICIT) TOTAL ------------ -------------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) Balance, December 31, 1993....................... 14,287,212 $ 69,684 $ -- $ (15,151) $ 54,533 Exercise of stock options........................ 633,585 1,622 -- -- 1,622 Net income....................................... -- -- -- 10,647 10,647 ------------ ------- ---------- ---------- --------- Balance, December 31, 1994....................... 14,920,797 71,306 -- (4,504) 66,802 Exercise of stock options........................ 323,464 837 -- -- 837 Purchase of treasury stock....................... -- -- (1,840) -- (1,840) Net income....................................... -- -- -- 11,524 11,524 ------------ ------- ---------- ---------- --------- Balance, December 31, 1995....................... 15,244,261 72,143 (1,840) 7,020 77,323 Exercise of stock options........................ 53,850 381 -- -- 381 Income tax benefits of stock options............. -- 808 -- -- 808 Purchase of treasury stock....................... -- -- (4,300) -- (4,300) Net income....................................... -- -- -- 14,576 14,576 ------------ ------- ---------- ---------- --------- Balance, December 31, 1996....................... 15,298,111 $ 73,332 $ (6,140) $ 21,596 $ 88,788 ------------ ------- ---------- ---------- --------- ------------ ------- ---------- ---------- --------- The accompanying notes are an integral part of these consolidated statements. F-36
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers.............................................. $ 389,101 $ 306,918 $ 284,605 Interest received......................................................... 129 224 134 Income tax refund......................................................... 156 -- -- Cash paid to suppliers and employees...................................... (354,037) (272,992) (259,147) Interest paid............................................................. (2,971) (4,220) (4,395) Income taxes paid......................................................... (4,171) (3,199) (2,663) ---------- ---------- ---------- Net cash provided by Continuing Operations................................ 28,207 26,731 18,534 Net cash used by Discontinued Operations.................................. -- -- (3,403) ---------- ---------- ---------- Net cash provided by operating activities................................. 28,207 26,731 15,131 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries: Working capital........................................................... (3,268) -- -- Property, plant and equipment............................................. (29,926) -- -- Other assets.............................................................. (111,809) -- -- Other long-term (assets) liabilities...................................... (311) -- -- ---------- ---------- ---------- (145,314) -- -- ---------- ---------- ---------- Capital expenditures...................................................... (11,462) (10,705) (7,622) Proceeds from sale of assets.............................................. -- 2 32 Dividends received from Preferred Stock................................... -- 268 -- Other..................................................................... (52) 1,258 682 ---------- ---------- ---------- Net cash used by Continuing Operations.................................... (156,828) (9,177) (6,908)  Discontinued Operations: Sale of Discontinued Operations........................................... -- -- 50,237 Sale of Preferred Stock................................................... -- 3,000 -- Capital and other expenditures............................................ -- -- (482) ---------- ---------- ---------- Net cash provided by Discontinued Operations.............................. -- 3,000 49,755 ---------- ---------- ---------- Net cash provided (used) by investing activities.......................... (156,828) (6,177) 42,847 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................................... 381 837 1,622 Purchase of treasury stock................................................ (4,300) (1,840) -- Proceeds from issuance of long-term debt.................................. 160,000 -- -- Net borrowings (repayments) under revolving credit facility............... 22,349 (1,892) (14,783) Principal payments on long-term debt...................................... (50,834) (14,000) (45,470) Dividends paid............................................................ -- -- (535) ---------- ---------- ---------- Net cash provided (used) by financing activities.......................... 127,596 (16,895) (59,166) NET INCREASE (DECREASE) IN CASH............................................. (1,025) 3,659 (1,188) CASH, BEGINNING OF PERIOD................................................... 5,811 2,152 3,340 ---------- ---------- ---------- CASH, END OF PERIOD......................................................... $ 4,786 $ 5,811 $ 2,152 ---------- ---------- ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these consolidated statements. F-37
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) NET INCOME.................................................................... $ 14,576 $ 11,524 $ 10,647 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATIONS: Discontinued Operations net income........................................ -- (184) (1,326) Depreciation.............................................................. 6,378 5,122 4,344 Amortization of intangibles............................................... 3,291 2,700 2,632 (Gain) loss on fixed asset retirements.................................... -- -- (243) Increase in deferred tax assets........................................... (4,250) 3,635 4,222 Change in assets and liabilities net of effects from acquisitions and divestitures of subsidiaries: Accounts receivable....................................................... (5,205) 2,426 (3,707) Inventories............................................................... (1,243) (583) 987 Prepaids and other........................................................ 1,493 151 3,569 Accounts payable.......................................................... 1,747 4,225 (655) Accrued liabilities....................................................... 8,011 (4,076) (1,986) Other long-term liabilities............................................... 3,409 1,791 50 ---------- ---------- ---------- Total adjustments......................................................... 13,631 15,207 7,887 ---------- ---------- ---------- Net cash provided by Continuing Operations................................ 28,207 26,731 18,534 Discontinued Operations: Discontinued Operations net income........................................ -- 184 1,326 Gain on disposal.......................................................... -- (184) (423) Change in working capital................................................. -- -- (4,914) Depreciation and amortization............................................. -- -- 608 ---------- ---------- ---------- Net cash used by Discontinued Operations.................................. -- -- (3,403) ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... $ 28,207 $ 26,731 $ 15,131 ---------- ---------- ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these consolidated statements. F-38
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. ORGANIZATION AND BUSINESS BACKGROUND The Morningstar Group Inc., a Delaware corporation (together with its subsidiaries, the "Company" or "Morningstar") was formed in March 1991. On April 1, 1988, the Company's predecessor, MorningStar Foods Inc., acquired substantially all of the net assets and operations of the Dairy Group of The Southland Corporation. BUSINESS The Company's Continuing Operations include its specialty operations which manufacture and market shelf stable, refrigerated and frozen food products including nationally branded products, other specialty, dairy-based cultured and ultra-pasteurized products and non-dairy based food products. Discontinued Operations include all previously divested regional dairy operations and other divested operations. 2. PRESTO FOOD PRODUCTS, INC. ACQUISITION On December 3, 1996, the Company acquired all of the issued and outstanding shares of capital stock of Presto Food Products, Inc. ("Presto"), a California corporation, from the shareholders of Presto pursuant to a stock purchase agreement dated as of October 20, 1996, by and among the Company, Presto and the Presto shareholders. Presto's sales for the year ended December 31, 1995, were approximately $139.5 million. Presto is a national manufacturer, marketer and distributor of non-dairy and dairy products, such as Mocha Mix non-dairy coffee creamers, Jon Donaire desserts and ice cream cakes, aerosols, bakery toppings and icings, frozen pre-whipped toppings and creamers, serving customers throughout the United States since 1937. The Company paid approximately $123.5 million in cash for the stock acquired and assumed approximately $37.4 million in related liabilities. The allocation of the purchase price was based on preliminary estimates of fair value. The final allocation may be revised if the appraised values are significantly different from the preliminary estimates. Included in the assumed liabilities is approximately $3.2 million related to costs associated with the involuntary termination and/or relocation of certain employees of the acquired company. The terminated employees represent redundant and excess personnel in the operations, marketing, selling, and general and administrative areas. This termination plan will likely be completed by the second quarter of 1997. In conjunction with the consummation of the Presto acquisition, the Company renegotiated its credit agreement. Funds provided by the renegotiated Senior Credit Agreement ("Senior Credit Agreement") were utilized to pay off existing senior debt of approximately $44.8 million, to acquire the capital stock of Presto for $123.5 million and to pay approximately $2.1 million in fees and expenses associated with the Presto acquisition. The Company accounted for the acquisition as a purchase and accordingly, Presto's results are included in the 1996 Consolidated Statement of Operations for the period December 3, 1996, through December 31, 1996. F-39
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 2. PRESTO FOOD PRODUCTS, INC. ACQUISITION (CONTINUED) Unaudited pro forma operating results of the Company, assuming the acquisition had been made as of January 1, 1995, follow. Such information includes adjustments to reflect additional goodwill and intangible amortization, a reduction in redundant and excess personnel related costs, additional interest expense, additional amortization of deferred financing costs and additional income tax expense. [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Pro forma net sales................................................... $ 528,056 $ 444,202 ---------- ---------- ---------- ---------- Pro forma net income from Continuing Operations....................... $ 18,325 $ 13,799 ---------- ---------- ---------- ---------- Pro forma net income.................................................. $ 18,325 $ 13,983 ---------- ---------- ---------- ---------- Pro forma earnings per share from Continuing Operations............... $ 1.21 $ 0.91 ---------- ---------- ---------- ---------- Pro forma earnings per share.......................................... $ 1.21 $ 0.92 ---------- ---------- ---------- ---------- 3. OTHER ACQUISITIONS WACKY WILLIE ACQUISITION On October 1, 1996, the Company completed the acquisition of the rights to the Wacky Willie and Killer Shake trademarks for $300,000 in cash from Killer Productions Company. There were no liabilities associated with the acquisition, nor were there any other assets included in the transaction. The Company may at its sole option, before August 1999, pay an additional $700,000 to Killer Productions representing the final portion of the purchase price. In addition, in the event net sales reach $5.0 million in any consecutive twelve-month period ending on or before August 1999, the Company will be required to pay the additional $700,000 representing the final portion of the purchase price. The funding for this purchase was provided by the Company's operations. Sales of Killer Shake are included in the 1996 Consolidated Statement of Operations for the period January 1, 1996, through December 31, 1996. The Company manufactured and sold this product under a license arrangement for the period January 1, 1996, through September 30, 1996. CREAM PRODUCTS ACQUISITION On August 1, 1996, the Company completed the purchase of substantially all of the assets of Cream Products Company ("Cream Products"), located in Chicago, Illinois. Cream Products' sales for the year ended December 31, 1995, were approximately $24.6 million. Cream Products is a manufacturer and distributor of dairy and non-dairy products primarily supplying food makers and food service customers throughout the United States since 1938. The Company paid approximately $5.9 million in cash for the assets acquired, and assumed approximately $2.3 million in related liabilities. Funds for this acquisition were provided by the Company's operations in conjunction with its revolving credit facility. The Company F-40
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 3. OTHER ACQUISITIONS (CONTINUED) accounted for the acquisition as a purchase and accordingly, Cream Products' results are included in the 1996 Consolidated Statement of Operations for the period August 1, 1996, through December 31, 1996. LA CORONA ACQUISITION On May 28, 1996, the Company completed the purchase of substantially all of the assets of La Corona Foods, Inc. ("La Corona"), located in Glendale, Arizona. La Corona's sales for the fiscal year ended September 30, 1995, were approximately $6.9 million. The Company paid approximately $3.4 million in cash for the assets purchased, and assumed approximately $2.5 million in related liabilities. The funding for this acquisition was provided by the Company's operations. The Company accounted for the acquisition as a purchase and accordingly, La Corona's results are included in the 1996 Consolidated Statement of Operations for the period May 29, 1996, through December 31, 1996. MERKTS CHEESE ACQUISITION On March 19, 1996, the Company completed the acquisition of substantially all of the assets of Merkts Cheese Company ("Merkts"), located in Bristol, Wisconsin. Merkts recorded approximately $10.3 million in sales for the fiscal year ending June 30, 1995. The Company paid approximately $3.6 million in cash for the assets purchased, and assumed approximately $0.4 million in liabilities. The funding for this acquisition was provided by the Company's operations. The Company accounted for the acquisition as a purchase and accordingly, Merkts' results are included in the 1996 Consolidated Statement of Operations for the period March 20, 1996, through December 31, 1996. 4. DISCONTINUED OPERATIONS The Company has made significant divestitures since its inception and as a result, the size and scope of the Company's operations have changed significantly. In 1991, the Company divested a novelty/ice cream operation in Texas and closed a novelty/ice cream operation in Missouri. In 1992, the Company divested a regional dairy operation and a novelty/ice cream operation, both located in Maryland. On April 13, 1994, the Company completed the divestiture of its Florida-based fluid milk operation Velda Farms Inc. ("Velda") for $51.0 million, consisting of $48.0 million in cash after working capital adjustments and $3.0 million of 9% Series A Preferred Stock (the "Preferred Stock"). The Company deferred the gain on the Preferred Stock pending realization of the gain. The majority of the cash proceeds were used to pay down external bank debt and to fund federal and state taxes generated by the gain on the sale. The sale of Velda concluded the divestiture of the Company's regional dairies which were considered a major and distinct segment of its business. As such, the operations of the regional dairies and other divested operations have been restated and presented in the consolidated financial statements to conform with discontinued operations treatment ("Discontinued Operations"). On March 31, 1995, the Preferred Stock was redeemed by its issuer at face value plus accrued dividends. The $3.0 million gain on the stock, less applicable taxes and other reserves of $2.3 million, was reflected in Discontinued Operations in the Consolidated Statements of Operations during the first quarter of 1995. The Company also recognized $268,000 in dividends, related to the Preferred Stock, during the first quarter of 1995 which was recorded in Continuing Operations. The Company recorded an additional loss from Discontinued Operations of approximately $0.5 million, net of tax benefits, during the second quarter of 1995, related to Discontinued Operations reserves and other liabilities. F-41
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 4. DISCONTINUED OPERATIONS (CONTINUED) Net sales of the Discontinued Operations were $38.6 million in 1994. Interest expense of $0.4 million was allocated to Discontinued Operations during 1994. The allocation method was based upon the ratio of net assets of Discontinued Operations to the sum of consolidated net assets plus consolidated debt, less debt specifically allocated to certain of the Company's subsidiaries. 5. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intracompany transactions and balances have been eliminated. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company sells its products to supermarkets, convenience stores, dairies, food service and institutional organizations, club stores and private label suppliers located in all 50 states and over 20 foreign countries, with a concentration of customers located in California. The Company performs ongoing credit evaluations of its customers' financial condition. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other relevant information.  CASH AND CASH EQUIVALENTS The Company considers overnight investments to be cash.  INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories are summarized as follows (in thousands): [Enlarge/Download Table] AT DECEMBER 31, -------------------- 1996 1995 --------- --------- Raw materials and supplies.............................................. $ 11,767 $ 5,975 Finished goods.......................................................... 13,633 5,148 --------- --------- Total................................................................. $ 25,400 $ 11,123 --------- --------- --------- --------- Finished goods inventories include the costs of materials, labor and plant overhead. F-42
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: [Enlarge/Download Table] USEFUL LIFE ASSET CATEGORY (YEARS) --------------------------------------------------------------------------- ----------------- Machinery and equipment.................................................... 3 - 10 Buildings and improvements................................................. 25 Property sold or retired is eliminated from the accounts in the year of disposition. Major expenditures for renewals and betterments are capitalized while maintenance and repairs are charged against income.  IDENTIFIABLE INTANGIBLE ASSETS Identifiable intangible assets related to the acquisition of Favorite were added in 1993, and are being amortized over their estimated useful lives which is generally five years. Identifiable intangible assets of approximately $72.3 million were recorded in connection with the acquisitions consummated in 1996. These assets are being amortized on a straight-line basis over a range of 5-40 years. Amortization costs totaled $1.0 million in 1996, $0.7 million in 1995, and $0.7 million in 1994. Accumulated amortization was $2.8 million and $1.8 million at December 31, 1996 and 1995, respectively.  GOODWILL Goodwill is amortized on a straight-line basis over a range of 25-40 years and is recorded at cost less accumulated amortization. Goodwill of approximately $39.4 million was recorded in connection with the acquisitions consummated in 1996. Amortization costs totaled $1.9 million in 1996, $1.7 million in 1995, and $1.7 million in 1994. Accumulated amortization was $10.4 million and $8.5 million at December 31, 1996 and 1995, respectively.  DEFERRED FINANCING COSTS Costs incurred that relate to the issuance of indebtedness and the corresponding accumulated amortization are included in deferred financing costs in the accompanying consolidated balance sheets. Deferred financing costs related to existing debt are amortized over the life of the related debt. In conjunction with renegotiating its Senior Credit Agreement in December 1996, the Company incurred deferred financing costs of approximately $2.7 million. Accumulated amortization was $87,000 and $1.5 million at December 31, 1996 and 1995, respectively. ACCOUNTING FOR LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued "SFAS" No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." This statement is effective for financial statements beginning after December 15, 1995. The Company elected to adopt the statement effective December 31, 1995. The adoption of SFAS No. 121 had no material effect on the Company's financial statements. F-43
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company continually evaluates whether events and circumstances indicate that the remaining carrying amount of an asset may not be recoverable or the remaining useful life may warrant revision. To make this evaluation, the Company uses its estimate of undiscounted future cash flows (without interest charges) over the remaining life of the asset.  ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands): [Enlarge/Download Table] AT DECEMBER 31, -------------------- 1996 1995 --------- --------- Accrued interest........................................................ $ 1,140 $ 407 Payroll and benefits (accrued wages, vacation and profit sharing)....... 8,315 4,080 Restructuring accruals.................................................. 60 230 Insurance accruals...................................................... 5,527 5,195 Income and property taxes............................................... 5,791 1,491 Marketing and advertising............................................... 6,863 2,017 Acquisition related accruals............................................ 6,290 -- Other accrued liabilities............................................... 5,937 2,449 --------- --------- Total................................................................. $ 39,923 $ 15,869 --------- --------- --------- --------- FAIR VALUE OF FINANCIAL INSTRUMENTS The financial position of the Company at December 31, 1996 and 1995, includes certain financial instruments which may have a fair value that is different from that which is currently reflected in the financial statements. However, any variation in value is insignificant. USE OF ESTIMATES The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue upon shipment to customers. DERIVATIVE FINANCIAL INSTRUMENTS The Company has not entered into any derivatives or other speculative financial instruments as of December 31, 1996. F-44
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Deferred income taxes reflect the tax effect of temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes and are measured by applying currently enacted tax laws. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. OTHER INCOME Other income primarily consists of royalty revenue.  EARNINGS PER COMMON SHARE The earnings per common share is computed based on the fully diluted weighted average number of shares of the Company's common stock and common stock equivalents outstanding during the period. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options. FINANCIAL STATEMENT PRESENTATION Certain prior year balances have been reclassified to conform to the current year presentation. F-45
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. INCOME TAXES The components of the provision for income taxes from Continuing Operations are as follows (in thousands): [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Current.......................................................... $ 6,271 $ 1,879 $ 272 Deferred......................................................... (340) 3,448 4,163 State............................................................ 1,913 735 1,098 --------- --------- --------- Provision for income taxes....................................... $ 7,844 $ 6,062 $ 5,533 --------- --------- --------- --------- --------- --------- Temporary differences and carryforwards which give rise to a significant portion of net deferred income tax assets are as follows (in thousands): [Enlarge/Download Table] YEAR ENDED DECEMBER 31, -------------------- 1996 1995 --------- --------- Deferred tax assets: Net operating loss carryforward.................... $ -- $ 385 Accrued vacation....................................................... 588 504 Accrued workers' compensation.......................................... 1,671 1,397 Acquisition reserves................................................... 2,394 -- Other insurance reserves............................................... 666 657 Restructuring reserves................................................. 350 396 Other accrued expenses and reserves.................................... 2,182 1,454 Other deferred tax assets.............................................. 600 2,340 --------- --------- Total deferred tax assets............................................ 8,451 7,133 Deferred tax liabilities: Accelerated depreciation and amortization...... 6,759 2,901 Other deferred tax liabilities......................................... 47 140 --------- --------- Total deferred tax liabilities....................................... 6,806 3,041 Valuation allowance...................................................... -- (3,073) --------- --------- Net deferred tax assets................................................ 1,645 1,019 Noncurrent deferred tax liabilities.................................... (5,694) (2,070) --------- --------- Current deferred tax assets............................................ $ 7,339 $ 3,089 --------- --------- --------- --------- The Company reduced goodwill by approximately $21,000, $5.6 million and $4.2 million for the years ended December 31, 1996, 1995 and 1994, respectively, representing realization of deferred tax assets created prior to the Company's financial restructuring transaction. F-46
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. INCOME TAXES (CONTINUED) The provision for income taxes was different from the amount computed using the statutory income tax rate for the reasons set forth in the following table (in thousands): [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Provision computed at statutory rate.......................... $ 7,846 $ 5,917 $ 5,050 State income taxes............................................ 1,243 1,025 905 Tax on non-deductible goodwill amortization................... 486 473 516 Utilization of previously unrecognized deferred tax assets.... (2,265) (1,405) (1,107) Other......................................................... 534 52 169 --------- --------- --------- Provision for income taxes.................................... $ 7,844 $ 6,062 $ 5,533 --------- --------- --------- --------- --------- --------- 7. LONG-TERM DEBT The Company's long-term debt consists of the following (in thousands): [Enlarge/Download Table] AT DECEMBER 31, --------------------- 1996 1995 ---------- --------- Senior term loan....................................................... $ 160,000 $ 41,000 Revolving credit facility.............................................. 22,349 -- Industrial development revenue bonds................................... 3,000 3,000 ---------- --------- Total long-term debt................................................. 185,349 44,000 Less: Current maturities............................................. (8,000) (8,000) ---------- --------- Long-term debt, net of current maturities............................ $ 177,349 $ 36,000 ---------- --------- ---------- --------- Maturities of long-term debt at December 31, 1996, are as follows (in thousands): [Enlarge/Download Table] 1997.............................................................................. $ 8,000 1998.............................................................................. 15,000 1999.............................................................................. 20,000 2000.............................................................................. 30,000 2001.............................................................................. 35,000 Thereafter........................................................................ 77,349 ---------- Total maturities................................................................ $ 185,349 ---------- ---------- SENIOR TERM LOAN AND REVOLVING CREDIT FACILITY On December 2, 1996, in conjunction with the Presto acquisition, the Company renegotiated a $220.0 million credit agreement ("Senior Credit Agreement"). Funding provided by the Senior Credit Agreement was utilized to acquire the capital stock of Presto for approximately $123.5 million, to pay off F-47
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7. LONG-TERM DEBT (CONTINUED) the existing senior debt of approximately $44.8 million and to pay $2.1 million in fees and expenses associated with the Presto acquisition. The base interest rate on the Term Loan and the Revolver is the prime rate plus an applicable margin spread. Both facilities have alternative rate options based upon applicable margin spreads above the London Interbank Offered Rate ("LIBOR"). At December 31, 1996, $160.0 million in borrowings under the Term Loan were outstanding at an interest rate of 6.95% and $22.4 million in borrowings were outstanding under the Revolver at an interest rate of 6.99%. Borrowings under these lending facilities are secured by virtually all of the assets of the Company. Up to $15.0 million in letters of credit may be issued under the Revolver, of which $8.8 million was issued and outstanding at December 31, 1996. As of December 31, 1996, approximately $28.8 million was additionally available to the Company under the $60.0 million Revolver. A fee of 1.5% per year is charged on outstanding letters of credit. A 0.42% per year commitment fee on uncommitted funds is payable quarterly. The Revolver matures on December 1, 2002, coincident with the scheduled maturity of the Term Loan. The Senior Credit Agreement contains numerous covenants pertaining to management and operations of the Company including, among other restrictions, limitations on the amount of annual capital expenditures as well as specification of certain maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth. The Senior Credit Agreement also requires mandatory prepayment of the loans under certain conditions such as the sale of assets, excess cash flow, the issuance of new debt or equity and the receipt of certain other cash proceeds. During April 1994, the Company completed the sale of Velda for approximately $51.0 million, consisting of $48.0 million in cash after working capital adjustments and $3.0 million in 9% Series A Preferred Stock. In conjunction with the sale, the Company paid down approximately $36.7 million of its then existing senior term loan and $11.8 million of its then existing revolver. The Company was in compliance with all financial covenants as of December 31, 1996.  INDUSTRIAL DEVELOPMENT REVENUE BONDS The industrial development revenue bonds were issued on December 14, 1988, to fund the construction of a waste water treatment facility at the Company's Frederick, Maryland, processing plant. The bonds mature on December 1, 2003, and bear interest that fluctuates weekly based upon market factors. The interest rate in effect for these bonds on December 31, 1996, was 4.30%. 8. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS The Company has adopted a defined contribution profit sharing plan for the purpose of providing retirement benefits for eligible non-union employees. At December 31, 1996, eligible employees totaled 363, of which 214 were participants in the plan. Contributions are made by the Company and by plan participants. Company contributions are allocated to the participants on the basis of individual contributions, the age of the participant and the number of years that the participant has been in the plan. During 1996 the Company also contributed to two single-employer and five multi-employer pension/retirement F-48
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8. EMPLOYEE BENEFIT PLANS (CONTINUED) plans under the terms of various union contracts, which covered 778 of its 1,403 employees at December 31, 1996. The number of union pension plans and the portion of employees covered has varied from year to year. Contributions to these pension plans are as follows (in thousands): [Enlarge/Download Table] YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Defined contribution profit sharing plan......................... $ 416 $ 250 $ 230 Union pension plans.............................................. 1,445 1,182 1,122 POST-RETIREMENT BENEFIT PLANS In December 1990, the Financial Accounting Standards Board issued its standard on accounting for post retirement benefits other than pensions. This standard requires that the expected cost of these benefits must be charged to expense during the years that the employees render service. The cost of providing these benefits has been primarily paid by non-union retirees and the Company's calculation of its obligation is not material as of December 31, 1996. The Company's union employees participate in various defined contribution union plans that provide health care and other welfare benefits during their employment and after retirement. Amounts charged to expense and contributed to these health and welfare plans totaled approximately $2.0 million in 1996, $2.0 million in 1995, and $2.6 million in 1994. Having made these payments, no remaining obligations exist for these years under the union plans. 9. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain plant facilities and related equipment and vehicles under operating lease arrangements. Lease expense pursuant to such arrangements was approximately $4.3 million in 1996, $3.2 million in 1995, and $3.0 million in 1994. The following is a summary of future minimum annual lease payments under noncancelable operating lease obligations as of December 31, 1996 (in thousands): [Enlarge/Download Table] YEAR ENDING DECEMBER 31, ------------------------ 1997................................................................ $ 3,893 1998................................................................ 3,469 1999................................................................ 2,557 2000................................................................ 1,965 2001................................................................ 693 Thereafter.......................................................... 1,383 ------- Total............................................................. $ 13,960 ------- ------- F-49
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) EMPLOYMENT AGREEMENTS As of December 31, 1996, the Company had entered into employment agreements with certain key management personnel which provide for annual compensation and benefits and also provide for certain severance payments to be made to such individuals in the event of a change in control (as defined) of the Company or the involuntary termination of such individuals for reasons other than cause (as defined). As of December 31, 1996, the maximum amount payable under these employment agreements was approximately $4.6 million in the aggregate. LITIGATION From time to time the Company is subject to litigation in the ordinary course of its business. In connection with the divestitures of certain of the Company's operations, the Company assumed certain obligations of indemnification, none of which is believed to be material to the Company. The Company maintains insurance in respect of certain losses that may result from its current or future operations. The Company believes that the outcome of any existing litigation, after considering the indemnities and insurance related to such litigation, would not have a material impact on its business, financial condition or results of operations. 10. RELATED PARTY TRANSACTIONS  HICKS MUSE The Company had previously entered into a financial advisory agreement dated March 1, 1991, as amended, pursuant to which Hicks Muse provided financial advisory services to the Company. Effective September 30, 1995, this agreement was terminated. As compensation for such services, the Company paid Hicks Muse an advisory fee, together with all reasonable expenses incurred in connection therewith. The Company paid advisory fees of $150,000 and $114,000 in 1995 and 1994, respectively, and reimbursed Hicks Muse approximately $28,000 and $37,000 for expenses for each year, respectively. Hicks Muse was also paid a fee of $300,000 relating to the sale of Velda. 11. EQUITY EMPLOYEE AND DIRECTOR STOCK OPTIONS The Company has several stock-based compensation plans, which are described below. The Company applies Accounting Principles Board ("APB") Opinion 25 and related Interpretations in accounting for its stock-based compensation plans. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of its stock-based compensation plans. Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has decided not to elect these provisions. However, pro forma disclosures as if the Company had adopted these cost recognition provisions in 1995 are required for fiscal years beginning after December 15, 1995. The Company has elected to provide these disclosures for its fiscal year which began on January 1, 1996. F-50
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 11. EQUITY (CONTINUED) 1991 STOCK OPTION PLAN In March 1991, the Company established the 1991 Incentive and Nonstatutory Stock Option Plan which provides for the issuance of options to purchase 999,999 shares of common stock to key employees of the Company. At December 31, 1996, 769,941 tenure options and 228,258 incentive options had been granted to employees. Upon completion of the common stock offering in 1992, the incentive options became vested, resulting in compensation expense of $1.1 million. The exercise price for all options granted was $2.56 per share, which was the fair market value of the options at the date of issuance. The options expire ten years after the date of their issuance. 1992 STOCK OPTION PLAN In July 1992, the Company established the 1992 Incentive and Nonstatutory Stock Option Plan which provides for the issuance of options to purchase 181,818 shares of common stock to key employees of the Company. At December 31, 1996, 175,000 options had been granted to employees. The exercise price for 25,000 of the options granted in 1992 is $9.00 per share, which was the fair market value of the options at the date of issuance. The exercise price for 120,000 of the options granted in 1994 is $7.00 per share, which was the fair market value of the options at the date of issuance. The exercise price for 30,000 of the options granted in 1995 is $6.75 per share, which was the fair market value of the options at the date of issuance. The options granted in 1992 become exercisable over a three-year period and expire ten years after the date of their issuance. One-third of the options granted in 1994 became exercisable on the date of issuance, while the remaining options vest in equal amounts over two years. The options granted in 1995 vest ratably over a three-year period. The options granted in 1994 and 1995 expire ten years after the date of their issuance. Under this plan, 14,000 options had been exercised as of December 31, 1996. 1992 DIRECTOR STOCK OPTION PLAN In April 1992, the Company established the 1992 Director Stock Option Plan which provides for the issuance of options to purchase 39,062 shares of common stock to non-employee directors of the Company. At December 31, 1996, 39,062 options had been granted to non-employee directors. The exercise price for these options is $2.56 per share, which was the fair market value of the options at the date of issuance. The options become exercisable over a three-year period and expire ten years after the date of their issuance. As of December 31, 1996, no options under this plan had been exercised. 1994 STOCK OPTION PLAN In June 1994, the Company established the 1994 Incentive and Nonstatutory Stock Option Plan which provides for the issuance of options to purchase 250,000 shares of common stock to key employees of the Company. At December 31, 1996, 231,000 options had been granted to employees. The exercise price for 195,000 of the options granted in 1994 is $7.00 per share, which was the fair market value of the options at the date of issuance. The exercise price for 24,000 of the options granted in 1995 is $8.00 per share, which was the fair market value of the options at the date of issuance. An additional 12,000 options were granted in 1996 under this plan at exercise prices of $9.50 (6,000 options) and $10.00 (6,000 options), which were the fair market values of the options on each issuance date. These options become exercisable over a three-year period and expire ten years after the date of their issuance. Under this plan, 26,000 options had been exercised as of December 31, 1996. F-51
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 11. EQUITY (CONTINUED) 1996 STOCK OPTION PLAN In May 1996, the Company amended the 1994 Incentive and Nonstatutory Stock Option Plan to provide for the issuance of options to purchase up to 1,440,000 shares of common stock to key employees of the Company. At December 31, 1996, 1,212,000 options had been granted to employees. The exercise price for these options is $10.25 per share, which was the fair market value of the options at the date of issuance. 387,000 of the options become exercisable over a three-year period and 825,000 of the options became exercisable on the date of issuance. These options expire ten years after the date of their issuance. As of December 31, 1996, no options under this plan had been exercised. 1996 DIRECTOR STOCK OPTION PLAN In May 1996, the Company established the 1996 Director Stock Option Plan which provides for the issuance of options to purchase 50,000 shares of common stock to non-employee directors of the Company. At December 31, 1996, 40,000 options had been granted to non-employee directors. The exercise price for these options is $10.25 per share, which was the fair market value of the options at the date of issuance. The options become exercisable over a three-year period and expire ten years after the date of their issuance. As of December 31, 1996, no options under this plan had been exercised. CHAIRMAN OPTION PLAN On February 15, 1994, the Compensation Committee of the Company's Board of Directors approved the issuance of options to purchase 600,000 shares of common stock of the Company to C. Dean Metropoulos, Chairman and CEO of the Company. As of December 31, 1996, 600,000 options had been granted to Mr. Metropoulos. The exercise price for these options is $6.50 per share, which was the fair market value of the options at the date of issuance. One-third of these options became exercisable on the date of issuance, while the remaining options vested in equal amounts over two years. The options expire ten years after the date of their issuance. As of December 31, 1996, no options under this plan had been exercised. F-52
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 11. EQUITY (CONTINUED) SUMMARY OF OPTIONS (NUMBER OF OPTIONS) [Enlarge/Download Table] 1992 1996 DIRECTOR CHAIRMAN DIRECTOR 1991 PLAN 1992 PLAN PLAN 1994 PLAN PLAN 1996 PLAN* PLAN ----------- ----------- ----------- ----------- ------------ ----------- --------- Outstanding at December 31, 1994........................... 335,413 176,000 39,062 210,000 600,000 -- -- Granted in 1995.................. -- 30,000 -- 81,000 -- -- -- Canceled in 1995................. (13,049) (31,000) -- (70,000) -- -- -- Exercised in 1995................ (311,464) -- -- (2,000) -- -- -- ----------- ----------- ----------- ----------- ------------ ----------- --------- Outstanding at December 31, 1995........................... 10,900 175,000 39,062 219,000 600,000 -- -- Granted in 1996.................. -- -- -- 12,000 -- 1,212,000 40,000 Canceled in 1996................. -- -- -- -- -- -- -- Exercised in 1996................ (5,850) (14,000) -- (24,000) -- -- -- ----------- ----------- ----------- ----------- ------------ ----------- --------- Outstanding at December 31, 1996........................... 5,050 161,000 39,062 207,000 600,000 1,212,000 40,000 ----------- ----------- ----------- ----------- ------------ ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- --------- Exercisable at December 31, 1995........................... 10,900 105,000 39,062 52,000 600,000 -- -- ----------- ----------- ----------- ----------- ------------ ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- --------- Exercisable at December 31, 1996........................... 5,050 141,000 39,062 119,000 600,000 825,000 -- ----------- ----------- ----------- ----------- ------------ ----------- --------- ----------- ----------- ----------- ----------- ------------ ----------- --------- ------------------------ * Granted under 1994 Stock Option Plan as amended. PRO FORMA NET INCOME AND EARNINGS PER COMMON SHARE Had the compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and earnings per common share for 1996 and 1995 would approximate the pro forma amounts below (in thousands, except per share data): [Enlarge/Download Table] AS REPORTED PRO FORMA AS REPORTED PRO FORMA DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1996 1995 1995 ------------ ------------ ------------ ------------ Net income......................... $ 14,576 $ 10,770 $ 11,524 $ 11,460 Earnings per common share.......... .96 .72 .76 .75 F-53
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 11. EQUITY (CONTINUED) Pro forma charges to expense for options granted in 1996 and 1995 are as follows (in thousands): [Enlarge/Download Table] 1996 CHARGE ANNUAL 1995 ANNUAL ALLOCABLE TO TOTAL CHARGE CHARGE FUTURE YEARS CHARGE --------- ----------- ------------- --------- 1995 Stock options................................. $ 104 $ 64 $ 144 $ 312 1996 Stock options................................. 3,702 -- 1,573 5,275 --------- --- ------ --------- Total............................................ $ 3,806 $ 64 $ 1,717 $ 5,587 --------- --- ------ --------- --------- --- ------ --------- The fair value of each option grant is estimated on the date of grant using the Modified Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: risk free interest rates of 6.47% and 6.65%; expected dividend yields of 0.00% and 0.00%; expected lives of 4.0 years and 4.0 years; expected volatility of 40.31% and 39.86%. The weighted average fair value of options granted in 1996 and 1995 was $10.31 and $6.93, respectively. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995. STOCK REPURCHASE PROGRAM On June 21, 1995, the Company's Board of Directors announced that it had approved a plan pursuant to which the Company may repurchase up to $20.0 million of its common stock. The purchases will be effected through open market transactions or negotiated transactions from time to time, depending on the market price of the stock and other factors. As of December 31, 1995, 230,000 shares had been repurchased by the Company at a cost of $1.8 million. As of December 31, 1996, the Company had purchased an additional 537,000 shares at a cost of $4.3 million. F-54
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for the years ended December 31, 1996 and 1995, is as follows: [Enlarge/Download Table] FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- ---------- DOLLARS IN THOUSANDS: Net sales.............................. 1996 $ 81,724 $ 85,693 $ 99,869 $ 127,020 1995 71,893 74,882 73,167 84,788 Gross profit........................... 1996 19,386 19,996 20,588 31,535 1995 17,269 17,718 16,295 20,500 Income from Continuing Operations...... 1996 2,831 3,463 3,027 5,255 1995 2,269 2,846 2,316 3,909 Income (loss) from Discontinued Operations........................... 1996 -- -- -- -- 1995 694 (510) -- -- Net income............................. 1996 2,831 3,463 3,027 5,255 1995 2,963 2,336 2,316 3,909 PER COMMON SHARE: Income from Continuing Operations...... 1996 $ 0.19 $ 0.23 $ 0.20 $ 0.34 1995 0.15 0.19 0.15 0.25 Income (loss) from Discontinued Operations........................... 1996 -- -- -- -- 1995 0.05 (0.03) -- -- Net income............................... 1996 0.19 0.23 0.20 0.34 1995 0.20 0.16 0.15 0.25 Market price range: High................................... 1996 10.00 12.25 11.88 20.00 Low.................................... 1996 7.88 9.13 10.25 11.88 High................................... 1995 7.50 8.00 9.25 9.00 Low.................................... 1995 5.50 6.38 6.38 7.50 F-55
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) [Enlarge/Download Table] JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash.......................................................................... $ 2,167 $ 4,786 Receivables, net of allowance for doubtful accounts of $8,852 and $6,676...... 48,038 57,802 Inventories................................................................... 25,689 25,400 Prepaids and other............................................................ 2,599 3,015 Deferred tax assets........................................................... 7,339 7,339 Net assets held for sale...................................................... 630 676 ----------- ------------ Total current assets........................................................ 86,462 99,018  PROPERTY, PLANT AND EQUIPMENT: Land.......................................................................... 12,551 7,843 Buildings..................................................................... 35,131 29,507 Machinery and equipment....................................................... 80,189 70,239 ----------- ------------ Gross property, plant and equipment......................................... 127,871 107,589 Less: Accumulated depreciation................................................ (27,163) (22,807) ----------- ------------ Net property, plant and equipment........................................... 100,708 84,782  INTANGIBLE AND OTHER ASSETS: Identifiable intangible assets................................................ 71,808 73,146 Goodwill...................................................................... 90,189 96,175 Deferred financing costs...................................................... 2,495 2,731 Other assets.................................................................. 661 139 ----------- ------------ Total intangible and other assets........................................... 165,153 172,191 ----------- ------------ TOTAL ASSETS.................................................................... $352,323 $355,991 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.............................................................. $ 27,102 $ 32,968 Accrued liabilities........................................................... 36,364 39,923 Current portion of long-term debt............................................. 11,500 8,000 ----------- ------------ Total current liabilities................................................... 74,966 80,891 LONG-TERM DEBT (net of current maturities)...................................... 169,200 177,349 OTHER LONG-TERM LIABILITIES..................................................... 3,020 3,269 DEFERRED TAX LIABILITIES........................................................ 5,694 5,694 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized; 15,382,942 shares in 1997 and 15,261,061 shares issued in 1996................................ 153 153 Additional paid-in capital.................................................... 73,873 73,179 Treasury stock, at cost (767,000 shares in 1997 and 1996)..................... (6,140) (6,140) Retained earnings............................................................. 31,557 21,596 ----------- ------------ Total stockholders' equity.................................................. 99,443 88,788 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $352,323 $355,991 ----------- ------------ ----------- ------------ The accompanying notes are an integral part of these consolidated statements. F-56
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) [Enlarge/Download Table] THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- NET SALES........................................... $ 140,374 $ 85,693 $ 270,672 $ 167,417 Cost of goods sold................................ 100,953 65,698 196,022 128,036 Selling, distribution, and general and administrative.................................. 26,337 14,239 51,223 28,737 ------------- ------------- ------------- ------------- OPERATING INCOME.................................... 13,084 5,756 23,427 10,644 OTHER (INCOME) AND EXPENSES: Interest expense.................................. 3,310 645 6,562 1,342 Amortization of deferred financing costs.......... 116 95 236 190 Other income, net................................. (131) (191) (249) (382) ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES.......................... 9,789 5,207 16,878 9,494 Provision for income taxes........................ 4,012 1,744 6,917 3,200 ------------- ------------- ------------- ------------- NET INCOME.......................................... $ 5,777 $ 3,463 $ 9,961 $ 6,294 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- EARNINGS PER COMMON SHARE........................... $ .37 $ .23 $ .64 $ .42 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING....................................... 15,716,000 14,724,000 15,643,651 14,778,316 The accompanying notes are an integral part of these consolidated statements. F-57
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, DOLLARS IN THOUSANDS) [Enlarge/Download Table] SIX MONTHS ENDED JUNE 30, ----------------------- 1997 1996 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers........................................................... $ 280,622 $ 169,021 Interest received...................................................................... 35 127 Income tax refund...................................................................... -- 156 Cash paid to suppliers and employees................................................... (245,771) (148,572) Interest paid.......................................................................... (7,415) (1,617) Income taxes paid...................................................................... (7,773) (2,807) ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................................ 19,698 16,308 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiary: Working capital............................................. (1,290) (125) Property, plant and equipment.......................................................... (1,559) (3,613) Other assets........................................................................... (4,151) (3,315) ----------- ---------- Net cash used by acquisition of subsidiary........................................... (7,000) (7,053) Capital expenditures................................................................... (10,121) (4,455) Proceeds from sale of fixed assets..................................................... 19 -- Other.................................................................................. (1,260) 1,173 ----------- ---------- NET CASH USED BY INVESTING ACTIVITIES.................................................... (18,362) (10,335) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock................................................. 694 118 Net payments under revolving credit facility........................................... (649) -- Payments on long-term debt............................................................. (4,000) (4,000) Purchase of treasury stock............................................................. -- (4,300) ----------- ---------- NET CASH USED BY FINANCING ACTIVITIES.................................................... (3,955) (8,182) ----------- ---------- NET DECREASE IN CASH..................................................................... (2,619) (2,209) CASH, BEGINNING OF PERIOD................................................................ 4,786 5,811 ----------- ---------- CASH, END OF PERIOD...................................................................... $ 2,167 $ 3,602 ----------- ---------- ----------- ---------- The accompanying notes are an integral part of these consolidated statements. F-58
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS (UNAUDITED, DOLLARS IN THOUSANDS) [Enlarge/Download Table] SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 --------- --------- NET INCOME.................................................................................. $ 9,961 $ 6,294 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOW FROM OPERATIONS: Depreciation.............................................................................. 5,243 2,938 Amortization of intangibles............................................................... 2,988 1,350 Increase in deferred taxes................................................................ -- 21 Change in assets and liabilities, net of effects from acquisition of subsidiary: Accounts receivable....................................................................... 10,477 1,604 Inventories............................................................................... 398 (1,094) Prepaids and other........................................................................ 416 (70) Accounts payable.......................................................................... (5,866) 2,384 Accrued liabilities....................................................................... (3,670) 3,018 Long-term liabilities..................................................................... (249) (138) --------- --------- NET CASH PROVIDED BY OPERATIONS............................................................. $ 19,698 $ 16,308 --------- --------- --------- --------- The accompanying notes are an integral part of these consolidated statements. F-59
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements as of June 30, 1997, and for the six months then ended have been prepared by The Morningstar Group Inc. (the "Company" or "Morningstar") without audit. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) to present fairly, in all material respects, the consolidated financial position, results of operations and changes in cash flows at June 30, 1997, and for the six months then ended, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the Company's 1996 financial statements contained in its most recent Annual Report on Form10-K. Certain prior year balances have been reclassified to conform to the current year presentation. On February 3, 1997, the Company completed the purchase of substantially all of the assets of the frozen whipped toppings business of Van de Kamp's, Inc. ("VDK"). VDK's sales for the year ended December 31, 1996 were approximately $13.1 million. VDK is a manufacturer and distributor of frozen whipped toppings primarily supplying retail customers throughout the United States. The Company paid approximately $7.0 million in cash for the assets acquired, and assumed approximately $.1 million in related liabilities. The source of funding was provided by the Company's operations in conjunction with its revolving credit facility. During the first six months of 1997, the company received appraised values on certain assets acquired in the Presto Food Products, Inc. acquisition. As a result, the allocation of the purchase price was revised resulting in a reclassification of $9.2 million from goodwill to property, plant and equipment. 2. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories are summarized as follows (in thousands): [Enlarge/Download Table] AT JUNE 30, 1997 AT DECEMBER 31, 1996 --------------- -------------------- Raw materials and supplies............................. $ 14,443 $ 11,767 Finished goods......................................... 11,246 13,633 ------- ------- Total................................................ $ 25,689 $ 25,400 ------- ------- ------- ------- Finished goods inventories include the costs of materials, labor and plant overhead. F-60
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THE MORNINGSTAR GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 3. DEBT The Company's outstanding long-term debt and average interest rates in effect on June 30, 1997 were: [Enlarge/Download Table] AMOUNT OF DEBT AVERAGE INTEREST RATE -------------- --------------------- (IN THOUSANDS) Senior term loan................................................................ $156,000 7.130% Revolving credit facility (a)................................................... 21,700 7.256% Industrial development revenue bonds............................................ 3,000 4.080% -------------- Total......................................................................... 180,700 Less: Current maturities........................................................ 11,500 -------------- Long-term debt, net of current maturities....................................... $169,200 -------------- -------------- ------------------------ (a) As of June 30, 1997, approximately $21,700,000 was outstanding under the revolving credit facility and letters of credit totaling $7,974,000 were issued. As of June 30, 1997, the Company had $30,326,000 in additional borrowing capacity under the terms of its revolving credit facility. 4. EARNINGS PER COMMON SHARE The earnings per common share is computed based on the weighted average number of shares of the Company's common stock and common stock equivalents outstanding during the period. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options. The Company intends to adopt SFAS No. 128 "Earnings Per Share" "SFAS 128" effective December 15, 1997 and present December 31, 1997 and prior periods earnings per share under SFAS128. Early adoption of the new statement is not permitted. The calculation of basic earnings per share under SFAS 128 will have a favorable impact as it excludes potentially dilutive options previously included in the calculation of primary earnings per share. 5. STOCK REPURCHASE PROGRAM On June 21, 1995, the Company's Board of Directors announced that it had approved a plan pursuant to which the Company may repurchase up to $20.0 million of its common stock. The purchases will be effected through open market transactions or negotiated transactions from time to time, depending on the market price of the stock and other factors. As of December 31, 1996, 767,000 shares had been repurchased by the Company at a cost of $6.1 million. As of June 30, 1997, the Company had not purchased any additional shares. F-61
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INDEPENDENT AUDITORS' REPORT Board of Directors Country Fresh, Inc. Grand Rapids, Michigan We have audited the accompanying consolidated balance sheets of Country Fresh, Inc. and subsidiaries as of March 1, 1997 and March 2, 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended March 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of Country Fresh, Inc. and subsidiaries as of March 1, 1997 and March 2, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 1, 1997, in conformity with generally accepted accounting principles. As discussed in Note 6 to the consolidated financial statements, in fiscal year 1995 the Company changed its method of accounting for postretirement benefits other than pensions to conform with Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." DELOITTE & TOUCHE LLP Grand Rapids, Michigan May 5, 1997 F-62
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COUNTRY FRESH, INC. AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] MARCH 2, MARCH 1, JULY 19, 1996 1997 1997 ------------ ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................................... $ 11,651,121 $ 10,524,048 $ 6,697,162 Accounts receivable, net of the allowance for doubtful accounts of $1,227,000, $670,000 and $672,000....................................................... 23,863,323 24,311,205 26,084,045 Inventories (Note 2).......................................................... 12,564,674 14,297,557 18,846,324 Deferred taxes on income (Note 7)............................................. 1,122,000 1,168,000 1,186,000 Prepaid income taxes.......................................................... 94,213 Prepaid expenses and other.................................................... 1,117,599 998,880 240,585 ------------ ------------ ------------ Total current assets........................................................ 50,412,930 51,299,690 53,054,116 DEFERRED TAXES ON INCOME (Note 7)............................................... 2,543,000 2,970,000 3,059,000 PROPERTY, PLANT AND EQUIPMENT (Note 4):......................................... Land and improvements......................................................... 2,852,510 3,124,502 3,224,502 Buildings..................................................................... 26,796,538 29,814,418 29,814,418 Machinery and equipment....................................................... 56,456,723 61,210,938 64,346,224 Shipping containers........................................................... 8,881,155 9,475,755 9,579,400 Transportation equipment...................................................... 12,507,898 14,391,892 14,633,233 ------------ ------------ ------------ 107,494,824 118,017,505 121,597,777 Accumulated depreciation...................................................... (68,987,812) (75,335,243) (78,122,058) ------------ ------------ ------------ 38,507,012 42,682,262 43,475,719 OTHER ASSETS.................................................................... 3,302,314 2,254,340 2,352,934 ------------ ------------ ------------ TOTAL ASSETS.................................................................... $ 94,765,256 $ 99,206,292 $101,941,769 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable........................................................ $ 18,029,941 $ 18,973,756 $ 19,226,753 Accrued expenses (Note 3)..................................................... 11,297,087 11,659,319 11,089,591 Income taxes payable.......................................................... 1,963,787 2,262,333 Current portion of long-term debt (Note 4).................................... 2,809,721 2,835,646 3,766,924 ------------ ------------ ------------ Total current liabilities................................................... 32,136,749 35,432,508 36,345,601 LONG-TERM DEBT (Note 4)......................................................... 32,152,297 28,571,200 26,522,684 POST RETIREMENT BENEFITS (Notes 5 and 6)........................................ 5,350,118 3,668,633 3,557,633 COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY (Note 98): Preferred stock, Series A, 8% cumulative, par value $320 a share; 31,250 authorized shares........................................................... 3,800,000 3,741,120 3,741,120 Common stock, no par value; 15,000,000 authorized shares...................... 1,774,092 1,869,950 1,897,660 Retained earnings............................................................. 19,552,000 25,922,881 29,877,071 ------------ ------------ ------------ Total shareholders' equity.................................................. 25,126,092 31,533,951 35,515,851 ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 94,765,256 $ 99,206,292 $101,941,769 ------------ ------------ ------------ ------------ ------------ ------------ See notes to consolidated financial statements. F-63
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COUNTRY FRESH, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF EARNINGS [Enlarge/Download Table] YEARS ENDED TWENTY WEEKS ENDED ---------------------------------------- -------------------------- FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19, 1995 1996 1997 1996 1997 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) NET SALES................................................... $310,164,014 $336,054,590 $353,037,053 $135,327,698 $136,154,331 COST OF GOODS SOLD.......................................... 268,500,028 291,721,220 305,613,569 115,962,551 116,232,837 ------------ ------------ ------------ ------------ ------------ Gross profit.............................................. 41,663,986 44,333,370 47,423,484 19,365,147 19,921,494 OPERATING COSTS AND EXPENSES: Selling and distribution.................................. 21,224,430 21,632,703 19,916,061 7,396,735 7,216,944 General and administrative................................ 15,036,712 15,699,730 16,009,777 5,907,043 6,234,400 Amortization of intangibles............................... 99,618 82,540 656,410 33,272 19,022 ------------ ------------ ------------ ------------ ------------ Total operating costs and expenses...................... 36,360,760 37,414,973 36,582,248 13,337,050 13,470,366 ------------ ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS...................................... 5,303,226 6,918,397 10,841,236 6,028,097 6,451,128 OTHER (INCOME) EXPENSE: Interest (income) expense, net............................ (258,505) 1,392,648 1,219,353 613,168 597,186 Miscellaneous income...................................... (551,116) (633,310) (435,642) (111,535) (254,070) ------------ ------------ ------------ ------------ ------------ Total other (income) expense............................ (809,621) 759,338 783,711 501,633 343,116 ------------ ------------ ------------ ------------ ------------ EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING............................................. 6,112,847 6,159,059 10,057,525 5,526,464 6,108,012 INCOME TAXES (Note 7)....................................... 2,145,000 2,090,000 3,385,000 1,884,000 2,079,000 ------------ ------------ ------------ ------------ ------------ EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING... 3,967,847 4,069,059 6,672,525 3,642,464 4,029,012 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (NET OF INCOME TAX BENEFIT OF $1,170,376) (Note 6)...................................... 2,271,907 ------------ ------------ ------------ ------------ ------------ NET EARNINGS................................................ $ 1,695,940 $ 4,069,059 $ 6,672,525 $ 3,642,464 $ 4,029,012 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET EARNINGS PER COMMON SHARE: Before cumulative effect of change in accounting.......... $ 0.52 $ 1.04 $ 1.75 $ 0.97 $ 1.07 Cumulative effect of change in accounting................. (0.30) ------------ ------------ ------------ ------------ ------------ Net earnings............................................ $ 0.22 $ 1.04 $ 1.75 $ 0.97 $ 1.07 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING......................... 7,622,840 3,609,245 3,636,519 3,631,758 3,685,236 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ See notes to consolidated financial statements. F-64
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COUNTRY FRESH, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY TWENTY WEEKS ENDED JULY 19, 1997 AND YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995 [Enlarge/Download Table] PREFERRED STOCK SERIES A 8% CUMULATIVE COMMON STOCK ADDITIONAL ---------------------- ----------------------- PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT CAPTIAL EARNINGS TOTAL --------- ----------- ---------- ----------- ----------- ------------- ------------- BALANCE, February 27, 1994......... 191,313 $ 3,884,020 $ 6,305,559 $ 39,416,901 $ 49,606,480 Net earnings..................... 1,695,940 1,695,940 Issuance of common stock......... 2,669 56,900 462,532 519,432 Redemption of common stock....... (2,291) (48,220) (48,530) (373,966) (470,716) Recapitalization expenses........ (86,569) (86,569) --------- ----------- ---------- ----------- ----------- ------------- ------------- BALANCE, February 25, 1995......... -- -- 191,691 3,892,700 6,632,992 40,738,875 51,264,567 Net earnings..................... 4,069,059 4,069,059 Redemption of Class A common stock and exchange of 40 shares of no par common stock for Class B common stock........... 7,451,549 (73,600) (73,600) Redemption of common pursuant to the redemption and exchange offer.......................... 11,875 3,800,000 (4,157,520) (2,078,760) (6,632,992) (24,548,365) (29,460,117) Issuance of common stock......... 4,459 35,672 35,672 Redemption of common stock....... (240) (1,920) (1,920) Recapitalization expenses........ (403,569) (403,569) Preferred stock dividends........ (304,000) (304,000) --------- ----------- ---------- ----------- ----------- ------------- ------------- BALANCE, March 2, 1996............. 11,875 3,800,000 3,489,939 1,774,092 -- 19,552,000 25,126,092 Net earnings..................... 6,672,525 6,672,525 Issuance of common stock......... 11,637 97,458 97,458 Redemption of common and preferred stock................ (184) (58,880) (200) (1,600) (60,480) Preferred stock dividends........ (301,644) (301,644) --------- ----------- ---------- ----------- ----------- ------------- ------------- BALANCE, March 1, 1997............. 11,691 3,741,120 3,501,376 1,869,950 -- 25,922,881 31,533,951 Net earnings (Unaudited)......... 4,029,012 4,029,012 Issuance of common stock (Unaudited).................... 2,611 27,710 27,710 Preferred stock dividends (Unaudited).................... (74,822) (74,822) --------- ----------- ---------- ----------- ----------- ------------- ------------- BALANCE, July 19, 1997 (Unaudited)...................... 11,691 $ 3,741,120 3,503,987 $ 1,897,660 $ -- $ 29,877,071 $ 35,515,851 --------- ----------- ---------- ----------- ----------- ------------- ------------- --------- ----------- ---------- ----------- ----------- ------------- ------------- See notes to consolidated financial statements. F-65
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COUNTRY FRESH, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] YEARS ENDED TWENTY WEEKS ENDED ---------------------------------------- ------------------------ FEBRUARY 25, MARCH 2, MARCH 1, JULY 20, JULY 19, 1995 1996 1997 1996 1997 ------------ ------------ ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.............................................. $ 1,695,940 $ 4,069,059 $ 6,672,525 $3,642,464 $4,029,012 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................. 7,932,522 8,401,628 6,577,718 2,600,153 2,786,815 Deferred income taxes..................................... (1,588,000) (126,000) (473,000) (297,000 ) (107,000 ) Post retirement benefits.................................. 1,540,535 459,795 (410,845) (158,018 ) (111,000 ) Change in operating assets and liabilities, net of effect of acquisitions: Accounts receivable..................................... (928,541) (2,059,592) (447,882) (4,991,501 ) (1,772,840 ) Inventories............................................. (1,064,010) (363,904) (1,732,883) (2,181,767 ) (2,279,467 ) Prepaid expenses and other.............................. 136,117 47,688 118,719 403,871 758,295 Accounts payable and accrued expenses................... 1,882,944 2,024,370 1,267,868 7,899,393 (316,731 ) Income taxes............................................ (1,487,000) (313,005) 2,058,000 864,000 298,546 ------------ ------------ ----------- ----------- ----------- Net cash provided by operating activities............. 8,120,507 12,140,039 13,630,220 7,781,595 3,285,630 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (5,817,122) (7,213,562) (8,810,163) (3,497,237 ) (2,380,272 ) Cash paid for acquisitions (Note 10)...................... (3,862,913) (3,469,300 ) (Increase) decrease in other assets....................... 1,336,367 (1,112,394) (307,292) 536,079 (98,594 ) ------------ ------------ ----------- ----------- ----------- Net cash used in investing activities................. (8,343,668) (8,325,956) (9,117,455) (2,961,158 ) (5,948,166 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt................................ (1,465,454) (7,231,685) (5,375,172) (1,183,941 ) (1,217,238 ) Proceeds from long-term borrowings........................ 27,000,000 100,000 Payments of recapitalization expenses..................... (86,569) (403,569) Proceeds from issuance of common stock.................... 519,432 35,672 97,458 93,426 27,710 Redemption of preferred and common stock.................. (470,716) (28,319,096) (60,480) Dividends paid on preferred stock......................... (304,000) (301,644) (60,480 ) (74,822 ) ------------ ------------ ----------- ----------- ----------- Net cash used in financing activities................. (1,503,307) (9,222,678) (5,639,838) (1,150,995 ) (1,164,350 ) ------------ ------------ ----------- ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (1,726,468) (5,408,595) (1,127,073) 3,669,442 (3,826,886 ) CASH AND CASH EQUIVALENTS, BEGINNING........................ 18,786,184 17,059,716 11,651,121 11,651,121 10,524,048 ------------ ------------ ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, ENDING........................... $17,059,716 $ 11,651,121 $10,524,048 $15,320,563 $6,697,162 ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. $ 615,498 $ 2,272,540 $ 1,993,371 $ 947,085 $ 629,580 Taxes on income paid...................................... 4,050,000 2,500,000 1,800,000 600,000 2,300,000 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of installment notes for the purchase of transportation equipment................................ $ 1,652,233 $ -- $ 1,820,000 $ -- $ -- Collection of note receivable through the redemption of common stock in the recapitalization (Note 8)........... 1,216,541 See notes to consolidated financial statements. F-66
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COUNTRY FRESH, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS--Country Fresh, Inc. and its subsidiaries (the "Company") process and market dairy and other related products to customers primarily located in Michigan, northern Indiana, and northern Ohio. The Company provides credit terms to its customers generally ranging up to 30 days, perform ongoing credit evaluations of their customers and maintain allowances for potential credit losses and rebates and allowances based on historical experience. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Country Fresh, Inc. and its wholly owned subsidiaries. All significant intercompany profits, transactions and balances have been eliminated in consolidation. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes the estimates are reasonable, actual results could differ from those estimates. FISCAL YEAR--The fiscal year of the Company ends on the Saturday closest to the end of February. The fiscal years ended March 1, 1997 and February 25, 1995 were comprised of fifty-two weeks, whereas the fiscal year ended March 2, 1996 was comprised of fifty-three weeks. References to fiscal years 1995, 1996 and 1997 represent the Company's fiscal years ended February 25, 1995, March 2, 1996 and March 1, 1997, respectively. CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash and highly-liquid investments purchased with a remaining maturity at date of purchase of approximately three months or less. INVENTORIES--Inventories are primarily stated at the lower of cost, using the LIFO (last-in, first-out) method, or market. The cost of manufactured finished goods inventories include raw materials direct labor and indirect production and overhead costs. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment assets are recorded at cost. Depreciation is computed using both the straight-line and declining balance methods based on the estimated useful lives of the related assets. [Enlarge/Download Table] ASSET USEFUL LIFE -------------------------------------------- -------------------------------------------- Buildings and improvements Ten to 20 years Machinery and equipment Three to 12 years Shipping containers Three years Transportation equipment Five to 12 years Expenditures for maintenance and repairs are charged to expense as incurred whereas major additions are capitalized. The Company periodically assesses the carrying values of its long lived assets, which primarily consists of its property, plant and equipment assets, by comparing the expected undiscounted future cash flows to the carrying amount of the asset, and would evaluate a potential impairment if the recorded value of these F-67
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COUNTRY FRESH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) assets exceeded the associated future cash flows. Any adjustment to the carrying value of long-lived assets is recognized on a current basis. DEFERRED INCOME TAXES--Deferred income taxes are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. EARNINGS PER COMMON SHARE--The Company computes earnings per common shared by dividing net earnings less dividends on preferred stock by the weighted average number of common shares outstanding, including common equivalent shares. UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's consolidated balance sheet as of July 19, 1997 and the consolidated statements of earnings, shareholders' equity and of cash flows for the twenty weeks ended July 20, 1996 and July 19, 1997, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the balance sheet of the Company at July 19, 1997, and the results of operations and cash flows of the Company for the twenty weeks ended July 20, 1996 and July 19, 1997, have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES Inventories consist of the following: [Enlarge/Download Table] MARCH 2, MARCH 1, JULY 19, 1996 1997 1997 ----------- ----------- ----------- (UNAUDITED) Finished products........................................... $ 7,099,479 $ 8,135,843 $11,199,792 Raw materials............................................... 3,010,340 5,498,844 7,054,746 Containers.................................................. 3,103,377 1,334,458 1,472,069 ----------- ----------- ----------- 13,213,196 14,969,145 19,726,607 Less LIFO reserve........................................... (648,522) (671,588) (880,283) ----------- ----------- ----------- $12,564,674 $14,297,557 $18,846,324 ----------- ----------- ----------- ----------- ----------- ----------- F-68
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COUNTRY FRESH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995 3. ACCRUED EXPENSES Accrued expenses consist of the following: [Download Table] MARCH 2, MARCH 1, JULY 19, 1996 1997 1997 ---------- ---------- ---------- (UNAUDITED) Payroll............................... $3,305,793 $3,428,354 $2,871,207 Discounts, rebates and allowances..... 2,837,837 2,982,688 1,625,292 Insurance............................. 1,702,439 1,689,717 1,942,919 Retirement and pension................ 698,113 799,193 1,226,093 Containers............................ 2,752,905 2,759,367 3,424,080 ---------- ---------- ---------- $11,297,087 11,659,319 11,089,591 ---------- ---------- ---------- ---------- ---------- ---------- The Company accrues customer discounts, rebates and allowances as earned by its customers, which are generally paid either monthly, quarterly or annually pursuant to the terms of the arrangement with the specific customer. The Company is self-insured in certain states, up to specified limits, for workers' compensation claims. Individual workers' compensation claims in excess of $300,000 and aggregate workers' compensation claims between $2.2 million and $20 million are insured through an insurance carrier. In addition, the Company is self-insured, up to certain limits, for medical benefit claims. The estimated cost of claims for workers' compensation and medical benefits are accrued as incurred in the consolidated financial statements. F-69
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COUNTRY FRESH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995 4. LONG-TERM DEBT Long-term debt is summarized as follows: [Enlarge/Download Table] MARCH 2, MARCH 1, JULY 19, 1996 1997 1997 ----------- ----------- ----------- (UNAUDITED) Credit agreement: Term loan facility........................................ $10,000,000 $ 8,000,000 $ 7,000,000 Revolving credit facility................................. 11,000,000 10,000,000 10,000,000 Revenue bonds: Economic Development Corporation of the County of Elkhart, Indiana................................................. 3,680,000 3,450,000 3,450,000 Economic Development Corporation of the City of Livonia, Michigan................................................ 2,780,000 2,570,000 2,570,000 Toledo-Lucas County Port Authority........................ 4,590,000 4,335,000 4,335,000 Installment loan............................................ 1,512,262 1,809,968 1,758,816 Promissory notes payable.................................... 1,084,000 1,084,000 1,078,000 Other notes payable......................................... 315,756 157,878 97,792 ----------- ----------- ----------- 34,962,018 31,406,846 30,289,608 Less current portion........................................ (2,809,721) (2,835,646) (3,766,924) ----------- ----------- ----------- Total long-term debt........................................ $32,152,297 $28,571,200 $26,552,684 ----------- ----------- ----------- ----------- ----------- ----------- CREDIT AGREEMENT--The Company has a credit agreement with a syndicate of banks which provides for both a term loan facility and a revolving credit facility, which are unsecured and mature on January 1, 2002. The term loan facility requires quarterly principal installments of $464,286 plus interest and the revolving credit facility, which provides for maximum borrowings of up to $20 million, requires quarterly interest payments. The interest rate under the credit agreement is determined at the Company's option at either (i) the LIBOR rate (6.38% at March 1, 1997) plus between 1% and 1.5%, based on certain financial ratios of the Company, or (ii) the prime rate. In addition to amounts available under the revolving credit facility of the credit agreement, the Company also has a $5 million unsecured line of credit with a bank, which expires in July 1998. No amounts are outstanding under this line of credit agreement, REVENUE BONDS--The Company has three series of revenue bonds outstanding which require aggregate annual sinking fund redemption installments of $695,000, and are secured by irrevocable letters of credit issued by financial institutions, along with first mortgages on real property and equipment with an aggregate net book value of approximately $9,100,000 at March 1, 1997, for certain of the revenue bonds. Advances made, if any, under these letters of credit provide for repayment of such advances either ratably over the remaining life of the bond issue or within one year of such advance. Interest on the revenue bonds is due semi-annually at rates, determined by the remarketing agents (subject to certain maximums), which will approximate market conditions for tax exempt securities of the same stature. At March 1, 1997, the interest rates on the revenue bonds ranged from 3.4% to 3.75%. These revenues bonds are included in the accompanying schedule of maturities on long-term debt based on their mandatory sinking fund redemption installments. F-70
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COUNTRY FRESH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995 4. LONG-TERM DEBT (CONTINUED) INSTALLMENT NOTE PAYABLE--The Company has an installment note payable with monthly payments of principal and interest of $21,938, which bears interest at a fixed rate of 7.85% through December 31, 2001 and a variable rate determined quarterly thereafter at the prime rate plus 1/2%. This installment note payable is collateralized by the Company's airplane. PROMISSORY NOTES PAYABLE--Between 1988 and 1993, the Company issued unsecured promissory notes in units of $1,000 pursuant to a Promissory Note Prospectus filed with the Corporation and Securities Bureau, Michigan Department of Commerce. These promissory notes require quarterly interest payments at the prime rate less 1% (7.25% at March 1, 1997) with a minimum interest rate of 8%, which was reduced to 6% in 1993, and are repayable at the option of the Company on any quarterly interest payment date. At March 2, 1996 and March 1, 1997, $543,000 of these promissory notes were held by certain of the Company's shareholders. DEBT COVENANTS--The loans under the credit agreement and certain of the revenue bonds contain covenants which include restrictions on additional indebtedness and the payment of cash dividends in excess of prescribed amounts and require the Company to maintain certain minimum financial ratios, including: a current ratio of 1.35 to 1.0; working capital of $18,500,000; tangible net worth of $21,500,000 at March 1, 1997, increasing $3,000,000 annually thereafter; a ratio of total liabilities to net worth of not more than 3.5 to 1.0, decreasing .5 annually; and fixed charge coverage ratios (as defined) of 2.0 to 1.0. The Company's working capital at March 1, 1997 and March 2, 1996 was less than the required amounts, however, this covenant was waived by the respective lendors through February 1998. DEBT MATURITIES--At March 1, 1997, future annual maturities on long-term debt are summarized as follows: [Download Table] YEAR ENDING ------------------------------------------------------------ 1998...................................................... $ 2,835,646 1999...................................................... 2,687,992 2000...................................................... 2,699,049 2001...................................................... 2,711,005 2002...................................................... 11,438,220 Thereafter................................................ 9,034,934 ----------- Total..................................................... $31,406,846 ----------- ----------- At March 1, 1997 and March 2, 1996, the estimated fair value of the Company's long-term debt, including current maturities, approximated its carrying value. The estimated fair value was based on anticipated rates available to the Company for debt with similar terms and maturities. 5. EMPLOYEE RETIREMENT PLANS The Company's retirement programs include both defined benefit and defined contribution pension plans. Substantially all of the Company's supervisory and administrative personnel are covered by a non-contributory defined benefit pension plan and the employees of a subsidiary which are covered by a non- contributory defined benefit pension plan required by a collective bargaining agreement. The benefits F-71
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COUNTRY FRESH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 25, 1995 5. EMPLOYEE RETIREMENT PLANS (CONTINUED) under these defined benefit plans are based on years of service and, as to one of the plans, the employee's compensation. The Company's funding policy is to contribute annually the minimum amount required under ERISA regulations. Plan assets consist principally of investments made with insurance companies under a group annuity contract. The following table sets forth the defined benefit plans' funded status and amounts recognized in the Company's balance sheets at March 1, 1997 and March 2, 1996, respectively: [Enlarge/Download Table] MARCH 2, MARCH 1, 1996 1997 ------------- ------------- Actuarial present value of benefit obligations: Accumulated benefit obligation including vested benefit obligations of $11,973,482 in 1997 and $10,462,548 in 1996.................................... $ 10,943,674 $ 12,508,894 ------------- ------------- ------------- ------------- Projected benefit obligation for service rendered to date........................ $ 12,668,312 $ 14,980,825 Plan assets, at estimated fair value............................................... 11,624,776 14,056,504 ------------- ------------- Projected benefit obligation in excess of the plan assets.......................... 1,043,536 924,321 Unrecognized net gain from past experience different from that assumed and effect of changes in assumptions........................................................ 1,742,605 1,361,803 Unrecognized prior s