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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-12755
SUIZA FOODS CORPORATION
(Exact name of the registrant as specified in its charter)
[LOGO]
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DELAWARE 75-2559681
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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2515 MCKINNEY AVENUE, SUITE 1200
DALLAS, TEXAS 75201
(214) 303-3400
(Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of August 6, 2001 the number of shares outstanding of each class of
common stock was:
Common Stock, par value $.01 27,810,567
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements............................ 3
Item 2--Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 16
Item 3--Quantitative and Qualitative Disclosures About
Market Risk............................................ 26
PART II--OTHER INFORMATION
Item 4--Submission of Matters to a Vote of Security
Holders................................................ 28
Item 6--Exhibits and Reports on Form 8-K................ 28
</Table>
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,938 $ 31,110
Accounts receivable, net.................................. 500,815 519,318
Inventories............................................... 194,465 186,713
Refundable income taxes................................... 4,392 3,925
Deferred income taxes..................................... 53,361 54,634
Prepaid expenses and other current assets................. 42,947 22,231
---------- ----------
Total current assets.................................... 818,918 817,931
Property, plant and equipment, net.......................... 1,006,372 1,003,769
Intangible and other assets................................. 1,935,678 1,958,778
---------- ----------
Total................................................... $3,760,968 $3,780,478
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 544,278 $ 567,342
Income taxes payable...................................... 8,782 4,342
Current portion of long-term debt and subsidiary lines of
credit.................................................. 136,011 128,224
---------- ----------
Total current liabilities............................... 689,071 699,908
Long-term debt.............................................. 1,135,563 1,225,045
Other long-term liabilities................................. 41,755 34,202
Deferred income taxes....................................... 129,798 123,614
Mandatorily redeemable convertible trust issued preferred
securities................................................ 584,323 584,032
Minority interest in subsidiaries........................... 524,271 514,845
Commitments and contingencies
Stockholders' equity:
Common stock, 27,702,829 and 27,285,649 shares issued and
outstanding............................................. 277 273
Additional paid-in capital................................ 182,151 166,361
Retained earnings......................................... 489,983 433,309
Accumulated other comprehensive income.................... (16,224) (1,111)
---------- ----------
Total stockholders' equity.............................. 656,187 598,832
---------- ----------
Total................................................... $3,760,968 $3,780,478
========== ==========
</Table>
See notes to condensed consolidated financial statements.
3
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SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Net sales................................................... $1,527,074 $1,434,354 $3,001,427 $2,828,495
Cost of sales............................................... 1,163,947 1,074,136 2,281,774 2,128,118
---------- ---------- ---------- ----------
Gross profit................................................ 363,127 360,218 719,653 700,377
Operating costs and expenses:
Selling and distribution.................................. 207,247 199,803 414,818 399,927
General and administrative................................ 39,522 42,939 90,415 92,200
Amortization of intangibles............................... 13,456 12,970 26,797 25,658
Plant closing and other costs............................. 1,190 843 2,964
---------- ---------- ---------- ----------
Total operating costs and expenses...................... 260,225 256,902 532,873 520,749
---------- ---------- ---------- ----------
Operating income............................................ 102,902 103,316 186,780 179,628
Other (income) expense:
Interest expense, net..................................... 25,934 26,914 53,236 54,135
Financing charges on trust issued preferred securities.... 8,395 8,395 16,791 16,805
Equity in earnings of unconsolidated affiliates........... (1,186) (3,535) (2,859) (5,404)
Other (income) expense, net............................... (189) (528) 502 (1,075)
---------- ---------- ---------- ----------
Total other (income) expense............................ 32,954 31,246 67,670 64,461
---------- ---------- ---------- ----------
Income from continuing operations before income taxes....... 69,948 72,070 119,110 115,167
Income taxes................................................ 25,982 27,700 44,649 43,879
Minority interest in earnings............................... 9,363 10,837 16,341 17,161
---------- ---------- ---------- ----------
Income before extraordinary items and cumulative effect of
accounting change......................................... 34,603 33,533 58,120 54,127
Extraordinary gain.......................................... 4,968
Cumulative effect of accounting change...................... (1,446)
---------- ---------- ---------- ----------
Net income.................................................. $ 34,603 $ 33,533 $ 56,674 $ 59,095
========== ========== ========== ==========
Average common shares: Basic................................ 27,560,301 28,896,573 27,458,327 28,984,020
Average common shares: Diluted.............................. 36,113,759 37,322,452 35,948,466 37,470,275
Basic earnings per common share:
Income before extraordinary items and cumulative effect of
accounting change....................................... $ 1.26 $ 1.16 $ 2.12 $ 1.87
Extraordinary gain........................................ 0.17
Cumulative effect of accounting change.................... (0.06)
---------- ---------- ---------- ----------
Net income................................................ $ 1.26 $ 1.16 $ 2.06 $ 2.04
========== ========== ========== ==========
Diluted earnings per common share:
Income before extraordinary items and cumulative effect of
accounting change....................................... $ 1.11 $ 1.04 $ 1.91 $ 1.73
Extraordinary gain........................................ .13
Cumulative effect of accounting change.................... (0.04)
---------- ---------- ---------- ----------
Net income................................................ $ 1.11 $ 1.04 $ 1.87 $ 1.86
========== ========== ========== ==========
</Table>
See notes to condensed consolidated financial statements.
4
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SUIZA FOODS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
--------------------------
2001 2000
----------- ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 56,674 $ 59,095
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 75,960 76,061
Minority interest....................................... 26,995 28,871
Equity in earnings of unconsolidated affiliates......... (2,859) (5,404)
Extraordinary gain...................................... (4,968)
Cumulative effect of accounting change.................. 1,446
Deferred income taxes................................... 12,455 18,336
Other, net.............................................. 639 (971)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................... 18,503 528
Inventories........................................... (7,752) (8,545)
Prepaid expenses and other assets..................... (10,653) 10,169
Accounts payable, accrued expenses and other
liabilities......................................... (45,170) (42,225)
Income taxes.......................................... 6,984 (7,993)
--------- ----------
Net cash provided by operating activities........... 133,222 122,954
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment............ (55,317) (55,378)
Cash outflows for acquisitions and investments............ (16,047) (270,131)
Net proceeds from divestitures............................ 89,037
Other..................................................... 1,230 1,139
--------- ----------
Net cash used in investing activities............... (70,134) (235,333)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ 107,366 1,265,908
Repayment of debt......................................... (185,196) (941,800)
Payment of deferred financing costs....................... (11,287)
Issuance of common stock, net of expenses................. 16,505 17,852
Redemption of trust issued preferred securities........... (100,000)
Redemption of common stock................................ (6,056) (69,386)
Distribution to minority interest......................... (3,879) (4,759)
--------- ----------
Net cash provided by (used in) financing
activities........................................ (71,260) 156,528
--------- ----------
Increase (decrease) in cash and cash equivalents............ (8,172) 44,149
Cash and cash equivalents, beginning of period.............. 31,110 25,155
--------- ----------
Cash and cash equivalents, end of period.................... $ 22,938 $ 69,304
========= ==========
</Table>
See notes to condensed consolidated financial statements.
5
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SUIZA FOODS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
1. GENERAL
BASIS OF PRESENTATION--The unaudited condensed consolidated financial
statements contained in this report have been prepared on the same basis as the
consolidated financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2000. In our opinion, we have made all necessary adjustments
(which include only normal recurring adjustments) in order to present fairly, in
all material respects, our consolidated financial position, results of
operations and cash flows as of the dates and for the periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. Our results of operations for the period ended June 30, 2001 may not be
indicative of our operating results for the full year. The consolidated
financial statements contained in this report should be read in conjunction with
our 2000 consolidated financial statements contained in our Annual Report on
Form 10-K as filed with the Securities and Exchange Commission on April 2, 2001.
This Quarterly Report, including these notes, have been written in
accordance with the Securities and Exchange Commission's "Plain English"
guidelines. Unless otherwise indicated, references in this report to "we," "us"
or "our" refer to Suiza Foods Corporation and its subsidiaries, including Suiza
Dairy Group (our joint venture with Dairy Farmers of America), as a whole.
RECENTLY ISSUED ACCOUNTING STANDARDS--Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, became effective for us as of January 1, 2001. We hedge
a portion of our exposure to variable interest rates using interest rate swaps.
These swaps, designated as cash flow hedging instruments, are used to hedge a
portion of our debt, with the objective of minimizing our interest rate risk and
stabilizing cash flows. These swaps are required to be recorded as an asset or
liability on our consolidated balance sheet at fair value, with an offset to
other comprehensive income to the extent the hedge is effective. Derivative
gains and losses included in other comprehensive income are reclassified into
earnings as the underlying transaction occurs. Any ineffectiveness in our hedges
is recorded as an adjustment to interest expense.
As of June 30, 2001, our derivative liability totaled $30.1 million on our
consolidated balance sheet. Hedge ineffectiveness, determined in accordance with
SFAS No. 133 and included in our income statement, totaled approximately $48,000
for the three-months and six-months ended June 30, 2001. Approximately
$1.4 million and $1.5 million of losses (net of taxes and minority interest)
were reclassified to interest expense from other comprehensive income during the
three- months and six-months ended June 30, 2001. We estimate that approximately
$8.6 million of net derivative losses (net of income taxes and minority
interest) included in other comprehensive income will be reclassified into
earnings within the next twelve months. These losses will partially offset the
lower interest payments recorded on our variable rate debt.
The Emerging Issues Task Force (Task Force) of the Financial Accounting
Standards Board Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs," became effective for us in the fourth quarter of 2000. Our shipping and
handling costs are included in either cost of sales or selling and distribution
expense, depending on the nature of such costs. Shipping and handling costs
included in cost of sales reflect the cost of shipping products to customers
through third party carriers, inventory warehouse costs and product loading and
handling costs. Shipping and handling costs included in selling and distribution
expense consist primarily of route delivery costs for both company-owned
delivery routes and independent distributor routes, to the extent that such
independent distributors are paid a delivery fee. Shipping and handling costs
that were recorded as a component of selling and distribution expense were
approximately $162.0 million and $322.6 million for the three-month and
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six-month periods ending June 30, 2001, compared to $149.6 million and
$298.5 million during the three-month and six-month periods ending June 30,
2000.
The Task Force recently reached a consensus on Issue No. 00-14, "Accounting
for Certain Sales Incentives," which will become effective for us in the first
quarter of 2002. This Issue addresses the recognition, measurement and income
statement classification of sales incentives that have the effect of reducing
the price of a product or service to a customer at the point of sale. Our
current accounting policy for recording sales incentives within the scope of
this Issue is to record estimated coupon expense as a reduction of revenue based
on historical coupon redemption experience which is consistent with the
requirements of this Issue. Therefore, our adoption of this Issue will have no
impact on our consolidated financial statements.
In April 2001, the Task Force reached a consensus on Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products." We plan to adopt this Issue in the first quarter of
2002, as required. Under this Issue, certain consideration paid to our customers
will be required to be classified as a reduction of revenue. Adoption of this
Issue will result in the reclassification of certain costs as a reduction of
revenue. However, there will be no change in reported net income.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for business
combinations. Under the new standard, all business combinations entered into
after June 30, 2001 are to be accounted for by the purchase method. SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. SFAS No. 142 requires that goodwill no longer be
amortized, but instead requires a transitional goodwill impairment assessment
and annual impairment tests thereafter. Any transitional impairment loss
resulting from the adoption will be recognized as the effect of a change in
accounting principle in our income statement. SFAS No. 142 will also require
that recognized intangible assets be amortized over their respective estimated
useful lives. As part of the adoption, we will reassess the useful lives and
residual values of all intangible assets. Any recognized intangible asset
determined to have an indefinite useful life will not be amortized, but instead
tested for impairment in accordance with the standard until its life is
determined to no longer be indefinite.
We are required to adopt the provisions of SFAS 142 on January 1, 2002.
However, for any business combination completed after June 30, 2001, the
purchase method of accounting will be required and goodwill and any intangible
asset determined to have an indefinite useful life will not be amortized.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized until December 31, 2001. At
June 30, 2001, our goodwill approximated $1.65 billion. Amortization of goodwill
and other intangible assets with indefinite lives was approximately
$12.7 million and $25.3 million for the three-month and six-month periods ended
June 30, 2001, respectively. We are currently evaluating the impact of adopting
these pronouncements on our consolidated financial statements.
2. INVENTORIES
<Table>
<Caption>
AT JUNE 30, AT DECEMBER 31,
2001 2000
----------- ---------------
(in thousands)
Raw materials and supplies......................... $ 94,854 $ 99,315
Finished goods..................................... 99,611 87,398
-------- --------
Total............................................ $194,465 $186,713
======== ========
</Table>
7
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3. LONG-TERM DEBT
<Table>
<Caption>
AT JUNE 30, AT DECEMBER 31,
2001 2000
----------- ---------------
(in thousands)
Parent-level credit facility...................... $ -- $ --
Subsidiary debt obligations:
Suiza Dairy Group credit facility............... 933,600 1,095,000
Receivable-backed loan.......................... 250,000 150,000
Foreign subsidiary term loan.................... 35,654 39,519
Uncommitted line of credit...................... -- 20,000
Other lines of credit........................... 5,873 --
Industrial development revenue bonds............ 8,845 8,845
Capital lease obligations and other............. 37,602 39,905
---------- ----------
1,271,574 1,353,269
Less current portion Less current portion......... (136,011) (128,224)
---------- ----------
Total........................................... $1,135,563 $1,225,045
========== ==========
</Table>
PARENT-LEVEL CREDIT FACILITY--This facility, which expires in January 2005,
provides us with a revolving line of credit of up to $300 million to be used for
general corporate and working capital purposes, including the financing of
acquisitions. As of June 30, 2001, no funds were borrowed under this facility,
but there were $4.8 million of issued but undrawn letters of credit outstanding.
See "Credit Facility Terms" below for a description of the terms of our
parent-level credit facility. This facility will be terminated and replaced upon
completion of our pending acquisition of Dean Foods.
SUIZA DAIRY GROUP CREDIT FACILITY--Suiza Dairy Group, our joint venture with
Dairy Farmers of America, has a $1.61 billion credit facility with a group of
lenders which expires in January 2005. This facility provides an $805 million
revolving line of credit, a $625 million term loan and a $180 million term loan.
At June 30, 2001, there were outstanding borrowings of $933.6 million under this
facility, in addition to $20.6 million of issued but undrawn letters of credit.
See "Credit Facility Terms" below for a description of the terms of the Suiza
Dairy Group credit facility. This facility will be terminated and replaced upon
completion of our pending acquisition of Dean Foods.
CREDIT FACILITY TERMS--Amounts outstanding under the Suiza Dairy Group
credit facility and our parent-level credit facility bear interest at a rate per
annum equal to one of the following rates, at our option:
- a base rate equal to the higher of the Federal Funds rate plus 50 basis
points or the prime rate, plus a margin that varies from 25 to 125 basis
points for the Suiza Dairy Group credit facility and 0 to 75 basis points
on the parent-level credit facility, depending on our ratio of defined
indebtedness to EBITDA; or
- the London Interbank Offering Rate ("LIBOR") computed as LIBOR divided by
the product of one minus the Eurodollar Reserve Percentage, plus a margin
that varies from 125 to 225 basis points for the Suiza Dairy Group credit
facility and 75 to 175 basis points on the parent-level credit facility,
depending on our ratio of indebtedness to EBITDA.
The interest rate in effect on the Suiza Dairy Group credit facility,
including the applicable interest rate margin, was 5.51% at June 30, 2001.
However, we have interest rate swap agreements in place that hedge variable rate
interest on a majority of this facility. The average interest rate on the swaps
during the three months ended June 30, 2001, plus the applicable interest rate
margin on the credit facility,
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totaled 8.16%. Interest is payable quarterly or at the end of the applicable
interest period. Scheduled principal payments on the $625 million term loan are
due in the following installments:
- $25.0 million quarterly from March 31, 2001 through December 31, 2001;
- $31.25 million quarterly from March 31, 2002 through December 31, 2002;
- $37.5 million quarterly from March 31, 2003 through December 31, 2003;
- 25% of the outstanding balance (up to $50 million) quarterly on each of
March 31, 2004, June 30, 2004 and September 30, 2004; and the
- Remaining balance on January 4, 2005.
No principal payments are due on the $805 million line of credit and the
$180 million term loan until maturity on January 4, 2005.
Both the parent-level credit facility and the Suiza Dairy Group credit
facility will be terminated and replaced upon completion of our pending
acquisition of Dean Foods.
In consideration for the revolving commitments, we pay a commitment fee on
unused amounts of the Suiza Dairy Group credit facility and the parent-level
credit facility that ranges from 25 to 50 basis points, based on our ratio of
indebtedness to EBITDA (as defined in the agreements).
The Suiza Dairy Group credit facility and our parent-level credit facility
both contain various financial and other restrictive covenants and requirements
that we maintain certain financial ratios, including a leverage ratio (computed
as the ratio of the aggregate outstanding principal amount of defined
indebtedness to EBITDA, as defined separately by each agreement) and an interest
coverage ratio (computed as the ratio of EBITDA to interest expense as defined
separately by each agreement). In addition, both facilities require that we
maintain a minimum level of net worth as defined separately by each agreement.
The facilities also contain limitations on liens, investments, the incurrence of
additional indebtedness and acquisitions, and prohibit certain dispositions of
property and restrict certain payments, including dividends. The credit
facilities are secured by the capital stock of certain of our subsidiaries.
RECEIVABLE-BACKED LOAN--On June 30, 2000 we entered into a $150 million
credit facility secured by certain subsidiary accounts receivable. Pursuant to
this transaction, we pledged receivables to a multi-seller asset-backed conduit
sponsored by a major financial institution. In February 2001, we increased the
amount of this facility to $175 million and in June 2001, we further increased
it to $250 million. We have used the proceeds of this facility to pay down
higher-cost borrowings under the Suiza Dairy Group credit facility. The loan
bears interest at a variable rate based on the commercial paper yield as defined
in the agreement. The interest rate on the receivable-backed loan at June 30,
2001 was 4.50%.
FOREIGN SUBSIDIARY TERM LOAN--In connection with our acquisition of Leche
Celta in February 2000, our Spanish subsidiary obtained a 7 billion peseta
non-recourse loan from a Spanish lender, all of which was borrowed at closing
and used to finance a portion of the purchase price. The loan, which is secured
by the stock of Leche Celta, will expire on February 21, 2007, bears interest at
a variable rate based on the ratio of Leche Celta's debt to EBITDA (as defined
in the loan agreement), and requires semi-annual principal payments beginning in
August 2001. The interest rate in effect on this loan at June 30, 2001 was
7.04%.
UNCOMMITTED LINE OF CREDIT--Suiza Dairy Group also has an agreement with
First Union National Bank pursuant to which it may borrow up to $20.0 million
from time to time on an uncommitted basis. There is no commitment fee associated
with this facility. On June 30, 2001, Suiza Dairy Group had no outstanding
balance under this line of credit.
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OTHER LINES OF CREDIT--Leche Celta, our Spanish subsidiary, is our only
subsidiary with a line of credit separate from the credit facilities described
above. Leche Celta's existing line of credit, which is in the principal amount
of 2.5 billion pesetas, was obtained on July 12, 2000 in replacement of a
pre-existing line of credit, bears interest at a variable interest rate based on
the ratio of Leche Celta's debt to EBITDA (as defined in the loan agreement), is
secured by our stock in Leche Celta and will expire in June 2007. At June 30,
2001, there were outstanding borrowings of $5.9 million under this line of
credit at an interest rate of 5.00%.
INDUSTRIAL DEVELOPMENT REVENUE BONDS--Certain of our subsidiaries have
revenue bonds outstanding which require annual sinking fund redemptions
aggregating $0.7 million and are secured by irrevocable letters of credit issued
by financial institutions, along with first mortgages on certain real property
and equipment. Interest on these bonds is due semiannually at interest rates
that vary based on market conditions which, at June 30, 2001 ranged from 2.95%
to 3.15%.
OTHER SUBSIDIARY DEBT--Other subsidiary debt includes various promissory
notes for the purchase of property, plant and equipment and capital lease
obligations. The various promissory notes payable provide for interest at
varying rates and are payable in monthly installments of principal and interest
until maturity, when the remaining principal balances are due. Capital lease
obligations represent machinery and equipment financing obligations which are
payable in monthly installments of principal and interest and are collateralized
by the related assets financed.
INTEREST RATE AGREEMENTS--We have interest rate swaps in place that have
been designated as hedges against variable interest rate exposure on loans under
the Suiza Dairy Group credit facility. The following table summarizes our
various interest rate agreements:
<Table>
<Caption>
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE
- -------------------- ---------------- ---------------
4.90% to 4.93% $275.0 million December 2002
6.07% to 6.23% 325.0 million December 2002
6.23% 50.0 million June 2003
6.69% 100.0 million December 2004
6.69% to 6.74% 100.0 million December 2005
6.78% 75.0 million December 2006
</Table>
These derivative agreements provide hedges for loans under Suiza Dairy
Group's credit facility by limiting or fixing the LIBOR interest rates specified
in the Suiza Dairy Group credit facility at the interest rates noted above until
the indicated expiration dates of these interest rate derivative agreements.
We have also entered into interest rate swap agreements that provide hedges
for loans under Leche Celta's term loan. See Note 3--Foreign Subsidiary Term
Loan. The following table summarizes these agreements:
<Table>
<Caption>
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE
- -------------------- ----------------------------- ---------------
5.54% 1,500,000,000 pesetas
(approximately $7.6 million) November 2003
5.6% 2,000,000,000 pesetas
(approximately $10.2 million) November 2004
</Table>
We are exposed to market risk under these arrangements due to the
possibility of interest rates on our outstanding debt falling below the rates on
our interest rate derivative agreements. We incurred $1.4 million of additional
interest expense, net of taxes and minority interest, during the three months
ended June 30, 2001 as a result of interest rates on our variable rate debt
falling below the agreed-upon interest rate on our existing swap agreements. See
Note 1--General--Recently Issued Accounting
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Standards. Credit risk under these arrangements is remote since the
counterparties to our interest rate derivative agreements are major financial
institutions.
NEW CREDIT FACILITY--On July 31, 2001, we entered into a new credit
agreement with a syndicate of banks and other financial institutions which will
replace the existing Suiza credit facility and the Suiza Dairy Group credit
facility and provide financing for our acquisition of Dean Foods. Although we
have entered into this new credit agreement, we will not be able to borrow under
the new credit agreement until certain conditions to funding have occurred.
These conditions include, among other conditions, the completion of our
acquisition of Dean Foods and the termination of our existing credit facilities.
Once all conditions precedent to funding have been satisfied, the following
credit facilities will be available to us:
- a revolving line of credit providing for periodic advances not to exceed
$800 million of which up to $100 million is available to Suiza on a
same-day basis in the form of swingline loans and up to $150 million is
available in the form of letters of credit; and
- two term loans in the amount of $900 million (Term Loan A) and $1 billion
(Term Loan B), respectively.
Term Loan A and Term Loan B are each available for funding only in
connection with the initial funding under the new credit agreement that is
expected to occur upon completion of our acquisition of Dean Foods. We
anticipate that both term loans will be fully funded at that time.
After funding of the two term loans, we will rely upon internally generated
cash flows and our revolving line of credit to meet our continuing working
capital needs, including the financing of acquisitions. Our new revolving line
of credit will expire, and Term Loan A will mature, on July 15, 2007, and Term
Loan B will mature on July 17, 2008.
Interest on outstanding loans (including revolving and term loans) under the
new credit facility will accrue at a variable rate of interest during the terms
of the loans. These interest rates will depend upon one or more of two
prevailing market interest rates, as follows:
(i) either the prime rate of First Union National Bank or a weighted average
of the overnight funds rate published by the Federal Reserve Bank of New York,
plus fifty basis points; (the Alternate Base Rate); or
(ii) the London Interbank Offered Rate as adjusted under a formula provided
in the new Credit Agreement (the LIBOR Rate).
In each case a margin that varies depending upon the ratio of our defined
indebtedness to EBITDA (the Leverage Ratio) is added to the foregoing reference
rates to determine the applicable interest rate.
In addition to interest, we will pay a commitment fee in respect of unused
portions of our unused revolving line of credit that varies from 37.5 basis
points to 50 basis points depending on our Leverage Ratio from time to time.
In addition to regular interest payments, we will be required to make
quarterly principal payments on the term loans commencing March 31, 2002. These
quarterly principal payments are not anticipated to fully amortize the principal
amount of the term loans prior to the maturity of such loans. As a result, we
expect that an additional principal payment in the amount of $112,500,000 will
be required in respect of Term Loan A on July 15, 2007. Similarly, we anticipate
a final principal payment in the amount of $472,500,000 will be required in
respect of Term Loan B on July 15, 2008.
In addition to affirmative and negative covenants similar to those contained
in our existing credit facilities, we: (i) will grant liens on substantially all
of our domestic assets (other than real property and improvements owned by Dean
Foods and its subsidiaries) to secure the indebtedness under the new credit
agreement; and (ii) have agreed, with limited exceptions, not to pay dividends
or repurchase our
11
<Page>
capital stock in amounts greater than $50 million unless our Leverage Ratio as
of our most recently ended fiscal quarter is less than 3.0 to 1.0 and we are
otherwise in compliance with our financial covenants after giving effect to the
payment of such dividend or the acquisition of such capital stock.
4. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
We currently have two reportable segments: Suiza Dairy Group and Morningstar
Foods. Suiza Dairy Group manufactures and distributes fluid milk, ice cream and
novelties, half-and-half and whipping cream, sour cream, cottage cheese and
yogurt, as well as fruit juices, flavored drinks and bottled water. Morningstar
Foods manufactures dairy and non-dairy coffee creamers, whipping cream and
pre-whipped toppings, specialty products such as lactose-reduced milk and soy
milk, as well as certain refrigerated and extended shelf-life products.
Our Puerto Rico and Spanish operations are not required under applicable
accounting rules to be separately reported and, therefore, they are included in
the charts below on the "Corporate/Other" line. This line also includes the two
European packaging businesses that we sold in March and May 2000.
The accounting policies of our segments are the same as those described in
the summary of significant accounting policies set forth in Note 1 to our 2000
consolidated financial statements contained in our 2000 Annual Report on
Form 10-K.
We do not allocate income taxes or management fees to segments. In addition,
there are no significant non-cash items other than depreciation and amortization
in reported operating income. The amounts in the following tables are derived
from reports used by our executive management team:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ---------- ----------
(in thousands)
Net sales from external customers:
Suiza Dairy Group........................... $1,242,045 $1,165,529 $2,444,862 $2,287,534
Morningstar Foods........................... 186,203 169,440 359,702 328,644
Corporate/Other............................. 98,826 99,385 196,863 212,317
---------- ---------- ---------- ----------
Total..................................... $1,527,074 $1,434,354 $3,001,427 $2,828,495
========== ========== ========== ==========
Intersegment sales:
Suiza Dairy Group........................... $ 3,969 $ 2,981 $ 8,095 $ 6,731
Morningstar Foods........................... 22,839 12,285 42,397 23,905
Corporate/Other.............................
---------- ---------- ---------- ----------
Total..................................... $ 26,808 $ 15,266 $ 50,492 $ 30,636
========== ========== ========== ==========
Operating income:
Suiza Dairy Group........................... $ 75,930 $ 81,943 $ 142,812 $ 142,567
Morningstar Foods........................... 24,748 23,337 46,265 43,790
Corporate/Other............................. 2,224 (1,964) (2,297) (6,729)
---------- ---------- ---------- ----------
Total..................................... $ 102,902 $ 103,316 $ 186,780 $ 179,628
========== ========== ========== ==========
Assets at June 30:
Suiza Dairy Group........................... $2,878,308 $2,833,485
Morningstar Foods........................... 438,753 394,776
Corporate/Other............................. 443,907 447,973
---------- ----------
Total..................................... $3,760,968 $3,676,234
========== ==========
</Table>
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<Page>
Geographic information for the three-month and six-month periods ended
June 30:
<Table>
<Caption>
REVENUES
------------------------------------------------------------ LONG-LIVED ASSETS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, AT JUNE 30,
---------------------------- -------------------------- --------------------------
2001 2000 2001 2000 2001 2000
----------- ----------- ---------- ---------- ---------- ----------
(in thousands) (in thousands) (in thousands)
United States.............. $1,428,248 $1,334,969 $2,804,564 $2,616,178 $2,711,862 $2,670,650
Puerto Rico................ 56,582 56,318 112,597 114,177 125,621 121,150
Europe..................... 42,244 43,067 84,266 98,140 100,582 116,330
---------- ---------- ---------- ---------- ---------- ----------
Total...................... $1,527,074 $1,434,354 $3,001,427 $2,828,495 $2,938,065 $2,908,130
========== ========== ========== ========== ========== ==========
</Table>
We have no single customer within any segment which represents greater than
ten percent of our consolidated revenues.
5. COMPREHENSIVE INCOME
Comprehensive income consists of net income plus all other changes in equity
from non-owner sources. Consolidated comprehensive income was $34.1 million and
$41.6 million for the three-months and six-months ended June 30, 2001. The
amounts of income tax (expense) benefit and minority interest charges allocated
to each component of other comprehensive income during the six months ended
June 30, 2001 are included below.
<Table>
<Caption>
TAX BENEFIT
PRE-TAX (EXPENSE)
INCOME AND MINORITY
(LOSS) INTEREST NET AMOUNT
-------- ------------ ----------
(in thousands)
Accumulated other comprehensive income, December 31,
2000..................................................... $ (2,394) $ 1,283 $ (1,111)
Cumulative translation adjustment arising during
period................................................. (3,534) 1,389 (2,145)
Cumulative effect of accounting change................... (16,278) 9,875 (6,403)
Net change in fair value of derivative instruments....... (15,564) 9,466 (6,098)
Amounts reclassified to income statement related to
derivatives............................................ 124 (74) 50
-------- -------- --------
Accumulated other comprehensive income, March 31, 2001..... $(37,646) $ 21,939 $(15,707)
-------- -------- --------
Cumulative translation adjustment arising during
period................................................. (2,013) 791 (1,222)
Net change in fair value of derivative instruments....... (1,823) 1,115 (708)
Amounts reclassified to income statement related to
derivatives............................................ 3,607 (2,194) 1,413
-------- -------- --------
Accumulated other comprehensive income, June 30, 2001...... $(37,875) $ 21,651 $(16,224)
======== ======== ========
</Table>
6. STOCKHOLDERS' EQUITY
We repurchased 123,334 shares under our open market share repurchase program
during the first six months of 2001, for an aggregate purchase price of
approximately $6.1 million. Approximately $101.3 million remains currently
available for spending under this program.
Repurchased shares are treated as effectively retired in our consolidated
financial statements.
7. PLANT CLOSING COSTS
PLANT CLOSING COSTS--As part of our overall integration and cost reduction
program initiated during 1999, we recorded plant closing costs during the first
quarter of 2001 in the amount of $843,000 related to the closing of our Canton,
Mississippi plant.
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<Page>
Our integration and cost reduction program consists of several individual
cost reduction plans. The principal components of each such plan are:
- Workforce reduction as a result of plant closings, plant rationalizations
and consolidation of administrative functions. Workforce reduction costs
are charged to earnings in the period that the plan is established in
detail and employee severance and benefits are appropriately communicated.
Our current plans include an overall reduction of 129 positions, primarily
plant employees associated with the plant closings and rationalization.
All of those employees had been severed as of June 30, 2001.
- Shutdown costs, which are costs necessary to prepare plant facilities for
closure.
- Additional costs incurred after shutdown, such as lease obligations or
termination costs, utilities and property taxes.
- Write-downs of property, plant and equipment and other assets, primarily
for asset impairments as a result of facilities that are no longer used in
operations. The impairments relate primarily to owned building, land and
equipment at the facilities which are being sold and are written down to
their estimated fair value.
Activity with respect to plant closing costs for 2001 to date is summarized
below:
<Table>
<Caption>
SIX MONTHS ENDED
ACCRUED CHARGES JUNE 30, 2001 ACCRUED CHARGES
AT ------------------- AT
DECEMBER 31, 2000 ACCRUALS PAYMENTS JUNE 30, 2001
----------------- -------- -------- ---------------
(in thousands)
Cash Charges:
Workforce reduction costs................. $1,179 $238 $(1,125) $292
Shutdown costs............................ 363 289 (159) 493
Lease obligations after shutdown.......... 118 182 (204) 96
Other..................................... 5 (2) 3
------ ---- ------- ----
Subtotal.................................... $1,660 $714 $(1,490) $884
====== ======= ====
Noncash charges:............................
Write-down of property, plant and
equipment............................... 129
----
Total charges............................... $843
====
</Table>
There have not been significant adjustments to any plan included within our
integration and cost reduction program, and the majority of future cash
requirements to reduce the liabilities under the plans are expected to be
completed within one year.
ACQUIRED FACILITY CLOSING COSTS--As part of our purchase price allocations
related to the acquisitions of Broughton Foods during 1999 and Southern Foods
during 2000, we accrued certain costs pursuant to plans to exit certain
activities and operations of those acquired businesses in order to rationalize
production and reduce costs and inefficiencies.
The principal components of the plans included the following:
- Workforce reduction as a result of plant closings including an overall
reduction of 212 plant personnel. The costs incurred were charged against
acquisition liabilities. All except 29 employees had been terminated under
these plans as of June 30, 2001.
- Shutdown costs including costs necessary to clean and prepare plant
facilities for closure, and certain additional costs to be incurred after
shutdown including lease obligations or termination costs, utilities and
property taxes.
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<Page>
Set forth in the following chart are the types and amounts of cash payments
made against these accruals during 2001 to date:
<Table>
<Caption>
ACCRUED CHARGES ACCRUED CHARGES
AT AT
DECEMBER 31, 2000 PAYMENTS JUNE 30, 2001
----------------- -------- ---------------
(in thousands)
Cash Charges:
Workforce reduction costs.................. $ 997 $ (145) $ 852
Shutdown costs............................. 7,271 (1,480) 5,791
------ ------- ------
Total.................................... $8,268 $(1,625) $6,643
====== ======= ======
</Table>
8. ACQUISITIONS
On April 4, 2001, we signed a definitive merger agreement with Dean Foods
Company, the nation's second largest dairy processor with annual revenues of
over $4 billion. The merger agreement provides for the merger of Dean Foods with
and into one of our subsidiaries. As a result of the merger, each share of
common stock of Dean Foods will automatically convert into the right to receive
.429 shares of our common stock and $21.00 in cash, subject to adjustment in
certain circumstances. We expect to issue approximately 15.3 million shares of
common stock, and to pay approximately $750 million in cash, to Dean's
stockholders in the merger. The merger agreement contains customary closing
conditions including, among others, approval of our stockholders and the
stockholders of Dean Foods, and expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. We expect to
close the merger during the fourth quarter of 2001.
In connection with the merger, we have also agreed to repurchase the 33.8%
minority interest in Suiza Dairy Group currently held by Dairy Farmers of
America (DFA) for:
- approximately $165 million in cash, subject to adjustment in certain
circumstances as described in our agreement with DFA,
- a subordinated contingent promissory note in the original principal amount
of $50 million payable only in the event that we terminate or breach one
of our existing milk supply agreements with DFA prior to the twentieth
anniversary of the closing date, and
- six plants (and the operations associated with those plants) located in
areas where our operations overlap with those of Dean Foods. DFA has
assigned its right to acquire these plants to National Dairy Holdings, an
entity in which DFA owns a minority interest. Therefore, when the merger
occurs, we expect to transfer the six plants to National Dairy Holdings
rather than to DFA.
Also as part of the consideration to be paid to DFA, we will amend one of
our existing milk supply agreements with DFA to provide that if we do not,
within a specified period after closing, offer DFA the right to supply raw milk,
or manage the supply of raw milk, to certain of Dean's dairy plants after the
merger, we could be required to pay liquidated damages to DFA in an amount of up
to $80 million. Any such liquidated damages would be paid without interest over
a five-year period and would reduce the principal amount of the $50 million
contingent promissory note described above by an amount equal to approximately
25% of such payments.
Our repurchase of DFA's interest in Suiza Dairy Group is conditioned on, and
is expected to occur simultaneously with, the closing of our acquisition of Dean
Foods.
We will pay the cash portion of the purchase price for the transactions with
Dean Foods and DFA with borrowings under a new $2.7 billion credit facility that
will be funded upon closing of the transactions.
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<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are the nation's leading dairy processor and distributor, producing a
full line of company-branded and customer-branded dairy products such as fluid
milk, ice cream and novelties, coffee creamers, half-and-half, whipping cream,
sour cream, cottage cheese, yogurt, extended shelf-life flavored milks, soy milk
and pre-whipped topping. We also manufacture and distribute fruit juices,
flavored drinks, bottled water and coffee, and own a 43.1% interest in
Consolidated Container Company, one of the largest rigid plastic container
manufacturers in the United States. We currently have two reportable segments,
including Suiza Dairy Group and Morningstar Foods.
RESULTS OF OPERATIONS
The following table presents certain information concerning our results of
operations, including information presented as a percentage of net sales:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------------------
2001 2000 2000 2001
--------------------- --------------------- --------------------- ---------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
---------- -------- ---------- -------- ---------- -------- ---------- --------
(dollars in thousands) (dollars in thousands)
Net sales..................... $1,527,074 100.0% $1,434,354 100.0% $3,001,427 100.0% $2,828,495 100.0%
Cost of sales................. 1,163,947 76.2 1,074,136 74.9 2,281,774 76.0 2,128,118 75.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit................ 363,127 23.8 360,218 25.1 719,653 24.0 700,377 24.8
Operating expenses
Selling and distribution.... 207,247 13.6 199,803 13.9 414,818 13.9 399,927 14.1
General and
administrative............ 39,522 2.6 42,939 3.0 90,415 3.0 92,200 3.3
Amortization of
intangibles............... 13,456 0.9 12,970 0.9 26,797 0.9 25,658 0.9
Plant closing and other
costs..................... 1,190 0.1 843 2,964 0.1
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating
expenses................ 260,225 17.1 256,902 17.9 532,873 17.8 520,749 18.4
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating income.... $ 102,902 6.7% $ 103,316 7.2% $ 186,780 6.2% $ 179,628 6.4%
========== ===== ========== ===== ========== ===== ========== =====
</Table>
The sales and operating expenses of minority-owned businesses, including
Consolidated Container, are not included in the table presented above, but are
instead condensed onto a single line below operating income (see discussion
below under "Other (Income) Expense").
SECOND QUARTER AND YEAR-TO-DATE 2001 COMPARED TO SECOND QUARTER AND YEAR-TO-DATE
2000
NET SALES--Net sales increased by $92.7 million or 6.5% to $1.53 billion in
the second quarter of 2001 from $1.43 billion in the second quarter of 2000. For
the six month period ending June 30, net sales increased by $172.9 million, or
6.1%, to $3.00 billion in 2001 from $2.83 billion in 2000. Net sales for Suiza
Dairy Group increased $76.5 million, or 6.6%, in the second quarter of 2001
compared to the same period in 2000, and increased $157.3 million, or 6.9%, in
the first six months of 2001 compared to the same period in 2000. Net sales for
Morningstar Foods increased $16.8 million, or 9.9%, in the second quarter of
2001 over the same period in 2000, and increased $31.1 million, or 9.5%, in the
first six months of 2001 compared to the year-earlier period. These increases
were due primarily to an increase in prices charged for our products in response
to higher raw milk and butterfat costs.
COST OF SALES--Our cost of sales ratio was 76.2% in the second quarter of
2001 compared to 74.9% in the second quarter of 2000, and 76.0% for the first
six months of 2001 compared to 75.2% in the same period of 2000. The cost of
sales ratio for Suiza Dairy Group increased to 77.0% in the second quarter of
2001 from 75.7% in 2000, and increased to 76.8% in the first six months of 2001
from 75.9% in the same period of 2000. The cost of sales ratio for Morningstar
Foods increased to 68.0% in the second quarter of 2001 from 66.7% in 2000 and
increased to 67.5% in the first six months of 2001 from 67.1% in 2000. These
increases were due to higher raw milk and butterfat costs in 2001.
16
<Page>
OPERATING COSTS AND EXPENSES--Our operating expense ratio was 17.1% in the
second quarter of 2001 compared to 17.9% in the second quarter of 2000, and
17.8% in the first six months of 2001 compared to 18.4% in the same period of
2000. The operating expense ratio at Suiza Dairy Group was 16.9% in the second
quarter of 2001 compared to 17.3% in 2000, and 17.4% in the first six months of
2001 compared to 17.9% in the same period of 2000. This ratio improved due to
lower plant closing costs in 2001 and lower selling and general and
administrative costs. The operating expense ratio at Morningstar Foods was 18.7%
in the second quarter of 2001 compared to 19.5% in 2000, and 19.6% in the first
six months of both 2001 and 2000. This ratio improved in the second quarter of
2001 due to lower selling and general and administrative costs, which were
offset in the six month period by higher distribution and selling expenses
related to the introduction of new products.
OPERATING INCOME--Operating income in the second quarter of 2001 was
$102.9 million, a decrease of 0.4% from the second quarter of 2000 operating
income of $103.3 million. Our operating margin was 6.7% in the second quarter of
2001 compared to 7.2% in the second quarter of 2000, and 6.2% in the first six
months of 2001 compared to 6.4% in the same period of 2000. Operating margin for
Suiza Dairy Group declined to 6.1% in the second quarter of 2001 from 7.0% in
2000 and declined to 5.8% in the first six months of 2001 from 6.2% in 2000.
This decrease is due to higher raw milk costs during 2001, partly offset by
lower operating costs. Morningstar Foods' operating margin declined to 13.3% in
the second quarter of 2001 from 13.8% in 2000 and declined to 12.9% in the first
six months of 2001 from 13.3% in 2000 due to higher butterfat and distribution
costs.
OTHER (INCOME) EXPENSE--Interest expense decreased to $25.9 million in the
second quarter of 2001 from $26.9 million in 2000, and decreased to
$53.2 million in the first six months of 2001 from $54.1 million in 2000. This
decrease was the result of lower debt balances and lower interest rates in the
second quarter of 2001. Income from investments in unconsolidated affiliates,
which is primarily related to our minority interest in Consolidated Container,
decreased to $1.2 million in the second quarter of 2001 from $3.5 million in
2000 and decreased to $2.9 million in the first six months of 2001 from
$5.4 million in 2000. The majority of this decrease was due to higher raw
material costs, primarily for high density, polyethylene resin, incurred by
Consolidated Container which adversely affected Consolidated Container's results
of operations.
INCOME TAXES--Income tax expense was recorded at an effective rate of 37.1%
in the second quarter of 2001 compared to 38.4% in the second quarter of 2000,
and at an effective rate of 37.5% in the first six months of 2001 compared to
38.1% during the same period of 2000. This rate varies as the mix of earnings
contributed by our various business units changes, and as tax savings
initiatives are adopted.
MINORITY INTEREST--Minority interest in earnings, which is primarily the
33.8% ownership interest of Dairy Farmers of America in Suiza Dairy Group,
decreased to $9.4 million in the second quarter of 2001 from $10.8 million in
2000, and decreased to $16.3 million in the first six months of 2001 from
$17.2 million in 2000, due to lower earnings at Suiza Dairy Group.
EXTRAORDINARY GAIN--During the first quarter of 2000 we recognized a
$5.0 million extraordinary gain, net of income tax expense of $2.8 million,
which included the following items related to the early extinguishment of our
previous senior credit facility:
- A $6.5 million gain, net of income tax expense of $3.6 million, for
interest rate derivatives which became unhedged and were marked to fair
market value, and
- A $1.5 million loss, net of an income tax benefit of $0.8 million, for the
write-off of deferred finance costs.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE--Effective January 1, 2001 we adopted
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities (as amended). Our adoption of this
accounting standard resulted in the recognition of
17
<Page>
$1.4 million, net of an income tax benefit of $1.5 million and minority interest
benefit of $0.7 million, as a charge to earnings.
PENDING ACQUISITION OF DEAN FOODS COMPANY
On April 4, 2001, we signed a definitive agreement to acquire Dean Foods
Company, the nation's second largest dairy processor (NYSE: DF) with annual
revenues of over $4.0 billion. In connection with this transaction, which is
expected to close in the fourth quarter of this year, we have also agreed to
repurchase the 33.8% minority interest in Suiza Dairy Group currently held by
Dairy Farmers of America. For more information about these transactions, please
see Note 8 to our Condensed Consolidated Financial Statements contained in this
report.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Net cash provided by operating activities was $133.2 million for the first
six months of 2001 as contrasted to $123.0 million for the first six months of
2000. This increase was primarily due to a reduction in working capital.
We spent $55.3 million during the first six months of 2001 for capital
expenditures, all of which was funded using cash flow from operations. We intend
to spend a total of approximately $150 million in 2001 on capital expenditures
for our existing manufacturing facilities and distribution capabilities. We will
fund all of these capital expenditures using cash flow from operations.
DEBT OBLIGATIONS
At June 30, 2001, Suiza Dairy Group had outstanding borrowings of
$933.6 million under its credit facility, compared to $1.095 billion at
December 31, 2000, and $20.6 million in outstanding letters of credit. As of
June 30, 2001, up to $605.8 million was available for future borrowings under
Suiza Dairy Group's senior credit facility, subject to satisfaction of certain
conditions contained in the loan agreement. Suiza Dairy Group is currently in
compliance with all covenants and financial ratios contained in its credit
agreement.
At June 30, 2001 we had no debt outstanding under our parent-level senior
credit facility, and $4.8 million in outstanding letters of credit, leaving
$295.2 million available for future borrowing. We are currently in compliance
with all covenants and financial ratios contained in our parent-level credit
facility.
Scheduled principal payments in the amount of $25.0 million each are due and
payable on Suiza Dairy Group's $625.0 million term loan during each quarter of
2001. We fund these payments using cash flow from operations or borrowings under
our existing credit facilities.
Both the Suiza Dairy Group credit facility and the parent-level credit
facility are scheduled to expire in 2005. However, both of these facilities will
be terminated and replaced upon completion of our pending acquisition of Dean
Foods, which is expected to be completed during the fourth quarter of this year.
See "--Future Capital Requirements."
In February 2001, we increased the amount of our receivable-backed loan from
$150 million to $175 million, and in June 2001, we further increased the amount
of this facility to $250 million. In both instances we used the proceeds to pay
down higher cost debt.
FUTURE CAPITAL REQUIREMENTS
On April 5, 2001, we announced that we had signed a definitive agreement to
acquire Dean Foods Company. Pursuant to this agreement, each shareholder of Dean
Foods will be entitled to receive $21.00 in cash plus .429 shares of our common
stock for each share of Dean Foods common stock,
18
<Page>
subject to adjustment in certain circumstances, as described in more detail in
the merger agreement. We expect to issue approximately 15.3 million new shares
of common stock, and pay approximately $750.0 million in cash, to the
shareholders of Dean Foods in connection with the proposed transaction.
In connection with our proposed acquisition of Dean Foods, we have entered
into an agreement with Dairy Farmers of America (DFA) to purchase their 33.8%
interest in Suiza Dairy Group in exchange for
- approximately $165.0 million in cash, subject to adjustment as described
in our agreement with DFA,
- a subordinated contingent promissory note in the original principal amount
of $50.0 million (which increases annually based on the change in the
consumer price index, up to a maximum of $120.0 million) payable only in
the event that we terminate or breach one of our existing milk supply
agreements with DFA prior to the twentieth anniversary of the closing
date, and
- six plants (and the operations associated with those plants) located in
areas where our operations overlap with those of Dean Foods.
We have also agreed to amend our current milk supply agreement with DFA to
provide that if we do not, within a specified period after closing, offer DFA
the right to supply raw milk, or manage the supply of raw milk, to certain of
Dean Foods' dairy plants after the acquisition, we could be required to pay them
liquidated damages in an amount of up to $80.0 million. Any such liquidated
damages would be paid, without interest, over a five-year period and would
reduce the principal amount of the $50.0 million contingent promissory note
described above by an amount equal to 25% of such payments. The closing of our
proposed acquisition of DFA's minority interest in Suiza Dairy Group is
contingent on, and is expected to occur simultaneously with, the completion of
our acquisition of Dean Foods.
We intend to pay the cash portion of the purchase price for the transactions
with Dean Foods and DFA with borrowings under a new $2.7 billion credit facility
that will be funded upon closing of the acquisition of Dean Foods and the
purchase of DFA's interest in Suiza Dairy Group. See Note 3 to our condensed
consolidated financial statements contained in this report. In addition to
paying the cash portion of the purchase price for these transactions, we will
use the proceeds of the new credit facility to repay existing indebtedness under
the Suiza Dairy Group credit facility and the parent-level credit facility, and
for general corporate purposes. The existing parent-level and Suiza Dairy Group
credit facilities will be simultaneously terminated. We signed a definitive
credit agreement related to the new facility in July 2001. We paid approximately
$9.0 million in fees through June 30, 2001 in connection with securing the new
credit facility, all of which were paid using cash flow from operations and
borrowings under our existing credit facilities. During the third and fourth
quarters of 2001, we expect to pay an additional $36.9 million in fees, related
to the credit facility regardless of when or whether the acquisition of Dean
Foods is completed. We expect to pay all future fees out of cash flow from
operations or using borrowings under our existing credit facilities or our new
credit facility.
In addition to fees paid to our commercial lenders, we spent approximately
$7.0 million through June 30, 2001 on fees, expenses and other costs related to
our pending acquisition of Dean Foods. Regardless of when or whether our
proposed acquisition of Dean Foods is completed, we expect to spend an
additional amount of approximately $12.0 million for other transaction related
costs (in addition to the fees for our new credit facility), all of which will
be paid using cash flow from operations or borrowings under our existing credit
facilities or our new credit facility.
Pending the closing of the transactions with Dean Foods and DFA, we may
pursue additional acquisitions that are compatible with our core business
strategy. Any such acquisitions of fluid dairy businesses in the United States
(excluding territories) will be purchased through Suiza Dairy Group, pursuant to
our partnership agreement with DFA, except in certain unusual circumstances.
Therefore, any such acquisitions will likely be funded under the Suiza Dairy
Group credit facility. Any
19
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international acquisitions, or domestic acquisitions of non-fluid dairy
businesses, as well as all stock repurchases, will be funded through the
parent-level credit facility.
We believe that we have the financial resources necessary to meet our
capital requirements for the foreseeable future.
KNOWN TRENDS AND UNCERTAINTIES
TRENDS IN TAX RATES
Our 2000 tax rate was approximately 38.6%. We believe that our effective tax
rate will range from 37% to 40% for the next several years. This note varies as
the mix of earnings contributed by our various business units changes, and as
tax savings initiatives are identified. Our effective tax rate is affected by
various tax advantages applicable to our Puerto Rico based operations, which
will phase out in 2002. Any future acquisitions or dispositions could change our
effective tax rate.
RATIONALIZATION ACTIVITIES
As a result of our rapid growth in recent years, we have had, and will
continue to have, many opportunities to lower costs and become more efficient in
our operations. In 2001 we are continuing our emphasis on our rationalization
activities. As we continue these activities, we may incur costs or other
charges. Although we cannot estimate the amount of these costs or other charges
at this time, we do not expect that these costs will have a material adverse
impact on our earnings or results of operations. We also expect that our
earnings from our 43.1% equity investment in Consolidated Container Company will
continue to be reduced by our share of restructuring and other non-recurring
charges recognized by Consolidated Container as they continue to integrate the
operations of our former U.S. plastic packaging business and the business of
Reid Plastics. Although we cannot estimate the effect of these charges on our
earnings at this time, we do not expect these costs to have a material adverse
impact on our earnings or results of operations.
See "Risk Factors" below for a description of certain other uncertainties
concerning our business.
RISK FACTORS
This report contains certain statements about our future that are not
statements of historical fact. These statements are found in the portions of
this report entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Known Trends and Uncertainties" and "Quantitative and Qualitative
Disclosures About Market Risk." In some cases, you can identify these statements
by terminology such as "may," "will," "should," "expects," "seek to,"
"anticipates," "plans," "believes," "estimates," "intends," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These statements are only predictions, and in evaluating those
statements, you should carefully consider the risks outlined below. Actual
performance or results may differ materially and adversely.
WE MAY HAVE DIFFICULTIES MANAGING OUR GROWTH
We have expanded our operations rapidly in recent years, and our operations
will expand even more dramatically if our pending acquisition of Dean Foods is
completed. This rapid growth places a significant demand on our management and
our financial and operational resources, which subjects us to various risks,
including
- inability to successfully integrate or operate acquired businesses,
- inability to retain key customers of acquired businesses, and
- inability to realize or delays in realizing expected benefits from our
increased size.
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The integration of businesses we have acquired or may acquire in the future may
also require us to invest more capital than we expected or require more time and
effort by management than we expected. If we fail to effectively manage the
integration of the businesses we have acquired, our operations and financial
results could be affected, both materially and adversely.
OUR FAILURE TO SUCCESSFULLY COMPETE COULD ADVERSELY AFFECT OUR PROSPECTS AND
FINANCIAL RESULTS
Our business is subject to significant competition. If we fail to
successfully compete against our competitors, our business will be adversely
affected. Significant consolidation is currently underway in the retail grocery
and food service industries. As our customer base continues to consolidate, we
expect competition among us and our competitors to intensify as we compete for
the business of fewer customers. As this consolidation continues, there can be
no assurance that we will be able to keep our existing customers, or to gain new
customers. Winning new customers is particularly important to our future growth,
as demand tends to be relatively flat in our industry. Moreover, as our
customers become larger, they will have significantly greater purchasing
leverage, and may force prices and margins significantly lower than current
competitive levels.
We could also be adversely affected by any expansion of capacity by our
existing competitors or by new entrants in our markets. We face pressure from
other beverage companies seeking to expand their influence over consumer
beverage choices. These larger competitors may adversely affect us in our fight
for shelf space and consumption of products.
OUR INNOVATION EFFORTS MAY NOT SUCCEED
We have invested, or intend to invest, significant resources in product
innovation in an effort to increase our sales and profit margins as well as the
overall consumption of dairy products. We believe that sales and profit growth
through innovation is a significant source of potential growth for our business.
Innovation may improve demand, which has been relatively flat in the dairy
industry for a number of years. Further, innovation is important because we
expect margins on non value-added dairy products to be compressed as our
customer base consolidates. The success of our innovation initiatives will
depend on customer and consumer acceptance of our products, of which there can
be no assurance. If our innovation efforts do not succeed, or if we do not have
adequate resources to invest in innovation, we may not be able to continue to
significantly increase demand for our products, or our sales or profit margins.
RAW MATERIAL AND SUPPLY COST INCREASES COULD ADVERSELY AFFECT US
The most important raw materials that we use in our operations are raw milk
and cream (including butterfat). The prices of these materials increase and
decrease depending on supply and demand and, in some cases, governmental
regulation. Prices of raw milk and cream (including butterfat) can fluctuate
widely over short periods of time. This volatility in the cost of our raw
materials can adversely affect our performance.
Also, because we deliver a majority of our products directly to our
customers through our "direct store delivery" system, we are a large consumer of
diesel fuel. We experienced increased fuel costs during 2000 and in 2001 to date
as a result of increased fuel prices. Further increase in fuel prices beyond our
expectations could adversely affect our results of operations.
Consolidated Container Company, in which we own a 43.1% interest, uses high
density, polyethylene resin as its primary raw material. Due to recent increases
in the cost of petroleum products, Consolidated Container incurred sharply
increased costs for high density, polyethylene resin during 2000 and in 2001 to
date, which adversely affected its results of operations for those periods and,
accordingly, our earnings per share for those periods. Consolidated Container is
also our primary supplier of plastic bottles. Pursuant to our supply agreements
with Consolidated Container, the price we pay for plastic bottles increases as
the cost of high density, polyethylene resin increases. We are
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adversely affected by these cost increases to the extent they are not passed on
to our customers. Should the cost of high density, polyethylene resin rise even
higher than expected during the remainder of 2001, our financial results
including our gross profit and our earnings per share, for the balance of 2001
could be adversely affected.
OBTAINING REQUIRED REGULATORY APPROVALS AND SATISFYING OTHER CLOSING
CONDITIONS COULD DELAY, PREVENT OR ALTER THE PROJECTED BENEFITS OF OUR
PROPOSED ACQUISITION OF DEAN FOODS COMPANY
Completion of our proposed acquisition of Dean Foods Company is conditioned
upon the expiration or termination of the "waiting period" under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, the absence of any
governmental order prohibiting the closing of the transaction or making it
illegal, and the approval of our shareholders and the shareholders of Dean Foods
Company, among other conditions. We can give no assurance as to when or if the
conditions to closing will be satisfied.
Generally, in order for the waiting period under the Hart-Scott Rodino
Antitrust Improvements Act to expire without resulting in the federal government
obtaining an injunction prohibiting us from closing the transaction, we must
first satisfy any concerns that the U.S. Department of Justice (DOJ) might have
regarding the competitive effects of the proposed transaction. We can give no
assurance as to the terms and conditions, if any, that we will be obliged to
comply with in order to satisfy the concerns that the DOJ, or any court
reviewing the transaction, may have. We may not be able to satisfy their
concerns at all. If we are required to divest operations or lines of business
beyond our current expectations, the projected benefits of the proposed
acquisition may be diminished, which could adversely affect the financial
performance and prospects of our company after the acquisition. Moreover, we can
give no assurance that the DOJ will not attempt to block the merger altogether,
or that any such attempt would not be successful. In certain circumstances,
state antitrust enforcement officials or private parties also have the ability
to attempt to block the proposed transaction if they have concerns about the
competitive effects of the proposed transaction. While state approval is not
formally required, we can give no assurance that any such challenge would not be
successful.
In connection with the Dean Foods acquisition, we intend to purchase Dairy
Farmers of America's interest in Suiza Dairy Group and to transfer certain
plants to National Dairy Holdings. In addition to the Dean Foods acquisition,
both of these transactions are subject to DOJ review. Although completion of
these transactions is not a condition to completion of the Dean Foods
acquisition, if regulatory approval for these transactions is not timely
obtained, we could be prohibited from purchasing DFA's interest in Suiza Dairy
Group on the terms currently contemplated, and/or be required to find another
buyer for the plants to be divested, which could (i) delay the acquisition of
Dean Foods, (ii) have a material adverse impact on the projected benefits of the
acquisition and our financial performance after the acquisition, and/or
(iii) jeopardize our ability to obtain financing for the transaction on
acceptable terms.
We have incurred and will continue to incur, significant costs and expenses
related to the proposed acquisition prior to closing. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." A significant delay in the closing
of the proposed transaction beyond our current expectations could substantially
burden our financial and management resources, which could have an adverse
effect on our operations and/or financial results.
If any of the conditions to closing contained in the merger agreement are
not timely satisfied in accordance with the terms of the merger agreement, the
merger agreement could be terminated and the transaction would not be completed
at all. In that case, we would have incurred significant costs without achieving
the expected benefits of the proposed merger. All costs incurred in attempting
to complete the merger would be reflected as expenses on our consolidated income
statement, which would have a significant adverse affect on our earnings per
share in the period such costs are recorded.
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WE COULD BE ADVERSELY AFFECTED BY CHANGES IN REGULATIONS
Under the Federal Milk Marketing Order program, the federal government and
several state agencies establish minimum regional prices paid to producers for
raw milk. These prices, which are calculated by economic formula based on supply
and demand, vary depending on the type of product manufactured using the raw
milk. In New England, the Northeast Dairy Compact Commission sets a minimum
price for milk independent of the price set by the federal milk marketing
orders. The price we pay for raw milk in New England currently exceeds the price
we pay for raw milk in other parts of the country. Several other states are
considering adopting compacts among milk producers which would establish minimum
prices paid by milk processors, including us, to raw milk producers in those
states. We do not know whether new compacts will be authorized by Congress or,
if authorized, the extent to which these compacts would increase the prices we
pay for raw milk. A substantial increase in the price we are required to pay for
raw milk beyond our expectations could have an adverse effect on our results of
operations, to the extent those increases are not passed on to customers.
Moreover, even if those costs are passed on to customers, we could suffer a loss
of sales if the price of processed milk and other dairy products rises beyond
the price that consumers are willing to pay.
We are also subject to federal, state and local laws and regulations
relating to
- food quality,
- manufacturing standards,
- labeling,
- packaging,
- waste water, storm water, air emissions, storage tanks and hazardous
materials,
- occupational health and safety, labor, discrimination, and
- other matters.
While we believe that we are in compliance with all material governmental
regulations, we cannot be certain what effect any future material noncompliance,
or any material changes in these laws and regulations, including changes in the
laws regulating minimum prices for raw milk, could have on our business.
Material changes in these laws and regulations could have positive or adverse
effects on our business.
WE HAVE SUBSTANTIAL DEBT AND OTHER FINANCIAL OBLIGATIONS AND WE MAY INCUR
ADDITIONAL DEBT
As of June 30, 2001, we had substantial debt and other financial obligations
including, among others,
- $933.6 million of borrowings under the Suiza Dairy Group credit facility,
- $584.3 million of 5.5% preferred securities, and
- $250.0 million of indebtedness under the receivable-backed loan.
Those amounts compare to our stockholders' equity of $656.2 million as of
June 30, 2001. If our proposed acquisition of Dean Foods is completed, we will
be even more highly leveraged.
As of June 30, 2001, up to $605.8 million was available for future
borrowings under Suiza Dairy Group's senior credit facility, subject to
satisfaction of certain conditions contained in the loan agreement, and a total
of $295.2 million was available for borrowing under the parent-level credit
facility. We have pledged the stock of some of our subsidiaries to secure these
facilities and the assets of other subsidiaries to secure other indebtedness.
Our credit facilities and debt service obligations
- limit our ability to obtain additional financing in the future without
obtaining prior consent,
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- require us to dedicate a significant portion of our cash flow to the
payment of principal and interest on our debt, which reduces the funds we
have available for other purposes,
- may limit our flexibility in planning for, or reacting to, changes in our
business and market conditions,
- impose on us additional financial and operational restrictions, and
- expose us to interest rate risk since a portion of our debt obligations
are at variable rates.
Our ability to make scheduled payments on our debt and other financial
obligations depends on our financial and operating performance. Our financial
and operating performance is subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond our control. If
we do not comply with the financial and other restrictive covenants under our
credit facilities, we may default under these facilities. Upon default, our
lenders could accelerate the indebtedness under the facilities, foreclose
against their collateral or seek other remedies.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS
We sell food products for human consumption, which involves risks such as
- product contamination or spoilage,
- product tampering, and
- other adulteration of food products.
Consumption of an adulterated, contaminated or spoiled product may result in
personal illness or injury. We could be subject to claims or lawsuits relating
to an actual or alleged illness or injury, and we could incur liabilities that
are not insured or that exceed our insurance coverages.
Although we maintain quality control programs designed to address food
quality and safety issues, an actual or alleged problem with the quality, safety
or integrity of our products at any of our facilities could result in
- product withdrawals,
- product recalls,
- negative publicity,
- reduced demand for our products,
- temporary plant closings, and
- substantial costs of compliance or remediation.
Any of these events could have a material and adverse effect on our
financial condition.
OUR FOREIGN OPERATIONS BRING ADDED RISK
In February 2000, we purchased a majority interest in a Spanish dairy
processor. We have limited experience in managing a European dairy operation.
There can be no assurance that we will be able to effectively manage a dairy
operation in Europe. Also, we are exposed to foreign currency risk due to
certain operating cash flows and various financial instruments being denominated
in Spanish pesetas. Any substantial devaluation of Spanish pesetas would have an
adverse effect on our financial condition and results of operations.
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NEGATIVE PUBLICITY AND/OR SHORTAGES OF MILK SUPPLY RELATED TO MAD COW
DISEASE AND/OR FOOT AND MOUTH DISEASE COULD ADVERSELY AFFECT US
Recent incidences of bovine spongiform encephalopathy ("BSE" or "mad cow
disease") in some European countries have raised public concern about the safety
of eating beef and using or ingesting certain other animal-derived products. The
World Health Organization, the U.S. Food and Drug Administration and the United
States Department of Agriculture have all affirmed that BSE is not transmitted
to milk. Moreover, recent incidences of mad cow disease have occurred primarily
in Europe. No cases of disease in humans or livestock caused by BSE have ever
been detected in the United States. Notwithstanding these facts, we are still
subject to risk as a result of public misperception that milk products may be
affected by mad cow disease. To date, we have not seen any measurable impact on
our milk sales in Spain or the United States resulting from concerns about mad
cow disease. However, should public concerns about the safety of milk or milk
products escalate as a result of further occurrences of mad cow disease, we
could suffer a loss of sales, which could have a material and adverse affect on
our financial results.
Foot and Mouth Disease ("FMD") is a highly contagious disease of cattle,
swine, sheep, goats, deer, and other cloven-hooved animals. FMD causes severe
losses in the production of meat and milk; however, FMD does not pose a health
risk to humans. While there have been several recent occurrences of FMD in
Europe, the United States has been free of FMD since 1929. To date, we have not
seen a measurable impact on our supply of raw milk in Spain as a result of FMD.
However, should FMD become widespread in Spain, a milk supply shortage could
develop, which would affect our ability to obtain raw milk for our Spanish
operations and the price that we are required to pay for raw milk in Spain. If
we are unable to obtain a sufficient amount of raw milk to satisfy our Spanish
customers' needs, and/or if we are forced to pay a significantly higher price
for raw milk in Spain, our financial results in Spain could be materially and
adversely affected. Likewise, if there is an outbreak of FMD in the United
States, a shortage of raw milk could develop in the United States, which would
affect our ability to obtain raw milk and the price that we are required to pay
for raw milk in the United States. If we are unable to obtain a sufficient
amount of raw milk to satisfy our U.S. customers' needs and/or if we are forced
to pay a significantly higher price for raw milk in the United States, our
consolidated financial results could be materially and adversely affected.
LOSS OF OR INABILITY TO ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS
Our success depends to a large extent on the skills, experience and
performance of our key personnel. The loss of one or more of these persons could
hurt our business. We do not maintain key man life insurance on any of our
executive officers, directors or other employees. Also, we have experienced, and
could continue to experience, some difficulty in attracting management personnel
due to the currently low unemployment rates in the United States. If we are
unable to attract and retain key personnel, our business will be adversely
affected.
LOSS OF RIGHTS TO ANY OF OUR LICENSED BRANDS COULD ADVERSELY AFFECT US
We sell certain of our products under licensed brand names, such as
Hershey's-Registered Trademark-, Borden-Registered Trademark-,
Pet-Registered Trademark- and, beginning in the fourth quarter of this year,
Folgers Jakada-TM-. Should our rights to manufacture and sell products under any
of these names be terminated, our financial performance and results of
operations could be materially and adversely affected.
CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE
LAW COULD DETER TAKEOVER ATTEMPTS
Some provisions in our certificate of incorporation and bylaws could delay,
prevent or make more difficult a merger, tender offer, proxy contest or change
of control. Our stockholders might view any such transaction as being in their
best interests since the transaction could result in a higher stock price
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than the current market price for our common stock. Among other things, our
certificate of incorporation and bylaws
- authorize our board of directors to issue preferred stock in series with
the terms of each series to be fixed by our board of directors,
- divide our board of directors into three classes so that only
approximately one-third of the total number of directors is elected each
year,
- permit directors to be removed only for cause, and
- specify advance notice requirements for stockholder proposals and director
nominations.
In addition, with some exceptions, the Delaware General Corporation Law
restricts mergers and other business combinations between us and any stockholder
that acquires 15% or more of our voting stock.
We also have a stockholder rights plan. Under this plan, after the
occurrence of specified events, our stockholders will be able to buy stock from
us or our successor at reduced prices. These rights do not extend, however, to
persons participating in takeover attempts without the consent of our board of
directors. Accordingly, this plan could delay, defer, make more difficult or
prevent a change of control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE AGREEMENTS
We have interest rate swaps in place that have been designated as hedges
against our variable interest rate exposure on our loans under the Suiza Dairy
Group credit facility. The following table summarizes our various interest rate
agreements:
<Table>
<Caption>
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE
- -------------------- ---------------- ---------------
4.90% to 4.93% $275.0 million December 2002
6.07% to 6.23% 325.0 million December 2002
6.23% 50.0 million June 2003
6.69% 100.0 million December 2004
6.69% to 6.74% 100.0 million December 2005
6.78% 75.0 million December 2006
</Table>
These derivative agreements provide hedges for loans under Suiza Dairy
Group's credit facility by limiting or fixing the LIBOR interest rates specified
in the Suiza Dairy Group credit facility at the interest rates noted above until
the indicated expiration dates of these interest rate derivative agreements.
We have entered into interest rate swap agreements that provide hedges for
loans under Leche Celta's term loan. See Note 3 to our Consolidated Financial
Statements contained in this report. The following table summarizes these
agreements:
<Table>
<Caption>
FIXED INTEREST RATES NOTIONAL AMOUNTS EXPIRATION DATE
- -------------------- ----------------------------- ---------------
5.54% 1,500,000,000 pesetas
(approximately $7.6 million) November 2003
5.6% 2,000,000,000 pesetas
(approximately $10.2 million) November 2004
</Table>
We are exposed to market risk under these arrangements due to the
possibility of interest rates on our outstanding debt falling below the rates on
our interest rate derivative agreements. We incurred
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$1.4 million of additional interest expense during the three months ended
June 30, 2001 as a result of interest rates on our variable rate debt falling
below the agreed-upon interest rate on our existing swap agreements. See
Note 1--General--Recently Issued Accounting Standards. Credit risk under these
arrangements is remote since the counterparties to our interest rate derivative
agreements are major financial institutions.
A majority of our debt obligations are at variable rates. We have performed
a sensitivity analysis assuming a hypothetical 10% adverse movement in interest
rates. As of June 30, 2001, the analysis indicated that such interest rate
movement would not have a material effect on our financial position, results of
operations or cash flows. However, actual gains and losses in the future may
differ materially from that analysis based on changes in the timing and amount
of interest rate movement and our actual exposure and hedges.
FOREIGN CURRENCY
We are exposed to foreign currency risk due to operating cash flows and
various financial instruments that are denominated in foreign currencies. Our
most significant foreign currency exposures relate to the Spanish peseta and the
euro. Although a substantial devaluation of Spanish pesetas would have an
adverse effect on our financial condition and results of operations, we do not
believe that any such adverse effects would be material to our financial
condition or results of operations on a consolidated basis.
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PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2001, we held our annual meeting of stockholders. At the annual
meeting, we submitted the following matters to a vote of our stockholders:
- the re-elections of Alan J. Bernon, Gregg L. Engles, Joseph S. Hardin, Jr.
and P. Eugene Pender as members of our Board of Directors,
- an increase in the number of shares of our common stock issuable under our
1997 Employee Stock Purchase Plan from 250,000 shares to 500,000 shares,
and
- the ratification of our Board of Directors' selection of Deloitte & Touche
LLP as our independent auditor for fiscal year 2001.
At the annual meeting, the stockholders re-elected the directors named
above, approved the proposed increase in the number of shares issuable under our
1997 Employee Stock Purchase Plan and ratified the selection of Deloitte &
Touche LLP as our independent auditor.
The vote of the stockholders with respect to each such matter was as
follows:
- Re-election of directors:
<Table>
Alan J. Bernon 21,899,244 votes for 171,168 votes withheld
Gregg L. Engles 21,899,916 votes for 170,496 votes withheld
Joseph S. Hardin, Jr. 21,899,223 votes for 171,189 votes withheld
P. Eugene Pender 21,896,623 votes for 173,789 votes withheld
</Table>
- Approval of the proposed increase in the number of shares issuable under
our 1997 Employee Stock Purchase Plan:
20,767,499 votes for 1,252,595 votes against; 50,318 abstentions; 0 broker
non-votes
- Ratification of our selection of Deloitte & Touche LLP as our independent
auditor:
21,128,398 votes for 921,290 votes against; 20,724 abstentions
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
10.1 Agreement and Plan of Merger, dated as of April 4, 2001,
among Suiza Foods Corporation, Dean Foods Company and
Blackhawk Acquisition Corp. (incorporated by reference from
Registrant's Current Report on Form 8-K filed April 5, 2001
(File No. 1-12755)).
10.2 Securities Purchase Agreement, dated as of April 4, 2001,
among Suiza Foods Corporation, Suiza Dairy Group
Holdings, Inc., Suiza Dairy Group, L.P., Suiza Southeast,
LLC, Dairy Farmers of America, Inc. and Mid-Am Capital,
L.L.C. (incorporated by reference from Registrant's Current
Report on Form 8-K filed April 5, 2001 (File No. 1-12755)).
10.3 Credit Agreement, dated July 31, 2001, among Suiza Foods
Corporation and certain of its subsidiaries, and various
lenders.
11 Statement regarding computation of per share earnings
</Table>
(b) Reports on Form 8-K and 8-K/A
Current Report on Form 8-K filed April 5, 2001 (as amended by Current
report on Form 8-K/A filed April 10, 2001) regarding our merger agreement
with Dean Foods Company.
Current Report on Form 8-K filed May 3, 2001 regarding our First
Quarter Earnings
Current Report on Form 8-K filed August 9, 2001 regarding our Second
Quarter Earnings
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<Table>
SUIZA FOODS CORPORATION
By: /s/ BARRY A. FROMBERG
-----------------------------------------
Barry A. Fromberg
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER (PRINCIPAL ACCOUNTING OFFICER)
</Table>
Date: August 9, 2001
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<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.1 Agreement and Plan of Merger, dated as of April 4, 2001,
among Suiza Foods Corporation, Dean Foods Company and
Blackhawk Acquisition Corp. (incorporated by reference from
Registrant's Current Report on Form 8-K filed April 5, 2001
(File No. 1-12755)).
10.2 Securities Purchase Agreement, dated as of April 4, 2001,
among Suiza Foods Corporation, Suiza Dairy Group Holdings,
Inc., Suiza Dairy Group, L.P., Suiza Southeast, LLC, Dairy
Farmers of America, Inc. and Mid-Am Capital, L.L.C.
(incorporated by reference from Registrant's Current Report
on Form 8-K filed April 5, 2001 (File No. 1-12755)).
10.3 Credit Agreement, dated July 31, 2001, among Suiza Foods
Corporation and certain of its subsidiaries, and various
lenders.
11 Statement re computation of per share earnings
</Table>